<PAGE>


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

                                  FORM 10-K

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

For the fiscal year ended December 31, 1997     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 Number)

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

                 Registrant's Telephone Number: 212-398-0700

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

                                    None


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

                        Common Stock, $.001 Par Value

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

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 February 28, 1998, 40,000,000 shares of the registrant's Common Stock
were outstanding.  The aggregate market value of the Common Stock (based on
the last reported sale price on such date) held by non-affiliates was
approximately $182,000.

                     DOCUMENTS INCORPORATED BY REFERENCE

The information responsive to Part III of this Annual Report on Form 10-K is
incorporated herein by reference to the registrant's Proxy Statement in
connection with the registrant's Annual Meeting of Stockholders to be held on
May 12, 1998. 

The Exhibit Index appears on page 34.

                              Page 1 of 37<PAGE>
<PAGE>

                                                                             

FORM 10-K                                                             PART I 
_____________________________________________________________________________


ITEM 1.  BUSINESS

Transderm Laboratories Corporation is a Delaware corporation and conducts its
business primarily through its subsidiary, Hercon Laboratories Corporation
("Hercon").  Unless the context otherwise requires, the term "Company"
includes Transderm Laboratories Corporation and Hercon, of which the Company
owns 98.5%.  The Company's executive offices are located in New York, New
York.

The Company is engaged in the development, manufacture and marketing of
transdermal drug delivery systems.  A transdermal drug delivery system is an
adhesive patch containing medication which is released through the skin into
the bloodstream at a controlled rate over an extended period of time. 
Transdermal delivery can significantly enhance the therapeutic benefit of
certain drugs, through improved efficacy, safety and patient compliance, when
compared to conventional methods of drug administration, such as oral,
parenteral and continuous infusion.  In addition, transdermal delivery systems
may provide additional commercial advantages compared to non-transdermal
delivery systems for certain drugs.

The Company has developed a base of technology in the design of transdermal
systems by applying its expertise in the area of skin biology, pharmaceutical
and polymer chemistry, drug diffusion, adhesive technology, pharmacokinetics
and clinical protocol design.  The Company believes that integration of these
technologies with its manufacturing experience gives it a competitive
advantage by providing it with the capability to custom design and produce
individual, cost-effective transdermal delivery systems for specific drugs.


TRANSDERMAL DRUG DELIVERY

In general, a transdermal drug delivery system consists of four basic
elements.  An inert backing, often the outermost component of the system,
protects the drug stored in the patch and provides support for the system. 
The next element of the system is a drug storage section, which provides a
supply of the drug for subsequent migration into the skin of a patient.  The
third element of the system is a mechanism by which the transdermal drug
delivery system is affixed to the patient.  Nearly all transdermal systems
employ a pressure-sensitive adhesive in some fashion to adhere the patch to
the skin.  Where the drug storage section is a pressure-sensitive adhesive
matrix, no separate adhesive element is required.  The last element of the
system is a disposable protective layer which protects the drug and the
adhesive from contamination prior to use.  The protective layer is removed
immediately prior to application, exposing the adhesive surface to the skin. 
Other elements such as penetration enhancers and rate-controlling membranes
may be employed for specific transdermal drug delivery systems.


PRODUCTS AND PRODUCTS UNDER DEVELOPMENT

  Nitroglycerin Transdermal Systems

    Since 1986, the Company has manufactured a transdermal nitroglycerin patch
which is used for transdermal relief of vascular and cardiovascular symptoms
related to angina pectoris.  This patch was the first such product introduced
in the United States for the generic market.  Since that time, the Company has
sold over 235 million of these patches.  The Company sells this product to
Warner Chilcott Laboratories and Watson Laboratories, Inc. for distribution in
the United States and to Almirall Prodesfarma S.A. for distribution in Spain.


<PAGE>    Angina pectoris is a condition caused by a lack of oxygen to the
heart.  Historically, nitroglycerin tablets were placed under the tongue after
an attack had begun.  A tablet releases the drug, which diffuses through
membranes beneath the tongue and into the bloodstream.  It then dilates the
blood vessels, increasing the flow of oxygenated blood to the heart, and
ending the attack within a few minutes.  Due to the body's rapid metabolism
and clearance of the drug, however, tablets are not a practical preventative
for angina attacks.  Nitroglycerin ointments, which deliver continuous levels
of nitroglycerin in the blood, are greasy and difficult to dose accurately. 
Transdermal nitroglycerin patches, which provide continuous therapeutic levels
of nitroglycerin in the blood and thereby help prevent angina attacks, became
commercially available in 1982 and are currently being marketed by several
companies.

    The Company is currently awaiting United States Food and Drug
Administration ("FDA") approval of applications to market the Company's
improved transdermal nitroglycerin products which are thinner, smaller, more
flexible and more comfortable than the Company's current patches and which are
expected to improve patient acceptance.  The FDA has established Novartis'
Transderm-Nitro(R) and Schering-Plough's Nitro-Dur(R) patches as suitable
reference standard products for bioequivalence comparisons and has given both
full New Drug Application ("NDA") approval.  On this basis, the FDA can issue
approval of Abbreviated New Drug Applications ("ANDAs") and therapeutic
equivalence ratings for generically substitutable nitroglycerin patches.  The
Company has conducted bioequivalence studies in support of its submissions and
is awaiting FDA approval of ANDAs referencing these products.  The Company has
been involved in litigation with the Schering-Plough subsidiary which owns the
patent relating to the Nitro-Dur(R) patches over Hercon's submission of
certain of its ANDAs to the FDA.  The Company has filed an appeal to the
United States Court of Appeals for the Federal Circuit of an adverse ruling
and an injunction issued by the lower court in this matter.  See "Item 3.
Legal Proceedings".

  Products for Hormone Replacement Therapy

    The Company is developing several different transdermal products for the
hormone replacement market.  Estrogen replacement therapy is the most
frequently prescribed therapy for prevention of menopausal symptoms and
osteoporosis.  The current market for estrogen in the United States is
dominated by oral products.  Transdermal delivery of estrogen avoids many of
the problems inherent in oral dosing.  The Company believes that transdermal
products will capture a significant portion of the hormone replacement market.

  Other Products

    The Company is also developing transdermal, topical and/or transmucosal
systems for the delivery of drugs including anesthetics and cardiovascular
agents.  A number of other feasibility studies are currently being conducted. 
Several products under evaluation are being targeted to compete in the non-
prescription or over-the-counter and cosmetics markets.

    For those additional products where FDA approval is necessary, there can
be no assurance that FDA filings for such products will be effected nor that
FDA approval will be obtained.  

    To date, the Company has pursued the development of delivery systems
primarily using its own resources.  The Company may, in the future, seek
collaborative partners to assist in funding the development of certain of the
Company's products currently under development after completion of Phase I
clinical trials with respect to a particular product.  The Company's ability
to develop and commercialize products in the future may depend in part on its
ability to enter into collaborative arrangements with pharmaceutical
companies.  There can be no assurance that the Company will be able to develop
products successfully or that the Company will be successful in the
manufacturing or commercialization of such products.  In addition, no
assurances can be given that the Company will enter into collaborative
arrangements or that such collaborative arrangements will be successful.

<PAGE>
RESEARCH AND DEVELOPMENT

The Company's pharmaceutical research and development laboratory facilities
are maintained in its York, Pennsylvania facilities.  At February 28, 1998,
the Company employed five full time employees with varying technical
backgrounds, including pharmaceutics and pharmaceutical sciences, to conduct
its research and development efforts in this area.  Independent laboratories
are often engaged for clinical testing.  See the Consolidated Statements of
Operations included below under "Item 8.  Financial Statements" for the amount
of research and development costs incurred during 1997, 1996 and 1995.


MANUFACTURING; SUPPLY

The Company manufactures its transdermal drug delivery systems at a fully-
equipped, state-of-the-art facility in York, Pennsylvania.  The Company's
patches are manufactured in accordance with Good Manufacturing Practices
("GMP") prescribed by the FDA.

The manufacture of advanced transdermal drug delivery systems requires
specialized skills in several areas, as well as specialized manufacturing
equipment.  The Company's process development and design engineers work
closely with the research and development department starting early in the
product design stage, resulting in efficiencies in the manufacturing
development process.  All scale up work, commencing with initial product
development trials, is conducted on full-size, completely functional
manufacturing equipment, reducing delays in the development and approval
process and smoothing the transition to commercial production.  Some of this
equipment is manufactured in-house; the balance is fabricated by outside
manufacturers to the Company's specifications.  The Company believes that this
equipment provides a decided advantage in the manufacture of the complex
multilayer systems necessary for successful transdermal drug delivery.  The
Company currently has assembly packaging equipment in place having a single
shift capacity of over 35 million patches annually.  Additional equipment has
been qualified to increase this capacity to over 70 million patches and
support the market introduction of the Company's next generation of
nitroglycerin patches.  Further product growth may require the Company to
expand its equipment base; however, the Company believes that its current
approximately 61,000 square foot plant will be sufficient for product
expansion for the foreseeable future.

As part of the manufacturing process, the Company has developed and performs
appropriate quality control procedures including testing of all raw materials
and finished product.

Several raw materials used in the manufacture of the Company's products are
available from only a single source.  These materials have generally been
available to the Company and the pharmaceutical industry on commercially
reasonable terms.  To date, the Company has not experienced difficulty
acquiring necessary materials.  The Company plans to negotiate supply
agreements, as appropriate, for certain components.  Any interruption of
supply could have a material adverse effect on the Company's ability to
manufacture its products.


COMPETITION

The Company's primary competitors that develop and/or manufacture transdermal
drug delivery systems include Alza Corporation, Cygnus, Inc., Elan
Corporation, plc, Ethical Holdings, PLC, Mylan Laboratories Inc., Novartis
Pharmaceuticals Corp., Noven Pharmaceuticals, Inc., Sano Corporation,
Schering-Plough Corporation and TheraTech, Inc.  Most of these companies have
substantially greater financial resources and larger research and development
staffs than the Company, and may have substantially greater experience in
developing products, in obtaining regulatory approvals and in manufacturing
and marketing pharmaceutical products.  Many other pharmaceutical companies
have the financial resources to acquire the skills necessary to develop
transdermal systems.



<PAGE>

The Company's products also compete with drugs marketed in traditional dosage
forms, including oral doses, injections and continuous infusion.  New drugs,
new therapeutic approaches or further developments or innovations in
alternative drug delivery methods, such as time release capsules, liposomes
and implants, may provide greater therapeutic benefits for a specific
indication or may offer comparable performance at lower cost, than those
offered by the Company's current transdermal drug delivery systems.  There can
be no assurance that the Company will successfully develop technologies and
products that are more effective or affordable than those being developed by
its competitors.  In addition, one or more of the Company's competitors may
achieve product commercialization or obtain patent protection earlier than the
Company.  Competitive products have either been approved or are being
developed for most of the Company's current or development stage products. 
The first pharmaceutical product to reach the market in a therapeutic area
often has a significant competitive advantage relative to later entrants to
the market.  There can be no assurance that product introductions or
developments by others will not render the Company's products or technologies
non-competitive or obsolete.

The Company expects products approved for sale to compete primarily on the
basis of product efficiency, safety, patient convenience, reliability,
availability and price.  The Company's competitive position will also depend
on its ability to attract and retain qualified scientific and other personnel,
develop effective proprietary products, implement production and marketing
plans, effect distribution of its products, obtain patent protection and
secure adequate capital resources.


PATENTS AND PROPRIETARY RIGHTS

The Company believes that protection of its patents, proprietary products,
technologies, processes and know-how is important to its business.  The
Company currently holds eight issued and allowed United States patents. 
Corresponding patents or applications have been issued or filed in Canada,
certain European countries and Japan.  There can be no assurance that the
Company's patents or those of its competitors would be held valid by a court
of competent jurisdiction.  Any litigation or proceedings with respect to
patents or proprietary rights could result in substantial costs to the
Company.  Except for the litigation matter with Key Pharmaceuticals, Inc.
described below under "Item 3. Legal Proceedings", the Company currently is
not aware of any claims of infringement against its products or technologies.

There can be no assurance that any of the Company's pending applications will
result in the issuance of any patents or whether any issued patents will
provide proprietary protection or be circumvented or invalidated.  The Company
may be required or may desire to obtain licenses from others to develop,
manufacture and market commercially viable products.  There can be no
assurance that such licenses will be obtainable on commercially reasonable
terms, if at all, or that any licensed patents or proprietary rights will be
valid and enforceable.

The Company also relies upon unpatented trade secrets.  No assurance can be
given that others will not independently develop substantially equivalent
proprietary information and techniques or otherwise gain access to the
Company's trade secrets or disclose such technology, or that the Company can
meaningfully protect its right to unpatented trade secrets.

It is Company policy to require its key employees, consultants and other
advisors to execute confidentiality agreements.  There can be no assurance,
however, that these agreements will provide meaningful protection or adequate
remedies for the Company's trade secrets in the event of unauthorized use or
disclosure of such information.



<PAGE>



GOVERNMENT REGULATION; ENVIRONMENTAL MATTERS

The research and development, manufacture and marketing of drug delivery
systems are subject to regulation by the FDA in the United States and by
comparable authorities in other countries.  These national agencies and other
federal, state and local entities regulate, among other things, research and
development activities and the testing, manufacturing, safety, effectiveness,
labelling, storage, record keeping, approval, advertising and promotion of the
Company's products.  The regulations and statutes applicable to the Company's
products may change as the currently limited number of approved transdermal
drug delivery products increases and regulators acquire additional experience
in this area.

Each domestic drug product manufacturing establishment must be registered with
and inspected by the FDA.  Drug product manufacturing establishments located
in Pennsylvania must be registered with the Pennsylvania Department of Health. 
Establishments handling controlled substances must be licensed by the United
States Drug Enforcement Administration ("DEA").  Domestic drug manufacturing
establishments are subject to periodic inspections by the FDA for GMP
compliance.

The process required by the FDA before a drug delivery system may be marketed
in the United States might depend on whether the pharmaceutically-active
ingredient has previously been approved by the FDA for use in other dosage
forms, and whether the drug has previously been approved by the FDA in the
particular dosage form.  If the drug is a new chemical entity that has not
been previously approved, then the process includes (i) pre-clinical
laboratory and animal testing, (ii) the submission to the FDA of an acceptable
Investigational New Drug Application ("IND"), (iii) adequate and well-
controlled human clinical trials to establish the safety and efficacy of the
drug for its intended use, (iv) submission to the FDA of an NDA which
demonstrates the safety and efficacy of the product, and (v) approval of an
NDA.  If the pharmaceutically-active ingredient has been previously approved,
then the approval process is similar, except that certain toxicity tests
normally required for the NDA should not be necessary.

If a product containing the pharmaceutically-active ingredient has previously
been approved by the FDA, a firm seeking approval for another formulation of
that drug may in some circumstances be able to submit an ANDA.  Under the ANDA
procedure, the FDA waives the requirement of submitting complete reports of
preclinical and clinical studies showing safety and efficacy, and instead
requires bioavailability data demonstrating that the applicant's drug
formulation is bioequivalent to the previously-approved drug.  A drug is
deemed bioequivalent to another if it is not significantly different in the
rate and extent of absorption of the drug's active ingredient and its
availability at the site of drug action.  These parameters are typically
measured by taking blood samples periodically after administration of a drug,
and analyzing those samples to determine the amount of drug and/or its
metabolites that are present.

Although ANDA procedures can reduce the time and cost required to bring a drug
to market, the statutory provisions which permit the ANDA procedure were also
designed to protect certain drugs approved under the IND/NDA procedure ("NDA
drugs") from immediate competition from drugs approved under the ANDA
procedure ("ANDA drugs").  The effective date of approval of an ANDA drug will
ordinarily be delayed until the expiration of patents, if any, covering the
NDA drug, or, in the event of a challenge to the validity or infringement of
an existing patent, until a final order that cannot be appealed has been
issued by a court that the patent is invalid or not infringed by the ANDA
drug.  Existing product or use patents on NDA drugs may be extended for up to
five years to compensate the patent holder for the reduction of the effective
patented marketing life of the drug caused by the FDA review period.  With
respect to NDA drugs not covered by existing patents, the FDA may award



<PAGE>


periods of three or five years of marketing exclusivity, depending on the
nature of the NDA drug and the type of data submitted in the NDA, during which
period an ANDA cannot be submitted or the FDA will not make effective any
approval of an ANDA drug that refers to the NDA drug as a basis for approval. 
Although most of the Company's products currently under development would
follow the IND/NDA process in pursuit of marketing approval, some of these
products might be eligible for the ANDA procedure.

Depending on the distribution arrangements for a particular product, either
the Company or the Company's distributor would be responsible for the clinical
and regulatory approval procedures.  In either case, the Company would be
responsible for providing the required data concerning the manufacturing
process for the product.  The clinical research and regulatory review process
generally takes a number of years and requires the expenditure of substantial
resources.  The Company's ability to manufacture and sell products depends
upon the satisfactory completion of clinical trials and obtaining the
foregoing approvals.  

Sales of the Company's products outside the United States are subject to
regulatory requirements governing human clinical trials and marketing approval
for drugs and transdermal delivery systems.  These requirements vary widely
from country to country.  

There can be no assurance that problems will not arise that could delay or
prevent the commercialization of the Company's products, or that the FDA and
foreign regulatory agencies will be satisfied with the results of the clinical
trials and approve the marketing of any products.

The Company is also subject to regulation under U.S. federal, state and local
regulations regarding work place safety, environmental protection and
hazardous and controlled substance controls, among others.

The Company does not believe that its compliance with federal, state or local
laws and regulations which have been enacted or adopted regulating the
discharge of materials into the environment or otherwise relating to the
protection of the environment has or will have any material effect upon the
capital expenditures, earnings or competitive position of the Company.  There
can be no assurance, however, (i) that changes in federal, state or local laws
or regulations, changes in regulatory policy or the discovery of unknown
problems or conditions will not in the future require substantial
expenditures, or (ii) as to the extent of the Company's liabilities, if any,
for past failures, if any, to comply with laws, regulations and permits
applicable to its operations.


BACKLOG;  SEASONALITY

The Company's backlog orders usually do not exceed 60 days.  Neither the
backlog nor the Company's operations are subject to substantial seasonal
variations. 


CUSTOMERS;  GOVERNMENT CONTRACTS

Currently, the Company sells its transdermal nitroglycerin patches to two
customers for distribution in the United States and to one customer for
distribution in Spain.

See Note 1a of the Notes to Consolidated Financial Statements included below
under "Item 8. Financial Statements" for (i) the percentage of sales to each
major customer who was responsible for 10% or more of total revenues during
1997, 1996 and 1995 and (ii) foreign sales during the same three years.

The Company does not currently sell its transdermal nitroglycerin patches
under government contracts.

<PAGE>


EMPLOYEES

As of February 28, 1998, the Company employed forty-seven full time employees. 
Of these, five were engaged in research and development, thirty in process
development and manufacturing and twelve in other disciplines.  Seventeen
employees at the York facility are covered by a collective bargaining
agreement with a local of the R.W.D.S.U. (an AFL-CIO unit) for a three year
period ending December 10, 1998, subject to annual renewal thereafter.  The
Company believes its relations with employees are good.


ITEM 2.  PROPERTIES

The Company owns an approximately 61,000 square foot building in York,
Pennsylvania which is used for manufacturing, quality control, research and
development, warehousing and office space.  The Company's manufacturing
facility complies with GMP standards and is operating under a license from the
DEA and pursuant to registration with the Pennsylvania Department of Health.


ITEM 3.  LEGAL PROCEEDINGS

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 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 patent.  Hercon counterclaimed against Key
for declaratory judgment of patent noninfringement, invalidity and
unenforceability.  A two-week, non-jury trial was completed on October 10,
1996.  On September 30, 1997, the Delaware District Court ruled in favor of
Key on its infringement claim and on Hercon's claim that Key's patent is
invalid and unenforceable.  On October 29, 1997, Hercon filed an appeal
against the Delaware District Court's judgment to the United States District
Court for the Federal Circuit in Washington, DC.  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.  The appeals were consolidated
on January 23, 1998 and are now in the briefing stage.  Management believes
that Hercon has strong grounds for appeal.

In October 1995, Gershon Yormack, a stockholder of the Company's parent,
Health-Chem Corporation ("Health-Chem"), initiated an action against Health-
Chem, its directors and the Company in the Delaware Chancery Court (New Castle
County) in which he sought injunctive and declaratory relief with respect to
certain options to purchase Common Stock of the Company granted to each of
Marvin M. Speiser, Health-Chem's Chairman of the Board and President, and
Robert D. Speiser, the Company's President and Health-Chem's Executive Vice
President.  Pursuant to Employment Agreements entered into in April 1995, in
November 1995 Health-Chem caused the Company to issue an option to purchase
shares of the Company's Common Stock at an exercise price of $.10 per share to




<PAGE>


each of Marvin M. Speiser and Robert D. Speiser.  The plaintiff alleges that
this exercise price, which is the same per share price as the subscription
price for Common Stock of the Company offered by Health-Chem to its
stockholders under a registered subscription rights offering (via a prospectus
dated September 18, 1995), was substantially less than the fair market value
of such Company Common Stock.  In June 1997, the defendants filed an answer
denying all material allegations and seeking dismissal of the complaint. 
Management believes that the claims are without merit and is defending the
action vigorously.  The action is in the discovery stage.


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

No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.


                                                                             
 
FORM 10-K                                                            PART II
                                                                             
 


ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS


The Company's Common Stock is traded on the NASDAQ OTC Bulletin Board under
the symbol TLCC.

The high and low sales prices for the Company's Common Stock, as reported by
NASDAQ, have been as follows during the past two years:


                              1997                   1996    

      QUARTER             High    Low           High     Low 
      1st                 0.625  0.125          1.00    0.125
      2nd                 0.25   0.125          0.28    0.125
      3rd                 0.50   0.156          0.50    0.25
      4th                 0.25   0.125          0.375   0.125


There were approximately 158 holders of record of the Company's Common Stock
as of February 28, 1998.

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


<PAGE>
<PAGE>


ITEM 6.  SELECTED FINANCIAL DATA


The following table presents selected consolidated financial information
derived from the Company's consolidated financial statements and include the
Company, Hercon Laboratories Corporation (excluding the environmental
division) and the land and building in which Hercon Laboratories Corporation's
operations are conducted as of the dates and for the periods indicated.  The
Selected Financial Data should be read in conjunction with "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Item 8. Financial Statements" included herein.

                                           Year Ended December 31,
                                  1997     1996     1995     1994     1993
                                   (In thousands, except per share amounts)

Net sales                      $ 5,299  $12,146  $12,495  $12,104  $13,503

<Loss> income from
  continuing operations(1)     $<2,222> $    84  $ 1,416  $ 1,129  $ 4,076

Net <loss> income (1)           <2,222>      84    1,416    1,129    4,076

Preferred dividends                612      674      233       --       --

Net <loss> income applicable
  to common stockholders       $<2,834> $  <590> $ 1,183  $ 1,129  $ 4,076

Net <loss> income per common
  share (basic and diluted)    $ <0.07> $ <0.01> $  0.03                  

Common shares outstanding       40,000   40,000   40,000 

Dividends per share                  0        0        0        0        0

Total assets                   $ 6,187  $ 7,863  $ 9,319  $ 9,130  $ 9,419

Long-term debt, less
  current portion              $ 9,108  $ 7,000  $ 7,200  $ 7,692  $ 8,877

Redeemable preferred stock     $ 8,500  $ 9,500  $10,000                  



(1)   1993 income from continuing operations and net income include the
      recognition of a tax benefit of $2,400,000 related to net operating loss
      and tax credit carryforwards.


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


Results of Operations

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-Q, which could cause actual results to differ materially from the
forward-looking statements.

Year ended December 31, 1997 versus December 31, 1996

Net sales decreased by $6,800,000 to $5,300,000 in 1997 as compared to
$12,100,000 in 1996.  The decrease in net sales consists of a $6,700,000
decrease in volume and $100,000 in lower selling prices.  The net sales
decrease is due primarily to the absence of sales to a former domestic
distributor who had accounted for approximately 38% of the Company's sales for
the year ended December 31, 1996.  The most recent sales to this distributor
were during the fourth quarter of 1996.  In August 1996, this former
distributor obtained approval from the FDA for the manufacture and sale of its
own nitroglycerin patches and now competes with the Company's nitroglycerin
patches.  Sales to both of the Company's current domestic distributors of
nitroglycerin patches also decreased during 1997 as compared to 1996.  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 is expected to reduce
annual payroll-related expenses by approximately $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 of the Notes to
Consolidated Financial Statements and discussion below).

Gross profit decreased by $4,700,000 to $2,300,000 or 44.1% of net sales in
1997 from $7,000,000 or 57.9% of net sales in 1996.  Gross profit decreased
primarily due to decreased domestic sales volumes of transdermal nitroglycerin
patches.  Lower margins reflect increased domestic sales volumes of lower
margin products, as well as the allocation of fixed costs over decreased
revenue.  Plant overhead decreased $630,000, including a $450,000 decrease for
payroll-related expenses, for the year ended December 31, 1997 as compared to
the same period in 1996 reflecting, in part, the organizational restructuring.

Selling, general and administrative expenses, excluding legal expenses, were
approximately $1,400,000 in 1997 as compared to $2,200,000 in 1996.  The
$800,000 decrease is due primarily to a lower allocation of expenses from
affiliates, amounting to approximately $480,000, from lower payroll-related
expenses of approximately $110,000 and from lower consulting costs of
approximately $100,000.  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-Chem's consolidated net sales.  The Company's allocation
of Health-Chem's total expenses in 1997 was lower than 1996 due to Health-
Chem's total expenses being lower and to the Company's share of these expenses
dropping from 26% in 1996 to 14% in 1997.  The decrease in payroll-related
expenses reflects, in part, the organizational restructuring.  The decrease in
consulting costs is due primarily to lower outside consulting service expenses
related to the Company's applications with the FDA to market improved
transdermal nitroglycerin products.

<PAGE>
Legal expenses decreased $1,800,000 for the year ended December 31, 1997 as
compared to the same period in 1996.  The decreased legal expenses are due
primarily to reduced activity associated with the Key Litigation.

Research and development expenses decreased $200,000, or 6.8%, for the year
ended December 31, 1997 as compared to the same period in 1996.  Payroll-
related expenses decreased $480,000, reflecting the organizational
restructuring changes.  The decrease is partially offset by higher outside
testing expenses.  The Company expects total research and development expenses
related to pharmaceutical products in 1998 to be lower than 1997 levels.

Net interest expense increased $310,000, or 68.4%, for the year ended December
31, 1997 as compared to the same period in 1996 due primarily to $230,000 in
additional interest related to higher average outstanding balances on
borrowings from affiliates and to an $85,000 reduction in capitalized interest
related to new equipment under construction.

Provision for income taxes was $35,000 in 1997 as compared to a benefit of
$4,000 in 1996.  Income tax provision or benefit varies with the amount and
nature of the components of income or loss from operations before income
taxes.  At December 31, 1997, the Company recorded a $1,082,000 net valuation
allowance relating to tax loss and tax credit carryforwards, with such
valuation allowance directly increasing the income tax provision.  This net
valuation allowance consists of a $1,307,000 decrease in tax loss and tax
credit carryforwards, partially offset by a $225,000 decrease in a payable to
Health-Chem which is only payable as certain net operating loss and tax credit
carryforwards are used.  During 1996, the Company reversed a portion of the
valuation allowance amounting to $25,000, with such reversal directly reducing
the income tax provision.  See Note 6 of the Notes to Consolidated Financial
Statements.

Year ended December 31, 1996 versus December 31, 1995

Net sales decreased by 2.8% to $12,100,000 in 1996 as compared to $12,500,000
in 1995.  The decrease in net sales consisted of an $800,000 decrease in
volume, partially offset by $400,000 in higher selling prices.  The net sales
decrease was due to lower sales to a former domestic distributor of the
Company.  This former distributor accounted for approximately 38% and 51% of
the Company's sales for the years ended December 31, 1996 and 1995,
respectively.  Sales to both of the Company's other domestic distributors of
nitroglycerin patches increased during 1996 as compared to 1995.

Gross profit decreased by 5.6% to $7,000,000 or 57.9% of net sales in 1996
from $7,400,000 or 59.6% of net sales in 1995.  Gross profit decreased
primarily due to decreased domestic sales volumes of transdermal nitroglycerin
patches.  Lower margins reflect increased domestic sales volumes of lower
margin products, as well as increased operating costs.

Selling, general and administrative expenses, excluding legal expenses, were
approximately $2,200,000 in 1996 as compared to $1,800,000 in 1995.  The
$400,000 increase was due primarily to a higher allocation of expenses from
affiliates, amounting to approximately $170,000, and from higher consulting
costs of approximately $160,000.  The Company's allocation of Health-Chem's
total expenses in 1996 was higher than 1995 due to Health-Chem's total
expenses being higher, partially offset by the Company's share of these
expenses dropping from 27% in 1995 to 26% in 1996.  The increase in consulting
costs was due primarily to outside consulting service expenses related to the
Company's applications with the FDA to market improved transdermal
nitroglycerin products.

Legal expenses increased $1,800,000 for the year ended December 31, 1996 as
compared to the same period in 1995.  In August 1995, Key Pharmaceuticals,
Inc. commenced an action against Hercon relating to some of Hercon's improved
transdermal nitroglycerin products.  The increased legal expenses were
primarily due to the costs related to the defense of this action, including
preparing for and conducting a two-week trial, which was completed on October
10, 1996.

<PAGE>

Research and development expenses decreased $400,000, or 15.4%, for the year
ended December 31, 1996 as compared to the same period in 1995.  The decrease
was due primarily to lower outside testing and clinical materials expenses.  

Net interest expense decreased $90,000, or 16.8%, for the year ended December
31, 1996 as compared to the same period in 1995 due primarily to capitalized
interest related to new equipment under construction of $85,000 and to a
$30,000 reduction in interest associated with a note payable to Circa
Pharmaceuticals, Inc. which was paid in full in June 1996.  This was partially
offset by $25,000 in additional interest related to higher average outstanding
balances on borrowings from affiliates.

Provision for income taxes was a $4,000 benefit in 1996 as compared to a
provision of $800,000 in 1995.  During 1996, the Company reversed a portion of
the valuation allowance amounting to $25,000, with such reversal directly
reducing the income tax provision.  


Liquidity and Capital Resources

The following measures of liquidity are drawn from the Company's consolidated
financial statements: 
                                                             December 31,
                                                            1997     1996

            Working capital deficit (in thousands)       $<1,019>  $ <309>
              (Current assets less current liabilities)   
            Current ratio                                    0.6      0.9
              (Current assets/current liabilities)
            Quick ratio                                      0.3      0.5
              (Cash and receivables/current liabilities)

Working capital deficit increased $710,000 from December 31, 1996 to December
31, 1997 due to a $607,000 decrease in current assets and a $103,000 increase
in current liabilities.  Cash, accounts receivable, inventory, deferred taxes
and other current assets decreased $3,000, $481,000, $21,000, $99,000 and
$3,000, respectively.  The decrease in accounts receivable resulted from a
decrease in sales in the fourth quarter of 1997 as compared to the fourth
quarter of 1996 and also reflects the timing of domestic distributor payments. 
The decrease in inventory reflects reduced domestic distributor sales and the
timing of raw material purchases.  The increase in current liabilities is due
to increases in dividends payable and accrued expenses of $280,000 and
$100,000, respectively, partially offset by decreases in accounts payable and
state taxes payable of $274,000 and $3,000, respectively.

Cash <used for> provided by operations for the years ended December 31, 1997,
1996 and 1995 was $<1,200,000>, $700,000 and $3,300,000, respectively.

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 for property, plant and equipment were $128,000 in 1997,
$357,000 in 1996 and $658,000 in 1995.  The majority of the expenditures in
1997 related to research and development equipment and equipment needed to
assemble and package the Company's second generation nitroglycerin products. 
Capital expenditures in 1998 for property, plant and equipment are projected
to be approximately $200,000.  The majority of these capital expenditures will
consist of equipment needed to assemble and package the Company's second
generation nitroglycerin products.




<PAGE>
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, was subject to various
financial covenants.  On January 21, 1998, Health-Chem entered into a First
Amendment (the "Amendment") to the Loan Agreement with the Bank.  The
Amendment, among other things, amends the terms for drawing upon the term loan
and amends certain financial covenants effective with the December 31, 1997
covenants.  At December 31, 1997, 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 will each be 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, with the
principal amount of $7,000,000 payable on March 31, 1999.  The Company made
the required 1997 semi-annual interest payments in March and September.

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.  In March 1997, the Company, as required, made the
semi-annual dividend payment and redeemed, for $1,000,000, 100,000 shares. 
Additional required redemption payments are $1,000,000 annually in 1998
through 2004 and $1,500,000 in 2005.  Legally available funds were not
available to make the September 1997 preferred dividend payment and are not
anticipated to be available to make either the preferred dividend payment or
the required redemption payment in March 1998.  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 has agreed to
waive this right in respect of the 1998 Annual Meeting of Stockholders 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 $521,000, $998,000 and
$827,000 in 1997, 1996, and 1995, 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>
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
December 31, 1997, the maximum amount of such payments which may be made in
the future was $225,000.

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 of some of these payment obligations or raise
additional capital from third parties.


Inflation

The Company believes that inflation has not had a material effect upon its
results of operations and liquidity and capital resources.


Impact of the Year 2000 Issue

The Year 2000 Issue is the result of computer programs being written using two
digits rather than four to define the applicable year.  Any of the Company's
computer programs that have date-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000.  This could result in a
system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions,
send invoices, or engage in similar normal business activities.

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 data processing functions.  Based on a recent assessment, Health-
Chem determined that it will be required to modify or replace significant
portions of its software so that its computer systems will properly utilize
dates beyond December 31, 1999.  Health-Chem presently believes that with
modifications to existing software and conversions to new software, the Year
2000 Issue can be resolved.  However, if such modifications and conversions
are not made, or are not completed on a timely basis, the Year 2000 Issue
could have a material impact on the operations of the Company.

Health-Chem will utilize both internal and external resources to reprogram or
replace, and test the software for Year 2000 modifications.  Health-Chem plans
to complete the Year 2000 project no later than June 30, 1999.  Health Chem's
total cost of the Year 2000 project is estimated at $100,000.  Pursuant to the
Corporate Services Agreement, the Company reimburses Health-Chem for data
processing services based upon an allocation method of the Company's net sales
as a percentage of Health-Chem's consolidated net sales.  The Company's share
of these expenses were 14%, 26% and 27% in 1997, 1996 and 1995, respectively. 
The Company's portion of Health-Chem's Year 2000 project costs will be
expensed as incurred over the next two years and is not expected to have a
material effect on the Company's results of operations.  To date, no external
costs related to the assessment of, and preliminary efforts in connection
with, the Year 2000 project and the development of a remediation plan have
been incurred.

The costs of the project and the date on which Health-Chem plans to complete
the Year 2000 modifications are based on Health-Chem management's best
estimates, which were derived utilizing numerous assumptions of future events
including the continued availability of certain resources and other factors. 
However, there can be no guarantee that these estimates will be achieved and
actual results could differ materially from those plans.  Specific factors
that might cause such material differences include, but are not limited to,
the availability and cost of personnel trained in this area, the ability to
locate and correct all relevant computer codes, and similar uncertainties.
<PAGE>

Implementation of New Financial Accounting Standards

In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 130 "Reporting Comprehensive
Income" ("SFAS 130").  SFAS 130 establishes standards for reporting and
display of comprehensive income and its components (revenues, expenses, gains
and losses) in a full set of general-purpose financial statements.  SFAS 130
requires that an enterprise (a) classify items of other comprehensive income
by their nature in a financial statement and (b) display the accumulated
balance of other comprehensive income separately from retained earnings and
additional paid-in-capital in the equity section of a statement of financial
position.  SFAS 130 is effective for financial statements issued for periods
beginning after December 15, 1997.  The Company does not expect the
implementation of SFAS 130 to have a material impact on the consolidated
financial statements of the Company.  

In June 1997, the FASB issued Statement of Financial Accounting Standards No.
131 "Disclosures about Segments of an Enterprise and Related Information"
("SFAS 131").  SFAS 131 establishes standards for the way that public business
enterprises report information about operating segments in annual financial
statements and requires that those enterprises report selected information
about operating segments in interim financial reports issued to shareholders. 
SFAS 131 also establishes standards for related disclosures about products and
services, geographic areas and major customers.  SFAS 131 is effective for
financial statements for periods beginning after December 15, 1997.  In the
initial year of application, comparative information for earlier years is to
be restated.  The Company does not expect the implementation of SFAS 131 to
have a material impact on the consolidated financial statements of the
Company.


ITEM 8.  FINANCIAL STATEMENTS

Index to Consolidated Financial Statements.

                                                                PAGE 

Report of Independent Accountants                                 17

Consolidated Balance Sheets - December 31, 1997 and 1996          18

Consolidated Statements of Operations
  Years Ended December 31, 1997, 1996 and 1995                    19

Consolidated Cash Flow Statements
  Years Ended December 31, 1997, 1996 and 1995                    20

Consolidated Statements of Stockholders' Equity (Deficiency)
  Years Ended December 31, 1997, 1996 and 1995                    21

Notes to Consolidated Financial Statements                     22-32

<PAGE>

<PAGE>








REPORT OF INDEPENDENT ACCOUNTANTS

The Board of Directors and Stockholders
  of Transderm Laboratories Corporation:


We have audited the accompanying consolidated financial statements of
Transderm Laboratories Corporation and Subsidiary as of December 31, 1997 and
1996 and for each of the three years in the period ended December 31, 1997,
listed in Item 14(a) of this Form 10-K.  These financial statements are the
responsibility of the Company's management.  Our responsibility is to express
an opinion on these financial statements based on our audits.  

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Transderm
Laboratories Corporation and Subsidiary as of December 31, 1997 and 1996, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles.



COOPERS & LYBRAND L.L.P.

One South Market Square
Harrisburg, Pennsylvania
March 25, 1998



<PAGE>
<PAGE>
<TABLE>
                     TRANSDERM LABORATORIES CORPORATION
                         CONSOLIDATED BALANCE SHEETS
                               (In thousands)
<CAPTION>

                        ASSETS                             December 31,
<S>                                                         1997      1996
CURRENT ASSETS                                          <C>       <C>
   Cash (Note 1f)                                       $     18  $     21
   Accounts receivable, net of allowances of $100
    and $0 (Note 1a)                                         751     1,232
   Inventories  (Notes 1b and 2)                             759       780
   Deferred income taxes - current (Note 6)                    0        99
   Other current assets                                        0         3
     Total Current Assets                                  1,528     2,135

PROPERTY, PLANT AND EQUIPMENT (Note 1c)
   Land                                                      120       120
   Building                                                2,734     2,734
   Equipment                                               7,855     6,729
   Construction-in-progress                                   54     1,158
     Total Property, Plant and Equipment                  10,763    10,741
   Less accumulated depreciation and amortization          6,105     5,527
     Net Property, Plant and Equipment                     4,658     5,214

NON-CURRENT ASSETS
   Deferred income taxes (Note 6)                              0       907
   Payable to Health-Chem as net operating loss and
     tax credit carryforwards are used (Note 1a)               0      <393>
   Other non-current assets                                    1         0
     Total Non-Current Assets                                  1       514

TOTAL ASSETS                                            $  6,187  $  7,863


      LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)

CURRENT LIABILITIES
   Accounts payable                                     $    639  $    913
   Accrued expenses and other current
     liabilities (Note 3)                                    462       362
   Current portion of redeemable preferred stock
     (Notes 1a and 7)                                      1,000     1,000
   Preferred dividends payable                               446       166
   Income taxes payable (Note 6)                               0         3
     Total Current Liabilities                             2,547     2,444

LONG-TERM LIABILITIES
   Subordinated promissory note (Notes 1a and 1f)          7,000     7,000
   Long-term payable <receivable> - Health-Chem
     (Note 1f)                                             2,087      <427>
   Other long-term debt (Note 4)                              21         0
   Deferred income taxes (Note 6)                              0       480

REDEEMABLE PREFERRED STOCK (Notes 1a and 7)                7,500     8,500

STOCKHOLDERS' EQUITY (DEFICIENCY) (Note 8)
   Common stock                                               40        40
   Retained deficit                                      <13,008>  <10,174>
     Total Stockholders' Equity (Deficiency)             <12,968>  <10,134>

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY) $  6,187  $  7,863
<FN>

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

</TABLE>
<TABLE>

                     TRANSDERM LABORATORIES CORPORATION
                    CONSOLIDATED STATEMENTS OF OPERATIONS
                  (In thousands, except per share amounts)

<CAPTION>

                                                 Year Ended December 31,
<S>                                              1997       1996       1995
REVENUE:                                      <C>        <C>        <C>
  Net sales (Note 1a)                         $ 5,299    $12,146    $12,495
  Cost of goods sold                            2,960      5,116      5,050
  Gross profit                                  2,339      7,030      7,445

OPERATING EXPENSES:     
  Selling, general and administrative 
    expense (Note 1g)                           1,413      2,183      1,838
  Legal expense                                   304      2,088        271
  Research and development expense (Note 1d)    2,112      2,265      2,678
  Net interest expense (Note 9)                   768        456        548
    Total operating expenses                    4,597      6,992      5,335

<LOSS> INCOME FROM OPERATIONS:                 <2,258>        38      2,110 
  Other income - net                               71         42        133

<LOSS> INCOME FROM OPERATIONS BEFORE TAXES:    <2,187>        80      2,243
  Income tax provision <benefit> (Note 6)          35         <4>       827 

NET <LOSS> INCOME                              <2,222>        84      1,416 

PREFERRED DIVIDENDS (Note 7)                      612        674        233

NET <LOSS> INCOME APPLICABLE TO COMMON         
 STOCKHOLDERS                                 $<2,834>   $  <590>   $ 1,183


Earnings per Common Share (basic & diluted)
  (Note 1h):

NET <LOSS> INCOME PER COMMON SHARE            $ <0.07>   $ <0.01>   $  0.03

Average number of common shares 
  outstanding (Note 1h)
   Basic                                       40,000     40,000     40,000
   Diluted                                     40,000     40,000     40,750


<FN>

See Notes to Consolidated Financial Statements.
<PAGE>
<PAGE>              TRANSDERM LABORATORIES CORPORATION

</TABLE>
<TABLE>               CONSOLIDATED CASH FLOW STATEMENTS
                              (In thousands)  
                                                    Year Ended December 31,
                                                     1997     1996     1995
<S>                                               <C>      <C>      <C>
Cash was <Used for> Provided by:

OPERATIONS:
 Net <loss> income                                $<2,222> $    84  $ 1,416
 Adjustments to reconcile net <loss> income to   
  net cash <used for> provided by operations:
   Depreciation and amortization                      598      672      703
   Deferred income taxes                              133       <2>     652
   Loss on disposal of property, plant and 
    equipment, net                                     10        0        0
 Changes in:
   Accounts receivable                                481     <582>     540
   Inventories                                         21      154      161
   Other current assets                                 3       <3>       0
   Other non-current assets                            <1>       1        0 
   Accounts payable                                  <274>     663     <163>
   Accrued expenses and other current liabilities      87     <190>      40
   Income taxes payable                                <3>     <88>     <22>
 Net cash <used for> provided by operations        <1,167>     709    3,327

INVESTING:
 Additions to property, plant and equipment          <128>    <357>    <658>
 Disposal of property, plant and equipment            121        0        0
 Net cash used for investing                           <7>    <357>    <658>

FINANCING:
 Borrowings from <payments to> affiliates, net      2,514    1,102   <2,391>
 Other long-term debt payments                        <11>    <200>    <200>
 Redemption of preferred stock                     <1,000>    <500>       0
 Preferred dividends paid                            <332>    <741>       0
 Decrease in Health-Chem equity in land and 
   building                                             0        0      <73>
 Net cash provided by <used for> financing          1,171     <339>  <2,664>


Net <Decrease> Increase in Cash                        <3>      13        5 
Cash at beginning of period                            21        8        3
Cash at end of period                             $    18  $    21  $     8

Supplemental Disclosures of Cash Flow Information:
 Cash paid during the period for:
  Interest                                        $   772  $   604  $   590
  Income taxes                                          1      116      176

Supplemental Schedule of Noncash Investing and
Financing:
 Acquisition of fixed assets through capital lease
  obligations                                          45        0        0
 Issuance of redeemable preferred stock in exchange
  for land and building and the stock of Hercon
  Laboratories Corporation (Note 1a)                    0        0   10,000
 Issuance of 40,000,000 shares of Transderm
  Laboratories Corporation common stock, $.001 par
  value, in exchange for the previously issued 
  $.01 par value common shares (Note 1a)                0        0       40
 Increase in Health-Chem payable for the right
  to use net operating loss and tax credit
  carryforwards (Note 1a)                               0        0      963
 Issuance of a 9% Subordinated Promissory Note in
  exchange for Health-Chem long-term debt (Note 1a)     0        0    7,000
<FN>
See Notes to Consolidated Financial Statements.
<PAGE>
<PAGE>

</TABLE>
<TABLE>
                     TRANSDERM LABORATORIES CORPORATION
        CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
                YEARS ENDED DECEMBER 31, 1997, 1996 and 1995
                               (In thousands)



                                                       Parent
                                                       Company
                                                       Equity in
                                  Common               Land and
                                  Stock     Retained   Building
                                (Note 1a)   Deficit    (Note 1a)     Total 

<S>                               <C>       <C>          <C>       <C>
Balance, January 1, 1995          $   100   $ <1,844>    $ 2,053   $    309

Decrease in equity due to
 depreciation charged to
 operations                                                  <73>       <73>

Issuance of redeemable preferred
 stock in exchange for land and
 building and the stock of
 Hercon Laboratories Corporation     <100>    <7,920>     <1,980>   <10,000>

Issuance of 40,000,000 shares of
 Transderm Laboratories            
 Corporation common stock, $.001
 par value, in exchange for the 
 previously issued $.01 par   
 value common shares                   40        <40>                     0

Increase in Health-Chem payable 
 for the right to use net 
 operating loss and tax credit
 carryforwards                                  <963>                  <963>

Net income available to common
 stockholders 1995                             1,183                  1,183
 
Balance, December 31, 1995             40     <9,584>          0     <9,544>

Net loss applicable to common
 stockholders 1996                              <590>                  <590>

Balance, December 31, 1996             40    <10,174>          0    <10,134>

Net loss applicable to common
 stockholders 1997                            <2,834>                <2,834>

Balance, December 31, 1997        $    40   $<13,008>    $     0   $<12,968>

<FN>
See Notes to Consolidated Financial Statements.

<PAGE>
<PAGE>              TRANSDERM LABORATORIES CORPORATION
                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                YEARS ENDED DECEMBER 31, 1997, 1996 and 1995


1.  Presentation and Accounting Policies

a.  Basis of Presentation and Nature of Operations

Transderm Laboratories Corporation (the "Company") is an indirect 90% owned
subsidiary of Health-Chem Corporation ("Health-Chem").

In April 1995, Health-Chem's Board of Directors approved a plan to realign
certain of its business operations in order to separate its transdermal
pharmaceutical business from its hospital and industrial laminated fabrics and
environmental chemical business.  As part of such realignment, Hercon
Laboratories Corporation ("Hercon") effectively transferred its environmental
chemical business to a subsidiary of Health-Chem, Hercon Environmental
Corporation.

Following the completion of the transfer of the environmental business, the
Company, Herculite Products, Inc. ("Herculite"), which is a wholly-owned
subsidiary of Health-Chem, and Health-Chem entered into a Plan of
Reorganization and Asset Exchange Agreement effective August 31, 1995.

The Plan of Reorganization and Asset Exchange Agreement required:

  .   The transfer from Herculite to the Company of the manufacturing
      facility in which Hercon's operations are conducted and the 985
      shares of Hercon common stock owned by Herculite in exchange for
      1,000,000 shares of the Company's Redeemable Preferred Stock,
      $10.00 par value.

  .   Hercon's issuance to Health-Chem of a $7,000,000, 9% Subordinated
      Promissory Note evidencing the approximate amount of intercompany
      advances owed by Hercon to Health-Chem.

  .   The Company's issuance of 40,000,000 shares of its authorized
      60,000,000 shares of Common Stock, $.001 par value, in exchange
      for the previously issued 50 shares of its $.01 par value common
      stock. 

  .   The Company's payment to Health-Chem as the Company uses its net
      operating loss and tax credit carryforwards to offset future
      taxable income as a result of entering into a Tax Sharing
      Agreement.

  .   The Company's participation in a Corporate Services Agreement with
      Health-Chem (See Note 1g).

In September 1995, subscription rights to purchase up to 4,000,000 shares of
the Company's Common Stock for $.10 per share were issued to holders of
Health-Chem common stock.  The Rights Offering expired November 10, 1995, with
shareholders subscribing to the 4,000,000 shares of the Company's Common Stock
by exercising their Basic Subscription Rights and Oversubscription Privileges.

The accompanying consolidated financial statements of the Company include the
operations of the following:

  .   Transderm Laboratories Corporation, an inactive company until
      August 31, 1995, which was originally incorporated in 1989.

  .   Hercon, excluding its former environmental division which was
      transferred to another subsidiary of Health-Chem effective April
      28, 1995.

  .   The land and building, previously owned by Herculite, in which
      Hercon's operations are conducted.

<PAGE>


The Company is engaged in the development, manufacture and marketing of
transdermal drug delivery systems.  Currently, the Company manufactures and
markets a transdermal nitroglycerin patch which it sells to two customers for
distribution in the United States and to one customer for distribution in
Spain.  In August 1996, Customer A obtained approval from the United States
Food and Drug Administration ("FDA") for the manufacture and sale of its own
nitroglycerin patches and now competes with the Company's nitroglycerin
patches.  The percentage of sales to each major customer who was responsible
for 10% or more of total revenues is as follows:

                                             Year Ended December 31,
                                             1997      1996     1995
    Customer A........................         0%       38%      51%
    Customer B........................        54        31       20
    Customer C........................        45        26       23

At December 31, 1997 and 1996, accounts receivable of approximately $689,000
and $1,222,000, respectively, were from such customers.  To reduce credit
risk, the Company performs ongoing credit evaluations of its customers'
financial condition but does not generally require collateral.

Foreign sales, consisting of sales to a distributor in Spain, were $76,000,
$558,000, and $718,000, or 1.4%, 4.6%, and 5.7% of sales in 1997, 1996 and
1995, respectively.

The Company is currently awaiting approval from the FDA for the sale of new
nitroglycerin patches which are thinner, more flexible and smaller than the
Company's current patches.  While the Company hopes to receive approvals in
1998, no assurances can be made that any new nitroglycerin patches will be
approved by the FDA or that they will achieve the same or greater success than
the Company's currently marketed nitroglycerin patches.  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
Pharmaceuticals, Inc.  The Company has filed an appeal to the United States
District Court for the Federal Circuit of an adverse ruling and an injunction
issued by the lower court in this matter (See Note 5).  

The first pharmaceutical product to reach the market in a specific therapeutic
area often obtains and maintains significant market share relative to later
entrants to the market.  There can be no assurance that developments by others
will not render the Company's products or technologies uncompetitive or
obsolete.

In addition, the Company is also developing a number of other transdermal
products.  These products will also require approval from the FDA.  There can
be no assurance that FDA filings for any of these additional products will be
effected nor that FDA approval for any of these products will be obtained.  

b.  Inventories

Inventories are stated at lower of cost (first-in, first-out basis) or market.

c.  Depreciation and Amortization

Property, plant and equipment are recorded at cost. Depreciation and
amortization are provided using the straight-line method by charges to
operations over the estimated useful lives of depreciable assets or, where
applicable, the terms of the respective leases, whichever is shorter, and
range from 4 to 25 years.  The cost and related accumulated depreciation of
disposed assets are removed from the applicable accounts and any gain or loss
is included in income in the period of disposal.

d.  Research and Development

Research and development costs are charged to operations as incurred.

<PAGE>

e.  Income Taxes

The Company is included in the consolidated federal income tax return of its
parent, Health-Chem, and is party to a Tax Sharing Agreement.  Income taxes
are provided by the Company on a stand-alone basis as the tax payable or
refundable for the period plus or minus the change during the period in
deferred tax assets and liabilities (See Note 6).   Deferred tax assets and 
liabilities are provided for differences between the financial statement and
tax bases of assets and liabilities that will result in future taxable or
deductible amounts.  Deferred tax assets are reduced by a valuation allowance
when, in the opinion of management, it is more likely than not that some
portion or all of the deferred tax assets will not be realized.  The deferred
tax assets and liabilities are measured using the enacted tax laws and rates
applicable to the periods in which the differences are expected to affect
taxable income.

f.  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 is expected to be paid out
of future cash flow and is therefore considered to be long-term.  Interest is
charged based upon the average outstanding intercompany balance and interest
rate on Health-Chem's credit facility which, since January 1997, has been with
IBJ Schroder Business Credit Corporation (as successor in interest to IBJ
Schroder Bank & Trust Company) (the "Bank").  The average interest rate
charged was 8.44%, 8.27% and 8.83% during 1997, 1996 and 1995, respectively. 
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 is required to make semi-annual interest payments
each March and September on this note, with the principal amount of $7,000,000
payable on March 31, 1999.

Health-Chem is a borrower along with its affiliates, including the Company,
under the terms of a secured financing agreement with 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 the assets of Health-Chem, the
Company and Health-Chem's other operating subsidiaries.  The Loan Agreement,
which expires on January 9, 2002, was subject to various financial covenants. 
On January 21, 1998, Health-Chem entered into a First Amendment (the
"Amendment") to the Loan Agreement with the Bank.  The Amendment, among other
things, amends the terms for drawing upon the term loan and amends certain
financial covenants effective with the December 31, 1997 covenants.  At
December 31, 1997, 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 will each be subject to a .25% decrease upon the Bank's
satisfactory review of Health-Chem's financial statements for the year ended
December 31, 1998.

g.  Expenses Charged by Health-Chem

Pursuant to a Corporate Services Agreement between the Company and Health-
Chem, Health-Chem pays for certain expenses on behalf of the Company for which
Health-Chem is reimbursed, including all of the costs related to the building
in which the Company operates.  The Company is also charged by Health-Chem for
the cost of certain administrative expenses, comprised mainly of an allocation
<PAGE>

of corporate services including executive, legal, accounting, human resources,
public relations, and office rent.  The allocation of these costs,
approximately $521,000, $998,000 and $827,000 for 1997, 1996, and 1995,
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.

h.  Per Share Information

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.

A reconciliation of the numerators and denominators of the basic and diluted
earnings per common share computations for income from continuing operations
for the years ended December 31, 1997, 1996 and 1995 is presented below (in
thousands, except per share amounts):

</TABLE>
<TABLE>
                            1997                    1996                    1995        
                  Income  Shares  Per-    Income  Shares  Per-    Income  Shares  Per-
                  (Numer- (Denom- Share   (Numer- (Denom- Share   (Numer- (Denom- Share
                  ator)   inator) Amount  ator)   inator) Amount  ator)   inator) Amount
<S>               <C>     <C>     <C>     <C>     <C>     <C>     <C>     <C>     <C>
Net <loss> income $<2,222>                  $  84                  $1,416
Less:
 Preferred stock
  dividends           612                     674                     233

Basic Earnings
Per Common Share
 Net <loss>
 income
 applicable
 to common
 stockholders      <2,834> 40,000 $<0.07>    <590> 40,000 $<0.01>   1,183  40,000  $0.03

Effect of 
Dilutive
Securities
 Options                0       0               0       0               0     750

Diluted Earnings
Per Common Share
 Net <loss>
 income applicable
 to common
 stockholders
 and assumed
 conversions      $<2,834> 40,000 $<0.07>   $<590> 40,000 $<0.01>  $1,183  40,750  $0.03

</TABLE>
<PAGE>


Options to purchase 11,400,000 shares of common stock were outstanding during
1997 and 1996, and options to purchase 10,000,000 shares of common stock were
outstanding during 1995 (See Note 8).  No options were included in the
computation of diluted earnings per common share for 1997 and 1996 because the
Company reported a loss from continuing operations for those years.

i.  Fair Value of Financial Instruments

The carrying amounts reported in the consolidated balance sheets at December
31, 1997 and 1996 for cash, accounts receivable, accounts payable, and accrued
expenses and other current liabilities approximate fair value due to the
short-term nature of these instruments.  The carrying amounts of the Company's
long-term payable <receivable> with Health-Chem approximate fair value because
the underlying instrument reprices frequently.  The fair value of the fixed
rate Subordinated Promissory Note is estimated by discounting future cash
flows using the Company's incremental borrowing rate.  At December 31, 1997
and 1996, the estimated fair values approximated the carrying values. 
Management believes that determining a fair value for the Company's Redeemable
Preferred Stock is impractical due to the closely-held nature of these
securities.

j.  Use of Estimates in the Preparation of Financial Statements

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period. 
Actual results could differ from those estimates.

k.  Implementation of New Financial Accounting Standards

In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 130 "Reporting Comprehensive
Income" ("SFAS 130").  SFAS 130 establishes standards for reporting and
display of comprehensive income and its components (revenues, expenses, gains
and losses) in a full set of general-purpose financial statements.  SFAS 130
requires that an enterprise (a) classify items of other comprehensive income
by their nature in a financial statement and (b) display the accumulated
balance of other comprehensive income separately from retained earnings and
additional paid-in-capital in the equity section of a statement of financial
position.  SFAS 130 is effective for financial statements issued for periods
beginning after December 15, 1997.  The Company does not expect the
implementation of SFAS 130 to have a material impact on the consolidated
financial statements of the Company.

In June 1997, the FASB issued Statement of Financial Accounting Standards No.
131 "Disclosures about Segments of an Enterprise and Related Information"
("SFAS 131").  SFAS 131 establishes standards for the way that public business
enterprises report information about operating segments in annual financial
statements and requires that those enterprises report selected information
about operating segments in interim financial reports issued to shareholders. 
SFAS 131 also establishes standards for related disclosures about products and
services, geographic areas and major customers.  SFAS 131 is effective for
financial statements for periods beginning after December 15, 1997.  In the
initial year of application, comparative information for earlier years is to
be restated.  The Company does not expect the implementation of SFAS 131 to
have a material impact on the consolidated financial statements of the
Company.

l.  Reclassifications

Certain amounts included in the consolidated financial statements relating to
prior periods have been reclassified to conform to the current presentation.


<PAGE>
2.  Inventories  (In thousands)
                                                           December 31, 
                                                          1997         1996

            Raw materials                               $  526       $  659
            Finished goods and work in process             233          121
            Total inventories                           $  759       $  780

At December 31, 1997 and 1996 the inventory valuation allowance balance was
$100,000 and $125,000, respectively.

Several raw materials used in the manufacture of the Company's products are
available only from sole source suppliers.  These materials have generally
been available to the Company and the pharmaceutical industry on commercially
reasonable terms.  To date, the Company has not experienced difficulty
acquiring materials necessary to manufacture its products.  The Company plans
to negotiate supply agreements, as appropriate, for certain components.  Any
interruption of supply could have a material adverse effect on the Company's
ability to manufacture its products.


3.  Accrued Expenses and Other Current Liabilities  (In thousands)

                                                           December 31,
                                                          1997         1996

Accrued interest                                        $  158       $  158
Deferred revenue                                           130          110
Accrued payroll and related liabilities                     35           58
Accrued bonuses                                             25           20
Accrued accounting fees                                     15           15
Accrued legal fees                                          86            1
Current portion of capitalized lease obligation             13            0
Total accrued expenses and other current liabilities    $  462       $  362

4.  Long-Term Debt

The Company's long-term debt balances are as follows (in thousands):

                                                           December 31,
                                                          1997         1996

  Subordinated promissory note (Note 1f)               $ 7,000      $ 7,000
  Long-term debt - Health-Chem (Note 1f)                 2,087            0
  Capitalized lease obligation                              21            0
  Total long-term debt                                 $ 9,108      $ 7,000


The Company leases certain equipment under an agreement which is classified as
a capital lease.  Future minimum payments under this lease are $18,000,
$18,000 and $1,000 in 1998, 1999 and 2000, respectively.


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
<PAGE>
of the patent.  Hercon counterclaimed against Key for declaratory judgment of
patent noninfringement, invalidity and unenforceability.  A two-week, non-jury
trial was completed on October 10, 1996.  On September 30, 1997, the Delaware
District Court ruled in favor of Key on its infringement claim and on Hercon's
claim that Key's patent is invalid and unenforceable.  On October 29, 1997,
Hercon filed an appeal against the Delaware District Court's judgment to the
United States District Court for the Federal Circuit in Washington, DC.  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.  The appeals
were consolidated on January 23, 1998 and are now in the briefing stage. 
Management believes that Hercon has strong grounds for appeal.  

In October 1995, Gershon Yormack, a stockholder of Health-Chem, initiated an
action against Health-Chem, its directors and the Company in the Delaware
Chancery Court (New Castle County) in which he sought injunctive and
declaratory relief with respect to certain options to purchase Common Stock of
the Company granted to each of Marvin M. Speiser, Health-Chem's Chairman of
the Board and President, and Robert D. Speiser, the Company's President and
Health-Chem's Executive Vice President.  Pursuant to Employment Agreements
entered into in April 1995, in November 1995 Health-Chem caused the Company to
issue an option to purchase shares of the Company's Common Stock at an
exercise price of $.10 per share to each of Marvin M. Speiser and Robert D.
Speiser.  The plaintiff alleges that this exercise price, which is the same
per share price as the subscription price for Common Stock of the Company
offered by Health-Chem to its stockholders under a registered subscription
rights offering (via a prospectus dated September 18, 1995), was substantially
less than the fair market value of such Company Common Stock.  In June 1997,
the defendants filed an answer denying all material allegations and seeking
dismissal of the complaint.  Management believes that the claims are without
merit and is defending the action vigorously.  The action is in the discovery
stage.


6.  Taxes on Income  (In thousands)

                                                    Year Ended December 31,
                                                     1997     1996     1995
Taxes on income include provision <benefit> for:
  Federal income taxes                             $  159   $   42  $   667
  State and local income taxes                       <124>     <46>     160 
   Total                                           $   35   $   <4> $   827

Taxes on income are comprised of:
  Current                                          $  <98>  $   <2> $   175 
  Deferred                                            133       <2>     652
   Total                                           $   35   $   <4> $   827

A reconciliation of taxes on income to the federal statutory rate is as
follows:
                                                    Year Ended December 31,
                                                     1997     1996     1995

  Tax <benefit> provision at statutory rate        $ <743>  $   27  $   763 
  <Decrease> increase resulting from:
   State and local taxes, net of federal tax 
    benefit                                          <120>     <23>     115 
   Decrease in <recognition of> tax loss and
    tax credit carryforwards (not previously 
    recognized)                                         0       16      <52>
   Provision for <reversal of> valuation 
    allowance                                         898      <25>       0
   Other                                                0        1        1
  Tax provision <benefit>                          $   35   $   <4> $   827
<PAGE>
At December 31, 1997 and 1996, the deferred tax assets and liabilities result
from the following temporary differences and carryforwards:

                                                      1997     1996
Deferred tax assets:
  Net operating loss carryforwards                 $ 1,121   $  502
  Tax credit carryforwards                             421      421
  Accrued research and development costs                69        0
  Inventory reserves                                    40       51
  Capitalization of overhead costs as
   inventory in accordance with tax laws                 8       13
     Total deferred tax assets                       1,659      987

Deferred tax liabilities:
  Accelerated depreciation                            <352>    <445>
     Total deferred tax liabilities                   <352>    <445>

Net deferred tax asset before valuation allowance    1,307      542
Valuation allowance                                 <1,307>     <16>
Net deferred tax asset                             $     0   $  526


At December 31, 1997, the Company had a net operating loss carryforward and
tax credit carryforwards, on a stand-alone basis, of approximately $3,059,000
and $421,000, respectively, available to offset future stand-alone income tax
liabilities which expire through 2012 and 2010, respectively (See Note 1a). 
Realization is dependent on generating sufficient taxable income prior to
expiration of the loss and credit carryforwards.  At December 31, 1997, the
Company recorded a $1,082,000 net valuation allowance relating to tax loss and
tax credit carryforwards, with such valuation allowance directly increasing
the income tax provision.  This net valuation allowance consists of a
$1,307,000 decrease in tax loss and tax credit carryforwards, partially offset
by a $225,000 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 FDA for the sale of the Company's new
transdermal nitroglycerin patches and the lack of a favorable resolution to
the Key litigation, with such matters contributing to the operating losses of
the Company.

The net deferred tax asset for the year ended December 31, 1996 of $526,000 is
included in the deferred income taxes accounts in the Balance Sheet.  For the
year ended December 31, 1997, the valuation allowance increased by $1,291,000.


7.  Redeemable Preferred Stock

On August 31, 1995, the Company issued to Herculite 1,000,000 shares of the
Company's Redeemable Preferred Stock, $10.00 par value, in exchange for the
manufacturing facility in which Hercon's operations are conducted and the 985
shares of Hercon common stock owned by Herculite.  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.  In March 1997, the Company, as required, made the
semi-annual dividend payment and redeemed, for $1,000,000, 100,000 shares. 
Additional required redemption payments are $1,000,000 annually in 1998
through 2004 and $1,500,000 in 2005.  Legally available funds were not
available to make the September 1997 preferred dividend payment and are not
anticipated to be available to make either the preferred dividend payment or
the required redemption payment in March 1998.  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 has agreed to
waive this right in respect of the 1998 Annual Meeting of Stockholders since
as a practical matter, it already possessed such power.  
<PAGE>


8.  Stock Options


In accordance with the terms of employment agreements between Health-Chem and
each of Robert D. Speiser and Marvin M. Speiser, on November 13, 1995, the
Company entered into stock option agreements with Robert D. Speiser and Marvin
M. Speiser allowing each of them to purchase 5,000,000 shares of the Company's
Common Stock at $.10 per share, exercisable in full commencing November 13,
1996 and expiring ten years from the grant date.  The Company has reserved
10,000,000 shares of Common Stock for issuance to Robert D. Speiser and Marvin
M. Speiser pursuant to these stock option agreements (the "Agreements").

In April 1996, the Company adopted the 1996 Performance Equity Plan (the
"Plan") which was designed to attract and retain employees of the highest
caliber, to provide increased incentive for officers and key employees and to
continue to 
promote the well-being of the Company.  Pursuant to the Plan, up to an
aggregate of 2,000,000 shares of the Company's Common Stock are available for
the granting of stock or stock related incentive awards.  During 1996, the
Company entered into stock option agreements with three officers and key
employees allowing them to purchase up to an aggregate of 1,400,000 shares
under the Plan.  The Company has reserved 1,400,000 shares of Common Stock
pursuant to these stock option agreements.

The Agreements and Plan are collectively referred to as "Plans".

The Company has adopted Statement of Financial Accounting Standards No. 123,
"Accounting for Stock Based Compensation" ("SFAS 123").  As permitted by SFAS
123, the Company has chosen to apply APB Opinion No. 25, "Accounting for Stock
Issued to Employees" and related Interpretations in accounting for its Plans. 
Accordingly, no compensation cost has been recognized for options granted
under the Plans.  Had compensation cost for the Company's Plans been
determined based on the fair value at the grant dates for awards under the
Plans consistent with the method of SFAS 123, the Company's net <loss> income
and net <loss> income per share would have been <increased> reduced to the pro
forma amounts indicated below.  The Company did not award any option grants
during the year ended December 31, 1997.  

                                         1997         1996        1995   

Net <loss> income     As reported    $<2,834,000> $  <590,000> $1,183,000
 applicable to 
 common stockholders  Pro forma      $<2,864,000> $<1,301,000> $1,041,000

Basic and diluted     As reported        $<0.07>      $<0.01>     $0.03
 <loss> earnings    
 per share            Pro forma          $<0.07>      $<0.03>     $0.03


The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1996 and 1995, respectively; no dividend yield
for both years; expected volatility of 100% for both years; risk-free interest
rates of 6.11% and 5.86%; and expected lives of seven years for both the 1996
and 1995 option grants.











<PAGE>

A summary of the status of the Company's Plans as of December 31, 1997, 1996
and 1995 and changes during the years ended on those dates is presented below
(in thousands, except per share amounts):


                           1997               1996               1995      
                             Weighted           Weighted           Weighted
                             Average            Average            Average
                             Exercise           Exercise           Exercise
                     Shares   Price     Shares   Price     Shares   Price  

Outstanding at
 beginning of year   11,400    $0.103   10,000    $0.10         0     $0

Granted                   0     0        1,400     0.125   10,000      0.10

Exercised                 0     0            0     0            0      0

Forfeited                 0     0            0     0            0      0

Outstanding at end
 of year             11,400     0.103   11,400     0.103   10,000      0.10

Options exercisable  
 at year-end         10,280             10,000

Weighted-average
 fair value of
 options granted
 during the year         $0             $0.106             $0.085




The following table summarizes information about the Plans' stock options
outstanding at December 31, 1997:


                   Options Outstanding                Options Exercisable  

                         Weighted-
                          Average      Weighted-                  Weighted-
Range of     Number      Remaining      Average       Number       Average
Exercise   Outstanding   Contractual   Exercise     Exercisable   Exercise
 Prices    at 12/31/97      Life         Price      at 12/31/97     Price  

$0.10-      11,400,000    8.0 years     $0.103       10,280,000    $0.101
$0.125


9.  Net Interest Expense  (In thousands)
                                                                             
                                                 Year Ended December 31,
                                                 1997      1996     1995
     Interest expense - promissory note        $  630    $  630   $  210
     Interest expense - long-term       
      payable/<receivable> - Health-Chem, net     132       <96>     299
     Interest expense - capitalized lease
      obligation                                    6         0        0
     Interest expense - note payable                0         9       39
     Capitalized interest                           0       <87>       0

     Total net interest expense                $  768    $  456   $  548




<PAGE>

10.  Employee Benefit Plan

All permanent, full-time non-union employees of the Company are eligible to
participate in Health-Chem's 401(k) Plan (the "Plan") following six months of
employment.  The Plan allows eligible employees to defer up to 20% of their
income on a pre-tax basis through contributions to the Plan.  The Company may
contribute for each participant a matching contribution equal to a percentage
of the elective contributions made by the participants.  The decision to make
matching contributions and the amount of such contributions will be made each
year by the Company.  These Company matching contributions were $14,000,
$21,000, and $21,000 in 1997, 1996 and 1995, respectively.

11.  Management Plans

The Company has incurred net losses applicable to common stockholders of
$2,834,000 and $590,000 for the years ended December 31, 1997 and 1996,
respectively, and has a retained deficit of $13,008,000 as of December 31,
1997.  Management developed a plan of action during 1997 which included cost
containment measures and the penetration of new markets.  Cost containment
measures include an organizational restructuring whereby plant overhead,
research and development and general and administrative expenses have been
reduced.  The penetration of new markets includes seeking contract
manufacturing opportunities and collaborative partnerships for the development
of new transdermal and topical products.  Management intends to continue to
refine and enhance this plan during 1998.



<PAGE>
<PAGE>


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

Not applicable.


                                                                             

FORM 10-K                                                            PART III
                                                                             


ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information responsive to this item is incorporated herein by reference to
the Company's Proxy Statement in connection with the registrant's Annual
Meeting of Stockholders to be held on May 12, 1998.


ITEM 11.  EXECUTIVE COMPENSATION

The information responsive to this item is incorporated herein by reference to
the Company's Proxy Statement in connection with the registrant's Annual
Meeting of Stockholders to be held on May 12, 1998.


ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information responsive to this item is incorporated herein by reference to
the Company's Proxy Statement in connection with the registrant's Annual
Meeting of Stockholders to be held on May 12, 1998.


ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information responsive to this item is incorporated herein by reference to
the Company's Proxy Statement in connection with the registrant's Annual
Meeting of Stockholders to be held on May 12, 1998.

<PAGE>
<PAGE>

                                                                            

FORM 10-K                                                            PART IV
                                                                            


ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

                                                                         PAGE
(a)  1.  FINANCIAL STATEMENTS

Report of Independent Accountants                                          17

Consolidated Balance Sheets - December 31, 1997 and 1996                   18

Consolidated Statements of Operations
  Years Ended December 31, 1997, 1996 and 1995                             19

Consolidated Cash Flow Statements
  Years Ended December 31, 1997, 1996 and 1995                             20

Consolidated Statements of Stockholders' Equity (Deficiency) 
  Years Ended December 31, 1997, 1996 and 1995                             21

Notes to Consolidated Financial Statements                              22-32

(a)  2.  FINANCIAL STATEMENT SCHEDULES


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

(a)  3.  EXHIBITS

 2      Plan of Reorganization and Asset Exchange Agreement dated as of June
        30, 1995, by and among Health-Chem Corporation, ("HCH") Herculite
        Products, Inc. ("HPI") and Transderm Laboratories Corporation (the
        "Company"), filed as Exhibit 2 to the Company's Registration Statement
        on Form S-1 No. 33-95080 filed with the Commission on July 28, 1995
        ("Registration Statement") and incorporated herein by reference.

 3.1    Restated Certificate of Incorporation dated April 27, 1995, filed as
        Exhibit 3.1 to the Registration Statement and incorporated herein by
        reference.

 3.2    Amendment to Restated Certificate of Incorporation dated July 13,
        1995, filed as Exhibit 3.2 to the Registration Statement and
        incorporated herein by reference.

 3.3    By-Laws, filed as Exhibit 3.3 to the Registration Statement and
        incorporated herein by reference.

10.1    Employment Agreement between HCH and Marvin M. Speiser dated April 4,
        1995.  Incorporated herein by reference to Exhibit 10.1 to HCH's
        Report on Form 10-Q for the quarter ended March 31, 1995.

10.2    Employment Agreement between HCH and Robert D. Speiser dated April 4,
        1995.  Incorporated herein by reference to Exhibit 10.2 to HCH's
        Report on Form 10-Q for the quarter ended March 31, 1995.

10.3    Stock Option Agreement between the Company and Marvin M. Speiser dated
        November 13, 1995.  Incorporated herein by reference to Exhibit 10.3
        to the Company's Annual Report on Form 10-K for the year ended
        December 31, 1995.



<PAGE>


10.4      Assignment of Stock Option Agreement dated December 6, 1996 between
          Marvin M. Speiser and the Marvin M. Speiser 1996 Trust. 
          Incorporated herein by reference to Item 7.(c) to Schedule 13D for
          Marvin M. Speiser et al. filed with the Commission on February 20,
          1997.

10.5      Stock Option Agreement between the Company and Robert D. Speiser
          dated November 13, 1995.  Incorporated herein by reference to
          Exhibit 10.4 to the Company's Annual Report on Form 10-K for the
          year ended December 31, 1995.

10.6      Distribution Agreement between Hercon Laboratories Corporation
          ("HLC") and Circa Pharmaceuticals, Inc. (f/k/a Bolar Pharmaceutical
          Co., Inc.) dated as of January 4, 1993.  Incorporated herein by
          reference to Exhibit 10.14 to HCH's Report on Form 10-K for the year
          ended December 31, 1992.

10.7      Agreement between HLC and Local 1034-R.W.D.S.U.--AFL-CIO dated
          December 11, 1995.  Incorporated herein by reference to Exhibit 10.6
          to the Company's Annual Report on Form 10-K for the year ended
          December 31, 1995.

10.8      Asset Acquisition Agreement dated April 28, 1995 between HEC and
          HLC, filed as Exhibit 10.7 to the Registration Statement and
          incorporated herein by reference.

10.9      $7,000,000 principal amount Subordinated Promissory Note of HLC,
          filed as Exhibit 10.8 to Amendment No. 1 and incorporated herein by
          reference.

10.10     Corporate Services Agreement between HCH and the Company, dated as
          of August 31, 1995, filed as Exhibit 10.9 to Amendment No. 1 and
          incorporated herein by reference.

10.11     Tax Sharing Agreement between HCH and the Company, dated as of
          August 31, 1995, filed as Exhibit 10.10 to Amendment No. 1 and
          incorporated herein by reference.

10.12(a)  Revolving Credit, Term Loan and Security Agreement dated as of
          January 9, 1997 by and between HCH, HPI, HEC, Pacific, HLC and the
          Company and IBJ Schroder Bank & Trust Company, filed as Exhibit 1 to
          HCH's Current Report on Form 8-K filed with the Commission on
          January 22, 1997 and incorporated herein by reference.

10.12(b)  First Amendment to Revolving Credit, Term Loan and Security
          Agreement dated as of January 21, 1998 by and between HCH, HPI, HEC,
          Pacific, HLC and the Company and IBJ Schroder Business Credit
          Corporation, filed as Exhibit 10.18(b) to HCH's Report on Form 10-K
          for the year ended December 31, 1997 and incorporated herein by
          reference.

21        Subsidiaries of Registrant.  Filed herewith on page 37.

27        Financial Data Schedule.  Filed herewith on page 38.


(b) REPORTS ON FORM 8-K

During the quarter ended December 31, 1997 the Company did not file any
reports on Form 8-K.

<PAGE>
<PAGE>
SIGNATURES

Pursuant to the requirements of Sections 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

Date:  March 23, 1998


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

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

Name and Signature               Titles                        Date


/s/ Robert D. Speiser            President, Chief Executive    March 23, 1998
Robert D. Speiser                Officer and Director
                                 (Principal Executive 
                                 Officer)


/s/ Thomas J. Atkins             Vice President and Director   March 23, 1998
Thomas J. Atkins


/s/ Joyce F. Brown               Director                      March 23, 1998
Joyce F. Brown


/s/ Ronald J. Burghauser         Treasurer, Secretary and      March 23, 1998
Ronald J. Burghauser             Vice President (Principal
                                 Financial Officer and 
                                 Principal Accounting
                                 Officer)


/s/ Michael J. Campbell          Director                      March 23, 1998
Michael J. Campbell


/s/ David N. Dinkins             Director                      March 23, 1998
David N. Dinkins

/s/ Ester R. Fuchs               Director                      March 23, 1998
Ester R. Fuchs


/s/ Donald E. Kauffman, Jr       Vice President and Director   March 23, 1998
Donald E. Kauffman, Jr.


/s/ Murray Lieber                Vice President and Director   March 23, 1998
Murray Lieber


/s/ Marvin M. Speiser            Director                      March 23, 1998
Marvin M. Speiser