<PAGE>




                               UNITED STATES
                     SECURITIES AND EXCHANGE COMMISSION
                           Washington, DC  20549

                                 FORM 10-Q




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

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


For the Quarter Ended June 30, 1998      Commission File Number 0-27642



                      TRANSDERM LABORATORIES CORPORATION
           (Exact name of registrant as specified in its charter)


      Delaware                                     13-3518345
(State of Incorporation)              (I.R.S. Employer Identification No.)


            1212 Avenue of the Americas, 24th Floor, New York, NY  10036
                      (Address of principal executive offices)


                    Registrant's Telephone Number:  212-398-0700



The registrant has filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the preceding 12 months,
and has been subject to such filing requirements for the past 90 days.

As of July 31, 1998, 40,000,000 shares of Common Stock, $.001 Par Value, were
outstanding.















                                  Page 1<PAGE>
<PAGE>
<TABLE>
                           TRANSDERM LABORATORIES CORPORATION          Part I
                         CONSOLIDATED BALANCE SHEETS  (Unaudited)      Item 1
                                   (In thousands)                      Page 2


                                                   June 30,    December 31,
                                                    1998           1997    
ASSETS
<S>                                                 <C>             <C>
CURRENT ASSETS
  Cash                                              $    21         $    18
  Accounts receivable, net                              245             751
  Inventories (Note 3)                                  810             759
  Other current assets                                    3               0
    Total Current Assets                              1,079           1,528

PROPERTY, PLANT & EQUIPMENT
  Land and building                                   2,854           2,854
  Other property, plant & equipment                   8,071           7,909
    Total Property, Plant & Equipment                10,925          10,763
  Less accumulated depreciation & amortization        6,391           6,105
    Net Property, Plant & Equipment                   4,534           4,658

NON-CURRENT ASSETS                                        1               1

TOTAL ASSETS                                        $ 5,614         $ 6,187

LIABILITIES AND STOCKHOLDERS' EQUITY <DEFICIENCY>

CURRENT LIABILITIES
  Accounts payable                                  $   416         $   639
  Accrued expenses and other current liabilities        522             462
  Current portion of redeemable preferred stock       2,000           1,000
  Preferred dividends payable                           744             446
    Total Current Liabilities                         3,682           2,547

LONG-TERM LIABILITIES
  Subordinated promissory note                        7,000           7,000
  Long-term payable - Health-Chem                     1,522           2,087
  Other long-term debt                                   14              21

REDEEMABLE PREFERRED STOCK                            6,500           7,500

STOCKHOLDERS' EQUITY <DEFICIENCY>
  Common stock                                           40              40
  Retained deficit                                  <13,144>        <13,008>
    Total Stockholders' Equity <Deficiency>         <13,104>        <12,968>

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
<DEFICIENCY>                                        $ 5,614         $ 6,187
<FN>


See Notes to Consolidated Financial Statements.
<PAGE>
<PAGE>

</TABLE>
<TABLE>
                        TRANSDERM LABORATORIES CORPORATION             Part I
                 CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)     Item 1
                      (In thousands, except per share data)            Page 3



                                                       For the Six Months
                                                         Ended June 30,  
<S>                                                       1998       1997
REVENUE:                                               <C>        <C>
  Net sales                                            $ 3,449    $ 2,554
  Cost of goods sold                                     1,681      1,513
  Gross profit                                           1,768      1,041

OPERATING EXPENSES:
  Selling, general and administrative expense              736        716
  Legal expense                                            220        114
  Research and development expense                         372        996
  Net interest expense                                     397        359
    Total operating expenses                             1,725      2,185

INCOME <LOSS> FROM OPERATIONS                               43     <1,144>
  Other income                                              94         95

INCOME <LOSS> FROM OPERATIONS BEFORE TAXES                 137     <1,049>
  Income tax <benefit> provision (Note 2)                  <25>       175 

NET INCOME <LOSS>                                          162     <1,224>

PREFERRED DIVIDENDS                                        298        315

NET LOSS APPLICABLE TO COMMON STOCKHOLDERS             $  <136>   $<1,539>


Earnings per Common Share  (basic & diluted)
 (Note 4):

NET LOSS PER COMMON SHARE                              $  0.00    $ <0.04>

Average number of common shares outstanding          
  (basic and diluted)  (Note 4)                         40,000     40,000



<FN>

See Notes to Consolidated Financial Statements.
<PAGE>
<PAGE>

</TABLE>
<TABLE>
                        TRANSDERM LABORATORIES CORPORATION             Part I
                 CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)     Item 1
                      (In thousands, except per share data)            Page 4



                                                       For the Three Months
                                                          Ended June 30,   
<S>                                                       1998         1997
REVENUE:                                               <C>          <C>
  Net sales                                            $ 1,310      $ 1,442
  Cost of goods sold                                       691          792
  Gross profit                                             619          650

OPERATING EXPENSES:
  Selling, general and administrative expense              364          363
  Legal expense                                             85           67
  Research and development expense                         182          375
  Net interest expense                                     193          195
    Total operating expenses                               824        1,000

LOSS FROM OPERATIONS                                      <205>       <350>
  Other income                                              94           77

LOSS FROM OPERATIONS BEFORE TAXES                         <111>        <273>
  Income tax provision (Note 2)                              0          433 

NET LOSS                                                  <111>        <706>

PREFERRED DIVIDENDS                                        149          149

NET LOSS APPLICABLE TO COMMON STOCKHOLDERS             $  <260>     $  <855>


Earnings per Common Share  (basic & diluted)
 (Note 4):

NET LOSS PER COMMON SHARE                              $ <0.01>     $ <0.02>

Average number of common shares outstanding
  (basic and diluted)  (Note 4)                         40,000       40,000


<FN>

See Notes to Consolidated Financial Statements.
<PAGE>
<PAGE>

</TABLE>
<TABLE>
                         TRANSDERM LABORATORIES CORPORATION          Part I
                   CONSOLIDATED CASH FLOW STATEMENTS (Unaudited)     Item 1
                                  (In thousands)                     Page 5


                                                        For the Six Months
                                                          Ended June 30,  
<S>                                                        1998       1997
Cash was Provided by <Used for>:                        <C>        <C>
OPERATIONS:
 Net income <loss>                                      $   162    $<1,224>
 Adjustments to reconcile net income <loss> to
  net cash provided by <used for> operations: 
   Depreciation and amortization                            286        311
   Deferred income taxes                                      0        175
   Gain on disposal of property, plant and equipment          0        <14>
 Changes in:  
   Accounts receivable                                      506        489
   Inventories                                              <51>       423
   Other current assets                                      <3>         3
   Other non-current assets                                   0         <1>
   Accounts payable                                        <223>      <814>
   Accrued expenses and other current liabilities            59         19
 Net cash provided by <used for> operations                 736       <633>

INVESTING:
 Additions to property, plant and equipment                <162>      <109>
 Disposal of property, plant and equipment                    0         16
 Net cash used for investing                               <162>       <93>

FINANCING:
 <Payments to> borrowings from affiliates, net             <565>     2,059
 Other long-term debt payments                               <6>        <5>
 Redemption of preferred stock                                0     <1,000>
 Preferred dividends paid                                     0       <332>
 Net cash <used for> provided by financing                 <571>       722

Net Increase <Decrease> in Cash                               3         <4>
Cash at beginning of period                                  18         21
Cash at end of period                                   $    21    $    17


Supplemental Disclosures of Cash Flow Information:
  Cash paid during the period for: 
   Interest                                             $   397    $   363
   Income taxes                                               1          1

Supplemental Schedule of Noncash Investing and
 Financing:
  Acquisition of fixed assets through capital
   lease obligations                                    $     0    $    45



<FN>


See Notes to Consolidated Financial Statements.

<PAGE>
<PAGE>

                        TRANSDERM LABORATORIES CORPORATION           Part I
                     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS      Item 1
                                   (Unaudited)                       Page 6




1.    Basis of Presentation and Nature of Operations

      The consolidated financial statements include the accounts of Transderm
      Laboratories Corporation and its subsidiary, Hercon Laboratories
      Corporation ("Hercon").  Transderm Laboratories Corporation and Hercon
      Laboratories Corporation are sometimes hereinafter referred to
      collectively as the "Company". The Company is an indirect 90% owned
      subsidiary of Health-Chem Corporation ("Health-Chem").
      
      The Consolidated Balance Sheet as of June 30, 1998, the Consolidated
      Statements of Operations and the Consolidated Cash Flow Statements for
      the interim periods ended June 30, 1998 and 1997 have been prepared by
      the Company, without audit.  In the opinion of the Company, all
      necessary adjustments, consisting of normal recurring items, have been
      made to present fairly the financial position, results of operations and
      cash flows at June 30, 1998 and for all periods presented.  Certain
      amounts included in the consolidated financial statements relating to
      prior periods have been reclassified to conform to the current
      presentation.

      Certain information and note disclosures normally included in financial
      statements prepared in accordance with generally accepted accounting
      principles have been condensed or omitted.  It is suggested that these
      consolidated financial statements be read in conjunction with the
      consolidated financial statements and notes thereto included in the
      Company's December 31, 1997 Annual Report on Form 10-K.  The results of
      operations for the periods ended June 30, 1998 and 1997 are not
      necessarily indicative of the operating results for the full years.


2.    Taxes on Income (In thousands)             For the Six Months
                                                   Ended June 30,  
                                                   1998        1997
      Taxes on income include 
        provision <benefit> for:
         Federal income taxes                    $    0      $  160
         State and local income taxes               <25>         15
           Total                                 $  <25>     $  175

      Taxes on income are comprised of:
         Current                                 $  <25>     $    0
         Deferred                                     0         175
           Total                                 $  <25>     $  175

      A reconciliation of taxes on income to the federal statutory rate is as
      follows:
                                                 For the Six Months
                                                   Ended June 30,  
                                                   1998        1997

      Tax provision <benefit> at statutory rate  $   47      $ <357>
      <Decrease> increase resulting from: 
         State and local taxes, net of federal 
          tax benefit                               <15>         15
         <Reversal of> provision for valuation
          allowance                                 <57>        517
      Tax <benefit> provision                    $  <25>     $  175


<PAGE>



                        TRANSDERM LABORATORIES CORPORATION           Part I
                     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS      Item 1
                                   (Unaudited)                       Page 7




      At June 30, 1998, the net valuation allowance relating to tax loss and
      tax credit carryforwards was $1,151,000.  This net valuation allowance
      consists of a $1,250,000 decrease in tax loss and tax credit
      carryforwards, partially offset by a $99,000 decrease in a payable to
      Health-Chem, which is only payable as certain net operating loss and tax
      credit carryforwards are used.  Management determined the valuation
      allowance was necessary as a result of delays in the anticipated
      approvals from the United States Food and Drug Administration ("FDA")
      for the sale of the Company's new transdermal nitroglycerin patches and
      the lack of a favorable resolution to the Key Pharmaceuticals, Inc.
      litigation, with such matters contributing to the operating losses of
      the Company in 1997.


3.    Inventories  (In thousands)

                                            June 30, 1998  December 31, 1997

      Raw materials                             $  570           $  526
      Finished goods and work in process           240              233
      Total inventories                         $  810           $  759


4.    Earnings Per Share

      On December 31, 1997, the Company adopted Statement of Financial
      Accounting Standards No. 128 "Earnings Per Share" ("SFAS 128").  SFAS
      128 establishes standards for computing and presenting earnings per
      share and applies to entities with publicly-held common stock or
      potential common stock.  SFAS 128 simplifies the standards for computing
      earnings per share previously found in APB Opinion No. 15, "Earnings Per
      Share", by replacing the presentation of primary earnings per share with
      a presentation of basic earnings per share.  It also requires dual
      presentation of basic and diluted earnings per share on the face of the
      income statement for all entities with complex capital structures. 
      Restatement of all prior-period earnings per share data is required upon
      adoption.  The impact of adopting SFAS 128 on the Company's earnings per
      share data is not material.

      Basic and diluted earnings per share are computed based upon the
      weighted average number of common shares outstanding after adjustment 
      for any dilutive effect of the Company's stock options.
<PAGE>
<PAGE>                  TRANSDERM LABORATORIES CORPORATION           Part I
                     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS      Item 1
                                   (Unaudited)                       Page 8


      A reconciliation of the numerators and denominators of the basic and
      diluted earnings per common share computations for income <loss> from
      continuing operations for the periods ended June 30, 1998 and 1997 is
      presented below (in thousands, except per share amounts):

                                                              For the
                                    For the Six Months     Three Months
                                      Ended June 30,       Ended June 30, 
                                       1998       1997      1998      1997

      Net Loss Applicable to      
       Common Stockholders:   
        Net income <loss>           $   162    $<1,224>  $  <111>  $  <706>
        Preferred stock dividends       298        315       149       149
        Loss applicable to common
         stockholders               $  <136>   $<1,539>  $  <260>  $  <855>

      Basic Earnings Per Common 
       Share:       
        Weighted average number of 
         common shares outstanding   40,000     40,000    40,000    40,000

        Basic loss per common share $  0.00    $ <0.04>  $ <0.01>  $ <0.02>

      Diluted Earnings Per Common 
       Share:
        Weighted average number of 
         common shares outstanding   40,000     40,000    40,000    40,000
        Stock options                     0          0         0         0

        Weighted average number of 
         common shares outstanding 
         - diluted                   40,000     40,000    40,000    40,000

        Diluted loss per common
         share                      $  0.00    $ <0.04>  $ <0.01>  $ <0.02>


      Options to purchase 11,450,000 and 11,400,000 shares of common stock
      were outstanding at June 30, 1998 and 1997, respectively.  No options
      were included in the computation of diluted earnings per common share
      because the Company reported a loss from continuing operations for all
      periods presented.


5.    Litigation

      In August 1995, Key Pharmaceuticals, Inc. a subsidiary of Schering-
      Plough Corporation ("Key") commenced an action against Hercon in the
      United States District Court for the District of Delaware ("Delaware
      District Court") alleging that Hercon's submission to the FDA of three
      Abbreviated New Drug Applications ("ANDAs") relating to some of Hercon's
      transdermal nitroglycerin products, for which the Company is awaiting
      FDA approval, constituted infringement of Key's patent for its Nitro-
      Dur(R) products.  Key sought certain injunctive relief, monetary damages
      if commercial manufacture, use or sale occurs, and a judgment that the
      effective date for FDA approval of the above-referenced ANDAs be not
      earlier than February 16, 2010, the expiration date of Key's patent. 
      Hercon denied the material allegations of the complaint, asserting,
      among other things, that the Key patent is invalid and unenforceable and
      that Hercon had not infringed and did not infringe any claim of the

<PAGE>
                        TRANSDERM LABORATORIES CORPORATION           Part I
                     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS      Item 1
                                   (Unaudited)                       Page 9




      patent.  Hercon counterclaimed against Key for declaratory judgment of
      patent noninfringement, invalidity and unenforceability.  On September
      30, 1997, the Delaware District Court ruled in favor of Key both on its
      infringement claim and on Hercon's claim that Key's patent is invalid
      and unenforceable.  On December 17, 1997, the Delaware District Court
      issued an injunction, enjoining Hercon, except as provided for by
      statute, from making, using, offering for sale, selling or importing any
      transdermal nitroglycerin patches that have been found to infringe claim
      14 of Key's patent, before the expiration of Key's patent on February
      16, 2010.  Hercon has appealed to the United States Court of Appeals for
      the Federal Circuit in Washington, D.C. from both the September 30, 1997
      judgment and the December 17, 1997 injunction.  Oral argument on the
      consolidated appeals was heard by the appellate court on August 5, 1998. 
      Hercon is awaiting decision by the court.  Management continues to
      believe that Hercon has strong grounds for prevailing on appeal.

<PAGE>
<PAGE>
                          TRANSDERM LABORATORIES CORPORATION          Part I
                       MANAGEMENT'S DISCUSSION AND ANALYSIS OF        Item 2
                    FINANCIAL CONDITION AND RESULTS OF OPERATIONS    Page 10


In connection with the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995, the Company provides the following cautionary
remarks regarding important factors which, among others, could cause future 
results to differ materially from the forward-looking statements, expectations
and assumptions expressed or implied herein.  The following discussion
includes certain forward-looking statements.  Such forward-looking statements
are subject to a number of factors, including material risks and
uncertainties, including those referred to herein and in the Company's Reports
on Form 10-K, which could cause actual results to differ materially from the
forward-looking statements.

Results of Operations

Net sales increased $895,000 for the six months ended June 30, 1998 as
compared to the same period in 1997.  The increase in net sales consists of an
$848,000 increase in volume and $47,000 in higher selling prices.  The net
sales increase is due primarily to increased domestic sales volumes of
transdermal nitroglycerin patches.  During the first half of 1997, in
anticipation of increased market pressures and delays in approvals from the
FDA for the sale of new nitroglycerin patches, Hercon undertook an
organizational restructuring which reduced annual payroll-related expenses by
$1,100,000.  While the Company hopes to receive approvals for its new
nitroglycerin patches in 1998, no assurances can be made that any new
nitroglycerin patches will be approved by the FDA.  Moreover, the Company's
ability to exploit its new nitroglycerin products may be limited in the
absence of a favorable resolution to its litigation with Key (the "Key
Litigation") (See Note 5 above and discussion below).  During the second
quarter, the Company commenced production of over-the-counter pharmaceutical
and cosmetic products, with initial shipments occurring in July.  Current
orders for these products are expected to contribute in excess of $4,500,000
in net sales during the second half of 1998.

Net sales decreased $132,000 for the quarter ended June 30, 1998 as compared
to the same period in 1997.  The reduction in sales is primarily attributable
to decreased domestic sales volumes.

Gross profit increased $727,000, or 70%, for the six months ended June 30,
1998 as compared to the same period in 1997.  Gross profit as a percentage of
net sales increased from 41% for 1997 to 51% for 1998.  Gross profit increased
primarily due to increased domestic sales volumes of transdermal nitroglycerin
patches.  Higher margins reflect the allocation of fixed costs over increased
revenue.  Plant overhead decreased $151,000, including a $62,000 decrease for
payroll-related expenses, for the six months ended June 30, 1998 as compared
to the same period in 1997 reflecting, in part, the organizational
restructuring.

Gross profit decreased $31,000, or 5%, for the quarter ended June 30, 1998 as
compared to the same period in 1997.  Gross profit as a percentage of net
sales increased from 45% for 1997 to 47% for 1998.  Plant overhead decreased
$133,000, including a $42,000 decrease for payroll-related expenses, for the
quarter ended June 30, 1998 as compared to the same period in 1997.  These
decreases in gross profit and plant overhead are attributable to the factors
noted above.

Selling, general and administrative expenses, excluding legal expenses,
increased $20,000 for the six months ended June 30, 1998 as compared to the
same period in 1997.  This increase is due primarily to a higher allocation of
expenses from affiliates of $90,000, partially offset by lower payroll-related
costs.  Pursuant to a Corporate Services Agreement between the Company and
Health-Chem, selling, general and administrative expenses incurred by Health-
Chem which cannot be directly attributed to a specific subsidiary are
allocated to the Company based upon its net sales as a percentage of Health-
<PAGE>

                          TRANSDERM LABORATORIES CORPORATION          Part I
                       MANAGEMENT'S DISCUSSION AND ANALYSIS OF        Item 2
                    FINANCIAL CONDITION AND RESULTS OF OPERATIONS    Page 11



Chem's consolidated net sales.  The Company's allocation of Health-Chem's
total expenses for the six months ended June 30, 1998 was higher than the
comparable period in 1997 due to the Company's share of these expenses
increasing from 16% in 1997 to 18% in 1998 and to Health-Chem's total expenses
being higher.  The decrease in payroll-related expenses reflects, in part, the
organizational restructuring.  Selling, general and administrative expenses
were essentially the same for the quarter ended June 30, 1998 as compared to
the same period in 1997.

Legal expenses for the six months and quarter ended June 30, 1998 increased
$106,000 and $18,000, respectively, as compared to the same periods in 1997. 
The increased legal expenses are due primarily to additional activity
associated with the Key Litigation.

Research and development expenses for the six months and quarter ended June
30, 1998 decreased $624,000 and $193,000, respectively, as compared to the
same periods in 1997.  These decreases are due primarily to lower payroll-
related, clinical materials and lab/testing supplies expenses.  Payroll-
related expenses decreased $387,000 and $148,000, respectively, reflecting the
organizational restructuring changes.  The Company expects total research and
development expenses in 1998 to be lower than 1997 levels.

Net interest expense increased $38,000 for the six months ended June 30, 1998
as compared to the same period in 1997.  This increase is due primarily to
higher average outstanding balances on borrowings from affiliates.  Net
interest expense was essentially the same for the quarter ended June 30, 1998
as compared to the same period in 1997.

The $94,000 other income for the six months ended June 30, 1998 pertains to
second quarter 1998 development work income.  The $95,000 other income for the
six months ended June 30, 1997 consists of nonrecurring proceeds of $75,000
received in the second quarter of 1997 related to a distribution agreement,
second quarter 1997 and first quarter 1997 nonrecurring insurance recovery
proceeds of $2,000 and $14,000, respectively, and $4,000 of first quarter 1997
nonrecurring income-producing items.  For the quarter ended June 30, 1998,
other income increased $17,000 due to the reasons described above.

Income from operations before taxes increased $1,186,000 and $162,000 for the
six months and quarter ended June 30, 1998, respectively, as compared to the
same periods in 1997 due primarily to the factors discussed above.  The
Company reported a $25,000 tax benefit on income from operations of $137,000
for the six months ended June 30, 1998 as compared to a $175,000 tax provision
on a $1,049,000 loss from operations for the same period in 1997.  Income tax
provision or benefit varies with the amount and nature of the components of
income or loss from operations before income taxes.  At June 30, 1998, the
Company reversed a net valuation allowance of $57,000 due to income earned
during the six months ended June 30, 1998.

Preferred dividends of $298,000 and $149,000 for the six months and quarter
ended June 30, 1998, respectively,  reflect dividends accumulated on the
Company's Redeemable Preferred Stock, $10.00 par value.  Annual dividend
payments required are $.70 per share.

The results of operations for the periods ended June 30, 1998 and 1997 are not
necessarily indicative of the operating results for the full years.





<PAGE>
                          TRANSDERM LABORATORIES CORPORATION          Part I
                       MANAGEMENT'S DISCUSSION AND ANALYSIS OF        Item 2
                    FINANCIAL CONDITION AND RESULTS OF OPERATIONS    Page 12



Liquidity and Capital Resources

The following measures of liquidity are drawn from the Company's consolidated
financial statements:
                                              June 30,      December 31,
                                               1998             1997    

Working capital deficit (in thousands)
  (Current assets less current liabilities)   $<2,603>          $<1,019>

Current ratio                          
  (Current assets/current liabilities)            0.3               0.6

Quick ratio                            
  (Cash and receivables/current liabilities)      0.1               0.3

Working capital deficit increased $1,584,000 from December 31, 1997 to June
30, 1998 due to a $449,000 decrease in current assets and a $1,135,000
increase in current liabilities.  Cash, inventories and other current assets
increased $3,000, $51,000 and $3,000, respectively, while accounts receivable
decreased $506,000.  The decrease in accounts receivable resulted from a
decrease in sales in the second quarter of 1998 as compared to the fourth
quarter of 1997 and also reflects the timing of domestic distributor payments. 
The increase in inventory reflects the timing of raw material purchases.  The
increase in current liabilities is due to increases in the current portion of
the redeemable preferred stock, preferred dividends payable and accrued
expenses of $1,000,000, $298,000 and $60,000, respectively, partially offset
by a decrease in accounts payable of $223,000.

Cash provided by operations for the six months ended June 30, 1998 was
$736,000.

The Company has not paid cash dividends on its Common Stock and does not
anticipate doing so in the foreseeable future.

The Company has financed its capital requirements primarily from cash flow
generated from operations and borrowings from its affiliates.

Capital expenditures in 1998 for property, plant and equipment are projected
to be approximately $600,000.  The majority of these capital expenditures will
consist of equipment needed to assemble and package the Company's second
generation nitroglycerin products and over-the-counter cosmetic products.

Health-Chem is a borrower along with its affiliates, including the Company,
under the terms of a secured financing agreement with IBJ Schroder Business
Credit Corporation (as successor in interest to IBJ Schroder Bank & Trust
Company) (the "Bank").  The Revolving Credit, Term Loan and Security Agreement
(the "Loan Agreement") which was entered into effective January 9, 1997, was
comprised of up to $7,000,000 in term loans and up to $8,000,000 in revolving
credit.  The line of credit's borrowing base is limited to the sum of 85% of
eligible accounts receivable and 50% of eligible inventory on a consolidated
Health-Chem basis.  Term loan advances were limited to $4,000,000 until the
resolution of the Key Pharmaceuticals, Inc. litigation in such a way as to be
immaterial on the future operations of Health-Chem.  Borrowings under the Loan
Agreement are collateralized by a pledge of substantially all of the assets of
Health-Chem, the Company and Health-Chem's other operating subsidiaries.  The
Loan Agreement, which expires on January 9, 2002, contained various financial
covenants.  On January 21, 1998, Health-Chem entered into a First Amendment



<PAGE>

                          TRANSDERM LABORATORIES CORPORATION          Part I
                       MANAGEMENT'S DISCUSSION AND ANALYSIS OF        Item 2
                    FINANCIAL CONDITION AND RESULTS OF OPERATIONS    Page 13



(the "Amendment") to the Loan Agreement with the Bank.  The Amendment, among
other things, amended the terms for drawing upon the term loan and amended
certain financial covenants.  At June 30, 1998, Health-Chem and its affiliates
were in compliance with the covenants, as amended.  Pursuant to the Amendment,
the maximum term loans amount was reduced from $7,000,000 to $3,998,000,
providing a revised aggregate of up to $11,998,000 in senior secured
financing.  The revolving credit line interest rate was increased to the
Bank's prime rate plus .50% and the term loans interest rate was increased to
the Bank's prime rate plus .875%.  These rates are subject to a .25% decrease
upon the Bank's satisfactory review of Health-Chem's financial statements for
the year ended December 31, 1998.

The Company is required to make semi-annual interest payments each March and
September on its $7,000,000, 9% Subordinated Promissory Note.  In March 1998,
the Company made the required semi-annual interest payment.  On May 12, 1998,
Hercon and Health-Chem entered into an amendment to the Subordinated
Promissory Note, whereby the maturity date of the note and corresponding
$7,000,000 principal payment were extended from March 31, 1999 to March 31,
2002.

The Company is required to make semi-annual preferred dividend payments out of
funds legally available therefor each March and September at the annual rate
of $.70 per share on the then-outstanding shares of its redeemable preferred
stock, $10.00 par value.  The Company anticipates that legally available funds
will not be available to make the September 1998 preferred dividend payment. 
Legally available funds were not available to make the September 1997 and
March 1998 preferred dividend payments, nor were they available to make the
required $1,000,000 redemption payment in March 1998.  Additional required
redemption payments are $1,000,000 annually in 1999 through 2004 and
$1,500,000 in 2005.  The terms of the preferred stock provide that if either
dividends payable on the preferred stock shall be in default in an amount
equal to two full semi-annual dividend payments or a mandatory redemption
payment is not made, the holder of all of the outstanding shares of the
preferred stock shall be entitled to elect the smallest number of Directors
necessary to constitute a majority of the Company's Board of Directors until
such time as the default is cured.  Health-Chem waived this right since, as a
practical matter, it already possessed such power.

Pursuant to a Corporate Services Agreement between the Company and Health-
Chem, Health-Chem provides or otherwise makes available to the Company certain
general corporate services provided by Health-Chem's corporate staff,
including, but not limited to, accounting, tax, corporate communications,
legal, data processing, purchasing, human resources, financial and other
administrative staff functions, and arranges for administration of insurance
and employee benefit programs.  The Company reimburses Health-Chem for the
actual out-of-pocket cost to Health-Chem or for those services not directly
attributable to the Company, reimburses them based upon a method (allocation
based upon the Company's net sales as a percentage of Health-Chem's
consolidated net sales) which is considered by the Company to be reasonable. 
The Company reimbursed Health-Chem approximately $328,000 and $238,000 for the
six months ended June 30, 1998 and 1997, respectively.  The Agreement had an
initial term that expired on December 31, 1997 and automatically renewed for
a one-year term.  The agreement will continue to automatically renew for
successive one-year terms unless notice of non-renewal is given by either
party.





<PAGE>





                          TRANSDERM LABORATORIES CORPORATION          Part I
                       MANAGEMENT'S DISCUSSION AND ANALYSIS OF        Item 2
                    FINANCIAL CONDITION AND RESULTS OF OPERATIONS    Page 14



Pursuant to a tax sharing agreement between the Company and Health-Chem, the
Company is required to pay Health-Chem as the Company uses its net operating
loss and tax credit carryforwards to offset future taxable income.  At June
30, 1998, the maximum amount of such payments which may be made in the future
was $99,000.

The semi-annual interest payment on the subordinated promissory note is
$315,000 and the semi-annual dividend on the preferred stock currently
outstanding is $297,500.  In addition to the cumulative dividends and interest
payments, the Company is obligated to redeem the preferred stock and repay the
promissory note as described above.  Internally generated funds are not
currently sufficient to provide the Company with cash to meet all of these
retirement and redemption obligations and thus the Company will need to either
continue to obtain waivers and amendments of some of these payment obligations
or raise additional capital from third parties.
<PAGE>
<PAGE>
                                                                   Part II
                                                                    Item 1
                                                                   Page 15

PART II.  OTHER INFORMATION

Item 1.  Legal Proceedings

Reference is made to Note 5 of the Notes to Consolidated Financial Statements
for an update on the litigation between Key Pharmaceuticals, Inc. and Hercon
Laboratories Corporation.

Item 4.  Submission of Matters to a Vote of Security Holders

The Company's Annual Meeting of Stockholders was held on May 12, 1998.  The
following members were elected to the Company's Board of Directors to hold
office for the ensuing year:

   Nominee                    In Favor                Withheld

Thomas J. Atkins              39,813,065              118,278
Joyce F. Brown                39,812,358              118,985
Michael J. Campbell           39,813,065              118,278
David N. Dinkins              39,812,017              119,326
Ester R. Fuchs                39,812,358              118,985
Donald E. Kauffman            39,813,065              118,278
Murray Lieber                 39,763,447              167,896
Marvin M. Speiser             39,762,058              169,285
Robert D. Speiser             39,811,876              119,467


Item 6.  Exhibits and Reports on Form 8-K

(a)   Exhibits

      None.

(b)   During the quarter ended June 30, 1998, the Company did not file any
reports on Form 8-K.

                                SIGNATURES


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

                               TRANSDERM LABORATORIES CORPORATION

August 10, 1998                /s/  Robert D. Speiser            
                               By:  Robert D. Speiser
                                    President
                                    (Principal Executive Officer)

                               /s/  Ronald J. Burghauser         
                               By:  Ronald J. Burghauser
                                    Vice President-Finance
                                    (Principal Financial Officer)
                                    (Principal Accounting Officer)

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