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, 1997

Commission File Number                       0-22314


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

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

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

                            (415) 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, 1997


         Common Stock                   8,109,338





                      PENEDERM INCORPORATED
                        TABLE OF CONTENTS
                            FORM 10-Q



                                                               Page Number
                                                                    
PART I.   FINANCIAL INFORMATION                                     
                                                                    
Item 1.   Financial Statements                                      
                                                                    
          Condensed Consolidated Balance Sheets -                   
             March 31, 1997 and December 31, 1996                   3
                                                                    
          Condensed Consolidated Statements of Operations -         
             Three months ended March 31, 1997 and 1996             4
                                                                    
          Condensed Consolidated Statements of Cash Flows -         
             Three months ended March 31, 1997 and 1996             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 6.   Exhibits and Reports on Form 8-K                         12
                                                                    
Signature Page                                                     13




PENEDERM INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
(unaudited)

                                                      March 31,   December 31,
                                                        1997          1996
ASSETS                                              ------------  ------------
Current Assets:
    Cash and cash equivalents                            $3,357        $3,062
    Short-term marketable securities                      6,869         2,259
    Accounts receivable                                   3,061           276
    Inventory                                             1,705         1,539
    Employee note receivable                                125           125
    Prepaid expenses and other current assets             1,111           524
                                                    ------------  ------------
         Total current assets                            16,228         7,785

    Marketable securities                                 1,000         1,099
    Property and equipment, at cost, less
         accumulated depreciation and amortization          281           277
    Intangible and other assets                           1,493         1,533
                                                    ------------  ------------
         Total assets                                   $19,002       $10,694
                                                    ============  ============

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
    Accounts payable                                     $1,052        $1,196
    Accrued liabilities                                   1,770           863
    Current portion of long-term obligations                 17            16
                                                    ------------  ------------
         Total current liabilities                        2,839         2,075

    Long-term obligations, less current portion              24            28
                                                    ------------  ------------
         Total liabilities                                2,863         2,103
                                                    ------------  ------------
Shareholders' equity:
    Common stock, no par value                           56,049        46,984

    Accumulated deficit                                 (39,910)      (38,393)
                                                    ------------  ------------
         Total shareholders' equity                      16,139         8,591
                                                    ------------  ------------
         Total liabilities and shareholders'
            equity                                      $19,002       $10,694
                                                    ============  ============


See accompanying notes.



PENEDERM INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except per share data)
(unaudited)


                                                        Three Months Ended
                                                             March 31,
                                                          1997      1996
                                                       --------  --------
Revenues:
          Product sales                                 $2,601      $593
          Licensing revenues                               300       207
                                                       --------  --------
                    Total revenues                       2,901       800
                                                       --------  --------
Costs and expenses:
          Cost of product sales                            763       428
          Research and development                       1,223     1,862
          Selling, general and administrative            2,491     1,186
                                                       --------  --------
                    Total costs and expenses             4,477     3,476
                                                       --------  --------
Loss from operations                                    (1,576)   (2,676)

Interest income, net                                        59       176
                                                       --------  --------
Net loss                                               ($1,517)  ($2,500)
                                                       ========  ========
Net loss per share                                      ($0.20)   ($0.34)
                                                       ========  ========
Number of shares used in computing net loss per share    7,583     7,254
                                                       ========  ========


See accompanying notes.




PENEDERM INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(unaudited)
                                                         Three Months Ended
                                                              March 31,
                                                          1997         1996
                                                        --------     --------
Cash flows from operating activities:
   Net loss                                             ($1,517)     ($2,500)  
   Adjustments to reconcile net loss to net cash used                          
          in operating activities:
      Depreciation and amortization                          81           70
      Decrease (increase) in accounts receivable         (2,785)          57
      Decrease (increase) in inventory                     (166)          46
      Decrease (increase) in prepaid expenses and
          other current assets                             (587)          16   
      Increase (decrease) in accounts payable, accrued
          and other liabilities                             763         (119)
      Increase in other assets                               (2)          --   
                                                        --------     --------
          Net cash used in operating activities          (4,213)      (2,430)
                                                        --------     --------
Cash flows from investing activities:
   Purchases of available-for-sale securities            (5,013)      (6,405)
   Maturities of available-for-sale securities              253        3,550
   Sales of available-for-sale securities                   249          260
   Aquisition of intangible asset                            --         (100)
   Aquisition of property and equipment                     (43)         (77)
                                                        --------     --------
          Net cash used in investing activities          (4,554)      (2,772)
                                                        --------     --------
Cash flows from financing activities:

   Net proceeds from private placement stock offering     8,975           --   
   Proceeds from issuance of common stock                    90           32
   Repayment of long-term obligations                        (3)         (10)
                                                        --------     --------
          Net cash provided by financing activities       9,062           22
                                                        --------     --------
Net increase (decrease) in cash and cash equivalents        295       (5,180)
Cash and cash equivalents at beginning of period          3,062        8,695
                                                        --------     --------
Cash and cash equivalents at end of period               $3,357       $3,515
                                                        ========     ========


See accompanying notes.



                              

                                
                      PENEDERM INCORPORATED
      NOTES TO  CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                           (unaudited)


     1.  Interim Unaudited Financial Information

     The    accompanying    interim   unaudited    condensed
     consolidated  financial statements of the  Company  for
     the  three months ended March 31, 1997 and 1996,   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, 1996.
     
     
     2.  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.
     
     In  February  1997, the Financial Accounting  Standards
     Board   issued   Statement  of   Financial   Accounting
     Standards No. 128 "Earnings Per Share" (SFAS 128) which
     is  required  to  be  adopted in periods  ending  after
     December 15, 1997.  SFAS 128 simplifies the calculation
     of  earnings  per  share in most situations,  excluding
     common  stock equivalents in the computation  of  basic
     earnings  per share.  SFAS 128 will have no  impact  on
     the  Company's computation of  loss per  share  in  the
     periods  ended March 31, 1997 and 1996 or in previously
     disclosed periods as common stock equivalents have been
     excluded due to their anti-dilutive effect.
     
     
     
Item 2.   Management's  Discussion  and  Analysis  of   Financial
          Condition and Results of Operations


          Recent  Events

          The Company received United Kingdom regulatory approval
          in  February to market its retinoic acid cream and  gel
          formulations  for  the treatment of  acne.  The  United
          Kingdom  will  be  Penederm's sponsor country  to  gain
          approval in other European nations through the European
          Mutual Recognition Process.
          
          In  January 1997, the Company announced it entered into
          a  co-promotion agreement with a division of Merck KGaA
          (Merck),  under  which  it will  sell  two  of  Merck's
          topical products in the U.S.  The companies will  share
          profits  according  to  their  respective  co-promotion
          efforts.
          
          In  March  1997,  Penederm  signed  an  agreement  with
          SmithKline   Beecham  (SmithKline)  to  co-develop   an
          undisclosed  OTC  product  using  Penederm's   patented
          TopiCare   Delivery   Compounds  with   a   proprietary
          SmithKline formulation.  Both companies will contribute
          their   scientific  and  technical  expertise  to   the
          collaboration. SmithKline has the exclusive  option  to
          market  the finished product worldwide.  Penederm  will
          receive milestone payments and royalties on the sale of
          products resulting from the collaboration, as  well  as
          revenues   from   the   supply  of  TopiCare   Delivery
          Compounds.
          
          In   March  1997,  the  Company  completed  a   private
          placement for which the net proceeds were approximately
          $9,000,000.


          Overview

          Penederm  is  a pharmaceutical company that specializes
          in   developing  and  marketing  dermatology  products.
          Penederm   recently  launched  Mentax,   a   once-a-day
          prescription  topical treatment for three  skin  fungal
          conditions:   tinea  pedis  (athlete's   foot),   tinea
          corporis  (ringworm) and tinea cruris  (groin  fungus).
          Penederm  also recently received FDA approval to  begin
          marketing its Avita prescription cream product for  the
          treatment  of  acne  and contingent approval  to  begin
          marketing  its Avita gel product upon expiration  of  a
          third  party  patent  in  January  1998.  Penederm  has
          several  other  pharmaceutical products for  psoriasis,
          nail  fungus and Mentax skin treatment line  extensions
          in  Phase II 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 through corporate partners.
          
          The   Company  has  several  agreements  with   various
          pharmaceutical companies, as follows:


<TABLE>
                                
                                
            COMPANY                         PRODUCT AREA                             TERRITORY
<S>                              <C>                                  <C>       

In-License and Co-Development                                         
Agreements:
-------------------------------
Kaken Pharmaceutical Company     Penederm in-licensed butenafine,     U.S. Canada, Mexico and Latin America
Ltd. (Kaken)                     the active ingredient incorporated   for skin antifungal; U.S., Canada,
                                 in Mentax                            Europe, Mexico, Latin America, Australia
                                                                      & New Zealand for nail antifungal.
The Merck KGaA Group/Center      Co-promote Akne-Mycin and Cloderm    U.S.
Laboratories
SmithKline Beecham (SmithKline)  Undisclosed OTC product              SmithKline option to market worldwide

Out-License Agreements:                                               
-------------------------------
Schering-Plough HealthCare       Prescription & OTC Nail and co-      U.S. and Canada
Products, Inc. (Schering-        promote prescription skin
Plough)                          antifungal
UCB Group of Belgium (UCB)       Prescription antifungal products     Europe, Africa and Middle East
Warner Wellcome Consumer Health  OTC Dry Skin                         U.S. and Canada
Products (Warner)
SmithKline Beecham (SmithKline)  OTC Consumer Products                Europe & Eastern Europe
Pierre Fabre Inc. (Pierre        DuraScreen sunscreen                 U.S.
Fabre)
                                
     
</TABLE>
     
     
     
          The  Company has been unprofitable since inception  and
          expects   to  incur  significant  additional  operating
          losses  in  the  near  future.   For  the  period  from
          inception through March 31, 1997, the Company  incurred
          a  cumulative  net  loss  of   $39,910,000.  Penederm's
          sources of working capital have been equity financings,
          product  sales to corporate partners, sales  of  Mentax
          and over-the-counter products, product license fees and
          sales  of  TopiCare  Delivery  Compounds  and  interest
          earned on investments.
     

     
     
          Results of Operations

          Three Months Ended  March 31, 1997 and 1996

          Total  revenues  for  the three months ended  March 31,
          1997  of  $2,901,000  increased  from  $800,000 in  the
          same  period of 1996.   This increase is due  primarily
          to  the  initial  product  stocking  shipments  of  the
          Company's  recently  launched  Mentax  and  out-license
          milestone payments from corporate partners.
         
          The  Company   expects  its  future   revenues  in  the
          near  term to be derived principally from the  sale  of
          its  recently approved pharmaceutical products, and for
          the revenues derived from OTC and cosmetic products  to
          become less significant relative to total revenues.

          The  Company's cost  of  sales  increased  to  $763,000
          in   the    three   months    ended   March   31,  1997
          from  $428,000  in  the  same period of 1996  primarily
          due  to the 1997 launch of Mentax sales.  Gross margins
          improved in the first quarter of 1997 compared  to  the
          same  period of 1996 due to the 1997 launch of  Mentax,
          the   Company's  first  pharmaceutical  product,  which
          contributes higher margins than the Company's  OTC  and
          cosmetic products.

          The   Company's   research  and  development   expenses
          decreased  34% to $1,223,000 in the three months  ended
          March  31,  1997 from $1,862,000 in the same period  of
          1996  primarily  due to the timing and  size  of  human
          clinical  trials.  The Company was conducting  a  large
          Phase  III  study in the first quarter of 1996  whereas
          several  smaller Phase II studies were being  conducted
          for the same period in 1997.

          Selling,  general and administrative expenses increased
          110% to $2,491,000 in the three months ended March  31,
          1997  from  $1,186,000 in the same period of  1996  due
          primarily  to marketing and other expenses  related  to
          the  product launch of Mentax and detailing support for
          Akne-mycin and Cloderm.
          
          Net  interest  income decreased 66% to $59,000  in  the
          three months ended March 31, 1997 from $176,000 in the
          same  period of 1996.  This decrease is primarily as  a
          result  of  lower average cash balances  available  for
          investment in the first quarter 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
          recently  approved pharmaceutical products.  Sales  and
          marketing    expenses   are   expected   to    increase
          significantly from the prior year as these products are
          promoted and sold in the marketplace.  The Company also
          expects  modest  expansion of research and  development
          programs,   increased  patent  and  regulatory   costs,
          expansion   of   regulatory,  clinical   and    quality
          assurance  capabilities,  and increased  administrative
          support costs.  Therefore, additional operating  losses
          are expected in the near future.
          
          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, 1997 are not necessarily indicative  of
          future operating results.


          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.  At  March  31,  1997,  the
          Company  had  cash,  cash equivalents  and  investments
          totaling $11,226,000.

          Cash expenditures related to operating activities,  the
          acquisition of fixed assets and repayment of  long-term
          obligations  totaled  $4,259,000  in  the three  months
          ended March 31, 1997 and $2,517,000 for the same period
          in   1996.   Operating  activities  were  comprised  of
          research  and  development,  clinical  trials,  product
          sales, promotion and general administration activities.
          The  Company  also made milestone payments of  $100,000
          related  to the in-licensing of drug compounds  in  the
          quarter  ended  March 31, 1996.  No  similar  milestone
          payments   were  made  in  the  first quarter 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 existing capital  resources,
          including  the interest income earned on  its  invested
          cash  balances, together with the anticipated  revenues
          (consisting   of  product  sales,  license   fees   and
          royalties), will satisfy the Company's working  capital
          and  identified  capital  expenditure  requirements  at
          least  through  1997.   However, the  Company's  future
          capital  requirements  will  depend  on  many  factors,
          including  the  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 licensing and marketing efforts.
          There  can  be no assurance that additional  funds,  if
          required, will be available to the Company on favorable
          terms,  if  at all, to permit the Company  to  continue
          with its plan for operations.
          


          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  contract sales force, the impact of  competitive
          products and pricing, 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  Securities   and
          Exchange Commission filings.  Actual results, events or
          performance   may  differ  materially.    Readers   are
          cautioned not to place undue reliance on these forward-
          looking  statements, which speak only as  of  the  date
          hereof.   The  Company  undertakes  no  obligation   to
          publicly  release the result of any revisions to  these
          forward-looking  statements  that  may  be  needed   to
          reflect  events or circumstances after the date  hereof
          or to reflect the occurrence of unanticipated events.




                      PENEDERM INCORPORATED



Part II:  OTHER INFORMATION

          Item 6.  Exhibits and Reports on Form 8-K

            (a)     Exhibits

                    27     Financial Data Schedule

            (b)     Reports on Form 8-K - Not Applicable




                           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 14, 1997                     /s/   Lloyd H. Malchow
     Date                            Lloyd H. Malchow, President
                                     and Chief Executive Officer






     May 14, 1997                     /s/   Michael A. Bates
     Date                            Michael A. Bates, Director
                                     of Finance and Administration