<DOCUMENT>
<TYPE>10-K
<SEQUENCE>1
<FILENAME>c75799e10vk.txt
<DESCRIPTION>FORM 10-K
<TEXT>
<PAGE>

                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K

       [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
                              EXCHANGE ACT OF 1934

                   For the fiscal year ended December 31, 2002
                                       OR

     [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
                     EXCHANGE ACT OF 1934 (NO FEE REQUIRED)

                         Commission file number 1-12584

                         SHEFFIELD PHARMACEUTICALS, INC.
             (Exact name of registrant as specified in its Charter)

        DELAWARE                                        13-3808303
(State of Incorporation)                    (IRS Employee Identification Number)

3136 WINTON ROAD SOUTH
STE 201                                     14623            (585) 292-0310
ROCHESTER, NEW YORK                       (Zip Code)    (Registrant's telephone,
(Address of principal executive offices)                  including area code)

           SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

             Title of Class           Name of each exchange on which registered
      Common Stock. $.01 par value               American Stock Exchange

           SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

                                      None

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

                  Indicate by check mark if disclosure of delinquent filers to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]

                  Indicate by check mark whether the Registrant is an
accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
YES [ ] NO [X]

                  The aggregate market value at June 30, 2002 of the voting
stock of the registrant held by non-affiliates (based upon the closing price of
$1.50 per share of such stock on the American Stock Exchange on June 28, 2002,
the last trading day of the Company's most recently completed second fiscal
quarter) was approximately $32,083,000. Solely for the purposes of this
calculation, shares held by the registrant's directors and executive officers
and beneficial owners of 10% or more of the Company's Common Stock of the
registrant have been excluded. Such exclusion should not be deemed a
determination or an admission by the registrant that such persons are, in fact,
affiliates of the registrant.

                  Indicate the number of shares outstanding of each of the
registrant's classes of common equity, as of the latest practicable date: At
April 10, 2003, there were outstanding 29,563,712 shares of the registrant's
Common Stock, $.01 par value.

                       DOCUMENTS INCORPORATED BY REFERENCE

                  None.

                                       1
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PART I

         The following contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended, which are intended to be
covered by the safe harbors created thereby. All forward-looking statements
involve risks and uncertainty. 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, the
Company's actual results may differ materially from the results anticipated in
the forward-looking statements. See "Business - Certain Risk Factors that May
Affect Future Results, Financial Condition and Market Price of Securities"
included herein for a discussion of factors that could contribute to such
material differences. In light of the significant uncertainties inherent in the
forward-looking statements included herein, the inclusion of such information
should not be regarded as a representation by the Company or any other person
that the objectives and plans of the Company will be achieved.

ITEM 1.  BUSINESS

THE COMPANY

         Sheffield Pharmaceuticals, Inc. (formerly Sheffield Medical
Technologies Inc.) ("Sheffield" or the "Company") was incorporated under
Canadian law in October 1986. In May 1992, the Company became domesticated as a
Wyoming Corporation pursuant to a "continuance" procedure under Wyoming law. In
January 1995, the Company's shareholders approved the proposal to reincorporate
the Company in Delaware, which was effected on June 13, 1995. The Company
provides innovative, cost-effective pharmaceutical therapies by combining
state-of-the-art pulmonary drug delivery technologies with existing and emerging
therapeutic agents. The Company is developing a range of products to treat
respiratory and systemic diseases in its proprietary pulmonary delivery systems,
including the Premaire(R) Delivery System ("Premaire") and Tempo(TM) Inhaler
("Tempo"). The Company is in the development stage and, as such, has been
principally engaged in the development of its pulmonary delivery systems.
Sheffield believes these pulmonary delivery technologies will allow the Company
to capitalize on the growing drug delivery market by providing both advanced
respiratory treatments and patient-friendly alternatives for therapies that can
currently be administered only by injection or other inconvenient means. Unless
the Company is able to raise significant capital ($1 million to $2.5 million)
within the next 30-60 days, management believes that it is unlikely that the
Company will be able to meet its obligations as they become due and to continue
as a going concern.

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

BUSINESS STRATEGY

         The Company's business strategy is to seek out opportunities to acquire
and develop commercially attractive pharmaceutical products, primarily in the
area of pulmonary drug delivery. The Company recognizes that no single
technology in the area of pulmonary drug delivery will meet the needs of
patients and providers of the wide variety of compounds (both for respiratory
disease and systemic disease therapy) that may benefit therapeutically and
commercially from pulmonary delivery. As a result, it remains the Company's goal
to acquire or in-license a portfolio of pulmonary delivery technologies to meet
the broadest based market opportunity. The Company intends to selectively enter
into joint ventures or other forms of strategic alliances to access technology
and compounds as well as defray or reduce significant development and
manufacturing costs associated with these opportunities that otherwise might be
borne by the Company. The Company will also retain certain commercial rights to
these products.

         The Company will continue to be opportunistic in the acquisition and/or
in-licensing of technologies or products that meet the Company's strategic
objectives. Such opportunities include: (1) technologies or products that meet
the needs of healthcare providers and patients that are not currently served,
(2) technologies or products that can effectively be developed when viewed in
light of the commercial opportunity and competitive environment within the U.S.
market, (3) technologies or products that will be of substantive interest to
other companies with regard to co-development and co-marketing with limited
incremental investment by the Company, and (4) products and technologies with
the potential for marketing to a specialty group or limited physician audience.
The Company plans to pay special attention to platform technologies that can be
developed into multiple applications in varying therapeutic categories.

STRATEGIC ALLIANCES

         The Company believes a less costly, more predictable path to commercial
development of therapeutics can be achieved through the creative use of
collaborations and alliances, combined with state-of-the-art technology and
experienced management. The Company is applying this strategy to the development
of both respiratory and systemic pharmaceutical products to be delivered through
the Company's

                                       2
<PAGE>

proprietary pulmonary delivery systems. Using these pulmonary delivery systems
as platforms, the Company has established strategic alliances for developing its
initial products.

         The Company is developing a range of pharmaceutical products delivered
by the Premaire to treat respiratory diseases. Products initially developed for
respiratory disease therapy delivered through the Premaire include albuterol
sulfate, ipratropium bromide, sodium cromoglycate and inhaled steroids. In June
1998, the Company sublicensed to Zambon Group SpA ("Zambon") worldwide marketing
and development rights to respiratory products to be delivered by the Premaire
in return for an equity investment in the Company (approximately 10%). From June
1998 to September 2001, Zambon funded the costs for the respiratory compounds
being developed for delivery in the Premaire. In September 2001, the Company
amended its 1998 agreement with Zambon whereby Sheffield regained the rights to
the Premaire previously granted to Zambon. As part of the amended agreement,
Zambon provided a low-interest, $2.5 million loan to Sheffield to progress the
development of the Premaire respiratory program. Upon commercialization, Zambon
will be entitled to certain royalties on payments received by Sheffield for
albuterol sulfate, ipratropium bromide and sodium cromoglycate sales for
specified periods.

         As part of a strategic alliance with Elan, a world leader in
pharmaceutical delivery technology, the Company is developing therapies for
systemic diseases to be delivered to the lungs using both the Premaire and
Tempo. In 1998, the systemic applications of the Premaire and Tempo were
licensed to Systemic Pulmonary Delivery, Ltd. ("SPD"), a wholly owned subsidiary
of the Company. In addition, two Elan technologies, UPDAS and the Enhancing
Technology, have also been licensed to SPD. The Company has retained exclusive
rights outside of the strategic alliance to respiratory disease applications
utilizing the Tempo technology and the two Elan technologies. On August 21, 2002
we ended this strategic alliance with Elan and regained all intellectual
property rights to the systemic applications of Premaire and Tempo that were
licensed to SPD. In addition, as part of the termination of this alliance, we
have been granted an exclusive license to Elan's UPDAS(TM) and the Enhancing
Technology. We have also granted to Elan an ongoing right to receive royalties
on commercialization of two products, morphine delivered by Premaire and
ergotamine tartrate delivered by Tempo.

         In addition to the above alliance with Elan, in 1999, the Company and
Elan formed a joint venture, Respiratory Steroid Delivery, Ltd. ("RSD"), an
80.1% owned subsidiary of the Company and 19.9% owned by Elan, to develop
certain inhaled steroid products to treat certain respiratory diseases using
Elan's NanoCrystal(TM) dispersion technology. The inhaled steroid products being
developed include a unit-dose-packaged steroid dispersion formulation for
delivery using a conventional tabletop nebulizer, and a steroid dispersion
formulation for delivery using the Premaire system. On November 8, 2002, as part
of an agreement between Elan and RSD, the parties terminated the license for the
Elan NanoCrystal technology to RSD. As provided in the 1999 license agreement,
upon termination of this license, all intellectual property of RSD was
transferred to and jointly owned by Elan and Sheffield. Elan and Sheffield are
in discussions regarding the restructure or termination of the RSD Venture.

         The Company is also currently in discussions with a number of
pharmaceutical and biotechnology companies concerning potential collaborations
for developing specific compounds (both respiratory and systemic) in the Tempo.
Unlike the Premaire, Tempo is a technology that lends itself to individual
product applications in the respiratory market. While the Tempo technology may
be applicable to a wide range of respiratory products, the Company believes that
a full line of products delivered by Tempo is not necessary for commercial
success. The reverse is true with the Premaire, since one of the Premaire's
primary competitive advantages is the delivery of a range of drugs in
interchangeable cartridges used with the parent nebulizer device.

PULMONARY DELIVERY MARKET ENVIRONMENT

         The Company competes in the pulmonary delivery market. The principal
use of pulmonary delivery has been in the treatment of respiratory diseases such
as asthma, chronic obstructive pulmonary disease ("COPD") and cystic fibrosis.
There is significant advantage in aerosol therapy for respiratory disease.
Pulmonary administration delivers the medication directly onto the lung's
epithelial surfaces. In many cases, this means that drugs can be effective in
very low doses -- reducing the side effects often associated with systemic
administration. In 1998, industry sources estimate there were approximately 35.5
million asthma patients and 49.5 million COPD patients worldwide. These sources
indicate that the number of newly diagnosed patients is growing at a rate in
excess of 10% annually due to an increase in worldwide air pollution levels and
the overall aging of the population. By the year 2005, the Company expects that
there will be more than 19 million asthma patients in the United States alone.

         In addition, the competitive marketplace has been significantly
affected by the worldwide phase out of clorofluorocarbons ("CFCs") pursuant to
the Montreal Protocol. CFCs are the propellants traditionally used in
pressurized metered dose inhalers ("pMDIs"), which are the most common form of
pulmonary delivery. Companies in the respiratory market have initiated
significant programs to redevelop existing products using alternative
propellants, dry powders or aqueous-based nebulizers.

         There is considerable interest in applying pulmonary delivery
technology to systemic therapies that would benefit from the relatively easy
administration to the circulatory system through the lungs. Work on pulmonary
delivery of insulin by other pulmonary delivery companies has received
significant public notice. There is a range of therapies that could provide a
significant market opportunity if available in an inhaled delivered form.

                                       3
<PAGE>

         Today, three types of devices are widely used in pulmonary drug
administration: pressurized metered dose inhalers, dry powder inhalers, and
nebulizers.

         Pressurized Metered Dose Inhalers. Currently, pMDIs are the most
         commonly used pulmonary delivery system. It is estimated that in the
         United States over 80% of pulmonary drug delivery is via pMDI, with the
         majority of this use coming from adults with asthma and COPD.

         The main components of a pMDI include a canister containing the drug
         mixed with propellant and surfactant, a mouthpiece that acts as the
         delivery conduit and the metering valve for the release of precise
         quantities of the drug. The initial velocity of particle and propellant
         droplets as they leave an inhaler is very high -- approximately 2-7
         meters per second -- resulting in wasted drug if the patient is not
         able to coordinate his/her breath with the delivery of aerosol into the
         mouth. A number of studies have demonstrated that as many as 80% of
         patients cannot accurately time their inspiration with the actuation of
         their inhaler which results in under medication and lack of compliance.
         Typically, less than 20% of metered drug actually reaches the lungs.

         The primary advantages of a pMDI include its excellent storage and
         metering capability, small size, portability, fast usage time, and its
         availability for use with most respiratory drugs. Disadvantages of a
         pMDI include patient coordination issues and efficient dose delivery.
         Additionally, because the use of CFCs traditionally used in pMDIs are
         being phased out by international agreement (Montreal Protocol),
         alternative propellants and formulations are being developed. Over
         time, all current pMDI users will be required to move to a non-CFC pMDI
         or other alternative delivery systems. The majority of U.S. patients
         favor aerosol pMDIs although a sizable percentage may not coordinate
         them properly.

         Dry Powder Inhalers. Dry powder inhalers ("DPIs") were introduced in
         the 1960s as single-dose inhalers. In these devices, the drug is loaded
         as a unit dose that is mechanically released as a powder for inhalation
         prior to each use. To date, these relatively cumbersome systems have
         been the primary form of DPI available in the United States, and
         account for approximately 1% of the total aerosol delivery market.

         The inconvenience of the single dose DPI has been overcome outside of
         the U.S. with the development and introduction of multi-dose DPIs that
         can deliver up to 200 doses of medication. However, like the single
         dose systems, they are inspiratory flow rate dependent; that is, the
         amount of drug delivered to the lung depends on the patient's ability
         to inhale.

         Two of the most significant advantages of DPIs include (1) no
         hand-breath coordination is required as with pMDIs; and (2) they
         contain no CFCs. However, most require a high inspiratory flow rate,
         which can be problematic in younger patients or patients with
         compromised lung function. In addition, they often present difficulties
         for those with manual disabilities (e.g., arthritis) or limited vision
         and, depending upon the powder load delivered, they may induce acute
         bronchospasm in sensitive individuals. Additionally, multi-dose powder
         inhalers are subject to moisture sensitivity either from the
         environment or patient breath and have had difficulty meeting U.S.
         regulatory standards for dose-to-dose variation.

         Nebulizers. The third widely used aerosol delivery system is the
         nebulizer. Jet nebulizers, which are the most commonly used nebulizer,
         work on a stream of compressed air or oxygen that is forced through a
         narrow tube lying just above the surface of the liquid to be nebulized.
         It takes approximately 10 to 15 minutes to nebulize this amount of
         liquid. Studies suggest keeping the duration of nebulization short, as
         longer durations are associated with poor compliance. During
         nebulization only about 10% of the drug is delivered to the lungs;
         about 80% gets trapped in the reservoir, tubing, mask or the patients
         mouth and throat; the rest is exhaled.

         Nebulizers can be used for a wide range of patients, but are especially
         useful for those older and younger patients who cannot manage other
         inhaler devices. Nebulizers also play a key role in emergency room and
         intensive care treatment for patients with acute bronchospasm. Another
         feature exclusive to nebulizers is that a mixture of drugs can be
         administered in one sitting. However, currently approved nebulizers are
         bulky tabletop units that are time consuming, have a high initial cost
         (often in excess of the amount reimbursable by managed care) and can be
         noisy during operation.

PREMAIRE(R) DELIVERY SYSTEM

         The Premaire system has been developed to provide the therapeutic
benefit of nebulization with the convenience of pressurized pMDIs in one system.
The Premaire was developed to meet specific needs within the respiratory market,
particularly for pediatric and geriatric patients suffering from asthma and
COPD.

Description of the Premaire

         The Premaire is comprised of two main components: (1) a reusable,
pocket-size inhaler unit developed and manufactured for the Company by Siemens;
and (2) drug cartridges, called Dosators(TM), containing multiple doses of drug
formulation assembled and filled by Chesapeake Biological Laboratories. The
cartridges are an integral part of the total system. The cartridge plus each
drug formulation will be the subject of a separate drug device combination New
Drug Application ("NDA").

         The basic technology of the system involves the rapid atomization of
therapeutic agents using ultrasonic energy. This produces a concentrated soft
mist of medication delivered through the mouthpiece over a one to two second
period for inhalation. The key components of the technology are housed in the
inhaler unit. They are the rechargeable battery-operated motor, ultrasonic horn
and drug cartridge. The

                                       4
<PAGE>

pocketsize Premaire allows for administration of a range of drugs in a single,
simple-to-use, environmentally friendly delivery system. Each cartridge
contains, depending on formulation, approximately a one-month supply of the
drug.

         To use the Premaire system, a patient simply selects the appropriate
color-coded drug cartridge and places it into the chamber of the inhaler unit.
Pressing the "on" button activates a small electrical motor that transports a
precise dose of drug from the cartridge chamber to the ultrasonic horn --
transforming the solution into an aerosolized cloud. The patient's inspiratory
breath carries this cloud of medication directly to the lungs where it is
needed. The dose delivered by the Premaire is very accurate and consistent
because: (1) the Premaire is designed to be inspiratory flow rate independent;
that is, delivery of the drug does not depend upon the patient's ability to
inhale forcefully, and (2) the Premaire does not require a high level of
coordination between inspiration and actuation of the device. The patient's
natural breath carries the medication directly to the lungs, minimizing the
amount of drug deposited in the mouth and throat.

Premaire Advantages

         The Company believes that the Premaire provides significant advantages
over other drug delivery systems. It is particularly suited for younger and
older asthma patients, as well as for older COPD patients who have difficulty
using pMDIs and currently have to depend on larger, more time-consuming tabletop
nebulizers for delivery of their medications. These potential advantages
include:

         Accuracy. The superior engineering and patient-friendly design of the
         Premaire is intended to provide minimal dose-to-dose variability.
         Patients can therefore expect to receive the right therapeutic dose
         consistently. Testing of the Premaire delivery system has shown that
         dose-to-dose variability with the Premaire is significantly better than
         the current FDA requirement.

         Enhanced Patient Compliance. The pocketsize, portable Premaire unit is
         designed to combine the therapeutic benefits of nebulization with the
         convenience of pressurized metered dose inhalers. The drug dose is
         precisely measured and delivered in a minute, as compared to 10 to 15
         minutes or more for the typical nebulizer. The device is easy to
         operate, requiring minimal coordination between actuation and
         inhalation for proper drug delivery. These benefits are expected to
         improve patient compliance with the proper administration of their
         respiratory medication. Another expected factor in enhanced patient
         compliance is the broad range of drugs that can be accommodated by the
         Premaire, allowing patients on multiple medications to rely on one
         simple delivery system.

         Inspiratory Flow Rate Independence. Unlike most of the DPIs currently
         available (or in development), the Premaire is designed to achieve a
         consistent and significant level of drug deposition over a broad range
         of inspiratory flow rates. This is especially important in younger
         patients or patients with compromised lung function (e.g., during an
         asthma attack) that have a difficult time breathing normally.

         Versatility. Many asthma and COPD patients are taking multiple
         inhalation medications. The Premaire accommodates drug cartridges to
         allow for the administration of a broad range of frequently used
         respiratory drugs in a single, simple-to-use delivery system. The
         system includes an early warning mechanism that signals when the
         batteries need recharging or when the dosator is not functioning
         properly and a dose counter indicating when a new inhaler unit is
         required. These user-friendly features result in a simplified dosing
         procedure for both patients and their caregivers.

         Pulmonary Targeting. The particle size of the inhaled medication
         affects the effectiveness of drug delivery to the lung. Generally, a
         drug is "respirable" if the particle size is between two and five
         microns. Larger particles tend to deposit in the inhaler or in the
         patient's mouth and throat. Smaller particles tend to be exhaled.
         Within the respirable range, the Premaire is designed to deliver
         particles specifically targeted for certain portions of the lungs; for
         example, the central lung for local treatment or the deep lung for
         enhanced absorption into the blood stream for systemic therapies.

         Environmentally Friendly. CFCs, the most commonly used propellant for
         pMDI aerosols, are believed to adversely affect the Earth's ozone
         layer. They are subject to worldwide regulations aimed at eliminating
         their production and use within the decade under the Montreal Protocol.
         The Premaire does not use CFCs or any other type of ozone depleting
         propellant.

         Economical. The Company believes that the Premaire offers significant
         value to the patient because it is designed to allow a single device to
         be used with a variety of respiratory medications available in
         cost-effective interchangeable cartridges. The inhaler unit itself is
         expected to have a life of up to two years. The initial cost of the
         inhaler unit is expected to be within the cost range that managed care
         providers will reimburse patients. The Company anticipates the combined
         cost to the patient of the device plus the drug filled cartridges will
         be comparable to the average cost per dose of the standard metered dose
         inhaler.

Premaire Product Pipeline in Development

         The Company is implementing a broad development strategy for the
Premaire. The Company is developing a range of widely used respiratory drugs for
delivery in the Premaire. Initial drugs being developed for respiratory disease
therapy include albuterol sulfate, ipratropium bromide, sodium cromoglycate, and
budesonide, an inhaled bronchial steroid, each of which is described below.

         As previously discussed, in June 1998, the Company sublicensed to
Zambon worldwide marketing and development rights to respiratory products to be
delivered by the Premaire. From June 1998 to September 2001, Zambon developed
and funded the costs for the respiratory compounds being developed for delivery
in the Premaire. In September 2001, the Company amended its 1998 agreement with
Zambon whereby Sheffield regained the rights to the Premaire previously granted
to Zambon. As a result, the sponsorship of the Premaire respiratory development
programs was transferred from Zambon to the Company with the Food and Drug
Administration ("FDA") being

                                       5
<PAGE>

notified accordingly. Sheffield has reviewed all of the development work
completed-to-date, identifying a number of deficiencies in the Zambon
development program. To address these issues, Sheffield has made a number of
internal management changes and moved the program to a group of highly
experienced pulmonary clinical and regulatory experts. The Premaire device is
currently in a to-be-marketed form and fully industrialized.

The following details the status of the respiratory applications being developed
in the Premaire system:

                  ALBUTEROL SULFATE. Albuterol sulfate, a beta agonist, is a
         bronchodilator used as rescue therapy for patients with asthma and
         COPD. It is the largest selling respiratory compound with U.S. sales of
         over $500 million in all dosage forms. It is available in a metered
         dose inhaler and nebulizer solution as well as solid and liquid dosage
         forms.

                  Status: Zambon initiated a Phase II clinical trial in December
         1999 that compared the Premaire-albuterol sulfate to a conventional
         albuterol-pMDI. Findings from Phase II studies indicated that
         Premaire-albuterol and pMDI-albuterol were comparable in improving lung
         function in the 24 adult patients. An end of Phase II meeting was held
         in February 2002 with the FDA where the results of the development
         activities-to-date, specifically the results of the Phase II trial,
         were reviewed. The Company is currently reviewing the FDA's comments
         and recommendations, integrating the information into the plans for the
         Phase III trial and NDA submission. The Company has completed device
         manufacturing scale-up to supply "to-be-marketed" product. When funding
         becomes available, the Company will initiate pivotal trials for the
         albuterol sulfate product.

                  BUDESONIDE. Budesonide is a corticosteroid, anti-inflammatory
         agent that treats the underlying inflammation in the lungs of asthma
         and COPD patients. It is currently available in a DPI, nebulizer
         respule and pMDI in Europe. Steroids are the fastest growing category
         in the respiratory market, growing at 20% per year.

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

                  IPRATROPIUM BROMIDE. Ipratropium bromide is a bronchodilator
         used primarily to treat COPD patients. It is useful because of its
         anticholinergic properties, which reduce pulmonary congestion. It is
         available in a metered dose inhaler, nebulizer solution and a
         combination product with albuterol.

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

                  SODIUM CROMOGLYCATE. Sodium cromoglycate is a non-steroidal,
         anti-inflammatory drug used to reduce the underlying bronchial
         inflammation associated with asthma. It is extremely safe and it is
         most commonly used to treat pediatric patients. It is available in a
         pMDI and nebulizer solution.

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

                  OTHER RESPIRATORY THERAPIES. In addition to the drugs listed
         above, the Company continues to assess the market potential for certain
         other respiratory therapies. These therapies may include a combination
         of an anti-inflammatory and beta agonist, an anticholinergic and beta
         agonist, as well as antibiotics for cystic fibrosis treatments.

         SYSTEMIC APPLICATIONS: Through its development alliance with Elan, the
Company evaluated certain drugs for systemic treatment by pulmonary delivery
through Premaire. By identifying a market opportunity for a rapid-acting,
non-invasive treatment for breakthrough pain, the first drug to be tested for
delivery in Premaire was morphine. The pain management market includes patients
with cancer, post-operative, migraine headache and chronic persistent pain.
Narcotic analgesics for treatment of these severe forms of pain are estimated to
exceed $1.0 billion in worldwide sales in the year 2000.

         Status: In July 1999, the Company completed a gamma
scintigraphy/pharmacokinetic trial comparing morphine delivered using the
Premaire to subcutaneous injection. The Premaire demonstrated good pulmonary
deposition and very rapid absorption, more rapid peak blood levels vs.
subcutaneous injection and low oral and throat deposition. As part of the
development alliance with Elan, Elan has the first right of refusal on the
development of any product developed by the joint venture. Elan has chosen not
to license this product from the joint venture. As such, the joint venture
continues to seek to attract a partner for the continued development and
commercialization of this product.

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<PAGE>

TEMPO(TM) INHALER

         Tempo, a new generation pMDI, was developed to correct major
deficiencies associated with existing pMDI technology. pMDIs have provided
convenient, safe, self-administered treatment for over 30 years and decreased
the cost of therapy because the patient at home can use them with minimal
medical supervision. However, proper use of current pMDIs requires training and
precise execution of the delivery technique. For these reasons, many patients do
not use their pMDIs in the prescribed manner to coordinate actuation and
inhalation. Incorrect technique has been shown to result in little or no
benefits from pMDI use in half of all adult patients and in a greater proportion
of children. Moreover, because of these coordination issues, most children under
age five cannot use a standard pMDI.

         Even with correct technique, current pMDIs typically deliver less than
20% of the drug to the lungs of the patient. The remainder of the drug is wasted
upon deposition on the back of the mouth, or by completely missing the airway.
This results from: (1) the high linear velocity (two to seven meters/second) of
the aerosol jet as it discharges; (2) incomplete evaporation of the propellant
leading to large size droplets that deposit in the mouth and larynx rather than
reaching the lung; and (3) inadequate mixing resulting in a non-uniform
distribution of drug particles in the inspiratory flow stream. Drug deposited in
the mouth and throat can be swallowed and absorbed systemically or, in the case
of inhaled steroids, may create a local concentration of the drug that causes
immunosuppression response and the development of fungal infections. In
addition, swallowing beta agonist bronchodilators may result in adverse effects
on heart rate, blood pressure, glucose and potassium.

         From a therapeutic view, the most serious problem with pMDIs is
inconsistency of delivery. With existing pMDIs the actual dose can vary from 0%
to 300% of the intended dose. Patients may not receive sufficient drug to
achieve a therapeutic effect, or they may overdose with undesirable side
effects. These conditions can lead to the need for emergency treatment.

         A major advantage for the Tempo technology is that it uses the same
aerosol canisters and valves as are currently used in existing pMDIs. As a
result, existing aerosol facilities will be able to produce canisters with
formulations optimized for use in Tempo. The only additional step required is to
place the aerosol canister in the "device" prior to final packaging. This
results in a cost effective product and provides numerous benefits to patients.
The device along with the canister is disposable when the canister is empty.

         The Tempo technology features two improvements over existing pMDIs and
dry powder inhalers. Fluid dynamics modeling, in-vitro and human trials indicate
that up to 60% of drug emitted by the Tempo reaches the lungs with oral
deposition reduced to approximately 15%. Because of this increase in efficiency,
Tempo should require less drug per actuation than existing devices to achieve
the same therapeutic effect. This may result in more unit doses per drug
canister than a conventional pMDI, with less potential for adverse reactions.

         Tempo also features a unique proprietary triggering mechanism that
actuates at the correct time during inhalation. It is designed to automatically
adjust to the patient's breathing pattern to accommodate differences in age and
disease state. This synchronous trigger is designed to reduce patient
coordination problems and enhance patient compliance.

Description of the Tempo

         The Tempo technology utilizes a standard aerosol pMDI canister and
metering valve, encased in a compact device that provides an aerosol
flow-control chamber and a synchronized triggering mechanism. Manipulation of
the discharged drug- containing aerosol cloud is key to optimization of the
efficiency and consistency for pMDIs.

         The Tempo design uses fluid dynamics to: (1) reduce the velocity of the
drug relative to the inspiratory breath velocity (less than one meter/second);
(2) increase residence time of the aerosol droplets before exiting the device to
allow near complete evaporation of the propellant; (3) increase droplet
dispersion and mixing, thus increasing evaporation and improving vapor fraction
at every point along the flow path; (4) reduce the diameter of the drug
particles at the exit plane of the device; (5) decrease inertia of droplets to
reduce impaction; and (6) improve timing of dose discharge with inspiratory
breath for increased drug deposition in lungs.

The unique features of Tempo are:

         Aerosol Flow-Control Chamber. The aerosol flow-control chamber allows
         the patient to inhale through the device at a normal breathing rate,
         instead of a forced breath. The inspiratory breath establishes flow
         fields within the device that mix and uniformly disperse the drug in
         the breath. In the mouthpiece, nearly all the propellant is evaporated
         leaving only drug particles to be inspired, allowing a significant
         increase in the amount of drug delivered to the lungs. Only small
         amounts of drug deposit in the mouth and throat.

         Synchronizing Trigger Mechanism. A triggering and timing mechanism that
         is synchronized with the patient's inspiratory breath controls the
         discharge of the metering valve. Tempo can accommodate different
         inspiratory flow rates, so any patient can activate the triggering
         device. Similarly, the timing mechanism will automatically adjust to
         the flow generated by the patient, delaying or hastening discharge in
         proportion to the total volume passing through the flow control
         chamber. This feature accommodates differences in inspiratory flow
         characteristic of pulmonary disease states in children, adults and the
         infirm.

Tempo Advantages

         The Company believes that the Tempo technology possesses many potential
competitive advantages over other inhalation systems in both local respiratory
and systemic applications. It is applicable to all age categories, eliminating
the most troublesome problems of

                                       7
<PAGE>

aerosol metered dose delivery. Increased efficiency allows for potential
application to proteins and peptides formerly not considered as candidates for
aerosol delivery.

         The performance characteristics of the Tempo are expected to translate
into multiple benefits, including:

         Improved Drug Delivery Efficiency. A higher percentage of the drug
         emitted by the Tempo is delivered to the lungs than current inhalation
         systems while approximately 15% is lost through deposition in the mouth
         and throat. The improved delivery efficiency enhances efficacy, reduces
         side effects and provides greater consistency of dose administration.

         Greater Patient Compliance. The Tempo reduces technique dependence for
         simple, consistent dose-to-dose delivery, resulting in improved
         compliance with prescribed therapy.

         Broader Patient Base. The Tempo can be prescribed for a broader patient
         base since it is designed to be self-administered by children and the
         elderly as well as adult patients.

         Pharmacoeconomic Benefit. The Tempo has increased delivery efficiency
         with less waste, so patients can receive more unit doses per standard
         canister. This allows for a lower drug cost per day in addition to
         reducing prescription and payer costs because fewer pharmacy visits are
         required.

Tempo Product Pipeline in Development

         TEMPO SYSTEMIC THERAPIES. The development of systemic drugs using Tempo
is being conducted as part of the Company's alliance with Elan. The initial
product developed was targeted to address migraine headaches. The Company
utilized ergotamine tartrate as a proof-of-principle product. Ergotamine, an
alpha adrenergic blocking agent, is a therapy to stop or prevent vascular
headaches such as migraines. Migraine headaches affect up to 30 million
Americans. Worldwide annual drug sales for the migraine therapy market are in
excess of $2.4 billion with many patients unable to get satisfactory relief from
currently available therapies. In fact, it is estimated that absenteeism and
medical expenses resulting from migraine total $50 billion annually. Current
oral drug therapies for the treatment of migraine headaches have slow onset of
action, resulting in a medical need that may be better satisfied through
pulmonary delivery.

         Status: In December 1999, the Company completed a gamma
scintigraphy/pharmacokinetic trial comparing the Tempo to a conventional pMDI.
The trial showed successful delivery of the drug to all regions of lung with
significantly reduced mouth and throat deposition, and rapid drug absorption. As
part of the development alliance with Elan, Elan has the first right of refusal
on the development of any product developed by the joint venture. Elan has
chosen not to license this product from the joint venture. As such, the joint
venture continues to seek to attract a partner for the continued development and
commercialization of this product.

         As a result of the work performed on the ergotamine product noted
above, Sheffield initiated a new development program for a novel formulation of
dyhydroergotamine ("DHE") for pulmonary delivery in the Tempo for the treatment
of specific types of migraines. Formulation work for this program was completed
and stability of the formulation has been demonstrated over six (6) months. A
clinical plan has been developed and the Company is currently in discussions
with pharmaceutical companies to develop, manufacture and market this product.

         TEMPO RESPIRATORY THERAPIES. The Tempo has broad applicability across
respiratory disease therapies since it utilizes basic pMDI delivery methods that
are the most popular forms of respiratory delivery. The Tempo technology's
ability to significantly minimize oral deposition makes it especially applicable
to steroids and steroid combinations with which fungal overgrowth side effects
are common. In addition, U.S. patients and physicians have indicated that they
prefer metered dose aerosol delivery. The Tempo technology is positioned to take
advantage of this built-in market preference for pMDIs with its potential for
superior performance, reduced adverse reactions and cost-effectiveness. Inhaled
steroids are the fastest growing segment of the respiratory market and the
largest in Europe. The features of the Tempo directly minimize the aspects of
inhaled steroids that remain a concern to patients and physicians. The market
for inhaled steroids on a worldwide basis is approximately $2.0 billion.

         Status: In September 2000, the Company completed a pilot study using
the Tempo to deliver a patented respiratory drug used to treat asthma. The study
measured the distribution of this respiratory drug delivered by Tempo compared
to the distribution of this same drug delivered through a commercially available
pMDI in 12 healthy volunteers. Results of this study demonstrated that Tempo
significantly increased drug deposition in all regions of the lung. Tempo
delivered approximately 200% more drug to the lungs, deposited approximately 75%
less drug in the mouth, and increased dosing consistency by approximately 55%
compared to the currently marketed form of this same drug. The Company is using
the results of this study as a basis for discussions for feasibility work and/or
clinical studies with potential collaboration partners. Currently two such
feasibility studies are in progress with major pharmaceutical companies to
demonstrate the advantages of Tempo in delivering New Chemical Entities ("NCE")
to the lung. One of these studies will be completed circa June 1, 2003 with the
intent to license the Tempo technology for use with the specific NCE.

         As with Premaire, there remain opportunities for developing Tempo for a
range of therapies either directly by the Company or in collaboration with
strategic partners. Unlike the Premaire, it is potentially advantageous for the
Company to partner on a product-by-product basis, concentrating on prime
partners to launch the system commercially and to aid in subsequent development
with products developed specifically for exclusive commercialization by the
Company.

                                       8
<PAGE>

INHALED STEROID PRODUCTS

         In October 1999, the Company and Elan formed a separate joint venture
to develop certain inhaled steroid products to treat certain respiratory
diseases that will utilize Elan's Nanocrystal(TM) dispersion technology and
Sheffield's pulmonary delivery systems. Because of the difficulties in
formulating steroids for delivery through a solution-based inhalation system,
only one steroid product is currently available in the United States for
delivery through a nebulizer. The estimated worldwide market for inhaled
steroids is $2 billion annually and growing at 20% per year. The products being
formulated using Elan's Nanocrystal technology and the status of each are as
follows:

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

Premaire nanobudesonide program - This product is for inhalation delivery using
the Company's Premaire device. The joint venture is currently conducting
formulation work on this product. See "Premaire Delivery System" above for
further discussion of this product.

OTHER TECHNOLOGIES AND PROJECTS

Ultrasonic Pulmonary Drug Absorption System

         The UPDAS(TM) is a novel ultrasonic pulmonary delivery system designed
by Elan as a disposable unit dose nebulizer system. UPDAS was designed primarily
for the delivery of proteins, peptides and other large molecules to the lungs
for absorption into the bloodstream. Elan's preliminary research with UPDAS
demonstrated unique atomization that may prevent denaturing of bioactive
molecules and particle size distribution that meets the targets for local and
systemic delivery. The Company is not conducting any development work related to
this technology.

Absorption Enhancing Technology

         As part of the same transaction in which the Company acquired UPDAS,
the Company also acquired a worldwide exclusive license to Elan's Absorption
Enhancing Technology. While not a delivery system itself, the Enhancing
Technology is a therapeutic agent identified by Elan to increase the systemic
absorption of drugs delivered to the lungs. The Enhancing Technology may be
utilized in conjunction with the Company's other pulmonary delivery systems. The
Company is not conducting any development work related to this technology.

Early Stage Research Projects

         As part of the Company's focus on later stage pharmaceutical
opportunities, the Company is seeking to out-license its portfolio of early
stage medical research projects to companies that are committed to early stage
biotechnology opportunities. The Company has determined that its early stage
technologies do not fit the Company's pulmonary drug delivery strategy.
Consequently, the Company plans to out-license these technologies while
maintaining an interest in the technologies' promise without incurring the
development costs associated with early stage research and development.

         Because the Company is no longer funding these projects, it is at risk
of losing its rights to certain of these technologies. There can be no assurance
that the Company will be able to sell or license its rights to any of its
remaining early stage research projects or realize any milestone payments or
other revenue from those early stage research projects that have been previously
divested.

         In November 1997, the Company entered into a license arrangement for
some of its early stage technologies with Lorus Therapeutics, Inc. (formerly
Imutec Pharma Inc.). The arrangement licenses rights to a series of compounds
for the treatment of cancer, Kaposi's sarcoma and actinic keratosis to a newly
formed company, NuChem Pharmaceuticals, Inc. ("NuChem") for which Lorus
Therapeutics will provide funding and management of the development program. The
Company holds a 20% equity interest in NuChem.

         Work on the lead compounds by NuChem has progressed in the pre-clinical
phase. In 1999, NuChem announced that the U.S. National Cancer Institute has
agreed to undertake additional in vitro screening after initial evaluation of
the compounds. In 2000, NuChem chose NC 381 as its lead anti-cancer drug for
further studies in preparation for clinical trials. Preclinical toxicology
studies are currently underway.

                                       9
<PAGE>

GOVERNMENT REGULATION

         The Company's research and development activities and, ultimately, any
production and marketing of its licensed products, are subject to comprehensive
regulation by numerous governmental authorities in the United States and other
countries. Among the applicable regulations in the United States, pharmaceutical
products are subject to the Federal Food, Drug & Cosmetic Act, the Public Health
Services Act, other federal statutes and regulations, and certain state and
local regulations. These regulations and statutes govern the development,
testing, formulation, manufacture, labeling, storage, record keeping, quality
control, advertising, promotion, sale, distribution and approval of such
pharmaceutical products. Failure to comply with applicable requirements can
result in fines, recall or seizure of products, total or partial suspension of
production, refusal by the government to approve marketing of the product and
criminal prosecution.

         A new drug may not be legally marketed for commercial use in the United
States without FDA approval. In addition, upon approval, a drug may only be
marketed for the indications, in the formulations and at the dosage levels
approved by the FDA. The FDA also has the authority to withdraw approval of
drugs in accordance with applicable laws and regulations. Analogous foreign
regulators impose similar approval requirements relating to commercial marketing
of a drug in their respective countries and may impose similar restrictions and
limitations after approval.

         In order to obtain FDA approval of a new product, the Company and its
strategic partners must submit proof of safety, efficacy, purity and stability,
and the Company must demonstrate validation of its manufacturing process. The
testing and application process is expensive and time consuming, often taking
several years to complete. There is no assurance that the FDA will act favorably
or quickly in reviewing such applications. With respect to patented products,
processes or technologies, delays imposed or caused by the governmental approval
process may materially reduce the period during which the Company will have the
exclusive right to exploit them. Such delays could also affect the commercial
advantages derived from proprietary processes. As part of the approval process,
the FDA reviews the Drug Master File (the "DMF") for a description of product
chemistry and characteristics, detailed operational procedures for product
production, quality control, process and methods validation, and quality
assurance. As process development continues to mature, updates and modifications
of the DMF are submitted.

         The FDA approval process for a pharmaceutical product includes review
of (i) chemistry and formulations, (ii) preclinical laboratory and animal
studies, (iii) initial IND clinical studies to define safety and dose
parameters, (iv) well-controlled IND clinical trials to demonstrate product
efficacy and safety, followed by submission and FDA approval of a New Drug
Application (the "NDA"). Preclinical studies involve laboratory evaluation of
the product and animal studies to assess activity and safety of the product.
Products must be formulated in accordance with United States Good Manufacturing
Procedures ("GMP") requirements and preclinical tests must be conducted by
laboratories that comply with FDA regulations governing the testing of drugs in
animals. The results of the preclinical tests are submitted to the FDA as part
of the IND application and are reviewed by the FDA prior to granting the sponsor
permission to conduct clinical studies in human subjects. Unless the FDA objects
to an IND application, the application will become effective 30 days following
its receipt by the FDA. There can be no certainty that submission of an IND will
result in FDA authorization to commence clinical studies.

         Human clinical trials are typically conducted in three sequential
phases with some amount of overlap allowed. Phase I trials normally consist of
testing the product in a small number of normal volunteers for establishing
safety and pharmacokinetics using single and multiple dosing regiments. In Phase
II, the continued safety and initial efficacy of the product are evaluated in a
limited patient population, and appropriate dosage amounts and treatment
intervals are determined. Phase III trials typically involve more definitive
testing of the appropriate dose for safety and clinical efficacy in an expanded
patient population at multiple clinical testing centers. A clinical plan, or
"protocol," accompanied by the approval of the institution participating in the
trials, must be submitted to the FDA prior to commencement of each clinical
trial phase. Each clinical study must be conducted under the auspices of an
Institutional Review Board (the "IRB") at the institution performing the
clinical study. The IRB is charged with protecting the safety of patients in
trials and may require changes in a protocol, and there can be no assurance that
an IRB will permit any given study to be initiated or completed. In addition,
the FDA may order the temporary or permanent discontinuation of clinical trials
at any time. The Company must rely on independent investigators and institutions
to conduct these clinical studies.

         All the results of the preclinical and clinical studies on a
pharmaceutical product are submitted to the FDA in the form of an NDA for
approval to commence commercial distribution. The information contained in the
DMF is also incorporated into the NDA. Submission of an NDA does not assure FDA
approval for marketing. The application review process often requires 12 months
to complete. However, the process may take substantially longer if the FDA has
questions or concerns about a product or studies regarding the product. In
general, the FDA requires two adequate and controlled clinical studies
demonstrating efficacy with sufficient levels of statistical assurance. However,
additional support may be required. The FDA also may request additional
information relating to safety or efficacy, such as long-term toxicity studies.
In responding to an NDA, the FDA may grant marketing approval, require
additional testing and/or information, or deny the application. Accordingly,
there can be no assurance about any specific time frame for approval, if any, of
products by the FDA or foreign regulatory agencies. Continued compliance with
all FDA requirements and conditions relative to an approved application,
including product specifications, manufacturing process, labeling and
promotional material, and record keeping and reporting requirements, is
necessary throughout the life of the product. In addition, failure to comply
with FDA requirements, the occurrence of unanticipated adverse effects during
commercial marketing or the result of future studies, could lead to the need for
product recall or other FDA-initiated actions that could delay further marketing
until the products or processes are brought into compliance.

         The facilities of each pharmaceutical manufacturer must be registered
with and approved by the FDA as compliant with GMP. Continued registration
requires compliance with standards for GMP. In complying with GMP, manufacturers
must continue to expend time, money and effort in production, record keeping and
quality control to ensure technical compliance. In addition, manufacturers must
comply with the United States Department of Health and Human Services and
similar state and local regulatory authorities if they handle controlled
substances, and they must be registered with the United States Drug Enforcement
Administration and similar state and local regulatory

                                       10
<PAGE>

authorities if they generate toxic or dangerous waste streams. Other regulatory
agencies such as the Occupational Safety and Health Administration also monitor
a manufacturing facility for compliance. Each of these organizations conducts
periodic establishment inspections to confirm continued compliance with its
regulations. Failure to comply with any of these regulations could mean fines,
interruption of production and even criminal prosecution.

         For foreign markets, a pharmaceutical company is subject to regulatory
requirements, review procedures and product approvals, which, generally, may be
as extensive, if not more extensive, as those in the United States. Although the
technical descriptions of the clinical trials are different, the trials
themselves are often substantially the same as those in the United States.
Approval of a product by regulatory authorities of foreign countries must be
obtained prior to commencing commercial product marketing in those countries,
regardless of whether FDA approval has been obtained. The time and cost required
to obtain market approvals in foreign countries may be longer or shorter than
required for FDA approval and may be subject to delay. There can be no assurance
that regulatory authorities of foreign countries will grant approval. The
Company has no experience in manufacturing or marketing in foreign countries nor
in matters such as currency regulations, import-export controls or other trade
laws.

PATENTS AND TRADEMARKS

         Premaire System Patents and Trademark

         Under its agreement with Siemens for the technology underlying the
Premaire system, the Company is responsible for jointly financing and
prosecuting the U.S. patent applications for the benefit of the owners and
licensors of this technology. To date, nine U.S. patents have issued, and six
corresponding foreign patents have been published. One U.S. application has been
allowed. The issued U.S. patents provide protection through 2017 for the
Premaire device, the dosator cartridges and their combinations. Also, a U.S.
trademark was granted in 2001 registering the Premaire brand name, as well as
Dosator(TM), and Misthaler(TM).

         Tempo System Patents

         As of the December 31, 2002, three U.S. patents have issued and one has
been allowed. Four corresponding foreign patents have been published. One U.S.
and three foreign applications are in prosecution. The issued U.S. patents cover
the Tempo flow control and triggering mechanism through 2019. The Company also
received trademark protection in 2001 for the Tempo(TM)brand name.

         Early Stage Research Technology Patents

         Under its license agreements for its early stage research projects, the
Company has been responsible for financing and prosecuting patent applications
for the benefit of the owners and licensors of these technologies. While the
Company holds, or has held, several U.S. and foreign patents and patent
applications for these early stage technologies, the Company expects to assign
these patents and applications to future acquirers, if any, of these
technologies. Because the Company does not intend to continue to pay for future
patent fees on these early stage technologies, in the event that no acquirers
are found for these technologies, the Company expects that it will allow some or
all of these patents and patent applications to lapse or the rights may be
returned to the licensors.

COMPETITION

         The Company competes with approximately 25 other companies involved in
developing and selling respiratory products for the U.S. market. Most of these
companies possess financial and marketing resources and developmental
capabilities substantially greater than the Company. Some of the products in
development by other companies may be demonstrated to be superior to the
Company's current or future products. Furthermore, the pharmaceutical industry
is characterized by rapid technological change and competitors may complete
development and reach the marketplace prior to the Company. The Company believes
that competition in the respiratory category will be based upon several factors,
including product efficacy, safety, reliability, availability, and price, among
others.

SUBSIDIARIES

         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, LLC ("Camelot"), a privately held
pharmaceutical development company. The Company acquired Camelot on April 25,
1997.

         As part of its strategic alliance with Elan, on June 30, 1998, the
Company formed SPD as a wholly owned subsidiary. At that time, SPD acquired the
Company's rights to the systemic applications of the Premaire and the Tempo. In
addition, SPD acquired Elan's rights to the UPDAS and the Enhancing Technology.
SPD is responsible for the development of systemic applications in both the
Premaire and Tempo. On August 21, 2002 the Company ended this strategic alliance
with Elan and regained all intellectual property rights to the systemic
applications of Premaire and Tempo that were licensed to SPD. In addition, as
part of the termination of this alliance, the Company will enter into a separate
agreement with Elan to license exclusively the UPDAS(TM) and the Enhancing
Technology. The Company has also granted to Elan an ongoing right to receive
royalties on commercialization of two products, morphine delivered by Premaire
and ergotamine tartrate delivered by Tempo.

                                       11
<PAGE>

         In addition to the above alliance with Elan, on October 18, 1999, the
Company and Elan formed a new joint venture, RSD, to develop certain respiratory
steroid products. The Company and Elan made equity investments in RSD
representing an initial 80.1% and 19.9%, respectively, ownership in the joint
venture. The joint venture is responsible for the development of the inhaled
steroid products. On November 8, 2002, as part of an agreement between Elan and
RSD, the parties terminated the license for the Elan NanoCrystal technology to
RSD. As provided in the 1999 license agreement, upon termination of this
license, all intellectual property of RSD was transferred to and jointly owned
by Elan and Sheffield.

EMPLOYEES

         As of April 10, 2003, the Company employed 10 persons, two of whom are
executive officers.

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

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

We will need additional financing, which if not available, could prevent us from
funding or expanding our operations.

         Unless the Company is able to raise significant additional capital ($1
million to $2.5 million) within the next 30-60 days, management believes that it
is unlikely that the Company will be able to meet its obligations as they become
due and to continue as a going concern. To meet this immediate capital
requirement, we are evaluating various financing alternatives including private
offerings of our securities, debt financings, collaboration and licensing
arrangements with other companies, and the sale of non-strategic assets and/or
technologies to third parties. Should the Company be unable to meet its capital
requirement through one or more of the above-mentioned financing alternatives,
we may file for bankruptcy or seek similar protection.

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

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

         Our operations to date have consumed substantial amounts of cash and we
have generated to date only limited revenues from contract research and
licensing activities. We have incurred approximately $98.6 million of operating
losses since our inception, including $8.1 million during the year ended
December 31, 2002. Our operating losses and negative cash flow from operations
are expected to continue in the foreseeable future. The Company expects that it
will continue to have a high level of operating expenses, negative cash flow
from operations and will be required to make significant up-front expenditures
in connection with its product development activities. As a result, the Company
anticipates additional operating losses for 2003 and that such losses will
continue thereafter until such time, if ever, as the Company is able to generate
sufficient revenues to sustain its operations. The independent auditors' report,
dated April 4, 2003, on the Company's consolidated financial statements stated
that the Company has incurred recurring operating losses and has a working
capital deficiency and that these conditions raise substantial doubt about its
ability to continue as a going concern.

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

         Our common stock is listed for trading on the American Stock Exchange,
or AMEX, under the symbol "SHM". We have not for some period of time and do not
now satisfy AMEX standards for continued listing, including a standard that a
listed company that has sustained losses from continuing operations and/or net
losses in its five most recent fiscal years have stockholders' equity of at
least $6,000,000. We had a net capital deficiency of $15.4 million at December
31, 2002. We submitted a plan advising the AMEX of the action

                                       12
<PAGE>

we will take that will bring us into compliance with continued listing
standards. On September 11, 2002, the AMEX notified us that it had accepted our
plan of compliance and granted us an extension through the 2002 year-end
reporting period to regain compliance with the continued listing standards. We
will be subject to periodic review by the AMEX staff during the extension
period. Failure to regain compliance with the continued listing standards by the
end of the extension period could result in our being delisted from the AMEX. If
our common stock were delisted from AMEX, trading of our common stock, if any,
would thereafter likely be conducted in the over-the-counter market, unless we
were able to list our common stock on The Nasdaq Stock Market or another
national securities exchange, which cannot be assured. If our common stock were
to trade in the over-the-counter market it may be more difficult for investors
to dispose of, or to obtain accurate quotations as to the market value of our
common stock. In addition, it may become more difficult for us to raise funds
through the sale of our securities.

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

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

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

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

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

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

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

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

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

                                       13
<PAGE>

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

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

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

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

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

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

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

         Our success will depend in part on our ability to obtain patent
protection for our technologies, products and processes and to maintain trade
secret protection and operate without infringing the proprietary rights of
others. The degree of patent protection to be afforded to pharmaceutical,
biomedical or medical inventions is an uncertain area of the law. In addition,
the laws of foreign countries do not protect our proprietary rights to the same
extent as do the laws of the United States. We may not develop or receive
sublicenses or other rights related to proprietary technology that are
patentable, patents that are pending may be not issued, and any issued patents
may not provide us with any competitive advantages and may be challenged by
third parties. Furthermore, others may independently duplicate or develop
similar products or technologies to those developed by or licensed to us. If we
are required to defend against charges of patent infringement or to protect our
own proprietary rights against third parties, substantial costs will be incurred
and we could lose rights to certain products and technologies or be required to
enter into costly royalty or licensing agreements.

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

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

                                       14
<PAGE>

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

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

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

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

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

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

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

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

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

                                       15
<PAGE>

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

         As of December 31, 2002, we had reserved approximately 4,215,372 shares
of our common stock for issuance upon exercise of outstanding options and
warrants convertible into shares of our common stock, including by our officers
and directors. In addition, as of December 31, 2002, we had $2,000,000 principal
amount of a convertible promissory note, 15,778 shares of our Series C preferred
stock, 14,795 shares of our Series D preferred stock, 3,378 shares of our Series
E preferred stock and 5,000 shares of our Series F preferred stock outstanding.
Each of the convertible securities provides for conversion into shares of our
common stock at a premium to the market price at December 31, 2002. Our Series
C, D, E and F preferred stock are convertible into 11,190,071 shares, 3,044,239
shares, 868,380 shares and 1,470,588 shares, respectively, of common stock. The
convertible promissory note, including accrued interest is convertible into
1,578,519 shares of common stock. The exercise of options and outstanding
warrants, the conversion of such other securities and sales of common stock
issuable thereunder could have a significant dilutive effect on the market price
of our common stock and could materially impair our ability to raise capital
through the future sale of our equity securities.

ITEM 2.  PROPERTIES

         The Company's principal executive offices are located at 3136 Winton
Road South, Suite 201, Rochester, New York 14623. These premises are subject to
a month-to-month lease with a monthly rent of $1,166. The Company also maintains
a research facility in Ann Arbor, Michigan, and leases a small office in St.
Louis, Missouri. The Company maintains no other laboratory, research or other
facilities, but primarily conducts research and development in outside
laboratories under contracts with universities or research facilities. The
Company believes that its existing office arrangements will be adequate to meet
its reasonably foreseeable future needs.

ITEM 3.  LEGAL PROCEEDINGS

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

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

         None.

PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

         The following table sets forth the high and low sale prices of the
Company's Common Stock on the American Stock Exchange (the "AMEX") for the
periods indicated.

<TABLE>
<CAPTION>
                                                                                   High        Low
                                                                                   ----        ---
<S>                                                                               <C>         <C>
2002:
Fourth Quarter............................................................        $0.750      $0.140
Third Quarter.............................................................         1.450       0.300
Second Quarter............................................................         2.200       1.020
First Quarter.............................................................         4.750       1.510
</TABLE>

<TABLE>
<CAPTION>
                                                                                   High        Low
                                                                                   ----        ---
<S>                                                                               <C>         <C>
2001:
Fourth Quarter............................................................        $4.750      $3.000
Third Quarter.............................................................         4.110       2.680
Second Quarter............................................................         4.900       3.500
First Quarter.............................................................         4.625       3.000
</TABLE>

         The closing sale price for the Company's Common Stock on the AMEX on
April 10, 2003 was $.23 per share. At April 10, 2003, there were approximately
409 holders of record of the Company's Common Stock.

         The Company has never paid dividends on its Common Stock and does not
intend to pay cash dividends on its Common Stock in the foreseeable future. The
terms of the Company's Series C, D and E Preferred Stock generally prohibit the
payment of cash dividends and other distributions on the Company's Common Stock
unless full cumulative stock dividends on shares of such Series C, D and E
Preferred Stock

                                       16
<PAGE>

have been paid or declared in full. During 2002, the Company issued stock
dividends totaling 1,070, 996, and 254 shares and cash dividends for fractional
shares of $1,913, $710, and $960 on Series C, D and E Preferred Stock,
respectively.

The following unregistered securities were issued by the Company during the
fiscal year ended December 31, 2002:

<TABLE>
<CAPTION>
                                                              NUMBER OF
                                                               SHARES
                                                             SOLD/ISSUED/
                                                              SUBJECT TO       OFFERING/
    DATE OF                      DESCRIPTION OF               OPTIONS OR    EXERCISE PRICE
 SALE/ISSUANCE                 SECURITIES ISSUED               WARRANTS      PER SHARE ($)      PURCHASER OR CLASS
 -------------                 -----------------               --------      -------------      ------------------
<S>                       <C>                                <C>            <C>                <C>
February 1, 2002          Warrants to Purchase Common           12,000           $3.52         Consultant in lieu of
                          Stock                                                                  cash consideration
July 1, 2002              Warrants to Purchase Common           16,205           $1.40         Consultant in lieu of
                          Stock                                                                  cash consideration
July 1, 2002              Warrants to Purchase Common           12,000           $2.17         Consultant in lieu of
                          Stock                                                                  cash consideration
August 1, 2002            Warrants to Purchase Common           12,000           $1.78         Consultant in lieu of
                          Stock                                                                  cash consideration
</TABLE>

The issuance of these securities are 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.

                                       17
<PAGE>

ITEM 6.  SELECTED FINANCIAL DATA

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

                         SELECTED FINANCIAL INFORMATION
                     (In dollars, except share information)

<TABLE>
<CAPTION>
                                                                       Years Ended December 31,

                                                   2002             2001            2000            1999             1998
                                               -----------------------------------------------------------------------------
<S>                                            <C>             <C>              <C>             <C>             <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:

Revenues:
   Contract research revenue                   $      5,000    $    869,095     $   501,572     $    399,378    $         --
   Sublicense revenue                                 5,000           5,000           5,000               --         350,000
                                               -----------------------------------------------------------------------------

   Total revenues                                    10,000         874,095         506,572          399,378         350,000

Expenses:

   Acquisition of research and
    development in-process technology                    --              --              --       15,000,000      13,325,000
   Research and development                       3,622,435       5,999,693       3,747,437        3,421,734       2,351,301
   General and administrative                     4,482,218       4,551,661       2,817,535        2,277,136       3,043,070
                                               -----------------------------------------------------------------------------

   Total expenses                                 8,104,653      10,551,354       6,564,972       20,698,870      18,719,371
                                               -----------------------------------------------------------------------------

Loss from operations                             (8,094,653)     (9,677,259)     (6,058,400)     (20,299,492)    (18,369,371)

Interest income                                       8,411          58,438         124,908           91,941          60,273
Interest expense                                   (744,533)       (318,642)       (224,360)        (162,237)       (251,363)
Realized gain on sale of marketable
securities                                               --          79,706         239,629               --              --
Minority interest in loss of subsidiary             213,193         378,620         155,072        2,985,000              --
                                               -----------------------------------------------------------------------------

Net loss                                       $ (8,617,582)    $(9,479,137)    $(5,763,151)    $(17,384,788)   $(18,560,461)
                                               =============================================================================

Basic and diluted net loss per common share    $       (.37)   $       (.40)    $      (.27)    $       (.68)   $       (.85)

Basic and diluted weighted average
 common shares outstanding                       29,425,210      28,963,562      27,956,119       27,236,715      21,931,040

CONSOLIDATED BALANCE SHEET DATA:

Working capital (net deficiency)               $ (4,187,615)   $ (4,160,823)    $ 3,439,120     $  3,344,174    $  1,456,833

Total assets                                      1,514,658       2,056,278       5,450,657        5,048,655       2,862,521

Long-term debt & redeemable preferred
stock                                            10,500,000       5,000,000       4,000,000        3,000,000       1,000,000

Accumulated deficit                            (103,438,129)    (92,496,964)    (80,967,524)     (73,409,828)    (55,156,763)

Stockholders' equity (net capital deficiency)  $(15,385,984)   $ (9,086,276)    $  (413,720)    $    671,073    $    655,205
</TABLE>

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

No cash dividends have been paid on Common Stock for any of the periods
presented.

Basic net loss per share is based on net loss available to common stockholders
divided by the weighted average common stock outstanding during the year.

See consolidated financial statements and accompanying footnotes.

                                       18
<PAGE>

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

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

         The following discussion contains certain forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, which are
intended to be covered by the safe harbors created thereby. All forward-looking
statements involve risks and uncertainty, including without limitation, risks
set forth in Part I of this Form 10-K.

         The discussion and analysis below should be read in conjunction with
the Financial Statements of the Company and the related Notes to Financial
Statements included on pages 27-40 in this Form 10-K.

OVERVIEW

         Sheffield Pharmaceuticals, Inc. ("Sheffield" or the "Company") provides
innovative, cost-effective pharmaceutical therapies by combining
state-of-the-art pulmonary drug delivery technologies with existing and emerging
therapeutic agents. The Company is developing a range of products to treat
respiratory and systemic diseases in its proprietary Premaire(R) Delivery System
("Premaire") and Tempo(TM) Inhaler ("Tempo"). The Company is in the development
stage and, as such, has been principally engaged in the development of its
pulmonary delivery systems.

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

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

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

         In June 1998, the Company sublicensed to Zambon Group SpA ("Zambon")
worldwide marketing and development rights to respiratory products to be
delivered by the Premaire in return for an equity investment in the Company
(approximately 10%). From June 1998 to September 2001, Zambon funded the
development costs for the respiratory compounds delivered by Premaire. In
September 2001, the Company amended its 1998 agreement with Zambon whereby
Sheffield regained the rights to the Premaire previously granted to Zambon. As
part of the amended agreement, Zambon provided a low-interest, $2.5 million loan
to Sheffield to progress the development of the Premaire respiratory program.
Upon commercialization, Zambon will be entitled to certain royalties on payments
received by Sheffield for albuterol, ipratropium and cromolyn sales for
specified periods.

         As part of a strategic alliance with Elan, the Company is developing
therapies for non-respiratory diseases to be delivered to the lungs using both
Tempo and Premaire. In 1998, the systemic applications of Premaire and Tempo
were licensed to Systemic Pulmonary Delivery, Ltd. ("SPD"), a wholly owned
subsidiary of the Company. In addition, two Elan technologies, UPDAS(TM) and the
Enhancing Technology, were also licensed to SPD. The Company retained exclusive
rights outside of the strategic alliance to respiratory disease applications
utilizing the Tempo technology and the two Elan technologies. On August 21, 2002
the Company ended this strategic alliance

                                       19
<PAGE>

with Elan and regained all intellectual property rights to the systemic
applications of Premaire and Tempo that were licensed to SPD. In addition, as
part of the termination of this alliance, the Company will enter into a separate
agreement with Elan to license exclusively the UPDAS(TM) and the Enhancing
Technology. The Company has also granted to Elan an ongoing right to receive
royalties on commercialization of two products, morphine delivered by Premaire
and ergotamine tartrate delivered by Tempo.

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

CRITICAL ACCOUNTING POLICIES

Basis of Presentation

         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 will require additional capital,
which the Company intends to obtain through out-licensing of rights to its
technology, as well as through equity and debt offerings, to continue to operate
its business. 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 research, development and unproven
technology 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 2003 is dependent upon obtaining additional funding. The Company's
consolidated financial statements have been prepared on a going concern basis,
which contemplates the realization of assets and satisfaction of liabilities and
commitments in the normal course of business. Should the Company not be
successful in obtaining sufficient funding, some of the assets and liabilities
may not be satisfied at the current carrying values.

         The consolidated financial statements include the accounts of Sheffield
and its wholly owned subsidiaries, Systemic Pulmonary Delivery, Ltd. ("SPD"),
Ion Pharmaceuticals, Inc., and CP Pharmaceuticals, Inc., and its 80.1% owned
subsidiary, Respiratory Steroid Delivery, Ltd. ("RSD").

Deferred Tax Assets

         As of December 31, 2002, the Company has approximately $24.0 million of
deferred tax assets, the majority of which relates to net operating loss
carryforwards that expire at various dates from 2007 to 2022 if not utilized.
The realization of these assets is dependent upon the Company generating future
taxable income. Due to the uncertainty of the amount, if any, of future taxable
income that may be generated, the Company has recorded a valuation allowance for
the entire deferred tax asset. Should the Company generate sufficient future
taxable income before the net operating loss carryforwards expire, the benefit
of the deferred tax asset will be realized at that time.

RESULTS OF OPERATIONS

Revenue

         Contract research revenues primarily represented revenues earned from a
collaborative research agreement with Zambon relating to the development of
respiratory applications of Premaire. Contract research revenue was $5,000,
$869,095 and $501,572 for the years ended December 31, 2002, 2001 and 2000,
respectively. The decrease of $864,095 from 2001 to 2002 reflects the fact the
Company no longer performs development work for Zambon, resulting from Sheffield
regaining the Premaire respiratory rights in the third quarter of 2001. The
increase of $367,523, or 73.3% from 2000 to 2001 reflects higher revenues
associated with Premaire device development work and testing as the Company
finalized the to-be-marketed device prior to the start of Phase III
Premaire-albuterol clinical trials. These higher revenues were partially offset
by the Company no longer performing development work for Zambon in the third and
fourth quarters of 2001. Future contract research revenues and expenses are
dependent on obtaining additional collaborative agreements.

         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 and
other arrangements.

                                       20

<PAGE>

Research and Development

         Research and development expenses were $3.6 million for the year ended
December 31, 2002 compared to $6.0 million and $3.7 million for the years ended
December 31, 2001 and 2000, respectively. The decrease of $2.4 million, or 40%,
was primarily due to lower design and development costs associated with
finalizing the to-be-marketed Premaire device in December 2001 and reduced
formulation work on certain respiratory products ($.9 million), lower Tempo
development costs resulting from finalizing the industrialization of the device
in the first half of 2002 for Phase I and II trials and reduced formulation work
on certain respiratory products ($.9 million), higher development expenses in
the third and fourth quarters of 2001 related to the anticipation of a Phase I
trial of RSD's unit dose product ($.7 million), lower new product development
work in the area of polypeptides ($.3 million) and reduced R&D administrative
costs ($.3 million). These decreases were partially offset by higher expenses
related to formulation work on the Tempo dihydroergotamine ("DHE") product ($.7
million). The increase of $2.3 million, or 60.1%, from 2000 to 2001 primarily
reflects higher expenses associated with the development of the Company's
unit-dose inhaled steroid product reflecting increased formulation work and the
start of a Phase I clinical trial during the fourth quarter ($1.2 million),
costs associated with the Company's feasibility work associated with new product
development in the area of polypeptides ($.5 million), higher costs related to
the industrialization of the Tempo Inhaler ($.4 million), and increased design
and development costs associated with finalizing the to-be-marketed Premaire
device prior to the start of a Phase III albuterol-clinical trial ($.2 million).

         The following details the status of each of the Company's development
programs as of December 31, 2002:

         Premaire Respiratory Program:

                  As a result of the Company regaining from Zambon the rights to
         the respiratory applications to the Premaire in September 2001, the
         sponsorship of the Premaire respiratory development programs was
         transferred from Zambon to the Company with the Food and Drug
         Administration ("FDA") being notified accordingly. In the fourth
         quarter of 2001, Sheffield reviewed all of the development work
         completed-to-date, identifying a number of deficiencies in the Zambon
         development program. To address these issues, Sheffield has made a
         number of internal management changes and moved the program to a group
         of highly experienced pulmonary clinical and regulatory experts. The
         Premaire device is currently in a to-be-marketed form and fully
         industrialized. As of December 31, 2002, the Company had spent $3.9
         million on developing the respiratory products discussed below.

                  The Company's strategy is to out license the U.S. rights to
         the Premaire respiratory products to a third party which the Company
         anticipates concluding in 2003. As a result, the Company estimates a
         U.S. commercial launch of its first products in Premaire to occur in
         the last half of 2005 or first half of 2006. Sheffield will fund the
         continued development work for the Premaire respiratory products up
         through the period of outlicensing, currently estimated at
         approximately $10 million, after which time the licensee will assume
         funding responsibility for further development work.

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

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

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

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

                                       21
<PAGE>

         Premaire Systemic Program:

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

         Tempo Respiratory Program:

                  In September 2000, the Company completed a pilot study using
         the Tempo to deliver an undisclosed, patented respiratory drug used to
         treat asthma. The study measured the distribution of this respiratory
         drug delivered by Tempo compared to the distribution of this same drug
         delivered through a commercially available pMDI in 12 healthy
         volunteers. Results of this study demonstrated that Tempo significantly
         increased drug deposition in all regions of the lung. Tempo delivered
         approximately 200% more drug to the lungs, deposited approximately 75%
         less drug in the mouth, and increased dosing consistency by
         approximately 55% compared to the currently marketed form of this same
         drug. As of December 31, 2002, the Company has incurred approximately
         $.9 million to-date on this study. The Company is using the results of
         this study as a basis for conducting discussions for feasibility work
         and/or clinical studies with potential collaboration partners.

         Tempo Systemic Program:

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

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

         Unit Dose Nebulizer Program:

                  As part of an alliance with Elan, RSD is developing a product
         for inhalation delivery in a standard commercial tabletop device using
         the steroid budesonide, formulated using the NanoCrystal technology. A
         Phase I, double-blind safety and pharmacokinetic study of nebulized
         nanobudesonide in 16 healthy volunteers was satisfactorily completed at
         Thomas Jefferson University Hospital in February 2002. This study
         compared single doses of Pulmicort Respules, nanobudesonide and
         placebo.

                                       22
<PAGE>

         Data from the study is currently undergoing final data and statistical
         analysis. After such data has been analyzed, the Company plans on
         initiating discussions with potential partners regarding the
         outlicensing of this opportunity. As of December 31, 2002, the Company
         incurred approximately $3.1 million to-date on this project. On
         November 8, 2002, as part of an agreement between Elan and RSD, the
         Company and Elan terminated the license for the Elan NanoCrystal
         technology to RSD. As provided in the 1999 license agreement, upon
         termination of this license, all intellectual property of RSD was
         transferred to and jointly owned by Elan and the Company. Use of the
         property by either party can only made with the applied written consent
         of the other. It is the Company's intent to continue pursuing licensing
         partners for this product while the Company and Elan negotiate the
         disposition of the use and ownership of the intellectual property.
         Subject to disposition of the property rights, the Company does not
         intend to incur any additional development costs related to this
         product.

General and Administrative Expenses

         General and administrative expenses were $4.5 million for the year
ended December 31, 2002 compared to $4.6 million and $2.8 million for the years
ended December 31, 2001 and 2000, respectively. The decrease of $.1 million from
2001 was primarily due to cost reduction efforts in the last six months of 2002
offset somewhat by higher costs in the first six months of 2002. The lower costs
in the last six months of 2002 resulted in part from cost reduction efforts to
conserve cash while various financing alternatives were evaluated including
lower legal and consulting fees ($1.1 million), reduced administrative headcount
($.3 million), and lower public relations expenditures ($.2 million). The lower
legal and consulting fees for 2002 also resulted from higher costs incurred in
the last six months of 2001 related to expanded business development and merger
and acquisition activities in the area of licensing and partnering of the
Company's delivery systems, as well as potential acquisitions of complementary
pulmonary delivery technologies and companies. The higher costs in the first six
months of 2002 were primarily due to higher consulting costs, legal fees and
severance-related costs. The higher consulting costs and legal fees were
associated with expanded business development, and merger and acquisition
activities in the area of licensing and partnering of our delivery systems, as
well as potential acquisitions of complementary pulmonary delivery technologies
and companies ($.7 million). The severance costs were associated with the
resignation of three executive officers in 2002 and include costs incurred
pursuant to their respective separation agreements for severance payments and
ongoing benefit coverage ($.6 million) and modification of the terms of certain
stock options ($.2 million). The increase of $1.8 million, or 61.5%, from 2000
to 2001 was primarily due to higher consulting costs and legal fees associated
with expanded business development and merger and acquisition activities in the
area of licensing and partnering of the Company's delivery systems, as well as
potential acquisitions of complementary pulmonary delivery technologies and
companies.

Interest

         Interest income was $8,411 for the year ended December 31, 2002 as
compared to $58,438 and $124,908 for the years ended December 31, 2001 and 2000,
respectively. The decrease of $50,027, or 85.6%, from 2001 to 2002, and $66,470,
or 53.2%, from 2000 to 2001 was primarily due to less cash available for
investment and lower yields on those investments.

         Interest expense was $744,533 for the year ended December 31, 2002 as
compared to $318,642 and $224,360 for the years ended December 31, 2001 and
2000, respectively. The increase of $425,891, or 134%, from 2001 to 2002, and
$94,282, or 42.0%, from 2000 to 2001 resulted primarily from interest associated
with the borrowings on the August 2001 Note Purchase Agreement with Elan Pharma
International Ltd. ("Elan Pharma"). The borrowings totaled $5 million as of
December 31, 2002, compared to total borrowings of $4 million as of December 31,
2001.

Realized Gain on Sale of Marketable Securities

         Realized gain on sale of marketable securities was $79,706 and $239,629
for the years ended December 31, 2001 and 2000, respectively. These gains
resulted from the sale of 283,188 and 300,000 shares for 2001 and 2000,
respectively, of the Company's investment in Lorus Therapeutics, Inc. ("Lorus").
As of December 31, 2001, the Company had no remaining investment in Lorus.

Minority Interest in Subsidiary

         Minority interest in loss of subsidiary was $.2 million for the year
ended December 31, 2002 compared to $.4 million and $.2 million for the years
ended December 31, 2001 and 2000, respectively. RSD, a consolidated and 80.1%
owned subsidiary of the Company, incurred a loss of $1.1 million in 2002
compared to $1.9 million and $.8 million in 2001 and 2000, respectively. The $.8
million decrease from 2001 to 2002 resulted primarily from costs incurred in
2001 associated with initiation of a Phase I/II clinical study of the inhaled
steroid product delivered using a tabletop nebulizer. This study was completed
in February 2002. The $1.1 million increase from 2000 to 2001 also resulted from
the costs associated with this clinical study in 2001. The minority interest in
loss of subsidiary represents Elan's portion, or 19.9%, of RSD's losses. Elan's
investment in RSD, shown as minority interest in subsidiary on the consolidated
balance sheets, was $0 at both December 31, 2002 and 2001, respectively.

                                       23
<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

         At December 31, 2002, the Company had $.3 million in cash and cash
equivalents compared to $.9 million at December 31, 2001. The decrease of $.6
million reflects $6.0 million of cash disbursements used primarily to fund
operating activities, partially offset by the receipt of $1.0 million from the
issuance of 1,000 shares of our Series E Cumulative Convertible Preferred Stock,
$1.5 million from the proceeds of a secured loan from Zambon, $1.5 million from
the proceeds of unsecured promissory notes from Elan Pharma, $.5 million from
the proceeds of unsecured promissory notes from certain shareholders and $1.0
million in proceeds from the exercise of a portion of a common stock warrant by
Elan International Services, Ltd.

         Cash available for funding our operations as of December 31, 2002 was
$.3 million. As of such date, we had trade payables and accrued liabilities of
$3.0 million. As of April 10, 2003, we had cash and equivalents of approximately
$.1 million. As of such date, we had trade payables and accrued liabilities of
approximately $3.0 million. Unless the Company is able to raise significant
capital ($1 million to $2.5 million) within the next 30-60 days, management
believes that it is unlikely that the Company will be able to meet its
obligations as they become due and to continue as a going concern. To meet this
capital requirement, we are evaluating various financing alternatives including
private offerings of our securities, debt financings, collaboration and
licensing arrangements with other companies, and the sale of non-strategic
assets and/or technologies to third parties. Should the Company be unable to
meet its capital requirement through one or more of the above-mentioned
financing alternatives, we may file for bankruptcy or seek similar protection.

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

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

         On November 8, 2002 the Company entered into an agreement with Elan
Pharma, whereby among other items, the Company received proceeds of $.5 million
evidenced by an unsecured demand promissory note. The promissory note provides
for interest on principal and semi-annually compounded interest at a fixed rate
of 10% per annum. Also as part of the agreement, the parties terminated the 1999
license agreement for the Elan NanoCrystal technology made between Elan Pharma
and RSD. As provided in the 1999 license agreement, upon termination of this
license, all intellectual property of RSD was transferred to and jointly owned
by Elan and Sheffield. The outstanding principal balance of the promissory note
at December 31, 2002 was $.5 million.

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

                                       24
<PAGE>

at the Company's discretion, either a premium of approximately 28% of the
principal amount, or issue warrants to purchase an aggregate of 500,000 shares
of the Company's common stock, of which 250,000 shares will have an exercise
price of $.60 per share, and 250,000 shares will have an exercise price of $.19
per share. Upon amending and restating certain of these notes, the Company
issued to certain noteholders warrants to purchase a total of 225,000 of the
Company's common stock at an exercise price of $.60 per share.

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

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

         In September 2001, in connection with the amendment of its 1998
agreement with Zambon, the Company entered into a Loan and Security Agreement
("Loan Agreement") with Zambon, pursuant to which Zambon agreed to lend the
Company $2.5 million. The Company received $1.0 million upon signing of the Loan
Agreement, with additional borrowings of $1.0 million and $.5 million to be made
on January 1, 2002 and April 1, 2002, respectively. The Loan Agreement provides
for interest on principal and annually compounded interest at a fixed rate of 2%
per annum and is secured by certain security interests in respiratory products
developed in the Premaire. One third of the principal balance, together with
interest, is payable by the Company upon the Company's execution of an agreement
with one or more third parties to develop, co-promote and/or sell certain
products in North America, with all remaining unpaid principal and interest due
on December 31, 2005. As part of the amendment of its 1998 agreement with
Zambon, on October 17, 2001 the Company repurchased from Zambon 214,997 shares
of common stock for $3.0233 per share ("Repurchase Price"). In addition, the
Company received an option, expiring December 31, 2002, to repurchase the
remaining shares of the Company's common stock held by Zambon at the Repurchase
Price. In the event the Company completes a sublicense for the North American
rights or a sublicense for the non-North American rights to certain Premaire
respiratory products prior to December 31, 2002, the Company will be required to
repurchase from Zambon 882,051 shares of the Company's common stock on each of
the events.

         In October 1999, as part of a licensing agreement with Elan, the
Company received gross proceeds of $17.0 million related to the issuance to Elan
of 12,015 shares of Series D Cumulative Convertible Exchangeable Preferred Stock
and 5,000 shares of Series F Convertible Non-Exchangeable Preferred Stock. In
turn, the Company made an equity investment of $12.0 million in a joint venture,
RSD, representing an initial 80.1% ownership. The remaining proceeds from this
preferred stock issuance were available for general operating purposes. As part
of the agreement, Elan also committed to purchase, on a drawdown basis, up to an
additional $4.0 million of the Company's Series E Preferred Stock, of which $3.0
million of such shares have been purchased. The proceeds from the Series E
Preferred Stock were utilized by the Company to fund its portion of RSD's
operating and development costs. As previously discussed, the 1999 license
agreement was terminated in November 2002. As a result of this termination, and
the transfer of all of the intellectual property of RSD to Elan and the
Company, Elan is no longer obligated to purchase additional shares of Series E
Preferred Stock.

         In May 1999, in conjunction with the completion of its Phase I/II
Premaire-albuterol trial, Zambon provided the Company with a $1.0 million
interest-free advance against future milestone payments. In January 2001, the
Company received an additional $1.0 million interest-free milestone advance
resulting from the demonstration of the technical feasibility of delivering an
inhaled steroid formulation in Premaire. The proceeds from these advances were
not restricted as to their use by the Company. As part of the amendment of its
1998 agreement with Zambon, the terms of the milestone advances were modified in
that the Company agreed to repay $1.0 million of the advance milestone payments
upon the earlier of December 31, 2003, or upon the first regulatory approval for
either albuterol or an inhaled steroid delivered in the Premaire. The remaining
$1.0 million advance shall be repaid by the Company on the earlier of December
31, 2005, or the regulatory approval of the second product (albuterol or an
inhaled steroid) delivered in the Premaire. Due to the modification in the
repayment terms, the advances have been reclassified in the Company's balance
sheet as long-term debt.

         Since its inception, the Company has financed its operations primarily
through the sale of securities and convertible debentures, from which it has
raised an aggregate of approximately $89.5 million through December 31, 2002, of
which approximately $30.0 million has been spent to acquire certain in-process
research and development technologies, and $38.4 million has been incurred to
fund certain ongoing technology research projects. The Company expects to incur
additional costs in the future, including costs relating to its ongoing research
and development activities, and preclinical and clinical testing of its product
candidates. The Company may also bear considerable costs in connection with
filing, prosecuting, defending and/or enforcing its patent and other
intellectual property claims. Therefore, the Company will need substantial
additional capital before it will recognize significant cash flow from
operations, which is contingent on the successful commercialization of the
Company's technologies. There can be no assurance that any of the technologies
to which the Company currently has or may acquire rights can or will be
commercialized or that any revenues generated from such commercialization will
be sufficient to fund existing and future research and development activities.

                                       25
<PAGE>

INFLATION

         While the Company does not believe that inflation has had a material
impact on its results of operations, there can be no assurance that inflation in
the future will not impact financial markets which, in turn, may adversely
affect the Company's valuation of its securities and, consequently, its ability
to raise additional capital, either through equity or debt instruments, or any
off-balance sheet refinancing arrangements, such as collaboration and licensing
agreements with other companies.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

The Company has no material market risk exposure.

                                       26
<PAGE>

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                         REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Stockholders
Sheffield Pharmaceuticals, Inc.

We have audited the accompanying consolidated balance sheets of Sheffield
Pharmaceuticals, Inc. and Subsidiaries (a development stage enterprise) as of
December 31, 2002, and the related consolidated statements of operations,
stockholders' equity (net capital deficiency), and cash flows for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit. The financial statements of Sheffield
Pharmaceuticals, Inc. and Subsidiaries as of December 31, 2001 and 2000 and for
the period from October 17, 1986 (inception) through December 31, 2001, were
audited by other auditors whose report, dated February 12 2002, expressed an
unqualified opinion on those statements with an explanatory paragraph related to
the going concern issue.

We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Sheffield
Pharmaceuticals, Inc. and Subsidiaries as of December 31, 2002, and the
consolidated results of their operations and their cash flows for the year then
ended, in conformity with accounting principles generally accepted in the United
States.

The accompanying financial statements have been prepared assuming that Sheffield
Pharmaceuticals, Inc. and Subsidiaries will continue as a going concern. As more
fully described in Note 1, the Company has incurred recurring operating losses
and has a working capital deficiency. Those conditions raise substantial doubt
about the Company's ability to continue as a going concern. Management's plans
in regard to these matters are also described in Note 1. The financial
statements do not include any adjustments to reflect the possible future effects
on the recoverability and classification of assets or the amounts and
classification of liabilities that may result from the outcome of this
uncertainty.

/s/ Rotenberg & Co., LLP
Rotenberg & Co., LLP
Rochester, New York
April 4, 2003

                                       27
<PAGE>
                         REPORT OF INDEPENDENT AUDITORS


The Board of Directors and Stockholders
Sheffield Pharmaceuticals, Inc.

We have audited the accompanying consolidated balance sheet of Sheffield
Pharmaceuticals, Inc. and Subsidiaries (a development stage enterprise) as of
December 31, 2001 and the related consolidated statements of operations,
stockholders' equity (net capital deficiency), and cash flows for each of the
two years in the period ended December 31, 2001 and for the period October 17,
1986 (inception) through December 31, 2001 (not presented herein). These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Sheffield
Pharmaceuticals, Inc. and Subsidiaries at December 31, 2001 and the consolidated
results of their operations and their cash flows for each of the two years in
the period ended December 31, 2001 and the period from October 17, 1986
(inception) through December 31, 2001 (not presented herein), in conformity with
accounting principles generally accepted in the United States.

The accompanying financial statements have been prepared assuming that
Sheffield Pharmaceuticals, Inc. and Subsidiaries will continue as a going
concern. As more fully described in Note 1, the Company has incurred recurring
operating losses and has a working capital deficiency. Those conditions raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 1. The
financial statements do not include any adjustments to reflect the possible
future effects on the recoverability and classification of assets or the
amounts and classification of liabilities that may result from the outcome of
this uncertainty.



/s/ Ernst & Young LLP
St. Louis, Missouri
February 12, 2002


                                      -28-

<PAGE>

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

                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                               ASSETS                                                    December 31,
                                                                                              ------------------------------
                                                                                                   2002             2001
                                                                                              -------------    -------------
<S>                                                                                           <C>              <C>
Current assets:
         Cash and cash equivalents (Note 1)                                                   $     327,195    $     859,298
         Clinical supplies                                                                          349,422          427,550
         Prepaid expenses and other current assets                                                  158,697           86,080
                                                                                              -------------    -------------
                  Total current assets                                                              835,314        1,372,928
                                                                                              -------------    -------------

Property and equipment (Note 1):
         Laboratory equipment                                                                       462,949          431,920
         Office equipment                                                                            75,723          245,019
         Leasehold improvements                                                                      18,320           25,309
                                                                                              -------------    -------------
                  Total at cost                                                                     556,992          702,248
         Less accumulated depreciation and amortization                                            (332,721)        (355,014)
                                                                                              -------------    -------------
                  Property and equipment, net                                                       224,271          347,234
                                                                                              -------------    -------------

Patent costs, net of accumulated amortization of $37,232 and $20,216, respectively (Note 1)         445,850          308,203
Other assets                                                                                          9,223           27,913
                                                                                              -------------    -------------

         Total assets                                                                         $   1,514,658    $   2,056,278
                                                                                              =============    =============

                    LIABILITIES AND STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)

Current liabilities:
         Accounts payable                                                                     $   2,598,678    $     856,216
         Accrued liabilities                                                                        449,251          441,778
         Sponsored research payable                                                                      --          235,757
         Current maturities of long-term debt (Note 5)                                            1,000,000               --
         Notes payable (Note 5)                                                                     975,000        4,000,000
                                                                                              -------------    -------------
                  Total current liabilities                                                       5,022,929        5,533,751

Convertible promissory note (Note 5)                                                              2,000,000        2,000,000
Long-term debt (Note 5)                                                                           8,500,000        3,000,000
Other long-term liabilities                                                                       1,377,713          608,803
Commitments and contingencies                                                                            --               --
                                                                                              -------------    -------------
                  Total liabilities                                                              16,900,642       11,142,554

Minority interest in subsidiary (Note 1)                                                                 --               --

Stockholders' equity (net capital deficiency) (Notes 3 & 4):
  Preferred stock, $.01 par value, authorized 3,000,000 shares:
      Series C cumulative convertible preferred stock, authorized 23,000 shares; 15,778
        and 14,708 shares issued and outstanding at December 31, 2002 and 2001, respectively            158              147
      Series D cumulative convertible exchangeable preferred stock, authorized 21,000
        shares; 14,795 and 13,799 shares issued and outstanding at December 31, 2002 and 2001,
        respectively                                                                                    148              138
      Series E cumulative convertible non-exchangeable preferred stock, authorized
        9,000 shares; 3,378 and 2,124 shares issued and outstanding at December 31, 2002
        and 2001, respectively                                                                           34               21
      Series F convertible non-exchangeable preferred stock, 5,000 shares authorized; 5,000
        shares issued and outstanding at December 31, 2002 and 2001                                      50               50
   Common stock, $.01 par value, authorized 100,000,000 shares; issued and outstanding
        29,563,712 and 29,001,602 shares at December 31, 2002 and 2001, respectively                295,637          290,016
   Additional paid-in capital                                                                    87,756,118       83,120,316
   Other comprehensive income                                                                            --               --
   Deficit accumulated during development stage                                                (103,438,129)     (92,496,964)
                                                                                              -------------    -------------
                   Total stockholders' equity (net capital deficiency)                          (15,385,984)      (9,086,276)
                                                                                              -------------    -------------
Total liabilities and stockholders' equity (net capital deficiency)                           $   1,514,658    $   2,056,278
                                                                                              =============    =============
</TABLE>

                 See notes to consolidated financial statements.

                                       29
<PAGE>

                SHEFFIELD PHARMACEUTICALS, INC. AND SUBSIDIARIES
                        (a development stage enterprise)
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                        For the Years Ended December 31,
                     2002, 2001 and 2000 and for the Period
             from October 17, 1986 (inception) to December 31, 2002

<TABLE>
<CAPTION>
                                                                                                           October 17,
                                                                                                              1986
                                                                                                         (inception) to
                                                                   Years ended December 31,               December 31,
                                                      -----------------------------------------------
                                                           2002               2001           2000             2002
                                                      -------------    -------------    -------------    -------------
<S>                                                   <C>              <C>              <C>              <C>
Revenues:
   Contract research revenue (Note 1)                 $       5,000    $     869,095    $     501,572    $   1,775,045
   Sublicense revenue (Note 6)                                5,000            5,000            5,000        1,375,000
                                                      -------------    -------------    -------------    -------------
     Total revenues                                          10,000          874,095          506,572        3,150,045

Expenses:
   Acquisition of research and development
     in-process technology (Note 6)                              --               --               --       29,975,000
   Research and development                               3,622,435        5,999,693        3,747,437       38,394,990
   General and administrative                             4,482,218        4,551,661        2,817,535       33,368,964
                                                      -------------    -------------    -------------    -------------

     Total expenses                                       8,104,653       10,551,354        6,564,972      101,738,954
                                                      -------------    -------------    -------------    -------------

Loss from operations                                     (8,094,653)      (9,677,259)      (6,058,400)     (98,588,909)

Interest income                                               8,411           58,438          124,908          797,798
Interest expense                                           (744,533)        (318,642)        (224,360)      (1,818,103)
Realized gain (loss) on sale of marketable                       --           79,706          239,629           (5,580)
  securities
Minority interest in loss of subsidiary (Note 1)            213,193          378,620          155,072        3,731,886
                                                      -------------    -------------    -------------    -------------

Net loss                                              $  (8,617,582)   $  (9,479,137)   $  (5,763,151)   $ (95,882,908)
                                                      =============    =============    =============    =============

Preferred stock dividends                                (2,361,114)      (2,084,392)      (1,830,094)      (8,090,634)
Accretion of mandatorily redeemable preferred stock              --               --               --         (103,400)
                                                      -------------    -------------    -------------    -------------

Net loss - attributable to common shares              $ (10,978,696)   $ (11,563,529)   $  (7,593,245)   $(104,076,942)
                                                      =============    =============    =============    =============

Basic and diluted weighted average common
  shares outstanding (Note 1)                            29,425,210       28,963,562       27,956,119       11,780,412

Basic and diluted net loss per share of common
  stock (Note 1):                                     $        (.37)   $        (.40)   $        (.27)   $       (8.83)
</TABLE>

                 See notes to consolidated financial statements.

                                       30
<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 December 31, 2002
                                   (Unaudited)

<TABLE>
<CAPTION>
                                                                                     Notes receivable
                                                                                      in connection      Additional
                                                       Preferred        Common         with sale of       paid-in
                                                         stock           stock             stock          capital
<S>                                                  <C>             <C>              <C>              <C>
Balance at October 17, 1986 ......................   $          --   $          --    $          --    $          --
   Common stock issued ...........................              --      11,487,457          110,000       30,628,244
   Reincorporation in Delaware at $.01 par value .              --     (11,220,369)              --       11,220,369
   Common stock subscribed .......................              --              --         (110,000)              --
   Common stock options and warrants issued ......              --              --               --          444,320
   Issuance of common stock in connection with
       acquisition of Camelot Pharmacal, L.L.C ...              --           6,000               --        1,644,000
   Common stock options extended .................              --              --               --          215,188
   Accretion of issuance costs for Series A
   preferred stock................................              --              --               --               --
   Series C preferred stock issued ...............             115              --               --       11,499,885
   Series C preferred stock dividends ............              13              --               --        1,279,987
   Series D preferred stock issued ...............             120              --               --       12,014,880
   Series F preferred stock issued ...............              50              --               --        4,691,255
   Comprehensive income (loss):
       Unrealized gain on marketable securities ..              --              --               --               --
       Net loss ..................................              --              --               --               --
       Comprehensive loss ........................              --              --               --               --
                                                     -------------   -------------    -------------    -------------
Balance at December 31, 1999 .....................             298         273,088               --       73,638,128
   Common stock issued ...........................              --          15,738               --        3,796,072
   Repurchase and retirement of common stock .....              --            (910)              --         (312,279)
   Series C preferred stock dividends ............               9              --               --          931,991
   Series D preferred stock dividends ............               9              --               --          854,991
   Series E preferred stock issued ...............              10              --               --          999,990
   Series E preferred stock dividends ............              --              --               --            4,000
   Common stock warrants issued ..................              --              --               --          195,202
   Comprehensive income (loss)
       Unrealized loss on marketable securities ..              --              --               --               --
       Net loss ..................................              --              --               --               --
       Comprehensive loss ........................              --              --               --               --
                                                     -------------   -------------    -------------    -------------
Balance at December 31, 2000 .....................             326         287,916               --       80,108,095
   Common stock issued ...........................              --           4,251               --          481,201
   Repurchase and retirement of common stock .....              --          (2,151)              --         (640,691)
   Series C preferred stock dividends ............              10              --               --          995,990
   Series D preferred stock dividends ............               9              --               --          928,991
   Series E preferred stock issued ...............              10              --               --          999,990
   Series E preferred stock dividends ............               1              --               --          119,999
   Common stock warrants issued ..................              --              --               --          126,741
   Comprehensive income (loss):
       Unrealized loss on marketable securities ..              --              --               --               --
       Net loss ..................................              --              --               --               --
       Comprehensive loss ........................              --              --               --               --
                                                     -------------   -------------    -------------    -------------
Balance December 31, 2001 ........................             356         290,016               --       83,120,316
   Common stock issued ...........................              --           5,621               --        1,001,379
   Series C preferred stock dividends ............              11              --               --        1,069,989
   Series D preferred stock dividends ............              10              --               --          995,990
   Series E preferred stock issued ...............              10              --               --          999,990
   Series E preferred stock dividends ............               3              --               --          253,997
   Common stock warrants issued and options
   accelerated ...................................              --              --               --          314,457
   Net loss ......................................              --              --               --               --
                                                     -------------   -------------    -------------    -------------
Balance December 31, 2002 ........................   $         390   $     295,637    $          --    $  87,756,118
                                                     =============   =============    =============    =============
</TABLE>

<TABLE>
<CAPTION>
                                                                         Deficit           Total
                                                         Other         accumulated     stockholders'
                                                      comprehen-         during         equity (net
                                                      sive income      development         capital
                                                         (loss)            stage         deficiency)
 <S>                                                 <C>              <C>              <C>
Balance at October 17, 1986 ......................   $          --    $          --    $          --
   Common stock issued ...........................              --               --       42,225,701
   Reincorporation in Delaware at $.01 par value .              --               --               --
   Common stock subscribed .......................              --               --         (110,000)
   Common stock options and warrants issued ......              --               --          444,320
   Issuance of common stock in connection with
       acquisition of Camelot Pharmacal, L.L.C ...              --               --        1,650,000
   Common stock options extended .................              --               --          215,188
   Accretion of issuance costs for Series A
   preferred stock................................              --         (103,400)        (103,400)
   Series C preferred stock issued ...............              --               --       11,500,000
   Series C preferred stock dividends ............              --       (1,283,389)          (3,389)
   Series D preferred stock issued ...............              --               --       12,015,000
   Series F preferred stock issued ...............              --               --        4,691,305
   Comprehensive income (loss):
       Unrealized gain on marketable securities ..         169,387               --               --
       Net loss ..................................              --      (72,023,039)              --
       Comprehensive loss ........................              --               --      (71,853,652)
                                                     -------------    -------------    -------------
Balance at December 31, 1999 .....................         169,387      (73,409,828)         671,073
   Common stock issued ...........................              --               --        3,811,810
   Repurchase and retirement of common stock .....              --               --         (313,189)
   Series C preferred stock dividends ............              --         (934,045)          (2,045)
   Series D preferred stock dividends ............              --         (855,750)            (750)
   Series E preferred stock issued ...............              --               --        1,000,000
   Series E preferred stock dividends ............              --           (4,750)            (750)
   Common stock warrants issued ..................              --               --          195,202
   Comprehensive income (loss):
       Unrealized loss on marketable securities ..         (11,920)              --               --
       Net loss ..................................              --       (5,763,151)              --
       Comprehensive loss ........................              --               --       (5,775,071)
                                                     -------------    -------------    -------------
Balance at December 31, 2000 .....................         157,467      (80,967,524)        (413,720)
   Common stock issued ...........................              --               --          485,452
   Repurchase and retirement of common stock .....              --               --         (642,842)
   Series C preferred stock dividends ............              --         (999,278)          (3,278)
   Series D preferred stock dividends ............              --         (929,603)            (603)
   Series E preferred stock issued ...............              --               --        1,000,000
   Series E preferred stock dividends ............              --         (121,422)          (1,422)
   Common stock warrants issued ..................              --               --          126,741
   Comprehensive income (loss):
       Unrealized loss on marketable securities ..        (157,467)              --               --
       Net loss ..................................              --       (9,479,137)              --
       Comprehensive loss ........................              --               --       (9,636,604)
                                                     -------------    -------------    -------------
Balance December 31, 2001 ........................              --      (92,496,964)      (9,086,276)
   Common stock issued ...........................              --               --        1,007,000
   Series C preferred stock dividends ............              --       (1,071,913)          (1,913)
   Series D preferred stock dividends ............              --         (996,710)            (710)
   Series E preferred stock issued ...............              --               --        1,000,000
   Series E preferred stock dividends ............              --         (254,960)            (960)
   Common stock warrants issued and options
   accelerated ..................................              --               --           314,457
   Net loss ......................................              --       (8,617,582)      (8,617,582)
                                                     -------------    -------------    -------------
Balance December 31, 2002 ........................   $          --    $(103,438,129)   $ (15,385,984)
                                                     =============    =============    =============
</TABLE>

                 See notes to consolidated financial statements.

                                       31
<PAGE>

                SHEFFIELD PHARMACEUTICALS, INC. AND SUBSIDIARIES
                        (a development stage enterprise)
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
  For the Years Ended December 31, 2002, 2001 and 2000 and for the Period from
                October 17, 1986 (Inception) to December 31, 2002

<TABLE>
<CAPTION>
                                                                                                                    October 17, 1986
                                                                                Years ended December 31,             (inception) to
                                                                     --------------------------------------------     December 31,
                                                                         2002            2001            2000             2002
                                                                     ------------    ------------    ------------     ------------
<S>                                                                  <C>             <C>             <C>            <C>
Cash flows from operating activities:
   Net loss                                                          $ (8,617,582)   $ (9,479,137)   $ (5,763,151)    $(95,882,908)
   Adjustments to reconcile net loss to net cash used by
     development stage activities:
        Issuance of common stock, stock options/warrants
          for services                                                    314,457         126,741         207,202        3,133,825
        Depreciation and amortization                                     154,128         130,554         118,775          883,018
        Non-cash acquisition of research and development
          in-process technology                                                 -               -               -        1,650,000
        (Gain) loss realized on sale of marketable securities                   -         (79,706)       (239,629)           5,580
        Decrease (increase) in clinical supplies, prepaid
          expenses & other current assets                                   5,511          26,642        (395,035)        (567,160)
        Decrease (increase) in milestone advance receivable                     -       1,000,000      (1,000,000)               -
        Decrease (increase) in other assets                                18,690         (12,083)           (188)          49,819
        Increase in accounts payable and accrued liabilities            2,002,977         352,646         615,636        3,157,125
        (Decrease) increase in sponsored research payable                (235,757)              -        (185,924)         577,070
        Increase in other long-term liabilities                           768,910         214,948         211,160        1,436,480
        Other                                                            (235,918)       (287,293)       (151,187)        (677,787)
                                                                     ------------    ------------    ------------     ------------
Net cash used by development stage activities                          (5,824,584)     (8,006,688)     (6,582,341)     (86,234,938)
                                                                     ------------    ------------    ------------     ------------

Cash flows from investing activities:
     Proceeds from sale of marketable securities                                -         249,661         419,674          844,420
     Acquisition of laboratory and office equipment, and
       leasehold improvements                                             (31,029)       (200,570)        (86,107)        (903,419)
     Acquisition of patents                                              (154,662)        (60,235)        (63,901)        (483,081)
     Other                                                                  4,750               -               -          (52,337)
                                                                     ------------    ------------    ------------     ------------
Net cash provided (used) by investing activities                         (180,941)        (11,144)        269,666         (594,417)
                                                                     ------------    ------------    ------------     ------------

Cash flows from financing activities:
     Payments on debt and capital leases                                   (8,578)         (7,428)         (6,435)        (858,614)
     Net proceeds from issuance of:
         Debt                                                           3,475,000       5,000,000       1,000,000       15,525,000
         Common stock                                                           -               -       2,015,625       23,433,660
         Preferred stock                                                1,000,000       1,000,000       1,000,000       35,741,117
     Proceeds from exercise of warrants/stock options                   1,007,000         485,452       1,784,185       14,770,358
     Repurchase and retirement of common stock                                  -        (642,842)       (313,189)        (956,031)
     Other                                                                      -               -               -         (500,024)
                                                                     ------------    ------------    ------------     ------------
Net cash provided by financing activities                               5,473,422       5,835,182       5,480,186       87,155,466

Net (decrease) increase in cash and cash equivalents                     (532,103)     (2,182,650)       (832,489)         326,111
Cash and cash equivalents at beginning of period                          859,298       3,041,948       3,874,437            1,084
                                                                     ------------    ------------    ------------     ------------
Cash and cash equivalents at end of period                           $    327,195    $    859,298    $  3,041,948     $    327,195
                                                                     ============    ============    ============     ============

Noncash investing and financing activities:
     Common stock, stock options and warrants issued for services    $    314,457    $    126,741    $    207,202     $  3,133,825
     Common stock redeemed in payment of notes receivable                       -               -               -           10,400
     Acquisition of research and development in-process                         -               -               -        1,655,216
      technology
     Common stock issued for intellectual property rights                       -               -               -          866,250
     Common stock issued to retire debt                                         -               -               -          600,000
     Common stock issued to redeem convertible securities                       -               -               -        5,353,368
     Securities acquired under sublicense agreement                             -               -               -          850,000
     Equipment acquired under capital lease                                     -               -               -          121,684
     Notes payable converted to common stock                                    -               -               -          749,976
     Stock dividends                                                    2,323,583       2,050,305       1,794,545        7,815,257

Supplemental disclosure of cash information:  Interest paid          $      6,894    $      7,060    $      2,940     $    293,214
                                    Income taxes paid                           -               -               -                -
</TABLE>

                 See notes to consolidated financial statements.

                                       32
<PAGE>

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation - Sheffield Pharmaceuticals, Inc. ("Sheffield" or the
"Company") a Delaware corporation, is focused on the development and
commercialization of later stage pharmaceutical products that utilize the
Company's unique proprietary pulmonary delivery technologies.

The accompanying consolidated financial statements have been prepared on a going
concern basis which contemplates the realization of assets and satisfaction of
liabilities and commitments in the normal course of business. 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, sustained significant net operating losses, and requires additional
capital that the Company intends to obtain through out-licensing of rights to
its technology, as well as through equity and debt offerings, to continue to
operate its business. 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 2003 is dependent upon obtaining additional
funding. In an effort to meet its capital requirement, the Company is evaluating
various financing alternatives including private offerings of its securities,
debt financing, and collaboration and licensing arrangements with other
companies. However, the accompanying financial statements do not include any
adjustments that might result from the outcome of this uncertainty.

Principles of Consolidation - The consolidated financial statements include the
accounts of Sheffield and its wholly owned subsidiaries, Systemic Pulmonary
Delivery, Ltd. ("SPD"), Ion Pharmaceuticals, Inc., and CP Pharmaceuticals, Inc.,
and its 80.1% owned subsidiary, Respiratory Steroid Delivery, Ltd. ("RSD"). All
significant intercompany transactions have been eliminated. Investments in
affiliated companies that are 50% owned or less, and where the Company does not
exercise control, are accounted for using the equity method.

Use of Estimates - The preparation of the financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.

Cash Equivalents - The Company considers all highly liquid instruments with
original maturities of three months or less to be cash equivalents. Cash and
cash equivalents include demand deposits held in banks, interest bearing money
market funds, and corporate commercial paper with A1 or P1 short-term ratings.

Property and Equipment - Property and equipment are stated at cost. Depreciation
is computed using the straight-line method over three or five year periods for
office equipment, and five years for laboratory equipment. Assets under capital
leases, consisting of office equipment and leasehold improvements, are amortized
over the lesser of the useful life or the applicable lease terms.

Patent Costs - Costs associated with obtaining patents, principally legal costs
and filing fees, are capitalized and being amortized on a straight-line basis
over the remaining lives of the respective patents. The Company periodically
evaluates the carrying amount of these assets based on current licensing and
future commercialization efforts, and if warranted, impairment would be
recognized.

Contract Research Revenue - Contract revenue from collaborative research
agreements is recorded when earned and as the related costs are incurred.
Payments received that are related to future performance are deferred and
recognized as revenue in the period in which they are earned.

Research and Development Costs - Research and development costs ("R & D costs")
are expensed as incurred, except for fixed assets to which the Company has
title, which are capitalized and depreciated over their estimated useful lives.

Income Taxes - The Company utilizes the liability method to account for income
taxes. Under this method, deferred tax assets and liabilities are determined
based on differences between financial reporting and tax bases of assets and
liabilities and are measured using enacted tax rates and laws that will be in
effect when the differences are expected to reverse.

Fair Value of Financial Instruments - The carrying amounts of cash and cash
equivalents, receivables, accounts payable, sponsored research payable and notes
payable approximate fair value.

                                       33
<PAGE>

Basic Net Loss per Share of Common Stock - Basic net loss per share is
calculated in accordance with Statement of Financial Accounting Standards
("SFAS") No. 128, Earnings Per Share. Basic net loss per share is based on net
loss available to common stockholders divided by the weighted average common
stock outstanding during the year. Potentially dilutive securities, such as
stock options, warrants, convertible debt and preferred stock, have not been
included in any years presented as their effect is antidilutive.

Stock-Based Compensation - SFAS No. 123, Accounting for Stock-Based
Compensation, defines a fair value method of accounting for stock options and
similar equity instruments. As permitted by SFAS 123, the Company continues to
account for employee stock options under Accounting Principal Board Opinion No.
25, Accounting for Stock Issued to Employees ("APB 25"), and has disclosed in a
note to the financial statements pro forma net loss and earnings per share as if
the Company had applied the fair value method of accounting for its stock-based
awards. Under APB 25, no expense is generally recognized at the time of option
grant because the exercise price of the Company's employee stock option equals
or exceeds the fair market value of the underlying common stock on the date of
grant.

Comprehensive Income (Loss) - SFAS No. 130, Reporting Comprehensive Income,
establishes standards for the reporting and display of comprehensive income and
its components in a full set of general purpose financial statements and applies
to all enterprises. Other comprehensive income or loss shown in the consolidated
statements of stockholders' equity at December 31, 2002, 2001 and 2000 is solely
comprised of unrealized gains or losses on marketable securities. The unrealized
loss on marketable securities during 2001 and 2000 includes reclassification
adjustments of $79,706 and $239,629, respectively, for gains realized in income
from the sale of the securities.

Segment Information - SFAS No. 131, Disclosures about Segments of an Enterprise
and Related Information, 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. It also establishes standards
for related disclosures about products and services, geographic areas and major
customers. The Company operates in one reportable segment as defined by SFAS No.
131.

Reclassifications - Certain amounts in the prior year financial statements and
notes have been reclassified to conform to the current year presentation.

2.     LEASES

         The Company leases its office space under a month-to-month operating
lease.

         Rent expense relating to operating leases for the years ended December
31, 2002, 2001 and 2000 was $231,959, $226,759, and $219,859, respectively.

3.     STOCKHOLDERS' EQUITY

         Preferred Stock

         In June 1998, the Company issued 4,571,428 shares of Common Stock and
11,500 shares of Series C Cumulative Convertible Preferred Stock ("Series C
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"), Elan
International Services, Ltd. ("Elan International"). The Series C Preferred
Stock earns cumulative dividends payable in shares of Series C Preferred Stock
at an annual rate of 7.0% on the stated value of each outstanding share of
Series C Preferred Stock on the dividend date. Elan International also received
a warrant to purchase 990,000 shares of Common Stock of the Company exercisable
from December 31, 1998 through January 30, 2005 at an exercise price of $2.00
per share. On April 5, 2002, Elan International exercised a portion of this
warrant and purchased 495,000 shares of our common stock at $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 (see Note
6). All of the outstanding Common Stock of SPD was pledged to Elan during the
term of the agreement. Subject to certain conditions and the making of certain
payments to the Company, Elan International had the option to acquire all or a
portion of the outstanding stock of SPD. On August 21, 2002 the Company ended
this strategic alliance with Elan and regained all intellectual property rights
to the systemic applications of Premaire and Tempo that were licensed to SPD. In
addition, as part of the termination of this alliance, the Company will enter
into a separate agreement with Elan to license exclusively the UPDAS(TM) and the
Enhancing Technology. The Company has also granted to Elan an ongoing right to
receive royalties on commercialization of two products, morphine delivered by
Premaire and ergotamine tartrate delivered by Tempo. The net book value of SPD
is $.1 million as of December 31, 2002. The Company issued stock dividends
totaling 1,070 and 996 shares of Series C Preferred Stock and cash dividends for
fractional shares of $1,913 and $3,278 for the years ended December 31, 2002 and
2001, respectively.

         In October 1999, pursuant to a definitive agreement, the Company and
Elan International formed RSD to develop certain respiratory steroid products.
Under the terms of the agreement, the Company issued to Elan International
12,015 shares of Series D Cumulative Convertible Exchangeable Preferred Stock
("Series D Preferred Stock"), convertible into shares of Common Stock of the

                                       34
<PAGE>

Company at $4.86 per Common Share or exchangeable for an additional 30.1%
ownership interest in the new joint venture, for $12.0 million. The Series D
Preferred Stock earns cumulative dividends payable in shares of Series D
Preferred Stock at an annual rate of 7.0% on the stated value of each
outstanding share of Series D Preferred Stock on the dividend date. The Company
issued stock dividends totaling 996 and 929 shares of Series D Preferred Stock
and cash dividends for fractional shares of $710 and $603 for the years ended
December 31, 2002 and 2001, respectively. Elan International also has committed
to purchase, on a drawdown basis, up to $4.0 million of the Company's Series E
Cumulative Convertible Preferred Stock ("Series E Preferred Stock"), convertible
into shares of Common Stock of the Company at $3.89 per Common Share. During
2002, 2001 and 2000, Elan International purchased a total of $3.0 million of the
Series E Preferred Stock. The proceeds from the sale of Series E Preferred Stock
were utilized by the Company to fund its portion of RSD's operating and
development costs. As further discussed in Note 5, in November 2002, the Company
and Elan International terminated a 1999 license agreement. As a result of this
termination, and the transfer of all of the intellectual property rights of RSD
to the Company and Elan International, Elan International is no longer obligated
to purchase additional shares of Series E Preferred Stock. The Series E
Preferred Stock earns cumulative dividends payable in shares of Series E
Preferred Stock at an annual rate of 9.0% on the stated value of each
outstanding share of Series E Preferred Stock on the dividend date. The Company
issued stock dividends totaling 254 and 120 shares of Series E Preferred Stock
and cash dividends for fractional shares of $960 and $1,422 for the years ended
December 31, 2002 and 2001, respectively. In addition to the above, the Company
issued to Elan International 5,000 shares of Series F Convertible
Non-Exchangeable Preferred Stock ("Series F Preferred Stock"), convertible into
shares of Common Stock of the Company at $3.40 per Common Share, for $5.0
million. The proceeds of the Series F Preferred Stock were utilized by the
Company for its own operating purposes. The holders of the Series F Preferred
Stock may be entitled to receive dividends on a pari passu basis with the
holders of Common Stock. As part of the transaction, Elan International also
received a warrant to purchase 150,000 shares of Common Stock of the Company at
an exercise price of $6.00 per share (see Note 6).

         Common Stock

         During 1998, the Company entered into an agreement with Zambon Group,
SpA ("Zambon") for a sublicense to the Company's proprietary Premaire(R)
Delivery System ("Premaire"), a portable nebulizer-based pulmonary delivery
system (see Note 6). Pursuant to an option agreement dated April 15, 1998, the
Company issued 800,000 shares of Common Stock to Zambon for $650,000 in cash. On
June 15, 1998, the Company entered into the definitive agreement, resulting in
the issuance of an additional 1,846,153 shares of Common Stock to Zambon for
$1.5 million. On October 17, 2001, as part of the September 28, 2001 amendment
of the Company's 1998 agreement with Zambon, the Company repurchased from
Zambon, 214,997 shares of common stock for $3.0233 per share ("Repurchase
Price"). In addition, the Company received an option, which expired December 31,
2002, to repurchase the remaining shares of the Company's common stock held by
Zambon at the Repurchase Price

         In December 2000, the Company entered into a stock purchase agreement
with The Tail Wind Fund Ltd. ("Tail Wind"). Under the agreement, the Company
issued and sold 626,950 shares of Common Stock and a warrant to purchase 112,500
shares of Common Stock at an exercise price of $4.9844 per share for total cash
consideration of $2.3 million. The net proceeds from the transaction of $2.0
million were available to be used for general corporate purposes. Pursuant to
the stock purchase agreement, until at least August 29, 2002, if Sheffield sold
shares of Common Stock or securities convertible into or exercisable for Common
Stock for less than $3.5888 per share, Sheffield was obligated to issue to Tail
Wind additional shares so that the number of shares purchased by Tail Wind in
the December 2000 private placement plus the additional shares issued to Tail
Wind equaled the number of shares that Tail Wind could have purchased for $2.3
million at the price per share at which the new shares were sold. In addition,
in the event that the Company is required to issue additional shares to Tail
Wind, Sheffield may not issue an aggregate of over 5,630,122 shares of Common
Stock in total to Tail Wind in connection with the December 2000 private
placement. If the Company would otherwise be required to issue more than
5,630,122 shares to Tail Wind, Sheffield must instead pay Tail Wind 105% of the
cash value of such shares the Company does not issue. This obligation has
expired and is no longer applicable.

4.     STOCK OPTIONS AND WARRANTS

Stock Option Plan - The 1993 Stock Option Plan (the "Option Plan") was adopted
by the Board of Directors in August 1992 and approved by the stockholders at the
annual meeting in December 1993. An amendment to the Option Plan increasing the
number of shares of Common Stock available for issuance thereunder from 3
million shares to 4 million shares received stockholder approval on July 15,
1998. The Option Plan permits the grant to employees and officers of the Company
of both incentive stock options and non-statutory stock options. The Option Plan
is administered by the Board of Directors or a committee of the Board, which
determines the persons to whom options will be granted and the terms thereof,
including the exercise price, the number of shares subject to each option, and
the exercisability of each option. The exercise price of all options for Common
Stock granted under the Option Plan must be at least equal to the fair market
value on the date of grant in the case of incentive stock options, and 85% of
the fair market value on the date of grant in the case of non-statutory stock
options. Options generally expire five to ten years from the date of grant and
vest either over time or upon the Company's Common Stock attaining a set market
price for a certain number of trading days. Certain employment agreements
provide for an immediate vesting of all unvested options held by the employee
upon a change of control of the Company. Upon such a change of control,
recognition of compensation expense may be triggered, the amount of which cannot
be determined at this time. As of December 31, 2002, there are 1,116,000 shares
available for grant under the Option Plan.

                                       35
<PAGE>

Restricted Stock Plan - The 1993 Restricted Stock Plan (the "Restricted Plan")
was adopted by the Board of Directors in August 1992 and approved by the
stockholders at the annual meeting in December 1993. The Restricted Plan
authorized the grant of a maximum of 150,000 shares of Common Stock to key
employees, consultants, researchers and members of the Company's Scientific
Advisory Board. The Restricted Plan is administered by the Board of Directors or
a committee of the Board, which determines the person to whom shares will be
granted and the terms of such share grants. As of December 31, 2002, no shares
have been granted under the Restricted Plan.

Directors Stock Option Plan - The 1996 Directors Stock Option Plan (the
"Directors Plan") was adopted by the Board of Directors and approved by the
stockholders on June 20, 1996. Under the Directors Plan, the maximum aggregate
number of shares that may be optioned and sold is 500,000 shares of Common
Stock. The Directors Plan initially granted each eligible director 15,000 stock
options. To the extent that shares remain available, any new directors shall
receive the grant of an option to purchase 25,000 shares. To the extent that
shares remain available under the Directors Plan, on January 1 of each year
commencing January 1, 1997, each eligible director shall be granted an option to
purchase 15,000 shares. The exercise price of all options granted under the
Directors Plan shall be the fair market value at the date of the grant. Options
generally expire five years from the date of grant. As of December 31, 2002,
there are 265,000 shares available for grant under the Directors Plan.

         SFAS No. 123 requires pro forma information regarding net income and
earnings per share as if the Company has accounted for its stock options granted
subsequent to December 31, 1994, under the fair value method of SFAS No. 123.
The fair value of these stock options is estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted average
assumptions for 2002, 2001 and 2000, risk-free interest rate ranging from 3.49%
to 6.36%; expected volatility ranging from 0.653 to 0.996; expected option life
of three to ten years from vesting and an expected dividend yield of 0.0%.

         For purposes of pro forma disclosures, the estimated fair value of the
stock options is amortized to expense over the options' vesting period. The
Company's pro forma information is as follows:

<TABLE>
<CAPTION>
                                                     2002                  2001                 2000
                                                 ------------          ------------         ------------
<S>                                              <C>                   <C>                  <C>
Pro forma net loss....................           $(11,338,200)         $(12,479,299)        $(10,036,410)
Pro forma basic net loss per share of
  common stock........................           $       (.39)         $       (.43)        $       (.36)
</TABLE>

                                       36
<PAGE>

         Transactions involving stock options and warrants are summarized as
follows:
<TABLE>
<CAPTION>
                                                                     Years Ended December 31,
                                ---------------------------------------------------------------------------------------------------
                                            2002                               2001                               2000
                                -----------------------------     ------------------------------    -------------------------------
                                                   Weighted                           Weighted                            Weighted
                                                   Average                            Average                              Average
                                Common Stock       Exercise         Common Stock      Exercise        Common Stock        Exercise
                              Options/Warrants      Price         Options/Warrants      Price        Options/Warrants      Price
                              ----------------   ------------     ----------------   ------------    ----------------   -----------
<S>                           <C>                <C>              <C>                <C>             <C>                <C>
Outstanding, January 1              6,185,469    $      3.18           6,921,629     $      3.02           7,782,954    $      2.59
         Granted                      127,742           3.65             156,940            4.44           1,041,040           5.34
         Expired                    1,270,039           3.42             250,000            2.99             660,820           2.90
         Exercised                    643,000           1.93             558,100            1.73           1,241,545           2.32
         Canceled                     184,800           5.03              85,000            3.21                  --             --
                                  -----------    -----------         -----------     -----------         -----------    -----------
Outstanding, December 31            4,215,372    $      3.23           6,185,469     $      3.18           6,921,629    $      3.02
                                  ===========    ===========         ===========     ===========         ===========    ===========
Exercisable at end of year          4,054,372    $      3.14           4,525,969     $      2.77           5,049,613    $      2.57
                                  ===========    ===========         ===========     ===========         ===========    ===========
</TABLE>

During the period January 1, 2000 through December 31, 2002, the exercise prices
and weighted average fair value of options and warrants granted by the Company
were as follows:

<TABLE>
<CAPTION>
Year                 Number of Options/Warrants             Exercise Price            Weighted Average Fair Value
----                 --------------------------             --------------            ---------------------------
<S>                  <C>                                    <C>                       <C>
2000                          1,041,040                      $3.50 - 7.00                        $3.37
2001                            156,940                      $3.58 - 5.25                        $3.03
2002                            127,742                      $1.40 - 4.69                        $2.37
</TABLE>

At December 31, 2002, outstanding warrants to purchase the Company's Common
Stock are summarized as follows:

<TABLE>
<CAPTION>
   Range of                                                Weighted Average Remaining
Exercise Prices              Outstanding Warrants           Contractual Life (Years)      Weighted Average Exercise Price
---------------              --------------------           ------------------------      -------------------------------
<S>                          <C>                            <C>                           <C>
 $1.38 - $2.00                       576,115                          2.35                             $1.94
 $2.31 - $4.98                       251,733                          2.94                             $4.50
 $5.00 - $6.13                       206,524                          3.27                             $5.92
                                   ---------
     Total                         1,034,372                          2.68                             $3.36
                                   =========
</TABLE>

  At December 31, 2002, outstanding options to purchase the Company's Common
Stock are summarized as follows:

<TABLE>
<CAPTION>
   Range of                                                Weighted Average Remaining
Exercise Prices               Outstanding Options           Contractual Life (Years)      Weighted Average Exercise Price
---------------               -------------------          --------------------------     -------------------------------
<S>                           <C>                          <C>                            <C>
 $1.24 - $2.69                       828,000                          2.57                             $1.69
 $2.75 - $3.13                     1,358,000                          2.13                             $2.78
 $3.50 - $7.00                       995,000                          5.26                             $4.98
                                   ---------
     Total                         3,181,000                          3.23                             $3.18
                                   =========
</TABLE>

5.     NOTES PAYABLE AND LONG-TERM DEBT

         Notes Payable

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

                                       37
<PAGE>

to purchase a total of 225,000 of the Company's common stock at an exercise
price of $.60 per share.

         On November 8, 2002 the Company entered into an agreement with Elan
Pharma International Ltd. ("Elan Pharma"). Under the terms of the agreement, the
Company received proceeds of $.5 million evidenced by an unsecured demand
promissory note of the Company that provides for interest on principal and
semi-annually compounded interest at a fixed rate of 10% per annum. Also as part
of the agreement, the parties terminated the 1999 license agreement for the Elan
NanoCrystal technology made between Elan Pharma and RSD. As provided in the 1999
license agreement, upon termination of this license, all intellectual property
of RSD was transferred to and jointly owned by Elan and Sheffield. The
outstanding principal balance of the promissory notes at December 31, 2002 was
$.5 million.

         Convertible Promissory Note

         As part of the 1998 agreement with Elan, Elan agreed to make available
to the Company a Convertible Promissory Note ("Convertible Note") that provides
the Company the right to borrow up to $2.0 million, subject to satisfying
certain conditions. No more than $500,000 may be drawn under the Convertible
Note in any calendar quarter and at least one-half of the proceeds must be used
to fund SPD's development activities. The principal outstanding under the
Convertible Note bears interest at the prime rate plus 1% and, if not previously
converted, matures on June 30, 2005. Prior to repayment, Elan has the right to
convert all principal and accrued interest into shares of the Company's Common
Stock at a conversion price of $1.75 per share. The outstanding principal
balance of the Convertible Note at December 31, 2002 and 2001 was $2.0 million,
and accrued interest was $.6 million and $.4 million at December 31, 2002 and
2001, respectively. The prime rate was 4.25% and 4.75% at December 31, 2002 and
2001, respectively.

         Long-Term Debt

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

         In September 2001, in connection with the amendment of its 1998
agreement with Zambon, the Company entered into a Loan and Security Agreement
(the "Loan") with Zambon, pursuant to which Zambon agreed to lend the Company
$2.5 million. The Company received $1.0 million upon signing of the Loan, with
additional borrowings of $1.0 million and $.5 million on January 1, 2002 and
April 1, 2002, respectively. The Loan provides for interest on principal and
annually compounded interest at a fixed rate of 2% per annum and is secured by
certain security interests in respiratory products developed in the Premaire.
One third of the principal balance, together with interest, is payable by the
Company upon the Company's execution of an agreement with one or more third
parties to develop, co-promote and/or sell certain products in North America,
with all remaining unpaid principal and interest due on December 31, 2005. The
outstanding principal balance of the Loan was $2.5 million and $1.0 million at
December 31, 2002 and 2001, respectively.

         In conjunction with the completion of the Phase I/II Premaire albuterol
trial in 1999 and the demonstration of the technical feasibility of delivering
an inhaled steroid formulation in the Premaire in 2000, Zambon provided the
Company with two $1.0 million interest-free advances against future milestone
payments. The second advance was received in January 2001 and was reflected in
the accompanying financial statements as a milestone advance receivable at
December 31, 2000. The proceeds from these advances were not restricted as to
their use by the Company (see Note 6). As part of the amendment of its 1998
agreement with Zambon, the terms of all milestone advances received from Zambon
were modified in that the Company shall repay $1.0 million of the advance
milestone payments upon the earlier of December 31, 2003, or upon the first
regulatory approval for either albuterol or an inhaled steroid delivered in the
Premaire. The remaining $1.0 million advance shall be repaid by the Company on
the earlier of December 31, 2005, or the regulatory approval of the second
product (albuterol or an inhaled steroid) delivered in the Premaire. Due to the
modification in the repayment terms, the advances, totaling $2.0 million at both
December 31, 2002 and 2001, have been reclassified in the Company's balance
sheet as long-term debt.

6.     RESEARCH AND DEVELOPMENT AGREEMENTS

         Pulmonary Delivery Technologies

         In June 1998, the Company sublicensed to Zambon worldwide marketing and
development rights to respiratory products to be delivered by the Premaire in
return for an equity investment in the Company (approximately 10%). From June
1998 to September 2001,

                                       38
<PAGE>

Zambon funded the development costs for the respiratory compounds delivered by
Premaire. In September 2001, the Company amended its 1998 agreement with Zambon
whereby the Company regained the rights to the Premaire previously granted to
Zambon. Upon commercialization, Zambon will be entitled to certain royalties on
payments received by Sheffield for albuterol, ipratropium and cromolyn sales for
specified periods.

         In June 1998, the Company issued certain equity securities pursuant to
an agreement with Elan (see Note 3). Under the terms of the agreement, the
Company, through its wholly owned subsidiary, SPD, acquired certain pulmonary
delivery technologies from Elan for $12.5 million in cash. In July 1998, SPD
acquired from Aeroquip-Vickers, Inc. a new generation propellant-based pulmonary
delivery system called the Tempo(TM) Inhaler for $.9 million. The payments for
these technologies were expensed during 1998 as acquired R&D in-process
technology since the technologies acquired had not demonstrated technological
feasibility and had no alternative future uses. SPD holds the rights to all
systemic disease applications of the Tempo technology while Sheffield retains
the rights to develop the respiratory disease applications of Tempo. The Company
is responsible for the development of these technologies. On August 21, 2002 the
Company ended this strategic alliance with Elan and regained all intellectual
property rights to the systemic applications of Premaire and Tempo that were
licensed to SPD. In addition, as part of the termination of this alliance, the
Company will enter into a separate agreement with Elan to license exclusively
the UPDAS(TM) and the Enhancing Technology. The Company has also granted to Elan
an ongoing right to receive royalties on commercialization of two products,
morphine delivered by Premaire and ergotamine tartrate delivered by Tempo. At
December 31, 2002, the Company was not committed to fund any additional costs
related to SPD's systemic development programs.

         In October 1999, the Company issued certain equity securities pursuant
to an agreement with Elan (see Note 3). Under the terms of the agreement, the
Company, through its majority owned subsidiary RSD, licensed certain pulmonary
NanoCrystal(TM) technology from Elan for $15.0 million in cash. This payment was
expensed as acquired R&D in-process technology as the license agreement
restricts the Company's use of the NanoCrystal technology to certain respiratory
steroid products that are currently research and development. The subsidiary is
responsible for the development of certain respiratory steroid products.
On November 8, 2002, as part of an agreement between Elan and RSD, the
parties terminated the license for the Elan NanoCrystal technology to RSD. As
provided in the 1999 license agreement, upon termination of this license, all
intellectual property of RSD was transferred to and jointly owned by Elan and
Sheffield.

         Early Stage Technologies

         The Company also is party to a number of license and research
agreements, primarily with universities, hospitals, and research facilities,
relating to early stage medical research projects that focus on the development
of new compounds for the treatment of cancer, acquired immune deficiency
syndrome and other diseases. As part of the Company's focus on later stage
opportunities, the Company is seeking to out-license these projects. There can
be no assurance that the Company will receive license fees or other payments
related to these technologies. The Company believes these early stage technology
license and research agreements will have no material impact on the financial
position of the Company.

         On November 20, 1997, the Company entered into a sublicense agreement
with Lorus Therapeutics, Inc. (formerly Imutec Pharma Inc.) ("Lorus"). The
agreement licenses rights to a series of clotrimazole-related compounds for the
treatment of cancer, Kaposi's sarcoma and actinic keratosis to a newly formed
company, NuChem Pharmaceuticals, Inc. ("NuChem"). In exchange, Lorus agreed to
manage and fund the remaining development program. The Company is entitled to
receive payments upon the completion of certain milestones in the development of
these compounds and retains a 20% ownership interest in NuChem.

7.     INCOME TAXES

         At December 31, 2002, the Company had available net operating loss
carryforwards for regular federal income tax purposes of approximately $58.8
million, of which $27.5 million will expire between 2007 and 2012, and $31.3
million will expire between 2018 and 2022, if not utilized. Utilization of the
Company's net operating loss carryforwards may be subject to an annual
limitation as a result of the "changes in ownership" provisions of the Internal
Revenue Code Section 382. Future changes in ownership may limit net operating
loss carryforwards generated in the year of change.

                                       39
<PAGE>

         Deferred income taxes reflect the net effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's net deferred tax asset at December 31, 2002 and 2001, which are
considered noncurrent, are as follows:

<TABLE>
<CAPTION>
DEFERRED TAX ASSETS                                     2002                   2001
                                                    ------------          ------------
<S>                                                 <C>                   <C>
Net operating loss carryforwards.........           $ 22,343,000          $ 19,348,000
Costs capitalized for tax purposes........             1,645,000             1,810,000
Deferred tax asset valuation allowance..             (23,988,000)          (21,158,000)
                                                    ------------          ------------
   Net deferred tax asset....................       $         --          $         --
                                                    ============          ============
</TABLE>

         The Company has recorded a valuation allowance for the entire deferred
tax asset due to the uncertainty of its realization. The deferred tax asset will
be amortized into taxable income over a useful life of 15 years.

8.     SUBSEQUENT EVENT

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

                                       40

<PAGE>

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA (CONTINUED)

Quarterly financial data for 2002 and 2001 is summarized below:

<TABLE>
<CAPTION>
                                                                  Three Months Ended
                                              ---------------------------------------------------------
                                                 Mar 31         Jun 30         Sep 30         Dec 31
                                              -----------    -----------    -----------    ------------
<S>                                           <C>            <C>            <C>            <C>
2002:
Total revenues                                $        --    $    10,000    $        --    $        --
Operating loss                                 (3,092,456)    (3,054,870)    (1,138,873)      (808,454)
Net loss                                       (3,133,583)    (3,176,896)    (1,302,732)    (1,004,371)
Basic and diluted net loss per common share          (.13)          (.13)          (.06)          (.05)

2001:
Total revenues                                $   180,747    $   693,348    $        --    $        --
Operating loss                                 (1,623,295)    (2,360,545)    (2,717,608)    (2,975,811)
Net loss                                       (1,580,410)    (2,279,410)    (2,592,821)    (3,026,496)
Basic and diluted net loss per common share          (.07)          (.10)          (.11)          (.12)
</TABLE>

ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

         Not applicable.

PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT

DIRECTORS AND EXECUTIVE OFFICERS

         The directors and executive officers of the Company and their positions
with the Company are set forth below.

<TABLE>
<CAPTION>
        Name                              Age    Director Since                            Position
--------------------                      ---    --------------              --------------------------------------
<S>                                       <C>    <C>                         <C>
John M. Bailey                             55    April 1997                  Chairman, Director

Thomas M. Fitzgerald                       53    September 1996              President, Chief Executive Officer and
                                                                             Director

Digby W. Barrios                           65    April 1997                  Director

Allan M. Fox                               55    April 2002                  Director

Thomas A. Armer                            49    --                          Vice President - Pulmonary Delivery
                                                                                Systems, Chief Scientific Officer
</TABLE>

         JOHN M. BAILEY. Mr. Bailey has been a Director of the Company since
April 1997 and has served as Chairman of the Company since April 2002. Mr.
Bailey is the founder and majority shareholder of Bailey Associates, a
consulting firm specializing in providing companies with strategic advice and
support through mergers, collaborations and divestments. From 1978 to 1996, Mr.
Bailey was employed by Fisons Group plc, U.K.-based ethical pharmaceutical
company ("Fisons") where he held a number of senior positions. In 1993, Mr.
Bailey was appointed to the main board of Fisons and, in 1995, he was appointed
Corporate Development Director of Fisons. In that role, he was directly
responsible for worldwide strategic and corporate development and for all
merger, divestment, acquisition and business development activities of Fisons
Group worldwide.

         THOMAS M. FITZGERALD. Mr. Fitzgerald has been a Director of the Company
since September 1996 and has served as President and Chief Executive Officer
since April 2002. From December 1997 to April 2002, Mr. Fitzgerald served as the
Chairman of the Company. From June 1996 to December 1997, Mr. Fitzgerald served
as Chief Operating Officer of the Company and, from February 1997 to December
1997, he served as President of the Company. From 1989 to 1996, Mr. Fitzgerald
was the Vice President and General Counsel of Fisons Corporation, an operating
unit of Fisons. Mr. Fitzgerald was Assistant General Counsel of SmithKline
Beecham prior to joining Fisons.

                                       41

<PAGE>

         DIGBY W. BARRIOS. Mr. Barrios has been a Director of the Company since
April 1997. Since 1992, Mr. Barrios has been a private consultant to the
pharmaceutical industry. Mr. Barrios served from 1985 to 1987 as Executive Vice
President, and from 1988 to 1992 as President and Chief Executive Officer, of
Boehringer Ingelheim Corporation. Mr. Barrios is also a member of the Board of
Directors of Sepracor Inc.

         ALLAN M. FOX. Mr. Fox has been a Director of the Company since April
2002. Since 1986, Mr. Fox has been a partner in the firm now known as FoxKiser,
a firm Mr. Fox founded specializing in identifying and enhancing business
opportunities and improving competitive market position in the pharmaceutical
and biotechnology industries. Previously, Mr. Fox served as Chief of Staff and
Chief Legislative Assistant to U.S. Senator Jacob K. Javits of New York and
Chief Counsel to the U.S. Senate Health and Scientific Research Subcommittee,
chaired by Senator Edward M. Kennedy. Mr. Fox currently serves on several boards
of educational and research institutions.

         THOMAS A. ARMER. Dr. Armer, Ph.D., has been Vice President - Pulmonary
Delivery Systems of the Company since August 1998 and was appointed Chief
Scientific Officer in March 2002. From January 1994 to August 1998, Dr. Armer
was Director of Aeroquip Specialty Products, a division of Aeroquip-Vickers
Corporation, a supplier of critical performance components and systems to the
aerospace industry. From 1989 to 1994, Dr. Armer served as Director of Market
Development for the Novon Products Group, a division of Warner Lambert
Corporation, a pharmaceutical company.

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

         Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires that the Company's officers and directors and persons who own more than
10% of the Company's Common Stock file reports of ownership and changes in
ownership with the Securities and Exchange Commission (the "SEC"). Officers,
directors and greater than 10% stockholders are required by SEC regulation to
furnish the Company with copies of all Section 16(a) forms that they file. Based
solely on its review of the copies of such forms received by it, the Company
believes that during the fiscal year ended December 31, 2002, all Section 16(a)
filing requirements applicable to its officers, directors and greater than 10%
beneficial owners were complied with on a timely basis.

                                       42

<PAGE>

ITEM 11. EXECUTIVE COMPENSATION

         The following table sets forth, for the fiscal years indicated, all
compensation awarded to, earned by or paid to the chief executive officer of the
Company ("CEO") and the executive officers of the Company (other than the CEO)
who were executive officers of the Company during the fiscal year ended December
31, 2002 and whose salary and bonus exceeded $100,000 with respect to the fiscal
year ended December 31, 2002 (the "named executive officers").

                           SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
                                                                                       Long-Term
                                                                                      Compensation
                                                                                         Awards
                                                                                         ------
                                                            Annual Compensation        Securities
           Name and                                         -------------------        Underlying            All Other
     Principal Position                      Year         Salary($)      Bonus($)      Options(#)       Compensation ($)(3)
     ------------------                      ----         ---------      --------      ----------       -------------------
<S>                                          <C>          <C>            <C>          <C>               <C>
Thomas M. Fitzgerald,                         2002        $212,269       $    --              --             $ 5,500
  Chairman and Chief Executive                2001         207,276            --              --               5,250
  Officer............................         2000         196,151        13,000         150,000               5,250

Loren G. Peterson,                            2002         $74,577       $    --              --             $37,100(4)
  Former President, Chief Executive           2001         207,126            --              --               5,250
  Officer(1)..........................        2000         196,081        13,000         150,000               5,250

Scott A. Hoffmann, Former Vice                2002        $141,594       $    --              --             $ 4,158
  President, Finance & Administration,        2001         138,417            --              --               3,968
  Chief Financial Officer(2).........         2000         130,837         9,000         135,000               3,925

Thomas A. Armer, Vice President,              2002        $141,594       $    --              --             $ 4,158
  Pulmonary Delivery Systems, Chief           2001         138,140            --              --               2,552
  Scientific Officer..................        2000         130,722         9,000          90,000               3,922
</TABLE>

---------------------
(1)      Mr. Peterson has resigned from the Company effective April 30, 2002.

(2)      Mr. Hoffmann resigned from the Company effective March 7, 2003.

(3)      Consists of matching contributions to the Company's 401(k) Plan.

(4)      Includes $315,000 payable to Mr. Peterson under the terms of a
         Separation Agreement, of which $35,000 was paid in the fiscal year
         ended December 31, 2002.


                                       43

<PAGE>

         The following table sets forth certain information regarding stock
options held by Messrs. Fitzgerald, Peterson, Hoffmann and Armer as of December
31, 2002.

                       FISCAL 2002 YEAR-END OPTION VALUES

<TABLE>
<CAPTION>
                                                        Number of Securities         Value(3) of
                                                             Underlying             Unexercised in-
                                                            Unexercised               the-Money
                                                           Options at FY-           Options at FY-
                                                              End (#)                  End($)
                                                            Exercisable/             Exercisable/
                    Name                                  Unexercisable             Unexercisable
                    ----                                  -------------             -------------
<S>                                                     <C>                         <C>
Thomas M. Fitzgerald,
  Chairman and Chief Executive
  Officer..........................................        505,000/50,000             $ -- / $ --

Loren G. Peterson,
  Former President and Chief Executive
  Officer(1).......................................        655,000/------             $ -- / $ --

Scott A. Hoffmann,
  Former Vice President, Finance &
  Administration, Chief Financial Officer(2).......        210,000/45,000             $ -- / $ --

Thomas A. Armer,
  Vice President, Pulmonary Delivery
  Systems, Chief Scientific Officer................        185,000/30,000             $ -- / $ --
</TABLE>

---------------------
(1) Mr. Peterson resigned from the Company effective April 30, 2002. As a result
of his resignation and pursuant to the separation agreement between the Company
and Mr. Peterson, unvested options representing 200,000 shares noted in the
table above became exercisable on the date of his resignation.

(2) Mr. Hoffmann resigned from the Company effective March 7, 2003.

(3) Represents the total gain that would be realized if all in-the-money options
held at December 31, 2002 were exercised, determined by multiplying the number
of shares underlying the options by the difference between the per share option
exercise price and the closing consolidated sale price of Common Stock of $.19
per share reported by the American Stock Exchange for December 31, 2002. An
option is in-the-money if the fair market value of the underlying shares exceeds
the exercise price of the option.

EMPLOYMENT AGREEMENTS

         In June 1996, the Company entered into a three-year employment
agreement with Thomas M. Fitzgerald pursuant to which Mr. Fitzgerald agreed to
serve as Chief Operating Officer of the Company. The term of the agreement is
automatically extended for an additional one year term from year to year unless
one party notifies the other of its intention to terminate at least six months
prior to the end of the then current term; provided that, such notice will have
no effect and the term will automatically be extended for one year if a
potential change of control occurs prior to or within one year following such
notice. The term shall be extended for two years if a change of control occurs
at any time during the term of the agreement. The employment agreement requires
Mr. Fitzgerald to devote his full business and professional time in furtherance
of the business of the Company. In June 2002, the agreement automatically
renewed for a one-year term. If Mr. Fitzgerald's employment is terminated other
than for cause, he is entitled to receive a severance payment of $105,000,
payable in six equal monthly installments and continued health insurance for
such period. The employment agreement contains confidentiality and non-compete
provisions. Mr. Fitzgerald's annual base salary under the agreement is currently
$210,000. Pursuant to the first amendment to Mr. Fitzgerald's employment
agreement, if Mr. Fitzgerald is terminated without cause or leaves the Company
for good reason following a potential change of control or within two years
following a change of control, Mr. Fitzgerald will be entitled to a payment
equal to two times his annual base salary, continuation of health insurance for
up to one year, accelerated vesting of all stock based compensation, a
three-year period to exercise all outstanding stock options and an additional
payment equal to certain excise taxes payable with respect to such amounts.

         In April 1997, the Company entered into a five-year employment
agreement with Loren G. Peterson pursuant to which Mr. Peterson agreed to serve
as Chief Executive Officer of the Company. The employment agreement required Mr.
Peterson to devote his full business and professional time in furtherance of the
business of the Company. If Mr. Peterson's employment was terminated other than
for cause, he was entitled to receive a severance payment equal to seventy-five
percent of his current base salary, payable in nine equal monthly installments,
continued health insurance for such period and premium payments on any life
and/or disability insurance maintained by the Company for such period. The
employment agreement included confidentiality and non-compete provisions. In
April 2002, the Company entered into a separation agreement with Mr. Peterson
pursuant to which Mr. Peterson agreed to resign as President and

                                       44
<PAGE>

Chief Executive Officer. Under the agreement Mr. Peterson received a severance
payment of $315,000, payable in 18 equal monthly installments, and certain
employee benefits previously provided to Mr. Peterson are to continue to be
provided by the Company during the severance period. In addition, the vesting
dates and exercise periods of certain stock options held by Mr. Peterson were
modified.

         In November 1998, the Company entered into a three-year employment
agreement with Scott A. Hoffmann pursuant to which Mr. Hoffmann agreed to serve
as Vice President - Finance and Administration, and Chief Financial Officer of
the Company. The term of the agreement was automatically extended for an
additional one year term from year to year unless one party notified the other
of its intention to terminate at least 90 days prior to the end of the then
current term; provided that, such notice would have no effect and the term would
automatically be extended for one year if a potential change of control occurred
prior to or within one year following such notice. The employment agreement
required Mr. Hoffmann to devote his full business and professional time in
furtherance of the business of the Company. If Mr. Hoffmann's employment was
terminated other than for cause, he was entitled to receive a severance payment
of $70,000, payable in six equal monthly installments. The employment agreement
included confidentiality and non-compete provisions. Mr. Hoffmann's annual base
salary under the employment agreement was $140,000. Mr. Hoffmann resigned from
the Company effective March 7, 2003. No severance payments will be made to Mr.
Hoffmann.

         In August 1998, the Company entered into a two-year employment
agreement with Thomas A. Armer pursuant to which Dr. Armer agreed to serve as
Vice President - Pulmonary Delivery Systems of the Company. The term of the
agreement is automatically extended for an additional one year term from year to
year unless one party notifies the other of its intention to terminate at least
60 days prior to the end of the then current term; provided that, such notice
will have no effect and the term will automatically be extended for one year if
a potential change of control occurs prior to or within one year following such
notice. The term shall be extended for two years if a change of control occurs
at any time during the term of the agreement. The employment agreement requires
Dr. Armer to devote his full business and professional time in furtherance of
the business of the Company. In August 2002, the agreement automatically renewed
for a one-year term. If Dr. Armer's employment is terminated other than for
cause, he is entitled to receive a severance payment of $60,000, payable in six
equal monthly installments. The employment agreement includes confidentiality
and non-compete provisions. Dr. Armer's annual base salary under the employment
agreement is currently $140,000. Pursuant to the first amendment to Dr. Armer's
employment agreement, if Dr. Armer is terminated without cause or leaves the
Company for good reason following a potential change of control or within two
years following a change of control, Dr. Armer will be entitled to a payment
equal to one and one-half times his annual base salary, continuation of health
insurance for up to one year, accelerated vesting of all stock based
compensation, a three year period to exercise all outstanding stock options and
an additional payment equal to certain excise taxes payable with respect to such
amounts.

BOARD OF DIRECTORS COMPENSATION

         The Company does not currently compensate directors who are also
executive officers of the Company. Under current Company policy, each
non-employee director of the Company receives a fee of $750 for each Board
meeting attended and $400 for each Board committee meeting attended. Directors
are reimbursed for their expenses incurred in attending meetings of the Board of
Directors or any committee of the Board of Directors. Under the terms of the
1996 Directors Stock Option Plan, each non-employee director receives a grant of
an option to purchase 25,000 shares of Common Stock upon initial election, as
well as additional option grants to purchase 15,000 shares of Common Stock on
January 1 of each year thereafter during eligible tenure. Such options will be
exercisable at a price per share equal to the fair market value of the Common
Stock on the date of grant and will vest six months from the date of grant.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

         During the Fiscal Year 2002, all executive officer compensation
decisions were made by the Compensation Committee or the full Board of
Directors. The Compensation Committee reviews and makes recommendations
regarding the compensation for top management and key employees of the Company,
including salaries and bonuses. No member of the Compensation Committee during
the Fiscal Year 2002 was an officer of the Company. The members of the
Compensation Committee during the Fiscal Year 2002 were John M. Bailey, Digby W.
Barrios and Allan M. Fox.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         The voting securities of the Company outstanding on April 10, 2003
consisted of 29,563,712 shares of Common Stock. The following table sets forth
information concerning ownership of the Company's Common Stock, as of April 10,
2003 (except as indicated below) by (i) each director and nominee, (ii) each
named executive officer as defined in the Summary Compensation Table, (iii) all
directors and executive officers as a group, and (iv) each person who, to the
knowledge of management, owned beneficially more than 5% of the outstanding
shares of Common Stock.

                                       45
<PAGE>

<TABLE>
<CAPTION>
                                                                 SHARES                   PERCENT OF
                                                              BENEFICIALLY                OUTSTANDING
      BENEFICIAL OWNER(1)                                       OWNED(2)                COMMON STOCK(2)
      -------------------                                       --------                ---------------
<S>                                                           <C>                       <C>
Elan International Services, Ltd.                             24,227,969(3)                 49.7%

John P. Curran                                                 3,267,900(4)                 11.1%

Inpharzam International S.A.                                   2,431,156(5)                  8.2%

Thomas M. Fitzgerald                                             571,597(6)                  1.9%

Loren G. Peterson                                                676,000(7)                  2.3%

Scott A. Hoffmann                                                261,700(8)                    *

Thomas A. Armer                                                  225,000(9)                    *

John M. Bailey                                                    75,000(10)                   *

Digby W. Barrios                                                  80,000(11)                   *

All Directors and Executive Officers
as a Group (five persons)                                        951,597(12)                 3.1%
</TABLE>
---------------------
*        Less than 1%

(1)      The persons named in the table, to the Company's knowledge, have sole
         voting and investment power with respect to all shares shown as
         beneficially owned by them, subject to community property laws where
         applicable and the information contained in the footnotes hereunder.

(2)      Calculations assume that all options, warrants and convertible
         securities held by each director, director nominee and executive
         officer and exercisable or convertible within 60 days after April 10,
         2003 have been exercised or converted.

(3)      Includes 19,161,541 shares of Common Stock issuable upon exercise of
         warrants, conversion of Series C, D, and F Preferred Stock, and a
         Convertible Promissory Note.

(4)      Based solely upon information in Amendment No. 2 to the Schedule 13G of
         John P. Curran, General Partner of Curran Partners, L.P., dated January
         30, 2003 and filed with the Securities and Exchange Commission on
         January 31, 2003. The address of John P. Curran set forth in such
         Schedule 13G is 237 Park Avenue, New York, New York, 10017.

(5)      Based solely upon information in Amendment No. 2 to the Schedule 13D of
         Inpharzam International S.A., an affiliate of Zambon Group, SPA, dated
         October 19, 2001 and filed with the Securities and Exchange Commission
         on October 26, 2001. The address of Inpharzam International S.A. set
         forth in such Schedule 13D is Via Industria 1, 7814 Cadempino,
         Switzerland.

(6)      Includes 555,000 shares of Common Stock issuable upon exercise of
         options exercisable within 60 days after April 10, 2003.

(7)      Includes 455,000 shares of Common Stock issuable upon exercise of
         options exercisable within 60 days after April 22, 2002. 9,000 of these
         shares are held by Mr. Peterson as custodian for the benefit of his
         children. Mr. Peterson disclaims beneficial ownership of such shares.
         Mr. Peterson resigned from the Company effective April 30, 2002.

(8)      Includes 255,000 shares of Common Stock issuable upon exercise of
         options exercisable within 60 days after April 10, 2003. Mr. Hoffmann
         resigned from the Company effective March 7, 2003.

(9)      Includes 215,000 shares of Common Stock issuable upon exercise of
         options exercisable within 60 days after April 10, 2003.

(10)     Includes 75,000 shares of Common Stock issuable upon exercise of
         options exercisable within 60 days after April 10, 2003.

(11)     Includes 75,000 shares of Common Stock issuable upon exercise of
         options exercisable within 60 days after April 10, 2003.

(12)     Includes 920,000 shares of Common Stock issuable upon exercise of
         options exercisable within 60 days after April 10, 2003.

                                       46
<PAGE>

EQUITY COMPENSATION PLAN INFORMATION

         The following table provides information as of December 31, 2002 about
our common stock that may be issued upon the exercise of options, warrants and
rights under all of our existing equity compensation plans, including the 1996
Directors Stock Option Plan, the 1993 Stock Option Plan and the 1993 Restricted
Stock Plan.

<TABLE>
<CAPTION>
                                                 (a)                     (b)                               (c)

                                      Number of securities to     Weighted-average        Number of securities remaining available
                                      be issued upon exercise     exercise price of       for issuance under equity compensation
                                      of outstanding options     outstanding options,      plans (excluding securities reflected
    Plan category                       warrants and rights      warrants and rights                 in column (a))
    -------------                       -------------------      -------------------                 --------------
<S>                                   <C>                        <C>                      <C>
Equity Compensation plans
approved by Shareholders                    3,181,000                 $ 3.18                            1,531,000

Equity Compensation plans not
approved by Shareholders (1)                  179,256                 $ 3.21                                   --

Total                                       3,360,256                 $ 3.18                            1,531,000
</TABLE>

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

(1) The Company has issued warrants to certain parties as compensation for
consulting services.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         In June 1998, the Company entered into a sublicense and development
agreement with Inpharzam International, S.A., an affiliate of Zambon Group SpA,
for the testing and development of the Company's rights in its Premaire metered
solution inhaler technology in respect of therapies for respiratory diseases.
From June 1998 to September 2001, Zambon funded the development costs for the
respiratory compounds delivered by Premaire. In September 2001, the Company
amended its 1998 agreement with Zambon whereby Sheffield regained the rights to
the Premaire previously granted to Zambon. As part of the amended agreement,
Zambon provided a low-interest, $2.5 million loan to Sheffield to progress the
development of the Premaire respiratory program. Upon commercialization, Zambon
will be entitled to certain royalties on payments received by Sheffield for
albuterol, ipratropium and cromolyn sales for specified periods.

         In June 1998, the Company consummated a license and financing
transaction with Elan International Services Ltd, an affiliate of Elan
Corporation, plc. In connection with this transaction, the Company formed
Systemic Pulmonary Delivery, Ltd. ("SPD"), a wholly owned subsidiary, and
entered into several agreements with Elan International Services Ltd., including
a Securities Purchase Agreement and a Joint Development and Operating Agreement.
In addition, Elan International Services Ltd. and the Company have licensed
certain of their intellectual property rights relating to pulmonary drug
delivery systems to SPD. On August 21, 2002 the Company ended this strategic
alliance with Elan and regained all intellectual property rights to the systemic
applications of Premaire and Tempo that were licensed to SPD. In addition, as
part of the termination of this alliance, the Company will enter into a separate
agreement with Elan to license exclusively the UPDAS(TM) and the Enhancing
Technology. The Company has also granted to Elan an ongoing right to receive
royalties on commercialization of two products, morphine delivered by Premaire
and ergotamine tartrate delivered by Tempo. In October 1999, the Company
consummated a separate license and financing transaction with Elan International
Services Ltd. In connection with this transaction, the Company formed
Respiratory Steroid Delivery, Ltd. ("RSD"), an 80.1 % owned subsidiary, 19.9% of
which is owned by Elan International Services, Ltd., and entered into several
agreements related to RSD with Elan International Services Ltd., including a
Securities Purchase Agreement and a Joint Development and Operating Agreement.
In addition, Elan International Services Ltd. and the Company have licensed
certain of their intellectual property rights relating to pulmonary drug
delivery systems to RSD. On November 8, 2002, as part of an agreement between
Elan and RSD, the parties terminated the license for the Elan NanoCrystal
technology to RSD. As provided in the 1999 license agreement, upon termination
of this license, all intellectual property of RSD was transferred to and jointly
owned by Elan and Sheffield.

         On April 5, 2002, the Company received notification from Elan
International Services, Ltd. that Todd C. Davis, a director of the Company, was
no longer Elan's appointed representative on the Board of Directors. Mr. Davis
remained on the Board as an independent director until his resignation on
November 12, 2002. Elan has not appointed another representative to the Board,
but reserves their right to do so in the future.

                                       47
<PAGE>

ITEM 14. CONTROLS AND PROCEDURES

Our principal executive officer and principal financial officer have concluded,
based on their evaluation within 90 days of the filing date of this report, that
our disclosure controls and procedures are effective for gathering, analyzing
and disclosing the information we are required to disclose in our reports filed
under the Securities Exchange Act of 1934. There have been no significant
changes in our internal controls or in other factors that could significantly
affect the internal controls subsequent to the date of their evaluation.

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

         (a)(1)   Financial Statements

                  The following Financial Statements are included in Item 8
                    hereto:
                  Report of Independent Auditors
                  Consolidated Balance Sheets as of
                    December 31, 2002 and 2001
                  Consolidated Statements of Operations for the years ended
                    December 31, 2002, 2001 and 2000 and for the period October
                    17, 1986 (inception) to December, 31 2002
                  Consolidated Statements of Stockholders' Equity (net capital
                    deficiency) for the period from October 17, 1986 (inception)
                    to December 31, 2002
                  Consolidated Statements of Cash Flows for the years ended
                    December 31, 2002, 2001 and 2000 and for the period from
                    October 17, 1986 (inception) to December 31, 2002
                  Notes to Financial Statements

         (a)(2)   Financial Statement Schedules

                  All financial statement schedules are omitted because they are
not applicable, or not required, or because the required information is included
in the financial statements or notes thereto.

         (a)(3)   Exhibits:

<TABLE>
<CAPTION>
NO.                                                                                     REFERENCE

<S>                                                                                     <C>
3.1       Certificate of Incorporation of the Company, as amended                           (9)

3.2       By-Laws of the Company                                                            (4)

4.1       Form of Common Stock Certificate                                                  (2)

4.4       Certificate of Designations defining the powers, designations, rights,            (9)
          preferences, limitations and restrictions applicable to the Company's
          Series C Cumulative Convertible Redeemable Preferred Stock.

4.5       Certificate of Designations defining the powers, designations, rights,           (14)
          preferences, limitations and restrictions applicable to the Company's
          Series D Cumulative Convertible Exchangeable Preferred Stock.

4.6       Certificate of Designations defining the powers, designations, rights,           (14)
          preferences, limitations and restrictions applicable to the Company's
          Series E Convertible Non-Exchangeable Preferred Stock.

4.7       Certificate of Designations defining the powers, designations, rights,           (14)
          preferences, limitations and restrictions applicable to the
</TABLE>

                                       48
<PAGE>

<TABLE>
<CAPTION>
 NO.                                                                                    REFERENCE
<S>                                                                                     <C>
          Company's Series F Convertible Non-Exchangeable Preferred Stock.

10.6      Employment Agreement dated as of June 6, 1996 between the Company and             (3)
          Thomas M. Fitzgerald*

10.6A     Amendment dated October 1, 2002 to Employment Agreement between the              (21)
          Company and Thomas M. Fitzgerald.*

10.6.5    Employment Agreement dated as of November 16, 1998 between the Company           (13)
          and Scott Hoffmann*

10.6.5A   Amendment dated October 1, 2001 to Employment Agreement between the              (21)
          Company and Scott Hoffmann.*

10.6.6    Employment Agreement dated as of August 3, 1998 between the Company              (21)
          and Thomas A. Armer*

10.6.6A   Amendment dated October 1, 2001 to Employment Agreement between the              (21)
          Company and Thomas A. Armer.*

10.8      1993 Stock Option Plan, as amended*                                              (17)

10.9      1993 Restricted Stock Plan, as amended*                                          (17)

10.10     1996 Directors Stock Option Plan*                                                 (6)

10.11     Agreement and Plan of Merger among the Company, Camelot Pharmacal,                (5)
          L.L.C., David A. Byron, Loren G. Peterson and Carl Siekmann dated
          April 25, 1997*

10.12     Employment Agreement dated as of April 25, 1997 between the Company               (5)
          and David A. Byron*

10.13     Employment Agreement dated as of April 25, 1997 between the Company               (5)
          and Loren G. Peterson, as amended*

10.13A    Amendment dated October 1, 2001 to Employment Agreement between the              (21)
          Company and Loren G. Peterson.*

10.14     Employment Agreement dated as of April 25, 1997 between the Company               (5)
          and Carl Siekmann*

10.19     Form of Sublicense and Development Agreement between Sheffield                   (11)
          Pharmaceuticals, Inc. and Inpharzam International, S.A. (portions of
          this exhibit were omitted and were filed separately with the
          Securities and Exchange Commission pursuant to the Company's
          application requesting confidential treatment in accordance with Rule
          24b-2 as promulgated under the Securities Exchange Act of 1934, as
          amended).

10.20     Securities Purchase Agreement, dated as of June 30, 1998, by and                 (12)
          between Sheffield Pharmaceuticals, Inc. and Elan International
          Services, Ltd., which includes the Certificate of Designations of
          Series C Convertible Preferred Stock as Exhibit B. The Company agreed
          to furnish the disclosure schedules as well as Exhibits A and C, which
          were omitted from this filing, to the Commission upon request
          (portions of this exhibit were omitted and were filed separately with
          the Securities and Exchange Commission pursuant to the Company's
          application requesting confidential treatment in accordance with Rule
          24b-2 as promulgated under the Securities Exchange Act of 1934, as
          amended).
</TABLE>

                                       49
<PAGE>

<TABLE>
<CAPTION>
  NO.                                                                                   REFERENCE
<S>                                                                                     <C>
10.21     Systemic Pulmonary Delivery, Ltd. Joint Development and Operating                (12)
          Agreement dated as of June 30, 1998 among Systemic Pulmonary Delivery,
          Ltd., Sheffield Pharmaceuticals, Inc. and Elan International Services,
          Ltd. (portions of this exhibit were omitted and were filed separately
          with the Securities and Exchange Commission pursuant to the Company's
          application requesting confidential treatment in accordance with Rule
          24b-2 as promulgated under the Securities Exchange Act of 1934, as
          amended).

10.22     License and Development Agreement dated June 30, 1998 between                    (12)
          Sheffield Pharmaceuticals, Inc. and Systemic Pulmonary Delivery, Ltd.
          and Elan Corporation plc. (portions of this exhibit were omitted and
          were filed separately with the Securities and Exchange Commission
          pursuant to the Company's application requesting confidential
          treatment in accordance with Rule 24b-2 as promulgated under the
          Securities Exchange Act of 1934, as amended).

10.23     License and Development Agreement dated June 30, 1998 between Systemic           (12)
          Pulmonary Delivery, Ltd. and Sheffield Pharmaceuticals, Inc. and Elan
          Corporation, plc. (portions of this exhibit were omitted and were
          filed separately with the Securities and Exchange Commission pursuant
          to the Company's application requesting Rule 24b-2 as promulgated
          under the Securities Exchange Act of 1934, as amended).

10.24     License and Development Agreement dated June 30, 1998 between Elan               (12)
          Corporation, plc and Systemic Pulmonary Delivery, Ltd. and Sheffield
          Pharmaceuticals, Inc. (portions of this exhibit were omitted and were
          filed separately with the Securities and Exchange Commission pursuant
          to the Company's application requesting confidential treatment in
          accordance with Rule 24b-2 as promulgated under the Securities
          Exchange Act of 1934, as amended).

10.25     Securities Purchase Agreement, dated as of October 18, 1999, by and              (14)
          between the Company and Elan (portions of this exhibit were omitted
          and were filed separately with the Securities and Exchange Commission
          pursuant to the Company's application requesting confidential
          treatment in accordance with Rule 24b-2 as promulgated under the
          Securities Exchange Act of 1934, as amended).

10.26     Subscription, Joint Development and Operating Agreement dated as of              (14)
          October 18, 1999 by and among Elan Pharma International Limited, Elan,
          the Company and Respiratory Steroid Delivery, Ltd. (portions of this
          exhibit were omitted and were filed separately with the Securities and
          Exchange Commission pursuant to the Company's application requesting
          confidential treatment in accordance with Rule 24b-2 as promulgated
          under the Securities Exchange Act of 1934, as amended).

10.27     License Agreement, dated as of October 19, 1999, by and between the              (14)
          Company and Respiratory Steroid Delivery, Ltd. (portions of this
          exhibit were omitted and were filed separately with the Securities and
          Exchange Commission pursuant to the Company's application requesting
          confidential treatment in accordance with Rule 24b-2 as promulgated
          under the Securities
</TABLE>

                                       50
<PAGE>

<TABLE>
<CAPTION>
  NO.                                                                                   REFERENCE
<S>                                                                                     <C>
          Exchange Act of 1934, as amended).

10.28     License Agreement, dated as of October 19, 1999, by and between Elan             (14)
          Pharma International Limited and Respiratory Steroid Delivery, Ltd.
          (portions of this exhibit were omitted and were filed separately with
          the Securities and Exchange Commission pursuant to the Company's
          application requesting confidential treatment in accordance with Rule
          24b-2 as promulgated under the Securities Exchange Act of 1934, as
          amended).

10.29     Registration Rights Agreement dated as of October 18, 1999 by and                (14)
          between Elan and the Company.

10.30     Securities Purchase Agreement dated as of December 29, 2000, by and              (15)
          between the Company and The Tail Wind Fund Ltd

10.31     Registration Rights Agreement dated as of December 29, 2000, by and              (15)
          between the Company and The Tail Wind Fund Ltd

10.32     Amendment to Sublicense and Development Agreement dated September 29,            (16)
          2001, between Sheffield Pharmaceuticals, Inc. and Inpharzam
          International S.A.

10.33     Loan and Security Agreement dated September 29, 2001, between                    (16)
          Sheffield Pharmaceuticals, Inc. and Inpharzam International, S.A.

10.34     Promissory Note dated September 29, 2001 issued to Inpharzam                     (16)
          International, S.A.

10.35     Note Purchase Agreement dated August 14, 2001 between Sheffield                  (16)
          Pharmaceuticals, Inc. and Elan Pharma International Ltd. (portions of
          this exhibit are omitted and were filed separately with the Securities
          and Exchange Commission pursuant to the Company's application
          requesting confidential treatment in accordance with Rule 24b-2 as
          promulgated under the Securities Exchange Act of 1934, as amended).

10.36     Promissory Note dated September 29, 2001 issued to Elan Pharma                   (16)
          International Ltd. (portions of this exhibit are omitted and were
          filed separately with the Securities and Exchange Commission pursuant
          to the Company's application requesting confidential treatment in
          accordance with Rule 24b-2 as promulgated under the Securities
          Exchange Act of 1934, as amended).

10.37     Separation Agreement dated as of February 18, 2002 between the Company           (21)
          and Carl Siekmann*

10.38     Separation Agreement dated as of February 18, 2002 between the Company           (21)
          and David A. Byron*

10.39     Indemnification Agreement dated January 23, 2002 between the Company             (21)
          and certain officers and directors.

10.40     Separation Agreement dated as of April 26, 2002 between the Company              (18)
          and Loren G. Peterson*

10.41     Form of promissory notes dated September 6, 2002 with certain                    (19)
          shareholders.

16        Letter from Ernst & Young LLP dated March 13, 2003                               (20)

21        Subsidiaries of Registrant                                                        (1)
</TABLE>

                                       51
<PAGE>

<TABLE>
<CAPTION>
  NO.                                                                                   REFERENCE
<S>                                                                                     <C>
23.1      Consent of Rotenberg & Co., LLP                                                   (1)

24        Power of Attorney (Included on page 42 hereof)                                    (1)

99.1      Certification of President, Chief Executive Officer and Acting                    (1)
          Chief Financial Officer pursuant to Section 906 of the
          Sarbanes-Oxley Act of 2002.
</TABLE>

* Management contracts or compensatory plans or arrangements.

-----------------------
(1)      Filed herewith.

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

(3)      Incorporated by reference to the Company's Quarterly Report on Form
         10-QSB for the quarter ended June 30, 1996 filed with the Securities
         and Exchange Commission.

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

(5)      Incorporated by reference to the Company's Quarterly Report on Form
         10-Q for the quarter ended March 31, 1997 filed with the Securities and
         Exchange Commission.

(6)      Incorporated by reference to the Company's Annual Report on Form 10-KSB
         for the year ended December 31, 1996 filed with the Securities and
         Exchange Commission.

(7)      Incorporated by reference to the Company's Registration Statement on
         Form S-3 (File No. 333-38327) filed with the Securities and Exchange
         Commission on October 21, 1997.

(8)      Incorporated by reference to the Company's Current Report on Form 8-K
         filed with the Securities and Exchange Commission on December 17, 1997.

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

(10)     Incorporated by reference to Exhibit 3 of the Company's Current Report
         on Form 8-K, dated April 17, 1998, filed with the Securities and
         Exchange Commission.

(11)     Incorporated by reference to Exhibit 2 of the Company's Current Report
         on Form 8-K, dated June 22, 1998, filed with the Securities and
         Exchange Commission.

(12)     Incorporated by reference to exhibits to the Company's Current Report
         on Form 8-K, dated July 16, 1998, filed with the Securities and
         Exchange Commission.

(13)     Incorporated by reference to the Company's Annual Report on Form 10-K
         for the year ended December 31, 1998 filed with the Securities and
         Exchange Commission.

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

(15)     Incorporated by reference to the Company's Registration Statement on
         Form S-3 (File No. 333-54446) filed with the Securities and Exchange
         Commission on January 26, 2001.

(16)     Incorporated by reference to the Company's Quarterly Report on Form
         10-Q for the quarter ended September 30, 2001 filed with the Securities
         and Exchange Commission.

(17)     Incorporated by reference to the Company's Annual Report on Form 10-K
         for the year ended December 31, 2000 filed with the Securities and
         Exchange Commission.

(18)     Incorporated by reference to the Company's Quarterly Report on Form
         10-Q for the quarter ended June 30, 2002 filed with the Securities and
         Exchange Commission.

(19)     Incorporated by reference to the Company's Quarterly Report on Form
         10-Q for the quarter ended September 30, 2002 filed with the Securities
         and Exchange Commission.

(20)     Incorporated by reference to the Company's Current Report on Form 8-K
         filed with the Securities and Exchange Commission on March 14, 2003.

(21)     Incorporated by reference to the Company's Annual Report on Form 10-K
         filed with the Securities and Exchange Commission on March 29, 2002.

(b)      Reports on Form 8-K

         None

                                       52

<PAGE>

SIGNATURES

         Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

                                          SHEFFIELD PHARMACEUTICALS, INC.

Dated:  April 15, 2003                                  /S/ Thomas M. Fitzgerald
                                          --------------------------------------
                                          Thomas M. Fitzgerald
                                          President and Chief Executive Officer

                                POWER OF ATTORNEY

         Sheffield Pharmaceuticals, Inc. and each of the undersigned do hereby
appoint Thomas M. Fitzgerald and each of them severally, its or his or her true
and lawful attorney to execute on behalf of Sheffield Pharmaceuticals, Inc. and
the undersigned any and all amendments to this Annual Report and to file the
same with all exhibits thereto and other documents in connection therewith, with
the Securities and Exchange Commission; each of such attorneys shall have the
power to act hereunder with or without the other.

         Pursuant to the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated.

<TABLE>
<CAPTION>
        SIGNATURE                                      TITLE                                DATE
        ---------                                      -----                                ----
<S>                                      <C>                                           <C>
        /S/ John M. Bailey               Chairman and Director                         April 15, 2003
-------------------------------
        John M. Bailey

    /S/ Thomas M. Fitzgerald             Director, President and Chief Executive       April 15, 2003
-------------------------------          Officer (Principal Executive Officer)
    Thomas M. Fitzgerald

     /S/ Digby W. Barrios                Director                                      April 15, 2003
-------------------------------
       Digby W. Barrios

       /S/ Allan M. Fox                  Director                                      April 15, 2003
-------------------------------
        Allan M. Fox
</TABLE>

                                       53

<PAGE>

CERTIFICATIONS

I, Thomas M. Fitzgerald, certify that:

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

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

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

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

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

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

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

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

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

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

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

Date:  April 15, 2003

                   /s/ Thomas M. Fitzgerald
                   ------------------------
                   Thomas M. Fitzgerald
                   President & Chief Executive Officer
                   (Principal Executive Officer and Principal Financial Officer)

                                       54


</TEXT>
</DOCUMENT>
