<PAGE>


                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-Q
                                   (Mark One)
          [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

                  For the quarterly period ended March 31, 2003
                                                 --------------

      [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITY
                              EXCHANGE ACT OF 1934

         For the transition period from ____________ to _______________

                         Commission file number 1-12584
                                                -------

                         SHEFFIELD PHARMACEUTICALS, INC.
            ---------------------------------------------------------
             (Exact Name of Registrant as Specified in Its charter)

<TABLE>
<S>                                               <C>                  <C>
                  DELAWARE                                                            13-3808303
  ------------------------------------------                           ------------------------------------------
        (State or Other Jurisdiction                                    (I.R.S. Employer Identification Number)
      of Incorporation or Organization)

           3136 WINTON ROAD SOUTH
                  SUITE 201
             ROCHESTER, NEW YORK                      14623                         (585) 292-0310
  ------------------------------------------       -------------       ------------------------------------------
  (Address of Principal executive offices)          (Zip Code)              (Registrant's Telephone Number,
                                                                                 Including Area Code)
</TABLE>


Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
[ X ]Yes [    ] No


Indicate by check mark whether the Registrant is an accellerated filer (as
defined in Rule 12b-2 of the Exchange Act).

[  ] Yes     [X] No

The number of outstanding shares of the Registrant's Common Stock was 29,563,712
shares as of April 14, 2003.

<PAGE>



                SHEFFIELD PHARMACEUTICALS, INC. AND SUBSIDIARIES
                        (a development stage enterprise)

                                    FORM 10-Q
                  For the Quarterly Period Ended March 31, 2003

                                Table of Contents
<TABLE>
<CAPTION>

                                                                                        Page
                                     PART I                                             ----
<S>                                                                                     <C>
Item 1.  Financial Statements

Consolidated Balance Sheets as of March 31, 2003
   and December 31, 2002.................................................................3

Consolidated Statements of Operations
  for the three months ended March 31, 2003 and 2002 and for the period from
  October 17, 1986 (inception) to March 31, 2003 ........................................4

Consolidated Statements of Stockholders' Equity
  (Net Capital Deficiency) for the period from October 17, 1986
  (inception) to March 31, 2003 .........................................................5

Consolidated Statements of Cash Flows
  for the three months ended March 31, 2003 and 2002 and for the period from
  October 17, 1986 (inception) to March 31, 2003.........................................6

Notes to Consolidated Financial Statements ..............................................7

Item 2.  Management's Discussion and Analysis of Financial
  Condition and Results of Operations....................................................9

Item 3.  Quantitative and Qualitative Disclosure About Market Risk.......................19

Item 4.  Controls and Procedures.........................................................19



                                     PART II

Item 1.  Legal Proceedings...............................................................21

Item 2.  Changes in Securities and Use of Proceeds.......................................21

Item 6.  Exhibits and Reports on Form 8-K................................................21

Signatures...............................................................................22

Certifications...........................................................................23

Index to Exhibits........................................................................24

</TABLE>




                                       2
<PAGE>
PART I:           FINANCIAL INFORMATION
Item 1.           Financial Statements

                SHEFFIELD PHARMACEUTICALS, INC. AND SUBSIDIARIES
                        (a development stage enterprise)
                           CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
                                      ASSETS                                            March 31,                December 31,
                                                                                          2003                       2002
                                                                                     ----------------           ---------------
                                                                                       (unaudited)
<S>                                                                                  <C>                       <C>
Current assets:
    Cash and cash equivalents ...............................................              $ 162,811                 $ 327,195
    Clinical supplies........................................................                349,422                   349,422
    Prepaid expenses and other current assets ...............................                 61,881                   158,697
                                                                                     ----------------
                                                                                                                ---------------
       Total current assets .................................................                574,114                   835,314
                                                                                     ----------------           ---------------

Property and equipment:
    Laboratory equipment ....................................................                462,949                   462,949
    Office equipment ........................................................                 75,723                    75,723
    Leasehold improvements ..................................................                 18,320                    18,320
                                                                                     ----------------           ---------------
       Total at cost ........................................................                556,992                   556,992
    Less accumulated depreciation and amortization ..........................              (357,464)                 (332,721)
                                                                                     ----------------
                                                                                                                ---------------
       Property and equipment, net ..........................................                199,528                   224,271
                                                                                     ----------------           ---------------

Patent costs, net of accumulated amortization of $42,791 and $37,232, respectively           462,108                   445,850
Other assets.................................................................                  8,234                     9,223
                                                                                     ----------------           ---------------
    Total assets ............................................................            $ 1,243,984               $ 1,514,658
                                                                                     ================           ===============

           LIABILITIES AND STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)

Current liabilities:
    Accounts payable.........................................................             $2,563,344               $ 2,598,678
    Accrued liabilities......................................................                565,093                   449,251
    Current maturities of long-term debt ....................................              1,000,000                 1,000,000
    Note payable ............................................................              1,305,000                   975,000
                                                                                     ----------------           ---------------
       Total current liabilities ............................................              5,433,437                 5,022,929

Convertible promissory note .................................................              2,000,000                 2,000,000
Long-term debt ..............................................................              8,500,000                 8,500,000
Other long-term liabilities .................................................              1,553,729                 1,377,713
Commitments and contingencies ...............................................                     --                        --
                                                                                     ----------------           ---------------
    Total liabilities .......................................................             17,487,166                16,900,642
                                                                                     ----------------           ---------------

Minority interest in subsidiary..............................................                  --                           --

Stockholders' equity (net capital deficiency): Preferred stock, $.01 par value,
    authorized 3,000,0000 shares:
       Series C cumulative convertible preferred stock, authorized 23,000
         shares; issued and outstanding 16,054 and 15,778 shares at March 31,
         2003 and December 31, 2002, respectively............................                    161                       158
       Series D cumulative convertible exchangeable preferred stock, authorized
         21,000 shares; issued and outstanding 14,795 shares at March 31, 2003 and
         December 31, 2002...................................................                    148                       148
       Series E cumulative convertible non-exchangeable preferred stock,
         authorized 9,000 shares; issued and outstanding 3,378 shares at March 31,
         2003 and December 31, 2002..........................................                     34                        34
       Series F convertible non-exchangeable preferred stock, 5,000 shares
         authorized; issued and outstanding 5,000 shares at March 31, 2003 and
         December 31, 2002...................................................                     50                        50
    Common stock, $.01 par value, authorized 100,000,000 shares; issued and
         outstanding 29,563,712 shares at March 31, 2003 and
         December 31, 2002...................................................                295,637                   295,637
      Additional paid-in capital ............................................             88,055,895                87,756,118
      Other comprehensive income ............................................                     --                        --
      Deficit accumulated during development stage ..........................          (104,595,107)             (103,438,129)
                                                                                     ----------------           ---------------
                    Total stockholders' equity (net capital deficiency) .....           (16,243,182)              (15,385,984)
                                                                                     ----------------           ---------------

Total liabilities and stockholders' equity (net capital deficiency)..........            $ 1,243,984               $ 1,514,658
                                                                                     ================           ===============
</TABLE>

                 See notes to consolidated financial statements.



                                       3
<PAGE>

                SHEFFIELD PHARMACEUTICALS, INC. AND SUBSIDIARIES
                        (a development stage enterprise)

                    CONSOLIDATED STATEMENTS OF OPERATIONS
     For the Three Months Ended March 31, 2003 and 2002 and for the Period
               from October 17, 1986 (inception) to March 31, 2003
                                   (unaudited)
<TABLE>
<CAPTION>

                                                                                        October 17, 1986
                                                         Three Months Ended              (inception) to
                                                             March 31,                     March 31,
                                                  ---------------------------------     ------------------
                                                      2003               2002                 2003
                                                  --------------     --------------    -------------------
<S>                                               <C>                <C>                <C>
Revenues:
  Contract research revenue.................          $  75,000           $     --           $  1,850,045
  Sublicense revenue........................                 --                 --              1,375,000
                                                  --------------     --------------    -------------------

     Total revenues.........................             75,000                 --              3,225,045
                                                  --------------     --------------    -------------------

Expenses:
  Acquisition of research and development
   in-process technology....................                 --                 --             29,975,000
  Research and development..................            250,250          1,153,790             38,645,240
  General and administrative................            398,838          1,938,666             33,767,802
                                                  --------------     --------------    -------------------

     Total expenses.........................            649,088          3,092,456            102,388,042
                                                  --------------     --------------    -------------------

Loss from operations........................          (574,088)        (3,092,456)           (99,162,997)

Interest income.............................                179              2,662                797,977
Interest expense............................          (320,110)          (149,831)            (2,138,213)
Realized loss on sale of marketable securities               --                 --                (5,580)
Minority interest in loss of subsidiary.....             13,156            106,042              3,745,042
                                                  --------------     --------------    -------------------

Net loss....................................        $ (880,863)      $ (3,133,583)         $ (96,763,771)
                                                  ==============     ==============    ===================

Preferred stock dividends...................          (611,033)          (552,663)            (8,701,667)
Accretion of mandatorily redeemable
  preferred stock...........................                 --                 --              (103,400)
                                                  --------------     --------------    -------------------

Net loss - attributable to common shares....      $ (1,491,896)      $ (3,686,246)        $ (105,568,838)
                                                  ==============     ==============    ===================

Weighted average common shares
  outstanding-basic and diluted.............         29,563,712         29,024,008             12,046,725
                                                  ==============     ==============    ===================

Net loss per share of common stock - basic and
  diluted...................................         $   (0.05)         $   (0.13)            $    (8.76)
                                                  ==============     ==============    ===================
</TABLE>


                 See notes to consolidated financial statements.





                                       4
<PAGE>
                SHEFFIELD PHARMACEUTICALS, INC. AND SUBSIDIARIES
                        (a development stage enterprise)
    CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
       For the Period from October 17, 1986 (Inception) to March 31, 2003
<TABLE>
<CAPTION>
                                                                                          Notes receivable
                                                                                           in connection        Additional
                                                           Preferred         Common         with sale of         paid-in
                                                             stock            stock            stock             capital
                                                             -----            -----            -----             -------
<S>                                                        <C>            <C>             <C>                 <C>
Balance at October 17, 1986.......................            $     --        $     --            $    --         $     --
   Common stock issued............................                  --      11,503,195            110,000       34,424,316
   Reincorporation in Delaware at $.01 par value..                  --     (11,220,369)                --       11,220,369
   Common stock subscribed........................                  --              --          (110,000)               --
   Repurchase and retirement of common stock......                  --           (910)                 --        (312,279)
   Common stock options and warrants issued.......                  --              --                 --          639,522
   Issuance of common stock in connection with
     acquisition of Camelot Pharmacal, L.L.C......                  --           6,000                 --        1,644,000
   Common stock options extended..................                  --              --                 --          215,188
   Accretion of issuance costs for Series A
     preferred stock..............................                  --              --                 --               --
   Series C preferred stock issued................                 115              --                 --       11,499,885
   Series C preferred stock dividends.............                  22              --                 --        2,211,978
   Series D preferred stock issued................                 120              --                 --       12,014,880
   Series D preferred stock dividends.............                   9              --                 --          854,991
   Series E preferred stock issued................                  10              --                 --          999,990
   Series E preferred stock dividends.............                                  --                 --            4,000
   Series F preferred stock issued................                  50              --                 --        4,691,255
   Comprehensive income (loss):
       Unrealized gain on marketable securities...                  --              --                 --               --
       Net loss...................................                  --              --                 --               --
       Comprehensive loss.........................                  --              --                 --               --
                                                          -------------    ------------    ---------------     ------------
Balance at December 31, 2000......................                 326         287,916                 --       80,108,095
   Common stock issued............................                  --           4,251                 --          481,201
   Repurchase and retirement of common stock......                  --         (2,151)                 --        (640,691)
   Series C preferred stock dividends.............                  10              --                 --          995,990
   Series D preferred stock dividends.............                   9              --                 --          928,991
   Series E preferred stock issued................                  10              --                 --          999,990
   Series E preferred stock dividends.............                   1              --                 --          119,999
   Common stock warrants issued...................                  --              --                 --          126,741
   Comprehensive income (loss):
       Unrealized loss on marketable securities...                  --              --                 --               --
       Net loss ..................................                  --              --                 --               --
       Comprehensive loss ........................                  --              --                 --               --
                                                          -------------    ------------    ---------------     ------------
Balance December 31, 2001.........................                 356         290,016                 --       83,120,316
   Common stock issued............................                  --           5,621                 --        1,001,379
   Series C preferred stock dividends.............                  11              --                 --        1,069,989
   Series D preferred stock dividends.............                  10              --                 --          995,990
   Series E preferred stock issued................                  10              --                 --          999,990
   Series E preferred stock dividends.............                   3              --                 --          253,997
   Common stock warrants issued...................                  --              --                 --          314,457
   Net loss (unaudited)...........................                  --              --                 --               --
                                                          -------------    ------------    ---------------     ------------
Balance December 31, 2002.........................              $  390      $  295,637           $     --      $87,756,118
   Series C preferred stock dividends.............                   3              --                 --          275,997
   Common stock warrants issued...................                  --              --                 --           23,780
   Net loss (unaudited) ..........................                  --              --                 --               --
                                                          -------------    ------------    ---------------     ------------
Balance March 31, 2003 (unaudited)................              $  393      $  295,637           $     --      $88,055,895
                                                          =============    ============    ===============     ============
</TABLE>

<TABLE>
<CAPTION>
                                                                               Deficit             Total
                                                                 Other       accumulated      stockholders'
                                                               comprehen-       during          equity (net
                                                              sive income     development         capital
                                                                (loss)           stage          deficiency)
                                                                ------           -----          -----------
<S>                                                           <C>             <C>              <C>
Balance at October 17, 1986.......................               $    --         $      --        $       --
   Common stock issued............................                    --                --        46,037,511
   Reincorporation in Delaware at $.01 par value..                    --                --                --
   Common stock subscribed........................                    --                --         (110,000)
   Repurchase and retirement of common stock......                    --                --         (313,189)
   Common stock options and warrants issued.......                    --                --           639,522
   Issuance of common stock in connection with
    acquisition of Camelot Pharmacal, L.L.C.......                                      --         1,650,000
   Common stock options extended..................                    --                --           215,188
   Accretion of issuance costs for Series A                           --
     preferred stock.............................                                (103,400)         (103,400)
   Series C preferred stock issued................                    --                --        11,500,000
   Series C preferred stock dividends.............                    --       (2,217,434)           (5,434)
   Series D preferred stock issued................                    --                --        12,015,000
   Series D preferred stock dividends.............                    --         (855,750)             (750)
   Series E preferred stock issued................                    --                --         1,000,000
   Series E preferred stock dividends.............                    --           (4,750)             (750)
   Series F preferred stock issued................                    --                --         4,691,305
   Comprehensive income (loss):
       Unrealized gain on marketable securities...               157,467                --                --
       Net loss...................................                    --      (77,786,190)                --
       Comprehensive loss.........................                    --                --      (77,628,723)
                                                              -----------    --------------    --------------
Balance at December 31, 2000......................               157,467      (80,967,524)         (413,720)
   Common stock issued............................                    --                --           485,452
   Repurchase and retirement of common stock......                    --                --         (642,842)
   Series C preferred stock dividends.............                    --         (999,278)           (3,278)
   Series D preferred stock dividends.............                    --         (929,603)             (603)
   Series E preferred stock issued................                    --                --         1,000,000
   Series E preferred stock dividends.............                    --         (121,422)           (1,422)
   Common stock warrants issued...................                    --                --           126,741
   Comprehensive income (loss):
       Unrealized loss on marketable securities...             (157,467)                --                --
       Net loss...................................                    --       (9,479,137)                --
       Comprehensive loss.........................                    --                --       (9,636,604)
                                                              -----------    --------------    --------------
Balance December 31, 2001.........................                    --      (92,496,964)       (9,086,276)
                                                                      --
   Common stock issued............................                                      --         1,007,000
   Series C preferred stock dividends.............                    --       (1,071,913)           (1,913)
   Series D preferred stock dividends.............                    --         (996,710)             (710)
   Series E preferred stock issued................                    --                --         1,000,000
   Series E preferred stock dividends.............                    --         (254,960)             (960)
   Common stock warrants issued...................                    --                --           314,457
   Net loss.......................................                    --       (8,617,582)       (8,617,582)
                                                              -----------    --------------    --------------
Balance December 31, 2002.........................               $    --     $(103,438,129)    $(15,385,984)
   Series C preferred stock dividends.............                    --         (276,115)             (115)
   Common stock warrants issued...................                    --                --            23,780
   Net loss (unaudited)...........................                    --         (880,863)         (880,863)
                                                              -----------    --------------    --------------
Balance March 31, 2003 (unaudited)................               $    --     $(104,595,107)    $(16,243,182)
                                                              ===========    ==============    ==============
</TABLE>


                 See notes to consolidated financial statements.




                                       5
<PAGE>

                SHEFFIELD PHARMACEUTICALS, INC. AND SUBSIDIARIES
                        (a development stage enterprise)

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
      For the Three Months Ended March 31, 2003 and 2002 and for the Period
               from October 17, 1986 (inception) to March 31, 2003
                                   (unaudited)

<TABLE>
<CAPTION>
                                                                                 Three Months Ended           October 17, 1986
                                                                                    March 31,                  (inception) to
                                                                         ---------------------------------       March 31,
                                                                               2003              2002              2003
                                                                         ---------------    --------------    ----------------
<S>                                                                      <C>                <C>               <C>
Cash outflows from operating activities:
    Net loss.....................................................           $(880,863)      $(3,133,583)      $ (96,763,771)
Adjustments to reconcile net loss to net cash used by
   development stage activities:
     Issuance of common stock, stock options/warrants for
       services..................................................               23,780           221,539           3,157,605
     Depreciation and amortization...............................               30,302            39,185             913,320
     Non-cash acquisition of research and development
       in-process technology.....................................                   --                --           1,650,000
     Loss on sale of marketable securities.......................                   --                --               5,580
     Decrease (increase) in clinical supplies, prepaid
       expenses &  other current assets..........................               96,815          (76,524)           (470,345)
     Decrease (increase) in other assets.........................                  988             (300)              50,807
     (Decrease) increase in accounts payable and accrued
       liabilities...............................................              (30,299)         1,124,040           3,126,826
     Increase in sponsored research payable......................                   --                --             577,070
     Increase in other long-term liabilities.....................              176,016           236,198           1,612,496
     Other.......................................................              111,459         (193,722)           (566,328)
                                                                         ---------------    --------------    ----------------
Net cash used by operating activities............................             (471,802)       (1,783,167)        (86,706,740)
                                                                         ---------------    --------------    ----------------
Cash flows from investing activities:
     Proceeds from sale of marketable securities.................                   --                --             844,420
     Acquisition of laboratory and office equipment, and
       leasehold improvements....................................                   --           (31,029)           (903,419)
     Acquisition of patents......................................              (21,817)           (3,154)           (504,898)
     Other.......................................................                   --                --            (52,337)
                                                                         ---------------    --------------    ----------------
Net cash provided (used) by investing activities.................              (21,817)          (34,183)           (616,234)
                                                                         ---------------    --------------    ----------------

Cash flows from financing activities:
     Payments on debt and capital leases.........................                 (765)           (2,030)           (859,379)
     Net proceeds from issuance of:
        Debt.....................................................              330,000         1,000,000          15,855,000
        Common stock.............................................                   --                --          23,433,660
        Preferred stock..........................................                   --         1,000,000          35,741,117
     Proceeds from exercise of warrants/stock options............                   --            17,000          14,770,358
     Repurchase and retirement of common stock...................                   --                --           (956,031)
     Other.......................................................                   --                --           (500,024)
                                                                         ---------------    --------------    ----------------
Net cash provided by financing activities........................              329,235         2,014,970          87,484,701
                                                                         ---------------    --------------    ----------------

Net (decrease) increase in cash and cash equivalents.............             (164,384)           197,620             161,727
Cash and cash equivalents at beginning of period.................              327,195           859,298               1,084
                                                                         ---------------    --------------    ----------------
Cash and cash equivalents at end of period.......................           $  162,811       $ 1,056,918          $  162,811
                                                                         ===============    ==============    ================

Noncash investing and financing activities:
     Common stock, stock options/warrants issued for
       services..................................................            $  23,780        $  221,539         $ 3,157,605

     Common stock redeemed in payment of notes receivable........                   --                --              10,400
     Acquisition of research and development in-process
         technology..............................................                   --                --           1,655,216
     Common stock issued for intellectual property rights........                   --                --             866,250
     Common stock issued to retire debt..........................                   --                --             600,000
     Common stock issued to redeem convertible securities........                   --                --           5,353,368
     Securities acquired under sublicense agreement..............                   --                --             850,000
     Equipment acquired under capital lease......................                   --                --             121,684
     Notes payable converted to common stock.....................                   --                --             749,976
     Stock dividends.............................................              276,115           257,390           8,091,372

Supplemental disclosure of cash flow information: Interest paid..           $    1,366          $    923          $  294,580
                                              Income taxes paid..                   --                --                  --
</TABLE>

                 See notes to consolidated financial statements.




                                       6
<PAGE>

                SHEFFIELD PHARMACEUTICALS, INC. AND SUBSIDIARIES
                        (a development stage enterprise)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 MARCH 31, 2003
                                   (Unaudited)

1.       BASIS OF PRESENTATION

         The accompanying unaudited consolidated financial statements have been
         prepared in accordance with the instructions to Form 10-Q of the U.S.
         Securities and Exchange Commission and should be read in conjunction
         with the financial statements and notes thereto included in Sheffield
         Pharmaceuticals, Inc.'s (the "Company's") Annual Report on Form 10-K
         for the year ended December 31, 2002. In the opinion of the Company's
         management, all adjustments (consisting only of normal recurring
         accruals) necessary to present fairly the financial position, results
         of operations, stockholders' equity and cash flows at March 31, 2003
         and for all periods presented have been made. Certain information and
         footnote disclosures normally included in financial statements prepared
         in accordance with accounting principles generally accepted in the
         United States have been condensed or omitted. The results of operations
         for the three months ended March 31, 2003 and 2002 are not necessarily
         indicative of the operating results for the full years. In addition,
         the preparation of financial statements in conformity with generally
         accepted accounting principles in the United States requires management
         of the Company to make estimates and assumptions that affect the
         amounts reported in the consolidated financial statements. Actual
         results could differ from these estimates.

         The consolidated financial statements include the accounts of the
         Company and its wholly owned subsidiaries, Systemic Pulmonary Delivery,
         Ltd., Ion Pharmaceuticals, Inc., and CP Pharmaceuticals, Inc., and its
         80.1% owned subsidiary, Respiratory Steroid Delivery, Ltd., ("RSD") and
         are herein together referred to as "Sheffield" or the "Company." All
         significant intercompany transactions are eliminated in consolidation.

         The Company is focused on the development and commercialization of
         later stage pharmaceutical products that utilize the Company's unique
         proprietary pulmonary delivery technologies. The Company is in the
         development stage and to date has been principally engaged in research,
         development and licensing efforts.

         The accompanying consolidated financial statements have been prepared
         on a going concern basis that contemplates the realization of assets
         and satisfaction of liabilities and commitments in the normal course of
         business. The Company has generated minimal operating revenue,
         sustained significant net operating losses, and requires additional
         capital that the Company intends to obtain through out-licensing of
         rights to its technology, as well as through equity and debt offerings,
         to continue to operate its business. Unless the Company is able to
         raise significant capital ($1 million to $2.5 million) within the next
         30-60 days, management believes that it is unlikely that the Company
         will be able to meet its obligations as they become due and to continue
         as a going concern. To meet this capital requirement, the Company is
         evaluating various financing alternatives including, but not limited
         to, private offerings of its securities, debt financings, collaboration
         and licensing arrangements with other companies, and the sale of
         non-strategic assets and/or technologies to third parties. Should the
         Company be unable to meet its capital requirement through one or more
         of the above-mentioned financing alternatives, the Company may file for
         bankruptcy or similar protection under the Federal Bankruptcy Code. In
         such event, the basis of presentation of the Company's financial
         statements will be adjusted to reflect a liquidation basis of
         accounting.

         Additionally, the Company's ability to meet its obligations as they
         become due and to continue as a going concern must be considered in
         light of the expenses, difficulties and delays frequently encountered
         in developing a new business, particularly since the Company intends to
         focus on product development that may require a lengthy period of time
         and substantial expenditures to complete. Even if the Company is able
         to successfully develop new products, there can be no assurance that
         the Company will generate sufficient revenues from the sale of, or that
         the licensing of such products will be profitable.

2.       BASIC LOSS PER COMMON SHARE

         Basic net loss per share is calculated in accordance with the Financial
         Accounting Standard Board's Statement of Financial Accounting Standards
         No. 128, Earnings Per Share. Basic net loss per share is based upon the
         weighted average common stock outstanding during each period.
         Potentially dilutive securities such as stock options, warrants,
         convertible debt and preferred stock have not been included in any
         periods presented as their effect is antidilutive.



                                       7
<PAGE>
3.       STOCK OPTION PLANS

         The Company applies Accounting Principles Board Opinion No. 25,
         "Accounting for Stock Issued to Employees", and related interpretations
         in accounting for its stock option plans. Accordingly, no compensation
         expense has been recognized for its stock option plans. During the
         first quarter of 2003, the Company adopted the disclosure provisions of
         SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and
         Disclosure". The following table illustrates the effect on net earnings
         and earnings per share had the Company adopted the fair value based
         method of accounting for stock-based employee compensation for all
         periods presented.
<TABLE>
<CAPTION>
                                                  3 Months Ended        3 Months Ended
                                                  March 31, 2003        March 31, 2002
                                                  --------------        --------------
<S>                                               <C>                   <C>

             Net loss, as reported                   $(1,491,896)          $(3,686,246)
             Pro forma net loss                      $(1,494,814)          $(3,824,170)
             Earnings per share:
         Basic - as reported                               $(.05)                $(.13)
                Basic - pro forma..........                $(.05)                $(.13)
</TABLE>

4.       NOTES PAYABLE

         On September 6, 2002, the Company entered into a $.5 million unsecured
         debt financing with certain shareholders of the Company. The promissory
         notes issued in connection with such unsecured debt financing provided
         for interest at the rate of 7% per annum and originally matured on
         January 1, 2003. Upon maturity, the promissory notes provide for the
         Company to repay the principal and accrued interest on each note, and
         at the Company's discretion, either a premium of approximately 14% of
         the principal amount, or a warrant to purchase the number of shares of
         the Company's common stock equal to the principal amount of each
         promissory note. Any warrants to be issued under the promissory notes
         would have an exercise price equal to $.60 per share, the closing price
         of the Company's common stock on the closing date of the promissory
         notes. The outstanding principal balance of the promissory notes at
         December 31, 2002 was $.5 million. On January 1, 2003, the Company
         amended and restated the promissory notes ("Amended Notes"). The
         Amended Notes provide for interest at the rate of 7% per annum and
         mature on May 15, 2003. Upon maturity of $225,000 of the Amended Notes,
         the Amended Notes provide for the Company to repay principal and
         accrued interest on each Amended Note, and at the Company's discretion,
         either a premium of approximately 14% of the principal amount, or issue
         warrants to purchase the number of shares of the Company's common stock
         equal to the principal amount of each Amended Note. Any warrants issued
         under the Amended Notes will have an exercise price of $.19 per share,
         the closing price of the Company's common stock on the closing date of
         the Amended Notes. Upon maturity of $250,000 of the Amended Notes, the
         Amended Notes provide for the Company to repay principal and accrued
         interest on each Amended Note, and at the Company's discretion, either
         a premium of approximately 28% of the principal amount, or issue
         warrants to purchase an aggregate of 500,000 shares of the Company's
         common stock, of which 250,000 shares will have an exercise price of
         $.60 per share, and 250,000 shares will have an exercise price of $.19
         per share. Upon amending and restating certain of the promissory notes,
         the Company issued to certain promissory noteholders warrants to
         purchase a total of 225,000 of the Company's common stock at an
         exercise price of $.60 per share.

         On February 25, 2003, the Company entered into a $.5 million secured
         debt financing with certain shareholders of the Company and a third
         party. The promissory note issued to the third party in connection with
         such secured debt financing provides up to $.45 million of financing
         which the Company, at its option, can draw down in three equal
         installments. The Company received the first installment on February
         25, 2003, the second installment on March 28, 2003, and the third
         installment on April 29, 2003. The promissory note provides for
         interest at the rate of 9% per annum and matures on the closing of a
         licensing transaction for the Unit Dose NanoCrystal(TM) Budesonide drug
         product being developed through RSD. The promissory note is secured by
         a priority claim on the Company's interest in the Unit Dose Budesonide
         product. Upon maturity, promissory note provides for the Company to
         repay principal and accrued interest on the promissory note, a premium
         of 100% of the outstanding balance of the promissory note, and a
         warrant to purchase the number of shares of the Company's common stock
         equal to the principal amount of the promissory note drawn down by the
         Company. Any warrants to be issued under the promissory note financing
         will have an exercise price of $.20 per share. The promissory notes
         with certain of the shareholders provide an additional $.03 million of
         financing received upon signing of the notes. These promissory notes
         include essentially the same terms and conditions as the aforementioned
         notes with the third party.

5.       RECLASSIFICATIONS

         Certain amounts in the Company's prior year financial statements and
         notes have been reclassified to conform to the current year
         presentation.



                                       8
<PAGE>

Item 2.
Management's Discussion and Analysis of Financial Condition and Results of
Operations

The information contained in this report contains certain forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended,
which are intended to be covered by the safe harbors created thereby. All
forward-looking statements, including, without limitation, statements containing
the words "believes," "anticipates," "intends," "plans," "expects" and words of
similar import, involve risks and uncertainty. Although Sheffield
Pharmaceuticals, Inc. (the "Company," "we," "our" or "us") believes that the
assumptions underlying the forward-looking statements contained herein are
reasonable, any of the assumptions could be inaccurate, and therefore, there can
be no assurance that the forward-looking statements included in this report will
prove to be accurate. The Company's actual results may differ materially from
the results anticipated in the forward-looking statements. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Important Factors that May Affect Future Results" included herein for a
discussion of certain factors that could contribute to such material
differences. In light of the significant uncertainties inherent in the
forward-looking statements included herein, the inclusion of such information
should not be regarded as a representation by the Company or any other person
that the objectives and plans of the Company will be achieved. The Company
disclaims any obligation to update or revise the information provided in this
report to reflect future events.

OVERVIEW

We provide innovative, cost-effective pharmaceutical therapies by combining
state-of-the-art pulmonary drug delivery technologies with existing and emerging
therapeutic agents. We are developing a range of products to treat respiratory
and systemic diseases in our proprietary Premaire(R) Delivery System
("Premaire") and Tempo(TM) Inhaler ("Tempo"). We are in the development stage
and, as such, have been principally engaged in the development of our pulmonary
delivery systems.

In 1997, we acquired the Premaire, a portable nebulizer-based pulmonary delivery
system, through a worldwide exclusive license and supply arrangement with
Siemens AG. During the second half of 1998, we acquired the rights to an
additional pulmonary delivery technology, Tempo, from a subsidiary of
Aeroquip-Vickers, Inc. The Tempo technology is a new generation propellant-based
pulmonary delivery system. Additionally, during 1998, we licensed from Elan
Corporation, plc ("Elan") the Ultrasonic Pulmonary Drug Absorption System
("UPDAS(TM)"), a novel disposable unit dose nebulizer system, and Elan's
Absorption Enhancing Technology ("Enhancing Technology"), a therapeutic agent to
increase the systemic absorption of drugs. In October 1999, we licensed Elan's
Nanocrystal(TM) technology to be used in developing certain inhaled steroid
products.

Our drug delivery technology includes the Premaire, which is a patented,
multi-dose nebulizer delivery system. The pocket-sized inhaled drug delivery
system features an ultrasonic nebulizer that emits high-frequency sound waves
that turn liquid medication into a fine cloud or soft mist. The Premaire
combines the therapeutic benefits of nebulization with the convenience of
pressurized metered dose inhalers, or pMDIs, in one patient-friendly device. The
Premaire is comprised of a hand-held ultrasonic nebulizer and drug-filled
cartridges that are inserted into the inhaler unit. The cartridges provide
patients who must take multiple respiratory medications with a single,
easy-to-use system. We believe the soft mist created by the Premaire provides
multiple drug administration advantages over the high-velocity pMDIs and dry
powder inhalers. Furthermore, the Premaire system is fast and portable as
compared to conventional tabletop nebulizers, which are large, cumbersome and
more time consuming to use. The Premaire system targets younger and older asthma
patients, as well as older chronic obstructive pulmonary disease patients who
have difficulty using pMDIs and currently depend on tabletop nebulizers for
delivery of their medications.

Our Tempo Inhaler is a patented, new generation pMDI that we believe has
significant efficiency and performance advantages over standard pMDIs. The Tempo
technology utilizes a standard aerosol pMDI canister, encased in a compact
device that provides an aerosol flow-control chamber and a synchronized
triggering mechanism. The aerosol flow-control chamber allows the patient to
inhale through the device at a normal breathing rate, instead of a forced
breath. The inspiratory breath establishes flow fields within the device that
mix and uniformly disperse the drug in the breath. At the mouthpiece, nearly all
the propellant is evaporated leaving only drug particles to be inspired,
allowing a significant increase in the amount of drug delivered to the lungs.
The Tempo system, like the Premaire system, is designed to reduce patient
coordination problems and enhance compliance with the prescribed treatment.

In June 1998, we sublicensed to Zambon Group SpA ("Zambon") worldwide marketing
and development rights to respiratory products to be delivered by the Premaire
in return for an equity investment in the Company (approximately 10%). From June
1998 to September 2001, Zambon funded the development costs for the respiratory
compounds delivered by Premaire. In September 2001, we amended our 1998
agreement with Zambon whereby we regained the rights to the Premaire previously
granted to Zambon. As part of the amended agreement, Zambon provided a
low-interest, $2.5 million loan to us to progress the development



                                       9
<PAGE>

of the Premaire respiratory program. Upon commercialization, Zambon will be
entitled to certain royalties on payments received by us for albuterol,
ipratropium and cromolyn sales for specified periods.

Also in 1998, the systemic applications of Premaire and Tempo were licensed to
Systemic Pulmonary Delivery, Ltd. ("SPD"), one of our wholly owned subsidiaries.
In addition, two Elan technologies, UPDAS(TM) and the Enhancing Technology, were
also licensed to SPD. We retained exclusive rights outside of the strategic
alliance to respiratory disease applications utilizing the Tempo technology and
the two Elan technologies. On August 21, 2002 we ended this strategic alliance
with Elan and regained all intellectual property rights to the systemic
applications of Premaire and Tempo that were licensed to SPD. In addition, as
part of the termination of this alliance, we intend to enter into a separate
agreement with Elan to license exclusively the UPDAS(TM) and the Enhancing
Technology. We have also granted to Elan an ongoing right to receive royalties
on commercialization of two products, morphine delivered by Premaire and
ergotamine tartrate delivered by Tempo.

In addition to the above alliance with Elan, in 1999, we and Elan formed a joint
venture, Respiratory Steroid Delivery, Ltd. ("RSD"), to develop certain inhaled
steroid products to treat respiratory diseases using Elan's NanoCrystal
technology. Currently, RSD is developing a solution-based unit-dose-packaged
steroid formulation for delivery using a conventional tabletop nebulizer, and a
solution-based steroid formulation for delivery using the Premaire. On November
8, 2002, as part of an agreement between Elan and RSD, the parties terminated
the license for the Elan NanoCrystal technology to RSD. As provided in the 1999
license agreement, upon termination of this license, all intellectual property
of RSD was transferred to and jointly owned by Elan and us.

RESULTS OF OPERATIONS

Revenue

Contract research revenues represent revenues earned from a feasibility study
with a third party relating to the development of respiratory applications of
Tempo. For the first three months of 2003 and 2002, contract research revenues
were $75,000 and $0, respectively. The increase was due to our beginning the
feasibility work in the first quarter of 2003. Costs of contract research
revenue approximated such revenues in 2003 and are included in research and
development expenses. Future contract research revenues and expenses are
anticipated to fluctuate depending, in part, on our ability to obtain additional
collaborative agreements and upon the success of current clinical studies.

Our ability to generate material revenues is contingent on the successful
commercialization of our technologies and other technologies and products that
we may acquire, followed by the successful marketing and commercialization of
such technologies through licenses, joint ventures and other arrangements.

Research and Development

Research and development ("R&D") expenses were $.3 million and $1.2 million for
the first quarter of 2003 and 2002, respectively. The decrease of $.9 million
from 2002 was primarily due to lower development expenses related to RSD's unit
dose product ($.4 million), lower Premaire development costs as well as reduced
formulation work on the Premaire budesonide product ($.3 million), lower Tempo
development costs resulting from finalizing the industrialization of the device
in the first half of 2002 for Phase I and II trials ($.1 million) and reduced
R&D administrative costs ($.1 million).

         The following details the status of each of our development programs as
of March 31, 2003:

         Premaire Respiratory Program:

         As a result of our regaining from Zambon the rights to the respiratory
         applications to the Premaire in September 2001, the sponsorship of the
         Premaire respiratory development programs was transferred to us from
         Zambon with the U.S. Food and Drug Administration ("FDA") being
         notified accordingly. In the fourth quarter of 2001, we reviewed all of
         the development work completed-to-date and identified a number of
         deficiencies in the Zambon development program. To address these
         issues, we made a number of internal management changes and moved the
         program to a group of highly experienced pulmonary clinical and
         regulatory experts. The Premaire device is currently in a
         to-be-marketed form and is fully industrialized. As of March 31, 2003,
         we had spent $3.9 million on developing the respiratory products
         discussed below.

         Our strategy is to license the U.S. rights to the Premaire respiratory
         products to a third party. We anticipate concluding a license
         arrangement sometime in 2003. As a result, we estimate a U.S.
         commercial launch of our first products in Premaire to occur in the
         last half of 2005 or first half of 2006. Subject to our obtaining
         additional financing, we intend to fund the continued development work
         for the Premaire respiratory products up through the period of
         outlicensing,



                                       10
<PAGE>

         currently estimated at approximately $10 million, after which time we
         anticipate that the licensee would assume funding responsibility for
         further development work.

                  Albuterol Sulfate. Zambon initiated a Phase II clinical trial
         in December 1999 that compared the Premaire-albuterol sulfate to a
         conventional albuterol-pMDI. Findings from Phase II studies indicated
         that Premaire-albuterol and pMDI-albuterol were comparable in improving
         lung function in the 24 adult patients. An end of Phase II meeting was
         held in February 2002 with the FDA where the results of the development
         activities-to-date, specifically the results of the Phase II trial,
         were reviewed. We are currently reviewing the FDA's comments and
         recommendations, integrating the information into the plans for the
         Phase III trial and NDA submission. Subject to our obtaining additional
         financing, we anticipate that we will begin pivotal clinical trials for
         the albuterol sulfate program sometime in 2003.

                  Budesonide. Preclinical formulation development work is
         currently underway. A formulation developed by Nanosystems has proven a
         feasible candidate for delivery in the Premaire. The formulation is
         dependent on a proprietary nanocrystaline dispersion of budesonide in
         an aqueous carrier. Two other alternative formulation approaches are
         also under evaluation. Subject to our obtaining additional financing,
         upon scale-up and production of clinical batches released under CMC
         protocol, an Investigational New Drug Application ("IND") will be
         prepared for filing with the FDA. This is currently planned for
         sometime in 2003.

                  Ipratropium Bromide. Zambon initiated a Phase I/II clinical
         trial in Europe in January 2000 assessing the safety and efficacy
         compared to a commercially available ipratropium bromide product
         delivered by a pMDI and placebo in patients with chronic obstructive
         pulmonary disease ("COPD"). The results of the study indicated that
         both Premaire-ipratropium bromide and pMDI-ipratropium were tolerated
         and improved lung function in the COPD patients. An IND was filed by
         Zambon with the FDA in May 2000. During 2001, the IND was transferred
         to us. We do not intend to further develop this product on our own as
         the program has progressed to the point where a potential licensing
         partner would be in a position to take the product into clinical
         studies.

                  Sodium Cromoglycate. An IND was filed by Zambon with the FDA
         in July 2000. No further development work is anticipated to be
         completed on this product as the projected market opportunity for
         sodium cromoglycate is currently deemed by us to be too small to
         justify further progression.

         Premaire Systemic Program:

         Through our development alliance with Elan and SPD, we evaluated
         certain drugs for systemic treatment by pulmonary delivery through
         Premaire. By identifying a market opportunity for a rapid-acting,
         non-invasive treatment for breakthrough pain, the first drug to be
         tested for delivery in Premaire was morphine. In July 1999, we
         completed a gamma scintigraphy/pharmacokinetic trial comparing morphine
         delivered using the Premaire to subcutaneous injection. The Premaire
         demonstrated good pulmonary deposition and very rapid absorption, more
         rapid peak blood levels vs. subcutaneous injection and low oral and
         throat deposition. As part of the development alliance with Elan, Elan
         had the first right of refusal on the development of any product
         developed by the joint venture. Elan chose not to license this product
         from the joint venture. In August 2002, we regained all intellectual
         property rights to the systemic applications of Premaire from SPD and
         ended the joint venture relationship with Elan. As such, we now
         continue to seek to attract a partner for the continued development and
         commercialization of this product. Upon commercialization, Elan will be
         entitled to certain royalties on payments received. We have spent $.4
         million to date to develop this product and do not anticipate incurring
         any future costs for further development until such time as a licensing
         partner is secured.

         Tempo Respiratory Program:

         In September 2000, we completed a pilot study using the Tempo to
         deliver an undisclosed, patented respiratory drug used to treat asthma.
         The study measured the distribution of this respiratory drug delivered
         by Tempo compared to the distribution of this same drug delivered
         through a commercially available pMDI in 12 healthy volunteers. Results
         of this study demonstrated that Tempo significantly increased drug
         deposition in all regions of the lung. Tempo delivered approximately
         200% more drug to the lungs, deposited approximately 75% less drug in
         the mouth, and increased dosing consistency by approximately 55%
         compared to the currently marketed form of this same drug. As of March
         31, 2003, we had incurred approximately $.9 million to-date on this
         study. We are using the results of this study as a basis for conducting
         discussions for feasibility work and/or clinical studies with potential
         collaboration partners.



                                       11
<PAGE>

         Tempo Systemic Program:

         The development of systemic drugs using Tempo was conducted as part of
         our alliance with Elan. The initial product developed was targeted to
         address migraine headaches. We utilized ergotamine tartrate as a
         proof-of-principle product. In December 1999, we completed a gamma
         scintigraphy/pharmacokinetic trial comparing the Tempo to a
         conventional pMDI. The trial showed successful delivery of the drug to
         all regions of lung with significantly reduced mouth and throat
         deposition, and rapid drug absorption. As part of the development
         alliance with Elan, Elan had the first right of refusal on the
         development of any product developed by the joint venture. Elan chose
         not to license this product from the joint venture. In August 2002, we
         regained all intellectual property rights to the systemic applications
         of Tempo from SPD and ended the joint venture relationship with Elan.
         As such, we now seek to attract a partner for the continued development
         and commercialization of this product. Upon commercialization, Elan
         will be entitled to certain royalties on payments received. As of March
         31, 2003, we had spent $1.0 million to date to develop this product and
         do not anticipate incurring any future costs for further development
         until such time as a licensing partner is secured.

         As a result of the work performed on the ergotamine product noted
         above, in April 2002, we announced the initiation of a pulmonary
         migraine therapy program with Inhale Therapeutic Systems ("Inhale"), a
         world-renowned expert in particle design. We will combine Inhale's
         supercritical fluid technology with our proprietary drug delivery
         technologies to develop a systemically acting DHE administered through
         the pulmonary route. We plan to study DHE in sub-categories of migraine
         where DHE administered by injection is often used to relieve migraine
         symptoms. These sub-categories are the more serious forms of migraine
         and often require either hospitalization or treatment in pain or
         headache clinics. Under the terms of the agreement, Inhale will supply
         the particle engineering technology and receive R&D funding, milestone
         payments, and royalties upon commercialization. We are responsible for
         all other aspects of clinical development and marketing of the product.
         As part of this agreement, Inhale will produce DHE particles using Good
         Manufacturing Practices ("GMP") for clinical development and commercial
         sale. The treatment of migraine represents a worldwide prescription
         market estimated at approximately $2.4 billion. As of March 31, 2003,
         we had incurred-to-date approximately $1.0 million related to this
         project. Future costs related to this project are dependent upon, among
         other factors, the timing of securing a development partner. Subject to
         our obtaining additional financing, we do not estimate incurring any
         costs related to the development of the DHE project until mid-year of
         2003.

         Unit Dose Nebulizer Program:

         As part of an alliance with Elan, RSD is developing a product for
         inhalation delivery in a standard commercial tabletop device using the
         steroid budesonide, formulated using the NanoCrystal technology. A
         Phase I, double-blind safety and pharmacokinetic study of nebulized
         nanobudesonide in 16 healthy volunteers was satisfactorily completed at
         Thomas Jefferson University Hospital in February 2002. This study
         compared single doses of Pulmicort Respules ("Pulmicort"), our
         proprietary nanobudesonide in two different single dose strengths and
         placebo. The study resulted in no significant adverse events with
         either of our dosage strengths or the Pulmicort reference drug. Data
         from the study is currently undergoing final data and statistical
         analysis. After such data has been analyzed, we plan on initiating
         discussions with potential partners regarding the outlicensing of this
         opportunity. As of March 31, 2003, we incurred-to-date approximately
         $3.1 million on this project. On November 8, 2002, as part of an
         agreement between Elan and RSD, we and Elan terminated the license for
         the Elan NanoCrystal technology to RSD. As provided in the 1999 license
         agreement, upon termination of this license, all intellectual property
         of RSD was transferred to and jointly owned by Elan and us. Use of the
         property by either party can only made with the applied written consent
         of the other. It is our intent to continue pursuing licensing partners
         for this product while we and Elan negotiate the disposition of the use
         and ownership of the intellectual property. Subject to disposition of
         the property rights, we do not intend to incur any additional
         development costs related to this product.

General and Administrative

General and administrative expenses were $.4 million for the first quarter of
2003 as compared to $1.9 million for the first quarter of 2002. The decrease of
$1.5 million from 2002 was primarily due to higher consulting costs, legal fees
and severance-related costs in the first quarter of 2002 (1.4 million) and cost
reduction efforts to conserve cash while various financing alternatives are
evaluated, including reduced administrative headcount ($.1 million). The higher
consulting costs and legal fees in 2002 were associated with expanded business
development, and merger and acquisition activities in the area of licensing and
partnering of our delivery systems, as well as potential acquisitions of
complementary pulmonary delivery technologies and companies ($.9 million). The
severance costs were associated with the resignation of two executive officers
in



                                       12
<PAGE>

the first quarter of 2002 and include the costs incurred pursuant to their
respective separation agreements for severance payments and ongoing benefit
coverage ($.3 million) and modification of the terms of certain stock options
($.2 million).

Interest

Interest income was $179 and $2,662 for the first quarter of 2003 and 2002,
respectively. The decrease in interest income from 2002 was primarily due to
less cash available for investment.

Interest expense was $320,110 and $149,831 for the first quarter of 2003 and
2002, respectively. The increase of $170,279 from 2002 resulted primarily from
interest associated with three short-term promissory notes and higher borrowings
on the August 2001 Note Purchase Agreement with Elan Pharma (borrowings totaled
$5 million as of March 31, 2003, compared to total borrowings of $4 million as
of March 31, 2002). The short-term promissory notes, totaling $1.3 million as of
March 31, 2003, consist of a September 6, 2002 (and amended and restated on
January 1, 2003) unsecured debt financing with certain shareholders, a November
8, 2002 unsecured promissory note with Elan Pharma, and a February 25, 2003
secured debt financing with certain shareholders and a third party.


LIQUIDITY AND CAPITAL RESOURCES

At March 31, 2003, we had $163,000 in cash and cash equivalents compared to
$327,000 at December 31, 2002. The decrease of $164,000 reflects cash
disbursements of approximately $500,000 used primarily to fund operating
activities, partially offset by the receipt of $330,000 from the proceeds of
secured promissory notes from certain shareholders and a third party.

Cash available for funding our operations as of March 31, 2003 was $.2 million.
As of such date, we had trade payables and accrued liabilities of $3.1 million.
As of May 12, 2003, we had cash and equivalents of approximately $.2 million. As
of such date, we had trade payables and accrued liabilities of approximately
$3.3 million. Unless the Company is able to raise significant capital ($1
million to $2.5 million) within the next 30-60 days, management believes that it
is unlikely that the Company will be able to meet its obligations as they become
due and to continue as a going concern. To meet this capital requirement, we are
evaluating various financing alternatives including, but not limited to, private
offerings of our securities, debt financings, collaboration and licensing
arrangements with other companies, and the sale of non-strategic assets and/or
technologies to third parties. We are also investigating other business
transaction opportunities on an ongoing basis. Should the Company be unable to
meet its capital requirement through one or more of the above-mentioned
financing alternatives, we may file for bankruptcy or seek similar protection.

Because we do not expect to generate significant cash flows from operations for
at least the next few years, we will require additional funds to meet our
current obligations and future costs. In an effort to meet both our short- and
long-term capital requirements, we are currently evaluating various financing
alternatives including, but not limited to, private offerings of our securities,
debt financings, and collaboration and licensing arrangements with other
companies. There can be no assurance that we will be able to obtain such
additional funds or enter into such collaborative and licensing arrangements on
terms favorable to us, if at all. Our development programs will cease if future
financings are not completed.

On February 25, 2003, we entered into a $.5 million secured debt financing with
certain of our shareholders and a third party. The promissory note issued in
connection with such unsecured debt financing provides up to $.45 million of
financing which we, at our option, can draw down in three equal installments. We
received the first installment on February 25, 2003, the second installment on
March 28, 2003, and the third installment on April 29, 2003. The promissory note
provides for interest at the rate of 9% per annum and matures on the closing of
a licensing transaction for the Unit Dose NanoCrystal(TM) Budesonide drug
product being developed through RSD. The promissory note is secured by a
priority claim on our interest in the Unit Dose Budesonide product. Upon
maturity, the promissory note provides for us to repay principal and accrued
interest on the promissory note, a premium of 100% of the outstanding balance of
the promissory note, and a warrant to purchase the number of shares of our
common stock equal to the principal amount of the note drawn down by us. Any
warrants to be issued under the note arrangement will have an exercise price of
$.20 per share. The promissory notes with certain of the shareholders provides
an additional $.03 million of financing received upon signing of the notes.
These notes include essentially the same terms and conditions as the
aforementioned notes with the third party.

On November 8, 2002 we entered into an agreement with Elan Pharma, whereby among
other items, we received proceeds of $.5 million evidenced by an unsecured
demand promissory note. The promissory note provides for interest on principal
and semi-annually compounded interest at a fixed rate of 10% per annum. Also as
part of the agreement, the parties terminated the 1999 license agreement for the
Elan NanoCrystal technology made between Elan Pharma and RSD. As provided in the
1999 license agreement, upon termination of this license, all intellectual
property of RSD was transferred to and jointly owned by



                                       13
<PAGE>

Elan and us. The outstanding principal balance of the promissory note at March
31, 2003 was $.5 million.

On September 6, 2002, we entered into a $.5 million unsecured debt financing
with certain of our shareholders. The promissory notes issued in connection with
this financing provide for interest at the rate of 7% per annum and originally
matured on January 1, 2003. Upon maturity, the promissory notes provide for us
to repay principal and accrued interest on each promissory note, and at our
discretion, either a premium of approximately 14% of the principal amount, or a
warrant to purchase the number of shares of our common stock equal to the
principal amount of each note. Any warrants to be issued under the promissory
notes would have an exercise price equal to $.60 per share, the closing price of
our common stock on the closing date of the promissory notes. On January 1,
2003, we amended and restated the promissory notes ("Amended Notes"). The
Amended Notes provide for interest at the rate of 7% per annum and mature on May
15, 2003. We are presently in discussions with the holders of the Amended Notes
to extend such maturity date. Upon maturity of $225,000 of the Amended Notes,
the Amended Notes provide that we will repay principal and accrued interest on
each Amended Note, and at our discretion, either a premium of approximately 14%
of the principal amount, or issue a warrant to purchase the number of shares of
our common stock equal to the principal amount of each Amended Note. Any
warrants issued under the Amended Notes will have an exercise price of $.19 per
share, the closing price of our common stock on the closing date of the Amended
Notes. Upon maturity of $250,000 of the Amended Notes, the Amended Notes provide
that we will repay principal and accrued interest on each Amended Note, and at
our discretion, either a premium of approximately 28% of the principal amount,
or issue warrants to purchase an aggregate of 500,000 shares of our common
stock, of which 250,000 shares will have an exercise price of $.60 per share,
and 250,000 shares will have an exercise price of $.19 per share. Upon amending
and restating certain of these notes, we issued to certain noteholders warrants
to purchase a total of 225,000 of Sheffield common stock at an exercise price of
$.60 per share. The outstanding principal balance of the promissory notes at
March 31, 2003 was $.5 million.

On April 5, 2002, Elan International Services, Ltd. exercised a portion of a
warrant that it had received in June 1998 as part of a strategic alliance with
us and purchased 495,000 shares of our common stock at $2.00 per share. We
received approximately $1.0 million in proceeds as a result of the exercise of a
portion of this warrant.

On August 14, 2001, we entered into a Note Purchase Agreement (the "Agreement")
with Elan Pharma, pursuant to which Elan Pharma agreed to lend us up to $4
million. On April 4, 2002, we amended the Agreement. Under the terms of the
amended Agreement, Elan Pharma agreed to increase the principal amount of the
loan available from $4 million to $5 million and extend the maturity date from
November 14, 2002 to April 4, 2004. On April 5, 2002, we received proceeds on
the loan of $1 million, increasing the total borrowings to $5 million. All
borrowings under the Agreement are evidenced by our $5 million unsecured
promissory note that provides for interest on principal and semi-annually
compounded interest at a fixed rate of 10% per annum. Due to the modification of
the maturity date, the borrowings under the Agreement, totaling $5 million at
March 31, 2003, have been classified in our balance sheet as long-term debt.

In September 2001, in connection with the amendment of our 1998 agreement with
Zambon, we entered into a Loan and Security Agreement ("Loan Agreement") with
Zambon, pursuant to which Zambon agreed to lend us $2.5 million. We received
$1.0 million upon signing of the Loan Agreement, $1.0 million on January 2, 2002
and $.5 million on April 5, 2002. The Loan Agreement provides for interest on
principal and annually compounded interest at a fixed rate of 2% per annum and
is secured by certain security interests in respiratory products developed in
the Premaire. One third of the principal balance, together with interest, is
payable by us upon our execution of an agreement with one or more third parties
to develop, co-promote and/or sell certain products in North America, with all
remaining unpaid principal and interest due on December 31, 2005. On October 17,
2001, as part of the amendment of our 1998 agreement with Zambon, we repurchased
from Zambon, 214,997 shares of common stock for $3.0233 per share ("Repurchase
Price"). In addition, we received an option, expiring December 31, 2002, to
repurchase the remaining shares of our common stock held by Zambon at the
Repurchase Price. In the event we complete a sublicense for the North American
rights or a sublicense for the non-North American rights to certain Premaire
respiratory products prior to December 31, 2002, we will repurchase from Zambon
882,051 shares of our common stock on each of the events.

In October 1999, as part of a licensing agreement with Elan, we received gross
proceeds of $17,015,000 related to the issuance to Elan of 12,015 shares of
Series D Cumulative Convertible Exchangeable Preferred Stock and 5,000 shares of
Series F Convertible Non-Exchangeable Preferred Stock. In turn, we made an
equity investment of $12,015,000 in a joint venture, RSD, representing an
initial 80.1% ownership. The remaining proceeds from this preferred stock
issuance will be utilized for general operating purposes. As part of the
agreement, Elan also committed to purchase, on a drawdown basis, up to an
additional $4.0 million of our Series E Preferred Stock. Although only $3
million has been drawn down under the Series E Preferred Stock, as part of the
November 8, 2002 Note Agreement with Elan, Elan is no longer obligated to
provide us with the remaining $1 million in funding.

In May 1999, in conjunction with the completion of its Phase I/II
Premaire-albuterol trial, Zambon provided us with a $1.0 million interest-free
advance against future milestone payments. In January 2001, we received an
additional $1.0 million



                                       14
<PAGE>

interest-free milestone advance resulting from the demonstration of the
technical feasibility of delivering an inhaled steroid formulation in Premaire.
The proceeds from these advances are not restricted as to their use by us. As
part of the amendment of its 1998 agreement with Zambon, the terms of the
milestone advances were modified in that we shall repay $1.0 million of the
advance milestone payments upon the earlier of December 31, 2003, or upon the
first regulatory approval for either albuterol or an inhaled steroid delivered
in the Premaire. The remaining $1.0 million advance is required to be repaid by
us on the earlier of December 31, 2005, or the regulatory approval of the second
product (albuterol or an inhaled steroid) delivered in the Premaire. Due to the
modification in the repayment terms, the advances have been reclassified in our
balance sheet as long-term debt.


CERTAIN RISK FACTOR THAT MAY AFFECT FUTURE RESULTS, FINANCIAL CONDITION AND
MARKET PRICE OF SECURITIES

The following are some of the factors that could affect our future results. They
should be considered in connection with evaluating forward-looking statements
contained in this report and otherwise made by us or on our behalf, because
these factors could cause actual results and conditions to differ materially
from those projected in forward-looking statements.

We need additional financing, which if not available, will prevent us from
continuing as a going concern.

Unless we are able to raise significant capital ($1 million to $2.5 million)
within the next 30-60 days, management believes that it is unlikely that we will
be able to meet our obligations as they become due and to continue as a going
concern. To meet this immediate capital requirement, we are evaluating various
financing alternatives including, but not limited to, private offerings of our
securities, debt financings, collaboration and licensing arrangements with other
companies, and the sale of non-strategic assets and/or technologies to third
parties. Should we be unable to meet our capital requirement through one or more
of the above-mentioned financing alternatives, we may file for bankruptcy or
seek similar protection.

Provided immediate funding is secured, we will still need to raise substantial
additional capital in the very near-term to fund our operations in an effort to
continue to meet our obligations as they become due and to continue as a going
concern. The development of our technologies and proposed products will require
a commitment of substantial funds to conduct costly and time-consuming research,
preclinical and clinical testing, and to bring any such products to market. Our
future capital requirements will depend on many factors, including continued
progress in developing and out-licensing our pulmonary delivery technologies,
our ability to establish and maintain collaborative arrangements with others and
to comply with the terms thereof, receipt of payments due from partners under
research and development agreements, progress with preclinical and clinical
trials, the time and costs involved in obtaining regulatory approvals, the cost
involved in preparing, filing, prosecuting, maintaining and enforcing patent
claims, the need to acquire licenses to new technology and the status of
competitive products. We are currently seeking such additional funding through
collaborative or partnering arrangements, the extension of existing
arrangements, or through public or private equity or debt financings. Additional
financing may not be available on acceptable terms or at all. If we raise
additional funds by issuing equity securities, stockholders may be further
diluted and such equity securities might have rights, preferences and privileges
senior to those of our current stockholders. If adequate funds are not available
over the longer-term, we may be required to delay, reduce the scope of, or
eliminate one or more of our research or development programs or obtain funds
through arrangements with collaborative partners or others that may require us
to relinquish rights to certain of our technologies, product candidates or
products that we would otherwise seek to develop or commercialize. If adequate
funds are not available from operations or additional sources of funding, our
business will suffer a material adverse effect.

We have experienced significant operating losses throughout our history and
expect these losses to continue for the foreseeable future.

Our operations to date have consumed substantial amounts of cash and we have
generated to date only limited revenues from contract research and licensing
activities. We have incurred approximately $99.2 million of operating losses
since our inception, including $.6 million for the three months ended March 31,
2003. Our operating losses and negative cash flow from operations are expected
to continue in the foreseeable future. We expect that we will continue to have a
high level of operating expenses, negative cash flow from operations and will be
required to make significant up-front expenditures in connection with its
product development activities. As a result, we anticipate additional operating
losses for the remainder of 2003 and that such losses will continue thereafter
until such time, if ever, as we are able to generate sufficient revenues to
sustain our operations. The independent auditors' report, dated April 4, 2003,
on our consolidated financial statements stated that we have incurred recurring
operating losses and have a working capital deficiency and that these conditions
raise substantial doubt about our ability to continue as a going concern.



                                       15
<PAGE>

If our common stock is delisted from the American Stock Exchange, the price of
our common stock and its liquidity could decline.

Our common stock is listed for trading on the American Stock Exchange, or the
AMEX, under the symbol "SHM". We have not for some period of time and do not now
satisfy AMEX standards for continued listing, including a standard that a listed
company that has sustained losses from continuing operations and/or net losses
in its five most recent fiscal years have stockholders' equity of at least
$6,000,000. We had a net capital deficiency of $16.2 million at March 31, 2003.
We submitted a plan advising the AMEX of the action we will take that will bring
us into compliance with continued listing standards. On September 11, 2002, the
AMEX notified us that it had accepted our plan of compliance and granted us an
extension through the 2002 year-end reporting period to regain compliance with
its continued listing standards. We will be subject to periodic review by the
AMEX staff during the extension period. Failure to regain compliance with the
continued listing standards by the end of the extension period could result in
our being delisted from the AMEX. If our common stock were delisted from AMEX,
trading of our common stock, if any, would thereafter likely be conducted in the
over-the-counter market, unless we were able to list our common stock on The
Nasdaq Stock Market or another national securities exchange, which cannot be
assured. If our common stock were to trade in the over-the-counter market it may
be more difficult for investors to dispose of, or to obtain accurate quotations
as to the market value of our common stock. In addition, it may become more
difficult for us to raise funds through the sale of our securities.

In the event of the delisting of our common stock from the AMEX and our
inability to list our common stock on The Nasdaq Stock Market or another
national securities exchange, the regulations of the SEC under the Securities
Exchange Act of 1934, as amended, require additional disclosure relating to the
market for penny stocks. SEC regulations generally define a penny stock to be an
equity security that has a market price of less than $5.00 per share, subject to
certain exceptions. A disclosure schedule explaining the penny stock market and
the risks associated therewith is required to be delivered to a purchaser and
various sales practice requirements are imposed on broker-dealers who sell penny
stocks to persons other than established customers and accredited investors
(generally institutions). In addition, the broker-dealer must provide the
customer with current bid and offer quotations for the penny stock, the
compensation of the broker-dealer and its salesperson in the transaction and
monthly account statements showing the market value of each penny stock held in
the customer's account. If our securities become subject to the regulations
applicable to penny stocks, the market liquidity for our securities could be
severely affected. In such an event, the regulations on penny stocks could limit
the ability of broker-dealers to sell our securities.

Our products are still in development and we may be unable to bring our products
to market.

We have not yet begun to generate revenues from the sale of products. Our
products will require significant additional development, clinical testing and
investment prior to their commercialization. We do not expect regulatory
approval for commercial sales of any of our products in the immediate future.
Potential products that appear to be promising at early stages of development
may not reach the market for a number of reasons. Such reasons include the
possibility that products will not be proven to be safe and efficacious in
clinical trials, that they will not be able to meet applicable regulatory
standards or obtain required regulatory approvals, that they cannot be produced
in commercial quantities at reasonable costs or that they fail to be
successfully commercialized or fail to achieve market acceptance.

If our products are not accepted by the medical community, our business will
suffer.

Commercial sales of our products will substantially depend upon the products'
efficacy and on their acceptance by the medical community. Widespread acceptance
of our products will require educating the medical community as to the benefits
and reliability of the products. Our products may not be accepted and, even if
accepted, we are unable to estimate the length of time it would take to gain
such acceptance.

We will be required to make royalty payments on products we may develop,
reducing the amount of revenues with which we could fund ongoing operations.

The owners and licensors of the technology rights acquired by us are entitled to
receive a certain percentage of all revenues received by us from
commercialization, if any, of products in respect of which we hold licenses.
Accordingly, in addition to our substantial investment in product development,
we will be required to make substantial payments to others in connection with
revenues derived from commercialization of products, if any, developed under
licenses we hold. Consequently, we will not receive the full amount of any
revenues that may be derived from commercialization of products to fund ongoing
operations.





                                       16
<PAGE>

Our dependence on third parties for rights to technology and the development of
our products could harm our business.

Under the terms of existing license agreements, we are obligated to make certain
payments to our licensors. In the event that we default on the payment of an
installment under the terms of an existing licensing agreement, our rights there
under could be forfeited. As a consequence, we could lose all rights under a
license agreement to the related licensed technology, notwithstanding the total
investment made through the date of the default. Unforeseen obligations or
contingencies may deplete our financial resources and, accordingly, sufficient
resources may not be available to fulfill our commitments. If we were to lose
our rights to technology, we may be unable to replace the licensed technology or
be unable to do so on commercially reasonable terms, which would materially
adversely affect our ability to bring products based on that technology to
market. In addition, we depend on our licensors for assistance in developing
products from licensed technology. If these licensors fail to perform or their
performance is not satisfactory, our ability to successfully bring products to
market may be delayed or impeded.

We face intense competition and rapid technological changes and our failure to
successfully compete or adapt to changing technology could make it difficult to
successfully bring products to market.

The medical field is subject to rapid technological change and innovation.
Pharmaceutical and biomedical research and product development are rapidly
evolving fields in which developments are expected to continue at a rapid pace.
Reports of progress and potential breakthroughs are occurring with increasing
frequency. Our success will depend upon our ability to develop and maintain a
competitive position in the research, development and commercialization of
products and technologies in our areas of focus. Competition from
pharmaceutical, chemical, biomedical and medical companies, universities,
research and other institutions is intense and is expected to increase. All, or
substantially all, of these competitors have substantially greater research and
development capabilities, experience, and manufacturing, marketing, financial
and managerial resources. Further, acquisitions of competing companies by large
pharmaceutical or other companies could enhance such competitors' financial,
marketing and other capabilities. Developments by others may render our products
or technologies obsolete or not commercially viable and we may not be able to
keep pace with technological developments.

We are subject to significant government regulation and failure to achieve
regulatory approval for our products would severely harm our business.

Our ongoing research and development projects are subject to rigorous FDA
approval procedures. The preclinical and clinical testing requirements to
demonstrate safety and efficacy in each clinical indication (the specific
condition intended to be treated) and regulatory approval processes of the FDA
can take a number of years and will require us to expend substantial resources.
We may be unable to obtain FDA approval for our products, and even if we do
obtain approval, delays in such approval would adversely affect the marketing of
products to which we have rights and our ability to receive product revenues or
royalties. Moreover, even if FDA approval is obtained, a marketed product, its
manufacturer and its manufacturing facilities are subject to continual review
and periodic inspections by the FDA, and a later discovery of previously unknown
problems with a product, manufacturer or facility may result in restrictions on
such product or manufacturer. Failure to comply with the applicable regulatory
requirements can, among other things, result in fines, suspensions of regulatory
approvals, product recalls, operating restrictions and criminal prosecution.
Additional government regulation may be established which could prevent or delay
regulatory approval of our products. Sales of pharmaceutical products outside
the United States are subject to foreign regulatory requirements that vary
widely from country to country. Even if FDA approval has been obtained, approval
of a product by comparable regulatory authorities of foreign countries must be
obtained prior to the commencement of marketing the product in those countries.
The time required to obtain such approval may be longer or shorter than that
required for FDA approval. We have no experience in manufacturing or marketing
in foreign countries nor in matters such as currency regulations, import-export
controls or other trade laws. To date, we have not received final regulatory
approval from the FDA or any other comparable foreign regulatory authority for
any of our products or technologies.

Our failure to meet product release schedules would make it difficult to predict
our quarterly results and may cause our operating results to vary significantly.

Delays in the planned release of our products may adversely affect forecasted
revenues and create operational inefficiencies resulting from staffing levels
designed to support the forecasted revenues. Our failure to introduce new
products on a timely basis could delay or hinder market acceptance and allow
competitors to gain greater market share.

If our intellectual property and proprietary rights are infringed, or infringe
upon the rights of others, our business will suffer.

Our success will depend in part on our ability to obtain patent protection for
our technologies, products and processes and to maintain trade secret protection
and operate without infringing the proprietary rights of others. The degree of
patent protection



                                       17
<PAGE>

to be afforded to pharmaceutical, biomedical or medical inventions is an
uncertain area of the law. In addition, the laws of foreign countries do not
protect our proprietary rights to the same extent as do the laws of the United
States. We may not develop or receive sublicenses or other rights related to
proprietary technology that are patentable, patents that are pending may be not
issued, and any issued patents may not provide us with any competitive
advantages and may be challenged by third parties. Furthermore, others may
independently duplicate or develop similar products or technologies to those
developed by or licensed to us. If we are required to defend against charges of
patent infringement or to protect our own proprietary rights against third
parties, substantial costs will be incurred and we could lose rights to certain
products and technologies or be required to enter into costly royalty or
licensing agreements.

We do not have any marketing or manufacturing capabilities and will likely rely
on third parties for these capabilities in order to bring products to market.

We do not currently have our own sales force or an agreement with another
pharmaceutical company to market all of our products that are in development.
When appropriate, we may build or otherwise acquire the necessary marketing
capabilities to promote our products. However, we may not have the resources
available to build or otherwise acquire our own marketing capabilities, and we
may be unable to reach agreements with other pharmaceutical companies to market
our products on terms acceptable to us, if at all.

In addition, we do not intend to manufacture our own products. While we have
already entered into two manufacturing and supply agreements related to the
Premaire system and one related to the Tempo, these manufacturing and supply
agreements may not be adequate and we may not be able to enter into future
manufacturing and supply agreements on acceptable terms, if at all. Our reliance
on independent manufacturers involves a number of risks, including the absence
of adequate capacity, the unavailability of, or interruptions in, access to
necessary manufacturing processes and reduced control over product quality and
delivery schedules. If our manufacturers are unable or unwilling to continue
manufacturing our products in required volumes, we will have to identify
acceptable alternative manufacturers. The use of a new manufacturer may cause
significant interruptions in supply if the new manufacturer has difficulty
manufacturing products to our specifications. Further, the introduction of a new
manufacturer may increase the variation in the quality of our products.

Healthcare reimbursement policies are uncertain and may adversely impact the
sale of our products.

Our ability to commercialize human therapeutic and diagnostic products may
depend in part on the extent to which costs for such products and technologies
are reimbursed by private health insurance or government health programs. The
uncertainty regarding reimbursement may be especially significant in the case of
newly approved products. Reimbursement price levels may be insufficient to
provide a return to us on our investment in new products and technologies. In
the United States, government and other third-party payers have sought to
contain healthcare costs by limiting both coverage and the level of
reimbursement for new pharmaceutical products approved for marketing by the FDA,
including some cases of refusal to cover such approved products. Healthcare
reform may increase these cost containment efforts. We believe that managed care
organizations may seek to restrict the use of new products, delay authorization
to use new products or limit coverage and the level of reimbursement for new
products. Internationally, where national healthcare systems are prevalent,
little if any funding may be available for new products, and cost containment
and cost reduction efforts can be more pronounced than in the United States.

We may become subject to product liability claims and our product liability
insurance may be inadequate.

The use of our proposed products and processes during testing, and after
approval, may entail inherent risks of adverse effects that could expose us to
product liability claims and associated adverse publicity. Although we currently
maintain general liability insurance, the coverage limits of our insurance
policies may not be adequate. We currently maintain clinical trial product
liability insurance of $2.0 million per event for certain clinical trials and
intend to obtain insurance for future clinical trials of products under
development. However, we may be unable to obtain or maintain insurance for any
future clinical trials. Such insurance is expensive, difficult to obtain and may
not be available in the future on acceptable terms, or at all. A successful
claim brought against us in excess of our insurance coverage would have a
material adverse effect upon us and our financial condition. We intend to
require our licensees to obtain adequate product liability insurance. However,
licensees may be unable to maintain or obtain adequate product liability
insurance on acceptable terms and such insurance may not provide adequate
coverage against all potential claims.



                                       18
<PAGE>

The price of biotechnology/pharmaceutical company stocks has been volatile which
could result in substantial losses to our stockholders.

The market price of securities of companies in the biotechnology/pharmaceutical
industries has tended to be volatile. Announcements of technological innovations
by us or our competitors, developments concerning proprietary rights and
concerns about safety and other factors may have a material effect on our
business or financial condition. The market price of our common stock may be
significantly affected by announcements of developments in the medical field
generally or our research areas specifically. The stock market has experienced
volatility in market prices of companies similar to us that has been unrelated
to the operating results of such companies. This volatility may have a material
adverse effect on the market price of our common stock.

Our ability to issue "blank check" preferred stock may make it more difficult
for a change in our control.

Our certificate of incorporation authorizes the issuance of "blank check"
preferred stock with such designations, rights and preferences as may be
determined from time to time by the Board of Directors, without shareholder
approval. In the event of issuance, such preferred stock could be utilized,
under certain circumstances, as a method of discouraging, delaying or preventing
a change in our control and preventing shareholders from receiving a premium for
their shares in connection with a change of control. We issued Series A and
Series B cumulative convertible redeemable preferred stock in connection with
private placements in February 1997 and April 1998, respectively. All of the
Series A preferred stock was converted into common stock during 1998. On July
31, 1998, all of the Series B Preferred stock was redeemed for cash. We also
issued shares of our Series C cumulative convertible preferred stock in
connection with the consummation of an agreement with Elan International
Services, Ltd. ("Elan International") in June 1998. In October 1999, in
conjunction with a licensing agreement with Elan International, we issued shares
of our Series D cumulative convertible exchangeable preferred stock and Series F
cumulative convertible preferred stock. During 2002, 2001 and 2000, Elan
International purchased a total of $3,000,000 of our Series E cumulative
convertible non-exchangeable preferred stock. Except for additional shares of
Series C, D and E preferred stock that may be payable as dividends to Elan
International, as holder of the outstanding Series C, D and E preferred stock,
we have no current plans to issue any additional shares of our preferred stock.
However, as we are currently attempting to secure additional capital, we may
issue additional shares of our preferred stock in the near future.

We are obligated to issue additional securities in the future diluting our
stockholders.

As of March 31, 2003, we had reserved approximately 4,215,372 shares of our
common stock for issuance upon exercise of outstanding options and warrants
convertible into shares of our common stock, including by our officers and
directors. In addition, as of March 31, 2003, we had $2,000,000 principal amount
of a convertible promissory note, 16,054 shares of our Series C preferred stock,
14,795 shares of our Series D preferred stock, 3,378 shares of our Series E
preferred stock and 5,000 shares of our Series F preferred stock outstanding.
Each of the convertible securities provides for conversion into shares of our
common stock at a premium to the market price at March 31, 2003. Our Series C,
D, E and F preferred stock are convertible into 11,385,816 shares, 3,044,239
shares, 868,380 shares and 1,470,588 shares, respectively, of common stock. The
convertible promissory note, including accrued interest is convertible into
1,600,527 shares of common stock. The exercise of options and outstanding
warrants, the conversion of such other securities and sales of common stock
issuable thereunder could have a significant dilutive effect on the market price
of our common stock and could materially impair our ability to raise capital
through the future sale of our equity securities.


Item 3.  Quantitative and Qualitative Disclosure About Market Risk

         The Company has no material market risk exposure.


Item 4.  Controls and Procedures

  (a)    Explanation Of Disclosure Controls And Procedures. Our President,
         Chief Executive Officer and Acting Chief Financial Officer (principal
         executive officer and principal financial officer), after evaluating
         the effectiveness of our disclosure controls and procedures (as defined
         in Securities Exchange Act Rules 13a-14(c) and 15d-14(c)) as of a date
         within 90 days of the filing date of this Form 10-Q (the "Evaluation
         Date"), has concluded that as of the Evaluation Date our disclosure
         controls and procedures were adequate and effective to ensure that
         material information relating to us would be made known to such officer
         by others within our company, particularly during the period in which
         this Form 10-Q was being prepared.



                                       19
<PAGE>
  (b)    Changes In Internal Controls. There were no significant changes in our
         internal controls or in other factors that could significantly affect
         our disclosure controls and procedures subsequent to the Evaluation
         Date, nor were there any significant deficiencies or material
         weaknesses in such disclosure controls and procedures requiring
         corrective action. As a result, no corrective action was taken.









                                       20
<PAGE>
PART II:          OTHER INFORMATION


Item 1.           Legal Proceedings

                  The Company was named as a defendant in Jeffrey Leston v.
                  Sheffield Pharmaceuticals, Inc., filed on October 16, 2002 in
                  the United States District Court, Southern District of New
                  York. The plaintiff in this action seeks damages of $100,000
                  for the breach of a contract under which Leston was retained
                  to introduce and facilitate a business alliance between
                  Sheffield and Zambon Corporation. The plaintiff claims that
                  under this contract, Sheffield was obligated, among other
                  things, to pay Leston a fee equal to 4% of any equity
                  purchased by Zambon in Sheffield or other financing by Zambon,
                  including loans. In January 1999, an agreement was entered
                  into amending the original contract in a manner that the
                  Company believes relieved the Company of any of the
                  obligations claimed in the Complaint. In September 2001,
                  Zambon loaned $2.5 million to Sheffield as part of a
                  restructuring of their alliance. This action seeks $100,000,
                  or 4% of the $2.5 million loaned to Sheffield under this
                  restructuring with Zambon. On January 21, 2003, the Company
                  filed an Answer and Counterclaim. The Company denied the
                  plaintiff's allegations and counter-claimed for the return of
                  monies previously paid to the plaintiff. The Company intends
                  to vigorously defend the action and prosecute its
                  counterclaim.

Item 2.           Changes in Securities and Use of Proceeds

                  The following unregistered securities were issued by the
                  Company during the quarter ended March 31, 2003:
<TABLE>
<CAPTION>
                                                             Number of
                                       Description of        Shares Subject
                  Date of              Securities            to Options or    Exercise
                  Sale/Issuance        Issued                Warrants         Price per Share ($)   Purchaser or Class
                  -------------        ------                --------         -------------------   ------------------
<S>                                    <C>                   <C>              <C>                   <C>
                  January 1, 2003      Warrants to           225,000          $.60                  Holders of promissory
                                       purchase Common                                              notes amended during the
                                       stock.                                                       period.
</TABLE>
                  The issuance of these securities is claimed to be exempt from
                  registration pursuant to Section 4(2) of the Securities Act of
                  1933, as amended, as transactions by an issuer not involving a
                  public offering. There were no underwriting discounts or
                  commissions paid in connection with the issuance of any of
                  these securities. These securities were issued in connection
                  with the amendment of certain of the Company's promissory
                  notes originally issued on September 6, 2002 and amended on
                  January 1, 2003.

Item 6.           Exhibits and Reports on Form 8-K.

                  (a)  Exhibits

                  See Index to Exhibits on Page 24.

                  (b)  Reports on Form 8-K

                  (1)      A current Report on Form 8-K was filed with the
                           Securities and Exchange Commission on January 28,
                           2003 to announce the filing of a press release under
                           Item 5.

                  (2)      A current Report on Form 8-K was filed with the
                           Securities and Exchange Commission on March 7, 2003
                           to announce the filing of a press release under Item
                           5.

                  (3)      A current Report on Form 8-K was filed with the
                           Securities and Exchange Commission on March 14, 2003
                           under Item 4, relating to a change in the
                           Registrant's certifying accountant.




                                       21
<PAGE>

                                   SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.


                                            SHEFFIELD PHARMACEUTICALS, INC.


Date:  May 12, 2003                         /s/ Thomas M. Fitzgerald
                                            ------------------------
                                            Thomas M. Fitzgerald
                                            President, Chief Executive Officer
                                            and Acting Chief Financial Officer









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<PAGE>

                                  CERTIFICATION


I, Thomas M. Fitzgerald, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Sheffield
Pharmaceuticals, Inc.;

2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;

3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;

4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;

b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and

c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):

a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and

6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.


Date:  May 12, 2003
                                         /s/ Thomas M. Fitzgerald
                                       --------------------------
                                        Thomas M. Fitzgerald
                                        President, Chief Executive Officer and
                                        Acting Chief Financial Officer
                                        (Principal Executive Officer and
                                        Principal Financial Officer)









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<PAGE>


                                Index to Exhibits

3.1      Certificate of Incorporation of the Company, as amended (1)

3.2      By-Laws of the Company (2)

4.1      Form of Common Stock Certificate (3)

4.4      Certificate of Designations defining the powers, designations, rights,
         preferences, limitations and restrictions applicable to the Company's
         Series C Cumulative Convertible Redeemable Preferred Stock. (1)

4.5      Certificate of Designations defining the powers, designations, rights,
         preferences, limitations and restrictions applicable to the Company's
         Series D Cumulative Convertible Exchangeable Preferred Stock.
         (4)

4.6      Certificate of Designations defining the powers, designations, rights,
         preferences, limitations and restrictions applicable to the Company's
         Series E Convertible Non-Exchangeable Preferred Stock. (4)

4.7      Certificate of Designations defining the powers, designations, rights,
         preferences, limitations and restrictions applicable to the Company's
         Series F Convertible Non-Exchangeable Preferred Stock. (4)

*10.42   Form of promissory note dated February 25, 2003 with certain
         shareholders and a third party.

*99.1    Certification of President, Chief Executive Officer and Acting Chief
         Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of
         2002.

-----------------
* Filed herewith.

(1)      Incorporated by reference to the Company's Quarterly Report on Form
         10-Q for the quarter ended June 30, 1998 filed with the Securities and
         Exchange Commission.

(2)      Incorporated by reference to the Company's Quarterly Report on Form
         10-Q for the quarter ended June 30, 1997 filed with the Securities and
         Exchange Commission.

(3)      Incorporated by reference to the Company's Annual Report on Form 10-KSB
         for its fiscal year ended December 31, 1995 filed with the Securities
         and Exchange Commission.

(4)      Incorporated by reference to the Company's Current Report on Form 8-K
         filed with the Securities and Exchange Commission on November 2, 1999.








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