--------------------------------------------------------------------------------

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                           ---------------------------

                                    FORM 10-Q

                   QUARTERLY REPORT UNDER SECTION 13 OR 15(D)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

                        For Quarter Ended March 31, 1998
                         Commission File Number 1-12584

                          ----------------------------


                         SHEFFIELD PHARMACEUTICALS, INC.
                    (EXACT NAME OF REGISTRANT IN ITS CHARTER)


DELAWARE                                                 13-3808303
(State of Incorporation)                       (IRS Employer Identification No.)


425 SOUTH WOODSMILL ROAD, SUITE 270
ST. LOUIS, MISSOURI                                      63017-3441
(Address of Principal Executive Offices)                 (Zip Code)


       Registrant's telephone number, including area code: (314) 579-9899





         Indicate  by check  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.

                                 Yes X      No 
                                    ------     -----

         The  number of  shares  outstanding  of the  issuer's  Common  Stock is
15,742,762 shares of Common Stock as of March 31, 1998.





--------------------------------------------------------------------------------


<PAGE>
                SHEFFIELD PHARMACEUTICALS, INC. AND SUBSIDIARIES
                        (A DEVELOPMENT STAGE ENTERPRISE)

                                      INDEX
                                      -----

                                                                            Page
PART I.                  Financial Information

            ITEM 1.      Financial Statements.

                         Consolidated  Balance  Sheets  - March  31,         1
                         1998 and December 31, 1997.

                         Consolidated  Statements of Operations  for         2
                         the three  months  ended March 31, 1998 and
                         1997 and for the period  from  October  17,
                         1986 (inception) to March 31, 1998.

                         Consolidated  Statements  of Cash Flows for         3
                         the three  months  ended March 31, 1998 and
                         1997 and for the period  from  October  17,
                         1986 (inception) to March 31, 1998.

                         Notes to Consolidated Financial Statements.         4

            ITEM 2.      Management's  Discussion  and  Analysis  of         6
                         Financial    Condition   and   Results   of
                         Operations.

PART II.                 Other Information.

            ITEM 2.      Changes in Securities.                             10
            ITEM 6.      Exhibits and Reports on Form 8-K.                  10

SIGNATURES                                                                  11


<PAGE>
                SHEFFIELD PHARMACEUTICALS, INC. AND SUBSIDIARIES
                        (A DEVELOPMENT STAGE ENTERPRISE)
                           CONSOLIDATED BALANCE SHEETS


<TABLE>
<CAPTION>
                                                                                                        March 31,
                                                                                                           1998       December 31,
                                                                                                       (unaudited)        1997
                                                                                                      ------------    -------------
                                                                                                      
                                     ASSETS
<S>                                                                                                   <C>             <C>         
Current assets:
                Cash and cash equivalents                                                             $      7,876    $    393,608
                Loan receivable - former officer                                                            72,500          80,000
                Prepaid expenses and other current assets                                                   40,329          47,378
                                                                                                      ------------    ------------
                     Total current assets                                                                  120,705         520,986
                                                                                                      ------------    ------------

Property and equipment:
                Laboratory equipment                                                                       185,853         185,852
                Office equipment                                                                           109,002         142,562
                                                                                                      ------------    ------------
                                                                                                           294,855         328,414
                Less accumulated depreciation and amortization                                             198,683         185,201
                                                                                                      ------------    ------------

                     Net property and equipment                                                             96,172         143,213
                                                                                                      ------------    ------------

Other assets                                                                                                11,869          25,738
                                                                                                      ------------    ------------

                     Total assets                                                                     $    228,746    $    689,937
                                                                                                      ============    ============

          LIABILITIES AND STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)

Current liabilities:
                Accounts payable and accrued liabilities                                              $  2,609,156    $    887,782
                Sponsored research payable                                                                 470,180         470,768
                                                                                                      ------------    ------------
                     Total current liabilities                                                           3,079,336       1,358,550

6% convertible subordinated debenture                                                                      882,000       1,551,000
Interest payable on debenture                                                                                 --            28,875

Cumulative convertible redeemable preferred stock, $.01 par value.  Authorized,
                3,000,000 shares; issued and outstanding, 10,000 and 25,000 shares at
                March 31, 1998 and December 31, 1997, respectively                                       1,000,479       2,468,263

Commitments and contingencies

Stockholders' equity (net capital deficiency):
                Common stock, $.01 par value.  Authorized, 50,000,000 shares;
                        issued and outstanding, 15,742,762 and 12,649,539
                        shares at March 31, 1998 and December 31, 1997, respectively                       157,428         126,495
                Notes receivable in connection with sale of stock                                          (49,300)        (72,600)
                Additional paid-in capital                                                              33,603,041      31,386,644
                Deficit accumulated during development stage                                           (38,444,238)    (36,157,290)
                                                                                                      ------------    ------------

                                                                                                        (4,733,069)     (4,716,751)
                                                                                                      ------------    ------------

                     Total liabilities and stockholders' equity (net capital deficiency)              $    228,746    $    689,937
                                                                                                      ============    ============

</TABLE>

                                       1

     See accompanying notes to unaudited consolidated financial statements

<PAGE>

                SHEFFIELD PHARMACEUTICALS, INC. AND SUBSIDIARIES
                        (A DEVELOPMENT STAGE ENTERPRISE)
                      CONSOLIDATED STATEMENTS OF OPERATIONS
      FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997 AND FOR THE PERIOD
               FROM OCTOBER 17, 1986 (INCEPTION) TO MARCH 31, 1998
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                                                          October 17, 1986
                                                            Three months ended             (inception) to
                                                                March 31,                     March 31
                                                  -------------------------------------  ----------------
                                                         1998                1997               1998
                                                  -----------------  ------------------  ----------------
<S>                                                 <C>                 <C>                <C>          
Revenues:
        Sub-license revenue                         $       --          $       --            1,010,000
        Interest income                                      953              18,225            454,780
                                                    ------------        ------------       ------------

        Total revenue                                        953              18,225          1,464,780

Expenses:
        Acquisition of R & D in-process
                technology                                  --                  --            1,650,000
        Research and development                       1,609,041           1,938,037         20,861,431
        General and administrative                       612,490             745,597         17,134,749
        Interest                                          42,470               2,679            202,225
                                                    ------------        ------------       ------------
        Total expenses                                 2,264,001           2,686,313         39,848,405
                                                    ------------        ------------       ------------

Loss before extraordinary item                        (2,263,048)         (2,668,088)       (38,383,625)
Extraordinary item                                          --                  --               42,787

                                                    ------------        ------------       ------------
Net loss                                            $ (2,263,048)       $ (2,668,088)       (38,340,838)
                                                    ============        ============       ============

Accretion of mandatorily redeemable
        preferred stock                                  (23,900)               --             (103,400)

                                                    ------------        ------------       ------------
Net loss - attributable to common shares            $ (2,286,948)       $ (2,668,088)      $(38,444,238)
                                                    ============        ============       ============
Loss per share of common stock - basic:
Loss before extraordinary item                      $      (0.17)       $      (0.23)      $      (7.49)
Extraordinary item                                          --                  --                 0.01
                                                    ------------        ------------       ------------
Basic net loss per share                            $      (0.17)       $      (0.23)             (7.48)
                                                    ============        ============       ============


Weighted average common shares
        outstanding - basic:                          13,655,722          11,388,274          5,133,612
                                                    ============        ============       ============
</TABLE>


                                       2

     See accompanying notes to unaudited consolidated financial statements

<PAGE>
                SHEFFIELD PHARMACEUTICALS, INC. AND SUBSIDIARIES
                        (A DEVELOPMENT STAGE ENTERPRISE)
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
      FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997 AND FOR THE PERIOD
               FROM OCTOBER 17, 1986 (INCEPTION) TO MARCH 31, 1998
                                   (UNAUDITED)
<TABLE>
<CAPTION>
                                                                                                                   October 17, 1986
                                                                                           Three months ended      (inception) to
                                                                                               March 31,               March 31,
                                                                                     ----------------------------  -----------------
                                                                                        1998              1997            1998
                                                                                     -----------      -----------  ----------------
<S>                                                                                  <C>              <C>              <C>          
Cash outflows from development stage activities and extraordinary gain:
      Loss before extraordinary item                                                 $(2,263,048)     $(2,668,088)     $(38,383,625)
      Extraordinary gain on extinguishment of debt                                          --               --        $     42,787
                                                                                     -----------      -----------      ------------
         Net loss                                                                     (2,263,048)      (2,668,088)      (38,340,838)
Adjustments to reconcile net loss to net cash used by
   development stage activities:
      Issuance of common stock, stock options/warrants for fees/services                  16,389             --           1,938,448
      Non-cash interest expense                                                           41,381             --             120,256
      Write-off of in-process technology                                                    --               --           1,650,000
      Securities aquired under sub-license agreement                                        --               --            (500,000)
      Issuance of common stock for intellectual property rights                             --               --             866,250
      Amortization of organizational and debt issuance costs                                --               --              77,834
      Depreciation and amortization                                                       13,482           17,775           260,073
      Increase in debt issuance and organizational costs                                    --               --             (77,834)
      Loss realized on sale of marketable securities                                        --               --             324,915
      Decrease (increase) in prepaid expenses and other current assets                     7,049           15,006           (99,370)
      Decrease (increase) in other assets                                                 13,869              600            47,172
      Increase (decrease) in accounts payable, accrued liabilities                     1,721,374         (114,400)        2,037,302
      Increase (decrease) in sponsored research payable                                     (588)         592,153         1,047,250
                                                                                     -----------      -----------      ------------
         Net cash used by development stage activities                                  (450,092)      (2,156,954)      (30,648,542)
                                                                                     -----------      -----------      ------------
Cash flows from investing activities:
      Proceeds on sale of marketable securities                                             --               --             175,085
      Acquisition of laboratory and office equipment                                        --               --            (317,352)
      Disposition of office equipment                                                     33,560             --              33,560
      Increase in notes receivable in connection with sale of stock                         --               --            (240,000)
      Decrease (increase) in loan receivable - former officer                              7,500             --             (72,500)
      Payments on notes receivable                                                        23,300             --             190,700
      Purchase of Camelot Pharmacal L.L.C., net of cash acquired                            --               --             (46,687)
                                                                                     -----------      -----------      ------------
         Net cash provided (used) by investing activities                                 64,360             --            (277,194)
                                                                                     -----------      -----------      ------------
Cash flows from financing activities:
      Principal payments under capital lease                                                --             (7,550)          (72,453)
      Conversion of convertible, subordinated notes                                         --               --             749,976
      Proceeds from issuance of convertible debenture                                       --               --           2,300,000
      Proceeds from issuance of common stock                                                --               --          13,268,035
      Proceeds from issuance of preferred stock                                             --          3,212,136         3,284,812
      Proceeds from exercise of stock options                                               --               --           1,337,677
      Proceeds from exercise of warrants                                                    --               --          10,064,481
                                                                                     -----------      -----------      ------------
         Net cash and cash equivalents provided by financing activities                     --          3,204,586        30,932,528
                                                                                     -----------      -----------      ------------
         Net increase (decrease) in cash and cash equivalents                           (385,732)       1,047,632             6,792
 Cash and cash equivalents at beginning of period                                        393,608        1,979,871           394,692
                                                                                     ===========      ===========      ============
 Cash and cash equivalents at end of period                                          $     7,876      $ 3,027,503      $    401,484
                                                                                     ===========      ===========      ============
Noncash investing and financing activities:
      Common stock, stock options and warrants issued for services                   $    16,389             --           1,937,648
      Common stock issued for acquisitions                                                  --               --           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                             2,136,784             --           3,470,889
      Securities acquired under sub-license agreement                                       --               --             500,000
      Unrealized (realized) depreciation of investments                                     --            241,183              --
      Equipment acquired under capital lease                                                --               --              72,453
      Notes payable converted to common stock                                               --               --             749,976
      Stock dividends                                                                    104,281             --             286,633
                                                                                     ===========      ===========      ============
Supplemental disclosure of cash flow information:
   Interest paid                                                                     $     1,089      $     2,679      $    131,969
                                                                                     ===========      ===========      ============
</TABLE>
                                       3

     See accompanying notes to unaudited consolidated financial statements
<PAGE>
                SHEFFIELD PHARMACEUTICALS, INC. AND SUBSIDIARIES
                        (A DEVELOPMENT STAGE ENTERPRISE)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 MARCH 31, 1998
                                   (UNAUDITED)

1.       CONSOLIDATED FINANCIAL STATEMENTS

         The  accompanying  consolidated  balance sheet as of March 31, 1998 and
         the accompanying  consolidated  statements of operations and cash flows
         for the three  months  ended March 31, 1998 and 1997 and for the period
         from October 17, 1986 (inception) to March 31, 1998, have been prepared
         by Sheffield  Pharmaceuticals,  Inc. (the "Company")  without audit. In
         the opinion of management,  all adjustments  (consisting only of normal
         recurring accruals) necessary to present fairly the financial position,
         results of  operations,  and cash  flows at March 31,  1998 and for all
         periods presented have been made.

         Certain  information  and  footnote  disclosures  normally  included in
         financial  statements  prepared in accordance  with generally  accepted
         accounting  principles have been condensed or omitted.  It is suggested
         that these  consolidated  financial  statements be read in  conjunction
         with  the  financial  statements  and  notes  thereto  included  in the
         Company's  annual report on Form 10-K,  as amended,  for the year ended
         December 31, 1997. The results of operations for the three months ended
         March 31, 1998 and 1997 are not necessarily indicative of the operating
         results for the full years.

         Sheffield Medical  Technologies Inc.  ("Sheffield") was incorporated on
         October 17, 1986. The Company's wholly-owned subsidiary, U-Tech Medical
         Corporation  ("U-Tech")  was  incorporated  on January 13, 1992 and was
         liquidated on June 30, 1997. On January 10, 1996, Ion  Pharmaceuticals,
         Inc. ("Ion"),  was formed as a wholly-owned  subsidiary of the Company.
         At that time, Ion acquired the Company's rights to certain  early-stage
         biomedical  technologies.  On April 17, 1997, CP Pharmaceuticals,  Inc.
         ("CP") was  formed for the  purpose  of  acquiring  Camelot  Pharmacal,
         L.L.C.,  a privately held  pharmaceutical  development  company,  which
         acquisition was consummated on April 25, 1997. On January 26, 1995, the
         Company's shareholders approved the proposal to reincorporate Sheffield
         in Delaware, which was effected on June 13, 1995. On June 26, 1997, the
         Company's shareholders approved the proposal to change Sheffield's name
         from Sheffield Medical Technologies Inc. to Sheffield  Pharmaceuticals,
         Inc. Unless the context requires otherwise,  Sheffield, U-Tech, Ion and
         CP are  referred  to as "the  Company."  All  significant  intercompany
         transactions are eliminated in consolidation.

         The  Company  is  in  the  development  stage  and  to  date  has  been
         principally engaged in research, development and licensing efforts. The
         Company has generated minimal operating revenue and requires additional
         capital which the Company  intends to obtain through  out-licensing  as
         well as through  equity and debt  offerings  to continue to operate its
         business.  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 will 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 or licensing of
         such products to be profitable.  Management believes that the Company's
         ability to meet its obligations as they become due and to continue as a
         going  concern  through  December  1998  is  dependent  upon  obtaining
         additional  financing.  Until such  financing is obtained,  the Company
         must  rely on  short-term  loans  from  its  officers  in order to meet
         certain of its obligations.


                                        4
<PAGE>
                SHEFFIELD PHARMACEUTICALS, INC. AND SUBSIDIARIES
                        (A DEVELOPMENT STAGE ENTERPRISE)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 MARCH 31, 1997
                                   (UNAUDITED)

2.       BASIC LOSS PER COMMON SHARE

         In 1997,  the Financial  Accounting  Standards  Board  ("FASB")  issued
         Statement of Financial  Accounting Standards ("SFAS") No. 128, Earnings
         Per Share.  SFAS No. 128 replaced the previously  reported  primary and
         fully  diluted  earnings per share with basic and diluted  earnings per
         share.  Unlike  primary  earnings per share,  basic  earnings per share
         excludes any  dilutive  effects of options,  warrants  and  convertible
         securities.   Diluted  earnings  per  share  is  very  similar  to  the
         previously  reported fully diluted  earnings per share.  Basic net loss
         per share is based upon the weighted  average Common Stock  outstanding
         during each year.  Common Stock  equivalents  are not included as their
         effect is  antidilutive.  The effect of adoption of SFAS No. 128 had no
         financial impact, and accordingly, no restatement of loss per share for
         prior periods was necessary.

3.       IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS

         On  January  1,  1998 the  Company  adopted  SFAS No.  130,  "Reporting
         Comprehensive  Income"  ("SFAS  No.  130").  SFAS No.  130  establishes
         standards for the reporting and display of comprehensive income and its
         components and is applied to all enterprises.  The adoption of SFAS No.
         130 had no impact on the Company's  consolidated results of operations,
         financial position or cash flows.

4.       SUBSEQUENT EVENTS

         On April 15, 1998,  the Company  entered into an option  agreement with
         Zambon Group SpA  ("Zambon")  of Milan,  Italy for a sublicense  to the
         Company's proprietary MSI drug delivery system. Under this contemplated
         transaction,  Zambon will receive an exclusive world-wide marketing and
         development sub-license for respiratory products to be delivered by the
         metered solution  inhaler ("MSI")  including four drugs currently under
         development by Sheffield.  Sheffield will maintain certain co-promotion
         rights  in the U.S.  for  respiratory  drugs as well as the  world-wide
         marketing  and  development  rights  for  all  applications  of the MSI
         delivery  system outside the respiratory  therapeutic  area. As part of
         this transaction,  Zambon will agree to fund all remaining  development
         costs  relating to these  respiratory  products,  will pay Sheffield an
         up-front fee in the form of an equity  investment  as well as milestone
         payments  upon  marketing  approval  for each of the four  products and
         royalties  upon  commercialization.  In  addition,  Zambon will provide
         Sheffield with an interest free line of credit upon the  achievement of
         certain early milestones.  Sheffield has received a $650,000 option fee
         from Zambon in the form of an equity  investment.  The  consummation of
         the  sublicensing  transaction  with  Zambon  will  be  subject  to the
         negotiation by the parties of a definitive sublicensing agreement.

         On April 15,  1998,  the Company  issued  1,250  shares of its Series B
         Cummulative  Convertible  Redeemable  Preferred  Stock  (the  "Series B
         Preferred  Stock") in a private  placement  for an  aggregate  purchase
         price of $1,250,000. Under the terms of this offering, the Company must
         redeem  the  preferred  stock at the  time it  concludes  a  definitive
         sub-license agreement on the MSI or other financing. As of May 15, 1998
         all of the Series B Preferred Stock remains to be redeemed or available
         for conversion.

         On April 15,  1998,  the  Company  made the DM 2.0  million  payment to
         Siemens,  A.G. that was  originally due in January 1998 under the terms
         of  its  license   agreement  with  Siemens,   A.G.  covering  the  MSI
         technology.  This  payment  was made with the  proceeds of the Series B
         Preferred Stock offering.

         For the  period  January 1, 1998  through  April 15,  1998,  a total of
         4,075,797  shares of common stock were issued as a result of conversion
         of the Company's  Series A Preferred  Stock.  As of April 15, 1998, all
         outstanding  shares of the Series A Preferred Stock had been converted.
         For the  period  January  1,  1998  through  May 15,  1998,  a total of
         2,291,798  shares of common  stock  were  issued as a result of partial
         conversion and interest  payments made on the Company's  outstanding 6%
         subordinated  convertible  debentures.  As of May 15, 1998, $447,500 in
         principal  remains to be repaid or available for  conversion  under the
         debentures.


                                       5
<PAGE>
                SHEFFIELD PHARMACEUTICALS, INC. AND SUBSIDIARIES
                        (A DEVELOPMENT STAGE ENTERPRISE)

ITEM 2:

                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The Company,  being a development stage  enterprise,  has incurred a net loss in
each of the  fiscal  years  since its  inception  and has had to rely on outside
sources of funds to maintain  its  liquidity.  Additional  operating  losses are
expected to be incurred  for the next several  years as the Company  expends its
resources for product acquisition,  research and development and preclinical and
clinical testing.

As a development  stage company without  significant  revenues,  the Company has
financed its development  activities and operations primarily through public and
private  offerings  of  securities,  from  which it has raised an  aggregate  of
approximately  $30.9  million  through  March 31, 1998.  On April 15, 1998,  the
Company  completed a private offering of 1,250 shares of its Series B Cumulative
Convertible  Redeemable  Preferred  Stock,  which raised total gross proceeds of
$1.25 million.  Also on April 15, 1998, the Company  received a $650,000  option
fee from  Zambon  in the form of an equity  investment.  The  proceeds  of these
placements  were to be used to make a DM 2.0 million payment to Siemens A.G. and
for working  capital and general  corporate  purposes.  The Company's  operating
results have fluctuated  significantly  during each quarter since its inception,
and the Company  anticipates  that such  fluctuations,  largely  attributable to
varying development commitments and expenditures,  as well as the acquisition of
drug  delivery  technologies  and products,  will continue into the  foreseeable
future.

The  Company  continues  to  conduct  scientific   research,   clinical  trials,
development, and intellectual property protection. During the three months ended
March 31, 1998,  the Company funded  $1,609,041 for research and  development on
its projects. During the succeeding 12-month period,  approximately $2.3 million
in  additional  funding is projected  to be incurred on clinical and  laboratory
research  and  development,  as well as the final  remaining  payment  of DM 2.0
million to  Siemens  relative  to the MSI.  All this  estimated  funding of $2.3
million,  is expected to be applied to the MSI.  The Company  continues  to seek
appropriate sub-licensing partners for its remaining early-stage technologies.

In addition to clinical and laboratory research development, the Company expects
to incur ongoing costs in connection with its intellectual  property  protection
and patent  prosecution,  which costs are expected to approximate  $100,000 over
the next 12 months.


                                       6
<PAGE>
          SHEFFIELD PHARMACEUTICALS, INC. AND SUBSIDIARIES
                  (A DEVELOPMENT STAGE ENTERPRISE)

REVENUES AND EXPENSES

Revenues:

From  inception  through the period ended March 31, 1998, the Company has earned
sub-license revenue of $1,010,000 relative to various early-stage technologies.

From  inception  through the period ended March 31, 1998, the Company has earned
interest  income  of  $454,780  and an  extraordinary  item  from  gain on early
extinguishment  of debt of $42,787.  The Company's  ability to generate material
revenues is contingent on the successful  commercialization  of its technologies
and  other  technologies  and  products  that it may  acquire,  followed  by the
successful   marketing  and   commercialization  of  such  technologies  through
licenses, joint ventures or other arrangements.

Interest  income for the three months ended March 31, 1998 was $953  compared to
$18,225  for the same  period  ended March 31,  1997.  The  decrease in interest
earned is attributable to a decrease of cash invested in short-term investments.
Except for the sub-license revenue mentioned above,  interest income represented
all of the Company's income in each of the prior periods.

Operating Expenses:

From  inception  through the period ended March 31, 1998,  the Company  incurred
$39,848,405  of operating  expenses.  Of the total  operating  expenses for that
period,  $20,861,431  were costs of research and  development  for the Company's
technologies and $1,650,000 for the acquisition of R & D in-process  technology.
The  remainder  of expenses  for the same period were  incurred  principally  as
consulting  costs,  costs of management,  legal and other  professional fees and
expenses  relating to the  Company's  technologies,  and for its  completed  and
proposed financing plans.  Research and development costs are expected to remain
high as the Company implements later-stage research projects of its technologies
and such costs will continue to be expensed for financial reporting purposes.

Operating  expenses for the three months ended March 31, 1998,  were  $2,264,001
compared to  $2,686,313  for the same period  ended March 31,  1997.  During the
quarter  ended March 31, 1998,  the Company  recognized  an  approximately  $1.1
million  expense  related to its obligation  due in January,  1998 under the MSI
license  agreement with Siemens A.G. There was no  corresponding  expense during
the  quarter  ended  March  31,  1997 as the  prior  year  obligation  under the
agreement  was not due until the  quarter  ended June 30,  1997.  The  remaining
decrease in operating  expenses of approximately  $1.5 million was primarily due
to   significantly   reduced   spending  on  both   research   and   development
(approximately   $1.4   million)   and  general  and   administrative   expenses
(approximately $130,000).

The table on the following page indicates (i) the Company's  direct research and
development  expenses by project for the three  months  ended March 31, 1998 and
from the  Company's  inception to March 31,  1998,  (ii) the  Company's  current
estimate by project of committed and/or anticipated  funding  requirements after
March 31, 1998 and (iii) revenues received to date by project.


                                       7
<PAGE>
                SHEFFIELD PHARMACEUTICALS, INC. AND SUBSIDIARIES
                        (A DEVELOPMENT STAGE ENTERPRISE)

                    Direct Research and Development Expenses
                                  (in dollars)
<TABLE>
<CAPTION>
                                        Three months                              Committed and/or
                                           ended             Inception to        anticipated R & D        Revenue
          R & D Projects                  3/31/98              3/31/98         funding after 0/31/98*    received
-------------------------------------------------------------------------------------------------------------------

<S>                                      <C>                 <C>                 <C>                          <C>
Multi-Dose Solution Inhaler (MSI)        1,514,832           3,459,680           16,000,000**                 0
Ion Pharmaceuticals, Inc.                      610           4,823,205                    0             510,000
   Technologies
RBC-CD4 Electroinsertion                         0           6,254,185                    0                   0
   Technology
Lipsome-CD4 Technology                           0           2,322,322                    0             500,000
HIV/AIDS Vaccine                                 0           1,211,618                    0                   0
UGIF Technology                                244             223,681                    0                   0
Membrane Attack Complex                          0             365,618                    0                   0
   (MAC)/Complement
</TABLE>
------------------------
 *       These figures include management's  estimates of anticipated direct R&D
         funding  as of the  date  of  this  report.  The  amounts  and  rate of
         application  of the  Company's  funds  to any  particular  project  are
         expected  to  fluctuate  and  will  depend  in  part  on the  Company's
         successful  completion of various stages of research,  the availability
         of  additional   financing  and  the   Company's   identification   and
         acquisition of rights in new technologies in the future.

**       It is contemplated  that this amount will be reduced to zero dollars in
         the event Zambon exercises its option agreement to acquire a sublicense
         for  MSI  respiratory  applications  and  assumes  related  development
         funding obligations.

In June 1997,  the FASB issued SFAS No. 131,  "Disclosures  about Segments of an
Enterprise and Related  Information"  ("SFAS No. 131"). SFAS No. 131 establishes
standards for the way that public business  enteprises report  information about
operating  segments  in annual  financial  statements  and  requires  that those
enterprises  report selected  information  about  operating  segments in interim
financial  reports issued to  stockholders.  It also  establishes  standards for
related  disclosures  about products and services,  geographic  areas, and major
customers.  SFAS No. 131 is effective for financial  statements for fiscal years
beginning  after December 15, 1997. The Company will adopt the new  requirements
in  conjunction  with its 1998 Form 10-K. The adoption of SFAS No. 131 will have
no significant impact on the Company's financial reporting.

LIQUIDITY AND CAPITAL RESOURCES

The Company's cash available for funding its operations as of March 31, 1998 was
$7,876.  As of such date,  the Company  had trade  payables  of  $2,609,156  and
current  research  obligations  of  $470,180.  In  addition,   committed  and/or
anticipated  funding  of  research  and  development  after  March  31,  1998 is
currently estimated at approximately  $16,000,000.  The Company will be required
to obtain additional funds for its business through operations or equity or debt
financings,  collaborative  arrangements  with corporate  partners or from other
resources.  No assurance can be given that these funds will be available for the
Company to finance its  development on acceptable  terms, if at all. If adequate
funds are not available from  operations or additional  sources of funding,  the
Company's business will suffer a material adverse effect.

The  Company's  operations  to date have  consumed  substantial  and  increasing
amounts of cash. The negative cash flow from  operations is expected to continue
in the foreseeable  future.  The Company has not yet begun to generate  revenues
from the sale of products.  The  Company's  products  will  require  significant
additional    development,    clinical   testing   and   investment   prior   to
commercialization.   The  Company  does  not  expect  regulatory   approval  for
commercial sales of any of its products in the immediate future. There can be no
assurance that such products will be successfully  developed,  proven to be safe
and  efficacious  in  clinical  trials,  able  to  meet  applicable   regulatory
standards,  able  to  obtain  required  regulatory  approvals,  or  produced  in
commercial quantities at reasonable costs or be successfully  commercialized and
marketed.

                                       8

<PAGE>
                SHEFFIELD PHARMACEUTICALS, INC. AND SUBSIDIARIES
                        (A DEVELOPMENT STAGE ENTERPRISE)

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

Under the terms of existing agreements, the Company is obligated to make certain
payments to its licensors. In the event that the Company defaults on the payment
of an installment under the terms of an existing licensing agreement, its rights
thereunder  could be  forfeited.  As a  consequence,  the Company could lose all
rights  under  a  license   agreement  to  the  related   licensed   technology,
notwithstanding the total investment made through the date of the default. There
can be no  assurance  that  unforeseen  obligations  or  contingencies  will not
deplete the Company's financial resources and, accordingly, sufficient resources
may not be available to fulfill the Company's  commitments.  In this regard,  in
January,  1998 a payment of DM 2.0 million  (approximately $1.1 million) was due
to Siemens AG under the terms of the agreement under which the Company holds the
world-wide  marketing rights to the MSI. Although included as an expense for the
period ended March 31, 1998, this payment was not made until April 15, 1998.

On April 15,  1998,  the Company  entered into an option  agreement  with Zambon
Group SpA of Milan, Italy for a sublicense to the Company's proprietary MSI drug
delivery system.  Under this  contemplated  transaction,  Zambon will receive an
exclusive  world-wide  marketing and  development  sub-license  for  respiratory
products  to be  delivered  by the MSI  including  four  drugs  currently  under
development by Sheffield. Sheffield will maintain certain co-promotion rights in
the  U.S.  for  respiratory  drugs  as  well  as the  world-wide  marketing  and
development  rights for all  applications  of the MSI  outside  the  respiratory
therapeutic  area.  As part of this  transaction,  Zambon will agree to fund all
remaining  development  costs relating to these respiratory  products,  will pay
Sheffield an up-front fee in the form of an additional equity investment as well
as milestone  payments upon marketing approval for each of the four products and
royalties upon  commercialization.  In addition,  Zambon would provide Sheffield
with an  interest  free line of credit  upon the  achievement  of certain  early
milestones.  Sheffield  received  a $650,000  fee from  Zambon in the form of an
equity  investment upon execution of the option  agreement.  The consummation of
the  sublicensing  transaction  with Zambon is subject to the negotiation by the
parties of a definitive sublicensing agreement.

On April 15, 1998,  the Company  issued 1,250 shares of its Series B Cummulative
Convertible  Redeemable  Preferred  Stock (the "Series B Preferred  Stock") in a
private placement for an aggregate purchase price of $1,250,000. Under the terms
of this  offering,  the Company must redeem the  preferred  stock at the time it
concludes a definitive  sub-license agreement on the MSI or other financing.  As
of May 15, 1998,  all of the Series B Preferred  Stock remains to be redeemed or
available for conversion.

On April 15, 1998, the Company made the DM 2.0 million payment to Siemens,  A.G.
that was  originally  due in  January  1998  under the terms of the MSI  license
agreement.  This  payment  was made with the  proceeds of the Series B Preferred
Stock offering.

As stated in the  Company's  press  release on April 16, 1998 and  included in a
Current Report on Form 8-K filed with the Securities and Exchange  Commission on
April 17, 1998, the Company  continues not to meet certain of the American Stock
Exchange's ("AMEX") continued listing guidelines, and, as a result, there can be
no assurance  that the Company's  common stock will continue to be listed on the
AMEX.

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 HEREBY.  ALL  FORWARD-LOOKING  STATEMENTS INVOLVE RISKS
AND UNCERTAINTY,  INCLUDING WITHOUT LIMITATION,  THE SUCCESSFUL  DEVELOPMENT AND
LICENSING OF THE COMPANY'S TECHNOLOGIES AND THE SUCCESSFUL COMPLETION OF PLANNED
FINANCINGS.  ALTHOUGH THE COMPANY  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.   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.

                                       9
<PAGE>
                SHEFFIELD PHARMACEUTICALS, INC. AND SUBSIDIARIES
                        (A DEVELOPMENT STAGE ENTERPRISE)

PART II:          OTHER INFORMATION

Item 2.           CHANGES IN SECURITIES.

                  The  following  unregistered  securities  were  issued  by the
                  Company during the quarter ended March 31, 1998:

<TABLE>
<CAPTION>

                                       Number
                                     of Shares
                                     Sold/Issued
                    Description      /Subject to
     Date of       Of Securities      Options or     Offering/exercise
   Sale/issuance     Issued            Warrants      Price Per Share ($)     Purchaser Or Class
   -------------   -------------     -----------     -------------------     ------------------


   <S>              <C>             <C>               <C>                    <C>
   January -        Common Stock      3,093,223       $0.5719 - $1.3313      Holders of Series A 
   March 1998                                                                Preferred Stock and
                                                                             6% Convertible 
                                                                             Convertible Debentures
</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.


ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K.

         (a) EXHIBITS

         NO.             DESCRIPTION

         27              Financial Data Schedule.

         (b) REPORTS ON FORM 8-K

         The Company filed a Current  Report on Form 8-K with the Securities and
Exchange  Commission on April 17, 1998  relating to (i) the  Company's  entering
into an option  agreement to form a strategic  arrangement with Zambon Group SpA
of Milan, Italy, for the worldwide development and commercialization of drugs to
treat  respiratory  disease in the Company's  proprietary  MSI system,  (ii) the
announcement of the Company's  financial results for the fourth quarter and year
ended  December 31, 1997,  (iii) the  completion of the offering and sale of the
Company's Series B Cumulative  Convertible  Redeemable Preferred Stock for gross
proceeds of $1.25 million, and (iv) certain other matters.



                                       10

<PAGE>
                SHEFFIELD PHARMACEUTICALS, INC. AND SUBSIDIARIES
                        (A DEVELOPMENT STAGE ENTERPRISE)


In accordance with the  requirements of the Exchange Act, the registrant  caused
this  report to be  signed on its  behalf  by the  undersigned,  thereunto  duly
authorized.


                                 SHEFFIELD PHARMACEUTICALS, INC.

Dated: May 15, 1998              /S/ Loren G. Peterson
                                  ----------------------
                                 Loren G. Peterson
                                 President & Chief Executive Officer


Dated: May 15, 1998              /S/ Judy Roeske Bullock
                                 -----------------------
                                 Judy Roeske Bullock
                                 Vice President & Chief Financial Officer
                                 (Principal Financial and Accounting Officer)