U.S.
      SECURITIES AND EXCHANGE COMMISSION





Washington,
      D.C. 20549





FORM
      10-QSB





x
      QUARTERLY REPORT
      PURSUANT TO SECTION 13 OR 15(D) OF THE


SECURITIES
      EXCHANGE ACT OF 1934


For
      the
      quarterly period ended: March 31, 2007





o
      TRANSITION REPORT
      PURSUANT TO SECTION 13 OR 15(D) OF THE


SECURITIES
      EXCHANGE ACT OF 1934





For
      the
      transition period from ________ to _________


Commission
      file number 000-27642





TRANSDERM
      LABORATORIES CORPORATION


(Exact
      name of small business issuer


as
      specified in its charter)





Delaware
              (State
                or other jurisdiction of
              incorporation
                or organization)
            13-3518345
              (I.R.S.
                Employer Identification No.)





101
      Sinking Springs Lane, Emigsville, PA 17318


(Address
      of principal executive offices)




(717)
      764-1191


(Issuer's
      telephone number)






(Former
      name, former address and former


fiscal
      year, if changed since last report)





APPLICABLE
      ONLY TO ISSUERS INVOLVED IN BANKRUPTCY


PROCEEDINGS
      DURING THE PRECEDING FIVE YEARS





Check
      whether the registrant filed all documents and reports required to be filed
      by
      Section l2, 13 or 15(d) of the Exchange Act after the distribution of securities
      under a plan confirmed by a court. Yes o No o





APPLICABLE
      ONLY TO CORPORATE ISSUERS





State
      the
      number of shares outstanding of each of the issuer's classes of common equity,
      as of the latest practicable date: At July 6, 2007, there were 40,000,000 shares
      of common stock outstanding.





Transitional
      Small Business Disclosure Format (Check one): Yes o No x










**PART
      I — FINANCIAL INFORMATION**





**Item
      1. Financial Statements.**




Index
        to
        Consolidated Financial Statements.
  PAGEConsolidated
                    Balance Sheet - March 31, 2007 (Unaudited)
                
                
                F-2Consolidated
                    Statements of OperationsThree
                    Months Ended March 31, 2007 (Unaudited) andMarch
                    31, 2006 (Unaudited)
                
                
                F-3Consolidated
                    Cash Flow StatementsThree
                    Months Ended March 31, 2007 (Unaudited) andMarch
                    31, 2006 (Unaudited)
                
                
                F-4Notes
                    to Consolidated Financial Statements (Unaudited)
                
                
                F-5
                    to F-10
  F-1
 TRANSDERM
        LABORATORIES CORPORATION
 CONSOLIDATED
        BALANCE SHEET (Unaudited)
 MARCH
        31,
        2007
 (In
        thousands, except per share amounts)
  ASSETSCURRENT
                    ASSETSCash
                
                $
                1,952Accounts
                    receivable
                
                
                781Inventories
                
                
                826Other
                    current assets
                
                
                17Total
                    Current Assets
                
                
                3,576PROPERTY,
                    PLANT AND EQUIPMENT, net
                
                
                1,448MORTGAGE
                    ESCROW DEPOSIT
                
                
                203TOTAL
                    ASSETS
                
                $
                5,227LIABILITIES
                    AND STOCKHOLDERS’ DEFICIENCYCURRENT
                    LIABILITIESAccounts
                    payable
                
                $
                186Royalties
                    payable
                
                
                7,584Other
                    liabilities
                
                
                736Current
                    portion of long-term debt
                
                
                40Subordinated
                    promissory note
                
                
                7,000Redeemable
                    preferred stock
                
                
                8,500Preferred
                    stock dividends payable
                
                
                5,788Total
                    Current Liabilities
                
                
                29,834LONG-TERM
                    LIABILITIESLong-term
                    payable - Health-Chem
                
                
                9,625Mortgage
                    payable
                
                
                1,309Payable
                    to affiliate
                
                
                666Note
                    payable
                
                
                167Total
                    Long-Term Liabilities
                
                
                11,767COMMITMENTSPREFERRED
                    STOCK
                
                
                0STOCKHOLDERS’
                    DEFICIENCYCommon
                    stock, par value $.001 per share;60,000,000
                    shares authorized; 40,000,000shares
                    issued and outstanding
                
                
                40Accumulated
                    deficit
                
                
                <36,414
                >Total
                    Stockholders’ Deficiency
                
                
                <36,374
                >TOTAL
                    LIABILITIES AND STOCKHOLDERS’ DEFICIENCY
                
                $
                5,227
  See
        Notes
        to Consolidated Financial Statements.
  F-2
  TRANSDERM
        LABORATORIES CORPORATION
 CONSOLIDATED
        STATEMENTS OF OPERATIONS (Unaudited)
 (In
        thousands, except per share amounts)
  Three
                    Months EndedMarch
                    31,2007
                
                2006REVENUE:Net
                    sales
                
                $
                1,149
                
                $
                1,619Cost
                    of goods sold - royalties
                
                
                263
                
                
                298Cost
                    of goods sold - other
                
                
                931
                
                
                914Total
                    cost of goods sold
                
                
                1,194
                
                
                1,212Gross
                    <loss> profit
                
                
                <45
                >
                
                407OPERATING
                    EXPENSES:Selling,
                    general and administrative
                
                
                449
                
                
                468Research
                    and development
                
                
                118
                
                
                120Interest,
                    net
                
                
                277
                
                
                258Total
                    operating expenses
                
                
                844
                
                
                846LOSS
                    FROM OPERATIONS
                
                
                <889
                >
                
                <439
                >Product
                    development income
                
                
                268
                
                
                5Other
                    income <expense> - net
                
                
                0
                
                
                0LOSS
                    FROM OPERATIONS BEFORE TAXESAND
                    MINORITY INTEREST
                
                
                <621
                >
                
                <434
                >Minority
                    interest
                
                
                0
                
                
                0Income
                    tax expense
                
                
                0
                
                
                0NET
                    LOSS
                
                
                <621
                >
                
                <434
                >PREFERRED
                    DIVIDENDS
                
                
                149
                
                
                149NET
                    LOSS APPLICABLE TO COMMON STOCKHOLDERS
                
                $
                <770
                >
                $
                <583
                >NET
                    LOSS PER COMMON SHARE (BASIC & DILUTED)
                
                $
                <.02
                >
                $
                <.01
                >Average
                    number of common sharesoutstanding:
                    (in thousands)Basic
                
                
                40,000
                
                
                40,000Diluted
                
                
                40,000
                
                
                40,000
 
 See
        Notes
        to Consolidated Financial Statements.
  F-3
  TRANSDERM
        LABORATORIES CORPORATION
 CONSOLIDATED
        CASH FLOW STATEMENTS (Unaudited)
 (In
        thousands)
  Three
                    Months EndedMarch
                    31,2007
                
                2006**CASH
                    FLOWS FROM OPERATING ACTIVITIES:**Net
                    loss applicable to common stockholders
                
                $
                <770
                >
                $
                <583
                >Adjustments
                    to reconcile net loss to net cashprovided
                    by operating activities:Depreciation
                    and amortization
                
                
                80
                
                
                78Preferred
                    stock dividends payable
                
                
                149
                
                
                149Changes
                    in:Accounts
                    receivable
                
                
                1,104
                
                
                1,913Inventories
                
                
                111
                
                
                <32
                >Other
                    current assets
                
                
                3
                
                
                7Mortgage
                    escrow deposit
                
                
                <2
                >
                
                <2
                >Accounts
                    payable
                
                
                39
                
                
                <114
                >Royalties
                    payable
                
                
                263
                
                
                298Other
                    liabilities
                
                
                <555
                >
                
                <898
                >Net
                    cash provided by operating activities
                
                
                422
                
                
                816**CASH
                    FLOWS FROM INVESTING ACTIVITIES:**Additions
                    to property, plant and equipment
                
                
                0
                
                
                <32
                >Net
                    cash used for investing activities
                
                
                0
                
                
                <32
                >**CASH
                    FLOWS FROM FINANCING ACTIVITIES:**Borrowings
                    from affiliates, net
                
                
                394
                
                
                302Long-term
                    debt payments
                
                
                <9
                >
                
                <14
                >Net
                    cash provided by financing activities
                
                
                385
                
                
                288**NET
                    INCREASE IN CASH**
                
                
                807
                
                
                1,072Cash
                    at beginning of period
                
                
                1,145
                
                
                759Cash
                    at end of period
                
                $
                1,952
                
                $
                1,831Supplemental
                    Disclosures of Cash Flow Information:Cash
                    paid during the period for:Interest
                
                $
                47
                
                $
                25
 See
        Notes
        to Consolidated Financial Statements.
  F-4
  TRANSDERM
        LABORATORIES CORPORATION
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
  1.
              Basis
                  of Presentation
 
 Transderm
        Laboratories Corporation (“Transderm”) engages in the development, manufacture
        and marketing of transdermal drug delivery systems. Transderm operates
        principally through its 98.5% owned subsidiary, Hercon Laboratories Corporation
        (“Hercon”, which together with Transderm is referred to collectively as the
“Company”). Transderm is 90% owned by Health-Chem Corporation (“Health-Chem” and
        together with Transderm, Hercon and Health-Chem’s other subsidiaries, the
“Group”).
 
 As
        of
        March 31, 2007, the Company’s sole product and continuing source of revenues was
        a transdermal nitroglycerin patch used for transdermal relief of the vascular
        and cardiovascular symptoms related to angina pectoris which it has manufactured
        and sold pursuant to the terms of a license agreement between Key
        Pharmaceuticals, Inc. (“Key”) and Hercon entered into in March 2000 (the “Key
        License”). Subsequent to the close of the period covered by this report, the Key
        License will expire on August 16, 2007, as more fully described in Notes
        6 and
        9, Going Concern and Subsequent Events, respectively.
 
 The
        Company also generates revenues from research and development activities
        it
        undertakes for client companies and will be the contract manufacturer of
        these
        products if United States Food and Drug Administration (“FDA”) approval is
        obtained.
 
 The
        accompanying unaudited consolidated financial statements include the accounts
        of
        Transderm and Hercon. As of December 31, 2004, the consolidated financial
        statements also include a Variable Interest Entity (“VIE”), York Realty Leasing
        LLC, of which Transderm is the primary beneficiary as further described in
        Note
        7. All significant intercompany accounts and transactions, including those
        involving the VIE, have been eliminated in consolidation. The Company is
        a 90%
        owned subsidiary of Health-Chem Corporation (“Health-Chem”).
 
 The
        accompanying unaudited consolidated financial statements have been prepared
        in
        accordance with generally accepted accounting principles in the United States
        of
        America for interim financial information. Accordingly, they do not include
        all
        of the information and footnotes required by generally accepted accounting
        principles in the United States for full year financial statements. In the
        opinion of management, all adjustments considered necessary for a fair
        presentation have been included and are of a normal, recurring nature. Operating
        results for the three month period ended March 31, 2007 are not necessarily
        indicative of the results that may be expected for the year ended December
        31,
        2007. These consolidated financial statements should be read in conjunction
        with
        the consolidated financial statements and notes thereto that are included
        in the
        Company’s Annual Report on Form 10-KSB for the fiscal period ended December 31,
        2006.
  2.
              Cash
                  Management
 
 The
        Company participates in Health-Chem’s cash management practice, wherein all cash
        requirements are borrowed from Health-Chem and all excess cash is advanced
        to
        Health-Chem. The intercompany balance was $9,625,000 at March 31, 2007. Interest
        is charged based upon the average outstanding intercompany balance and interest
        rate on Health-Chem’s debt. The average interest rate charged was 10.375% during
        both the three months ended March 31, 2007 and 2006.
  F-5
  3.
              Expenses
                  Charged by Health-Chem
 
 Pursuant
        to a Corporate Services Agreement between the Company and Health-Chem,
        Health-Chem pays for certain administrative expenses on behalf of the Company
        for which Health-Chem is reimbursed. These expenses are comprised primarily
        of
        an allocation of corporate services including executive, professional, legal
        and
        accounting. The allocation of these costs, approximately $166,000 and $119,000
        for the three months ended March 31, 2007 and 2006, respectively, reflect
        Health-Chem’s estimate of their cost for these services 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 estimates that these expenses, on a stand-alone basis, would not
        have
        been materially different from the costs allocated.
  4.
              Per
                  Share Information
 
 Basic
        and
        diluted earnings per share are computed based upon the weighted average number
        of common shares outstanding during each period after adjustment for any
        dilutive effect of the Company's stock options.
  5.
              Stock
                  Options
 
 In
        accordance with SFAS No. 123, *Accounting
        for Stock-Based Compensation* and SFAS
        No. 148, *Accounting
        for Stock-Based Compensation-Transition and Disclosure* ,
        the
        Company accounts for its stock option plans under the intrinsic-value-based
        method as defined in APB No. 25, *Accounting
        for Stock Issued to Employees* .
        The
        following table illustrates the effect on net earnings and earnings per share
        if
        the Company had applied the fair value recognition provisions of SFAS No.
        123 to
        stock-based employee compensation (in thousands, except per share
        amounts):
  Three
                    Months EndedMarch
                    31,2007
                
                2006Net
                    loss applicable to common stockholders,as
                    reported:
                
                $
                <770
                >
                $
                <583
                >Add:
                    Stock-based compensation expenserecognized
                    under the intrinsic value method
                
                
                0
                
                
                0Deduct:
                    Stock-based compensation expensedetermined
                    under fair value based method
                
                
                0
                
                
                0Pro
                    forma net loss applicable to commonstockholders
                
                $
                <770
                >
                $
                <583
                >Net
                    loss per common share:Basic
                    - as reported
                
                $
                <.02
                >
                $
                <.01
                >Basic
                    - pro forma
                
                $
                <.02
                >
                $
                <.01
                >Diluted
                    - as reported
                
                $
                <.02
                >
                $
                <.01
                >Diluted
                    - pro forma
                
                $
                <.02
                >
                $
                <.01
                >
  F-6
  6.
              Going
                  Concern
 
 As
        of
        March 31, 2007, the Company’s financial and operating condition raised
        significant doubt about its ability to continue as a going concern. At said
        date, the Company had
        aggregate debts and liabilities of $41,601,000
        and had a working capital deficiency of $26,258,000. These debts and liabilities
        include $7,584,000 of royalties due under the Key License and $30,913,000
        to
        Health-Chem. T he
        Company has sustained operating losses in each of the last three years.
 
 In
        addition, at March 31, 2007 Health-Chem owes $11,621,000 under outstanding
        debentures which became due in 1999 and under which it currently is in default,
        which exerts pressure on the financial condition of the Group as a
        whole.
 
 The
        Group
        has been able to continue to operate over the last several years because
        it has
        not made any payments under the debentures since 1999 nor has it paid any
        royalties under the Key License since its inception in March 2000. Apart
        from
        these obligations, the Group has been paying its other current debts and
        liabilities as they become due from cash flow generated from operations.
        The
        Group does not have cash on hand to pay the royalties due under the Key License
        or to repay the amount due under the debentures.
 
 In
        April
        2007, subsequent to the close of the period covered by this report, Key
        terminated the License Agreement for, among other things, Hercon’s failure to
        pay accrued royalties and thereafter filed a complaint against Hercon demanding
        payment of all amounts due under the License Agreement. The Company could
        not
        make such payment and on May 23, 2007, Key and Hercon entered into a Final
        Judgment on Consent under which Hercon paid Key the sum of $500,000 and which
        granted a judgment to Key in the amount of $8 million and provided, among
        other
        things, that Hercon could continue to operate under the Key License until
        August
        16, 2007 for the purpose of maximizing that company’s assets and inventory for
        the benefit of its creditors and wind
        down
        and cease business operations by August 16, 2007, as more fully described
        in
        Note 9 - Subsequent Events.
 
 The
        Company does not have cash on hand to pay the entire amount of the royalties
        due
        pursuant to the Key License. The Company’s financial condition has prevented it
        from securing financing or obtaining loans from which it could repay all
        or a
        portion of the amounts due. Moreover, as
        previously noted, as of March 31, 2007, the Company’s sole product and
        continuing source of revenues was a transdermal nitroglycerin patch and the
        Company does not have any business prospects for the foreseeable future. In
        light
        of these conditions, Transderm and/or Hercon may have to seek protection
        under
        federal bankruptcy laws in which case it would not be able to continue as
        a
        going concern.
 
 Management
        has not developed a firm plan for addressing the conditions that give rise
        to
        its ability to continue operating as a going concern, but at a minimum
        will:
 
 ·
              negotiate
                  with Key to obtain a new license for the technology on commercial
                  terms
                  corresponding to the market for generic transdermal
                  products;
 ·
              seek
                  to develop other business opportunities for the Company, in the
                  pharmaceutical industry or otherwise;
  F-7
  ·
              investigate
                  the possibility of selling Hercon Laboratories Corporation;
 ·
              seek
                  to raise working capital through borrowing or through issuing equity;
                  and
 ·
              evaluate
                  new directions for the Company.
 
 Management
        will continue to develop and modify its plans to adapt to business and financial
        conditions as they evolve. However, management can offer no assurance that
        it
        will be successful in developing a plan which permits the Company to continue
        as
        a going concern. The accompanying consolidated financial statements do not
        include any adjustments that might result from the outcome of these
        uncertainties.
 
 7.
              Property,
                  Plant and Equipment
 
 In
        December 2004, the Company sold its real property, buildings, improvements
        and
        equipment located in Emigsville, Pennsylvania to York Realty Leasing LLC,
        an
        affiliated company, for a sale price of $1.9 million. Concurrent with the
        sale,
        the Company entered into a 15-year net lease with York Realty Leasing LLC
        for
        the property expiring in December 2019, which can be extended by the Company
        for
        an additional five years. The agreement provides for a Company repurchase
        option
        at a price of $1,995,000. The base annual lease cost during the initial 15
        year
        term is $212,400, and the base lease expense for the remaining term of the
        lease
        is as follows: 2007 - $212,400; 2008 - $212,400; 2009 - $212,400; 2010 -
        $212,400; 2011 - $212,400; and 2012 and thereafter - $1,699,200. In December
        2002, the Company received an appraisal for the real property, including
        the
        structures and appurtenances, which appraised the market value of the property
        at $1,850,000. The proceeds from the sale were used to satisfy a $1.6 million
        first mortgage associated with the property and to substantially pay off
        a
        $367,500 second mortgage, a portion of which was held by related parties.
        Andy
        Yurowitz, the Company’s Chairman of the Board, President, Chief Executive
        Officer and a member of the Board of Directors, is a 50% owner of York Realty
        Leasing LLC. As a result of Financial Interpretation 46(R), effective as
        of
        December 31, 2004, the Company’s consolidated balance sheet includes the assets
        and liabilities of York Realty Leasing LLC. In December 2005, York Realty
        Leasing LLC obtained a $1.4 million mortgage on this property with a financial
        institution.
  8.
              Commitments
                  & Contingencies
 
 Approximately
        thirty percent of the Company’s employees are covered by a collective bargaining
        agreement with a local unit of the Retail Wholesale and Department Store
        Union,
        AFL-CIO (“R.W.D.S.U.”). The R.W.D.S.U. agreement is for a three year period
        ending December 10, 2007. The contract is subject to annual renewal thereafter
        and acknowledges that the R.W.D.S.U. is the exclusive bargaining agent for
        the
        Company’s regular production employees, excluding all other employees including
        but not limited to supervisors, foremen, clerical employees, time-keepers,
        watchmen, guards, maintenance personnel and part-time employees.
 
 Certain
        raw materials and components used in the manufacture of our products are
        available from limited sources, and, in some cases, a single source. Generally,
        regulatory authorities must approve raw material sources for transdermal
        products. Without adequate approved supplies of raw materials or packaging
        supplies, our manufacturing operations could be interrupted until another
        supplier is identified, our products approved and trading terms with it
        negotiated. We may not be able to identify an alternative supplier and any
        supplier that we do identify may not be able to obtain the requisite regulatory
        approvals in a timely manner, or at all. Furthermore, we may not be able
        to
        negotiate favorable terms with an alternative supplier. Any disruptions in
        our
        manufacturing operations from the loss of an approved supplier may cause
        us to
        incur increased costs and lose revenues and may have an adverse effect on
        our
        relationships with our partners and customers, any of which could have adverse
        effects on our business and results of operations. Our business also faces
        the
        risk that third party suppliers may supply us with raw materials that do
        not
        meet required specifications, which, if undetected by us, could cause our
        products to test out of specification and require us to recall the affected
        product.
  F-8
  We
        market
        all of our products through a single marketing representative. If we were
        to
        lose the services of such marketing agent for any reason or said entity does
        not
        maintain a steady demand for our product, and we are unable to identify an
        adequate replacement, our business, results of operations and financial
        condition would be materially adversely affected.
 
 We
        rely
        on insurance to protect us from many business risks, including product
        liability, business interruption, property and casualty loss and employment
        practices liability. The cost of insurance has risen significantly in recent
        years. In response, we may increase deductibles and/or decrease certain
        coverages to mitigate these costs. There can be no assurance that the insurance
        that we maintain and intend to maintain will be adequate, or that the cost
        of
        insurance and limitations in coverage will not adversely affect our business,
        financial position or results of operations. Furthermore, it is possible
        that,
        in some cases, coverage may not be available at any price.
  9.
              Subsequent
                  Events
 
 During
        March 2006, the Company received notice from Key that it was in default under
        the License Agreement for failing to make royalty payments due. The License
        Agreement includes a provision affording Key the right to terminate the License
        Agreement if a breach of the agreement was continuing for thirty days after
        the
        receipt from Key of notice of and a demand to cure the breach. Hercon did
        not
        have the financial resources to pay the accrued royalties within the prescribed
        time and, on April 26, 2007, Key terminated the License and Hercon’s right to
        manufacture and sell products utilizing its technology.
 
 On
        April
        27, 2007, Key filed a complaint against Hercon in the United States District
        Court, District of New Jersey (the “Court”) demanding, among other things, that
        Hercon pay accrued royalties under the License Agreement (the “Complaint”).
 
 On
        May 4,
        2007, Health-Chem executed a Trust Mortgage in favor of McTevia &
Associates, LLC (“McTevia”) under which it granted to McTevia a security
        interest in all of the Group’s real and personal property in order to secure the
        Group’s obligations as of such date. In connection with the execution of the
        Trust Mortgage, the board of directors of Health-Chem appointed James McTevia
        as
        its Chief Restructuring Officer and granted to him broad powers to restructure
        the Company’s operations by negotiating settlements of outstanding debt and a
        new license with Key or, if he was not successful in such efforts, to undertake
        an orderly liquidation of the Group and/or its individual constituent
        corporations, if the parties agreed that was in the best interest of the
        various
        entities and their respective creditors.
  F-9
  On
        May
        23, 2007, the Court entered a Final Judgment On Consent between Key and Hercon
        (the “Consent Judgment”) which set aside the Complaint and serves as the basis
        for settling the amount due by Hercon to Key under the License Agreement
        and
        governs the relationship between the parties thereafter. The Consent Judgment
        is
        predicated on Hercon’s intention to wind down and cease business operations by
        August 16, 2007 while remaining operational until such date in order to maximize
        the value of its assets and inventory for the benefit of its creditors. Under
        the Consent Judgment, the parties agreed, among other things, that (i) Hercon
        owed Key accrued royalties in the amount of $8,000,000 (the “Judgment Amount”);
        (ii) Hercon would have a limited right to operate under the License Agreement
        until August 16, 2007, provided that Hercon paid to Key the sum of $500,000
        upon
        the execution of the Consent Judgment, which sum Hercon paid as ordered on
        May
        23, 2007, which, under the Consent Order, reduced the Judgment Amount to
        $7
        million; and (iii) any additional payments made to Key would reduce the Judgment
        Amount by twice as much as any payment made.
  F-10




**Item
      2. Management’s Discussion and Analysis or Plan of
      Operation.**




This
      Management’s Discussion or Plan of Operation section contains a number of
      forward-looking statements, all of which are based on current expectations.
      Actual results may differ materially from the anticipated results discussed
      herein.





The
      Company





Transderm
      Laboratories Corporation (“Transderm”) is a Delaware corporation that conducts
      its business primarily through its subsidiary, Hercon Laboratories Corporation
      ("Hercon" and together with Transderm, the “Company”). Unless the context
      otherwise requires, the terms “we”, “us”, the “Company” or similar terminology,
      includes Transderm Laboratories Corporation and Hercon, of which Transderm
      owns
      98.5%. Transderm is a 90%-owned subsidiary of Health-Chem Corporation
      ("Health-Chem" which, together with Transderm, Hercon and Health-Chem’s other
      subsidiaries, may be referred to as the “Group”).





Since
      March 2000, the Company has been manufacturing transdermal nitroglycerin patches
      pursuant to a License Agreement ( the
      “License Agreement”) between Key
      Pharmaceuticals, Inc. (“Key”) and Hercon which allows Hercon to utilize a
      certain patent and technology developed by Key (the “Key Technology”). As of
      March 31, 2007, Hercon had not paid any royalties under the License Agreement
      and owed approximately $7.6 million to Key thereunder. By letter dated April
      26,
      2007, Key terminated the License Agreement as a result of Hercon’s failure to
      make royalty payments under the License Agreement and demanded that Hercon
      immediately cease manufacturing and selling products that incorporate the Key
      Technology.





In
      light
      of the Company’s tenuous financial and operating condition, on May 4, 2007,
      Health-Chem executed a Trust Mortgage in favor of McTevia & Associates, LLC
      (“McTevia”) under which it granted to McTevia a security interest in all of the
      Group’s real and personal property in order to secure its collective obligations
      as of such date. In determining to execute the Trust Mortgage, the board of
      directors of Health-Chem considered such mechanism to be the safest and most
      efficient means of preserving the Group’s assets in the event that the board
      determined that any of the constituent corporation’s of the Group could not
      continue operating and that it may be in the best interest of Health-Chem and/or
      any member of the Group, individually or jointly, to liquidate assets for the
      benefit of creditors. In connection with the execution of the Trust Mortgage,
      Health-Chem’s board appointed James McTevia to serve as the Chief Restructuring
      Officer of the Group and granted to him broad powers to take the steps necessary
      to restructure the Group’s operations by negotiating settlements of outstanding
      debt and a new license with Key or, if he was not successful in such efforts,
      to
      undertake an orderly liquidation of the Group or any constituent corporation,
      if
      the parties agreed that was in the best interest of a particular entity and
      its
      creditors.





On
      April
      27, 2007, Key served Hercon with a complaint filed in the United States District
      Court, District of New Jersey, demanding payment of all royalties due under
      the
      License Agreement (the “Complaint”). Hercon does not have the means to repay the
      accrued royalties under the License Agreement.





The
      products covered by the Key License represented the Group’s only products and
      without any other meaningful source of continuing revenue, on May 7, 2007,
      Hercon discontinued manufacturing operations. Hercon operated sporadically
      over
      the ensuing two weeks under permission from Key and on May 24, 2007 recommenced
      continuous manufacturing operations subject to the terms of the Consent
      Judgment.




2





On
      May
      23, 2007, the United States District Court, District of New Jersey entered
      a
      Final Judgment On Consent between Key and Hercon (the “Consent Judgment”) which
      would set aside the Complaint and serve as the basis for the satisfaction by
      Hercon of the amount due to Key under the License Agreement and govern the
      relationship between the parties after such date. The Consent Judgment is
      predicated on Hercon’s intention to wind down and cease business operations by
      August 16, 2007 while remaining operational until such date in order to maximize
      the value of its assets and inventory for the benefit of its creditors. Under
      the Consent Judgment, the District Court:





(i)
      granted a judgment in favor of Key and against Hercon in the amount of
      $8,000,000 (the “Judgment Amount”);





(ii)
      granted to Hercon a limited right to operate under the License Agreement until
      August 16, 2007 (the “Temporary License”), provided that Hercon paid to Key the
      sum of $500,000 upon the execution of the Consent Judgment, which sum Hercon
      paid as ordered;





(iii)
      ordered that Hercon’s right to recommence sales and operate its business was
      solely for the purpose of winding-down its operations and maximizing the value
      of its assets;





(iv)
      ordered that upon the expiration of Hercon’s limited right to operate under the
      License Agreement on August 16, 2007, that Hercon and its related parties would
      be restrained and enjoined from infringing or using the Licensed Technology;





(v)
      ordered that upon the execution of the Consent Judgment and the receipt by
      Key
      of the $500,000, that:





(a)
      the
      Judgment Amount would be reduced to $7,000,000;





(b)
      Key
      would forebear on its right to enforce the Final Judgment through August 16,
      2007 (except for its ability to take discovery in aid of execution);
      and





(c)
      Key’s
      agreement to forebear is conditioned upon Hercon’s (1) compliance with the terms
      of the License Agreement and the Consent Judgment, (2) maintaining the Mortgage
      Trust, (3) maintaining Mr. McTevia as its Chief Restructuring Officer and (4)
      representation that it has no other creditors;





(vi)
      any
      additional payments made to Key by Hercon or on Hercon’s behalf through August
      16, 2007 in partial satisfaction of the Judgment Amount shall reduce said amount
      by twice as much as any payment made;





(vii)
      ordered that in the event that any monies paid to Key in satisfaction of the
      Judgment Amount are set aside as a preference or otherwise ordered to be
      disgorged from Key under the federal bankruptcy laws, the full Judgment Amount
      shall be due, reduced only by twice the amount of payments made in partial
      satisfaction of the Judgment Amount which are not set aside as a preference
      or
      otherwise disgorged;





(viii)
      Key shall be entitled to recover reasonable attorneys’ fees and costs incurred
      in enforcing the Final Judgment from Hercon; and





(ix)
      so
      long as Hercon is in compliance with the Consent Judgment, Key shall not file
      nor shall it assist any third party in filing a petition against Hercon under
      federal bankruptcy laws through August 16, 2007; and




3





(x)
      Key’s
      complaint against Hercon is dismissed without prejudice and that the Court
      shall
      retain jurisdiction over this matter for the purposes of enforcing the Consent
      Judgment.




Current
      Financial Condition





As
      of
      March 31, 2007, the Company had total liabilities of approximately $41.6
      million, which includes (i) $30.9 million owed to Health-Chem, (ii) $7.6 million
      of royalties owed to Key under
      the Key License and (iii) other current trade payables and miscellaneous
      liabilities aggregating $3.1 million. Also, at March 31, 2007, the Company
      had a
      working capital deficiency of $26.3 million and cash and other current assets
      of
      $3.6 million. The notes to our audited consolidated financial statements for
      the
      year ended December 31, 2006 and the auditor’s report accompanying said
      financial statements indicate that these liabilities and the Company’s working
      capital deficiency raise substantial doubt about its ability to continue as
      a
      going concern.





All
      of
      the Group’s assets are being held by the Mortgage Trustee on its behalf as
      security for the satisfaction of the Group’s creditors. As of the date hereof,
      the Company’s assets and cash reserves are insufficient to satisfy all its
      outstanding obligations and the Company does not have any borrowing capacity
      upon which to draw which would permit it to satisfy its obligations.





In
      light
      of the basis for and terms of the Consent Judgment to which Hercon is a party,
      management of Health-Chem has not reached any conclusions as to the Company’s
      operations (or the operations of the individual corporate constituents) after
      August 16, 2007, the expiration of the Temporary License. Assuming Hercon is
      unable to reach an alternative resolution with Key prior to the expiration
      of
      the Temporary License, as of such date, Hercon will have to discontinue all
      operations and commence liquidation. The Board of Directors of Health-Chem
      currently is investigating all options for all of the corporations comprising
      the Group but has not reached any decisions as of the date hereof.





Results
      of Operations .





Three
      months ended March 31, 2007 versus March 31, 2006





We
      incurred a net loss during the three months ended March 31, 2007 of $770,000
      as
      compared to a net loss of $583,000 for the same period in 2006. The increase
      in
      net loss was attributable primarily to a decline in sales, as described in
      the
      ensuing paragraph.





For
      the
      three months ended March 31, 2007, net sales decreased by approximately 29%
      from
      the corresponding 2006 period from $1,619,000 to $1,149,000, which, in each
      case, consisted exclusively of sales of transdermal nitroglycerin patches.
      Management attributes the decrease to a 57% decline in sales to one of our
      largest customers.





Product
      development income for the three months ended March 31, 2007 was $268,000,
      consisting of revenues generated from research and development projects we
      are
      undertaking for two customers. Product development income for the same period
      in
      2006 was $5,000, consisting of revenues from a third research and development
      project we are undertaking for a third customer. The $263,000 increase is due
      primarily to additional development work income associated with two new projects
      that commenced subsequent to March 31, 2006.





Gross
      profit decreased by $452,000, or 111%, leading to a gross loss of $45,000 for
      the three months ended March 31, 2007 as compared to a gross profit of $407,000
      for the same period in 2006. Gross profit as a percent of sales decreased from
      25% during the three months ended March 31, 2006 to a negative 4% during the
      same period in 2007. **** The
      decrease in gross profit was due primarily to decreased sales volumes of lower
      margin products.




4





Selling,
      general and administrative expenses decreased by $19,000 for the three months
      ended March 31, 2007 as compared to the corresponding period in 2006. The
      decrease is due primarily to decreases in wages and commission expense of
      $39,000 and $24,000, respectively, partially offset by an increase in corporate
      services expenses allocated from Health-Chem of $47,000.





Research
      and development expenses were essentially the same for the three months ended
      March 31, 2007 as compared to the same period in 2006.





Net
      interest expense increased by $19,000, or 7%, to $277,000 for the three months
      ended March 31, 2007 as compared to $258,000 for the same period in 2006. The
      increase consists of a $34,000 increase in interest expense, partially offset
      by
      a $15,000 increase in interest income. The interest expense increase is due
      to
      $30,000 of additional interest related to higher average outstanding balances
      on
      borrowings from Health-Chem and to $4,000 of additional interest due to higher
      interest rates associated with the variable rate mortgage. The interest income
      increase is due primarily to the Company adopting an investment policy in April
      2006 whereby all excess cash is automatically invested in interest-bearing
      instruments.





Liquidity
      and Capital Resources .





At
      March
      31, 2007, the Company had total current assets of $3.6 million, including
      $1,952,000 in cash, and a working capital deficiency of $26.3 million, the
      calculation of which includes current liabilities owed to Health-Chem
      aggregating $21.3 million. Without giving effect to current liabilities in
      favor
      of Health-Chem, we had a working capital deficiency of $5 million. Our total
      stockholders’ deficiency was $36.4 million at March 31, 2007, compared to $35.6
      million at December 31, 2006. As of March 31, 2007, we had an accumulated
      deficit of approximately $36,414,000. Our principal sources of liquidity have
      been cash provided by loans from management and cash generated by operations.
      Our principal uses of cash have been for working capital and research and
      development.





Our
      working capital deficiency increased by $307,000 from December 31, 2006 to
      March
      31, 2007 due to a decrease of $411,000 in current assets, partially offset
      by a
      decrease of $104,000 in current liabilities. The current assets decrease
      consists primarily of decreases in accounts receivable and inventory of
      $1,104,000 and $111,000, respectively, partially offset by an increase in cash
      of $807,000. The current liabilities decrease consists of a decrease in other
      liabilities of $555,000, partially offset by increases in accounts payable,
      royalties payable and preferred stock dividends payable of $39,000, $263,000
      and
      $149,000, respectively. The decrease in accounts receivable resulted from a
      decrease in sales in the first quarter of 2007 as compared to the first quarter
      of 2006 and also reflects the timing of customer payments. The decrease in
      inventory reflects lower transdermal nitroglycerin product sales and the timing
      of raw material purchases. The royalties payable increase is attributable to
      the
      Company not making payments to Key during the period. The increase in preferred
      stock dividends payable is due to legally available funds not being available
      to
      make the required dividend payment. The other liabilities decrease is due
      primarily to decreases in accrued chargebacks, rebates and allowances, and
      audit
      fees.





Cash
      provided by operating activities for the three months ended March 31, 2007
      was
      $422,000, as compared to cash provided by operating activities of $816,000
      for
      the same period in 2006. The decrease is due primarily to a $770,000 net loss
      in
      2007 as compared to a $583,000 net loss in 2006 and to decreasing accounts
      receivable, inventory and other liabilities of $1,104,000, $111,000 and
      $555,000, respectively, and increasing accounts payable and royalties payable
      of
      $39,000 and $263,000, respectively, in 2007 as compared to decreasing accounts
      receivable, accounts payable and other liabilities of $1,913,000, $114,000
      and
      $898,000, respectively, and increasing inventory and royalties payable of
      $32,000 and $298,000, respectively, in 2006. The Company had no investing
      activities for the three months ended March 31, 2007. Investing activities
      for
      the three months ended March 31, 2006 used cash of $32,000, consisting of
      additions made to property, plant and equipment. Financing activities for the
      three months ended March 31, 2007 provided $385,000 of cash as compared to
      the
      same period in 2006 which provided $288,000 of cash.




5





We
      are
      paying our current obligations and liabilities as they become due from cash
      generated from sales and product development. We do not have sufficient funds
      to
      pay the entire amount of royalties due under the License Agreement and have
      no
      credit facilities upon which to draw to pay royalties due. Given our operating
      condition it is unlikely we can access capital markets for funds to pay the
      royalties due or take other steps which would strengthen our
      business.





Liquidity
      and Operations Going Forward .





In
      light
      of the developments occurring after the end of the period, including the entry
      of the Consent Judgment, we are uncertain as to our future cash requirements
      and
      the sources and uses of cash. The board of directors and management will not
      be
      able to determine the Company’s prospects until we have come to a conclusion as
      to Hercon’s prospects upon termination or other resolution of the Temporary
      License and the manner in which the Company deals with its other obligations
      and
      liabilities.





On
      May 8,
      2007, Hercon received an order from one of its major customers for products
      valued at $1,283,000. As of the date hereof, Hercon expects that the proceeds
      generated from this order will be applied to operating expenses and payment
      of
      past and current royalties owed to Key.





Off-Balance
      Sheet Arrangements .





We
      have
      not entered into any off-balance sheet arrangements.





Critical
      Accounting Policies .





Our
      significant accounting policies are described in Note 2 of the Notes to
      Consolidated Financial Statements of the Company’s Annual Report on Form 10-KSB
      for the year ended December 31, 2006. Included within these policies are certain
      policies which contain critical accounting estimates and, therefore, have been
      deemed to be “critical accounting policies.” Critical accounting estimates are
      those which require management to make assumptions about matters that were
      uncertain at the time the estimate was made and for which the use of different
      estimates, which reasonably could have been used, or changes in the accounting
      estimates that are reasonably likely to occur from period to period, could
      have
      a material impact on the presentation of our financial condition, changes in
      financial condition or results of operations.





Inflation .





We
      believe that our results of operations are not dependent upon moderate changes
      in inflation rates.





**FORWARD-LOOKING
      STATEMENTS**





The
      Private Securities Litigation Reform Act of 1995 (the Act) provides a safe
      harbor for forward-looking statements made by or on behalf of our company.
      From
      time to time, our representatives and we may make written or verbal
      forward-looking statements, including statements contained in this report and
      other company filings with the SEC and in our reports to stockholders.
      Statements that relate to other than strictly historical facts, such as
      statements about our plans and strategies, expectations for future financial
      performance, new and existing products and technologies, and markets for our
      products are forward-looking statements within the meaning of the Act.
      Generally, the words "believe," "expect," "intend," "estimate," "anticipate,"
      "will" and other similar expressions identify forward-looking statements. The
      forward-looking statements are and will be based on our then-current views
      and
      assumptions regarding future events and operating performance, and speak only
      as
      of their dates. Investors are cautioned that such statements involve risks
      and
      uncertainties that could cause actual results to differ materially from
      historical or anticipated results due to many factors including, but not limited
      to, our limited revenues, our future capital needs, uncertainty of capital
      funding, acceptance of our product offerings, the effects of government
      regulations on our business, competition, and other risks. We undertake no
      obligation to publicly update or revise any forward-looking
      statements.




6




**Item
      3. Controls and Procedures.**





(a)
      Disclosure Controls and Procedures. Our management, with the participation
      of
      our chief executive officer and chief financial officer, has evaluated the
      effectiveness of our disclosure controls and procedures (as such term is defined
      in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the
      period covered by this report. Based on such evaluation, our chief executive
      officer and chief financial officer have concluded that, as of the end of such
      period, our disclosure controls and procedures are effective in recording,
      processing, summarizing and reporting, on a timely basis, information required
      to be disclosed by us in the reports that we file or submit under the Exchange
      Act.





(b)
      Internal Control Over Financial Reporting. There have not been any changes
      in
      our internal control over financial reporting (as such term is defined in Rules
      13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to
      which this report relates that have materially affected, or are reasonably
      likely to materially affect, our internal control over financial
      reporting.





**PART
      II — OTHER INFORMATION**





**Item
      1. Legal Proceedings.**





See
      Part
      I, Item 2. Management’s Discussion and Analysis or Plan of Operation for a
      discussion of the law suit commenced against Hercon by Key in the Federal
      District Court for the District of New Jersey for a description of Key’s action
      for the payment of accrued royalties under the License Agreement and the
      resolution thereof.




**Item
      2. Unregistered Sales of Equity Securities and Use of Proceeds.**





(a) None.





(b) None.





(c)
       During the three months ended March 31, 2007, the Company did not issue
      any securities.





(d) None.





(e) None.





7





**Item
      3. Defaults Upon Senior Securities.**





On
      August
      31, 1995, Hercon issued to Health-Chem a $7,000,000, 9% Subordinated Promissory
      Note in exchange for the then outstanding borrowings from affiliates. The
      Company has been required to make semi-annual interest payments each March
      and
      September on this note. The principal amount of $7,000,000 was due on March
      31,
      2002. In March, 2002 the Company defaulted on its obligation to repay the
      principal amount of $7,000,000. Interest on the principal amount of this
      promissory note, which accrues at the rate of $630,000 per annum, is transferred
      semi-annually each March and September into the Group’s intercompany account.





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





None.





**Item
      5. Other Information.**





None





**Item
      6. Exhibits.**





(a)
      Exhibits.





Exhibit
                No.
            
            Description10.1
            
            Trust
                Mortgage dated May 4, 2007 by and between McTevia & Associates, LLC as
                trustee and Health-Chem Corporation.31.1
            
            Certification
                of Principal Executive Officer pursuant to Rule 13a-14 and Rule15d-14(a),
                promulgated under the Securities and Exchange Act of 1934, asAmended.31.2
            
            Certification
                of Principal Financial Officer pursuant to Rule 13a-14 and Rule15d
                14(a), promulgated under the Securities and Exchange Act of 1934,
                asAmended.32.1
            
            Certification
                pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
                Section906
                of the Sarbanes-Oxley Act of 2002.




8





SIGNATURES





In
      accordance with 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.


TRANSDERM
                LABORATORIES CORPORATION


Name
                and Capacity
            
            
            Date/s/
                Andy E. Yurowitz
            
            
            July
                16, 2007By:
                Andy E. Yurowitz
              Chairman
                of the Board,
              President
                and Chief Executive
              Officer
                (Principal Executive Officer)




/s/
                Ronald J. Burghauser
            
            
            July
                16, 2007By:
                Ronald J. Burghauser
              Chief
                Financial Officer,
              Treasurer
                and Secretary
              (Principal
                Financial Officer)
              (Principal
                Accounting Officer)





9