UNITED STATES
               SECURITIES AND EXCHANGE COMMISSION
                      Washington, DC  20549
                                
                                
                            Form 10-Q



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

For the quarterly period ended      March 31, 1998

Commission File Number              0-22314


                   PENEDERM INCORPORATED
   (Exact name of registrant as specified in its charter)

       DELAWARE                            77-0146116
(State of other jurisdiction of      I.R.S. Employer Identification Number
incorporation or organization)



    320 LAKESIDE DRIVE   FOSTER CITY,  CALIFORNIA           94404
    (Address of principal executive offices)             (Zip Code)

                     (650) 358-0100
      (Registrant's telephone number, including area code)


Indicate by check whether the registrant (1) has filed all
reports required to be filed by section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 month (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing
requirements for the past 90 days.

                    YES    X       NO

Indicate number of shares outstanding of each of the issuer's
classes of common stock, at the latest practicable date:

Class                         Outstanding as of: MARCH 31, 1998
-----                         ---------------------------------
Common Stock                         8,256,057


<PAGE>

                      PENEDERM INCORPORATED
                        TABLE OF CONTENTS
                            FORM 10-Q



                                                                Page
                                                               Number
                                                               ------
PART I.   FINANCIAL INFORMATION                       
                                                      
Item 1.   Financial Statements                        
                                                      
          Condensed Consolidated Balance Sheets-
             March 31, 1998 and December 31, 1997                  3
          
                                                      
          Condensed Consolidated Statements of Operations-
             Three months ended March 31, 1998 and 1997            4
                                                      
          Condensed Consolidated Statements of Cash Flows-
             Three months ended March 31, 1998 and 1997            5
                                                      
          Notes to Condensed Consolidated Financial Statements     6
                                                      
Item 2.   Management's Discussion and Analysis        
          of Financial Condition and Results of Operations         7
                                                      
PART II.  OTHER INFORMATION                           
                                                      
Item 2.   Sale of Unregistered Securities                         13
                                                      
Item 6.   Exhibits and Reports on Form 8-K                        13
                                                      
Signature Page                                                    14


<PAGE>

                                
                         PENEDERM INCORPORATED
                 CONDENSED CONSOLIDATED BALANCE SHEETS
                  March 31, 1998 and December 31, 1997
                             (in thousands)
                                                                
                                                March 31,         December 31, 
                                                   1998                1997
                                               -----------        -----------
                                               (unaudited)            (Note)
ASSETS                                                                    
Current assets:                                                                 
  Cash and cash equivalents                     $   1,608          $   1,519
  Short-term marketable securities                  1,000              3,102
  Accounts receivable                               2,760              1,013
  Inventory                                         1,962              1,501
  Prepaid expenses and other current assets           654                466
                                                ----------         ----------
Total current assets                                7,984              7,601
                                                                                
  Marketable securities                                 -              1,000
  Property and equipment, at cost, less                                         
    accumulated depreciation and amortization         304                267
  Intangible and other assets                       1,746              1,363
                                                ----------         ----------
Total assets                                    $  10,034          $  10,231
                                                ==========         ==========
                                                                                
LIABILITIES                                                                     
Current liabilities:                                                         
  Accounts payable                              $   1,321          $   1,264
  Accrued liabilities                               3,982              3,763
                                                ----------         ----------
Total current liabilities                           5,303              5,027
                                                                              
Long-term obligations                                   8                 10
                                                ----------         ----------
Total liabilities                                   5,311              5,037
                                                                               

STOCKHOLDERS' EQUITY                                                            
Common stock, $.01 par value                           83                 82
Additional paid-in capital                         57,160             56,222
Accumulated deficit                               (52,520)           (51,110)
                                                 ----------        ----------
Total stockholders' equity                          4,723              5,194
                                                 ----------        ----------
Total liabilities and stockholders' equity       $ 10,034          $  10,231
                                                 ==========        ==========   
                              
See accompanying notes.                                                       
Note:    The condensed consolidated  balance sheet at December 31, 1997 has been
derived from audited financial statements as of that date.
                                

<PAGE>


                       PENEDERM INCORPORATED
          CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                (in thousands except per share data)
                            (unaudited)
                                                                               
                                                                               
                                               Three Months Ended            
                                                    March 31,                 
                                               ------------------         
                                               1998          1997               
                                               ----          ----               
                                                                                
Revenues:                                                                       
Product sales                               $   2,730    $   2,601              
Licensing revenues                              1,271          300              
                                            ----------   ----------
Total revenues                                  4,001        2,901              
                                            ----------   ----------            
Costs and expenses:                                                             
Cost of product sales                             726          763              
Research and development                        2,392        1,223              
Sales and marketing                             1,829        2,163              
General and administrative                        508          328 
                                            ----------   ----------             
Total costs and expenses                        5,455        4,477              
                                            ----------   ----------            
Loss from operations                           (1,454)      (1,576)             
                                                                                
Interest income, net                               44           59              
                                            ----------   ----------            
Net loss                                     $ (1,410)    $ (1,517)             
                                            ==========   ==========             
Basic and diluted net loss per share         $  (0.17)    $  (0.20)             
                                            ==========   ==========           
Number of shares used in computing basic                                        
  and diluted net loss  per share               8,191        7,583
                                            ==========   ==========            
                                                                                
See accompanying notes.                                                         
                                                                                
                                                                                
<PAGE>                                                                         
                                
                                
                     PENEDERM INCORPORATED
        CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                        (in thousands)
                          (unaudited)
                                                            
                                                            
                                                                               
                                                          Three Months Ended
                                                              March 31,
                                                          ------------------ 
Increase (decrease) in cash and cash equivalents          1998          1997
                                                          ----          ---- 
Cash flows from operating activities:                                         
Net loss                                               $ (1,410)     $ (1,517)
Adjustments to reconcile net loss to net cash used                              
  in operating activities:                                                      
Depreciation and amortization                                94            81
Increase in accounts receivable                          (1,747)       (2,785)
Increase in inventory                                      (461)         (166)
Increase in prepaid expenses and other                                          
     current assets                                        (188)         (587)
Increase in accounts payable and accrued                                        
     liabilities                                            278           763
Increase in other assets                                    (32)           (2)
                                                        --------      --------
Net cash used in operating activities                    (3,466)       (4,213)
                                                        --------      -------- 

Cash flows from investing activities:                                           
Purchases of available-for-sale securities                    -        (5,013)
Maturities of available-for-sale securities               2,102           253
Sales of available-for-sale securities                    1,000           249
Acquisition of intangible assets                           (400)            -
Acquisition of fixed assets                                 (82)          (43)
                                                        --------      --------
Net cash provided by (used in) investing activities       2,620        (4,554)
                                                        --------      --------
                                                                                
Cash flows from financing activities:                                           
Issuance of common stock in private placement                 -         8,975
Issuance of common stock under equity line of credit        890             -
Proceeds from issuance of common stock                       49            90
Repayment of long-term obligations                           (4)           (3)
                                                        --------      --------
Net cash provided by financing activities                   935         9,062
                                                        --------      --------
                                                                                
Net increase in cash and cash equivalents                    89           295
Cash and cash equivalents at beginning of period          1,519         3,062
                                                        --------      --------
Cash and cash equivalents at end of period              $ 1,608       $ 3,357
                                                        ========      ========
                                                                                
See accompanying notes.                                                         
                                
                                
<PAGE>                       


         
                      PENEDERM INCORPORATED
      NOTES TO  CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                           (unaudited)

     1.  Interim Unaudited Financial Information

     The    accompanying    interim   unaudited    condensed
     consolidated   financial   statements    of    Penederm 
     Incorporated (the Company) for the three month  periods
     ended  March 31, 1998 and 1997,  have been prepared  in
     accordance    with   generally   accepted    accounting
     principles for interim financial statements and include
     all  adjustments  (consisting of normal  and  recurring
     adjustments) that the Company considers necessary for a
     fair  presentation of the operating  results  and  cash
     flows for these periods. The results of operations  for
     the  interim periods are not necessarily indicative  of
     the  results to be expected for an entire year.   These
     financial statements should be read in conjunction with
     the audited financial statements and notes included  as
     part  of  the  Company's Form 10-K for the  year  ended
     December 31, 1997.
     
     2.  Inventory

     Inventories are stated at the lower of cost  (first-in,
     first-out) or market and consisted of the following:

                               March 31,      December 31,
     (In thousands)              1998             1997
                                 ----             ----      
     Raw materials             $   691          $   572
     Finished goods              1,271              929
                               -------          -------                         
                               $ 1,962          $ 1,501
                               =======          =======


     3.  Net Loss Per Share

     Net  loss  per  share  is computed using  the  weighted
     average number of common shares outstanding during  the
     period.   Common  stock equivalents relating  to  stock
     options  are  excluded  from the computation  as  their
     effect is anti-dilutive.

     
     4.  Comprehensive Income

     As of January 1, 1998, the company adopted Statement of
     Financial Accounting Standard (SFAS) No. 130, Reporting
     Comprehensive Income.  SFAS 130 establishes  new  rules
     for  the reporting and display of comprehensive  income
     and  its  components;  however, the  adoption  of  this
     statement  had no impact on the Company's net  loss  or
     stockholders' equity.

<PAGE>
     
Part I Item  2.  Management's  Discussion  and  Analysis  of
                 Financial Condition and Results of Operations

     
          Forward Looking Statements

          The statements in "Management's Discussion and Analysis
          of  Financial Condition and Results of Operations" that
          relate   to   future  plans,  events  or   performance,
          including  statements relating to  future  revenue  and
          expense  levels,  are forward-looking statements  which
          involve  risks  and  uncertainties including,  but  not
          limited  to, product development and market  acceptance
          risks,  product  manufacturing risks, risks  associated
          with the establishment and management of a sales force,
          the  development of competitive therapies, the  pricing
          of  competitive therapies, the results of  current  and
          future licensing and other collaborative relationships,
          the   results   of   financing  efforts,   developments
          regarding  intellectual property rights and litigation,
          risks of product nonapproval or delays or post-approval
          reviews  by  the FDA or foreign regulatory authorities,
          and other risks identified in the Company's most recent
          Form  10-K and other Securities and Exchange Commission
          filings.   Actual  results, events or  performance  may
          differ materially. The Company undertakes no obligation
          to  update these forward-looking statements to  reflect
          events  or  circumstances after the date hereof  or  to
          reflect the occurrence of unanticipated events.

          Recent  Events

          Penederm announced in January 1998 that it had  entered
          into   an  agreement  with  Alpharma  Inc.,  a  leading
          multinational   pharmaceutical   company,   to   market
          Alpharma's  recently approved permethrin cream  5%  for
          the  treatment of sarcoptes scabiei (scabies infection)
          under its trade name Acticin.  In February, the Company
          announced that it had received approval from the United
          States Food and Drug Administration to market its Avita
          gel  product in the United States for the treatment  of
          acne. Penederm recently commenced the commercial launch
          of  Avita  gel  and Acticin, increasing the  number  of
          dermatologic  pharmaceutical products  offered  by  the
          Company to four.
          
          On  March  31  1998,  the Company amended  its  current
          agreement with Kaken Pharmaceutical Co. Ltd. to provide
          the  Company with an option to develop and market  oral
          forms  of  butenafine (the active drug  in  Mentax)  in
          North  and South America.  If the option for  the  oral
          form  of butenafine is exercised, and assuming an  oral
          drug  product  could  be  successfully  developed,  the
          development process would be expected by management  to
          take  several  years  before  such  product  could   be
          commercialized.
      
<PAGE>
    
          During  the  first  quarter of 1998,  the  Company  met
          certain  development  milestones  under  one   of   its
          agreements with SmithKline Beecham plc.  The  agreement
          involves the co-development by the companies of  a  new
          formulation of an undisclosed currently marketed  over-
          the-counter  (OTC) topical product.   The  Company  was
          paid  a  related  development  milestone  payment   and
          intends  to negotiate a final license agreement related
          to the product during the second quarter of 1998.
          
          In  March  1998, the Company entered into an  agreement
          for  generic  tretinoin 0.025% cream to be manufactured
          by its contract manufacturer for an undisclosed generic
          pharmaceutical  company.   The  Company  believes  that
          Retin-A  (Ortho) has 97% of the 0.025% cream  tretinoin
          market segment.  The Company will receive royalties and
          certain other minimum payments under the agreement.
          
          Penederm also met certain development milestones for  a
          topical  nail antifungal product being co-developed  by
          the  Company  and  Schering-Plough HealthCare  Products
          Inc.  and  was paid a related milestone payment  during
          the  quarter.  The Company also reacquired  promotional
          rights   related   to   the   podiatry   promotion   of
          prescription Mentax cream effective April 15, 1998.
          
     Overview

          Penederm  is  a pharmaceutical company that specializes
          in   developing  and  marketing  dermatology  products.
          Penederm  now  offers  four prescription  topical  drug
          treatments to dermatologists:
          
            - Mentax,  a  prescription topical cream treatment
              for  three  skin fungal conditions: tinea  pedis
              (athlete's foot), tinea corporis (ringworm)  and
              tinea cruris (groin fungus)
              
            - Avita cream   and   gel,   prescription   topical
              treatments for acne, and
              
            - Acticin,  a prescription topical cream treatment
              for scabies infection.
          
<PAGE>
          
          Penederm has several other pharmaceutical products  for
          fungal  inflammatory conditions, psoriasis, nail fungus
          and  Mentax  skin  treatment line extensions  in  human
          clinical  trials. The Company also sells  its  patented
          TopiCare   Delivery Compounds  for use in cosmetics and
          personal  care products, and markets its own  over-the-
          counter   (OTC)  skin  care  products.   Penederm   has
          established  collaborative  relationships  with   other
          pharmaceutical companies as follows:
          
                                
        COMPANY                  PRODUCT AREA                 TERRITORY
        -------                  ------------                 ---------
In-License and Co-                                     
Development Agreements:
-----------------------
Kaken Pharmaceutical     Penederm in-licensed          United States, Canada,
Company Ltd. (Kaken)     butenafine, the active        Mexico and Latin
                         ingredient incorporated in    America for skin
                         Mentax                        antifungal; U.S.,
                                                       Canada, Europe, Mexico,
                                                       Latin America,
                                                       Australia and New
                                                       Zealand for nail
                                                       antifungal

SmithKline Beecham plc   Undisclosed OTC product       SmithKline option to
(SmithKline)                                           market worldwide

Alpharma, Inc.           Acticin for scabies           United States
(Alpharma)

Out-License Agreements:                                
-----------------------
Schering-Plough          Prescription and OTC skin     United States and
HealthCare               antifungal and nail           Canada
Products, Inc.           antifungal
(Schering-Plough)

UCB Group of Belgium     Prescription antifungal       Europe, Africa and
(UCB)                    products                      Middle East

Warner Wellcome Consumer OTC dry skin                  Canada
Health Products (Warner)

SmithKline               OTC consumer products         Europe and Eastern
                                                       Europe

Pierre Fabre Inc.        DuraScreen sunscreen          United States
(Pierre Fabre)

Allergan, Inc.           Butenafine topical            Central and South
(Allergan)               antifungal and retinoic       America
                         acid cream and gel

Mylan Laboratories, Inc. Co-promote Mentax cream to    United States
(Mylan)                  primary care physicians


<PAGE>
          
          The  Company  has  been  unprofitable  since inception.
          For  the period from inception through March 31,  1998,
          the   Company  incurred  a  cumulative  net   loss   of
          $52,520,000.   Penederm's sources  of  working  capital
          have been equity financings, product sales to corporate
          partners,  sales  of Mentax, Avita and over-the-counter
          products,  product  license  fees,  sales  of  TopiCare
          Delivery Compounds and interest earned on investments.


          Results of Operations

          Three Months Ended March 31, 1998 and 1997

          Total  revenues  for  the three months ended  March 31,
          1998  of  $4,001,000 increased 38%  from  $2,901,000 in
          the  same  period of 1997.  The first quarter  of  1998
          reflects  product  revenues of  $2,730,000  from  Avita
          cream  and  Mentax  sales  and  initial  product  stock
          shipments  of  the Company's recently launched  Acticin
          and Avita gel products.  Product revenues of $2,601,000
          in  the  first  quarter of 1997 consisted primarily  of
          initial  product  stocking shipments of  the  Company's
          first   pharmaceutical  product,   Mentax.    Licensing
          revenues  increased to $1,271,000 in the first  quarter
          of  1998,  compared to $300,000 in the same quarter  of
          the prior year, as a result of increased attainment  of
          performance   milestones   under   various    corporate
          partnering  arrangements in 1998 versus the  comparable
          prior year period.

          The Company's  cost of sales  decreased to  $726,000 in
          the  three  months  ended  March 31, 1998 from $763,000
          in the same period of 1997 primarily due to a change in
          revenue mix favoring higher margin products.

<PAGE>
          
          The   Company's   research  and  development   expenses
          increased  96% to $2,392,000 in the three months  ended
          March  31,  1998 from $1,223,000 in the same period  of
          1997  due  to  the  timing and size of  human  clinical
          trials.   The  Company commenced two  Phase  III  human
          clinical  studies of its 501 cream combination  product
          during  the  third quarter of 1997.  These studies  are
          being  conducted at over 32 clinical sites and  involve
          over  1,600  patients.   Sales and  marketing  expenses
          decreased to $1,829,000 in the three months ended March
          31,  1998 from $2,163,000 for the same period of  1997.
          The  prior  year period includes costs related  to  the
          initial  launch  of the Company's first  drug  product.
          These  costs did not recur in 1998, but were  partially
          replaced  by  increased costs related to  internalizing
          the  Company's sales force.  General and administrative
          expenses increased 55% to $508,000 in the three  months
          ended  March 31, 1998 from $328,000 in the same  period
          of  1997.  General and administrative expenses  in  the
          first quarter of 1997 reflect a recovery of legal  fees
          related to prior patent litigation.
          
          Net  interest  income was $44,000 in the  three  months
          ended March 31, 1998 and $59,000 in the same period  of
          1997.
          
          The Company expects that annual revenues, and costs and
          expenses  will continue to increase in the future,  due
          principally   to  further  commercialization   of   its
          pharmaceutical products.  Sales and marketing  expenses
          are  expected to increase significantly from the  prior
          year reflecting the increased costs associated with its
          sales  force.  The Company also expects some  expansion
          of  research and development programs, increased patent
          and regulatory costs, expansion of regulatory, clinical
          and   quality  assurance  capabilities,  and  increased
          administrative support costs.
          
          In  addition,  sales of a product upon  initial  market
          introduction generally include a significant amount  of
          initial   orders  for  inventory  by  wholesalers   and
          distributors  and  are  not necessarily  indicative  of
          actual   demand  for  that  product  by  patients   and
          physicians.    There   can   be   no   assurance   that
          distributors and wholesalers will be able  to  forecast
          demand   for   product  accurately.   Fluctuations   in
          operating  results will occur to the extent  that  sell
          through  of  products  does not meet  distributors'  or
          wholesalers'  expectations.  The Company  also  expects
          that  future  operating  results  may  be  subject   to
          quarterly  variations that may impact  cash  flow  from
          operations.   Operating results for  the  three  months
          ended March 31, 1998 are not necessarily indicative  of
          future operating results.

<PAGE>

          Liquidity and Capital Resources

          The  Company's  principal  sources  of  capital to date
          have   been  the  proceeds  from  public  and   private
          offerings of its equity securities, including  a  March
          1997  private placement for which the net proceeds were
          approximately $9,000,000.  In January 1998, the Company
          entered into an agreement with an investment group  for
          an  equity  line of credit which allows the Company  to
          access  up  to $10 million through sales of its  common
          stock over a period ending in April 2000.  At March 31,
          1998,  the  Company  had  cash,  cash  equivalents  and
          investments  totaling   $2,608,000,  and  approximately
          $9  million  was  available  under  the  equity line of 
          credit.

          Cash expenditures related to operating activities,  the
          acquisition of fixed assets and repayment of  long-term
          obligations  totaled  $3,552,000 in  the  three  months
          ended March 31, 1998 and $4,259,000 for the same period
          in   1997.   Operating  activities  were  comprised  of
          research  and  development,  clinical  trials,  product
          sales, promotion and general administration activities.
          The  Company  also made milestone payments of  $400,000
          related  to the in-licensing of drug compounds  in  the
          three   months  ended  March  31,  1998.   No   similar
          milestone payments were made in the first three  months
          of  1997.   The  Company expects that amounts  expended
          historically  are not indicative of future expenditures
          by   the  Company,  which  the  Company  believes  will
          increase.   The  Company expects to continue  to  incur
          substantial   expenditures  related  to   the   further
          research   and   development   of   its   technologies,
          development of its products, acquisition of  additional
          products  and  rights to drug compounds and  sales  and
          marketing.
          
          The   Company  believes  that  its  capital  resources,
          including  anticipated revenues (consisting of  product
          sales,  license  fees  and  royalties),  proceeds  from
          sales   of   common   stock    under    the      equity 
          line   of   credit   and    interest  income  earned on 
          its   invested   cash   balances,   will   satisfy  the
          Company's   working  capital  and  identified   capital
          expenditure  requirements at least  through  March  31,
          1999.  The  Company's future capital requirements  will
          depend   on  many  factors,  including  the  commercial
          success  of  the  Company's products, progress  of  the
          Company's  collaborative and independent  research  and
          development    programs,   payments   received    under
          collaborative agreements with other companies, if  any,
          the  results  and  costs  of preclinical  and  clinical
          testing   for   the  Company's  products,   the   costs
          associated with and the timing of regulatory approvals,
          technological  advances,  the  status  of   competitive
          products,  and  the  commercial success  of  Penederm's
          strategic  relationships.  There can  be  no  assurance
          that  additional funds will be available to the Company
          on favorable terms, if at all, to permit the Company to
          continue with its current plan for operations.


<PAGE>


Part II Item 2.  Sales of Unregistered Securities

          The Company issued an aggregate of 96,983 shares of its
          Common   Stock   (the  "Shares")   for   an   aggregate
          consideration   of   $988,500   in   an    unregistered
          transaction in the fiscal quarter ended March 31, 1998.
          The  Shares  were issued pursuant to the  Common  Stock
          Investment  Agreement  dated as  of  January  21,  1998
          between  the  Company and Promethean Investment  Group,
          L.L.C. (the "Investor").  Based on representations made
          by  the  Investor in the Agreement, the Company  issued
          the  Shares  pursuant  to  the  exemption  provided  by
          Section 4(2) of the Securities Act of 1933, as amended.


Part II Item 6.  Exhibits and Reports on Form 8-K
          
          (a)       Exhibits

     27             Financial Data Schedule

            (b)     Reports on Form 8-K

                    None.
     


<PAGE>

                           SIGNATURES




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




                                   PENEDERM INCORPORATED





     May 7, 1998                /s/   Lloyd H. Malchow
     -----------                --------------------------------
     Date                       Lloyd H. Malchow, President
                                and Chief Executive Officer






     May 7, 1998                /s/   Michael A. Bates
     -----------                --------------------------------
     Date                       Michael A. Bates, Vice President
                                Finance and Administration and
                                Chief Financial Officer



<PAGE>



                        INDEX TO EXHIBITS


        Exhibit
           No.      Description
        -------     -----------

          27        Financial Data Schedule