--------------------------------------------------------------------------------
                                  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 June 30, 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
26,853,537 shares of Common Stock as of June 30, 1998.
--------------------------------------------------------------------------------
<PAGE>
                SHEFFIELD PHARMACEUTICALS, INC. AND SUBSIDIARIES
                        (A DEVELOPMENT STAGE ENTERPRISE)

                                     INDEX

                                                                            Page
PART I.         Financial Information

      ITEM 1.   Financial Statements.

                Consolidated Balance Sheets - June 30, 1998                  1
                and December 31, 1997.

                Consolidated Statements of Operations for the                2
                three and six months ended June 30, 1998 and
                1997 and for the period from October 17, 1986
                (inception) to June 30, 1998.

                Consolidated Statements of Cash Flows for the                3
                three and six months ended June 30, 1998 and
                1997 and for the period from October 17, 1986
                (inception) to June 30, 1998.

                Consolidated Statements of Stockholders' Equity              4
                (Net Capital Deficiency) for the period from
                October 17, 1986 (inception) to June 30, 1988

                Notes to Consolidated Financial Statements.                  5

      ITEM 2.   Management's Discussion and Analysis of                      8
                Financial Condition and Results of Operations

PART II.        Other Information.

      ITEM 2.   Changes in Securities.                                      12
      ITEM 6.   Exhibits and Reports on Form 8-K.                           13

SIGNATURES                                                                  14

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

<TABLE>
<CAPTION>

                                                                                     June 30,
                                                                                       1998                 December 31,
                                                                                    (Unaudited)                 1997
                                                                                -----------------        ---------------
                                     ASSETS
Current assets:
<S>                                                                                 <C>                  <C>         
     Cash and cash equivalents                                                      $  5,421,662         $    393,608
     Marketable securities                                                               350,000                 --
     Loan receivable - former officer                                                     65,000               80,000
     Prepaid expenses and other current assets                                            33,451               47,378
                                                                                    ------------         ------------
       Total current assets                                                            5,870,113              520,986
                                                                                    ------------         ------------

Property and equipment:
     Laboratory equipment                                                                185,853              185,852
     Office equipment                                                                    111,598              142,562
                                                                                    ------------         ------------
                                                                                         297,451              328,414
     Less accumulated depreciation and amortization                                      211,578              185,201
                                                                                    ------------         ------------
       Net property and equipment                                                         85,872              143,213
                                                                                    ------------         ------------

Other assets                                                                               5,680               25,738
                                                                                    ------------         ------------
       Total assets                                                                 $  5,961,665         $    689,937
                                                                                    ============         ============
</TABLE>
<TABLE>
<CAPTION>

          LIABILITIES AND STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)

Current liabilities:
<S>                                                                                 <C>                  <C>         
     Accounts payable and accrued liabilities                                       $    716,505         $    887,782
     Sponsored research payable                                                          470,180              470,768
                                                                                    ------------         ------------
       Total current liabilities                                                       1,186,685            1,358,550

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

Preferred stock, $.01 par value, authorized 3,000,000 shares:
     Series A cumulative convertible redeemable preferred stock,
        0 and 10,000 shares issued and oustanding at June 30, 1998
        and December 31, 1997, respectively                                                 --              2,468,263
     Series B cumulative convertible redeemable preferred stock,
        1,250 and 0 shares issued and oustanding at June 30, 1998
        and December 31, 1997, respectively                                            1,250,000                 --

Commitments and contingencies

Stockholders' equity (net capital deficiency):
     Series C convertible preferred stock, 11,500 and 0 shares
        issued and outstanding at June 30, 1998 and December 31,
        1997, respectively                                                                   115                 --
     Common stock, $.01 par value.  Authorized, 50,000,000 shares;
        issued and outstanding, 26,853,537 and 12,649,539
        shares at June 30, 1998 and December 31, 1997, respectively                      268,534              126,495
     Notes receivable in connection with sale of stock                                   (25,400)             (72,600)
     Additional paid-in capital                                                       55,029,090           31,386,644
     Deficit accumulated during development stage                                    (51,747,359)         (36,157,290)
                                                                                    ------------         ------------
                                                                                       3,524,980           (4,716,751)
                                                                                    ------------         ------------
        Total liabilities and stockholders' equity (net capital deficiency)         $  5,961,665         $    689,937
                                                                                    ============         ============
</TABLE>


     See accompanying notes to unaudited consolidated financial statements

                                       1

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

                     CONSOLIDATED STATEMENTS OF OPERATIONS
  FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1998 AND 1997 AND FOR THE PERIOD
               FROM OCTOBER 17, 1986 (INCEPTION) TO JUNE 30, 1998
                                   (UNAUDITED)
<TABLE>
<CAPTION>

                                                                                                                    October 17, 1986
                                                              Three months ended                Six months ended     (inception) to
                                                                    June 30,                        June 30,            June 30,
                                                       -----------------------------------------------------------------------------

                                                             1998           1997            1998           1997            1998
                                                             ----           ----            ----           ----            ----
Revenues:
<S>                                                    <C>             <C>             <C>             <C>                <C>      
  Sub-license revenue                                  $    350,000    $       --      $    350,000    $       --         1,360,000
  Interest income                                             2,562          21,747           3,515          39,972         457,342
                                                       ------------    ------------    ------------    ------------    ------------

  Total revenue                                             352,562          21,747         353,515          39,972       1,817,342

Expenses:
  Acquisition of R & D in-process
    technology                                           12,500,000       1,650,000      12,500,000       1,650,000      14,150,000
  Research and development                                  187,063         786,165       1,796,104       2,724,202      21,048,494
  General and administrative                                882,409       1,004,893       1,494,899       1,750,489      18,017,158
  Interest                                                   86,211           2,089         128,681           4,768         288,436
                                                       ------------    ------------    ------------    ------------    ------------
  Total expenses                                         13,655,683       3,443,147      15,919,684       6,129,459      53,504,088
                                                       ------------    ------------    ------------    ------------    ------------

Loss before extraordinary item                          (13,303,121)     (3,421,400)    (15,566,169)     (6,089,487)    (51,686,746)
Extraordinary item                                             --              --              --              --            42,787

                                                       ============    ============    ============    ============    ============
Net loss                                               $(13,303,121)   $ (3,421,400)   $(15,566,169)   $ (6,089,487)    (51,643,959)
                                                       ============    ============    ============    ============    ============

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

                                                       ============    ============    ============    ============    ============
Net loss - attributable to common shares               $(13,303,121)   $ (3,421,400)   $(15,590,069)   $ (6,089,487)   $(51,747,359)
                                                       ============    ============    ============    ============    ============

Loss per share of common stock - basic and diluted:
Loss before extraordinary item                         $      (0.67)   $      (0.29)   $      (0.93)   $      (0.52)   $      (9.50)
Extraordinary item                                             --              --              --              --              0.01
                                                       ============    ============    ============    ============    ============
Basic and diluted net loss per share                   $      (0.67)   $      (0.29)   $      (0.93)   $      (0.52)          (9.49)
                                                       ============    ============    ============    ============    ============

Weighted average common shares
  outstanding - basic and diluted:                       19,950,354      11,823,439      16,820,359      11,607,059       5,448,993
                                                       ============    ============    ============    ============    ============
</TABLE>


     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 AND SIX MONTHS ENDED JUNE 30, 1998 AND 1997 AND FOR THE PERIOD
               FROM OCTOBER 17, 1986 (INCEPTION) TO JUNE 30, 1998
                                   (UNAUDITED)
<TABLE>
<CAPTION>

                                                                                                                    October 17, 1986
                                                                  Three months ended          Six months ended        (inception) to
                                                                     June 30,                      June 30,              June 30,
                                                              --------------------------   ------------------------ ----------------
                                                                   1998         1997           1998          1997          1998
                                                              ------------  ------------   ------------  ----------    -------------

Cash outflows from development stage activities and
 extraordinary gain:
<S>                                                           <C>           <C>            <C>            <C>          <C>          
 Loss before extraordinary item                               $(13,303,121) $(3,421,400)   $(15,566,169)  $(6,089,487) $(51,686,746)
 Extraordinary gain on extinguishment of debt                         --           --              --            --          42,787
                                                              ------------  -----------    ------------   -----------  ------------
  Net loss                                                     (13,303,121)  (3,421,400)    (15,566,169)   (6,089,487)  (51,643,959)
Adjustments to reconcile net loss to net cash used by
 development stage activities:
   Issuance of common stock, stock options/warrants
    for fees/services                                                 --         25,000          16,389        25,000     1,938,448
   Non-cash interest expense                                         4,793         --            46,174          --         125,049
   Non-cash acquisition of R&D in process technology                  --      1,650,000            --       1,650,000     1,650,000
   Securities aquired under sub-license agreement                 (350,000)        --          (350,000)         --        (850,000)
   Issuance of common stock for intellectual property rights          --           --              --            --         866,250
   Amortization of organizational and debt issuance costs             --           --              --            --          77,834
   Depreciation and amortization                                    12,895       18,243          26,377        36,017       272,968
   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                                                  6,878      (75,451)         13,927       (60,445)      (92,492)
   Decrease (increase) in other assets                               6,188         --            20,057           600        53,360
   Increase (decrease) in accounts payable,
    accrued liabilities                                         (1,892,651)     172,305        (171,277)       57,905       144,651
   Increase (decrease) in sponsored research payable                  --       (840,676)           (588)     (248,523)    1,047,250
                                                              ------------  -----------    ------------   -----------  ------------
    Net cash used by development stage activities              (15,515,018)  (2,471,979)    (15,965,110)   (4,628,933)  (46,163,560)
                                                              ------------  -----------    ------------   -----------  ------------
Cash flows from investing activities:
   Proceeds on sale of marketable securities                          --           --              --            --         175,085
   Acquisition of laboratory and office equipment                   (2,596)      (2,087)         (2,596)       (2,087)     (319,948)
   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         --            15,000          --         (65,000)
   Payments on notes receivable                                     23,900         --            47,200          --         214,600
   Purchase of Camelot Pharmacal L.L.C., net of
     cash acquired                                                    --         (8,259)           --          (8,259)      (46,687)
                                                              ------------  -----------    ------------   -----------  ------------
    Net cash provided (used) by investing activities                28,804      (10,346)         93,164       (10,346)     (248,390)
                                                              ------------  -----------    ------------   -----------  ------------
Cash flows from financing activities:
   Principal payments under capital lease                             --         (5,891)           --         (13,441)      (72,453)
   Conversion of convertible, subordinated notes                      --           --              --            --         749,976
   Proceeds from issuance of convertible debenture                    --           --              --            --       2,300,000
   Proceeds from issuance of common stock                        8,150,000         --         8,150,000          --      21,418,035
   Proceeds from issuance of preferred stock                    12,750,000         --        12,750,000     3,212,136    16,034,812
   Proceeds from exercise of stock options                            --           --              --            --       1,337,677
   Proceeds from exercise of warrants                                 --           --              --            --      10,064,481
                                                              ------------  -----------    ------------   -----------  ------------
   Net cash provided (used) by financing activities            20,900,000       (5,891)     20,900,000     3,198,695    51,832,528
                                                              ------------  -----------    ------------   -----------  ------------

    Net increase (decrease) in cash and cash equivalents         5,413,786   (2,488,216)      5,028,054    (1,440,584)    5,420,578
 Cash and cash equivalents at beginning of period                    7,876    3,027,503         393,608     1,979,871         1,084
                                                              ============  ===========    ============   ===========  ============
 Cash and cash equivalents at end of period                   $  5,421,662  $   539,287    $  5,421,662   $   539,287  $  5,421,662
                                                              ============  ===========    ============   ===========  ============

Noncash investing and financing activities:
    Common stock, stock options and warrants issued
     for services                                             $       --    $    25,000    $       --     $    25,000  $  1,937,648
    Acquisiton of R&D in-process technology                           --      1,650,000            --       1,650,000     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         1,882,479         --         4,019,263          --       5,353,368
    Securities acquired under sub-license agreement                350,000         --           350,000          --         850,000
    Unrealized (realized) depreciation of investments                 --         20,178            --         261,361          --
    Equipment acquired under capital lease                            --           --              --            --          72,453
    Notes payable converted to common stock                           --           --              --            --         749,976
    Stock dividends                                                 77,914         --           182,195          --         364,547
                                                             =============  ===========    ============   ===========  ============

Supplemental disclosure of cash flow information:
   Interest paid                                              $      6,330    $   2,089    $      7,419   $     4,768  $    138,299
                                                             =============  ===========    ============   ===========  ============
</TABLE>


     See accompanying notes to unaudited consolidated financial statements

<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 JUNE 30, 1998
                                   (UNAUDITED)

<TABLE>
<CAPTION>

                                                                 Notes                  Unrealized    Deficit         Total
                                                               receivable               gain (loss) accumulated   stockholders'
                                                             in connection  Additional     on          during        equity
                                        Common     Preferred   with sale     paid-in    marketable  development   (Net capital
                                         stock       stock      of stock     capital    securities     stage       deficiency)
                                      --------------------------  ---------------------------  ------------------------  -----
<S>                                   <C>             <C>    <C>        <C>                        <C>              <C>
Balance at October 17, 1986                   --      --        --             --           --             --             --
Common stock issued                   $ 11,288,329    --        --      $   254,864         --             --       11,543,193
Common stock options issued                   --      --        --           75,000         --             --           75,000
Net loss                                      --      --        --             --           --      (12,192,046)   (12,192,046)
                                      ------------    ---   --------    -----------   ----------    -----------    -----------
Balance at December 31, 1994            11,288,329    --        --          329,864         --      (12,192,046)      (573,853)
Reincorporation in Delaware
   at $.01 par value                   (11,220,369)   --        --       11,220,369         --             --             --
Common stock issued                         27,656    --        --        9,726,277         --             --        9,753,933
Net loss                                      --      --        --             --           --       (7,387,717)    (7,387,717)
                                      ------------    ---   --------    -----------   ----------    -----------    -----------
Balance at December 31, 1995                95,616    --        --       21,276,510         --      (19,579,763)     1,792,363
Common stock issued                         18,267    --        --        7,043,328         --             --        7,061,595
Common stock subscribed                       --      --    (110,000)          --           --             --         (110,000)
Unrealized loss on marketable
   securities                                 --      --        --             --        (39,232)          --          (39,232)
Net loss                                      --      --        --             --           --       (7,008,889)    (7,008,889)
                                      ------------    ---   --------    -----------   ----------    -----------    -----------
Balance at December 31, 1996               113,883    --    (110,000)    28,319,838      (39,232)   (26,588,652)     1,695,837
Issuance of common stock in
  connection with
  acquisition of Camelot
  Pharmacal, L.L.C                           6,000    --        --        1,644,000         --             --        1,650,000
Common stock issued                          6,612    --      37,400      1,041,750         --             --        1,085,762
Common stock options and
  warrants issued                             --      --        --          165,868         --             --          165,868
Common stock options extended                 --      --        --          215,188         --             --          215,188
Accretion of issuance costs for
 cumulative convertible
 redeemable preferred stock                   --      --        --             --           --          (79,500)       (79,500)
Unrealized gain on marketable
  securities                                  --      --        --             --         39,232           --           39,232
Net loss                                      --      --        --             --           --       (9,489,138)    (9,489,138)
                                      ------------    ---   --------    -----------   ----------    -----------    -----------
Balance at December 31, 1997               126,495    --     (72,600)    31,386,644         --      (36,157,290)    (4,716,751)
Common stock issued                         30,933    --      23,300      2,216,397                                  2,270,630
Accretion of issuance costs for
 cumulative convertible redeemable
 preferred stock                              --      --        --             --           --          (23,900)       (23,900)
Net loss                                      --      --        --             --           --       (2,263,048)    (2,263,048)
                                      ------------    ---   --------    -----------   ----------    -----------    -----------
Balance at March 31, 1998                  157,428    --     (49,300)    33,603,041         --      (38,444,238)    (4,733,069)
Common stock issued                        111,106    --      23,900      9,926,164         --             --       10,061,170
Preferred stock issued                        --      115       --       11,499,885         --             --       11,500,000
Net loss                                      --      --        --             --           --      (13,303,121)   (13,303,121)
                                      ------------    ---   --------    -----------   ----------    -----------    -----------
Balance at June 30, 1998                   268,534    115    (25,400)    55,029,090         --      (51,747,359)     3,524,980
                                      ============    ===   ========    ===========   ==========    ===========    ===========
</TABLE>


     See accompanying notes to unaudited consolidated financial statements

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

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 1998
                                   (UNAUDITED)

1.       CONSOLIDATED FINANCIAL STATEMENTS

         The  accompanying  consolidated  balance sheets as of June 30, 1998 and
         December  31,  1997 and the  accompanying  consolidated  statements  of
         operations  and cash flows for the three and six months  ended June 30,
         1998 and 1997 and for the period from October 17, 1986  (inception)  to
         June 30, 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 June 30, 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 and six
         months ended June 30, 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  26,  1995,  the  Company's
         shareholders  approved  the  proposal  to  reincorporate  Sheffield  in
         Delaware, which was effected on June 13, 1995. 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 June
         26, 1997,  the Company's  shareholders  approved the proposal to change
         Sheffield's name from Sheffield Medical  Technologies Inc. to Sheffield
         Pharmaceuticals,  Inc. As part of an agreement  with Elan  Corporation,
         plc, on June 30, 1998,  Systemic Pulmonary  Delivery,  Ltd. ("SPD") was
         formed as a wholly-owned  subsidiary of the Company.  At that time, SPD
         acquired  the  Company's  rights to the  systemic  applications  of the
         Metered  Solution Inhaler ("MSI") and acquired Elan's rights to certain
         pulmonary delivery technologies. Unless the context requires otherwise,
         Sheffield,  U-Tech,  Ion,  CP and SPD are  referred  herein  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 that 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
         has the  ability  to meet its  obligations  as they  become  due and to
         continue as a going concern through December 1998.


<PAGE>
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 JUNE 30, 1998
                                  (UNAUDITED)

2.       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. Options,  warrants and convertible securities 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.

         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 enterprises
         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.

4.       RESEARCH AND DEVELOPMENT

         On June 15, 1998,  the Company  entered  into an agreement  with Zambon
         Group SpA ("Zambon") of Milan,  Italy for a sublicense to the Company's
         proprietary  MSI drug  delivery  system.  Zambon  received an exclusive
         world-wide  marketing  and  development   sub-license  for  respiratory
         products  to be  delivered  by the  metered  solution  inhaler  ("MSI")
         including  four  drugs  previously  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
         agreed  to fund  all  remaining  development  costs  relating  to these
         respiratory  products,  paid the Company an up-front fee in the form of
         an equity investment as well as will pay the Company 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.  Relative to the agreement,  on April 15, 1998, the Company
         issued 800,000 shares of Common Stock, for the sum of $650,000 in cash,
         pursuant  to an option  agreement  and on June 15,  1998,  the  Company
         entered into the definitive agreement which resulted in the issuance of
         an additional 1,846,153 shares of Common Stock for $1,500,000.

         On June 30, 1998, the Company issued  5,571,428  shares of Common Stock
         and 11,500 shares of Series C Cumulative  Convertible  Preferred Stock,
         convertible  into  shares  of  Common  Stock of the  Company  or of its
         wholly-owned   subsidiary,   SPD,  for  $17.5  million  pursuant  to  a
         definitive agreement with an  affiliate of Elan Corporation,  plc, Elan
         International  Services  ("Elan").   Elan  also  received  warrants  to
         purchase 990,000 shares of Common Stock of the Company with an exercise
         price of $2.00  per  share.  Under  the  terms  of the  agreement,  the
         Company,  through SPD, acquired certain pulmonary delivery technologies
         for the sum of $12.5 million in cash.


<PAGE>

         The Company is responsible for the  development of these  technologies.
         All of the  outstanding  common  stock of SPD is pledged to Elan during
         the term of the  agreement,  and Elan agreed to make  available  to the
         Company  an  additional  $2  million  in  funding  in  the  form  of  a
         convertible note, at the option of the Company.

5.       CAPITAL TRANSACTIONS

         On April 15,  1998,  the Company  issued  1,250  shares of its Series B
         Cumulative   Convertible   Redeemable  Preferred  Stock  in  a  private
         placement for an aggregate purchase price of $1,250,000. As of June 30,
         1998,  all of the Series B Preferred  Stock  remained to be redeemed or
         available  for  conversion.  On July  31,  1998,  all of the  Series  B
         Preferred Stock was redeemed by the Company.

         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.  concerning  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  June 3,  1998,  a total of
         2,925,941  shares of common stock were issued as a result of conversion
         and interest payments made on the Company's 6% subordinated convertible
         debentures.  As of June 3, 1998,  all principal had been converted into
         shares of common stock.

6.       SUBSEQUENT EVENTS

         On July 15, 1998,  the Company,  through SPD,  acquired  from  Aeroquip
         Corporation a new  generation  metered dose inhaler (MDI) system called
         the Aerosol Drug Delivery  System ("ADDS") in a cash  transaction.  SPD
         holds  the  rights to all  systemic  disease  applications  of the ADDS
         technology. Sheffield retains the rights to develop respiratory disease
         applications  of this  ADDS  technology.  In  connection  with the ADDS
         acquisition,   the  three  member  technology  team  at  Aeroquip  that
         developed the ADDS system have joined Sheffield.

         On July 15, 1998, in connection with an annual Meeting of Stockholders,
         stockholders  approved  certain  amendments to the Company's 1993 Stock
         Option Plan,  increasing the number of shares of Common Stock available
         for issuance thereunder from 3,000,000 shares to 4,000,000 shares.


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

ITEM 2:

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

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.


OVERVIEW

The Company is a specialty pharmaceutical company focused on the development and
commercialization  of later  stage,  lower  risk  pharmaceutical  opportunities,
particularly those utilizing unique pulmonary delivery technologies over a range
of therapeutic  areas.  The Company is focusing its resources on the development
and  commercialization  of pharmaceutical  products whose utility and commercial
potential  can be  exploited  or enhanced  by  delivery in one of the  Company's
proprietary  pulmonary delivery systems.  The Company has established  strategic
alliances with Siemens AG, Zambon Group Spa, and Elan Corporation,  plc. for the
development of these systems.  The Company through its wholly-owned  subsidiary,
Systemic  Pulmonary  Delivery,  Ltd.  ("SPD")  has  expanded  its  portfolio  of
proprietary  pulmonary delivery technologies with the recent acquisitions of the
UPDAS(TM)  and  Enhancing  Technology  from Elan  Corporation,  plc and the ADDS
system from Aeroquip  Corporation.  The Company will seek to acquire  additional
novel platform drug delivery systems and technologies.

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The Company, 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 few 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 $51.9 million through June 30, 1998.

The  Company  continues  to  conduct  scientific   research,   clinical  trials,
development, and intellectual property protection. During the three months ended
June 30, 1998, the Company funded  $47,729 for direct  research and  development
costs on its projects.  The Company continues to seek appropriate  sub-licensing
partners for its remaining early-stage technologies.


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

REVENUES AND EXPENSES

Revenues:

From  inception  through the period ended June 30, 1998,  the Company has earned
sub-license revenue of $1,360,000 relative to various early-stage  technologies.
The Company  earned  sub-license  revenue of $350,000 for the quarter ended June
30, 1998.

From  inception  through the period ended June 30, 1998,  the Company has earned
interest  income  of  $457,342  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 June 30, 1998 was $2,562 compared to
$21,747 for the same period ended June 30, 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 June 30, 1998,  the Company  incurred
$55,768,089  of operating  expenses.  Of the total  operating  expenses for that
period,  $21,048,494  were costs of research and  development  for the Company's
technologies and $14,150,000 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 the cost of completing
its financings.  Research and  development  costs are expected to remain high as
the  Company  develops  its  current   technologies   and  acquires   additional
technologies.  Such costs will continue to be expensed for  financial  reporting
purposes.

Operating  expenses for the three months ended June 30, 1998,  were  $13,655,683
compared to  $3,443,147  for the same  period  ended June 30,  1997.  During the
quarter  ended June 30, 1998,  the Company  recognized a $12.5  million  expense
related to the acquisition of R&D in-process technology under its agreement with
Elan  Corporation,  plc, as discussed  below.  During the quarter ended June 30,
1997, the Company  recognized a $1.65 million expense related to the acquisition
of R&D  in-process  technology  pursuant to the merger with  Camelot  Pharmacal,
L.L.C.

The Company's  direct  research and  development  expenses were  $12,547,729 and
$31,208,038  for the three  months  ended June 30,  1998 and from the  Company's
inception  to June  30,  1998,  respectively.  The  Company's  committed  direct
research and  development  funding after June 30, 1998 is currently $2.0 million
and  relates  primarily  to  the  development  of  certain  pulmonary   delivery
technologies  by  SPD  (i.e.,  systemic  applications  of  the  MSI,  UPDAS(TM),
Enhancing  Technology,  ADDS). The Company  anticipates  funding the development
costs  associated  with the  respiratory  applications of the UPDAS(TM) and ADDS
technologies,  the  anticipated  costs of which have not been  determined at the
time of this  filing.  The Company  continues  to  out-license  the  early-stage
technologies  remaining  in its  portfolio,  seeking  organizations  having  the
interest and resources to continue development accordingly.


<PAGE>
LIQUIDITY AND CAPITAL RESOURCES

The Company's  cash available for funding its operations as of June 30, 1998 was
$5,421,662.  As of such date,  the  Company had trade  payables of $716,505  and
current  research  obligations of $470,180.  As a result of its  development and
growth plans, the Company will need 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.

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

On April 15,  1998,  the Company  issued  800,000  shares of Common  Stock,  for
$650,000  pursuant  to an  option  agreement  with an  affiliate  of the  Zambon
Corporation,  Inpharzam International, S.A., relative to certain MSI respiratory
applications.  On June  15,  1998,  the  Company  entered  into  the  definitive
agreement  with  Inpharzam,  which  resulted in the  issuance  of an  additional
1,846,153  shares  of  Common  Stock  for  $1,500,000.  Under  the  terms of the
agreement, Inpharzam will fund all development costs associated with the subject
MSI respiratory applications.

On April 15,  1998,  the Company  issued 1,250 shares of its Series B Cumulative
Convertible  Redeemable  Preferred Stock in a private placement for an aggregate
purchase price of $1,250,000, plus warrants to purchase 300,000 shares of Common
Stock with an exercise price of $1.00 per share. As of June 30, 1998, all of the
Series B Preferred Stock remained to be redeemed or available for conversion. On
July 31, 1998, all of the Series B Preferred Stock was redeemed by the Company.

On June 30, 1998, the Company issued 5,571,428 shares of Common Stock and 11,500
shares of Series C Cumulative  Convertible  Preferred  Stock,  convertible  into
shares of Common Stock of the Company or of its  wholly-owned  subsidiary,  SPD,
for $17.5 million pursuant to a definitive  agreement with an  affiliate of Elan
Corporation,  plc,  Elan  International  Services  ("Elan").  Elan also received
warrants  to purchase  990,000  shares of Common  Stock of the  Company  with an
exercise  price of $2.00  per  share.  Under  the  terms of the  agreement,  the
Company,  through SPD, acquired certain pulmonary delivery  technologies for the
sum of $12.5 million in cash. The Company is responsible  for the development of
these  technologies.  All of the  outstanding  common stock of SPD is pledged to
Elan during the term of the agreement,  and Elan agreed to make available to the
Company an additional  $2 million in funding in the form of a convertible  note,
at the option of the Company.

<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 June 30, 1998:
<TABLE>
<CAPTION>

                                                       Number of
                                                        Shares
                                                       Sold/Issued
                               Description             /Subject to
            Date of           of Securities            Options or      Offering/Exercise
          Sale/Issucane          Issued                  Warrants      Price per Share ($)       Purchaser of Class
          -------------          ------                  --------      -------------------       ------------------

<S>                 <C>        <C>                       <C>             <C>                     <C>
         April-June 1998       Common Stock              3,908,512       $0.5156-$0.7125         Holders of Preferred
                                                                                                 Stock and Convertible
                                                                                                 Debentures

         April 1998            Common Stock                800,000           $0.8125             Investor/Licensor

         April 1998            Common Stock Warrants       300,000            $1.00              Holder of Preferred Stock

         May 1998              Common Stock Warrants        52,410       $1.375-$1.625           Advisors

         May 1998              Common Stock Options         30,000            $1.375             Issuance to eligible Directors
                                                                                                 pursuant to the 1996 Directors
                                                                                                 Stock Option Plan

         June 1998             Common Stock              1,846,153            $0.8125            Investor/Licensor

         June 1998             Common Stock              4,571,428            $1.3125            Investor/Licensor

         June 1998             Common Stock Warrants       990,000             $2.00             Investor/Licensor
</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.

<PAGE>
ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K.

         (a)  EXHIBITS

         NO.          DESCRIPTION

         3.1          Certificate of Incorporation, as amended

         4.1          Certificate   of   Designations   defining   the   powers,
                      designations,   rights,   preferences,   limitations   and
                      restrictions   applicable  to  the   Company's   Series  B
                      Cumulative Convertible Redeemable Preferred Stock.

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

         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.

         The Company filed a current  Report on Form 8-K with the Securities and
Exchange  Commission on June 22, 1998 relating to the Company's  entering into a
sublicense  and  development  agreement with  Inpharzam  International,  S.A. of
Switzerland (an affiliate of Zambon Group,  SpA) for the testing and development
of the  Company's  rights in its MSI  technology  in  respect of  therapies  for
respiratory diseases.

         The Company filed a current  Report on Form 8-K with the Securities and
Exchange Commission on July 16, 1998 relating to the Company's consummation of a
license  and  financing  transaction  with  Elan  International  Services,  Ltd.
("Elan") (an affiliate of Elan Corporation plc, an Irish pharmaceutical company)
in accordance with the terms of the binding letter of intent dated June 3, 1998.



<PAGE>

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:  August 14, 1998          /S/ LOREN G. PETERSON
                                 ----------------------
                                 Loren G. Peterson
                                 President & Chief Executive Officer


Dated:  August 14, 1998          /S/ JUDY ROESKE BULLOCK
                                 ------------------------
                                 Judy Roeske Bullock
                                 Vice President & Chief Financial Officer
                                 (Principal Financial and Accounting Officer)