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          June 30, 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:JUNE 30, 1998

           Common Stock              8,644,400



<PAGE>

                      PENEDERM INCORPORATED
                        TABLE OF CONTENTS
                            FORM 10-Q



                                                               Page
                                                              Number
                                                      
PART I.   FINANCIAL INFORMATION                       
                                                      
Item 1.   Financial Statements                        
                                                      
          Condensed Consolidated Balance Sheets-
             June 30, 1998 and December 31, 1997                  3
                                                      
          Condensed Consolidated Statements of Operations-
             Three months ended June 30, 1998 and 1997 and
             six months ended June 30, 1998 and 1997              4
          
          Condensed Consolidated Statements of Cash Flows-
             Three months ended June 30, 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                     8
                                                      
PART II.  OTHER INFORMATION                           
                                                      
Item 2.   Sale of Unregistered Securities                        15
                                                      
Item 4.   Submission of Matters to a Vote of                     16
          Security Holders
                                                      
Item 6.   Exhibits and Reports on Form 8-K                       16
                                                      
Signature Page                                                   17


<PAGE>

                                
                    PENEDERM INCORPORATED
            CONDENSED CONSOLIDATED BALANCE SHEETS
             June 30, 1998 and December 31, 1997
                        (in thousands)
                                                         
                                                 June 30,         December 31,
                                                   1998               1997
                                               -----------        -----------  
                                               (unaudited)           (Note)
                                
ASSETS                                                   
Current assets:                                               
  Cash and cash equivalents                      $ 1,732            $  1,519
  Short-term marketable securities                 1,000               3,102
  Accounts receivable                              7,280               1,013
  Inventory                                        2,385               1,501
  Prepaid expenses and other current assets          382                 466
                                                --------            --------
Total current assets                              12,779               7,601
                                                              
  Marketable securities                                -               1,000
  Property and equipment, at cost,less 
    accumulated depreciation and amortization        270                 267
  Intangible and other assets                      1,720               1,363
                                                --------            --------
Total assets                                    $ 14,769            $ 10,231
                                                ========            ========    
LIABILITIES                                                   
Current liabilities:                                          
  Accounts payable                              $  1,039           $   1,264
  Accrued liabilities                              6,208               3,763
                                                --------             --------
Total current liabilities                          7,247               5,027
                                                              
Long-term obligations                                  5                  10
                                                --------            --------
Total liabilities                                  7,252               5,037
                                                              
STOCKHOLDERS' EQUITY                                          
Common stock, $.01 par value                          86                  82
Additional paid-in capital                        61,111              56,222
Accumulated deficit                              (53,680)            (51,110)
                                                --------            --------
Total stockholders' equity                         7,517               5,194
                                                --------            --------
Total liabilities and stockholders' equity      $ 14,769            $ 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     Six  Months Ended   
                                     June 30,               June 30,
                               -------------------   -------------------  
                                 1998       1997        1998       1997
                                 ----       ----        ----       ----        
                                                                   
Revenues:                                                          
Product sales                $  4,388   $  1,643    $  7,118   $  4,244
Royalties                       1,236          -       1,236          -
Licensing revenues                700        360       1,971        660
                             ---------  ---------   ---------  ---------
Total revenues                  6,324      2,003      10,325      4,904
                             ---------  ---------   ---------  ---------       
Costs and expenses:                                                
Cost of product sales           1,147        845       1,873      1,608
Research and development        1,134      1,259       2,963      2,482
Sales and marketing             3,736      1,769       6,128      3,932
General and administrative        594        603       1,102        931
Merger expenses                   900          -         900          -
                             ---------  ---------   ---------  ---------
Total costs and expenses        7,511      4,476      12,966      8,953
                             ---------  ---------   ---------  ---------       
Loss from operations           (1,187)    (2,473)     (2,641)    (4,049)
                                                                   
Interest income, net               27        151          71        210
                             ---------  ---------   ---------  ---------    
Net loss                     $ (1,160)  $ (2,322)   $ (2,570)  $ (3,839)
                             =========  =========   =========  =========       
Basic and diluted net loss
   per share                 $  (0.14)  $  (0.29)   $  (0.31)  $  (0.49)
                             =========  =========   =========  =========       
Number of shares used in                                           
  computing basic and diluted                
  net loss  per share           8,511      8,112       8,351      7,848 
                             =========  =========   =========  =========        
                                                                   
See accompanying notes.                                            
                                                                   
                                                                   
<PAGE>                                                                   
                                
                                
                     PENEDERM INCORPORATED
        CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                        (in thousands)
                          (unaudited)
                                                  Six Months Ended
                                                      June 30,
                                                --------------------
                                                   1998        1997
                                                   ----        ----
Increase (decrease) in cash and cash
equivalents    
                                                               
Cash flows from operating activities:                          
  Net loss                                       $ (2,570)   $ (3,839)
  Adjustments to reconcile net loss to net                       
    cash used in operating activities:                                     
      Depreciation and amortization                   188         159
      Increase in accounts receivable              (6,267)     (1,403)
      Increase in inventory                          (884)       (240)
      Decrease (increase) in prepaid expenses                    
        and other current assets                       84         (75)
      Increase (decrease) in accounts payable                    
        and accrued liabilities                     2,224        (118)
      Increase in other assets                        (58)         (2)
                                                 ---------   ---------
      Net cash used in operating activities        (7,283)     (5,518)
                                                 ---------   ---------         
Cash flows from investing activities:                          
  Purchases of available-for-sale securities            -      (7,032)
  Maturities of available-for-sale securities       2,102         266
  Sales of available-for-sale securities            1,000         500
  Acquisition of intangible assets                   (400)          -
  Acquisition of fixed assets                         (90)        (54)
                                                 ---------   ---------
      Net cash provided by (used in) investing 
        activities                                  2,612      (6,320)
                                                 ---------   ---------         
Cash flows from financing activities:                          
  Issuance of common stock in private placement         -       8,975
  Issuance of common stock under equity line    
    of credit                                       4,741           -
  Proceeds from issuance of common stock              152         196
  Repayment of long-term obligations                   (9)         (8)
                                                 ---------   ---------
      Net cash provided by financing activities     4,884       9,163
                                                 ---------   ---------         
Net increase (decrease) in cash and cash        
  equivalents                                         213      (2,675)
Cash and cash equivalents at beginning of     
  period                                            1,519       3,062
                                                 ---------   ---------
Cash and cash equivalents at end of period       $  1,732    $    387
                                                =========   =========          
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 or Penederm) for  the  three
     and  six  month periods ended June 30, 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:

                                 June 30,        December 31,
     (In thousands)                1998              1997
                               ------------      ------------                 
     Raw materials             $      204          $    572
     Finished goods                 2,181               929
                               ------------      ------------
                               $    2,385          $  1,501
                               ============      ============        

     3.  Merger Expenses

     The  Company's expenses for the quarter ended June  30,
     1998 include $900,000 of investment banking, legal  and
     accounting  expenses related to its pending acquisition
     by Mylan Laboratories Inc. announced on June 24, 1998.

     4.  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.
     

<PAGE>

     
     5.  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 presentation  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

          On  June 24, 1998, Mylan Laboratories Inc. (Mylan)  and
          the  Company  announced that they had  entered  into  a
          definitive   agreement   whereby  Mylan  will   acquire
          Penederm  in  a  tax-free reorganization by  exchanging
          0.68  shares  of Mylan common stock for each  share  of
          Penederm common stock.  The Boards of Directors of both
          companies have unanimously approved the agreement.  The
          consumation  of  the  transaction  is  subject  to  the
          approval  of  the  Company's  stockholders  and   other
          customary closing conditions.
          
          On  June 30 and July 2, 1998, the Company and Schering-
          Plough   HealthCare  Products  Inc.  (Schering  Plough)
          entered into additional letter amendments to their 1994
          agreement.   Under  these amendments,  Schering  Plough
          agreed  to a milestone obligation as of June  30,  1998
          and  to make certain additional milestone payments over
          the  remainder  of 1998 and exclusively sublicensed  to
          the  Company  certain  rights  to  market  the  topical
          prescription   nail  antifungal  product   to   certain
          categories  of  physicians that it obtained  under  the
          original agreement in 1994.  In exchange, Penederm will
          pay  Schering royalties on sales of the product to this
          category  of  physicians.  Schering Plough retains  its
          OTC rights to the product and rights to improvements to
          the topical nail product.

<PAGE>
          
          
Part I Item  2.       Management's  Discussion  and  Analysis  of
          Financial   Condition   and   Results   of   Operations
          (continued)
          
          Effective  July  1,  1998, the  Company's  Senior  Vice
          President of Research and Development, John W.  Quigley
          Jr.,  Ph.D.  assumed a new position of  Senior  Science
          Advisor  in  which  he  continues  to  report  to   the
          President  and CEO.  In conjunction with the change  in
          Dr.  Quigley's status, Bhaskar Chaudhuri,  Ph.D.,  Vice
          President,  Pharmaceutical Sciences and Mary  Treuhaft,
          Vice President of Regulatory and Clinical Affairs, will
          now report directly to the President and CEO.
          
          On  July 10, 1998, the Company and Mylan announced that
          Bertek Pharmaceutical Inc., a subsidiary of Mylan,  had
          entered into an agreement effective June 30, 1998 to co-
          promote   Avita,  Penederm's  topical   retinoic   acid
          product,  to  primary  care physicians  in  the  United
          States.   The agreement provides for a license fee  and
          an  advance  against Penederm's share  of  the  profits
          under  the agreement.  The license fee was recorded  as
          licensing  revenue in the quarter ended June  30,  1998
          and the advance was recorded as deferred revenues.  The
          advance  will  be recognized as income as  the  Company
          recognizes  profits  under  the  agreement.   Both  the
          license  fee  and the advance are included in  accounts
          receivable at June 30, 1998.
          
          On  July 21, 1998, the Company announced it had entered
          into  a  co-promotion agreement with Pedinol  Pharmacal
          Inc.    (Pedinol),   a   privately    held    specialty
          pharmaceutical  company,  under  which   Pedinol   will
          promote   Mentax,   Penederm's   topical   prescription
          antifungal product to podiatrists in the United States.
          
          
     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)
              
              Avitacream   and   gel,   prescription   topical
              treatments for acne, and
              
              Acticin,  a prescription topical cream treatment
              for scabies infection.

<PAGE>

          
Part I Item  2.       Management's  Discussion  and  Analysis  of
          Financial   Condition   and   Results   of   Operations
          (continued)
          
          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               Penederm in-licensed  United States, Canada,
Pharmaceutical      butenafine, the       Mexico and Latin
Company Ltd.        active ingredient     America for skin
(Kaken)             incorporated in       antifungal; U.S.,
                    Mentax                Canada, Europe, Mexico,
                                          Latin America,
                                          Australia and New
                                          Zealand for nail
                                          antifungal

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

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


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

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

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

SmithKline          OTC consumer          Europe and Eastern
                    products              Europe

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

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

Mylan               Co-promote Mentax     United States
Laboratories, Inc.  and Avita to
(Mylan)             selected physician
                    groups

Pedinol Pharmacal   Co-promote Mentax to  United States
Inc. (Pedinol)      podiatrists

<PAGE>

Part I Item  2.       Management's  Discussion  and  Analysis  of
          Financial   Condition   and   Results   of   Operations
          (continued)
          
          The  Company has been unprofitable since inception. For
          the  period from inception through June 30,  1998,  the
          Company incurred a cumulative net loss of  $53,680,000.
          Penederm's sources of working capital have been  equity
          financings, product sales, corporate licensing payments
          and interest earned on investments.

          Results of Operations

          Three Months Ended June 30, 1998 and 1997

          Total  revenues  for  the  three months  ended June 30,
          1998  of  $6,324,000 increased 216% from $2,003,000  in
          the  same  period  of 1997.  Product revenues  for  the
          second  quarter  of 1998 of $4,388,000 reflect  ongoing
          sales of Mentax and Avita cream, which were launched in
          1997, and Avita gel and Acticin, which were launched in
          the  first  quarter of 1998.  Revenues  in  the  second
          quarter also include royalties related to the Company's
          tretinoin distribution relationship with an undisclosed
          manufacturer.  Licensing revenues were $700,000 in  the
          second  quarter  of 1998, compared to $360,000  in  the
          same  quarter  of the prior year, as a  result  of  new
          corporate partnering arrangements in the period.

          The    Company's   cost   of   sales    increased    to
          $1,147,000 in the three months ended June 30, 1998 from
          $845,000  in the same period of 1997 primarily  due  to
          the increase in product revenues; however gross margins
          improved between the two periods due to a change in mix
          toward higher margin products.
          
          The   Company's   research  and  development   expenses
          decreased  10% to $1,134,000 in the three months  ended
          June  30,  1998 from $1,259,000 in the same  period  of
          1997  due  to  completion of the 501 cream  combination
          product  human clinical trials in the first quarter  of
          1998.  Sales and marketing expenses increased  111%  to
          $3,736,000 in the three months ended June 30, 1998 from
          $1,769,000  for the same period of 1997.   The  current
          year  period reflects the cost of the Company's  direct
          sales  force which was established in the first quarter
          of  1998  and increased expenses under its product  co-
          promotion  agreements.  In the prior year, the  Company
          utilized   a   contract  sales  force.    General   and
          administrative  expenses decreased  modestly  from  the
          prior year quarter.


<PAGE>

Part I Item  2.       Management's  Discussion  and  Analysis  of
          Financial   Condition   and   Results   of   Operations
          (continued)
          
          The  Company's expenses for the second quarter of  1998
          include  $900,000  of  investment  banking,  legal  and
          accounting  expenses related to its pending acquisition
          by Mylan announced on June 24, 1998.
          
          Net  interest  income was $27,000 in the  three  months
          ended June 30, 1998 and $151,000 in the same period  of
          1997.   Net interest income decreased primarily due  to
          lower  amounts  of cash and investments in  the  second
          quarter  of  1998 compared to the same  period  of  the
          prior year.


          Six Months Ended June 30, 1998 and 1997

          Total  revenues for the six months ended June 30,  1998
          of  $10,325,000 increased 111% from $4,904,000  in  the
          same  period of 1997.  Product revenues for the  second
          quarter of 1998 of $7,118,000 reflect ongoing sales  of
          Mentax  and Avita cream, which were launched  in  1997,
          and  Avita gel and Acticin, which were launched in  the
          first  quarter  of 1998.  Revenues in  the  six  months
          ended  June 30, 1998 also include royalties related  to
          the  Company's tretinoin distribution relationship with
          an  undisclosed manufacturer.  Licensing revenues  were
          $1,971,000 in the first six months of 1998, compared to
          $360,000  in the same period of the prior  year,  as  a
          result  of  new  corporate partnering arrangements  and
          increased achievement of milestones in the 1998 period.

          The Company's cost of sales increased to $1,873,000  in
          the  six months ended June 30, 1998 from $1,608,000  in
          the  same  period of 1997 primarily due to the increase
          in  product  revenues; however gross  margins  improved
          between  the two periods due to a change in mix  toward
          higher margin products.


<PAGE>

Part I Item  2.       Management's  Discussion  and  Analysis  of
          Financial   Condition   and   Results   of   Operations
          (continued)
          
          The   Company's   research  and  development   expenses
          increased  19%  to $2,963,000 in the six  months  ended
          June  30,  1998 from $2,482,000 in the same  period  of
          1997  due  to  the  timing and size of  human  clinical
          trials.   The  Company  completed  recording   expenses
          related to two pivotal phase III human clinical studies
          (involving  over  32 clinical sites  and  approximately
          1,600 patients) of its 501 cream combination product in
          the   first  quarter  of  1998.   Sales  and  marketing
          expenses increased 56% to $6,128,000 in the six  months
          ended June 30, 1998 from $3,932,000 for the same period
          of  1997.  The current year period reflects the cost of
          the  Company's direct sales force which was established
          in  the  first  quarter of 1998 and increased  expenses
          under  its  product  co-promotion agreements.   In  the
          prior  year,  the  Company utilized  a  contract  sales
          force.  General  and administrative expenses  increased
          18% to $1,102,000 in the six months ended June 30, 1998
          from $931,000.  General and administrative expenses  in
          the  first  six months of 1997 reflect the recovery  of
          legal  fees related to prior patent litigation.   There
          was no such recovery in 1998.
          
          Net interest income was $71,000 in the six months ended
          June  30, 1998 and $210,000 in the same period of 1997.
          Net  interest income decreased primarily due  to  lower
          amounts of cash and investments in the six months ended
          June  30, 1998 compared to the same period of the prior
          year.
          
          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 six months ended
          June  30, 1998 are not necessarily indicative of future
          operating results.


<PAGE>

Part I Item  2.       Management's  Discussion  and  Analysis  of
          Financial   Condition   and   Results   of   Operations
          (continued)

          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.  In January  1998,
          the  Company  entered  into an equity  line  of  credit
          agreement  with  an investment group which  allows  the
          Company  to access up to $10 million through  sales  of
          its common stock over a period ending in April 2000, of
          which $5 million remains available as of June 30, 1998.
          The   Company  issued  common  stock  in  exchange  for
          $4,741,000, net of related financing costs,  under  the
          equity  line  for the six month period ended  June  30,
          1998.  At  June  30, 1998, the Company had  cash,  cash
          equivalents and investments totaling $2,732,000.

          Cash expenditures related to operating activities,  the
          acquisition of fixed assets and repayment of  long-term
          obligations totaled $7,382,000 in the six months  ended
          June  30,  1998 and $5,580,000 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
          six  months ended June 30, 1998.  No similar  milestone
          payments  were  made in the first six 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. 


<PAGE>

          
Part I Item  2.       Management's  Discussion  and  Analysis  of
          Financial   Condition   and   Results   of   Operations
          (continued)


          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  June  30, 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.


Part II Item 2.  Sales of Unregistered Securities

          The  Company issued an aggregate of 376,499  shares  of
          its  Common  Stock  (the  "Shares")  for  an  aggregate
          consideration   of   $4,011,500  in   an   unregistered
          transaction in the fiscal quarter ended June 30,  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.



<PAGE>

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

          The Company held its annual meeting of stockholders  on
          June  24,  1998.   At  the  meeting,  the  shareholders
          considered the items described below:

          Each  of  the nominees for director,  David E. Collins,
          Lloyd  H.  Malchow,  Robert  F.  Allnutt,  William   I.
          Bergman,  Mark  J. Gabrielson, Harvey S. Sadow,  Ph.D.,
          Joseph  E.  Smith  and Gerald D. Weinstein,  M.D.,  was
          elected  by the affirmative vote of at least  5,739,488
          shares  (out  of  5,766,484 shares represented  at  the
          meeting).

          The  stockholders voted to approve an amendment to  the
          Penederm  Incorporated 1994 Nonemployee Director  Stock
          Option Plan to increase by 150,000 the number of shares
          reserved  for  issuance under the plan.  The  amendment
          was  approved  by  a  vote  of  3,878,291  shares  for,
          1,875,146 shares against and 13,042 shares abstaining.

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

     10.8D     Amendment No. 6 entered into April 30, 1998  to 
               Vintage Park Net Lease, between  the Company and 
               Spieker Properties, L.P.

     27        Financial Data Schedule

          (b)  Reports on Form 8-K

          On  June  30,  1998,  the  Company  filed  a  Form  8-K
          disclosing  the Company's June 24, 1998  Agreement  and
          Plan of Merger with Mylan Laboratories Inc.


<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





     July 31, 1998              /s/   Lloyd H. Malchow
     -------------              --------------------------------
     Date                       Lloyd H. Malchow, President
                                and Chief Executive Officer






     July 31, 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
         -------       ------------------------------------------------
          10.8D        Amendment No. 6 entered into April 30,  1998  to 
                       Vintage Park Net Lease, between  the Company and 
                       Spieker Properties, L.P.

          27           Financial Data Schedule