MYLAN LABORATORIES INC
S-4/A, 1998-08-28
PHARMACEUTICAL PREPARATIONS
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<PAGE>
 
    
 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 28, 1998.     
                                                   
                                                REGISTRATION NO. 333-61959     
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
 
                      SECURITIES AND EXCHANGE COMMISSION
 
                            WASHINGTON, D.C. 20549
 
                               ---------------
                                
                             AMENDMENT NO. 1     
                                       
                                    TO     
                                   FORM S-4
                            REGISTRATION STATEMENT
                                     UNDER
                          THE SECURITIES ACT OF 1933
 
                               ---------------
 
                            MYLAN LABORATORIES INC.
            (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
 
                               ---------------
  PENNSYLVANIA                       2834                          25-1211621
    (STATE OR                       (PRIMARY                         (I.R.S.
 JURISDICTION OF                    STANDARD                        EMPLOYER
INCORPORATION OR                   INDUSTRIAL                    IDENTIFICATION
  ORGANIZATION)                  CLASSIFICATION                       NO.)
                                  CODE NUMBER)
                   130 SEVENTH STREET, 1030 CENTURY BUILDING
                        PITTSBURGH, PENNSYLVANIA 15222
                                 412-232-0100
  (ADDRESS, INCLUDING ZIP CODE AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
                   REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
 
                               ---------------
 
                               MR. MILAN PUSKAR
                            MYLAN LABORATORIES INC.
                   130 SEVENTH STREET, 1030 CENTURY BUILDING
                        PITTSBURGH, PENNSYLVANIA 15222
                                 412-232-0100
 (NAME, ADDRESS, INCLUDING ZIP CODE AND TELEPHONE NUMBER, INCLUDING AREA CODE,
                             OF AGENT FOR SERVICE)
 
                               ---------------
 
                                  COPIES TO:
 
           JOHN R. PREVIS                          HENRY LESSER
   BUCHANAN INGERSOLL PROFESSIONAL        HELLER EHRMAN WHITE & MCAULIFFE
             CORPORATION                       525 UNIVERSITY AVENUE
          ONE OXFORD CENTRE                  PALO ALTO, CA 94301-1800
    301 GRANT STREET, 20TH FLOOR             TELEPHONE: (650) 324-7000
      PITTSBURGH, PA 15219-1410              TELECOPY: (650) 324-0638
      TELEPHONE: (412) 562-8800
       
    TELECOPY: (412) 562-1041     
 
  Approximate date of commencement of the proposed sale of the securities to
the public: As soon as practicable after this Registration Statement becomes
effective.
 
  If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box. [_]
 
  If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
 
  If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
       
                               ---------------
 
  THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
 
 
                                     LOGO
                                   PENEDERM
                          320 LAKESIDE DRIVE, SUITE A
                         FOSTER CITY, CALIFORNIA 94404
                                
                             AUGUST 31, 1998     
 
Dear Stockholder:
   
  You are cordially invited to attend a Special Meeting of Stockholders of
Penederm Incorporated to be held at the Westin Hotel--San Francisco Airport,
located at 1 Bayshore Highway, Millbrae, California, on October 2, 1998, at
9:30 a.m., local time.     
 
  At the Special Meeting, stockholders will vote on a proposal to approve and
adopt an Agreement and Plan of Merger which provides for the Company's
acquisition by Mylan Laboratories Inc. In this transaction, 0.68 of a share of
Mylan Common Stock will be exchanged for each Penederm share.
 
  Penederm's Board of Directors has unanimously decided that the Mylan
acquisition is in your best interests and unanimously recommends that you vote
"FOR" it at the Special Meeting.
 
  As I said in the joint press release announcing the proposed transaction on
June 24, 1998:
 
    "The Penederm Board is very pleased to be able to offer our stockholders
  this opportunity to exchange their shares for a significant equity
  investment in Mylan. We believe this transaction will enhance significantly
  Penederm's ability to pursue its product development and marketing plans."
 
  In the same joint press release, Mylan's CEO and President, Milan Puskar,
commented:
 
    "Penederm is an excellent strategic fit with Mylan. We expect their
  products and sales force to meaningfully add to our proprietary product
  line and marketing efforts. In addition, Penederm's current products under
  development offer significant opportunities for our combined shareholders.
  We see numerous opportunities to apply Penederm's patented drug delivery
  technology to products we have under development."
 
  Enclosed is our Proxy Statement relating to the Special Meeting, which also
constitutes Mylan's Prospectus covering the shares offered to you in exchange
for your Penederm shares. The Proxy Statement/Prospectus includes your Board's
recommendation in favor of the Mylan acquisition and our reasons for it, as
well as the background of the transaction, the conditions to closing and other
important information regarding the proposed transaction (including a
description of a stock option agreement with Mylan, voting agreements signed
by the Penederm directors and a new co-promotion agreement with Mylan relating
to our Avita(R) acne products).
 
  The enclosed Proxy Statement/Prospectus also includes the opinion of our
financial advisor, Lehman Brothers Inc., that, as of June 24, 1998 (the date
the Merger Agreement was signed) the exchange ratio of 0.68 of a Mylan share
for each Penederm share was, from a financial point of view, fair to the
Penederm stockholders. Please read the entire Proxy Statement/Prospectus,
including the Lehman Brothers opinion, carefully.
 
  Approval of the Mylan acquisition requires the favorable vote of a majority
of the outstanding Penederm shares. Your vote is important regardless of how
many shares you own. In order to ensure that your shares are represented at
the Special Meeting whether or not you are able to attend in person, we
strongly urge you to complete the enclosed proxy card promptly and return it
in the envelope provided.
<PAGE>
 
  Please do not send us any of your stock certificates at this time. Following
the closing of the Mylan transaction, you will receive information about the
procedure for surrendering your Penederm stock certificates in exchange for
Mylan stock certificates.
  
                                                  Sincerely,
                                                     
                                                  /s/ LLOYD H. MALCHOW     
                                                         
                                                  LLOYD H. MALCHOW
                                                  President and Chief
                                                  Executive Officer
 
 
                           IF YOU HAVE ANY QUESTIONS
                              OR NEED ASSISTANCE
                          COMPLETING YOUR PROXY CARD
                                 PLEASE CALL:

                                     LOGO
                           MACKENZIE PARTNERS, INC.
                               156 FIFTH AVENUE
                           NEW YORK, NEW YORK 10010
                         (212) 929-5500 (CALL COLLECT)
                                      OR
                         CALL TOLL-FREE (800) 322-2885
<PAGE>
 
                              
                           PENEDERM INCORPORATED     
                           
                        320 LAKESIDE DRIVE, SUITE A     
                          
                       FOSTER CITY, CALIFORNIA 94404     
 
                   NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
 
To the Stockholders of
Penederm Incorporated:
   
  NOTICE IS HEREBY GIVEN that Penederm Incorporated ("Penederm") will hold a
special meeting of its stockholders on October 2, 1998, at 9:30 a.m., local
time, at the Westin Hotel--San Francisco Airport, 1 Bayshore Highway, Millbrae,
California (including any adjournments or postponements thereof, the "Special
Meeting"), for the following purposes:     
 
       1. To consider and vote upon a proposal to approve and adopt an
     Agreement and Plan of Merger, dated as of June 24, 1998 (the "Merger
     Agreement"), by and among Penederm, Mylan Laboratories Inc., a
     Pennsylvania corporation ("Mylan"), and MLI Acquisition Corp., a
     Delaware corporation and a wholly-owned subsidiary of Mylan ("Merger
     Sub"), and the transactions contemplated thereby, including the
     merger of Merger Sub with and into Penederm (the "Merger"). In the
     Merger, each outstanding share of the Common Stock, par value $.01
     per share, of Penederm ("Penederm Common Stock") will be converted
     into the right to receive 0.68 of a share of the common stock, par
     value $.50, of Mylan, and Penederm will become a wholly-owned
     subsidiary of Mylan.
 
       2. To transact such other business as may properly come before the
     Special Meeting.
   
  Only holders of record of Penederm Common Stock at the close of business on
August 28, 1998 (the "Record Date") will be entitled to notice of, and to vote
at, the Special Meeting. The affirmative vote of a majority of the outstanding
shares of Penederm Common Stock entitled to vote at the Special Meeting is
required to approve and adopt the Merger Agreement.     
 
  If your shares are held of record by a broker, bank or other nominee, you
must instruct your broker, bank or other nominee on how to vote your shares, or
else your shares will not be voted. If you attend the Special Meeting, you may
vote your shares in person, which will revoke any previously executed proxy.
FAILURE TO RETURN A PROPERLY EXECUTED PROXY CARD OR TO VOTE AT THE SPECIAL
MEETING WILL GENERALLY HAVE THE SAME EFFECT AS A VOTE AGAINST THE MERGER.
 
                                        By Order of the Board of Directors
                                           
                                        /s/ MICHAEL A. BATES     
                                        ----------------------------------
                                        Michael A. Bates
                                        Secretary
 
Foster City, California
   
August 31, 1998     
 
                          YOUR VOTE IS VERY IMPORTANT
 
 WHETHER OR NOT YOU EXPECT TO ATTEND THE SPECIAL MEETING, PLEASE SIGN, DATE AND
    PROMPTLY RETURN THE ENCLOSED PROXY CARD IN THE ENCLOSED POSTAGE PREPAID
                                   ENVELOPE.
<PAGE>
 
                             PENEDERM INCORPORATED
                                PROXY STATEMENT
 
                               ----------------
 
                     PROSPECTUS OF MYLAN LABORATORIES INC.
 
                               ----------------
   
  This Proxy Statement/Prospectus is being furnished to holders of common
stock, par value $.01 per share ("Penederm Common Stock"), of Penederm
Incorporated, a Delaware corporation ("Penederm"), in connection with the
solicitation of proxies by the Board of Directors of Penederm (the "Penederm
Board") for use at the special meeting of stockholders of Penederm ("Penederm
Stockholders") to be held on October 2, 1998, at the Westin Hotel--San
Francisco Airport, 1 Bayshore Highway, Millbrae, California, at 9:30 a.m.,
local time, and at any adjournments or postponements thereof (the "Special
Meeting").     
   
  At the Special Meeting, Penederm Stockholders as of the close of business on
August 28, 1998 (the "Record Date") will consider and vote on the proposed
merger of MLI Acquisition Corp. ("Merger Sub"), a wholly-owned subsidiary of
Mylan Laboratories Inc., a Pennsylvania corporation ("Mylan"), with and into
Penederm (the "Merger"), whereby Penederm will become a wholly-owned
subsidiary of Mylan, pursuant to the terms of the Agreement and Plan of
Merger, dated June 24, 1998, among Mylan, Merger Sub and Penederm (the "Merger
Agreement"). If the Merger is consummated, each outstanding share of Penederm
Common Stock will be converted into the right to receive 0.68 of a share (the
"Exchange Ratio") of common stock of Mylan, $.50 par value per share (the
"Mylan Common Stock").     
 
  This Proxy Statement/Prospectus also constitutes a Prospectus of Mylan with
respect to up to 6,791,216 shares of Mylan Common Stock to be issued in the
Merger in exchange for outstanding shares of Penederm Common Stock. Mylan
Common Stock is listed on the New York Stock Exchange ("NYSE") and trades
under the symbol "MYL." Penederm Common Stock is quoted on the Nasdaq National
Market ("NASDAQ") and trades under the symbol "DERM."
 
  All information contained or incorporated by reference in this Proxy
Statement/Prospectus relating to Mylan and to the transactions described
herein has been supplied by Mylan, and all information contained or
incorporated by reference in this Proxy Statement/Prospectus relating to
Penederm has been supplied by Penederm.
   
  THIS PROXY STATEMENT/PROSPECTUS AND THE ACCOMPANYING PROXY CARD ARE FIRST
BEING MAILED TO PENEDERM STOCKHOLDERS ON OR ABOUT AUGUST 31, 1998.     
   
  The Merger involves certain risks to Penederm Stockholders. See "RISK
FACTORS," beginning on page 13.      
                               ----------------
THE  SECURITIES TO BE ISSUED PURSUANT TO THIS PROXY STATEMENT/PROSPECTUS  HAVE
 NOT BEEN  APPROVED OR DISAPPROVED BY THE SECURITIES AND  EXCHANGE COMMISSION
  OR  BY ANY  STATE SECURITIES  COMMISSION, NOR  HAS THE  COMMISSION OR  ANY
   STATE  SECURITIES COMMISSION  PASSED UPON  THE ACCURACY  OR ADEQUACY  OF
    THIS PROXY  STATEMENT/ PROSPECTUS. ANY REPRESENTATION  TO THE CONTRARY
     IS A CRIMINAL OFFENSE.
 
                               ----------------
          
     THE DATE OF THIS PROXY STATEMENT/PROSPECTUS IS AUGUST 31, 1998.     
<PAGE>
 
       
                             AVAILABLE INFORMATION
 
  Mylan and Penederm are each subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith file reports, proxy statements and other information with
the Securities and Exchange Commission (the "Commission"). These reports,
proxy statements and other information should be available for inspection at
the public reference facilities of the Commission located at Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549, and should also be available
for inspection and copying at prescribed rates at the Commission's Regional
Offices at 7 World Trade Center, Suite 1300, New York, New York 10048, and 500
West Madison Street, Room 1400, Chicago, Illinois 60661. Copies of such
material also can be obtained from the Public Reference Section of the
Commission, Washington, D.C. 20549, at prescribed rates. The Commission also
maintains an Internet web-site at http://www.sec.gov that contains reports,
proxy statements and other information. Reports, proxy statements and other
information concerning Mylan can also be inspected at the offices of the NYSE,
20 Broad Street, New York, New York 10005, on which Mylan Common Stock is
listed. Reports, proxy statements and other information concerning Penederm
can be inspected at the Nasdaq National Market, Operations, 1735 K Street,
N.W., Washington D.C. 20006.
 
  Mylan has filed with the Commission a Registration Statement on Form S-4
(together with any amendments thereto, the "Registration Statement") under the
Securities Act of 1933, as amended (the "Securities Act"), with respect to the
Mylan Common Stock to be issued pursuant to the Merger Agreement. This Proxy
Statement/Prospectus does not contain all the information set forth in the
Registration Statement. Such additional information may be obtained from the
Commission's principal office in Washington, D.C.
   
  THIS PROXY STATEMENT/PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE WHICH
ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. SUCH DOCUMENTS ARE
INCORPORATED BY REFERENCE AT THE LOCATIONS IN THIS PROXY STATEMENT/PROSPECTUS
WHERE SUCH INFORMATION IS REQUIRED TO BE SET FORTH. THE DOCUMENTS RELATING TO
MYLAN (OTHER THAN EXHIBITS TO SUCH DOCUMENTS UNLESS SUCH EXHIBITS ARE
SPECIFICALLY INCORPORATED BY REFERENCE) ARE AVAILABLE TO ANY PERSON, INCLUDING
ANY BENEFICIAL OWNER TO WHOM THIS PROXY STATEMENT/PROSPECTUS IS DELIVERED, ON
WRITTEN OR ORAL REQUEST, WITHOUT CHARGE, TO MYLAN LABORATORIES INC., 130
SEVENTH STREET, 1030 CENTURY BUILDING, PITTSBURGH, PENNSYLVANIA 15222
(TELEPHONE NUMBER (412) 232-0100), ATTENTION: PATRICIA SUNSERI, VICE
PRESIDENT--INVESTOR AND PUBLIC RELATIONS. THE DOCUMENTS RELATING TO PENEDERM
(OTHER THAN EXHIBITS TO SUCH DOCUMENTS UNLESS SUCH EXHIBITS ARE SPECIFICALLY
INCORPORATED BY REFERENCE) ARE AVAILABLE TO ANY PERSON, INCLUDING ANY
BENEFICIAL OWNER TO WHOM THIS PROXY STATEMENT/PROSPECTUS IS DELIVERED, ON
WRITTEN OR ORAL REQUEST, WITHOUT CHARGE, TO PENEDERM INCORPORATED, 320
LAKESIDE DRIVE, SUITE A, FOSTER CITY, CALIFORNIA 94404 (TELEPHONE NUMBER (650)
358-0100), ATTENTION: CORPORATE SECRETARY. IN ORDER TO ENSURE TIMELY DELIVERY
OF THE DOCUMENTS, ANY REQUESTS SHOULD BE MADE BY SEPTEMBER 25, 1998.     
 
 
                                       i
<PAGE>
 
                INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
 
  The following documents previously filed by Mylan and Penederm,
respectively, with the Commission pursuant to the Exchange Act are
incorporated herein by this reference:
   
  1. Mylan's Annual Report on Form 10-K for the fiscal year ended March 31,
1998 ("Mylan's 1998 Form 10-K"); Mylan's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1998 ("Mylan's Most Recent 10-Q"); Mylan's Current
Report on Form 8-K/A dated August 26, 1998; and the description of Mylan
Common Stock in Mylan's Registration Statements filed pursuant to Section 12
of the Exchange Act, and any amendment or report filed for the purpose of
updating any such description.     
 
  2. Penederm's Annual Report on Form 10-K for the fiscal year ended December
31, 1997 ("Penederm's 1997 Form 10-K"); Penederm's Quarterly Report on Form
10-Q for the quarter ended March 31, 1998; Penederm's Quarterly Report on Form
10-Q for the quarter ended June 30, 1998; and Penederm's Current Report on
Form 8-K dated June 29, 1998.
 
  In addition, the Merger Agreement and the Stock Option Agreement (as
hereinafter defined), copies of which are attached hereto as Appendix A and
Appendix B, respectively, are incorporated herein by reference.
 
  All documents filed by Mylan and Penederm pursuant to Section 13(a), 13(c),
14 or 15(d) of the Exchange Act subsequent to the date hereof and prior to the
termination of the offering of any securities offered hereby shall be deemed
to be incorporated by reference herein and to be a part hereof from the date
any such document is filed. Any statement contained in a document incorporated
or deemed to be incorporated by reference herein shall be deemed to be
modified or superseded for purposes hereof to the extent that a statement
contained herein (or in any other subsequently filed document that also is
incorporated by reference herein) modifies or supersedes such statement. Any
statement so modified or superseded shall be deemed, except as so modified or
superseded, to constitute a part hereof. All information appearing in this
Proxy Statement/Prospectus is qualified in its entirety by the information and
financial statements (including notes thereto) appearing in the documents
incorporated herein by reference, except to the extent set forth in the
immediately preceding statement.
 
               SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
 
  This Proxy Statement/Prospectus contains and incorporates by reference
certain statements that constitute "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. These
forward-looking statements include all statements regarding the intent, belief
or current expectations regarding the matters discussed or incorporated by
reference in this Proxy Statement/Prospectus (including statements as to
"beliefs," "expectations," "anticipations," "intentions" or similar words) and
all statements which are not statements of historical fact. Such statements
are subject to risks, uncertainties and assumptions, including, but not
limited to, trends for the continued growth of the businesses of Mylan and
Penederm, the realization of anticipated revenues, profitability and cost
synergies of the combined companies and other risks and uncertainties
described in "RISK FACTORS." Should one or more of these risks or
uncertainties materialize or should underlying assumptions prove incorrect,
Mylan's or Penederm's actual results, performance or achievements in 1998 and
beyond could differ materially from those expressed in, or implied by, such
forward-looking statements.
 
  NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS WITH RESPECT TO THE MATTERS DESCRIBED IN THIS PROXY
STATEMENT/PROSPECTUS OTHER THAN THOSE CONTAINED HEREIN OR IN THE DOCUMENTS
INCORPORATED BY REFERENCE HEREIN. ANY INFORMATION OR REPRESENTATIONS WITH
RESPECT TO SUCH MATTERS NOT CONTAINED HEREIN OR THEREIN MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY MYLAN OR
 
                                      ii
<PAGE>
 
PENEDERM. THIS PROXY STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL
OR A SOLICITATION OF AN OFFER TO BUY SECURITIES OR THE SOLICITATION OF ANY
PROXY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH
OFFER OR SOLICITATION IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS PROXY
STATEMENT/PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF MYLAN OR PENEDERM SINCE THE DATE HEREOF OR THAT THE INFORMATION IN
THIS PROXY STATEMENT/PROSPECTUS OR IN THE DOCUMENTS INCORPORATED BY REFERENCE
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF OR THEREOF.
 
  As used herein, unless the context otherwise clearly requires, "Mylan"
refers to Mylan Laboratories Inc. and its consolidated subsidiaries, and
"Penederm" refers to Penederm Incorporated and its consolidated subsidiary.
 
 
                                      iii
<PAGE>
 
                               TABLE OF CONTENTS
<TABLE>
<CAPTION>
                                                                            PAGE
                                                                            ----
<S>                                                                         <C>
AVAILABLE INFORMATION......................................................   i
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE............................  ii
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS..........................  ii
SUMMARY....................................................................   1
 Risk Factors..............................................................   1
 The Companies.............................................................   1
 The Special Meeting.......................................................   1
 The Merger................................................................   2
 Selected Historical Consolidated Financial Data of Mylan..................   7
 Selected Historical Consolidated Financial Data of Penederm...............   8
 Selected Unaudited Pro Forma Combined Financial Data......................   9
 Comparative Per-Share Data of Mylan and Penederm..........................  10
 Market Price Information..................................................  11
RISK FACTORS...............................................................  13
 Fixed Exchange Ratio Despite Possible Changes in Stock Prices.............  13
 Federal Trade Commission Investigation....................................  13
 Uncertainties in Realizing Synergies of the Merger........................  14
THE SPECIAL MEETING........................................................  14
 Matters to Be Considered at the Special Meeting...........................  14
 Record Date and Quorum....................................................  14
 Required Vote.............................................................  14
 Proxies...................................................................  15
 Solicitation of Proxies...................................................  15
 Independent Auditors......................................................  15
 Recommendation of Penederm Board..........................................  15
THE MERGER.................................................................  16
 Background of the Merger..................................................  16
 Penederm's Reasons for the Merger; Recommendation of the Penederm Board...  20
 Opinion of Penederm's Financial Advisor...................................  23
 Mylan's Reasons for the Merger............................................  28
 Regulatory Approvals......................................................  29
 Interests of Certain Persons in the Merger................................  30
 Accounting Treatment......................................................  30
 Certain Federal Income Tax Consequences...................................  31
 Absence of Appraisal Rights...............................................  32
THE MERGER AGREEMENT AND THE RELATED AGREEMENTS............................  33
 General...................................................................  33
 Consideration to Be Received in the Merger................................  33
 Exchange of Shares........................................................  33
 Treatment of Options......................................................  34
 Representations and Warranties............................................  34
 Conduct of Penederm's Business............................................  35
 Exclusivity...............................................................  35
 Resales of Mylan Common Stock.............................................  36
 Conditions to the Merger..................................................  36
 Termination of the Merger Agreement.......................................  37
 Termination Fee; Expenses of the Merger...................................  38
 Benefit Plans.............................................................  39
</TABLE>
 
                                       iv
<PAGE>
 
<TABLE>   
<CAPTION>
                                                                            PAGE
                                                                            ----
<S>                                                                         <C>
 The Stock Option Agreement................................................  40
  The Option...............................................................  40
  Purchase Events..........................................................  40
  Mylan's "Put" Rights.....................................................  41
  Mylan's Registration Rights..............................................  41
  Termination..............................................................  41
  Profit Limitation........................................................  41
 The Voting Agreements.....................................................  42
  Voting and Proxies.......................................................  42
  Prohibited Actions.......................................................  42
  Alternate Voting Agreement...............................................  42
  Other Provisions.........................................................  43
 Co-Promotion Agreements...................................................  43
COMPARISON OF SHAREHOLDER RIGHTS...........................................  43
 Shareholder Rights Generally..............................................  43
 Shareholder Voting Rights.................................................  44
 Shareholder Appraisal Rights..............................................  45
 Rights With Respect to Shares.............................................  46
 Fiduciary Duties of Directors.............................................  46
 Director and Officer Liability and Indemnification........................  47
 Charter Amendments........................................................  47
 Bylaw Amendments..........................................................  48
DESCRIPTION OF MYLAN CAPITAL STOCK.........................................  48
 Mylan Common Stock........................................................  48
 Mylan Preferred Stock.....................................................  48
 Special Considerations....................................................  49
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION.........................  49
EXPERTS....................................................................  55
LEGAL MATTERS..............................................................  55
STOCKHOLDER PROPOSALS......................................................  55
APPENDIX A AGREEMENT AND PLAN OF MERGER.................................... A-1
APPENDIX B STOCK OPTION AGREEMENT.......................................... B-1
APPENDIX C VOTING AGREEMENTS............................................... C-1
APPENDIX D OPINION OF LEHMAN BROTHERS INC. ................................ D-1
</TABLE>    
 
                                       v
<PAGE>
 
 
                                    SUMMARY
 
  The following is a summary of certain important terms of the proposed Merger
and related information contained elsewhere in this Proxy Statement/Prospectus.
This summary is not intended to be complete and is qualified in its entirety by
reference to the more detailed information and financial statements, including
the notes thereto, contained elsewhere, or incorporated by reference, in this
Proxy Statement/Prospectus and the Appendices hereto. Except as otherwise
indicated, all financial information in this Proxy Statement/Prospectus is
presented in accordance with generally accepted accounting principles ("GAAP").
Penederm Stockholders are urged to read this Proxy Statement/Prospectus, the
Appendices hereto and the documents incorporated herein by reference in their
entirety. Unless otherwise defined herein, capitalized terms used in this
summary have the respective meanings ascribed to them elsewhere in this Proxy
Statement/Prospectus.
 
RISK FACTORS
 
  The completion of the Merger and an investment in Mylan Common Stock each
involve substantial risks. Before voting on the Merger and acquiring the
securities offered hereby, Penederm Stockholders should carefully consider the
information set forth in "RISK FACTORS" and other information contained or
incorporated by reference herein.
 
THE COMPANIES
 
Mylan...................  Mylan is engaged in the development, licensing,
                          manufacturing and marketing of numerous generic and
                          proprietary finished pharmaceutical and wound care
                          products. The principal executive offices of Mylan
                          are located at 130 Seventh Street, 1030 Century
                          Building, Pittsburgh, Pennsylvania 15222, and its
                          telephone number at that address is (412) 232-0100.
 
Penederm................  Penederm is engaged in the development and
                          commercialization of topically administered
                          prescription dermatology products that use Penederm's
                          proprietary drug delivery technology or drug
                          compounds to achieve enhanced patient safety or
                          clinical efficacy. The principal executive offices of
                          Penederm are located at 320 Lakeside Drive, Foster
                          City, California 94404, and its telephone number at
                          that address is (650) 358-0100.
 
THE SPECIAL MEETING
 
Time, Date and Place....     
                          The Special Meeting will be held on October 2, 1998,
                          at the Westin Hotel--San Francisco Airport, 1
                          Bayshore Highway, Millbrae, California, commencing at
                          9:30 a.m., local time.     
 
Purpose of the Special    The purpose of the Special Meeting is (i) to consider
 Meeting................  and vote upon a proposal to approve and adopt the
                          Merger Agreement and the transactions contemplated
                          thereby, including the Merger, and (ii) to transact
                          such other business as may properly be brought before
                          the Special Meeting. See "THE SPECIAL MEETING--
                          Matters to Be Considered at the Special Meeting."
 
<PAGE>
 
Record Date; Shares
 Entitled to Vote;           
 Quorum.................  Penederm Stockholders at the close of business on
                          August 28, 1998 (the "Record Date") are entitled to
                          notice of and to vote at the Special Meeting. On the
                          Record Date, there were 8,673,886 shares of Penederm
                          Common Stock outstanding and entitled to vote. Each
                          holder of record of shares of Penederm Common Stock
                          on the Record Date is entitled to cast, either in
                          person or by properly executed proxy, one vote per
                          share on the approval and adoption of the Merger
                          Agreement and other matters, if any, properly
                          submitted for the vote of Penederm Stockholders at
                          the Special Meeting. See "THE SPECIAL MEETING."     
 
                          The presence, in person or by properly executed
                          proxy, of the holders of stock representing a
                          majority of the voting power of all outstanding
                          shares of the Penederm Common Stock at the Special
                          Meeting is necessary to constitute a quorum at the
                          Special Meeting. See "THE SPECIAL MEETING."
 
Vote Required; Voting
 Agreements.............  The approval by Penederm Stockholders of the Merger
                          Agreement will require the affirmative vote of the
                          holders of a majority of the outstanding shares of
                          Penederm Common Stock entitled to vote thereon. As an
                          inducement to Mylan to enter into the Merger
                          Agreement, each of the directors of Penederm, who
                          collectively hold approximately 3.8% of the
                          outstanding Penederm Common Stock, has entered into
                          an agreement with Mylan (the "Voting Agreements")
                          pursuant to which each director has agreed to vote
                          all of the shares of Penederm Common Stock
                          beneficially owned by such director and all shares of
                          Penederm Common Stock subsequently acquired (i) in
                          favor of the Merger, the adoption by Penederm of the
                          Merger Agreement and the approval of the other
                          transactions contemplated by the Merger Agreement at
                          any meeting of Penederm Stockholders at which such
                          matters are considered and at every adjournment or
                          postponement thereof and (ii) against any action or
                          proposal that would impede, frustrate, prevent or
                          nullify the Merger or the Merger Agreement. However,
                          shares representing approximately 3.1% of the
                          outstanding Penederm Common Stock are held by a
                          director who has entered into an Alternate Voting
                          Agreement permitting those shares to be distributed,
                          as close to September 15, 1998 as possible, to the
                          individual investors of the investment fund which
                          owns such shares, and if such distribution occurs
                          before the Penederm Stockholders vote on the Merger
                          Agreement, there is no assurance as to how those
                          shares will be voted. See "THE MERGER AGREEMENT AND
                          THE RELATED AGREEMENTS--The Voting Agreements."
 
THE MERGER
 
Merger Consideration....  If the Merger is consummated, holders of Penederm
                          Common Stock will receive, in exchange for each share
                          of Penederm Common Stock they own, the right to
                          receive 0.68 of a share of Mylan Common Stock.
                          Fractional shares of Mylan Common Stock will not be
                          issuable in connection with the Merger. Holders of
                          Penederm Common Stock
 
                                       2
<PAGE>
 
                          otherwise entitled to a fractional share will be paid
                          the value of such fraction in cash determined as
                          described herein under "THE MERGER AGREEMENT AND THE
                          RELATED AGREEMENTS." The Mylan Common Stock to be
                          issued to Penederm Stockholders pursuant to Merger
                          and any cash to be paid in lieu of fractional shares
                          of Mylan Common Stock are referred to collectively as
                          the "Merger Consideration."
 
                          As soon as practicable after the filing of a
                          certificate of merger with respect to the Merger in
                          the office of the Delaware Secretary of State (the
                          "Effective Time"), a letter of transmittal (including
                          instructions setting forth the procedures for
                          exchanging such holder's certificates representing
                          Penederm Common Stock for the Merger Consideration
                          payable to such holder pursuant to the Merger
                          Agreement) will be sent to each holder of record, as
                          of the Effective Time, of shares of Penederm Common
                          Stock. Upon surrender of such certificates to the
                          Exchange Agent (as defined herein) together with a
                          duly completed and executed letter of transmittal,
                          such holder will promptly receive the Merger
                          Consideration for each share of Penederm Common Stock
                          previously represented by the certificates so
                          surrendered. See "THE MERGER AGREEMENT AND THE
                          RELATED AGREEMENTS--Exchange of Shares."
 
Treatment of Existing     All rights under any stock option granted by Penederm
 Options................  pursuant to Penederm's Equity Incentive Plan,
                          Employee Stock Option Plan, Consultant Stock Option
                          Plan or Nonemployee Directors Stock Option Plan
                          (collectively, the "Penederm Stock Option Plans")
                          that remain unexercised immediately prior to the
                          Effective Time will, together with the Penederm Stock
                          Option Plans, be assumed by Mylan, and will
                          thereafter represent the right to acquire that number
                          of shares of Mylan Common Stock to which the holder
                          would have been entitled pursuant to the Exchange
                          Ratio if, immediately prior to the Effective Time,
                          the holder had fully exercised the option and had
                          been a stockholder of record of Penederm. The
                          duration and other terms of the options will be the
                          same as the original Penederm options, except that
                          the references to Penederm in the Penederm Stock
                          Option Plans will be deemed to be references to
                          Mylan. The option price per share of Mylan Common
                          Stock will be equal to the exercise price per share
                          of Penederm Common Stock provided therein divided by
                          the Exchange Ratio rounded up to the nearest cent.
                          See "THE MERGER AGREEMENT AND THE RELATED
                          AGREEMENTS--Treatment of Options."
 
Reasons for the Merger;
 Recommendation of the
 Penederm Board.........
                          The Penederm Board has unanimously determined that
                          the Merger is in the best interests of Penederm and
                          Penederm Stockholders and has approved the Merger
                          Agreement. THE PENEDERM BOARD UNANIMOUSLY RECOMMENDS
                          THAT THE PENEDERM STOCKHOLDERS VOTE IN FAVOR OF
                          APPROVAL AND ADOPTION OF THE MERGER AGREEMENT AT THE
                          SPECIAL MEETING. For a discussion of the factors
                          considered by the Penederm Board in approving the
                          Merger, see "THE MERGER--Penederm's Reasons for the
                          Merger; Recommendation of the Penederm Board."
 
 
                                       3
<PAGE>
 
Opinion of Penederm's
 Financial Advisor......  Lehman Brothers Inc. ("Lehman Brothers") has
                          delivered its written opinion to the Penederm Board
                          that, as of June 24, 1998, the Exchange Ratio is
                          fair, from a financial point of view, to the Penederm
                          Stockholders.
 
                          The full text of the written opinion of Lehman
                          Brothers, setting forth assumptions made, procedures
                          followed, other matters considered and review
                          undertaken in connection with the opinion, is
                          attached hereto as Appendix D and is incorporated
                          herein by reference. Holders of Penederm Common Stock
                          are urged to, and should, read such opinion in its
                          entirety. See "THE MERGER--Opinion of Penederm's
                          Financial Advisor" and Appendix D.
 
Interests of Certain
 Persons in the Merger..  For a discussion of the interests of certain
                          executive officers and directors of Penederm in
                          addition to their interests as Penederm Stockholders
                          generally and information regarding Penederm Stock
                          Options and other rights of certain members of the
                          Penederm Board, see "THE MERGER--Interests of Certain
                          Persons in the Merger."
 
Effective Time of the     The Effective Time will occur upon the filing of a
 Merger.................  Certificate of Merger with the Secretary of State of
                          the State of Delaware or at such time thereafter as
                          is provided in the Certificate of Merger. See "THE
                          MERGER AGREEMENT AND THE RELATED AGREEMENTS."
 
Conditions to the         The obligations of Mylan and Penederm to consummate
 Merger.................  the Merger are subject to the satisfaction of certain
                          conditions, including, without limitation, obtaining
                          the requisite approval of Penederm Stockholders,
                          delivery to Mylan and Penederm of tax opinions, the
                          continued accuracy of the representations and
                          warranties contained in the Merger Agreement and the
                          receipt of certain consents and approvals, including,
                          without limitation, certain consents and approvals
                          required under agreements to which Penederm is a
                          party. Consummation of the Merger is also subject to
                          compliance with Hart-Scott-Rodino Antitrust
                          Improvements Act of 1976, as amended (the "HSR Act").
                          The notifications required under the HSR Act have
                          been furnished to the Federal Trade Commission (the
                          "FTC") and the Antitrust Division of the Department
                          of Justice (the "Antitrust Division") and the parties
                          have been granted early termination of the waiting
                          period. However, the Antitrust Division and the FTC
                          will continue to have the authority to challenge the
                          Merger on antitrust grounds before or after the
                          Merger is complete. See "THE MERGER--Regulatory
                          Approvals" and "THE MERGER AGREEMENT AND THE RELATED
                          AGREEMENTS--Conditions to the Merger."
 
Termination of the
 Merger Agreement.......  The Merger Agreement may be terminated at any time
                          prior to the Effective Time under certain
                          circumstances, including, among others: (i) by mutual
                          written consent of Mylan and Penederm; (ii) by either
                          Mylan or Penederm if an event or circumstance shall
                          have occurred which has, or is reasonably expected to
                          have, a Material Adverse Effect on the other
 
                                       4
<PAGE>
 
                          or if there has been a Material Adverse Change with
                          respect to the other; (iii) by either Mylan or
                          Penederm if the Merger has not been effected prior to
                          the close of business on November 30, 1998, subject
                          to certain limitations; (iv) by either Mylan or
                          Penederm if the requisite approval of Penederm
                          Stockholders is not obtained; (v) by Mylan or
                          Penederm if Penederm enters into a merger,
                          acquisition or other agreement to effect a Superior
                          Proposal (as defined below); and (vi) by Mylan if the
                          Penederm Board, in breach of the Merger Agreement,
                          withdraws or modifies its recommendation of the
                          Merger, recommends a competing transaction or fails
                          to recommend against a tender or exchange offer by a
                          third party. See "THE MERGER AGREEMENT AND THE
                          RELATED AGREEMENTS--Termination of the Merger
                          Agreement."
 
Termination Fee;          Under certain circumstances, including a termination
 Expenses...............  by Mylan if the Penederm Board withdraws or modifies
                          its recommendation of the Merger or a termination by
                          Penederm to execute a definitive agreement to
                          implement another transaction, a termination of the
                          Merger Agreement will require Penederm to pay Mylan a
                          termination fee of $9 million (the "Termination
                          Fee"). Other than expenses incurred in connection
                          with the filing, printing and mailing of this Proxy
                          Statement/Prospectus, which shall be borne equally
                          between Mylan and Penederm, expenses incurred in
                          connection with the Merger and Merger Agreement will
                          be paid by the party incurring such expenses.
 
Stock Option Agreement..  In connection with the execution of the Merger
                          Agreement, Mylan and Penederm entered into the Stock
                          Option Agreement pursuant to which Penederm granted
                          Mylan an option (the "Mylan Option") to purchase up
                          to 1,717,878 shares of Penederm Common Stock (the
                          "Option Shares") (approximately 19.9% of the
                          outstanding shares of Penederm Common Stock as of the
                          date of the Merger Agreement) at an exercise price of
                          $20.00 per share (the "Option Price"). The Mylan
                          Option is exercisable only upon the occurrence of
                          certain events and provides Mylan the right, under
                          certain circumstances, to require Penederm to
                          purchase for cash the unexercised portion of the
                          Mylan Option. The Mylan Option was a condition to
                          Mylan's entering into the Merger Agreement, and it
                          might increase the likelihood of consummation of the
                          Merger by discouraging competing offers for Penederm.
                          Certain aspects of the Stock Option Agreement may
                          have the effect of discouraging persons who may now,
                          or prior to the Effective Time, be interested in
                          acquiring all of or a significant interest in
                          Penederm from considering or proposing such an
                          acquisition, even if such persons were prepared to
                          offer to pay consideration to Penederm Stockholders
                          that had a higher current market price than the
                          shares of Mylan Common Stock to be received for each
                          share of Penederm Common Stock pursuant to the Merger
                          Agreement. In addition, if Mylan were to become
                          entitled to, and did, exercise the Mylan Option, such
                          exercise could preclude a third party from acquiring
                          Penederm in a transaction intended to be accounted
                          for as a "pooling of interests," and the potential
                          for such preclusion could further discourage
                          competing offers for Penederm. Pursuant to the terms
                          of the Stock Option Agreement, the aggregate maximum
                          value of the Termination Fee and the Mylan Option
 
                                       5
<PAGE>
 
                          is limited to $24 million. See "THE MERGER--
                          Background of the Merger" and "--Penederm's Reasons
                          for the Merger; Recommendation of the Penederm Board"
                          and "THE MERGER AGREEMENT AND THE RELATED
                          AGREEMENTS--The Stock Option Agreement."
 
                          A copy of the Stock Option Agreement is attached as
                          Appendix B to this Proxy Statement/Prospectus and is
                          incorporated by reference herein.
 
Absence of Appraisal
 Rights.................  Penederm Stockholders are not entitled to exercise
                          any appraisal rights under the Delaware General
                          Corporation Law (the "DGCL") in connection with the
                          Merger. See "THE MERGER--Absence of Appraisal
                          Rights."
 
Certain Federal Income
 Tax Consequences.......  It is expected that the Merger will constitute a
                          reorganization under Section 368(a) of the Internal
                          Revenue Code of 1986, as amended (the "Code"), for
                          federal income tax purposes, and accordingly, no gain
                          or loss will be recognized by Penederm Stockholders
                          upon their exchange of Penederm Common Stock for
                          Mylan Common Stock (except to the extent of any cash
                          received in lieu of a fractional share interest in
                          Mylan Common Stock). See "THE MERGER--Certain Federal
                          Income Tax Consequences."
 
Accounting Treatment....  The Merger is expected to be accounted for under the
                          purchase method of accounting in accordance with
                          GAAP. Under this method of accounting, the value of
                          the consideration to be paid by Mylan in the Merger
                          will be allocated to the assets acquired and the
                          liabilities assumed based upon their estimated fair
                          market values at the date of the consummation of the
                          Merger. The results of operations of Penederm prior
                          to the Merger will not be included in the reported
                          results of the combined company thereafter. See "THE
                          MERGER--Accounting Treatment."
 
Comparison of
 Shareholder Rights.....  Upon consummation of the Merger, Penederm
                          Stockholders will become shareholders of Mylan. There
                          are certain material differences between the rights
                          of holders of Mylan Common Stock and the rights of
                          holders of Penederm Common Stock. These differences
                          arise from the distinctions between the laws of the
                          jurisdictions in which Mylan and Penederm are
                          incorporated (Pennsylvania and Delaware,
                          respectively) and the distinctions between the
                          articles of incorporation and bylaws of Mylan and the
                          certificate of incorporation and bylaws of Penederm.
                          See "COMPARISON OF SHAREHOLDER RIGHTS."
 
                                       6
<PAGE>
 
 
            SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA OF MYLAN
 
  The selected historical consolidated financial data for Mylan are based on
and derived from, and should be read in conjunction with, the historical
consolidated financial statements and the related notes thereto of Mylan. The
selected historical financial data for Mylan for each of the years ended March
31, 1996, 1995 and 1994 are derived from audited financial statements of Mylan
for those years. Mylan's consolidated balance sheets at March 31, 1998 and
1997, and the consolidated statements of operations, shareholders' equity and
cash flows for each of the three years in the period ended March 31, 1998, were
audited by Deloitte & Touche LLP, independent auditors, and are included in
Mylan's 1998 Form 10-K which is incorporated by reference herein. The selected
historical consolidated financial data for Mylan should be read in conjunction
with Mylan's 1998 Form 10-K. The selected historical consolidated financial
data for Mylan set forth for each of the three month periods ended June 30,
1998 and 1997 are derived from the unaudited financial statements of Mylan
which, in the opinion of Mylan's management, contain all adjustments,
consisting only of normal recurring items, necessary to present fairly the
selected financial data for such periods. The results of operations for the
three months ended June 30, 1998 may not be indicative of the results of
operations to be expected for a full year. See "INCORPORATION OF CERTAIN
DOCUMENTS BY REFERENCE."
 
<TABLE>
<CAPTION>
                         THREE MONTHS ENDED
                              JUNE 30,                   YEAR ENDED MARCH 31,
                         ------------------- --------------------------------------------
                             1998      1997    1998     1997     1996     1995     1994
                         --------- --------- -------- -------- -------- -------- --------
                                (AMOUNTS IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
<S>                      <C>       <C>       <C>      <C>      <C>      <C>      <C>
STATEMENT OF EARNINGS DATA:(1)
  Total Revenues........  $166,718  $109,188 $555,423 $440,192 $392,860 $396,120 $251,773
  Net Earnings..........    34,182    16,598  100,777   63,127  102,325  120,869   73,067
PER COMMON SHARE:(2)
  Net Earnings--Basic...      0.28      0.14     0.83     0.52     0.86     1.02     0.62
  Net Earnings--Diluted.      0.28      0.13     0.82     0.51     0.85     1.01     0.61
  Dividends
   Declared(3)(4).......      0.04      0.04     0.16     0.16     0.15     0.19     0.10
Shares Used in Net
 Earnings Per Common
 Share Computation--
 Basic..................   122,295   122,065  122,094  121,926  119,530  118,963  118,423
Shares Used in Net
 Earnings Per Common
 Share Computation--
 Diluted................   124,078   123,039  123,043  122,727  120,706  119,912  119,502
<CAPTION>
                              JUNE 30,                        MARCH 31,
                         ------------------- --------------------------------------------
                             1998      1997    1998     1997     1996     1995     1994
                         --------- --------- -------- -------- -------- -------- --------
<S>                      <C>       <C>       <C>      <C>      <C>      <C>      <C>
BALANCE SHEET DATA:(1)
  Working Capital.......  $381,711  $298,372 $358,752 $300,274 $330,733 $275,032 $191,647
Total Assets............   890,899   787,492  847,753  777,580  692,009  546,201  403,325
Long-term Obligations
 (includes long-term
 debt and post-
 retirement
 compensation)..........    26,417    32,936   26,218   32,593   18,002    7,122    4,609
Shareholders' Equity....   774,705   672,627  744,465  659,740  616,441  482,728  379,969
Book Value Per Common
 Share..................      6.33      5.51     6.10     5.40     5.06     4.06     3.20
</TABLE>
- --------
(1) The acquisition of UDL Laboratories, Inc. is reflected in the financial
    data effective for the periods subsequent to February 28, 1996.
 
                                       7
<PAGE>
 
(2) The above financial information gives retroactive effect to the three-for-
    two stock split effective August 15, 1995.
(3) Mylan's current dividend program totals $.16 per share per year.
(4) For the year ended March 31, 1995, Mylan declared a special one-time
    dividend of $.067 per share.
 
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA OF PENEDERM
 
  The selected consolidated financial data for Penederm are based on and
derived from, and should be read in conjunction with, the historical
consolidated financial statements and the related notes thereto of Penederm.
Penederm's historical consolidated balance sheets at December 31, 1997 and
1996, and the consolidated statements of operations, stockholders' equity and
cash flows for each of the years ended December 31, 1995 through 1997, and
notes thereto, were audited by Ernst & Young LLP, independent auditors, and are
included in Penederm's 1997 Form 10-K which is incorporated by reference
herein. Penederm's consolidated statements of operations, stockholders' equity
and cash flows for the years ended December 31, 1993 and 1994, and notes
thereto, were audited by PricewaterhouseCoopers LLP, independent auditors. The
selected historical consolidated financial data for Penederm should be read in
conjunction with Penederm's 1997 Form 10-K. The selected historical unaudited
consolidated financial data for Penederm set forth for each of the six-month
periods ended June 30, 1998 and 1997 have been prepared on the same basis as
the selected historical information derived from such audited financial
statements and, in the opinion of Penederm's management, include all
adjustments, consisting only of normal recurring items, necessary to present
fairly the selected financial data for such periods. The results of operations
for the six months ended June 30, 1998 may not be indicative of the results of
operations to be expected for a full year. See "INCORPORATION OF CERTAIN
DOCUMENTS BY REFERENCE."
 
<TABLE>
<CAPTION>
                            SIX MONTHS
                          ENDED JUNE 30,            YEAR ENDED DECEMBER 31,
                          ----------------  -------------------------------------------
                           1998     1997     1997     1996     1995     1994     1993
                          -------  -------  -------  -------  -------  -------  -------
                             (AMOUNTS IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
<S>                       <C>      <C>      <C>      <C>      <C>      <C>      <C>
STATEMENT OF OPERATIONS
 DATA:
  Total Revenues........  $10,325  $ 4,904  $ 9,005  $ 2,905  $ 5,401  $ 5,123  $ 1,378
  Net (Loss)............   (2,570)  (3,839) (12,717)  (7,643)  (5,036)  (4,993)  (5,539)
PER COMMON SHARE:(1)
  Net (Loss)--Basic and
   Diluted..............    (0.31)   (0.49)   (1.59)   (1.05)   (0.70)   (0.71)   (4.61)
  Dividends Declared....      --       --       --       --       --       --       --
Shares Used in Net
 (Loss) Per Common Share
 Computation--Basic and
 Diluted................    8,351    7,848    7,995    7,275    7,171    6,990    1,202
<CAPTION>
                             JUNE 30,                    DECEMBER 31,
                          ----------------  -------------------------------------------
                           1998     1997     1997     1996     1995     1994     1993
                          -------  -------  -------  -------  -------  -------  -------
<S>                       <C>      <C>      <C>      <C>      <C>      <C>      <C>
BALANCE SHEET DATA:
  Working Capital.......  $ 5,532  $11,236  $ 2,574  $ 5,710  $13,164  $17,307  $23,972
  Total Assets..........   14,769   15,900   10,231   10,694   17,968   23,538   27,498
  Long-term Obligations.        5       20       10       28       54       15       70
  Stockholders' Equity..    7,517   13,923    5,194    8,591   15,934   20,659   26,160
  Book Value Per Common
   Share................     0.87     1.72     0.64     1.17     2.20     2.95     3.75
</TABLE>
- --------
(1) Net (Loss) Per Common Share for the year ended December 31, 1993 has been
    retrospectively restated to apply Staff Accounting Bulletin (SAB) 98. SAB
    98 had no impact on any other year presented.
 
                                       8
<PAGE>
 
 
SELECTED UNAUDITED PRO FORMA COMBINED FINANCIAL DATA
 
  The following selected unaudited pro forma combined financial information has
been derived from and should be read in conjunction with the Unaudited Pro
Forma Combined Financial Statements and notes thereto included elsewhere in
this Proxy Statement/Prospectus. Mylan has a fiscal year ending on March 31,
and Penederm has a fiscal year ending on December 31. The following selected
unaudited pro forma combined financial information is based on the historical
consolidated balance sheets and related historical consolidated statements of
income of Mylan and Penederm as adjusted to give effect to the Merger using the
purchase method of accounting for business combinations, and for purposes of
such selected pro forma financial data, the Penederm financial information has
been recast to conform to the March 31 fiscal year used by Mylan. The
information set forth in the unaudited pro forma combined financial data should
be read in connection with the unaudited pro forma combined financial
statements and notes thereto appearing elsewhere herein. See "Unaudited Pro
Forma Combined Financial Information." The pro forma amounts are not
necessarily indicative of the results of operations or the combined financial
position that would have resulted had the Merger been consummated at the
beginning of the fiscal year presented, nor are they necessarily indicative of
future results of operations or financial position of Mylan.
<TABLE>
<CAPTION>
                                                   THREE MONTHS
                                                       ENDED       YEAR ENDED
                                                   JUNE 30, 1998 MARCH 31, 1998
                                                   ------------- --------------
                                                      (AMOUNTS IN THOUSANDS,
                                                    EXCEPT FOR PER SHARE DATA)
<S>                                                <C>           <C>
STATEMENT OF EARNINGS DATA:
  Total Revenues..................................   $173,042       $565,528
  Net Earnings(1).................................     33,838         91,022
PER COMMON SHARE:(1)
  Net Earnings--Basic.............................       0.26           0.71
  Net Earnings--Diluted...........................       0.26           0.71
  Dividends Declared..............................       0.04           0.16
Shares Used in Net Earnings Per Common Share
 Computation--Basic...............................    128,082        127,634
Shares Used in Net Earnings Per Common Share
 Computation--Diluted.............................    130,200        128,661
<CAPTION>
                                                   JUNE 30, 1998
                                                   -------------
<S>                                                <C>          
BALANCE SHEET DATA:
  Working Capital.................................   $384,743
  Total Assets....................................    976,251
  Long-term Obligations (includes long-term debt
   and post-retirement compensation)..............     26,422
  Shareholders' Equity............................    844,205
  Book Value Per Common Share.....................       6.59
</TABLE>
- --------
(1) As required by Article 11 of Regulation S-X under the Securities Exchange
    Act of 1934, the pro forma income statements exclude the nonrecurring
    charges for in-process research and development estimated at $145,000 and
    $900 of nonrecurring merger costs incurred by Penederm during the three
    months ended June 30, 1998. Had the pro forma income statements included
    these charges, Pro Forma Net (Loss) and Pro Forma Net (Loss) Per Common
    Share--Basic and Diluted would have been $(112,062) million, $(.87) for the
    three months ended June 30, 1998 and $(53,978) million, $(.42) for the year
    ended March 31, 1998.
 
 
                                       9
<PAGE>
 
COMPARATIVE PER-SHARE DATA OF MYLAN AND PENEDERM
 
  The following table presents: (i) the selected comparative per-share data for
each of Mylan and Penederm on an historical basis and (ii) the selected
unaudited pro forma combined comparative per-share data reflecting the
consummation of the Merger. The unaudited pro forma comparative per-share data
assume the Merger has been consummated at the beginning of the periods
presented. The unaudited pro forma data have been prepared giving effect to the
Merger under the purchase method of accounting.
 
  Under the purchase method of accounting, the total value of the Mylan Common
Stock issued in the Merger and the fair value of the vested stock options
granted by Penederm and assumed by Mylan are allocated among assets of Penederm
based upon their fair market values, and any value in excess of such fair
market values is recorded as goodwill.
 
  The Penederm pro forma equivalent amounts are presented with respect to each
set of pro forma information, and have been calculated by multiplying the
corresponding pro forma combined amounts per share of Mylan Common Stock by the
Exchange Ratio.
 
  The comparative per-share data presented herein are based on and derived
from, and should be read in conjunction with, the historical consolidated
financial statements and the related notes thereto of each of Mylan and
Penederm included in the documents incorporated by reference herein. See
"INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE." Pro forma amounts are not
necessarily indicative of the results of operations or the combined financial
position that would have resulted had the Merger been consummated at the
beginning of the fiscal year presented or indicative of the future earnings of
Mylan.
 
<TABLE>
<CAPTION>
                                                   THREE MONTHS
                                                       ENDED       YEAR ENDED
                                                   JUNE 30, 1998 MARCH 31, 1998
                                                   ------------- --------------
                                                      (AMOUNTS IN THOUSANDS,
                                                    EXCEPT FOR PER SHARE DATA)
<S>                                                <C>           <C>
MYLAN HISTORICAL:
  Net Earnings--Basic.............................   $    0.28     $    0.83
  Net Earnings--Diluted...........................        0.28          0.82
  Dividends Declared..............................        0.04          0.16
  Book Value......................................        6.33          6.10
  Shares Used in Net Earnings Per Common Share
   Computation--Basic.............................     122,295       122,094
  Shares Used in Net Earnings Per Common Share
   Computation--Diluted...........................     124,078       123,043
PENEDERM HISTORICAL:
  Net (Loss)--Basic...............................   $   (0.14)    $   (1.55)
  Net (Loss)--Diluted.............................       (0.14)        (1.55)
  Dividends Declared..............................         --            --
  Book Value......................................        0.87          0.58
  Shares Used in Net (Loss) Per Common Share
   Computation--Basic and Diluted.................       8,511         8,147
MYLAN PRO FORMA:(1)(4)
  Net Earnings--Basic.............................   $    0.26     $    0.71
  Net Earnings--Diluted...........................        0.26          0.71
  Dividends Declared..............................        0.04          0.16
  Book Value......................................        6.59           N/C
  Shares Used in Net Earnings Per Common Share
   Computation--Basic.............................     128,082       127,634
  Shares Used in Net Earnings Per Common Share
   Computation--Diluted...........................     130,200       128,661
</TABLE>
 
                                       10
<PAGE>
 
<TABLE>
<CAPTION>
                                                   THREE MONTHS
                                                       ENDED       YEAR ENDED
                                                   JUNE 30, 1998 MARCH 31, 1998
                                                   ------------- --------------
                                                      (AMOUNTS IN THOUSANDS,
                                                    EXCEPT FOR PER SHARE DATA)
<S>                                                <C>           <C>
PENEDERM EQUIVALENT PRO FORMA:(2)(4)
  Net Earnings--Basic.............................   $    0.18     $    0.48
  Net Earnings--Diluted...........................        0.18          0.48
  Dividends Declared..............................        0.03          0.11
  Book Value......................................        4.49           N/C
  Shares Used in Net Earnings Per Common Share
   Computation--Basic(3)..........................     188,356       187,697
  Shares Used in Net Earnings Per Common Share
   Computation--Diluted(3)........................     191,471       189,207
</TABLE>
- --------
(1) The pro forma information was calculated by combining the historical
    amounts from Mylan and Penederm after considering the pro forma adjustments
    divided by the sum of Mylan's historical share information and the
    additional shares of Mylan Common Stock estimated to be issued upon
    consummation of the Merger. Pro forma book value per share is presented for
    the interim period only.
(2) Represents the pro forma information (as calculated in note 1) adjusted to
    reflect the value of one share of Penederm Common Stock.
(3) Penederm equivalent pro forma shares represent the Mylan pro forma shares
    divided by the conversion ratio of .68.
(4) Had the pro forma income statements included the nonrecurring charges for
    in-process research and development estimated at $145,000 and $900 of
    nonrecurring merger costs incurred by Penederm during the three months
    ended June 30, 1998, Pro Forma Net (Loss) Per Common Share--Basic and
    Diluted would have been $(.87) for the three months ended June 30, 1998 and
    $(.42) for the year ended March 31, 1998.
 
Additionally, Penederm equivalent Pro Forma Net (Loss) Per Common Share-Basic
and Diluted would have been $(.59) for the three months ended June 30, 1998 and
$(.29) for the year ended March 31, 1998.
 
N/C = Not computed.
 
MARKET PRICE INFORMATION
 
  Mylan Common Stock is traded on the NYSE under the symbol "MYL." The table
below sets forth for the periods indicated the high and low closing sale prices
per share of Mylan Common Stock and the dividends paid per share of Mylan
Common Stock. For current price information with respect to the Mylan Common
Stock, Penederm Stockholders are urged to consult publicly available sources.
No assurance can be given as to future prices of, or markets for, Mylan Common
Stock. See "RISK FACTORS--Fixed Exchange Rate Despite Possible Changes in Stock
Prices" and "--Federal Trade Commission Investigation."
 
 
                                       11
<PAGE>
 
<TABLE>   
<CAPTION>
                                                           MYLAN COMMON STOCK
                                                         -----------------------
                                                          HIGH   LOW   DIVIDENDS
                                                         ------ ------ ---------
<S>                                                      <C>    <C>    <C>
FISCAL YEAR ENDED MARCH 31, 1997
  First Quarter......................................... $21.63 $16.25   $.04
  Second Quarter........................................  17.50  14.25    .04
  Third Quarter.........................................  17.50  14.00    .04
  Fourth Quarter........................................  18.25  14.38    .04
FISCAL YEAR ENDED MARCH 31, 1998
  First Quarter.........................................  16.88  11.50    .04
  Second Quarter........................................  24.75  14.63    .04
  Third Quarter.........................................  25.25  17.44    .04
  Fourth Quarter........................................  24.31  17.06    .04
FISCAL YEAR ENDING MARCH 31, 1999
  First Quarter.........................................  32.75  22.06    .04
  Second Quarter (through August 27, 1998)..............  35.13  24.50    .04
</TABLE>    
 
  Penederm Common Stock is quoted on NASDAQ and traded under the symbol "DERM."
The table below sets forth for the periods indicated the high and low sales
prices per share of Penederm Common Stock. For current price information with
respect to the Penederm Common Stock, Penederm Stockholders are urged to
consult publicly available sources. Penederm has never declared or paid any
cash dividends on Penederm Common Stock.
 
<TABLE>   
<CAPTION>
                                                                     PENEDERM
                                                                   COMMON STOCK
                                                                   -------------
                                                                    HIGH   LOW
                                                                   ------ ------
<S>                                                                <C>    <C>
FISCAL YEAR ENDED DECEMBER 31, 1996
  First Quarter................................................... $18.25 $10.75
  Second Quarter..................................................  17.75  12.50
  Third Quarter...................................................  16.50   4.88
  Fourth Quarter..................................................  12.50   6.75
FISCAL YEAR ENDED DECEMBER 31, 1997
  First Quarter...................................................  17.25  10.50
  Second Quarter..................................................  13.50  10.00
  Third Quarter...................................................  14.88  10.00
  Fourth Quarter..................................................  13.88   9.13
FISCAL YEAR ENDING DECEMBER 31, 1998
  First Quarter...................................................  13.00   9.56
  Second Quarter..................................................  21.31  10.25
  Third Quarter (through August 27, 1998).........................  23.50  16.25
</TABLE>    
   
  Set forth below are the last reported sale prices of the Mylan Common Stock
and the Penederm Common Stock on June 23, 1998, the last trading day prior to
the public announcement of the Merger Agreement, and on August 27, 1998, as
well as the equivalent pro forma sale prices of the Penederm Common Stock on
such dates, as determined by multiplying the applicable last reported sale
price of the Mylan Common Stock on the NYSE by the Exchange Ratio.     
 
<TABLE>   
<CAPTION>
                                                  PENEDERM
                             MYLAN COMMON STOCK COMMON STOCK PENEDERM EQUIVALENT
                             ------------------ ------------ -------------------
<S>                          <C>                <C>          <C>
June 23, 1998...............      $ 32.19          $15.75          $ 21.88
August 27, 1998.............      $ 25.69          $17.50          $ 17.47
</TABLE>    
 
                                       12
<PAGE>
 
                                 RISK FACTORS
 
  The following factors should be considered carefully by the Penederm
Stockholders in evaluating whether to approve and adopt the Merger Agreement.
These factors should be considered in conjunction with any additional risk
factors in documents incorporated by reference in this Proxy
Statement/Prospectus and any other information included or incorporated by
reference herein, including in conjunction with forward-looking statements
made herein. See "INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE."
 
  Fixed Exchange Ratio Despite Possible Changes in Stock Prices. The Exchange
Ratio establishing the percentage of a share of Mylan Common Stock into which
each share of Penederm Common Stock will be converted is a fixed ratio.
Accordingly, the Exchange Ratio will not be adjusted in the event of any
increase or decrease in the price of Mylan Common Stock or the price or value
of Penederm Common Stock. In addition, neither party has the right to
terminate the Merger Agreement or elect not to consummate the Merger as a
result of changes in the prices of such stocks. The price of Mylan Common
Stock at the Effective Time or at any time thereafter may vary from its price
at the date of execution of the Merger Agreement, the date of this Proxy
Statement/Prospectus or the date of the Special Meeting. Such variations may
be the result of changes in the business, operations or prospects of Mylan or
Penederm, market assessments of the likelihood that the Merger will be
consummated and the timing thereof, regulatory considerations, general market
and economic conditions and other factors. Because the Effective Time may
occur at a date later than the Special Meeting, there can be no assurance that
the price of Mylan Common Stock on the date of the Special Meeting will be
indicative of its price at the Effective Time or at any time thereafter. The
Effective Time will occur as soon as practicable following the Special Meeting
and the satisfaction or waiver of the other conditions set forth in the Merger
Agreement. Penederm Stockholders are urged to obtain current market quotations
for Mylan Common Stock. See "THE MERGER AGREEMENT AND THE RELATED AGREEMENTS--
Consideration to Be Received in the Merger" and "--Conditions to the Merger."
For a discussion of the risk of unusual volatility in the market price of
Mylan Common Stock, see "--Federal Trade Commission Investigation." For
information with respect to the market prices of Penederm Common Stock and
Mylan Common Stock during certain periods and on certain dates, see "SUMMARY--
Market Price Information."
 
  Federal Trade Commission Investigation. Mylan has received from the Federal
Trade Commission (the "FTC") a non-public subpoena requiring Mylan to provide
certain information in connection with a pending FTC investigation to
determine whether Mylan or others had engaged in unlawful activities
restricting competition in the manufacture or sale of active pharmaceutical
ingredients or pharmaceutical products. Four states have also notified Mylan
that they are conducting their own investigations. Mylan understands that the
FTC investigation was prompted by price increases initiated by it on certain
of its products. However, Mylan does not know whether the focus of the
investigation is Mylan's price increases or is (or might lead to) a broader
investigation into pricing in the generic drug industry generally. Mylan's
Most Recent 10-Q (see "INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE")
reported that Mylan is cooperating fully with the FTC and is providing all
information requested by it. As with all governmental investigations, the
process is inherently uncertain. However, Mylan has stated in Mylan's Most
Recent 10-Q that it believes that its management has acted properly and in
full compliance with the Federal Trade Commission Act and all other laws and
regulations governing trade and competition in the marketplace, and that the
ultimate resolution of the matter will not have a material adverse effect on
Mylan's financial position, results of operations or cash flows. Mylan's Most
Recent 10-Q contains additional discussion relating to the FTC investigation.
 
  Uncertainty as to the effects or outcome of the FTC investigation is one of
many factors that can adversely affect the market price of Mylan Common Stock.
In addition, public reports about the investigation that may appear from time
to time in the future (whether or not correct) may cause the market price of
Mylan Common Stock to decline. As a consequence, the FTC investigation, until
resolved, may cause unusual volatility in the market price of Mylan Common
Stock irrespective of other factors that could positively or negatively affect
such market price, including the possible continuation of the volatility that
has characterized stock prices in the generic drug sector and the stock market
generally during the period following the public announcement of the Merger on
June 24, 1998. See "SUMMARY--Market Price Information."
 
                                      13
<PAGE>
 
  Uncertainties in Realizing Synergies of the Merger. In determining that the
Merger is advisable and in the best interests of Penederm Stockholders, the
Penederm Board considered, among other things, special opportunities for
synergistic benefits to be realized from a combination of Penederm and Mylan,
including those enumerated in paragraph 2 under "THE MERGER--Penederm's
Reasons for the Merger; Recommendation of the Penederm Board." The realization
of these synergistic opportunities presents significant management challenges.
There can be no assurance that such opportunities will be successfully
realized, realized as expeditiously as currently expected or realized in any
meaningful way. Moreover, there can be no assurance of the extent to which any
synergies will be achieved. See "THE MERGER--Penederm's Reasons for the
Merger; Recommendation of the Penederm Board."
 
                              THE SPECIAL MEETING
   
  The Special Meeting will be held on October 2, 1998, at 9:30 a.m., local
time, at the Westin Hotel--San Francisco Airport, 1 Bayshore Highway,
Millbrae, California. This Proxy Statement/Prospectus is also being used in
the solicitation of proxies from the Penederm Stockholders by the Penederm
Board for use at the Special Meeting.     
   
  This Proxy Statement/Prospectus is first being mailed to Penederm
Stockholders, and the accompanying forms of proxies are first being mailed on
or about August 31, 1998.     
 
MATTERS TO BE CONSIDERED AT THE SPECIAL MEETING
 
  At the Special Meeting, holders of Penederm Common Stock will (i) consider
and vote upon the approval and adoption of the Merger Agreement and (ii)
transact such other business as may properly come before the Special Meeting.
 
RECORD DATE AND QUORUM
   
  The Penederm Board has fixed August 28, 1998 as the Record Date for the
determination of the Penederm Stockholders entitled to notice of and to vote
at the Special Meeting. Accordingly, only Penederm Stockholders of record on
the Record Date will be entitled to notice of and to vote at the Special
Meeting. As of August 28, 1998, there were 8,673,886 shares of Penederm Common
Stock outstanding, entitled to vote and held by 146 holders of record. Each
Penederm Stockholder of record on the Record Date is entitled to cast one vote
per share on each proposal properly submitted for the vote of the Penederm
Stockholders, either in person or by properly executed proxy, at the Special
Meeting. The presence, in person or by properly executed proxy, of the holders
of a majority of the outstanding shares of Penederm Common Stock entitled to
vote is necessary to constitute a quorum at the Special Meeting.     
 
REQUIRED VOTE
 
  The approval by Penederm Stockholders of the Merger Agreement will require
the affirmative vote of the holders of a majority of the outstanding shares of
Penederm Common Stock entitled to vote thereon. A failure to vote or an
abstention or a broker non-vote will have the same legal effect as a vote by a
Penederm Stockholder against the approval of the Merger and approval and
adoption of the Merger Agreement.
 
  Each Penederm director has advised Penederm that he intends to vote or
direct the vote of all shares of Penederm Common Stock over which he has
voting control FOR approval of the Merger Agreement pursuant to the terms of
the voting agreements entered into between Mylan and each such director at the
time of the execution of the Merger Agreement. Directors of Penederm own
beneficially approximately 3.8% of the outstanding shares of Penederm Common
Stock. See "THE MERGER AGREEMENT AND THE RELATED AGREEMENTS--The Voting
Agreements."
 
 
                                      14
<PAGE>
 
   
  As of August 28, 1998, neither Mylan nor any of its subsidiaries owned any
shares of Penederm Common Stock.     
 
PROXIES
 
  This Proxy Statement/Prospectus is being furnished to Penederm Stockholders
in connection with the Special Meeting. In addition, it is being used in the
solicitation of proxies (individually a "Solicited Proxy" and collectively the
"Solicited Proxies") from the Penederm Stockholders for use at the Special
Meeting.
 
  All shares of Penederm Common Stock that are entitled to vote and are
represented at the Special Meeting by properly executed Solicited Proxies
received prior to or at the Special Meeting, and not revoked, will be voted at
the Special Meeting in accordance with the instructions indicated on such
Solicited Proxies. If no instructions are indicated, such Solicited Proxies
will be voted FOR approval of the Merger and approval and adoption of the
Merger Agreement.
 
  If any other matters are properly presented at the Special Meeting for
consideration, including consideration of a motion to adjourn the Special
Meeting to another time and/or place (including for the purpose of soliciting
additional Solicited Proxies), unless otherwise indicated on such Solicited
Proxies, the person named in the enclosed forms of Solicited Proxies and
acting thereunder will have discretion to vote on such matters in accordance
with his best judgment.
 
  Any Solicited Proxy given pursuant to this solicitation may be revoked by
the person giving it at any time before it is voted. Solicited Proxies may be
revoked by (i) filing with the Secretary of Penederm, at or before the taking
of the vote at the Special Meeting, a written notice of revocation bearing a
later date than the Solicited Proxy; (ii) duly executing a later-dated proxy
relating to the same shares and delivering it to the Secretary of Penederm
before the taking of the vote at the Special Meeting; or (iii) attending the
Special Meeting and voting in person (although attendance at the Special
Meeting will not in and of itself constitute a revocation of the Solicited
Proxy). Any written notice of revocation or subsequent proxy should be sent so
as to be delivered to Michael A. Bates, Secretary, Penederm Incorporated, 320
Lakeside Drive, Foster City, California 94404, or hand-delivered to the
Secretary of Penederm, at or before the taking of the vote at the Special
Meeting.
 
SOLICITATION OF PROXIES
 
  The entire cost of soliciting the proxies from Penederm Stockholders will be
borne by Penederm, except that Mylan and Penederm have each agreed to pay one
half of the printing and mailing costs associated with this Proxy
Statement/Prospectus. See "THE MERGER AGREEMENT AND THE RELATED AGREEMENTS--
Termination Fee; Expenses of the Merger." In addition to the solicitation of
the proxies by mail, MacKenzie Partners, Inc., a proxy solicitation firm, will
assist Penederm in soliciting proxies for the meeting and will be paid a fee
of $7,500 plus out-of-pocket expenses. Penederm will also request banks,
brokers and other record holders to send proxies and proxy material to the
beneficial owners of the stock and secure their voting instructions, if
necessary. Penederm will reimburse such record holders for their reasonable
expenses in so doing. Proxies may also be solicited personally or by telephone
or other means of communication by directors, officers and regular employees
of Penederm without additional compensation therefor.
 
INDEPENDENT AUDITORS
 
  One or more representatives of Ernst & Young LLP, independent auditors for
Penederm, are expected to be present at the Special Meeting and will have an
opportunity to make a statement if they desire to do so and will be available
to respond to appropriate questions.
 
RECOMMENDATION OF PENEDERM BOARD
 
  The Penederm Board has unanimously approved the Merger Agreement and
recommended a vote FOR approval of the Merger Agreement by the Penederm
Stockholders.
 
                PENEDERM STOCKHOLDERS SHOULD NOT SEND ANY STOCK
                     CERTIFICATES WITH THEIR PROXY CARDS.
 
                                      15
<PAGE>
 
                                  THE MERGER
 
BACKGROUND OF THE MERGER
 
  In early 1997, the Chief Executive Officer of Bertek Pharmaceuticals, Inc.
("Bertek"), a wholly-owned subsidiary of Mylan engaged in the development and
sale of proprietary pharmaceutical products, approached Penederm to explore
the possibility of a collaboration with respect to Penederm's proprietary
dermatology products. Following additional intermittent discussion, in March
1997, Bertek and Penederm signed a confidentiality agreement providing for
Penederm to furnish to Bertek proprietary information regarding certain of
Penederm's products with a view to a possible product development and
commercialization collaboration. Further discussion on that subject took place
in June 1997 during a visit to Penederm by Bertek's Chief Executive Officer
and Chief Financial Officer.
   
  During the next several months, discussions regarding a possible product
development collaboration continued intermittently. Lloyd H. Malchow,
Penederm's President and Chief Executive Officer, and Penederm's Vice
President for Business Development led the discussions on behalf of Penederm,
and in addition to the two senior executives of Bertek, the discussions also
involved Roderick P. Jackson, Mylan's Senior Vice President. By October 1997,
the discussions had focused on a proposed co-promotion agreement (the
"Mentax(R) Co-Promotion Agreement") under which Bertek would promote
Penederm's Mentax(R) topical prescription anti-fungal product to primary care
physicians in the United States. There was also some discussion of the
possibility that, in conjunction with the execution of the Mentax(R) Co-
Promotion Agreement, Mylan would make an equity investment in Penederm in the
range of $3-10 million. These proposed arrangements were approved by the
Penederm Board at a regular meeting on October 13, 1997 and were discussed at
a meeting among representatives of Penederm, Bertek and Mylan on October 16,
1997.     
 
  During the next several weeks, Penederm and Bertek finalized the terms of
the Mentax(R) Co-Promotion Agreement while deferring discussion of a possible
equity investment by Mylan in Penederm. The Mentax(R) Co-Promotion Agreement
was signed on December 2, 1997 and jointly announced by Penederm and Mylan on
December 9, 1997.
 
  At a meeting held on December 2, 1997 among representatives of Penederm,
Bertek and Mylan, the possibility of Mylan making a $3-$10 million equity
investment in Penederm was again discussed, and Mylan also expressed interest
in a broader relationship with Penederm, including not only a possible co-
promotion arrangement for Penederm's Avita(R) cream and gel acne products but
also an acquisition of Penederm. Mr. Malchow indicated that Penederm was
interested in discussing the possible equity investment as a means of
financing Penederm's operations until Penederm began to generate positive cash
flow from product revenues. However, he advised that Penederm was not in a
position to discuss any broader collaboration at that time because the
Penederm Board had scheduled strategic planning sessions with senior
management for December 1997 and February 1998 and, pending the outcome of
those sessions, Penederm was focused on completing its financing arrangements
and continuing to implement its internal business plan, which called for
continued dedication to product development and marketing.
 
  At a regularly scheduled meeting held on December 15, 1997, the Penederm
Board received a presentation from Penederm's senior management regarding
Penederm's strategic alternatives for its future direction, including the
possibility of changing Penederm's product development and commercialization
strategies, seeking a partner for a strategic "merger of equals," selling
Penederm and continuing to operate under the current business plan. Each of
these possibilities was discussed as a general matter but no decision was made
and no action was authorized. The Penederm Board decided to resume the
discussion at its regularly scheduled February 1998 meeting. The Penederm
Board also discussed Penederm's capital needs and financing alternatives, and
authorized Mr. Malchow to continue exploring a sale of a minority equity
position in Penederm to one of Penederm's product collaboration partners
(including Mylan).
 
 
                                      16
<PAGE>
 
  During the next few weeks, Penederm and Mylan again discussed a possible
equity investment by Mylan in Penederm. However, the companies could not agree
on mutually acceptable terms, the discussions were discontinued and on January
21, 1998, Penederm entered into definitive agreements with another party (not
one of Penederm's product collaboration partners) for a $10 million equity
line of credit.
 
  On February 10, 1998, at a meeting between Messrs. Malchow and Jackson, Mr.
Jackson expressed Mylan's interest in acquiring Penederm for a price of up to
$18.00 per share, subject to due diligence and definitive documentation. Mr.
Malchow undertook to convey Mylan's interest to the Penederm Board at its
regularly scheduled February 1998 meeting.
 
  At a regularly scheduled meeting of the Penederm Board held on February 25,
1998, Mr. Malchow advised the Penederm Board of his conversation with Mr.
Jackson. After discussing the matter and conferring with Penederm's outside
counsel, Heller Ehrman White & McAuliffe ("HEWM"), the Penederm Board
unanimously decided to engage a nationally recognized investment banking firm
to assist in the Penederm Board's evaluation of Penederm's strategic
alternatives, including an independent analysis of senior management's long-
term business plan, an examination of equity financing possibilities and an
assessment of the possibility of Penederm pursuing a business combination. The
Penederm Board also decided that, unless and until it determined otherwise
after the evaluation was completed, Penederm was not for sale and Penederm's
senior management should continue to focus on implementing Penederm's own
business plan. However, the Penederm Board concluded that it would be
desirable to pursue Mylan's interest in a possible development and
commercialization agreement for other Penederm products and authorized Mr.
Malchow to convey the Penederm Board's position to Mr. Jackson. To facilitate
the selection of an investment banking firm prior to the Penederm Board's next
regularly scheduled meeting in April 1998, the Penederm Board appointed a
committee consisting of Mr. David Collins (Penederm's Chairman), Dr. Harvey
Sadow (another of Penederm's outside directors) and Mr. Malchow (the
"Investment Banker Selection Committee").
 
  Shortly following the February 25, 1998 meeting of the Penederm Board, Mr.
Malchow advised Mr. Jackson of the outcome of that meeting.
 
  On March 6, 1998, the Investment Banker Selection Committee met to interview
representatives of Lehman Brothers Inc. ("Lehman Brothers") and another
nationally recognized investment banking firm. Lehman Brothers and the other
firm were selected as candidates both because of their excellent reputations
in assisting public companies in evaluating strategic alternatives and because
each firm was widely recognized as expert in the pharmaceutical products and
healthcare industries. At the conclusion of the meeting, the Investment Banker
Selection Committee approved the engagement of Lehman Brothers and authorized
Mr. Malchow to execute an engagement agreement with Lehman Brothers on behalf
of Penederm on the basis of the terms proposed by Lehman Brothers at the
meeting (the "Lehman Brothers Engagement Agreement"). The Lehman Brothers
Engagement Agreement was executed on March 10, 1998 (see "--Opinion of
Penederm's Financial Advisor").
 
  Thereafter, for the next several weeks, Lehman Brothers examined Penederm's
business, financial condition, prospects and strategic alternatives with a
view to making a presentation to the Penederm Board at its regularly scheduled
April 1998 meeting, and in connection with this examination, Lehman Brothers
representatives met with Penederm's senior management.
 
  On March 27, 1998, Penederm and Mylan entered into a confidentiality
agreement (the "Initial Confidentiality Agreement") to facilitate Penederm's
delivery of proprietary information to Mylan in connection with a possible
collaboration for product development and commercialization with respect to
one or more of three specified Penederm products. Thereafter, proprietary
information about these products was provided to Mylan. During discussions
between representatives of the two companies, the Mylan representatives
indicated heightened interest, on the basis of Mylan's review of this
information, in a possible acquisition of Penederm.
 
  At a regularly scheduled meeting of the Penederm Board held on April 23,
1998, Lehman Brothers made a presentation regarding its work in connection
with Penederm's evaluation of its strategic alternatives. A general
 
                                      17
<PAGE>
 
discussion of those matters ensued. It was the unanimous consensus of the
Penederm Board that it would not be in the best interests of Penederm
Stockholders for Penederm to initiate a process of actively soliciting
possible buyers because such a process would divert senior management's
attention from Penederm's operations at a crucial stage in Penederm's
development, when the possibility of Penederm generating operating profits in
the near term appeared reasonably likely and Penederm was critically dependent
on the retention of its established research and development staff and of its
newly-hired sales force. However, the Penederm Board unanimously concluded
that there was some significant possibility, which should be pursued, that
Mylan--because of its existing familiarity with Penederm's products and
potential as well as its own stature in the pharmaceutical products industry
and its repeatedly expressed view that Penederm represented a highly
attractive acquisition candidate that could advance Mylan's strategy of
expanding into dermatological products--might be in a position to formulate,
very quickly, a proposal at a purchase price that the Penederm Board would
view as sufficiently attractive to warrant negotiating a sale of Penederm to
Mylan. The Penederm Board also concluded that dialogue with Mylan, even if it
did not result in an acquisition of Penederm, could advance the possibility of
Mylan and Penederm entering into a product development and commercialization
arrangement that could be attractive to Penederm. The Penederm Board
authorized Mr. Malchow, in collaboration with Lehman Brothers and HEWM, to
convey to Mylan the Penederm Board's decision that Penederm was not for sale
but would be willing to permit Mylan expanded due diligence on Penederm for a
30-day period if Mylan was willing to indicate immediately that it could
realistically envision the possibility of such due diligence enabling it to
make an acquisition proposal at a price exceeding $20 per share (on April 22,
1998, the day before the meeting, the closing price of Penederm Common Stock
on NASDAQ was $11 7/8).
 
  Within a few days of the April 23, 1998 meeting of the Penederm Board, the
position of the Penederm Board was conveyed to Mylan and its representatives.
Mylan's response, directly and through its financial advisor, Warburg Dillon
Read LLC ("Warburg Dillon Read"), was that it was willing to accept the offer
of expedited and expanded due diligence on the basis outlined by the Penederm
Board. A Supplement to the Confidentiality Agreement, dated May 6, 1998, was
thereafter executed in order to permit Mylan to receive proprietary
information about Penederm that was not limited to the three possible product
collaborations contemplated by the Initial Confidentiality Agreement.
 
  For the next four weeks, Mylan and Warburg Dillon Read carried out a due
diligence investigation regarding Penederm. In response to a request by Mylan
for an exclusivity agreement, Penederm representatives responded that such an
agreement would not be considered unless and until Mylan made a proposal to
Penederm that reflected a valuation of Penederm consistent with the Penederm
Board's views.
 
  On June 5, 1998, Warburg Dillon Read advised Lehman Brothers that Mylan was
prepared to move forward with a proposal in which Mylan would acquire Penederm
for $20 per share payable in Mylan Common Stock in a tax-free reorganization,
subject to additional due diligence, mutually acceptable agreements and
certain arrangements to enhance the prospects of the transaction being
consummated (including an option on unissued shares of Penederm Common Stock
constituting approximately 19.9% of the outstanding Penederm Common Stock,
irrevocable proxies from Penederm's directors and a cash fee in the event the
transaction was terminated because of the activities of another bidder).
 
  Also on June 5, 1998, Mr. Jackson wrote a letter to Mr. Malchow confirming
the discussion that had occurred earlier that day between Warburg Dillon Read
and Lehman Brothers. The letter indicated that Mylan's valuation remained
subject to mutual due diligence in order to verify the facts upon which it was
based. The letter listed several material matters upon which mutual agreement
would have to be reached. The letter proposed that the parties' respective due
diligence reviews be completed concurrently with the negotiation of the
transaction documents and indicated that drafts of the Merger Agreement, a
stock option agreement, the Voting Agreements and a reciprocal confidentiality
agreement (to facilitate Penederm performing due diligence on Mylan) were
being delivered that day.
 
  Later on June 5, 1998, the Penederm Board considered Mylan's proposal at a
special meeting. After receiving presentations from HEWM and Lehman Brothers,
and discussing the matter, the Penederm Board
 
                                      18
<PAGE>
 
unanimously concluded that it was willing to authorize Penederm to continue
negotiations with Mylan only if Mylan was willing to increase the per-share
consideration to a level the Penederm Board considered commensurate with
Penederm's prospects and sufficient to justify deviating from Penederm's own
business plan. The Penederm Board directed Lehman Brothers to convey this
position to Warburg Dillon Read and to advise Warburg Dillon Read that unless
Mylan was willing to raise its valuation of Penederm, the Penederm Board was
not willing to authorize negotiation of definitive agreements.
 
  On June 9, 1998, Warburg Dillon Read advised Lehman Brothers that Mylan was
now willing to exchange 0.68 of a share of Mylan Common Stock for each share
of Penederm Common Stock, which constituted a price of $21.12 per share of
Penederm Common Stock based on the closing price of Mylan Common Stock on the
NYSE the previous day (the closing price of Penederm Common Stock on NASDAQ
that day had been $14 3/4). Warburg Dillon Read also informed Lehman Brothers
that this offer represented Mylan's maximum and final offer and that Mylan had
raised its price as a final incentive to Penederm to move towards finalizing
definitive agreements immediately. At a special meeting of the Penederm Board
held later that day, the Penederm Board, after a presentation from Lehman
Brothers and a general discussion, unanimously authorized Mr. Malchow, with
the assistance of Lehman Brothers and HEWM, to conduct immediate negotiations
with Mylan and its representatives and perform the necessary related due
diligence, with a view to bringing back to the Penederm Board for its
evaluation definitive agreements based upon Mylan's increased offer.
 
  On June 11, 1998, at a meeting at Mylan's headquarters between Mr. Malchow
and representatives of Lehman Brothers, on the one hand, and Mr. Jackson,
other representatives of Mylan and Bertek, and Warburg Dillon Read, on the
other hand, a reciprocal confidentiality agreement was signed to facilitate
Penederm's receipt of proprietary information from Mylan, and Mylan provided
proprietary information to Penederm's representatives regarding its business,
financial condition and prospects.
 
  At the conclusion of this meeting the representatives of Penederm and Mylan
jointly concluded that it was in the respective best interests of both
companies to seek to complete the negotiations and submit definitive
agreements to their respective boards of directors as soon as possible.
Recognizing, however, the possibility that open issues might not necessarily
be resolved immediately, and in response to Mylan's request for a brief
exclusivity period (which request had, as indicated above, been declined at an
earlier stage in the negotiations), Penederm and Mylan entered into a letter
agreement pursuant to which Penederm agreed that, until July 10, 1998 or such
earlier date as Penederm and Mylan either executed definitive agreements or
mutually agreed to discontinue discussions of the proposed transaction,
Penederm would not solicit any proposal from, furnish any information to or
participate in any negotiations with any third party regarding any acquisition
of Penederm or any material portion of its stock or assets.
 
  During the week of June 15, 1998, Mylan completed its due diligence on
Penederm, Penederm completed its due diligence on Mylan, and intensive
negotiations continued between the two companies and their respective
financial and legal advisors.
 
  At a special meeting held on June 17, 1998, the Penederm Board received from
Mr. Malchow and Lehman Brothers a summary of the information that had been
provided by Mylan at the due diligence meeting on June 9, as well as an
interim report from Lehman Brothers and HEWM regarding the progress of
negotiations on the definitive agreements.
 
  On June 19, 1998, the Mylan Board received detailed presentations from its
senior management and Warburg Dillon Read regarding the status of the due
diligence and the negotiations. The Mylan Board also received a due diligence
report from its outside counsel, Buchanan Ingersoll Professional Corporation
("Buchanan Ingersoll"). The Mylan Board unanimously concluded that it was
willing to authorize its senior management to continue negotiations on the
definitive agreements.
 
  On June 21, 1998, the Penederm Board received detailed presentations from
Mr. Malchow, Lehman Brothers and HEWM regarding the proposed transaction, and
Lehman Brothers indicated that it was willing to
 
                                      19
<PAGE>
 
render an opinion that, as of the date the opinion was rendered, from a
financial point of view the Exchange Ratio was fair to Penederm Stockholders.
After discussing the matter, the Penederm Board unanimously directed Mr.
Malchow, with the assistance of Lehman Brothers and HEWM, to negotiate further
on certain provisions of the various agreements. The Penederm Board also
unanimously authorized Mr. Malchow to pursue Mylan's recent suggestion that,
in conjunction with the execution of the definitive agreements, the companies
commit to completing negotiations on a co-promotion agreement for Penederm's
Avita(R) cream and gel products modeled on the Mentax(R) Co-Promotion
Agreement, but with certain royalty and licensing payments to be paid to
Penederm upon execution of the agreement (the "Avita(R) Co-Promotion
Agreement").
 
  Negotiations continued over the next two days. On June 23, 1998, the Mylan
Board received a report from Warburg Dillon Read and Buchanan Ingersoll as to
the progress of the negotiations and the tentative terms which had been
negotiated since June 19, 1998. Warburg Dillon Read indicated that it was
willing to render an opinion that, as of June 23, 1998, from a financial point
of view the Exchange Ratio was fair to Mylan. The Mylan Board unanimously
authorized the execution of definitive agreements on the basis that had been
negotiated.
 
  At a special meeting held later on June 23, 1998, the Penederm Board
received a presentation from Mr. Malchow, Lehman Brothers and HEWM regarding
the outcome of those negotiations. The Penederm Board also received Lehman
Brothers' written opinion that, as of that date, from a financial point of
view the Exchange Ratio was fair to Penederm Stockholders (see "--Opinion of
Penederm's Financial Advisor"). After discussion, the Penederm Board
unanimously approved the Merger Agreement, the Stock Option Agreement and the
terms of the Avita(R) Co-Promotion Agreement.
 
  Before the opening of trading on June 24, 1998, the Merger Agreement, the
Stock Option Agreement between Mylan and Penederm dated June 24, 1998 (as
amended and restated, the "Stock Option Agreement") and the Voting Agreements
were executed and publicly announced in a joint press release, which Mr.
Malchow read at the annual meeting of Penederm Stockholders held later that
morning (this meeting had previously been scheduled in a notice of meeting and
proxy statement dated May 11, 1998, preceding the negotiations between
Penederm and Mylan). The Avita(R) Co-Promotion Agreement was separately
negotiated, and executed and publicly announced on July 10, 1998.
 
PENEDERM'S REASONS FOR THE MERGER; RECOMMENDATION OF THE PENEDERM BOARD
 
  On June 23, 1998, the Penederm Board unanimously determined the Merger to be
advisable and fair to, and in the best interests of, Penederm and the Penederm
Stockholders. The Penederm Board unanimously approved the Merger Agreement and
unanimously decided to recommend that Penederm Stockholders approve and adopt
the Merger Agreement. In making this decision, the Penederm Board considered
the factors listed below:
 
  1. As indicated above (see "--Background of the Merger"), at its April 23,
1998 meeting the Penederm Board determined that initiating an active process
of soliciting possible buyers for Penederm would be detrimental to senior
management's ability to focus on the pursuit of Penederm's business plan at a
crucial stage in Penederm's development. In approving the Merger Agreement on
June 23, 1998, the Penederm Board also concluded that there was substantial
uncertainty as to the prospect that such a process would yield value for
Penederm Stockholders in excess of the Merger in light of the uncertainty that
would necessarily continue, for some substantial time into the future, to
affect Penederm's attractiveness as an acquisition candidate in light of (i)
Penederm's dependence on a limited number of products, several of which, while
they could prove key to Penederm's future profitability, were still in the
development or testing stage and may take years to reach the marketplace, and
(ii) the presence of competitors with substantially greater resources to
devote to product development, testing and marketing and with substantially
more diversified lines of products, many of which were already in the
marketplace. The Penederm Board determined that, but for Mylan's unsolicited
overture to Penederm and its willingness to acquire Penederm on the terms of
the Merger Agreement, Penederm would more likely enhance long-term value for
Penederm Stockholders by continuing to develop, test and market its line of
products and to seek partners (such as Mylan, in the case of the Mentax(R) Co-
Promotion Agreement and the Avita(R) Co-Promotion Agreement) with which to
enter into product-specific collaborative arrangements, and that
 
                                      20
<PAGE>
 
the risks of deviating from this plan to pursue possible buyers outweigh the
potential and speculative benefits of that process.
 
  2. However, the Penederm Board determined that the Merger presented Penederm
Stockholders with a unique strategic opportunity to maximize the long-term
value of their investment in Penederm by exchanging their shares of Penederm
Common Stock for Mylan Common Stock, giving them the opportunity to continue
to participate in Penederm's potential growth while (i) substantially reducing
the risk that such growth will be impeded by Penederm's limited resources as
an independent entity; (ii) substantially reducing the risks associated with
transitioning from a product development-oriented company to a commercial
sales and marketing-oriented enterprise; and (iii) simultaneously offering
them the chance to benefit from Mylan's substantially greater capacity to
develop, test and market Penederm's products as part of Mylan's broader
strategy of expanding its range of products beyond seasoned generic drugs to
innovative proprietary pharmaceuticals. The Penederm Board also believes there
are special opportunities for synergistic benefits to be realized from a
combination of Penederm and Mylan, including (i) reduction in overhead
relating to distribution and manufacturing activities; (ii) efficiencies in
the management of trade relations and managed care contracting; (iii) expanded
distribution of Penederm's products into new market segments such as hospitals
and institutions; and (iv) development and commercialization of new oral
dermatological dosage forms, although the Penederm Board also recognizes the
risk that such benefits may not be realized (see "RISK FACTORS--Uncertainties
in Realizing Synergies of the Merger").
 
  3. In reaching this conclusion, the Penederm Board considered not only the
value of the consideration being offered to Penederm Stockholders in the
Merger (see paragraph 4 below), but also certain other specific aspects of
Mylan's proposal, including:
 
  (i) Mylan's existing familiarity with Penederm and its product line as a
      result of the discussions that started in early 1997 and led to the
      Mentax(R) Co-Promotion Agreement (see "--Background of the Merger");
 
  (ii) Mylan's repeatedly expressed interest, throughout that period, in
       broadening its relationship with Penederm through additional product
       collaborations (such as the Avita(R) Co-Promotion Agreement) and its
       demonstrated commitment to the acquisition of Penederm as an integral
       step in Mylan's own business strategy;
 
  (iii) Mylan's willingness to complete due diligence on Penederm in a short
        period and to increase substantially its offer for Penederm (from a
        price of up to $18 per share to an exchange ratio representing, on
        the date it was offered, approximately $21 per share);
 
  (iv) Mylan's willingness to reduce the risk that adverse developments in
       Penederm's business would give Mylan the right to terminate the Merger
       Agreement by agreeing to a stringent articulation, in the Merger
       Agreement, of the material adverse events that would trigger a
       termination right on Mylan's part (see "THE MERGER AGREEMENT AND THE
       RELATED AGREEMENTS--Conditions to the Merger");
 
  (v) Mylan's intention to retain Penederm's own workforce to continue
      developing, testing and marketing Penederm's existing and potential
      products; and
 
  (vi) the vigorous nature of the arm's length negotiations that resulted in
       the final terms of the transaction.
 
  4. The Penederm Board also took into account: (i) its own, Lehman Brothers'
and Mylan's respective assessments of Penederm's business, financial
condition, existing products, pipeline of potential products, contractual
arrangements, plans and prospects; (ii) its own, Lehman Brothers' and Mylan's
respective assessments of Mylan's business, financial condition, prospects and
capacity, as a major participant in the pharmaceutical products industry, to
exploit Penederm's potential; and (iii) the perception of Mylan's prospects on
the part of professional securities analysts who follow both Mylan and its
competitors.
 
                                      21
<PAGE>
 
  5. The Penederm Board viewed the Exchange Ratio as an attractive price for
Penederm. Among other factors, the Penederm Board took into consideration:
 
  (i) The Penederm Board's evaluation of financial data presented in
      connection with Lehman Brothers' analysis (see "--Opinion of Penederm's
      Financial Advisor"). On the basis of this data, the Penederm Board
      concluded that the Exchange Ratio compared favorably to the per-share
      prices negotiated in recent comparable acquisitions in Penederm's
      industry and to any reasonable estimate of the near-term value of
      Penederm if it were to remain independent;
 
  (ii) The relationship of the Exchange Ratio to the historical market prices
       for Penederm Common Stock, including the fact that the Exchange Ratio
       represented (based on the closing prices of Penederm Common Stock and
       Mylan Common Stock, respectively, on the relevant dates) a premium of
       approximately 43.2% over the closing price of Penederm Common Stock on
       June 8, 1998 (the last day preceding Mylan's offer of the Exchange
       Ratio), approximately 36.5% over the closing price of Penederm Common
       Stock on June 19, 1998 (the last trading day preceding the meeting of
       the Penederm Board at which Lehman Brothers presented the financial
       analysis supporting its fairness opinion), approximately 39.0% over
       the closing price of Penederm Common Stock on June 23, 1998 (the last
       trading day preceding the meeting of the Penederm Board at which the
       Merger Agreement was approved), and approximately 77.6%, 88.5% and
       84.1% over the average closing prices of Penederm Common Stock during
       the 90-day, 180-day and 52-week periods, respectively, preceding the
       execution of the Merger Agreement (see paragraph 7 below);
 
  (iii) The trading history and pattern of Mylan Common Stock, which
        indicated to the Penederm Board that the shares of Mylan Common Stock
        that Penederm Stockholders would receive in the Merger (and that
        would represent approximately 4.8% of the shares of Mylan Common
        Stock outstanding immediately after the Effective Time) would be
        readily tradeable by those Penederm Stockholders who do not wish to
        make a long-term investment in Mylan and would therefore offer
        immediate liquidity to such Penederm Stockholders; and
 
  (iv) The facts that (i) the Merger is conditioned upon the receipt of
       opinions of counsel that it will be treated for federal income tax
       purposes as a reorganization within the meaning of Section 368 of the
       Code and, (ii) assuming such treatment, no gain or loss will be
       recognized by Penederm Stockholders upon their exchange of Penederm
       Common Stock for Mylan Common Stock (except with respect to any cash
       received in lieu of fractional shares).
 
  6. The Penederm Board took into consideration Lehman Brothers' oral opinion
that, as of June 23, 1998 (the date the Merger Agreement was approved by the
Penederm Board), the Exchange Ratio was from a financial point of view fair to
Penederm Stockholders (see "--Opinion of Penederm's Financial Advisor"). A
copy of Lehman Brothers' confirmatory written opinion dated June 23, 1998,
setting forth the assumptions made, matters considered and review undertaken,
is attached to this Proxy Statement/Prospectus as Appendix D. The full text of
such written opinion is incorporated herein by reference, and the foregoing
description thereof is qualified in its entirety by such reference. Penederm
Stockholders are urged to read such opinion carefully in its entirety.
 
  7. The Penederm Board took note of the fact that the Merger Agreement
provides for a fixed Exchange Ratio of 0.68 of a share of Mylan Common Stock
for each share of Penederm Common Stock, without any so-called "collar"
provision, floating exchange ratio or termination provision designed to ensure
a minimum value to Penederm Stockholders at the instant of the Effective Time.
The Penederm Board recognized that a fixed exchange ratio posed some risk to
Penederm Stockholders in the event of a decline in the value of Mylan Common
Stock (see "RISK FACTORS--Fixed Exchange Ratio Despite Possible Changes in
Stock Prices" and "--Federal Trade Commission Investigation" and "SUMMARY--
Market Price Information"), and that, if such a decline occurred, the Exchange
Ratio might represent less of a premium over the market price of Penederm
Common Stock than it represented on June 23, 1998, when the Penederm Board
approved the Merger Agreement. However, the Penederm Board concluded that,
from a long-term perspective as distinguished from
 
                                      22
<PAGE>
 
the market price of Mylan Common Stock on any given day, the Exchange Ratio
represented an attractive price for Penederm, in part, because it preserved
for Penederm Stockholders the "upside" opportunity to benefit from any future
increase in the market price of Mylan Common Stock, whether due to the
combination of the two companies (see paragraph 2 above) or otherwise. After
discussing with Lehman Brothers the pharmaceutical products industry generally
and professional securities analysts' perceptions of Mylan specifically, the
Penederm Board determined that the benefits of a fixed exchange ratio at least
equalled and possibly outweighed the risks.
 
  8. The Penederm Board considered generally the material terms of the Merger
and concluded that such terms were appropriate for a transaction of the nature
of the Merger. The Penederm Board recognized that the conditions to Mylan's
obligations to consummate the Merger include conditions beyond the ability of
Penederm to control (see "THE MERGER AGREEMENT AND THE RELATED AGREEMENTS--
Conditions to the Merger") and concluded that the risk of nonconsummation of
the Merger has been appropriately limited and is outweighed by the potential
advantages of the Merger to Penederm Stockholders.
 
  9. The Penederm Board considered the termination provisions of the Merger
Agreement, including the obligation of Penederm to pay Mylan a termination fee
of $9 million under certain circumstances involving an acquisition of Penederm
by a competing bidder (see "THE MERGER AGREEMENT AND THE RELATED AGREEMENTS--
Termination Fee; Expenses of the Merger"), as well as the provisions of the
Stock Option Agreement, under which Mylan has the right to buy, at $20 per
share, newly issued shares of Penederm Common Stock representing approximately
19.9% of the presently outstanding shares under certain generally similar
circumstances and certain other circumstances involving a competing bid for
Penederm (see "THE MERGER AGREEMENT AND THE RELATED AGREEMENTS--The Stock
Option Agreement"). The Penederm Board noted that these provisions had been
insisted upon by Mylan as a condition to entering into the Merger Agreement in
order to enhance the likelihood that Mylan would achieve its objective of
acquiring Penederm. The Penederm Board recognized that these provisions would
increase the cost to a competing bidder of acquiring Penederm and might
therefore deter competing bids. However, in light of its decision that
Penederm was not for sale (see paragraph 1 above), that the Merger represented
a unique strategic opportunity for Penederm Stockholders (see paragraph 2
above) and that, for a number of reasons, Mylan was the most likely bidder
able to satisfy itself promptly that Penederm's value as an acquisition
candidate was consistent with the Penederm Board's view of the long-term value
of Penederm (see paragraphs 1 and 3 above), the Penederm Board decided that it
was appropriate to accede to Mylan's requirements, as they had been modified
in the process of the vigorous negotiation between the two companies.
 
  The foregoing discussion of the factors considered by the Penederm Board is
not intended to be exhaustive, but summarizes all material factors considered.
The Penederm Board did not assign any relative or specific weights to the
foregoing factors nor did it specifically characterize any factor as positive
or negative (except as described above), and individual directors may have
given differing weights to differing factors and may have viewed certain
factors more positively or negatively than others. Throughout its
deliberations, the Penederm Board received the advice of HEWM, its legal
advisor, and Lehman Brothers, its financial advisor.
 
  The Penederm Board unanimously recommends that Penederm Stockholders approve
the Merger Agreement and the transactions contemplated thereby, including the
Merger.
 
OPINION OF PENEDERM'S FINANCIAL ADVISOR
 
  Lehman Brothers has acted as financial advisor to Penederm in connection
with the Merger. As part of its role as financial advisor to Penederm, Lehman
Brothers rendered to the Penederm Board an opinion dated June 23, 1998 (the
"Lehman Brothers Opinion") as to the fairness, from a financial point of view,
to Penederm Stockholders of the Exchange Ratio to be offered to Penederm
Stockholders in the Merger.
 
  On June 21, 1998, in connection with an evaluation of the Merger by the
Penederm Board, Lehman Brothers made a presentation to the Penederm Board with
respect to the Merger. At that time, Lehman Brothers reviewed the information
and financial data described below with the Penederm Board, and advised the
Penederm Board
 
                                      23
<PAGE>
 
that it was prepared to render its opinion that the proposed Exchange Ratio to
be offered to Penederm Stockholders in the Merger was fair from a financial
point of view, as of that date, to Penederm Stockholders (see "--Background of
the Merger"). At the June 23, 1998 meeting of the Penederm Board, Lehman
Brothers delivered its written opinion that the proposed Exchange Ratio to be
offered to Penederm Stockholders in the Merger was fair from a financial point
of view to such Penederm Stockholders as of the date of such opinion. A copy
of the Lehman Brothers Opinion, which sets forth assumptions made and matters
considered therein and limitations thereof, is attached as Appendix D to this
Proxy Statement/Prospectus and is incorporated by reference. Penederm
Stockholders should read the Lehman Brothers Opinion for a discussion of such
assumptions, matters and limitations. The summary of the Lehman Brothers
Opinion set forth in this Proxy Statement/Prospectus is qualified in its
entirety by reference to the full text of the Lehman Brothers Opinion. There
is no requirement in the Merger Agreement or otherwise that the Lehman
Brothers Opinion be updated to any date subsequent to June 23, 1998.
 
  No limitations were imposed by Penederm on the scope of Lehman Brothers'
investigation or the procedures to be followed by Lehman Brothers in rendering
the Lehman Brothers Opinion, except that Lehman Brothers was not authorized
to, and did not, solicit any indications of interest from any third party with
respect to the purchase of all or part of Penederm's business. Lehman Brothers
was not requested to and did not make any recommendation to the Penederm Board
as to the form or amount of the consideration to be offered to Penederm
Stockholders in the Merger, which was determined through arm's length
negotiations between the parties. In arriving at the Lehman Brothers Opinion,
Lehman Brothers did not ascribe a specific range of value to Penederm, but
made its determination as to the fairness from a financial point of view of
the Exchange Ratio to be offered to Penederm Stockholders in the Merger on the
basis of the financial and comparative analyses described below. The Lehman
Brothers Opinion is for the use and benefit of the Penederm Board and was
rendered to the Penederm Board in connection with its consideration of the
Merger. The Lehman Brothers Opinion is not intended to be and does not
constitute a recommendation to any Penederm Stockholders as to how such
Penederm Stockholders should vote with respect to the Merger. Lehman Brothers
was not requested to opine to, and the Lehman Brothers Opinion does not
address, Penederm's underlying business decision to proceed with, or the
effect of, the Merger.
 
  In arriving at the Lehman Brothers Opinion, Lehman Brothers reviewed and
analyzed: (i) the Merger Agreement and the specific terms of the Merger, (ii)
Penederm's 1997 Form 10-K and such other publicly available information
concerning Penederm and Mylan that Lehman Brothers believed to be relevant to
its analysis, (iii) financial and operating information with respect to the
business, operations, assets, financial condition and prospects of Penederm
furnished to Lehman Brothers by Penederm, (iv) financial and operating
information with respect to the business, operations, assets, financial
condition and prospects of Mylan furnished to Lehman Brothers by Mylan, (v) a
trading history of Penederm Common Stock from June 17, 1996 to June 17, 1998,
and a comparison of that trading history with those of other companies that
Lehman Brothers deemed relevant, (vi) a trading history of Mylan Common stock
from June 17, 1996 to June 17, 1998, and a comparison of that trading history
with those of other companies that Lehman Brothers deemed relevant, (vii) a
comparison of Penederm's historical financial results and financial condition
as of the date of the Lehman Brothers Opinion with those of other companies
that Lehman Brothers deemed relevant, (viii) a comparison of Mylan's
historical financial results and financial condition as of the date of the
Lehman Brothers Opinion with those of other companies that Lehman Brothers
deemed relevant, (ix) a comparison of the financial terms of the Merger with
the financial terms of certain other transactions that Lehman Brothers deemed
relevant, and (x) published estimates of third-party research analysts with
respect to the future financial performance of Mylan. In addition, Lehman
Brothers had discussions with the respective management of Penederm and Mylan
concerning its businesses, operations, assets, financial condition and
prospects and the operating synergies expected by such management to result
from the Merger, and undertook such other studies, analyses and investigations
as Lehman Brothers deemed appropriate.
 
  In arriving at the Lehman Brothers Opinion, Lehman Brothers assumed and
relied upon the accuracy and completeness of the financial and other
information used by it without assuming any responsibility for
 
                                      24
<PAGE>
 
independent verification of such information, and further relied upon the
advice of the management of Penederm and Mylan that they were not aware of any
facts or circumstances that would make such information inaccurate or
misleading. With respect to the financial projections of Penederm, upon advice
of Penederm, Lehman Brothers assumed that such projections were reasonably
prepared on a basis reflecting the best available estimates and judgments of
the management of Penederm as to the future financial performance of Penederm,
and Lehman Brothers relied upon such projections in arriving at the Lehman
Brothers Opinion. With respect to the future financial performance of Mylan,
upon advice of Mylan, Lehman Brothers assumed that the published estimates of
third-party research analysts were a reasonable basis upon which to evaluate
the future financial performance of Mylan. In arriving at the Lehman Brothers
Opinion, Lehman Brothers did not conduct a physical inspection of the
properties and facilities of Penederm or Mylan, and did not make or obtain any
evaluations or appraisals of the assets or liabilities of Penederm. In
addition, Penederm did not authorize Lehman Brothers to solicit, and Lehman
Brothers did not solicit, any indications of interest from any third party
with respect to the purchase of all or a part of the business of Penederm. In
addition, Lehman Brothers assumed that, as contemplated by the Merger
Agreement, the Merger will qualify as a reorganization within the meaning of
Section 368(a) of the Code, and therefore as a tax-free transaction to
Penederm Stockholders. The Lehman Brothers Opinion was necessarily based upon
market, economic and other conditions as they existed on, and could be
evaluated as of, the date of the Lehman Brothers Opinion.
 
  In connection with the preparation and delivery of the Lehman Brothers
Opinion to the Penederm Board, Lehman Brothers performed a variety of
financial and comparative analyses, as described below. The preparation of a
fairness opinion involves various determinations as to the most appropriate
and relevant methods of financial and comparative analysis and the application
of those methods to the particular circumstances, and therefore, such an
opinion is not readily susceptible to summary description. Furthermore, in
arriving at the Lehman Brothers Opinion, Lehman Brothers did not attribute any
particular weight to any analysis or factor considered by it, but rather made
qualitative judgments as to the significance and relevancy of each analysis
and factor. Accordingly, Lehman Brothers believes that its analyses must be
considered as a whole and that considering any portion of such analyses and
factors, without considering all analyses and factors, could create an
incomplete or misleading view of the process underlying the Lehman Brothers
Opinion. In its analyses, Lehman Brothers made numerous assumptions with
respect to industry performance, general business and economic conditions and
other matters, many of which are beyond Penederm's and Mylan's control. Any
estimates contained in these analyses are not necessarily indicative of actual
values or predictive of future results or values, which may be significantly
more or less favorable than as set forth therein. Additionally, analyses
relating to the value of businesses do not purport to be appraisals or to
reflect the prices at which businesses actually may be sold.
 
  Transaction Terms. Lehman Brothers considered that the implied value to be
received by Penederm Stockholders in the Merger, based upon the Exchange Ratio
and the closing price of Mylan Common Stock of $31.19 on June 17, 1998, was
$21.21 per share of Penederm Common Stock.
 
  Historical Stock Price Performance of Penederm and of Mylan. Lehman Brothers
reviewed the price performance of Penederm Common Stock for the twenty-four-
month period preceding the delivery of the Lehman Brothers Opinion and noted
that the closing price of Penederm Common Stock had fluctuated over that
period from a high of $17.50 to a low of $5.50, and was trading at $15.69 on
June 17, 1998. Lehman Brothers also compared the price performance of Penederm
Common Stock to a weighted average of the stock prices of certain publicly
traded drug delivery companies and to the S&P 400 Index for the twenty-four-
month period prior to the delivery of the Lehman Brothers Opinion. The
companies that Lehman Brothers considered included Anesta Corp., Aradigm
Corporation, Atrix Laboratories, Inc., Cygnus, Inc., Emisphere Technologies,
Inc., Fuisz Technologies, Inc., Inhale Therapeutic Systems, InSite Vision
Incorporated, Medicis Pharmaceutical Corporation, Noven Pharmaceuticals, Inc.
and Theratech, Inc. (the "Comparable Drug Delivery Companies"). Lehman
Brothers noted that the price of Penederm Common Stock had declined 12.4%
compared to an increase of 25.4% for the Comparable Drug Delivery Companies
and an increase of 57.9% in the S&P 400 Index over the past twenty-four
months. Lehman Brothers also compared the price performance of Mylan Common
Stock to a weighted average of the stock prices of certain publicly traded
generic pharmaceutical companies and to the
 
                                      25
<PAGE>
 
S&P 400 Index for the twenty-four-month period prior to the delivery of the
Lehman Brothers Opinion (from June 17, 1996 to June 17, 1998). The companies
that Lehman Brothers considered included Alpharma Inc., Barr Laboratories,
Inc., IVAX Corporation, Schein Pharmaceutical, Inc., Teva Pharmaceutical
Industries Ltd. and Watson Pharmaceuticals, Inc. (the "Comparable Generic
Pharmaceutical Companies"). Lehman Brothers noted that the price of Mylan
Common Stock had increased 55.7% compared to an increase of 24.3% for the
Comparable Generic Pharmaceutical Companies and an increase of 59.9% in the
S&P 400 Index over the past twenty-four months.
 
  Comparable Public Company Analysis of Penederm and of Mylan. Lehman Brothers
compared the historical, financial and operating performance of the Comparable
Drug Delivery Companies with the historical financial and operating
performance of Penederm and of the Comparable Generic Pharmaceutical Companies
with that of Mylan, based upon information that was publicly available at that
time and based upon information provided to Lehman Brothers by the respective
management of Penederm and Mylan. Lehman Brothers examined both the market
value of the total outstanding common equity ("Market Value") and the Market
Value plus Debt minus Cash ("Technology Value" or "Firm Value") of such
comparable companies on a primary and fully diluted basis. "Debt" equals long-
and short-term debt and current portion of long-term debt and capital lease
obligations. "Cash" equals cash and cash equivalents plus marketable
securities. For Penederm, Lehman Brothers noted that, at the proposed Exchange
Ratio of 0.68 of a share of Mylan Common Stock per share of Penederm Common
Stock, the Market Value for Penederm of $196.6 million was within the range of
$52.2 million to $723.1 million, and was below the mean of $236.6 million and
above the median of $164.7 million, for the Comparable Drug Delivery
Companies. Lehman Brothers also noted that, at the proposed Exchange Ratio of
0.68 of a share of Mylan Common Stock per share of Penederm Common Stock, the
Technology Value for Penederm of $194 million was within the range of $45.5
million to $490.3 million, and was below the mean of $200.3 million and above
the median of $155.2 million, for the Comparable Drug Delivery Companies.
 
  Lehman Brothers also noted that the mean and median price earnings ratios
using calendar 1998 estimates provided by First Call of the Comparable Drug
Delivery Companies were 23.1x and 23.1x, respectively, compared to 75.7x for
Penederm at the Exchange Ratio. The mean and median price earnings ratios
using calendar 1999 estimates provided by First Call of the Comparable Drug
Delivery Companies were 16.1x and 16.5x, respectively, compared to 22.3x for
Penederm at the Exchange Ratio.
 
  Lehman Brothers noted that the Market Value for Mylan of $3.8 billion was
within the range of $520.3 million to $4.3 billion, and higher than the mean
and median of $1.7 billion and $1.1 billion, respectively, for the Comparable
Generic Pharmaceutical Companies. Lehman Brothers also noted that the Firm
Value for Mylan of $3.7 billion was within the range of $0.8 billion to $4.3,
and was higher than the mean and median of $1.8 billion and $1.2 billion,
respectively, for the Comparable Generic Pharmaceutical Companies.
 
  Lehman Brothers also noted that the mean and median price earnings ratios
using calendar 1998 estimates provided by First Call of the Comparable Generic
Pharmaceutical Companies were 25.9x and 23.1x, respectively, compared to 28.1x
for Mylan. The mean and median price earnings ratios using calendar 1999
estimates provided by First Call of the Comparable Generic Pharmaceutical
Companies were 20.0x and 18.1x, respectively, compared to 24.8x for Mylan.
Lehman Brothers further noted that the mean and median price earnings ratios
using calendar 1998 estimates provided by First Call divided by each company's
respective 5-year median growth rate as reported by the Institutional Brokers
Estimate System ("IBES") of the Comparable Generic Pharmaceutical Companies
were 0.94x and 0.79x, respectively, compared to 1.40x for Mylan. The mean and
median price earnings ratios using calendar 1999 estimates provided by First
Call divided by each company's respective 5-year median growth rate as
reported by IBES of the Comparable Generic Pharmaceutical Companies were 0.73x
and 0.61x, respectively, compared to 1.24x for Mylan.
 
  However, because of the inherent differences between the businesses,
operations and prospects of Penederm and Mylan and the businesses, operations,
technology and prospects of the Comparable Drug Delivery Companies and
Comparable Generic Pharmaceutical Companies, as the case may be, Lehman
Brothers did not rely solely on the quantitative results of the analysis, but
rather also made qualitative judgments concerning
 
                                      26
<PAGE>
 
differences between the financial and operating characteristics and prospects
of Penederm and Mylan and the Comparable Drug Delivery Companies and
Comparable Generic Pharmaceutical Companies, as the case may be, that would
affect the public trading values of each.
 
  Discounted Cash Flow Analysis for Penederm. Lehman Brothers performed a
discounted cash flow analysis based upon Penederm's projected financial
performance. This analysis was based upon information and projections provided
by Penederm's management. Lehman Brothers discounted to present value the
projected stream of after-tax cash flows and the terminal year value
("Terminal Value") of the business. Terminal Value was based upon different
ranges of multiples of projected fiscal 2006 earnings before interest and
taxes and discount rates from 25% to 35%, which were chosen based on several
assumptions regarding factors such as the inflation rate, interest rates, the
inherent business risk in Penederm's operations as well as in the drug
delivery industry as a whole and the cost of capital to Penederm. The imputed
value per share of Penederm Common Stock resulting from these analyses ranged
from $11.89 to $23.91.
 
  Comparable Transaction Analysis for Penederm. Lehman Brothers compared the
financial terms of certain recent stock-for-stock merger transactions which
Lehman Brothers considered relevant with the financial terms of the Merger,
based upon information that was publicly available at the time and based upon
information provided to Lehman Brothers by Penederm management. The
transactions that Lehman Brothers considered comparable to the Merger included
35 stock-for-stock merger transactions that occurred in the biopharmaceuticals
industry since 1988 ("Comparable Transactions"). Lehman Brothers calculated
the transaction value per share implied by the exchange ratio for shares
purchased directly from the target company in the Comparable Transactions
("Merger Purchase Price Per Share"). The mean, median, high and low Merger
Purchase Price Per Share for the Comparable Transactions was then compared to
the target's stock price one day and one month prior to the announcement of
the transaction and to the target's latest twelve-month high and low stock
price to calculate the premium over such prices ("Premium"). The mean, median,
high and low Premiums one day prior to the transaction announcement were
23.7%, 10.9%, 126.3% and (17.9%), respectively, in the Comparable
Transactions. Lehman Brothers noted that the Exchange Ratio represented a
39.0% Premium over the price of Penederm Common Stock one day prior to the
announcement of the Merger (the closing price of Penederm Common Stock on June
23, 1998 was $15.75) and was within the range of the Comparable Transactions
and above the mean and median of the Comparable Transactions. The mean,
median, high and low Premiums one month prior to the Merger announcement were
29.4%, 23.4%, 220.0% and (31.5%), respectively, in the Comparable
Transactions. Lehman Brothers noted that the Exchange Ratio represented a
61.7% Premium over the price of Penederm Common Stock of $13.54 one month
prior to the announcement of the Merger and was within the range of the
Comparable Transactions and above the mean and median of the Comparable
Transactions.
 
  However, because the reasons for and the circumstances surrounding each of
the transactions analyzed were specific to each transaction and because of the
inherent differences between the business, operations, technology and
prospects of Penederm and the businesses, operations, technology and prospects
of the selected acquired companies analyzed, Lehman Brothers did not rely
solely on the quantitative results of the analysis but, rather, also made
qualitative judgments concerning differences between the characteristics of
these transactions and the Merger that would affect the acquisition values of
Penederm and such acquired companies.
 
  Exchange Ratio Analysis. Lehman Brothers compared the exchange ratios
implied by average historical prices of Penederm Common Stock and Mylan Common
Stock to the Exchange Ratio. Lehman Brothers reviewed the ratios of the
closing stock prices of Penederm Common Stock and Mylan Common Stock over
various time periods during the twenty-four-month period ended June 17, 1998
and computed the premiums represented by the Exchange Ratio over the averages
of these daily ratios over various periods. The averages of these daily ratios
of the closing prices of Penederm Common Stock and Mylan Common Stock were
0.48 for the previous 10 calendar days, 0.44 for the previous 30 calendar
days, 0.43 for the previous 60 calendar days, 0.45 for the previous 90
calendar days, 0.49 for the previous 180 calendar days and 0.54 for the
previous 52 weeks ending June 17, 1998. Lehman Brothers noted that the
Exchange Ratio exceeded the high end of these historical
 
                                      27
<PAGE>
 
exchange ratios. The Exchange Ratio represented premiums of 42.5%, 55.0%,
58.8%, 49.5%, 38.7% and 26.9%, respectively, over the aforementioned average
exchange ratios of Penederm's and Mylan's stock prices.
 
  Relative Contribution Analysis. Lehman Brothers analyzed the pro forma
historical and projected financial contribution of Penederm and Mylan to the
combined company assuming consummation of the Merger based upon projections
for Penederm provided by Penederm and published estimates of research analysts
for Mylan. This analysis showed, among other things, that Penederm would
contribute 4.6% of projected revenue and 2.8% of the projected operating
income of the combined company for the fiscal year ended March 31, 1999.
Lehman Brothers noted that Penederm Stockholders would own 4.8% of the
combined company's common stock.
 
  Mylan Common Stock Trading Volume Analysis. Lehman Brothers analyzed the
historical daily trading volume of Mylan Common Stock over various periods.
The 10-, 30-, 60-, 90- and 120-day average daily trading volume of Mylan
Common Stock was approximately 642,460, 843,732, 931,688, 908,900 and 863,759
shares, respectively.
 
  Pro Forma Analysis. Lehman Brothers analyzed the pro forma effects of the
Merger using Penederm's financial projections and publicly available financial
information for Mylan. Lehman Brothers noted that, at the Exchange Ratio,
assuming no synergy savings and excluding one-time extraordinary charges, the
Merger would be slightly dilutive to Mylan in fiscal years 1999 and 2000.
However, assuming moderate synergy savings, expected by Mylan and Penederm,
the Merger would be neither dilutive nor accretive in 1999 and accretive in
2000.
 
  Mylan Dividend Analysis. Lehman Brothers reviewed Mylan's dividend history
and indicated that Mylan had declared a quarterly dividend of $0.04 per share
on June 12, 1998. The quarterly dividend of $0.04 per share represented a
15.4% payout ratio and an annualized dividend yield (assuming a $0.16 annual
dividend) of 0.52% based on the 30-day average trading price of Mylan Common
Stock of $30.89. Lehman Brothers also noted that Penederm does not pay
dividends on Penederm Common Stock and that, based on the Exchange Ratio,
Penederm Stockholders will receive through the Merger an annual $0.11 dividend
for each Penederm share owned.
 
  Lehman Brothers is an internationally recognized investment banking firm and
in connection with its investment banking activities is regularly engaged in
the evaluation of businesses and their securities in connection with mergers
and acquisitions, negotiated underwritings, competitive bids, secondary
distributions of listed and unlisted securities and private placements, and in
valuations for corporate and other purposes. The Penederm Board selected
Lehman Brothers because of Lehman Brothers' expertise, reputation and
familiarity with biopharmaceutical and generic pharmaceutical companies and
because its investment banking professionals have substantial experience in
transactions similar to the Merger.
 
  As compensation for its services in connection with the Merger under the
Lehman Brothers Engagement Agreement, Penederm has paid Lehman Brothers a
retainer fee of $100,000 upon its engagement and agreed to pay Lehman Brothers
a fee of $300,000 upon delivery of the Lehman Brothers Opinion. In addition,
Penederm has agreed to pay Lehman Brothers a fee of 1.25% of the Merger
Consideration (or approximately $2.6 million) contingent upon the consummation
of the Merger, against which the retainer fee and the opinion fee will be
credited. Penederm has also agreed to reimburse Lehman Brothers for its
reasonable out-of-pocket expenses and has agreed to indemnify Lehman Brothers
against certain liabilities that may arise in connection with its engagement.
In the ordinary course of its business, Lehman Brothers may trade in the
securities of Penederm and Mylan for its own account and for accounts of
customers and, accordingly, may at any time hold a short position in such
securities.
 
MYLAN'S REASONS FOR THE MERGER
 
  The Board of Directors of Mylan believes that the acquisition of Penederm is
fair to and in the best interests of Mylan and its shareholders. In reaching
such determination, the Board of Directors of Mylan considered the following
material factors:
 
                                      28
<PAGE>
 
  (i) Mylan's review of Penederm, including its business, operations,
      management, earnings and financial condition on an historical and
      prospective basis;
 
  (ii) the presentations by Warburg Dillon Read to the Board of Directors of
       Mylan on June 19, 1998 and June 23, 1998 and the written opinion
       rendered by Warburg Dillon Read, dated June 23, 1998, to the effect
       that, as of such date, the Exchange Ratio was fair to Mylan from a
       financial point of view;
 
  (iii) the terms and conditions of the Merger Agreement, including, without
        limitation, provisions relating to the number of shares of Mylan
        Common Stock to be issued in the Merger and the conditions to the
        consummation of the Merger;
 
  (iv) its belief that the Merger will significantly enhance its ability to
       serve physicians in both the primary care and dermatology markets;
 
  (v) the potential to leverage Penederm's current research and development
      efforts to assist current Mylan research and development efforts that
      have the potential to be improved by Penederm's potential drug-delivery
      technology; and
 
  (vi) its belief that the Merger would constitute an additional step towards
       Mylan's strategic goal of establishing proprietary pharmaceutical
       products.
 
  After reviewing the factors described above in their totality, the Mylan
Board determined that the Merger is in the best interests of Mylan and its
shareholders. In view of the variety of factors considered in connection with
its evaluation of the Merger, the Mylan Board found it impractical to, and did
not, quantify or attempt to assign relative weight to the specific factors
considered in reaching its determination. There can be no assurances that the
expected benefits of the Merger will be realized. See "RISK FACTORS."
 
REGULATORY APPROVALS
 
  Under the HSR Act and the rules promulgated thereunder by the FTC, the
Merger may not be consummated until notifications have been given and certain
information has been furnished to the FTC and the Antitrust Division and
specified waiting period requirements have been satisfied. Mylan and Penederm
each filed notification and report forms under the HSR Act with the FTC and
the Antitrust Division on July 21, 1998. The FTC and the Antitrust Division
granted early termination of the waiting period on July 31, 1998. At any time
before or after consummation of the Merger, the Antitrust Division or the FTC
could take such action under the antitrust laws as it deems necessary or
desirable in the public interest, including seeking to enjoin the consummation
of the Merger or seeking divestiture of substantial assets of Mylan or
Penederm. At any time before or after the Effective Time, and notwithstanding
that the HSR Act waiting period has been terminated, any state could take such
action under its antitrust laws as it deems necessary or desirable in the
public interest. Such action could include seeking to enjoin the consummation
of the Merger or seeking divestiture of Penederm or businesses of Mylan or
Penederm. Private parties may also seek to take legal action under antitrust
laws under certain circumstances.
 
  Based on information available to them, Mylan and Penederm believe that the
Merger can be effected in compliance with federal and state antitrust laws.
However, there can be no assurance that a challenge to the consummation of the
Merger on antitrust grounds will not be made or that, if such a challenge were
made, Mylan and Penederm would prevail or would not be required to accept
certain conditions, possibly including certain divestitures, in order to
consummate the Merger.
 
  Consummation of the Merger is conditioned upon the receipt of all material
governmental authorizations, consents, orders and approvals, subject to waiver
of such conditions, in accordance with the terms of the Merger Agreement.
Although Mylan and Penederm have agreed to use commercially reasonable efforts
to secure all such approvals, there can be no assurance regarding the timing
of such approvals or that such approvals will, in fact, be obtained.
 
                                      29
<PAGE>
 
INTERESTS OF CERTAIN PERSONS IN THE MERGER
 
  In considering the approval by the Penederm Board of the Merger, Penederm
Stockholders should be aware that the members of the Penederm Board and
management of Penederm have certain interests in, and will receive benefits
from, the Merger that are in addition to, and differ from, the interests of
and benefits to Penederm stockholders generally. No director or executive
officer of Penederm had or is expected to have a business relationship with
Mylan prior to the Effective Time.
   
  Penederm's directors and executive officers have previously been granted
options to purchase Penederm Common Stock. Such options will be assumed by
Mylan at the Effective Time (see "THE MERGER AGREEMENT AND THE RELATED
AGREEMENTS--Treatment of Options"). As of the Record Date, directors and
executive officers of Penederm held options to purchase an aggregate of
900,069 shares of Penederm Common Stock, including options to purchase an
aggregate of 242,500 shares of Penederm Common Stock held by non-employee
directors. Such options are exercisable at exercise prices ranging from $.55
to $20.50 per share. Pursuant to a resolution of the Penederm Board adopted in
December 1997, all Penederm stock options, including those held by Penederm
executive officers and directors, will become fully vested immediately upon
the consummation of the Merger.     
 
  In addition, Mylan has consented to (and the Penederm Board intends to
consider) Penederm entering into arrangements with each of Messrs. Lloyd H.
Malchow (Penederm's President and Chief Executive Officer) and Michael A.
Bates (Penederm's Chief Financial Officer) providing for (i) the payment to
each of them, if their employment terminates following the Effective Time, of
an amount equal to the maximum bonus each could have earned under Penederm's
existing bonus guidelines for 1998 if he had remained in his present position
through year-end, and (ii) the payment of six months' salary as severance from
Penederm. Messrs. Malchow and Bates are in discussions with Mylan with respect
to the role, if any, they will play in the combined company after the
Effective Time.
 
  The Merger Agreement provides that for six years after the Effective Time,
Mylan shall cause the Surviving Corporation, and shall guarantee the
obligations of the Surviving Corporation, to (a) maintain in effect the
current provisions regarding indemnification of officers and directors
contained in the charter and bylaws of Penederm and in any indemnification
agreements of Penederm and (b) indemnify the past and present officers and
directors of Penederm to the fullest extent to which Penederm is permitted to
indemnify such officers and directors under its charter, bylaws and applicable
law. Further, Mylan shall or shall cause the Surviving Corporation to provide,
for a period of six years from the Effective Time, the current directors and
officers of Penederm an insurance and indemnification policy that provides
coverage for events prior to the Effective Time that is substantially similar
to the policy currently maintained by Penederm; provided that Mylan or the
Surviving Corporation, as applicable, shall not be required to spend as an
annual premium for such insurance an amount in excess of 200% of the annual
premium paid for such insurance in effect prior to the date of the Merger
Agreement.
 
  The Penederm Board was aware of these interests and considered them, among
other matters, in approving the Merger Agreement and the transactions
contemplated thereby.
 
ACCOUNTING TREATMENT
 
  The Merger will be accounted for by Mylan under the purchase method of
accounting in accordance with GAAP. Under the purchase method of accounting,
all of the assets and liabilities of Penederm will be recorded in Mylan's
consolidated financial statements at their estimated fair values at the
Effective Time, and the consideration to be paid in the Merger will be
allocated to such assets and liabilities based on such fair values. The amount
by which such consideration exceeds the fair value of the net assets acquired
by Mylan through the Merger will be recorded as goodwill. Mylan's consolidated
financial statements will include the operations of Penederm after the
Effective Time. Income (or loss) of Penederm prior to the Effective Time will
not be included in the income of the combined company.
 
                                      30
<PAGE>
 
  The selected unaudited pro forma combined financial data and the unaudited
pro forma combined financial statements contained in this Proxy
Statement/Prospectus have been prepared using the purchase accounting method to
account for the Merger. See "SUMMARY--Selected Unaudited Pro Forma Combined
Financial Data."
 
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
 
  The following discussion summarizes the material federal income tax
considerations generally applicable to Penederm Stockholders. It is a condition
to the obligation of Mylan to consummate the Merger that Mylan shall have
received an opinion of Buchanan Ingersoll, in form and substance reasonably
satisfactory to Mylan, and it is a condition to the obligation of Penederm to
consummate the Merger that Penederm shall have received an opinion of HEWM, in
form and substance reasonably satisfactory to Penederm, in each case dated as
of the date upon which the Merger is consummated (the "Effective Date") and
based on representations contained in the Merger Agreement, to the effect that
the Merger will constitute a "reorganization" within the meaning of Section
368(a) of the Code and that Penederm, Mylan and Merger Sub will each be a party
to that reorganization within the meaning of Section 368(b) of the Code. The
discussion below under "--Exchange of Penederm Common Stock for Mylan Common
Stock," "--Cash Received in Lieu of Fractional Shares" and "--Reporting
Requirements" assumes that the Merger will be treated in accordance with the
opinions of Buchanan Ingersoll and HEWM described in the preceding sentence.
There can be no assurance that the Internal Revenue Service (the "IRS") will
not take a contrary view, and no ruling from the IRS has been or will be
sought.
 
  The discussion below is based upon the Code, the applicable Treasury
Department regulations thereunder, judicial authority and current
administrative rulings and practice, all as in effect as of the date hereof.
Future legislative, judicial or administrative changes or interpretations could
alter or modify the statements and conclusions set forth herein, and any such
changes or interpretations could have retroactive effect and could affect the
federal income tax consequences to Penederm Stockholders.
 
  The following discussion does not address the consequences of the Merger
under state, local or foreign law, nor does the discussion address all aspects
of federal income taxation that may be important to a Penederm Stockholder in
light of such stockholder's particular circumstances or tax issues which may be
significant to Penederm Stockholders subject to special rules, including,
without limitation, financial institutions, insurance companies, foreign
individuals and entities, tax-exempt entities, dealers in securities, persons
who acquired Penederm Common Stock pursuant to the exercise of an employee
option (or otherwise as compensation) or persons holding Penederm Common Stock
as part of an integrated investment (including a "straddle") composed of
Penederm Common Stock and one or more other positions. This discussion assumes
that Penederm Stockholders hold their respective Penederm Common Stock as
capital assets within the meaning of Section 1221 of the Code.
 
  Exchange of Penederm Common Stock for Mylan Common Stock. Except as
  discussed below under "--Cash Received in Lieu of Fractional Shares," no
  gain or loss will be recognized for federal income tax purposes by Penederm
  Stockholders who exchange their Penederm Common Stock for Mylan Common
  Stock pursuant to the Merger. The aggregate tax basis of Mylan Common Stock
  received as a result of the Merger will be the same as the stockholder's
  aggregate tax basis in the Penederm Common Stock surrendered in the
  exchange (reduced by any tax basis allocable to fractional shares exchanged
  for cash), and the holding period of the Mylan Common Stock received will
  include the holding period of the Penederm Common Stock surrendered
  therefor.
 
  Cash Received in Lieu of Fractional Shares. The payment of cash to a
  Penederm Stockholder in lieu of a fractional share interest in Mylan Common
  Stock will be treated as if the fractional share had been distributed as
  part of the exchange and then redeemed by Mylan. The cash payment will be
  treated as having been received as a distribution in payment for the Mylan
  Common Stock hypothetically redeemed as provided in Section 302 of the Code
  and generally should result in the recognition of capital gain or loss
  measured by the difference between the amount of cash received and the
  portion of the tax basis of the
 
                                       31
<PAGE>
 
  Penederm Common Stock allocable to such fractional share interest. In the
  case of an individual, capital gain recognized with respect to cash
  received in lieu of fractional share interests in Mylan Common Stock
  generally will be subject to United States federal income tax at a maximum
  rate of 20% if such individual held his or her Penederm Common Stock for
  more than one year at the Effective Time and at ordinary income rates as a
  short-term capital gain if such individual held his or her Penederm Common
  Stock for one year or less at the Effective Time. The deductibility of
  capital losses is subject to limitation.
 
  Reporting Requirements. Each Penederm Stockholder that receives Mylan
  Common Stock in the Merger will be required to file with such holder's
  federal income tax return a statement setting forth the basis of the
  Penederm Common Stock surrendered and the fair market value of the Mylan
  Common Stock and any other property received in the Merger, and to retain
  permanent records of these facts relating to the Merger.
 
  Backup Withholding. Unless an exemption applies under applicable law and
  regulations, the Exchange Agent (as defined in "THE MERGER AGREEMENT AND
  THE RELATED AGREEMENTS--Exchange of Shares") is required to withhold, and
  will withhold, 31% of any cash payments to a Penederm Stockholder in the
  Merger unless the stockholder provides the appropriate form as described
  below. Each Penederm Stockholder should complete and sign the Substitute
  Form W-9 included as part of the letter of transmittal to be sent to each
  Penederm Stockholder, so as to provide the information (including such
  stockholder's taxpayer identification number) and certification necessary
  to avoid backup withholding, unless an applicable exemption exists and is
  proved in a manner satisfactory to Mylan and the Exchange Agent.
 
  The preceding discussion does not purport to be a complete analysis or
  discussion of all potential tax effects relevant to the Merger. Thus,
  Penederm Stockholders are urged to consult their own tax advisors as to the
  specific tax consequences to them of the Merger, including tax return
  reporting requirements, the applicability and effect of federal, state,
  local and other applicable tax laws and the effect of any proposed changes
  in the tax laws.
 
ABSENCE OF APPRAISAL RIGHTS
 
  Penederm is incorporated under Delaware law, and the DGCL governs the
availability of appraisal rights with respect to mergers involving Penederm.
Penederm Stockholders are not entitled to appraisal rights under the DGCL in
connection with the Merger Agreement and the consummation of the transactions
contemplated thereby.
 
                                       32
<PAGE>
 
                THE MERGER AGREEMENT AND THE RELATED AGREEMENTS
 
  This Proxy Statement/Prospectus contains a brief summary of certain
provisions of the Merger Agreement, the Stock Option Agreement and the Voting
Agreements. This summary is qualified in its entirety by reference to the full
texts of such agreements, which are included as Appendices A, B and C hereto
and which are incorporated herein by reference.
 
GENERAL
 
  Pursuant to the Merger Agreement, Merger Sub will be merged with and into
Penederm and Penederm will become a wholly-owned subsidiary of Mylan. At the
Effective Time, each outstanding share of Penederm Common Stock will be
converted into the right to receive 0.68 of a share of Mylan Common Stock (or
cash in lieu of fractional shares) as described herein. The name of the
Surviving Corporation shall be "Penederm Incorporated."
 
CONSIDERATION TO BE RECEIVED IN THE MERGER
 
  At the Effective Time, each share of Penederm Common Stock issued and
outstanding immediately prior to the Effective Time will, by virtue of the
Merger and without any action on the part of the holder thereof, be converted
into the right to receive 0.68 of a share of Mylan Common Stock.
 
  No fractional shares of Mylan Common Stock will be issued in the Merger.
Each holder of Penederm Common Stock who upon surrender of certificates
representing such Penederm Common Stock (each, a "Certificate") therefor would
be entitled to receive a fraction of a share of Mylan Common Stock will
receive, in lieu of such fractional share, cash in an amount equal to such
fraction multiplied by the closing price of Mylan Common Stock on the
Effective Date, less the amount of any taxes which may be required to be
withheld under any provision of federal, state, local or foreign tax law.
 
  Each share of Penederm Common Stock issued and held in Penederm's treasury
at the Effective Time shall, by virtue of the Merger, cease to be outstanding
and shall be cancelled and retired without payment of any consideration
thereof.
 
EXCHANGE OF SHARES
 
  As soon as practicable after the Effective Time, Mylan will instruct
American Stock Transfer and Trust Company (the "Exchange Agent") to send to
each Penederm Stockholder of record a letter of transmittal for use in the
exchange of Penederm Common Stock. As soon as practicable after the Effective
Time, Mylan will deposit with the Exchange Agent the aggregate consideration
for the Merger to be paid in respect of the Penederm Common Stock to the
holders thereof.
 
  Upon surrender to the Exchange Agent of a Certificate or Certificates,
together with a properly completed letter of transmittal, the holder of such
Certificate shall be entitled to receive in exchange therefor that number of
Mylan Common Stock which such holder has the right to receive (and any amount
of cash payable in lieu of fractional shares), after giving effect to any
required withholding tax.
 
  If any portion of the Merger Consideration is to be paid to a person other
than the registered holder of Penederm Common Stock formerly represented by
the Certificate or Certificates surrendered in exchange for the Merger
Consideration, it shall be a condition to such payment that the Certificate or
Certificates so surrendered shall be properly endorsed or otherwise be in
proper form for transfer and that the person requesting such payment shall pay
to the Exchange Agent any transfer or other taxes required as a result of such
payment to a person other than the registered holder of such Penederm Common
Stock or establish to the satisfaction of the Exchange Agent that such tax has
been paid or is not payable.
 
  Any portion of the Merger Consideration made available to the Exchange Agent
pursuant to these procedures that remains unclaimed by Penederm Stockholders
twelve months after the Effective Time shall be
 
                                      33
<PAGE>
 
returned to Mylan, upon demand, and any such person who has not exchanged
properly such person's Certificate or Certificates for the Merger
Consideration prior to that time shall thereafter look only to Mylan for
payment of the Merger Consideration. Notwithstanding the foregoing, Mylan
shall not be liable to any person for any amount paid to a public official
pursuant to applicable abandoned property laws.
 
  No dividends or other distributions with respect to securities of Mylan
constituting part of the Merger Consideration shall be paid to the holder of
any unsurrendered Certificates until such Certificates are properly
surrendered. Upon such surrender, there shall be paid, without interest, to
the person in whose name the Certificates representing the securities of Mylan
into which such Penederm Common Stock were converted are registered, all
dividends and other distributions payable in respect of such securities on a
date subsequent to, and in respect of a record date after, the Effective Time,
less the amount of any required withholding taxes.
 
  PENEDERM STOCKHOLDERS SHOULD NOT FORWARD STOCK CERTIFICATES TO THE EXCHANGE
AGENT UNTIL THEY HAVE RECEIVED TRANSMITTAL LETTERS. PENEDERM STOCKHOLDERS
SHOULD NOT RETURN STOCK CERTIFICATES WITH THE ENCLOSED PROXY.
 
TREATMENT OF OPTIONS
   
  As of the Record Date, there were a total of 1,293,397 shares of Penederm
Common Stock subject to Penederm stock options.     
 
  At the Effective Time, as required by the Merger Agreement, Mylan will
assume Penederm's Stock Option Plans and Penederm's rights and obligations
under each Penederm stock option that is outstanding immediately prior to the
Effective Time (an "Existing Option"). Under each Existing Option existing
immediately after the Effective Time (an "Assumed Option"), the optionee shall
have the right to receive from Mylan, in accordance with the terms and subject
to the conditions of the Existing Option, the number of shares of Mylan Common
Stock equal to the Exchange Ratio multiplied by the number of shares of
Penederm Common Stock that such optionee would have been entitled to receive
had the optionee exercised his or her Existing Option immediately prior to the
Effective Time, but only in accordance with the terms and conditions of the
Existing Option (including payment of the aggregate exercise price thereof,
rounded up to the nearest cent). No Assumed Option shall give the optionee any
additional benefits that the holder thereof did not have under the Existing
Option; and the terms of such Existing Options shall govern the vesting
thereof including, if applicable, any vesting of Existing Options as a result
of the Merger. Each Assumed Option shall constitute a continuation of the
Existing Option, substituting Mylan for Penederm and, in the case of
employees, employment by a Mylan company for employment by Penederm. Mylan has
agreed to file, and maintain the effectiveness of, a registration statement
with the Commission covering the Assumed Options.
 
REPRESENTATIONS AND WARRANTIES
 
  Penederm and Mylan have made representations in the Merger Agreement
relating to, among other things: (a) each of Penederm's and Mylan's
capitalization and organization and similar corporate matters, (b)
authorization, execution, delivery and enforceability of the Merger Agreement
and the Stock Option Agreement, (c) conflicts under governing documents,
required consents or approvals, and violations of any agreements or law, (d)
documents filed with the Commission and the accuracy of information contained
therein, (e) absence of material adverse events, changes or effects, (f)
brokers and finders, (g) tax matters relating to the proposed Merger, (h) the
absence of undisclosed liabilities, (i) compliance with FDA laws, (j)
litigation, (k) intellectual property matters, and (l) the absence of
contracts or disputes with labor unions or organizations.
 
  Penederm has made additional representations, among others, relating to: (a)
compliance with law, including compliance with environmental and tax laws and
regulations, (b) retirement and other employee plans and matters, (c) the
disclosure and enforceability of certain material contracts, (d) certain
business matters relating to permits and licenses and insurance and accounts
receivables, (e) product warranties, and (f) liabilities with labor unions or
organizations.
 
                                      34
<PAGE>
 
  Mylan and Merger Sub made additional representations in the Merger Agreement
concerning Merger Sub relating to, among other things: (a) organization and
similar corporate matters, (b) authorization, execution, delivery and
enforceability of the Merger Agreement, conflicts under governing documents,
required consents or approvals, and violations of any agreements or law, and
(c) the absence of prior business authorities.
 
  None of the representations and warranties of Penederm, Mylan or Merger Sub
in the Merger Agreement described above will survive the Effective Time.
 
  In addition, Mylan and Penederm have made representations that serve as the
basis for the tax opinions of Buchanan Ingersoll and HEWM described under "THE
MERGER--Certain Federal Income Tax Consequences."
 
CONDUCT OF PENEDERM'S BUSINESS
 
  Penederm has covenanted to Mylan that, except as contemplated by the Merger
Agreement or agreed to in writing by Mylan, from the date of the Merger
Agreement to the Effective Time, Penederm will, and will cause its subsidiary
to, conduct its business in the ordinary course, consistent with past
practice, and will use commercially reasonable efforts to preserve its
business organization, its relationship with its customers and suppliers and
maintain satisfactory relationships with all persons with which it does
business. In addition, the Merger Agreement contains specific restrictions
with respect to certain matters.
 
EXCLUSIVITY
 
  Penederm has agreed that it will not, and will not authorize or permit its
subsidiary or any of their respective officers, directors, employees, counsel,
investment bankers, financial advisors, accountants, other representatives and
agents (collectively, the "Penederm Representatives") to, (A) solicit,
initiate or encourage (including by way of furnishing information), or take
any other action to facilitate, any inquiries or the making of any proposal
which constitutes, or may reasonably be expected to lead to, any Takeover
Proposal (as defined below); (B) participate in any discussion or negotiations
regarding any Takeover Proposal; (C) approve or agree to endorse any Takeover
Proposal; (D) enter into any agreement with respect to any Takeover Proposal;
or (E) withdraw or modify, or propose to withdraw or modify, in a manner
adverse to Mylan, the approval or recommendation of the Merger Agreement or
the Merger, unless the Penederm Board determines in good faith, after
consulting with its legal counsel, that it is necessary to withdraw or modify
its recommendation because of the occurrence of a Material Adverse Change with
respect to Mylan, or the occurrence of an event which has or could reasonably
be expected to have a Material Adverse Effect on Mylan (for the meaning of
these terms, see "--Conditions to the Merger"). Penederm and the Penederm
Board may, however, at any time prior to the Special Meeting, engage in the
prohibited actions in response to an unsolicited Takeover Proposal if, and
only to the extent that, (x) the Penederm Board determines in good faith,
based upon the advice of its legal counsel as to legal matters, that it is
necessary to do so in order to comply with its fiduciary duties to Penederm
Stockholders under applicable law, (y) the Penederm Board determines that the
Takeover Proposal is a Superior Proposal (as defined below), and (z) the party
who submitted the Takeover Proposal executes a customary confidentiality
agreement.
 
  In addition, Penederm has agreed to advise promptly Mylan (orally and in
writing) of any Takeover Proposal received by Penederm or any request for
information stated by the proponent to be in contemplation of any Takeover
Proposal, or any inquiry which could reasonably be expected to lead to any
Takeover Proposal, the material terms and conditions of such Takeover Proposal
or request or inquiry and the identity of the person making such Takeover
Proposal, request or inquiry. Penederm has also agreed to keep Mylan
reasonably informed of any material amendment or modification to such Takeover
Proposal, request or inquiry.
 
  "Takeover Proposal" means any inquiry, proposal or offer from any person
relating to any: (A) tender or exchange offer, merger, consolidation or
similar transaction involving Penederm or its subsidiary; (B) sale, lease or
other disposition directly or indirectly by merger, consolidation, or share
exchange of assets of Penederm or its subsidiary representing 10% or more of
the consolidated assets of Penederm and its subsidiary; (C) issuance, sale or
other disposition of (including by way of merger, consolidation, share
exchange or similar transaction)
 
                                      35
<PAGE>
 
securities (or options, rights or warrants to purchase, or securities
convertible into, such securities) representing 10% or more of the voting
power of Penederm; or (D) transaction in which any person shall acquire
beneficial ownership (as such term is defined in Rule 13d-3 under the Exchange
Act) or the right to acquire beneficial ownership of, or any "group" (as such
term is defined under the Exchange Act) shall have been formed which
beneficially owns or has the right to acquire beneficial ownership of, 25% or
more of the outstanding Penederm Common Stock.
 
  "Superior Proposal" means any Takeover Proposal on terms which the Penederm
Board determines in its good-faith judgment, based in part on the advice of a
financial advisor of nationally recognized reputation, to be more favorable to
the Penederm Stockholders than the Merger from a financial point of view and
for which financing is then committed or reasonably likely to be available.
 
RESALES OF MYLAN COMMON STOCK
 
  All Mylan Common Stock received by Penederm Stockholders in the Merger will
be freely transferable pursuant to the Securities Act, except that Mylan
Common Stock received by persons who are deemed to be "affiliates" (as such
term is defined under the Securities Act) of Penederm at the time that
Penederm Stockholders vote on the Merger may be resold only in transactions
permitted by the resale provisions of Rule 145 promulgated under the
Securities Act or as otherwise permitted under the Securities Act. Under the
Merger Agreement, Penederm intends to designate its directors and executive
officers as its affiliates for purposes of these restrictions and the
requirement of the Merger Agreement that its affiliates sign letters
acknowledging these restrictions. Each Penederm affiliate has executed a
written agreement agreeing to comply with the requirements of the Securities
Act (the "Affiliate Letter").
 
CONDITIONS TO THE MERGER
 
  The respective obligations of Penederm, Mylan and Merger Sub to effect the
Merger are subject to the fulfillment at or prior to the Effective Time of the
following conditions:
 
  (a) The Merger Agreement and the Merger shall have been approved and
      adopted by the requisite vote of the Penederm Stockholders;
 
  (b) All required governmental approvals and contractual consents shall have
      been obtained, and the applicable waiting period under the HSR Act
      shall have expired;
 
  (c) The Registration Statement shall have become effective under the
      Securities Act and shall not be the subject of any stop order or
      proceeding seeking a stop order;
 
  (d) The Mylan Common Stock issued in the Merger shall have been approved
      for listing on the NYSE upon official notice of issuance; and
 
  (e) No legal restraint or prohibition preventing the consummation of the
      Merger shall be in effect.
 
  The obligations of Penederm to effect the Merger are subject to the
satisfaction or waiver on or before the Effective Time of each of the
following additional conditions:
 
  (a) No event or circumstance shall have occurred which has or is reasonably
      expected to have a Material Adverse Effect (as defined below) on Mylan
      and its subsidiaries taken as a whole, including, without limitation,
      such event or occurrence caused by: (i) the failure of representations
      and warranties of Mylan and Merger Sub contained in the Merger
      Agreement to continue to be true and correct on and as of the date on
      which the Effective Time occurs, except for changes contemplated in the
      Merger Agreement, with the same force and effect as if made on and as
      of the Effective Date; (ii) the failure of Mylan or Merger Sub to have
      performed or complied with all agreements, conditions and covenants
      required by the Merger Agreement to be performed or complied with by
      them on or before the Effective Date; or (iii) the execution, delivery
      and performance by Mylan of the Merger Agreement and the consummation
      of the Merger resulting in or constituting an event of default under an
      obligation under any agreement of Mylan;
 
                                      36
<PAGE>
 
  (b) There shall have been no Material Adverse Change (as defined below)
      with respect to Mylan;
 
  (c) Penederm shall have received a certificate of an executive officer of
      each of Mylan and Merger Sub certifying as to compliance with the
      conditions set forth in clauses (a) and (b) above;
 
  (d) Penederm shall have received an opinion of HEWM to the effect that,
      among other things, the Merger will constitute a reorganization within
      the meaning of Section 368(a) of the Code and that Mylan, Merger Sub
      and Penederm shall each be a party to that reorganization within the
      meaning of Section 368(b) of the Code; and
 
  (e) Penederm shall have received from Mylan a certificate confirming
      certain representations and covenants of Mylan contained in the Merger
      Agreement with respect to tax matters relating to the status of the
      Merger as a reorganization within the meaning of Section 368(a) of the
      Code.
 
  The obligations of Mylan and Merger Sub to effect the Merger are subject to
the satisfaction or waiver on or before the Effective Time of each of the
following additional conditions:
 
  (a) No event or circumstance shall have occurred which has or is reasonably
      expected to have a Material Adverse Effect on Penederm, including,
      without limitation, such event or occurrence caused by: (i) the failure
      of representations and warranties of Penederm contained in the Merger
      Agreement to be true and correct on and as of the Effective Date,
      except for changes contemplated in the Merger Agreement, with the same
      force and effect as if made on and as of the Effective Date; (ii) the
      failure of Penederm to have performed or complied with all agreements,
      conditions and covenants required by the Merger Agreement to be
      performed or complied with by Penederm on or before the Effective Date;
      or (iii) the execution, delivery and performance of the Merger
      Agreement and the consummation of the Merger resulting in or
      constituting an event of default under an obligation under any
      agreement of Penederm;
 
  (b) There shall have been no Material Adverse Change with respect to
      Penederm;
 
  (c) Mylan shall have received a certificate of an executive officer of
      Penederm certifying as to compliance with the conditions set forth in
      clauses (a) and (b) above;
 
  (d) Mylan shall have received an opinion of Buchanan Ingersoll to the
      effect that, among other things, the Merger will constitute a
      reorganization within the meaning of Section 368(a) of the Code and
      that Mylan, Merger Sub and Penederm shall each be a party to that
      reorganization within the meaning of Section 368(b) of the Code;
 
  (e) Mylan shall have received from Penederm a certificate confirming
      certain representations and covenants of Penederm contained in the
      Merger Agreement with respect to tax matters relating to the status of
      the Merger as a reorganization within the meaning of Section 368(a) of
      the Code; and
 
  (f) No shares of preferred stock of Penederm shall be issued or
      outstanding.
 
  "Material Adverse Change" or "Material Adverse Effect" means, when used in
the Merger Agreement with respect to Mylan and Penederm, as the case may be,
any event, circumstance, change or effect that is or could reasonably be
expected (as far as can be foreseen at the time) to be so adverse as to result
in a severe and critical impairment of the business, assets, liabilities,
financial condition or results of operations of Mylan and its subsidiaries,
taken as a whole, or Penederm and its subsidiary, taken as a whole, as the
case may be.
 
TERMINATION OF THE MERGER AGREEMENT
 
  Under the Merger Agreement, Penederm, on the one hand, and Mylan or Merger
Sub, on the other hand, is entitled to abandon the Merger and terminate the
Merger Agreement if the conditions to its respective obligations to effect the
Merger (see "--Conditions to the Merger") shall not have been satisfied or
waived in writing on November 30, 1998.
 
                                      37
<PAGE>
 
  In addition, the Merger may be abandoned and the Merger Agreement may be
terminated at any time on or before the Effective Time, whether before or
after approved by Penederm Stockholders:
 
  (a) by mutual agreement of the Penederm Board and the Boards of Directors of
each of Mylan and Merger Sub;
 
  (b) by either Mylan or Merger Sub, on the one hand, or Penederm, on the
other, if the consummation of the Merger would violate any preliminary
injunction or restraining order or final and nonappealable order, decree,
injunction or restraining order or judgment of any United States court or
other tribunal of competent jurisdiction;
 
  (c) by Mylan if any of the following shall have occurred: (i) any person
(other than Mylan or any subsidiary of Mylan) shall have commenced (as such
term is defined in Rule 14d-2 under the Exchange Act), a tender offer or
exchange offer to purchase any Penederm Common Stock or securities convertible
into such shares such that, upon consummation of such offer, such person would
own or control 50% or more of the then outstanding Penederm Common Stock and
the Penederm Board, within ten business days after such tender or exchange
offer shall have been so commenced, fails to recommend against acceptance of
such tender or exchange offer by its stockholders; (ii) Penederm or its
subsidiary shall have authorized, recommended, proposed or publicly announced
an intention to authorize, recommend or propose, or entered into, an agreement
with any person (other than Mylan or any subsidiary of Mylan) to (A) effect a
merger, consolidation or similar transaction involving Penederm or its
subsidiary, (B) sell, lease or otherwise dispose of assets of Penederm or its
subsidiary representing 10% or more of the consolidated assets of Penederm,
(C) issue, sell or otherwise dispose of (including by way of merger,
consolidation, share exchange or any similar transaction) securities (or
options, rights or warrants to purchase), or securities convertible into, such
securities) representing 10% or more of the voting power of Penederm, or (D)
grant to such person a license of any intellectual property of Penederm other
than licenses in the ordinary course of business relating to the sale of
Penederm's products; (iii) any Person (other than Mylan or any subsidiary of
Mylan) shall have acquired beneficial ownership (as such term is defined in
Rule 13d-3 under the Exchange Act) or the right to acquire beneficial
ownership of, or any "group" (as such term is defined under the Exchange Act)
shall have been formed which beneficially owns or has the right to acquire
beneficial ownership of, 25% or more of the then outstanding Penederm Common
Stock; or (iv) the Penederm Board shall have withdrawn or modified in a manner
adverse to Mylan the recommendation of the Penederm Board that the Penederm
Stockholders approve the Merger Agreement and the Merger;
 
  (d) by Penederm in connection with entering into an agreement for a Superior
Proposal as expressly permitted by the Merger Agreement (see "--Exclusivity")
provided that (i) immediately following such termination Penederm executes a
definitive agreement to implement such Superior Proposal, (ii) prior to any
such termination, (x) Penederm shall have provided Mylan with four days'
notice of the terms of the Superior Proposal and (y) Penederm shall, have, and
shall have caused its financial and legal advisors to have, negotiated in good
faith with Mylan with respect to any proposal made by Mylan to adjust the
terms of the Merger Agreement as would enable Penederm, consistent with the
fiduciary duties of the Penederm Board, to proceed with the Merger, and (iii)
Penederm shall have paid Mylan the Termination Fee;
 
  (e) by either Mylan or Penederm if the Merger shall not have been
consummated on or before November 30, 1998, provided that the right to
terminate the Merger Agreement on this basis shall not be available to any
party whose failure to fulfill any obligation under the Merger Agreement has
been the cause of, or resulted in, the failure of the Effective Time to occur
on or before November 30, 1998; or
 
  (f) by Penederm, 10 days after the Special Meeting, if at the Special
Meeting the Merger Agreement and the Merger shall fail to be approved and
adopted by the affirmative vote of the Penederm Stockholders as required under
the DGCL.
 
TERMINATION FEE; EXPENSES OF THE MERGER
 
  If the Merger Agreement is terminated, it shall forthwith become void, but
each party shall be entitled to pursue all of its remedies for any prior
breach.
 
                                      38
<PAGE>
 
  Except as described below with respect to the Termination Fee, each party is
required by the Merger Agreement to bear all of its own costs and expenses in
connection with the Merger Agreement and the transactions contemplated
thereby, whether or not the Merger is consummated, other than the costs of
printing and mailing this Proxy Statement/Prospectus, which shall be shared
equally.
 
  Penederm is required by the Merger Agreement to pay Mylan a termination fee
(the "Termination Fee") equal to $9 million within two business days of the
occurrence of any of the following events:
 
  (a) Mylan terminates the Merger Agreement on the basis described in
paragraph (c)(i) under "--Termination of the Merger Agreement," or Mylan had
the right so to terminate at the time the Merger Agreement was otherwise
terminated, and within 12 months after such termination Penederm executes a
definitive agreement to implement a Takeover Proposal (whether or not such
Takeover Proposal triggered Mylan's termination right);
 
  (b) Mylan terminates the Merger Agreement on the basis described in
paragraph (c)(ii) under "--Termination of the Merger Agreement," or Mylan had
the right so to terminate at the time the Merger Agreement is otherwise
terminated;
 
  (c) Mylan terminates the Merger Agreement on the basis described in
paragraph (c)(iv) under "--Termination of the Merger Agreement," or Mylan had
the right so to terminate at the time the Merger Agreement is otherwise
terminated, except that Penederm is not obligated to pay Mylan the Termination
Fee under those conditions in the event that (i) such actions of the Penederm
Board that gave rise to Mylan's right to terminate on that basis were the
result of an event which had, or was reasonably expected to have, a Material
Adverse Effect on Mylan or had caused, or was reasonably expected to cause,
Mylan to suffer a Material Adverse Change, and (ii) the Penederm Board made a
good-faith determination, based on the advice of its legal counsel as to legal
matters, that such actions were necessary in order to comply with its
fiduciary duties to Penederm Stockholders under applicable law;
 
  (d) Penederm terminates the Merger Agreement on the basis described in
paragraph (d) under "--Termination of the Merger Agreement";
 
  (e) Either Mylan or Penederm terminates the Merger Agreement, following a
Takeover Proposal, on the basis described in paragraph (e) under "--
Termination of the Merger Agreement" and within 12 months after such
termination Penederm executes with a third party a definitive agreement to
implement a Takeover Proposal; or
 
  (f) Penederm terminates the Merger Agreement, following a Takeover Proposal,
on the basis set forth in paragraph (f) under "--Termination of the Merger
Agreement" and within 12 months after such termination Penederm executes with
a third party a definitive agreement to implement a Takeover Proposal.
 
BENEFIT PLANS
 
  The Merger Agreement provides that the eligibility of Penederm employees
(and their spouses and dependents) to participate in the combined company's
welfare benefit plans after the Effective Time will be determined without
regard to any exclusion or condition to which the employee is not subject
under any similar Penederm plan. Participants in Penederm's welfare benefit
plans will receive credit, under the welfare benefit plan of the combined
company in which they participate after the Effective Time, toward annual co-
insurance and deductible limitations and requirements for any payments made
for eligible charges incurred by them during the calendar year in which the
Effective Time occurs, under the applicable welfare plan of Penederm. In
addition, all employees of Penederm following the Effective Time will receive
credit, for purposes of determining vesting the eligibility under retirement,
welfare, vacation and similar plans or policies, for service with Penederm
prior to the Effective Date. All Penederm employees immediately prior to the
Effective Time will be eligible to participate in the combined company's
employment severance programs, and for the purposes of such programs will
receive credit for service with Penederm prior to the Effective Date.
 
                                      39
<PAGE>
 
THE STOCK OPTION AGREEMENT
 
 The Option
 
  In order to induce Mylan to enter into the Merger Agreement, Penederm
entered into the Stock Option Agreement at Mylan's request. Pursuant to the
Stock Option Agreement, Mylan has been granted the Mylan Option, which gives
Mylan the right to purchase the Option Shares (approximately 19.9% of the
outstanding Penederm Common Stock as of June 24, 1998 prior to giving effect
to the exercise of the Mylan Option) at the Option Price ($20 per Option
Share, subject to adjustment under specified circumstances). The Mylan Option
was a condition to Mylan's entering into the Merger Agreement, and it might
increase the likelihood of consummation of the Merger by discouraging
competing offers for Penederm. Certain aspects of the Stock Option Agreement
may have the effect of discouraging persons who may now, or prior to the
Effective Time, be interested in acquiring all of or a significant interest in
Penederm from considering or proposing such an acquisition, even if such
persons were prepared to offer to pay consideration to Penederm Stockholders
that had a higher current market price than the shares of Mylan Common Stock
to be received for each share of Penederm Common Stock pursuant to the Merger
Agreement. In addition, if Mylan were to become entitled to, and did, exercise
the Mylan Option, such exercise could preclude a third party from acquiring
Penederm in a transaction intended to be accounted for as a pooling of
interests, and the potential for such preclusion could further discourage
competing offers for Penederm. The Stock Option Agreement is in effect and is
not conditioned on approval by the Penederm Stockholders.
 
  The Mylan Option may be exercised by Mylan, in whole or in part, at any
time, or from time to time, following the occurrence of one of the Purchase
Events described in the following paragraph. Mylan may exercise the Mylan
Option by paying the Option Price in cash and receiving the Option Shares
(which exercise requires the satisfaction of certain additional conditions).
 
 Purchase Events
 
  The Mylan Option may be exercised on the occurrence of at least one of the
following "Purchase Events":
 
  (a) any of the following occurs prior to the earlier of the Effective Time
or the termination of the Merger Agreement in accordance with its terms: (i)
any person (other than Mylan or any of its subsidiaries) shall have commenced
(as such term is defined in Rule 14d-2 under the Exchange Act) a tender offer,
or shall have filed a registration statement under the Securities Act with
respect to an exchange offer, to purchase any shares of Penederm Common Stock
such that, upon consummation of such offer, such person or a "group" (as such
term is defined under the Exchange Act) of which such person is a member shall
have acquired beneficial ownership (as such term is defined in Rule 13d-3 of
the Exchange Act), or the right to acquire beneficial ownership, of 25% or
more of the then outstanding Penederm Common Stock; (ii) Penederm or any of
its subsidiaries shall have authorized, recommended, proposed or publicly
announced an intention to authorize, recommend or propose, or entered into, an
agreement including, without limitation, an agreement in principle, with any
person (other than Mylan or any of its subsidiaries) to effect or provide for
a Takeover Proposal; (iii) any person (other than Mylan or any of its
subsidiaries) shall solicit proxies or consents or announce a bona fide
intention to solicit proxies or consents from the Penederm Stockholders (x) in
opposition to the Merger, the Merger Agreement or any related transactions or
(y) relating to a Takeover Proposal (other than solicitations of stockholders
seeking approval of the Merger, the Merger Agreement or any related
transactions), and the Penederm Stockholders shall have failed to approve the
Merger; or (iv) any person (other than Mylan or any of its subsidiaries) shall
have acquired beneficial ownership (as such term is defined in Rule 13d-3
under the Exchange Act) or the right to acquire beneficial ownership of, or
any "group" (as such term is defined under the Exchange Act) shall have been
formed which beneficially owns or has the right to acquire beneficial
ownership of, Penederm Common Stock (other than trust account shares)
aggregating 25% or more of the then outstanding Penederm Common Stock;
 
  (b) the termination of the Merger Agreement under circumstances entitling
Mylan to immediate payment of the Termination Fee pursuant to the Merger
Agreement (see "--Termination of the Merger Agreement");
 
                                      40
<PAGE>
 
  (c) the execution by Penederm, within 12 months of a termination of the
Merger Agreement (i) by either Mylan or Penederm on the basis described in
paragraph (e) under "--Termination of the Merger Agreement" or (ii) by
Penederm on the basis described in paragraph (f) under "--Termination of the
Merger Agreement," of a definitive agreement to implement a Takeover Proposal
with a third party who had submitted a Takeover Proposal prior to such
termination (a "Proponent"); or
 
  (d) the execution by Penederm, within six months of a termination of the
Merger Agreement on the basis described in clause (c), of a definitive
agreement to implement a Takeover Proposal with a third party who is not a
Proponent, provided Penederm had received a Takeover Proposal from a Proponent
prior to such termination.
 
 Mylan's "Put" Rights
 
  The Stock Option Agreement gives Mylan the right to "put" the Mylan Option
(unless it has expired or terminated) and all Option Shares that have
previously been purchased by Mylan and are still owned by it back to Penederm,
and thereby obligate Penederm to repurchase the Mylan Option and such Option
Shares, for a six-month period commencing upon the first occurrence of a
"Repurchase Event," as defined in the Stock Option Agreement. The "Put Price"
payable by Penederm upon Mylan's exercise of such put right is the sum of: (i)
the aggregate Option Price paid by Mylan for all Option Shares previously
purchased by Mylan that are still owned by it; (ii) the excess (if any) of the
average of the last sales prices for Penederm Common Stock on NASDAQ for the
ten preceding trading days (the "Market Price") over the aggregate Option
Price referred to in clause (i), multiplied by the number of Option Shares
that are still owned by Mylan; and (iii) the excess (if any) of the Market
Price over the Option Price, multiplied by the number of Option Shares with
respect to which the Mylan Option has not been exercised.
 
 Mylan's Registration Rights
 
  The Stock Option Agreement provides that if Mylan desires to sell any of the
Option Shares, Penederm will cooperate with Mylan and any underwriters in
registering such Option Shares for resale including, without limitation,
promptly filing a registration statement which complies with the requirements
of applicable federal and state securities laws. Penederm is not required to
have declared effective more than two such registration statements.
 
 Termination
 
  The Stock Option Agreement provides that the Mylan Option will terminate and
be of no further force and effect upon the earliest to occur of (a) the
Effective Time, (b) 12 months after the first occurrence of a Purchase Event
of the type described in subclause (a) or (b) under "--Purchase Events" above
and (c) six months after the first occurrence of a Purchase Event of the type
described in subclause (c) or (d) under "--Purchase Events" above.
Notwithstanding the termination of the Mylan Option, Mylan will be entitled to
purchase the Option Shares if it has exercised the Mylan Option in accordance
with the terms hereof prior to the termination of the Mylan Option and the
termination of the Mylan Option shall not affect any rights hereunder which by
their terms do not terminate or expire prior to or as of such termination.
 
 Profit Limitation
 
  Under the Stock Option Agreement, in no event shall Mylan's "Total Profit"
(as hereinafter defined) exceed $24 million (the "Cap"), and if Total Profit
otherwise would exceed the Cap, Mylan, at its sole election, shall either (a)
deliver to Penederm for cancellation Option Shares previously purchased by
Mylan valued at the average of the last sales price for Penederm Common Stock
on NASDAQ for the ten trading days ending on the day immediately preceding
such delivery), (b) pay cash to Penederm, or (c) undertake any combination
thereof, so that Total Profit shall not exceed the Cap after taking into
account the foregoing actions.
 
  As used herein, the term "Total Profit" shall mean the aggregate amount
(before taxes) of the following: (i) the amount of cash paid or payable by
Mylan as the Termination Fee pursuant to the Merger Agreement;
 
                                      41
<PAGE>
 
(ii)(x) the amount paid or payable by Mylan pursuant to the Penederm's
repurchase of Option Shares pursuant to the Stock Option Agreement, less (y)
Mylan's purchase price for such Option Shares; and (iii) (x) the net cash
amounts received by Mylan pursuant to the sale of Option Shares (or any other
securities into which such Option Shares are converted or exchanged) to any
unaffiliated party, less (y) Mylan's purchase price for such Option Shares.
 
THE VOTING AGREEMENTS
 
 Voting and Proxies
 
  In order to induce Mylan to enter into the Merger Agreement, each director
of Penederm (in his capacity as a Penederm Stockholder and without limiting or
affecting his obligations as a director) has entered into a voting agreement
at Mylan's request. Pursuant to and during the term of the Voting Agreements,
each director of Penederm has agreed, to vote (or cause to be voted) all of
the Penederm Common Stock beneficially owned by such director and all shares
subsequently acquired by such holder (i) to adopt and approve the Merger and
the Merger Agreement and the approval of the other transactions contemplated
by the Merger Agreement at any meeting of Penederm Stockholders at which such
matters are considered and at every adjournment or postponement thereof and
(ii) against (a) any merger agreement or merger (other than the Merger
Agreement and the Merger), consolidation, combination, sale of substantial
assets, reorganization, recapitalization, dissolution, liquidation or winding
up, of or by Penederm, or any other Takeover Proposal (collectively,
"Alternative Transactions") or (b) any amendment of Penederm's certificate of
incorporation ("Penederm's Certificate") or Penederm's bylaws ("Penederm's
Bylaws") or other proposal or transaction involving Penederm or its
subsidiary, which would in any manner impede, frustrate, prevent or nullify
the Merger, the Merger Agreement or any of the other transactions contemplated
by the Merger Agreement (collectively, "Frustrating Transactions"). In
addition, each such director (in his capacity as a Penederm Stockholder) has
granted Mylan an irrevocable proxy to vote shares of Penederm Common Stock
held by such director (i) in favor of the Merger and the Merger Agreement and
(ii) against any Alternative Transactions or Frustrating Transactions. The
Voting Agreements terminate upon the earlier of the Effective Time or
termination of the Merger Agreement in accordance with its terms. See "--
Exclusivity."
 
  The aggregate number of shares of Penederm Common Stock which is subject to
the Voting Agreements is 331,656, or approximately 3.8% of the shares of
Penederm Common Stock outstanding on the Record Date. See, however, "--
Alternate Voting Agreement" for information about circumstances in which the
270,091 shares subject to a Voting Agreement with one director, whose shares
of Penederm Common Stock represent approximately 3.1% of the shares of
Penederm Common Stock outstanding on the Record Date, will cease to be bound
by the voting obligations of such Alternate Voting Agreement.
 
 Prohibited Actions
 
  Each director has also agreed (in his capacity as a Penederm Stockholder)
that he will not (i) sell, transfer, pledge, assign or otherwise dispose of,
or enter into any contract, option or other arrangement (including any profit
sharing arrangement) or understanding with respect to the sale, transfer,
pledge, assignment or other disposition of, Penederm Common Stock to any
person other than Mylan or Mylan's designee, (ii) enter into any voting
arrangement, whether by proxy, voting agreement, voting trust, power-of-
attorney or otherwise, with respect to Penederm Common Stock, or (iii) take
any other action that would in any way restrict, limit or interfere with the
performance of such director's obligations under his Voting Agreement or the
transactions contemplated thereby; provided, however, that he may transfer all
or part of his securities of Penederm to any sibling or any other member of
his immediate family or lineal descendants or any trust for the benefit of any
of them, so long as the recipient of the Penederm securities agrees to be
bound by the Voting Agreement.
 
 Alternate Voting Agreement
 
  All of the 270,091 outstanding shares of Penederm Common Stock beneficially
owned by one of Penederm's directors are held by him in his capacity as the
general partner of a partnership which is in turn the
 
                                      42
<PAGE>
 
   
general partner of an investment fund. Such shares are owned by the investment
fund, which is currently scheduled by its governing agreement to be wound up
on September 15, 1998. To facilitate such winding-up and the related
distribution of the shares of Penederm Common Stock owned by such investment
fund to its individual investors, Mylan has entered into an Alternate Voting
Agreement with the applicable director permitting him to effect such
distribution as close to September 15, 1998 as is consistent with the fund's
obligation to effect the distribution, at which point he will cease to be
bound by the voting obligations of the Alternate Voting Agreement as to the
distributed shares, his irrevocable proxy in favor of Mylan will terminate as
to those shares and the individual distributees will be free to vote the
distributed shares as they choose. Accordingly, if the vote on the Merger
Agreement by the Penederm Stockholders occurs after the distribution, there is
no assurance as to how those shares, which constitute approximately 3.1% of
the shares of Penederm Common Stock outstanding on the Record Date, will be
voted thereon.     
 
 Other Provisions
 
  Each Voting Agreement also contains provisions relating to, among other
things, representations and warranties by the applicable director (in his
capacity as a Penederm Stockholder) and specific enforcement of his Voting
Agreement.
 
CO-PROMOTION AGREEMENTS
 
  In December 1997, Penederm and Bertek entered into the Mentax(R) Co-
Promotion Agreement to market Mentax(R) in the United States to primary care
physicians who are called on by members of Bertek's sales force (the "Bertek
Audience"). Pursuant to the Mentax(R) Co-Promotion Agreement, Bertek receives
a portion of the profit Penederm earns in connection with revenues generated
from prescriptions written by the Bertek Audience. The initial term of the
Mentax(R) Agreement is four years.
 
  In July 1998, Penederm and Bertek entered into the Avita(R) Co-Promotion
Agreement, pursuant to which Bertek will co-promote Avita(R) in the United
States to primary care physicians. The terms of the Avita(R) Co-Promotion
Agreement are similar to those of the Mentax(R) Co-Promotion Agreement, except
that the Avita(R) Co-Promotion Agreement provides for a nonrefundable up-front
license fee and an advance on Penederm's share of the profits generated from
revenues on prescriptions written by the Bertek Audience.
 
  Both the Mentax(R) Co-Promotion Agreement and the Avita(R) Co-Promotion
Agreement are in effect, are independent of the Merger Agreement, are not
conditioned on approval by the Penederm Stockholders and will survive the
termination of the Merger Agreement.
 
                       COMPARISON OF SHAREHOLDER RIGHTS
 
  If the Merger is consummated, holders of Penederm Common Stock will become
holders of Mylan Common Stock, which will result in their rights as
shareholders being governed by the laws of the Commonwealth of Pennsylvania
and the Amended and Restated Articles of Incorporation of Mylan ("Mylan's
Articles") and the Bylaws of Mylan ("Mylan's Bylaws"). The rights of holders
of Penederm Common Stock currently are governed by the laws of the State of
Delaware and by Penederm's Certificate and Penederm's Bylaws.
 
  It is not practicable to describe all of the differences between the laws of
the Commonwealth of Pennsylvania and the laws of the State of Delaware,
between Mylan's Articles and Penederm's Certificate and between Mylan's Bylaws
and Penederm's Bylaws. The following is a summary of certain differences
between the rights of a holder of Penederm Common Stock and the rights of a
holder of Mylan Common Stock.
 
SHAREHOLDER RIGHTS GENERALLY
 
  Notice of Meetings. Under the Pennsylvania Business Corporation Law of 1988,
as amended (the "PBCL"), holders of Mylan Common Stock are entitled to at
least 10 days' prior written notice for a meeting
 
                                      43
<PAGE>
 
called to consider a fundamental change (as defined in the PBCL) and five
days' prior written notice for any other meeting. Under the DGCL and
Penederm's Bylaws, holders of Penederm Common Stock are entitled to at least
10 days' prior written notice for a special meeting called to consider general
matters. Under the DGCL, at least 20 days' notice is required to consider a
merger.
 
  Proxies. Under the DGCL and Penederm's Bylaws, a proxy is invalid after
three years from its date, unless the proxy provides for a longer period.
Under the PBCL, there are no limitations on the duration of proxies except
that an unrevoked proxy is not valid after three years unless a longer time is
expressly provided therein.
 
  Right to Call Special Meetings. Under the PBCL, holders of Mylan Common
Stock have no right to call special meetings of shareholders except that an
interested shareholder (i.e., the beneficial owner of at least 20% of the
corporation's outstanding voting securities) has the right to call a special
meeting of shareholders to approve certain business combinations. Under the
DGCL, a special meeting of stockholders may be called only by the Penederm
Board or by such person or persons as may be authorized by Penederm's
Certificate or Penederm's Bylaws. Under Penederm's Certificate and Penederm's
Bylaws, the Chairman of the Board or the President may call a special meeting
of stockholders, but business transacted must be limited to that stated in the
notice of such meeting.
 
SHAREHOLDER VOTING RIGHTS
 
  General Vote Required. Under the PBCL, corporate action taken by
shareholders, including shareholder action to amend the articles of
incorporation or to approve mergers, consolidations or dissolution, generally
is authorized upon receiving the affirmative vote of a majority of the votes
cast by all shareholders entitled to vote thereon (and, if any class of shares
is entitled to vote thereon as a class, the affirmative vote of a majority of
the votes cast in such class). Under the DGCL and Penederm's Bylaws, the
affirmative vote of the holders of a majority of the stock having voting power
present in person or represented by proxy at a meeting at which a quorum is
present is required for stockholder action unless the DGCL requires otherwise.
Under the DGCL, the affirmative vote of the majority of the outstanding shares
entitled to vote thereon generally is required to effect mergers or
consolidations.
 
  Special Vote Required for Certain Business Combinations. Mylan's Articles
require the affirmative vote of at least 75% of the outstanding shares of
Mylan Common Stock entitled to vote in order to effect certain business
combinations. See "DESCRIPTION OF MYLAN CAPITAL STOCK--Special
Considerations."
 
  In addition, Mylan is subject to provisions of the PBCL regarding business
combinations. The PBCL prohibits certain business combinations (as defined in
the PBCL) involving a Pennsylvania corporation that has shares registered
under the Exchange Act and an "interested shareholder" unless one of the five
conditions described below is satisfied or an exemption is found. An
"interested shareholder" is generally defined to include a person who
beneficially owns at least 20% of the votes that all shareholders would be
entitled to cast in an election of directors of the corporation.
 
  In general, a corporation can effect a business combination involving an
interested shareholder under the PBCL if one of the following five conditions
is satisfied: (i) prior to the date on which the person becomes an interested
shareholder, the board of directors approves the business combination or the
purchase of shares that causes the person to become an interested shareholder;
(ii) the business combination is approved by an affirmative vote of the
holders of all outstanding shares; (iii) the business combination is approved
by a majority of the disinterested shareholders at a meeting called at least
five years after the date the person becomes an interested shareholder; (iv)
the interested shareholder holds 80% or more of the votes that all
shareholders would be entitled to cast in an election of directors of the
corporation and the business combination is approved by a majority of the
disinterested shareholders at a meeting held at least three months after the
interested shareholder acquired such 80% interest, provided that the fair
price and procedural requirements set forth in the PBCL are satisfied; or (v)
the business combination is approved by the shareholders at a meeting called
at least five years
 
                                      44
<PAGE>
 
after the date the person becomes an interested shareholder, provided that the
fair price and procedural requirements set forth in the PBCL are satisfied.
 
  The DGCL prohibits certain business combinations (as defined in the DGCL)
between a Delaware corporation that has shares listed on a national stock
exchange, authorized for quotation on The NASDAQ Stock Market or held of
record by more than 2,000 stockholders and an interested stockholder that
occur within three years of the time that such stockholder became an
interested stockholder, unless one of three conditions is satisfied or an
exemption is found. An "interested stockholder" is generally defined to
include a person who beneficially owns at least 15% of the voting stock of the
corporation. In general, a corporation can effect a business combination
involving an interested stockholder under the DGCL within three years of the
time that such stockholder became an interested stockholder if one of the
following three conditions is satisfied: (i) prior to such time, the board of
directors approves the business combination or the transaction that causes the
person to become an interested stockholder; (ii) upon consummation of the
transaction which resulted in the stockholder becoming an interested
stockholder, the interested stockholder owned at least 85% of the voting stock
at the time the transaction commenced; or (iii) at or subsequent to such time
the business combination is approved by the board of directors and authorized
by the affirmative vote of two-thirds of the disinterested shareholders.
 
  Merger or Consolidation Without Shareholder Approval. Under the PBCL, no
vote of the shareholders of a corporation is required to approve a merger or
consolidation if (i) the plan does not alter the corporation's status as a
Pennsylvania corporation or in any respect its articles of incorporation and
each share of its capital stock is to continue as or be converted into an
identical share of the surviving corporation; or (ii) another corporation
directly or indirectly owns 90% or more of shares of each class of the
corporation.
 
  Under the DGCL, no vote of the stockholders of a corporation is required to
approve a merger or consolidation if (i) the plan does not amend in any
respect the corporation's certificate of incorporation; (ii) each share of its
capital stock is to continue as or be converted into an identical share of the
surviving corporation; or (iii) either no stock of the surviving corporation
is to be issued under the plan or the treasury or unissued authorized shares
of the surviving corporation to be issued plus those shares issuable upon
conversion of other shares to be issued in the merger do not exceed 20% of the
outstanding shares of such corporation immediately prior to the merger.
 
SHAREHOLDER APPRAISAL RIGHTS
 
  Under the DGCL, a stockholder of a corporation who does not vote in favor of
certain merger transactions and who demands appraisal of his shares in
connection therewith may, under varying circumstances, be entitled to
appraisal rights pursuant to which such stockholder may receive cash in the
amount of the fair value of his shares (as determined by a Delaware court) in
lieu of the consideration he would otherwise receive in the transaction.
Unless the corporation's certificate of incorporation provides otherwise, such
appraisal rights are not available in certain circumstances, including without
limitation (a) the sale, lease or exchange of all or substantially all of the
assets of a corporation, (b) the merger or consolidation by a corporation the
shares of which are either listed on a national securities exchange or the
NASDAQ National Market or are held of record by more than 2,000 holders if
such stockholders receive only shares of the surviving corporation or shares
of any other corporation which are either listed on a national securities
exchange or the NASDAQ National Market or held of record by more than 2,000
holders, plus cash in lieu of fractional shares or (c) to stockholders of a
corporation surviving a merger if no vote of the stockholders of the surviving
corporation is required to approve the merger because the merger agreement
does not amend the existing certificate of incorporation, each share of the
surviving corporation outstanding prior to the merger is an identical
outstanding or treasury share after the merger, and the number of shares to be
issued in the merger does not exceed 20% of the shares of the surviving
corporation outstanding immediately prior to the merger and if certain other
conditions are met.
 
  Under the PBCL, a shareholder of a corporation has the right, under varying
circumstances, to dissent from certain corporate transactions (including
mergers, share exchanges, the sale of all or substantially all of the
corporate assets and corporate divisions) and to obtain payment in cash of the
fair value of his shares in lieu of
 
                                      45
<PAGE>
 
the consideration he would otherwise receive in the transaction. Such
dissenters rights are not available where the shares held by the shareholder
are either listed on a national securities exchange or are held of record by
more than 2,000 shareholders. Notwithstanding this limitation, the PBCL
provides that the bylaws or a resolution of the board of directors may direct
that all or part of the shareholders shall have dissenters' rights in
connection with any corporate transaction that would not otherwise entitle
such shareholder to dissenters' rights. Mylan's Bylaws do not include such a
provision nor has the Board of Directors of Mylan adopted such a resolution.
 
  The concept of "fair value" in payment for shares upon exercise of appraisal
rights is different under the DGCL and the PBCL. Under the DGCL, "fair value"
must be determined exclusive of any element of value arising from the
accomplishment or expectation of the relevant transaction. The PBCL provides
that the fair value of shares must be determined immediately before the
effectuation of the corporate action to which the dissenter objects taking
into account all relevant factors, but excluding any appreciation or
depreciation in anticipation of the corporate action.
 
RIGHTS WITH RESPECT TO SHARES
 
  Dividends; Purchases and Redemptions of Shares. Under the PBCL, Mylan may
pay dividends and make stock purchases and redemptions unless, after giving
effect to the distribution: (i) the corporation would be unable to pay its
debts as they become due in the usual course of its business, or (ii) the
total assets of the corporation would be less than the sum of its total
liabilities plus the amount that would be needed, if the corporation were to
be dissolved at the time of distribution, to satisfy the preferential rights
upon dissolution of stockholders whose preferential rights are superior to
those receiving the distribution. The Board of Directors of Mylan may base its
determination of total assets and total liabilities on any factors it
considers relevant, including the book values of the corporation's assets and
liabilities as reflected on its books and records, unrealized appreciation and
depreciation of the corporation's assets or the current value of the
corporation's assets and liabilities, either valued separately or valued in
segments or as an entirety as a going concern.
 
  The DGCL provides that a corporation shall not redeem its stock for cash or
property if such redemption would cause an impairment of capital of the
corporation. The DGCL further provides that a corporation may pay dividends
(i) out of its capital surplus or (ii) in the event there is no capital
surplus, out of its net profits for the fiscal year in which the dividend is
declared and/or the preceding year.
 
FIDUCIARY DUTIES OF DIRECTORS
 
  Both Delaware and Pennsylvania law provide that a corporation's board of
directors has the ultimate responsibility for managing the business and
affairs of the corporation. The PBCL expressly provides that directors of a
Pennsylvania corporation are obligated to perform their duties in good faith,
in a manner they reasonably believe to be in the best interests of the
corporation and with such care, including reasonable inquiry, skill and
diligence as a person of ordinary prudence would use under similar
circumstances. Absent breach of fiduciary duty, lack of good faith or self-
dealing, actions taken as a director of a Pennsylvania corporation are
presumed to be in the best interests of the corporation. The PBCL states that
directors of a Pennsylvania corporation may, but are not required to, take
into consideration the effects of their actions upon various groups affected
by such action, including not only shareholders, but also employees,
suppliers, customers, creditors and communities. The PBCL also makes clear
that a director has no greater obligation to justify, or higher burden of
proof with respect to, any act relating to an actual or potential takeover of
the corporation than he or she has with respect to any other act as a
director.
 
  The DGCL is silent as to the nature of the duties of directors of a Delaware
corporation. Delaware courts have held that the duty of care requires the
directors to exercise an informed business judgment. Under Delaware case law,
an informed business judgment means that the directors have informed
themselves of all material information reasonably available to them. Having
become so informed, they then must act with requisite care in the discharge of
their duties. Delaware courts have also imposed a heightened standard of
scrutiny regarding the conduct of directors in resisting unsolicited takeover
attempts. Liability of directors of a Delaware corporation to
 
                                      46
<PAGE>
 
the corporation or its stockholders for breach of the duty of care generally
requires a finding by a court that the directors were grossly negligent.
Delaware courts have also held that the directors of a Delaware corporation
owe the corporation and its stockholders a duty of loyalty, requiring them to
act in good faith and in what they believe to be the best interests of the
corporation and its stockholders and that, whenever their interests with
respect to a transaction conflict with those of the corporation, the
transaction be fair to the corporation.
 
  The duty of loyalty in both states requires that the directors act in good
faith and place the best interests of the corporation and its stockholders
above any individual interests of their own.
 
DIRECTOR AND OFFICER LIABILITY AND INDEMNIFICATION
 
  In accordance with the PBCL, Mylan's Bylaws provide that a director of Mylan
shall not be personally liable for monetary damages for any action taken, or
any failure to take any action, unless the director has breached or failed to
perform the duties required under Pennsylvania law and the breach or failure
to perform constitutes self-dealing, willful misconduct or recklessness.
 
  As permitted by the PBCL, Mylan's Bylaws provide that directors of Mylan are
indemnified under certain circumstances for expenses, judgments, fines or
settlements incurred in connection with suits and other legal proceedings. The
PBCL allows indemnification in cases where the person "acted in good faith and
in a manner he reasonably believed to be in, or not opposed to, the best
interests of the corporation and, with respect to any criminal proceeding, had
no reasonable cause to believe his conduct was unlawful."
 
  Under the DGCL, a corporation may include in its certificate of
incorporation provisions which eliminate or limit, within prescribed
limitations, the personal liability of a director of the corporation for
monetary damages for breach of fiduciary duty as a director. Penederm's
Certificate limits the personal liability of directors for monetary damages
for breaches of their fiduciary duty as directors to the fullest extent
permissible under the DGCL.
 
  The DGCL generally provides that a corporation may, and in certain
circumstances must, indemnify its directors, officers, employees or agents
("indemnitees") for expenses (including attorneys' fees), judgments, fines or
settlements actually and reasonably incurred by them in connection with suits
and other legal actions or proceedings if they acted in good faith and in a
manner they reasonably believed to be in or not opposed to the best interests
of the corporation and, with respect to any criminal action or proceeding, had
no reasonable cause to believe their conduct was unlawful. In the case of
stockholder derivative suits, the corporation may indemnify its directors,
officers, employees or agents if they acted in good faith and in a manner they
reasonably believed to be in or not opposed to the best interests of the
corporation, except that no indemnification may be made in respect of any
claim, issue or matter as to which such person shall have been adjudged liable
to the corporation unless and only to the extent that the Court of Chancery or
the court in which the action was brought determined upon application that, in
view of all the circumstances of the case, the person is fairly and reasonably
entitled to indemnity for such expenses as the court deems proper. The DGCL
also permits a corporation to adopt procedures for advancing expenses to
indemnitees without the need for a case-by-case determination of eligibility,
so long as in the case of officers and directors they undertake to repay the
amounts advanced if it is ultimately determined that the officer or director
was not entitled to be indemnified.
 
  Penederm's Certificate requires indemnification of officers, directors,
employees and agents acting on behalf of Penederm to the fullest extent
permissible under the DGCL.
 
CHARTER AMENDMENTS
 
  Under the PBCL, amendments to a corporation's articles of incorporation may
only be proposed by its board of directors. Except for certain amendments
which do not require shareholder approval and unless a greater vote is
required by its articles of incorporation, amendments of the articles of
incorporation of a Pennsylvania corporation are to be approved by the
affirmative vote of a majority of the votes cast by all shareholders entitled
to vote thereon and, if any class or series of capital stock is entitled to
vote as a class, the affirmative vote of a majority of the votes cast in each
such separate vote.
 
                                      47
<PAGE>
 
  To amend a Delaware corporation's certificate of incorporation, the DGCL
requires approval first by that corporation's board of directors and then by
the holders of a majority of the outstanding shares of stock entitled to vote
thereon and a majority of each class of stock entitled to vote thereon as a
class, unless a larger proportion is specified in its certificate of
incorporation or except when the provision being amended or repealed provides
for a supermajority vote of the board or the stockholders, in which case, the
same percentage of the board or the stockholders, as the case may be, is
needed to amend or repeal that provision.
 
BYLAW AMENDMENTS
 
  Under the PBCL, the shareholders of a Pennsylvania corporation who are
entitled to vote have the power to adopt, amend and repeal its bylaws. The
authority to adopt, amend and repeal bylaws of a Pennsylvania corporation may
be expressly vested by the bylaws in the board of directors, subject to the
power of the shareholders to override such actions and except that a board of
directors may not have the authority to adopt or change a bylaw on any subject
that is committed expressly to the shareholders under the PBCL, unless the
articles of incorporation of that corporation give the board that authority.
 
  Under the DGCL, the stockholders entitled to vote have the power to adopt,
amend or repeal bylaws as do the directors to the extent that the certificate
of incorporation confers such powers on the directors. Penederm's Certificate
expressly grants the Penederm Board the authority to adopt, amend or repeal
Penederm's Bylaws.
 
                      DESCRIPTION OF MYLAN CAPITAL STOCK
   
  The authorized capital stock of Mylan consists of 300,000,000 shares of
Mylan Common Stock, of which, as of the date of this Proxy
Statement/Prospectus, 122,409,579 shares are outstanding, and 5,000,000 shares
of preferred stock, par value $.50 per share ("Mylan Preferred Stock"),
issuable in series, none of which are outstanding as of the date of this Proxy
Statement/Prospectus.     
 
MYLAN COMMON STOCK
 
  Holders of Mylan Common Stock have one vote per share on all matters
submitted to a vote of shareholders. Shareholders do not have cumulative
voting rights. The holders of Mylan Common Stock have the right to receive
dividends when, as and if declared by the Board of Directors of Mylan out of
funds legally available therefor, subject to the rights of the holders of any
outstanding Mylan Preferred Stock to receive preferential dividends. Upon the
liquidation of Mylan, holders of Mylan Common Stock would share ratably in any
assets available for distribution to shareholders after payment of all
obligations of Mylan and the aggregate liquidation preference (including
accrued and unpaid dividends) of any outstanding Mylan Preferred Stock.
 
  The Mylan Common Stock is not redeemable and has no preemptive, subscription
or conversion rights. Shares of Mylan Common Stock currently outstanding are,
and the Mylan Common Stock to be issued in the Merger will be, validly issued,
fully paid and nonassessable.
 
  American Stock Transfer Co., New York, New York, is the transfer agent and
registrar for the Mylan Common Stock.
 
MYLAN PREFERRED STOCK
 
  The authorized Mylan Preferred Stock is available for issuance from time to
time at the discretion of the Board of Directors of Mylan without shareholder
approval. The Board of Directors has authority to prescribe for each series of
Mylan Preferred Stock it establishes the number of shares in that series, the
dividend rate, and the voting rights, conversion privileges, redemption,
sinking fund and liquidation rights, if any, and any other rights,
preferences, qualifications and limitations of the particular series. The
issuance of Mylan Preferred Stock could decrease the amount of earnings and
assets available for distribution to the holders of Mylan Common Stock or
adversely affect the rights and powers, including voting rights, of the
holders of Mylan Common Stock. Mylan has no present plans to issue any Mylan
Preferred Stock.
 
                                      48
<PAGE>
 
SPECIAL CONSIDERATIONS
 
  Mylan is subject to provisions of the PBCL regarding business combinations.
See "COMPARISON OF SHAREHOLDER RIGHTS--Shareholder Voting Rights."
 
  In addition, Mylan's Articles provide that each of the following corporate
actions requires approval in compliance with all applicable provisions of the
PBCL and Mylan's Articles and, with certain exceptions, the affirmative vote
of at least 75% of the outstanding shares of Mylan Common Stock entitled to
vote, at a meeting called for such purpose: (i) any merger or consolidation to
which Mylan and an Interested Person (as defined in Mylan's Articles) are
parties; (ii) any sale, lease, exchange or other disposition, in a single
transaction or series of related transactions, of all or substantially all or
a Substantial Part (as defined in Mylan's Articles) of the properties or
assets of Mylan to an Interested Person; (iii) the adoption of any plan or
proposal for the liquidation or dissolution of Mylan under or pursuant to
which the rights or benefits inuring to an Interested Person are different in
kind or character from the rights or benefits inuring to the other holders of
Mylan Common Stock; (iv) any transaction of the foregoing character involving
an Affiliate or Associate (as defined in Mylan's Articles) of an Interested
Person or involving an Associate of any such Affiliate. The 75% voting
requirement will not apply if the Board of Directors shall have approved the
transaction by a majority vote of all directors prior to the time the
Interested Person connected with the transaction became an Interested Person
or if the Board of Directors shall have approved the transaction prior to
consummation thereof by a majority vote of all directors, disregarding the
vote of each director who was an Interested Person, or an Affiliate, Associate
or agent of such Interested Person, or an Associate or agent of any such
Affiliate. The affirmative vote of the holders of at least 75% of the
outstanding shares of Mylan Common Stock entitled to vote is required to amend
or repeal the foregoing provisions.
 
  Mylan's Bylaws provide that a director shall not be personally liable for
monetary damages as such for any action, or any failure to take any action,
unless he has breached or failed to perform his statutory duties and the
breach or failure to perform constitutes self-dealing, willful misconduct or
recklessness; provided, however, that such limitation of liability shall not
apply to the responsibility or liability of a director pursuant to any
criminal statute or to liability for payment of taxes pursuant to local, state
or federal law. If Pennsylvania law is amended in the future to authorize
corporate action further limiting the personal liability of directors, the
liability of a director will be limited to the fullest extent permitted by
such amendment.
 
              UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
 
  The following tables present the combination of Mylan and its subsidiaries
and Penederm and its subsidiary. The combination will be accounted for by
Mylan under the purchase method of accounting. The results of operations of
Penederm have been converted to a fiscal March 31 year-end and are unaudited.
 
  The Unaudited Pro Forma Combined Financial Statements reflect the
significant adjustments giving effect to the Merger (including the preliminary
purchase accounting adjustments) that are expected to have a continuing impact
on Mylan. Estimates relating to the fair value of Penederm's assets,
liabilities and other events requiring recognition have been made as more
fully described in the Notes to the Unaudited Pro Forma Combined Financial
Statements. Actual adjustments will be made on the basis of actual assets,
liabilities and other items as of the Effective Date on the basis of
appraisals and evaluations, and therefore, actual fair value amounts are
expected to differ from those reflected in the Unaudited Pro Forma Combined
Financial Information.
 
  The pro forma financial information included herein does not purport to
represent what the consolidated financial position or results of operations
actually would have been if the Merger in fact had occurred on such dates or
at the beginning of the period indicated or to project the consolidated
financial position or results of operations as of any future date or any
future period.
 
  The pro forma financial information included herein should be read in
conjunction with the historical consolidated financial statements of Mylan and
Penederm, including the notes thereto, and other financial information
incorporated by reference into this Proxy Statement/Prospectus. See
"INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE."
 
                                      49
<PAGE>
 
                    MYLAN LABORATORIES INC. AND SUBSIDIARIES
 
                        PRO FORMA COMBINED BALANCE SHEET
                              AS OF JUNE 30, 1998
                             (AMOUNTS IN THOUSANDS)
                                  (UNAUDITED)
 
<TABLE>
<CAPTION>
                                                        PRO FORMA       PRO FORMA
                                     MYLAN   PENEDERM  ADJUSTMENTS      COMBINED
                                    -------- --------  -----------      ---------
<S>                                 <C>      <C>       <C>              <C>
              ASSETS
CURRENT ASSETS:
  Cash and cash equivalents........ $139,111 $ 1,732         --         $140,843
  Marketable securities............   17,979   1,000         --           18,979
  Accounts receivable..............  137,229   7,280         --          144,509
  Inventories......................  150,032   2,385         --          152,417
  Deferred income tax benefit......    9,559     --          --            9,559
  Prepaid and refundable income
   tax.............................    7,890     382         --            8,272
  Other current assets.............    6,198     --          --            6,198
  In-process research and
   development.....................      --      --     $145,000(1)          --
                                                        (145,000)(3)
                                    -------- -------    --------        --------
    Total current assets...........  467,998  12,779         --          480,777
PROPERTY, PLANT AND EQUIPMENT, net
 of accumulated depreciation.......  153,207     270         --          153,477
  Marketable securities, non-
   current.........................   21,131     --          --           21,131
INTANGIBLE ASSETS--NET of
 accumulated amortization..........  126,855   1,720      67,000(1)      199,158
                                                           3,583(1)
OTHER ASSETS.......................   89,907     --          --           89,907
  Investment in and advances to
   Somerset........................   31,801     --          --           31,801
                                    -------- -------    --------        --------
      TOTAL ASSETS................. $890,899 $14,769    $ 70,583        $976,251
                                    ======== =======    ========        ========
   LIABILITIES AND SHAREHOLDERS'
               EQUITY
CURRENT LIABILITIES:
  Trade accounts payable........... $ 18,817 $ 1,039         --         $ 19,856
  Current portion of long-term
   debt............................    9,118     --          --            9,118
  Income taxes payable.............   18,376     --          --           18,376
  Other current liabilities........   35,069   6,208    $  2,500(1)       43,777
  Cash dividend payable............    4,907     --          --            4,907
                                    -------- -------    --------        --------
    Total current liabilities......   86,287   7,247       2,500          96,034
  Long-term debt...................    4,000     --          --            4,000
  Long-term obligations............   22,417       5         --           22,422
  Deferred income tax liability....    3,490     --        6,100(1)(2)     9,590
SHAREHOLDERS' EQUITY:
  Preferred stock..................      --      --          --              --
  Common stock.....................   61,609      86       2,950(1)       64,559
                                                             (86)(1)
  Additional paid-in capital.......   94,778  61,111     211,550(1)      306,328
                                                         (61,111)(1)
  Retained earnings (deficit)......  624,134 (53,680)   (145,000)(3)     479,134
                                                          53,680(1)
  Unrealized gain on investments...       78     --          --               78
                                    -------- -------    --------        --------
                                     780,599   7,517      61,983         850,099
  Less: Treasury stock.............    5,894     --          --            5,894
                                    -------- -------    --------        --------
  Net worth........................  774,705   7,517      61,983         844,205
                                    -------- -------    --------        --------
      TOTAL LIABILITIES AND
       SHAREHOLDERS' EQUITY........ $890,899 $14,769    $ 70,583        $976,251
                                    ======== =======    ========        ========
</TABLE>
 
      See accompanying Notes to the Unaudited Pro Forma Combined Financial
                                  Statements.
 
                                       50
<PAGE>
 
                    MYLAN LABORATORIES INC. AND SUBSIDIARIES
 
                      PRO FORMA COMBINED INCOME STATEMENT
                       FOR THE YEAR ENDED MARCH 31, 1998
               (AMOUNTS IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
                                  (UNAUDITED)
 
<TABLE>
<CAPTION>
                                                           PRO FORMA    PRO FORMA
                                        MYLAN   PENEDERM  ADJUSTMENTS   COMBINED
                                       -------- --------  -----------   ---------
<S>                                    <C>      <C>       <C>           <C>
REVENUES:
  Net Sales..........................  $528,601 $  6,470       --       $535,071
  Other..............................    26,822    3,635       --         30,457
                                       -------- --------    ------      --------
    Total Revenues...................   555,423   10,105       --        565,528
COSTS AND EXPENSES:
  Costs of Sales.....................   288,290    2,624    $3,350(4)    294,264
  Research and Development...........    46,278    8,119       --         54,397
  Selling, General and
   Administrative....................    96,708   12,381       179(4)    109,268
                                       -------- --------    ------      --------
    Total Costs and Expenses.........   431,276   23,124     3,529       457,929
  Equity in Earnings of Somerset.....    10,282      --        --         10,282
  Other Income, net..................    13,960      409       --         14,369
                                       -------- --------    ------      --------
  Income (Loss) Before Income Taxes..   148,389  (12,610)   (3,529)      132,250
  Income Taxes.......................    47,612      --     (1,340)(5)    41,228
                                                            (5,044)(6)
                                       -------- --------    ------      --------
  Net Earnings (Loss) (7)............  $100,777 $(12,610)   $2,855      $ 91,022
                                       ======== ========    ======      ========
NET EARNINGS (LOSS) PER COMMON SHARE:
 (7)
  Basic..............................  $   0.83 $  (1.55)               $   0.71
  Diluted............................      0.82    (1.55)                   0.71
  Shares Used in Net Earnings (Loss)
   Per Common Share Computation--
   Basic.............................   122,094    8,147    (2,607)      127,634
  Shares Used in Net Earnings (Loss)
   Per Common Share Computation--
   Diluted...........................   123,043    8,147    (2,529)      128,661
</TABLE>
 
 
      See accompanying Notes to the Unaudited Pro Forma Combined Financial
                                  Statements.
 
 
                                       51
<PAGE>
 
                    MYLAN LABORATORIES INC. AND SUBSIDIARIES
 
                      PRO FORMA COMBINED INCOME STATEMENT
                    FOR THE THREE MONTHS ENDED JUNE 30, 1998
               (AMOUNTS IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
                                  (UNAUDITED)
 
<TABLE>
<CAPTION>
                                                           PRO FORMA    PRO FORMA
                                        MYLAN   PENEDERM  ADJUSTMENTS   COMBINED
                                       -------- --------  -----------   ---------
<S>                                    <C>      <C>       <C>           <C>
REVENUES:
  Net Sales........................... $166,718 $ 4,388        --       $171,106
  Other...............................      --    1,936        --          1,936
                                       -------- -------     ------      --------
    Total Revenues....................  166,718   6,324        --        173,042
COSTS AND EXPENSES:
  Costs of Sales......................   81,564   1,147     $  838(4)     83,549
  Research and Development............   14,084   1,134        --         15,218
  Selling, General and Administrative.   25,009   5,230         45(4)     29,384
                                                              (900)(7)
                                       -------- -------     ------      --------
    Total Costs and Expenses..........  120,657   7,511        (17)      128,151
  Equity in Earnings of Somerset......    2,350     --         --          2,350
  Other Income, net...................    4,034      27        --          4,061
                                       -------- -------     ------      --------
INCOME (LOSS) BEFORE INCOME TAXES.....   52,445  (1,160)        17        51,302
INCOME TAXES..........................   18,263     --        (335)(5)    17,464
                                                              (464)(6)
                                       -------- -------     ------      --------
  Net Earnings (Loss) (7)............. $ 34,182 $(1,160)    $  816      $ 33,838
                                       ======== =======     ======      ========
NET EARNINGS (LOSS) PER COMMON SHARE:
 (7)
  Basic............................... $   0.28 $ (0.14)                $   0.26
  Diluted.............................     0.28   (0.14)                    0.26
  Shares Used in Net Earnings (Loss)
   Per Common Share Computation--
   Basic..............................  122,295   8,511     (2,724)      128,082
  Shares Used in Net Earnings (Loss)
   Per Common Share Computation--
   Diluted............................  124,078   8,511     (2,389)      130,200
</TABLE>
 
 
      See accompanying Notes to the Unaudited Pro Forma Combined Financial
                                  Statements.
 
                                       52
<PAGE>
 
                   MYLAN LABORATORIES INC. AND SUBSIDIARIES
 
               NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS
                 (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
 
(1) Records the purchase accounting adjustments (pursuant to Accounting
    Principles Board Opinion No. 16) necessary to record Mylan's acquisition
    of Penederm's net assets for approximately $217,000. Intangible assets
    relate principally to existing product patents and trademarks. The
    allocation of the purchase price is subject to change based on final
    valuation and appraisals and was estimated as follows:
 
<TABLE>
   <S>                                                                 <C>
   Net worth of Penederm at June 30, 1998............................. $  7,517
   Intangible assets..................................................   67,000
   In-process research and development................................  145,000
   Goodwill...........................................................    3,583
   Net deferred tax liability.........................................   (6,100)
                                                                       --------
   Purchase price..................................................... $217,000
                                                                       ========
</TABLE>
 
  The estimated purchase price includes the issuance of approximately
  5,900,000 shares of Mylan Common Stock for Penederm Common Stock
  outstanding and includes the fair value of vested Penederm stock options
  assumed by Mylan and Mylan's direct acquisition costs estimated at $2,500.
 
(2) Record the deferred taxes related to the purchase. Specifically, $20,700
    in tax benefits associated with Penederm's net operating loss and credit
    carryforwards netted with deferred taxes provided on the $67,000 in
    intangibles assets (principally patents) acquired with no tax basis
    (calculated as the $67,000 of intangible assets times the 40% tax rate
    which equals $26,800 of deferred tax liability less $20,700 in tax
    benefits acquired).
 
(3) Records the write-off of the in-process research and development upon
    consummation of the acquisition.
 
(4) Reflects the estimated amortization of intangibles (including goodwill)
    pursuant to the purchase method of accounting. Intangibles are being
    amortized on a straight line basis over their economic useful life which
    is estimated to be 20 years. The allocation of the purchase price and the
    useful life assigned are subject to change based on the final valuation
    and appraisals. The in-process research and development will be charged to
    research and development expense upon consummation of the Merger but is
    not included in the Unaudited Pro Forma Combined Income Statements as it
    is nonrecurring in nature.
 
<TABLE>
<CAPTION>
                                                       USEFUL LIFE    ANNUAL
                                            ALLOCATION   (YEARS)   AMORTIZATION
                                            ---------- ----------- ------------
   <S>                                      <C>        <C>         <C>
   Patents and Trademarks..................  $67,000        20        $3,350
   Goodwill................................    3,583        20           179
                                                                      ------
                                                                      $3,529
                                                                      ======
</TABLE>
 
(5) Reflects the tax effect of the amortization of patents and trademarks
    assuming a 40% taxable rate.
 
<TABLE>
<CAPTION>
    YEARLY AMORTIZATION OF INTANGIBLES       TAXABLE RATE            ANNUAL BENEFIT
    ----------------------------------       -------------           --------------
   <S>                                       <C>                     <C>
                 $3,350                            40%                   $1,340
</TABLE>
 
(6) To recognize tax benefit associated with Penederm's current year loss
    using a 40% effective tax rate.
 
 
                                      53
<PAGE>
 
                    MYLAN LABORATORIES INC. AND SUBSIDIARIES
 
         NOTES TO PRO FORMA COMBINED FINANCIAL STATEMENTS--(CONTINUED)
                 (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(7) As required by Article 11 of Regulation S-X under the Securities Exchange
    Act of 1934, the pro forma income statements exclude the nonrecurring
    charge for in-process research and development estimated at $145,000 and
    $900 of nonrecurring acquisition costs incurred by Penederm during the
    three months ended June 30, 1998. The following schedule shows the effect
    of the write-off (had it occurred as of the first day of each period
    presented) on Pro Forma Net (Loss) and Pro Forma Net (Loss) Per Common
    Share--Basic and Diluted.
 
<TABLE>
<CAPTION>
                                                    THREE MONTHS
                                                        ENDED       YEAR ENDED
                                                    JUNE 30, 1998 MARCH 31, 1998
                                                    ------------- --------------
   <S>                                              <C>           <C>
   Net (Loss)......................................   $(112,062)     $(53,978)
                                                      =========      ========
   Per Common Share
   Net (Loss)--Basic and Diluted...................   $   (0.87)     $  (0.42)
                                                      =========      ========
</TABLE>
 
Note: There are no eliminations of intercompany accounts and balances between
    Mylan and Penederm as amounts are immaterial.
 
                                       54
<PAGE>
 
                                    EXPERTS
 
  The consolidated financial statements of Mylan at March 31, 1998 and 1997
and for each of the three years in the period ended March 31, 1998,
incorporated in this Proxy Statement/Prospectus by reference from Mylan's 1998
Form 10-K, have been audited by Deloitte & Touche LLP, independent auditors,
as stated in their report which is incorporated by reference herein, and have
been so incorporated in reliance upon the report of such firm given upon their
authority as experts in accounting and auditing.
 
  The consolidated financial statements of Somerset Pharmaceuticals, Inc. at
December 31, 1997 and 1996 and for each of the three years in the period ended
December 31, 1997, incorporated in this Proxy Statement/Prospectus by
reference from Mylan's 1998 Form 10-K, have been audited by Deloitte & Touche
LLP, independent auditors, as stated in their report which is incorporated by
reference herein, and have been so incorporated in reliance upon the report of
such firm given upon their authority as experts in accounting and auditing.
 
  The consolidated financial statements of Penederm as of December 31, 1997
and 1996, and for each of the three years in the period ended December 31,
1997, have been incorporated in this Proxy Statement/Prospectus by reference
from Penederm's 1997 Form 10-K, have been audited by Ernst & Young LLP,
independent auditors, as stated in their report which is incorporated by
reference herein, and have been so incorporated in reliance upon the report of
such firm given upon their authority as experts in accounting and auditing.
 
                                 LEGAL MATTERS
 
  The validity of the Mylan Common Stock to be issued by Mylan in connection
with the Merger will be passed upon by Buchanan Ingersoll Professional
Corporation, Pittsburgh, Pennsylvania.
 
  Certain tax matters relating to the Merger will be passed upon for Penederm
by Heller Ehrman White & McAuliffe, Palo Alto, California, and for Mylan by
Buchanan Ingersoll Professional Corporation, Pittsburgh, Pennsylvania.
 
                             STOCKHOLDER PROPOSALS
 
  Penederm will hold a 1999 Annual Meeting of Stockholders only if the Merger
is not consummated. In the event that such a meeting is held, any proposal of
a Penederm Stockholder intended to be presented at the 1999 Annual Meeting
will be required to be received by the Secretary of Penederm no later than
January 11, 1999 in order to be considered for inclusion in the Penederm 1999
proxy materials. Any such proposal will be subject to Rule 14a-8 of the Rules
and Regulations under the Exchange Act.
 
                                      55
<PAGE>
 
                                                                      APPENDIX A
 
                          AGREEMENT AND PLAN OF MERGER
 
                                  BY AND AMONG
 
                             PENEDERM INCORPORATED
 
                                      AND
 
                             MLI ACQUISITION CORP.
 
                                      AND
 
                            MYLAN LABORATORIES INC.
 
                                 JUNE 24, 1998
<PAGE>
 
                               TABLE OF CONTENTS
<TABLE>   
<CAPTION>
                                                                            PAGE
                                                                            ----
 <C>               <S>                                                      <C>
 ARTICLE 1  NAME OF SURVIVING CORPORATION, CERTIFICATE OF INCORPORATION,
            BYLAWS
      Section 1.01 Name of Surviving Corporation.........................    A-2
      Section 1.02 Certificate of Incorporation..........................    A-2
      Section 1.03 Bylaws; Directors and Officers........................    A-2
      Section 1.04 Filing of Certificate of Merger; Effective Date;
                   Effective Time........................................    A-2
      Section 1.05 Effects of Merger.....................................    A-2
      Section 1.06 Tax-Free Reorganization...............................    A-2
 ARTICLE 2 STATUS AND CONVERSION OF SECURITIES
      Section 2.01 Company Capital Stock.................................    A-2
                   (a) Conversion of Company Common Stock Into Parent
                       Common Stock......................................    A-2
                   (b)Delivery of Certificates...........................    A-2
                   (c)Dividends; Transfer Taxes; Withholding.............    A-2
                   (d)No Fractional Shares...............................    A-4
                   (e)Return of Exchange Fund............................    A-4
                   (f)Adjustment of Exchange Ratio.......................    A-4
                   (g)No Further Ownership Rights in Company Common
                   Stock.................................................    A-4
                   (h)Closing of the Company Transfer Books..............    A-4
                   (i)Further Assurances.................................    A-4
      Section 2.02 Subsidiary Common Stock...............................    A-5
      Section 2.03 Assumption of Stock Options; Company Warrant; Employee
                   Stock Purchase Plan...................................    A-5
      Section 2.04 Closing...............................................    A-5
 ARTICLE 3 REPRESENTATIONS, WARRANTIES AND AGREEMENTS
      Section 3.01 Representations, Warranties and Agreements of the
                   Company...............................................    A-6
                   (a)Organization, Standing and Power...................    A-6
                   (b)Capital Structure..................................    A-6
                   (c)Authority..........................................    A-7
                   (d)Consents and Approvals; No Violation...............    A-8
                   (e)SEC Documents and Other Reports....................    A-8
                   (f)Registration Statement and Prospectus/Proxy
                   Statement.............................................    A-9
                   (g)Absence of Certain Changes or Events...............    A-9
                   (h)Permits and Compliance.............................   A-10
                   (i)Tax Matters........................................   A-10
                   (j)Actions and Proceedings............................   A-10
                   (k)FDA and Related Matters............................   A-11
                   (l)Certain Agreements.................................   A-12
                   (m)Material Contracts.................................   A-12
                   (n)Opinion of Financial Advisor.......................   A-12
                   (o)Takeover Provisions Inapplicable...................   A-12
                   (p)Required Vote of the Company Stockholders..........   A-13
                   (q)Finders and Investment Bankers.....................   A-13
                   (r)Authorized Stock...................................   A-13
                   (s)Company Affiliates.................................   A-13
                   (t)Owned Real Property................................   A-13
                   (u)Leased Real Estate.................................   A-13
                   (v)Owned and Leased Tangible Personal Property........   A-13
</TABLE>    
 
                                      A-i
<PAGE>
 
<TABLE>   
<CAPTION>
                                                                            PAGE
                                                                            ----
 <C>               <S>                                                      <C>
                   (w)Physical Condition of Property.....................   A-13
                   (x)Patents and Certain Other Intellectual Property
                   Rights................................................   A-14
                   (y)Accounts Receivable................................   A-14
                   (z)Insurance and Bonds................................   A-14
                   (aa)Product Warranties and Liability..................   A-14
                   (bb)Contracts, Proposals and Bids.....................   A-14
                   (cc)Labor and Employment Matters......................   A-15
                   (dd)Insider Contracts.................................   A-16
                   (ee)Other Material Contracts..........................   A-16
                   (ff)Export of Products and Technologies...............   A-16
                   (gg)Absence of Illegal Payments.......................   A-16
                   (hh)Absence of Anti-Boycott Violations................   A-17
                   (ii)Environmental Matters.............................   A-17
                   (jj)No Adverse Actions................................   A-18
      Section 3.02 Representations, Warranties and Agreements of the
                   Parent................................................   A-18
                   (a)Organization, Standing and Power...................   A-18
                   (b)Capital Structure..................................   A-19
                   (c)Authority..........................................   A-19
                   (d)Consents and Approvals; No Violation...............   A-20
                   (e)SEC Documents and Other Reports....................   A-20
                   (f)Registration Statement and Prospectus/Proxy
                   Statement.............................................   A-21
                   (g)Absence of Certain Changes or Events...............   A-21
                   (h)Permits and Compliance.............................   A-21
                   (i)Actions and Proceedings............................   A-21
                   (j)FDA Matters........................................   A-22
                   (k)Labor Relations....................................   A-22
                   (l)Patents and Certain Other Intellectual Property
                   Rights................................................   A-22
                   (m)Parent Common Stock................................   A-23
                   (n)Opinion of Financial Advisor.......................   A-23
                   (o)Finders and Investment Bankers.....................   A-23
                   (p)Parent Affiliate Agreements........................   A-23
      Section 3.03 Representations and Warranties as to the Merger
                   Subsidiary............................................   A-23
                   (a)Organization, Standing, Power and Capitalization of
                   the Merger Subsidiary.................................   A-23
                   (b)Business of the Merger Subsidiary..................   A-23
                   (c)Authorization; Binding Agreement...................   A-23
                   (d)Compliance With Other Instruments, Etc.............   A-24
                   (e)Governmental and Other Consents, Etc...............   A-24
 ARTICLE 4 COVENANTS
      Section 4.01 Covenants of the Company..............................   A-24
                   (a)Action in Furtherance of Merger....................   A-24
                   (b)Maintenance of Properties..........................   A-24
                   (c)Access and Information.............................   A-24
                   (d)Conduct of Business................................   A-25
                   (e)Capital Stock......................................   A-25
                   (f)No Solicitation....................................   A-26
                   (g)No Final Put Notice................................   A-27
                   (h)Compensation Matters...............................   A-27
                   (i)Contracts..........................................   A-27
                   (j)Tax Matters........................................   A-27
                   (k)Amendments to the Schedules........................   A-27
</TABLE>    
 
                                      A-ii
<PAGE>
 
<TABLE>   
<CAPTION>
                                                                            PAGE
                                                                            ----
 <C>               <S>                                                      <C>
                   (l)Notification of Certain Matters....................   A-27
                   (m)Stockholder Approval...............................   A-28
                   (n)Financial Statements...............................   A-28
                   (o)Proxy Statement....................................   A-28
                   (p)Company Affiliates.................................   A-28
                   (q)Takeover Statutes..................................   A-28
                   (r)Prohibited Transactions............................   A-28
                   (s)Accounting Changes.................................   A-29
                   (t)Compliance With Law................................   A-29
                   (u)Company Affiliates Agreements......................   A-29
      Section 4.02 Covenants of the Parent...............................   A-29
                   (a)Action in Furtherance of Merger....................   A-29
                   (b)Maintenance of Properties..........................   A-29
                   (c)Access and Information.............................   A-29
                   (d)Listing Application................................   A-30
                   (e)Public Filings.....................................   A-30
                   (f)Registration Statement.............................   A-30
                   (g)Conduct of Business................................   A-30
      Section 4.03 Covenants as to the Merger Subsidiary.................   A-30
                   (a)No Business........................................   A-30
                   (b)Access.............................................   A-30
                   (c)Actions in Furtherance of Merger...................   A-30
      Section 4.04 Covenants of the Company and the Parent...............   A-30
                   (a)Registration Statement.............................   A-30
                   (b)Tax-Free Reorganization Treatment..................   A-30
 ARTICLE 5. CONDITIONS TO CLOSING; ABANDONMENT AND TERMINATION
      Section 5.01 Conditions to Each Party's Obligation to Effect the
                   Merger................................................   A-30
                   (a)Company Stockholder Approval.......................   A-30
                   (b)Consents...........................................   A-31
                   (c)Effectiveness......................................   A-31
                   (d)Listing............................................   A-31
                   (e)No Legal Restraints................................   A-31
      Section 5.02 Conditions to the Company's Closing and Its Right to
                   Abandon...............................................   A-31
                   (a)No Material Adverse Effect.........................   A-31
                   (b)No Material Adverse Change.........................   A-31
                   (c)Officer's Certificate..............................   A-31
                   (d)Tax Opinion........................................   A-31
                   (e)Tax Certificate....................................   A-32
      Section 5.03 Conditions to the Parent's and the Merger Subsidiary's
                    Closing and Right of the Parent and the Merger
                    Subsidiary to Abandon................................   A-33
                   (a)No Material Adverse Effect.........................   A-33
                   (b)No Material Adverse Change.........................   A-33
                   (c)Officer's Certificate..............................   A-33
                   (d)Tax Opinion........................................   A-33
                   (e)Tax Certificates...................................   A-34
                   (f)Outstanding Shares of Preferred Stock..............   A-34
                   (g)FIRPTA Statement...................................   A-34
</TABLE>    
 
                                     A-iii
<PAGE>
 
<TABLE>   
<CAPTION>
                                                                            PAGE
                                                                            ----
 <C>               <S>                                                      <C>
 ARTICLE 6. ADDITIONAL PROVISIONS FOR ABANDONMENT AND TERMINATION
      Section 6.01 Provisions of Abandonment and Termination.............   A-34
                   (a)Mutual Agreement...................................   A-34
                   (b)Violation of Order.................................   A-34
                   (c)Other Transactions Involving Company...............   A-34
                   (d)Superior Proposal..................................   A-35
      Section 6.02 Termination of Agreement..............................   A-35
      Section 6.03 Effect of Abandonment or Termination..................   A-35
 ARTICLE 7. EXPENSES
      Section 7.01 Costs and Expenses....................................   A-35
                   (a)Payment of Own Expenses............................   A-35
                   (b)Termination Fee....................................   A-36
 ARTICLE 8. MISCELLANEOUS
      Section 8.1  Certification of the Company's Shareholder Votes,
                   Etc ..................................................   A-36
      Section 8.2  Certification of the Parent's Stockholder Votes,
                   Etc ..................................................   A-36
      Section 8.3  Termination of Covenants, Representations and
                   Warranties............................................   A-37
      Section 8.4  Certain Tax Matters...................................   A-37
      Section 8.5  Execution in Counterparts.............................   A-39
      Section 8.6  Waivers and Amendments................................   A-39
      Section 8.7  Confidentiality.......................................   A-39
      Section 8.8  Indemnification; Directors and Officers Insurance.....   A-39
      Section 8.9  Notices...............................................   A-39
      Section 8.10 Entire Agreement; No Third-Party Beneficiaries; Rights
                   of Ownership..........................................   A-40
      Section 8.11 Governing Law.........................................   A-40
      Section 8.12 Partial Invalidity....................................   A-40
      Section 8.13 Publicity.............................................   A-40
      Section 8.14 Defined Terms.........................................   A-40
      Section 8.15 Benefit Plans.........................................   A-40
      Section 8.16 Enforcement of Agreement..............................   A-41
      Section 8.17 Waiver of Jury Trial..................................   A-41
      Section 8.18 No Presumption Against the Draftsman..................   A-41
 APPENDIX A GLOSSARY OF DEFINED TERMS/SECTION REFERENCES
</TABLE>    
 
<TABLE>
<CAPTION>
                             LIST OF EXHIBITS
 EXHIBIT
 -------
 <C>         <S>                                               <C>
 EXHIBIT A   COMPANY OPTION AGREEMENT.......................   Recital 7
 EXHIBIT B-1 FORM OF VOTING AGREEMENT.......................   Recital 8
 EXHIBIT B-2 FORM OF ALTERNATE VOTING AGREEMENT.............   Recital 8
 EXHIBIT C   FORM OF COMPANY AFFILIATE AGREEMENT............   4.1(p), 4.1(u),
                                                               4.4(c)(i), 3.1(t)
</TABLE>
 
                                      A-iv
<PAGE>
 
                         AGREEMENT AND PLAN OF MERGER
 
  THIS AGREEMENT AND PLAN OF MERGER (this "Agreement") is dated June 24, 1998,
by and among PENEDERM INCORPORATED, a Delaware corporation (hereinafter called
the "Company"), and MLI ACQUISITION CORP., a Delaware corporation (hereinafter
called the "Merger Subsidiary") (the Company and the Merger Subsidiary being
hereinafter sometimes called the "Constituent Corporations"), and MYLAN
LABORATORIES INC., a Pennsylvania corporation (hereinafter called the
"Parent"), which is joining as a third party and is not a Constituent
Corporation.
 
                                   RECITALS:
 
  1. The Boards of Directors of each of the Parent and the Merger Subsidiary
have determined that it is in the best interests of the Parent and the Merger
Subsidiary and the Board of Directors of the Company has determined that it is
advisable and in the best interests of the Company and is fair to the
stockholders of the Company, for the Parent to acquire the Company upon the
terms and subject to the conditions set forth herein;
 
  2. In furtherance of such acquisition, the Boards of Directors of the
Company and the Merger Subsidiary have resolved and approved that the Merger
Subsidiary be merged with and into the Company under and pursuant to the
Delaware General Corporation Law (the "DGCL") into a single corporation (the
"Merger") existing under the laws of the State of Delaware, and the Company
shall be the surviving corporation in the Merger (the Company in its capacity
as such surviving corporation being sometimes referred to herein as the
"Surviving Corporation");
 
  3. The Parent, as sole shareholder of the Merger Subsidiary, and the
respective Boards of Directors of each of the Constituent Corporations and the
Parent have approved the Merger upon the terms and conditions hereinafter set
forth and have approved this Agreement;
 
  4. The Merger is permitted pursuant to the DGCL;
 
  5. For federal income tax purposes, it is intended that the Merger shall
qualify as a reorganization within the meaning of Section 368(a) of the
Internal Revenue Code of 1986, as amended (the "Code");
 
  6. For accounting purposes, it is intended that the Merger shall be
accounted for under the purchase method;
 
  7. Simultaneously with the execution and delivery of this Agreement and as a
condition and inducement to the Parent's and the Merger Subsidiary's
willingness to enter into this Agreement, the Parent is entering into a Stock
Option Agreement dated the date hereof in the form of Exhibit A (the "Company
Option Agreement") with the Company pursuant to which the Company is granting
to the Parent the right and option to purchase 1,717,878 shares of common
stock, par value $.01 per share, of the Company (the "Company Common Stock")
from the Company; and
 
  8. Simultaneously with the execution and delivery of this Agreement and as a
condition and inducement to the Parent's and the Merger Subsidiary's
willingness to enter into this Agreement, the Parent is entering into Voting
Agreements in the form of Exhibit B-1 with certain members of the Board of
Directors of the Company in their respective capacities as stockholders of the
Company and a Voting Agreement in the form of Exhibit B-2 with a member of the
Board of Directors of the Company in his capacity as the general partner of a
limited partnership which is a stockholder of the Company (together, the
"Voting Agreements").
 
  NOW, THEREFORE, in consideration of the premises and the mutual agreements,
provisions and covenants herein contained and for other good and valuable
consideration, the receipt and adequacy of which are hereby acknowledged, the
parties hereto, intending to be legally bound, hereby agree that the Merger
Subsidiary shall be merged with and into the Company at the Effective Time in
accordance with the DGCL, the Company shall be the Surviving Corporation, and
the parties hereto adopt and agree to the following agreements, terms and
conditions relating to the Merger and the mode of carrying the same into
effect.
 
                                      A-1
<PAGE>
 
1. NAME OF SURVIVING CORPORATION, CERTIFICATE OF INCORPORATION, BYLAWS.
 
  1.1 Name of Surviving Corporation. The name of the Surviving Corporation
from and after the Effective Time shall be Penederm Incorporated.
 
  1.2 Certificate of Incorporation. The Certificate of Incorporation of the
Company as in effect on the date hereof shall from and after the Effective
Time be and continue to be the Certificate of Incorporation of the Surviving
Corporation until changed or amended as provided by law, except that at the
Effective Time and upon filing of the Certificate of Merger, the Certificate
of Incorporation of the Company shall be amended and restated in its entirety
to read identically with the Certificate of Incorporation of the Merger
Subsidiary except that the name of the Surviving Corporation shall be
"Penederm Incorporated" (the "Amended and Restated Certificate of
Incorporation").
 
  1.3 Bylaws; Directors and Officers. The Bylaws of the Company as in effect
immediately prior to the Effective Time shall from and after the Effective
Time be and continue to be the Bylaws of the Surviving Corporation until
amended as provided therein. The directors and officers of the Merger
Subsidiary at the Effective Time shall, from and after the effectiveness of
the Merger, be the directors and officers, respectively, of the Surviving
Corporation until their successors shall have been duly elected or appointed
and qualified or until their earlier death, resignation or removal in
accordance with the Surviving Corporation's Amended and Restated Certificate
of Incorporation and Bylaws.
 
  1.4 Filing of Certificate of Merger; Effective Date; Effective Time. Upon
fulfillment of the conditions set forth in Article 5 hereof (or at such time
thereafter as provided in the Certificate of Merger), and if this Agreement is
not thereafter, and has not theretofore been, terminated or abandoned as
permitted by the provisions hereof, then a Certificate of Merger shall be
filed in accordance with Section 103 and Section 251 of the DGCL. Said
Certificate of Merger shall be submitted for filing in accordance with the
DGCL as soon as practicable after the Closing. The Merger shall become
effective immediately upon such filing with the Secretary of State of the
State of Delaware, which time is herein referred to as the "Effective Time"
and which date is herein referred to as the "Effective Date."
 
  1.5 Effects of Merger. The Merger shall have the effects set forth in
Section 259 of the DGCL.
 
  1.6 Tax-Free Reorganization. The Merger is intended to be a reorganization
within the meaning of Section 368(a) of the Code, and this Agreement is
intended to be a "plan of reorganization" within the meaning of the
regulations promulgated under Section 368 of the Code.
 
2. STATUS AND CONVERSION OF SECURITIES.
 
  The manner and basis of converting the shares of the capital stock of the
Constituent Corporations in the Merger and the nature and amount of securities
of the Parent which the holders of shares of Company Common Stock are to
receive in exchange for such shares in the Merger are as follows:
 
  2.1 Company Capital Stock.
 
  (a) Conversion of Company Common Stock Into Parent Common Stock. At the
Effective Time, the shares of Company Common Stock, other than Company Common
Stock (if any) owned by the Company, the Parent or the Merger Subsidiary,
shall, by virtue of the Merger and without any action on the part of the
Parent, the Merger Subsidiary, the Company, the Surviving Corporation or the
holder thereof, automatically be cancelled and be converted into shares of
common stock, par value $.50 per share, of the Parent (the "Parent Common
Stock") at a ratio equal to 0.68 shares of Parent Common Stock for each share
of Company Common Stock (the "Exchange Ratio"), subject to the provisions of
Sections 2.1(b) and 2.1(d). Any shares of Company Common Stock (if any) owned
by the Company, the Parent or the Merger Subsidiary shall be cancelled and no
Parent Common Stock or other consideration shall be delivered in exchange
therefor.
 
 
 
                                      A-2
<PAGE>
 
  (b) Delivery of Certificates.
 
    (i) The Parent shall authorize American Stock Transfer and Trust Company
  (or such other Person or Persons as shall be reasonably acceptable to the
  Parent and the Company) to act as Exchange Agent hereunder (the "Exchange
  Agent"). As soon as practicable after the Effective Time, the Parent shall
  deposit with the Exchange Agent, in trust for the holders of shares of
  Company Common Stock converted in the Merger, certificates representing the
  shares of Parent Common Stock issuable pursuant to Section 2.1(a) in
  exchange for outstanding shares of Company Common Stock and cash as
  required to make payments in lieu of any fractional shares pursuant to
  Section 2.1(d) (such cash and shares of Parent Common Stock, together with
  any dividends or distributions with respect thereto, being hereinafter
  referred to as the "Exchange Fund"). The Exchange Agent shall deliver the
  Parent Common Stock contemplated to be issued pursuant to Section 2.1(a)
  out of the Exchange Fund.
 
    (ii) The Parent shall instruct the Exchange Agent, as soon as practicable
  after the Effective Time, to mail to each record holder of a certificate or
  certificates which immediately prior to the Effective Time represented
  outstanding shares of Company Common Stock converted in the Merger (the
  "Certificates") a letter of transmittal (which shall specify that delivery
  shall be effected, and risk of loss and title to the Certificates shall
  pass, only upon actual delivery of the Certificates to the Exchange Agent,
  and shall contain instructions for use in effecting the surrender of the
  Certificates in exchange for certificates representing shares of Parent
  Common Stock and cash in lieu of fractional shares in accordance with
  Section 2.1(d)). Upon surrender for cancellation to the Exchange Agent of
  all Certificates held by any record holder of a Certificate, together with
  such letter of transmittal, duly executed, the holder of such Certificate
  shall be entitled to receive in exchange therefor a certificate
  representing that number of whole shares of Parent Common Stock into which
  the shares represented by the surrendered Certificate shall have been
  converted at the Effective Time pursuant to this Article 2, cash in lieu of
  any fractional share in accordance with Section 2.1(d) and certain
  dividends and other distributions in accordance with Section 2.1(c), and
  any Certificate so surrendered shall forthwith be cancelled.
 
  (c) Dividends; Transfer Taxes; Withholding. No dividends or other
distributions that are declared on or after the Effective Time on Parent
Common Stock, or are payable to the holders of record thereof on or after the
Effective Time, shall be paid to any Person entitled by reason of the Merger
to receive a certificate representing Parent Common Stock until such Person
surrenders the related Certificate or Certificates, as provided in Section
2.1(b), and no cash payment in lieu of fractional shares shall be paid to any
such Person pursuant to Section 2.1(d) until such Person shall so surrender
the related Certificate or Certificates. Subject to the effect of applicable
law, there shall be paid to each record holder of a new certificate
representing such Parent Common Stock: (A) at the time of such surrender or as
promptly as practicable thereafter, the amount of any dividends or other
distributions theretofore paid with respect to the shares of Parent Common
Stock represented by such new certificate and having a record date on or after
the Effective Time and a payment date prior to such surrender; (B) at the
appropriate payment date or as promptly as practicable thereafter, the amount
of any dividends or other distributions payable with respect to such shares of
Parent Common Stock and having a record date on or after the Effective Time
but prior to such surrender and a payment date on or subsequent to such
surrender; and (C) at the time of such surrender or as promptly as practicable
thereafter, the amount of any cash payable with respect to a fractional share
of Parent Common Stock to which such holder is entitled pursuant to Section
2.1(d). In no event shall the Person entitled to receive any such dividends or
other distributions be entitled to receive interest on such dividends or other
distributions. If any cash or certificate representing shares of Parent Common
Stock is to be paid to or issued in a name other than that in which the
Certificate surrendered in exchange therefor is registered, it shall be a
condition of such exchange that the Certificate so surrendered shall be
properly endorsed and otherwise in proper form for transfer and that the
Person requesting such exchange shall pay to the Exchange
Agent any transfer or other taxes required by reason of the issuance of
certificates for such shares of Parent Common Stock in a name other than that
of the registered holder of the Certificate surrendered, or shall establish to
the satisfaction of the Exchange Agent that such tax has been paid or is not
applicable. The Parent or the Exchange Agent shall be entitled to deduct and
withhold from the consideration otherwise payable pursuant to this Agreement
to any holder of shares of Company Common Stock such amounts as the Parent or
the Exchange
 
                                      A-3
<PAGE>
 
Agent is required to deduct and withhold with respect to the making of such
payment under the Code or under any provision of state, local or foreign tax
law. To the extent that amounts are so withheld by the Parent or the Exchange
Agent, such withheld amounts shall be treated for all purposes of this
Agreement as having been paid to the holder of the shares of Company Common
Stock in respect of which such deduction and withholding was made by the
Parent or the Exchange Agent.
 
  (d) No Fractional Shares. No certificates or scrip representing fractional
shares of Parent Common Stock shall be issuable upon the surrender for
exchange of Certificates pursuant to this Article 2, and no dividend or other
distribution or stock split of the Parent shall relate to any fractional
share, and no fractional share shall entitle the owner thereof to vote or to
any other rights of a security holder of the Parent. In lieu of any such
fractional share, each holder of Company Common Stock who would otherwise have
been entitled to a fraction of a share of Parent Common Stock upon surrender
of Certificates for exchange pursuant to this Article 2 shall be paid an
amount in cash (without interest), rounded to the nearest cent, determined by
multiplying (i) the per-share closing price on the New York Stock Exchange,
Inc. (the "NYSE") of Parent Common Stock (as reported in the NYSE Composite
Transactions) on the Effective Date (or, if the shares of Parent Common Stock
do not trade on the NYSE on such date, the first date of trading of shares of
Parent Common Stock on the NYSE after the Effective Time) by (ii) the
fractional interest to which such holder would otherwise be entitled. As
promptly as practicable after the determination of the amount of cash, if any,
to be paid to holders of fractional share interests, the Exchange Agent shall
so notify the Parent, and the Parent shall deposit such amount with the
Exchange Agent and shall cause the Exchange Agent to forward payments to such
holders of fractional share interests subject to and in accordance with the
terms of Section 2.1(c) and this Section 2.1(d).
 
  (e) Return of Exchange Fund. Any portion of the Exchange Fund which remains
undistributed to the former stockholders of the Company for twelve (12) months
after the Effective Time shall be delivered to the Parent, upon demand of the
Parent, and any such former stockholders who have not theretofore complied
with this Article 2 shall thereafter look only to the Parent for payment of
their claims for Parent Common Stock, any cash in lieu of fractional shares of
Parent Common Stock and any dividends or distributions with respect to Parent
Common Stock. Neither the Parent nor the Surviving Corporation shall be liable
to any former holder of Company Common Stock for any such shares of Parent
Common Stock, cash and dividends and distributions held in the Exchange Fund
which are delivered to a public official pursuant to any applicable abandoned
property, escheat or similar law.
 
  (f) Adjustment of Exchange Ratio. In the event of any reclassification,
stock split, stock dividend, or other subdivision or combination, with respect
to the Parent Common Stock, any change or conversion of Parent Common Stock
into other securities of the Parent or any other dividend or distribution with
respect to the Parent Common Stock other than normal quarterly cash dividends
as the same may be adjusted from time to time pursuant to the terms of this
Agreement (or if a record date with respect to any of the foregoing should
occur) prior to the Effective Time, appropriate and proportionate adjustments,
if any, shall be made to the Exchange Ratio, and all references to the
Exchange Ratio in this Agreement shall be deemed to be to the Exchange Ratio
as so adjusted.
 
  (g) No Further Ownership Rights in Company Common Stock. All shares of
Parent Common Stock issued upon the surrender for exchange of Certificates in
accordance with the terms hereof (including any cash paid pursuant to Section
2.1(d)) shall be deemed to have been issued in full satisfaction of all rights
pertaining to the shares of Company Common Stock represented by such
Certificates.
 
  (h) Closing of the Company Transfer Books. At the Effective Time, the stock
transfer books of the Company shall be closed and no transfer of shares of
Company Common Stock shall thereafter be made on the records of the Company.
If, after the Effective Time, Certificates are presented to the Surviving
Corporation, the Exchange Agent or the Parent, such Certificates shall be
cancelled and exchanged as provided in this Article 2.
 
  (i) Further Assurances. If at any time after the Effective Time the
Surviving Corporation shall consider or be advised that any deeds, bills of
sale, assignments or assurances or any other acts or things are necessary,
desirable or proper (a) to vest, perfect or confirm, of record or otherwise,
in the Surviving Corporation its right,
 
                                      A-4
<PAGE>
 
title or interest in, to or under any of the rights, privileges, powers,
franchises, properties or assets of either of the Constituent Corporations, or
(b) otherwise to carry out the purposes of this Agreement, the Surviving
Corporation and its proper officers and directors or their designees shall be
authorized to execute and deliver, in the name and on behalf of either of the
Constituent Corporations, all such deeds, bills of sale, assignments and
assurances and to do, in the name and on behalf of either Constituent
Corporation, all such other acts and things as may be necessary, desirable or
proper to vest, perfect or confirm the Surviving Corporation's right, title or
interest in, to or under any of the rights, privileges, powers, franchises,
properties or assets of such Constituent Corporation and otherwise to carry
out the purposes of this Agreement.
 
  2.2 Subsidiary Common Stock. Each share of common stock, par value $.50 per
share, of the Merger Subsidiary (the "Subsidiary Common Stock") outstanding
immediately prior to the Effective Time shall, by virtue of the Merger and
without any action on the part of the holder thereof, be converted into and be
one share of the Common Stock of the Surviving Corporation.
 
  2.3 Assumption of Stock Options; Company Warrant; Employee Stock Purchase
Plan.
 
  (a) Except as expressly provided in this Section 2.3, all rights under any
stock option granted by the Company pursuant to its Equity Incentive Plan,
Employee Stock Option Plan, Consultant Stock Option Plan or Nonemployee
Directors Stock Option Plan (collectively, the "Company Stock Option Plans")
that remains unexercised immediately prior to the Effective Time ("Unexercised
Options") shall, together with the Company Stock Option Plans, be assumed by
the Parent, but shall thereafter represent the right to acquire that number of
shares of Parent Common Stock to which the optionee would have been entitled
pursuant to the Exchange Ratio if, immediately prior to the Effective Time,
the optionee had fully exercised the option and had been a stockholder of
record of the Company. The option price per share of Parent Common Stock shall
be equal to the exercise price per share of the Company Common Stock under
each option divided by the Exchange Ratio, rounded up to the nearest cent. The
Parent and the Company shall each take all action necessary to assure that the
rights and benefits of the optionee under each such option shall not be
increased or decreased by reason of this Section 2.3, and in addition, each
option which is an incentive stock option shall be adjusted as required by
Section 424 of the Code and the regulations promulgated thereunder so as not
to constitute a modification, extension or renewal of the option within the
meaning of Section 424(h) of the Code. The duration and other terms of the
options shall be the same as the original Company options, except that
reference to the Company in the Company Stock Option Plans shall be deemed to
be references to the Parent.
 
  (b) In the event that the Common Stock Purchase Warrant issued by the
Company to Promethean Investment Group, L.L.C. (the "Warrant Holder"), dated
January 21, 1998 (the "Company Warrant"), exercisable for 25,000 shares of
Company Common Stock (the "Company Warrant Shares") has not been fully
exercised at the Effective Time, the Company Warrant shall terminate in
accordance with its terms. Upon tender to the Surviving Corporation of the
aggregate Purchase Price (as defined in the Company Warrant) then in effect
under the Company Warrant, the Warrant Holder shall be entitled, in accordance
with the terms of the Company Warrant, to receive that number of shares of
Parent Common Stock to which the Warrant Holder would have been entitled
pursuant to the Exchange Ratio if, immediately prior to the Effective Time,
the Warrant Holder had fully exercised the Company Warrant and had been a
stockholder of record of the Company.
 
  (c) On the Effective Date, the Parent shall file, and thereafter shall
maintain the effectiveness of, a registration statement with the Securities
and Exchange Commission (the "SEC") covering the Unexercised Options and the
shares issuable under the Company Employee Stock Purchase Plan and the Company
Warrant Shares and the sale of the Parent Common Stock issued upon exercise of
the Unexercised Options and, if applicable, the termination of the Company
Warrant.
 
  (d) The Employee Stock Purchase Plan of the Company (the "Company Employee
Stock Purchase Plan") shall remain in effect, without amendment or
modification, through the Effective Time.
 
  2.4 Closing. After all conditions set forth in Article 5 hereof have been
satisfied (other than those which have been expressly waived), the closing of
the Merger (the "Closing") shall occur at the offices of Buchanan
 
                                      A-5
<PAGE>
 
Ingersoll Professional Corporation, 20th Floor, One Oxford Centre, Pittsburgh,
Pennsylvania, at which the documents to be delivered on the Effective Date as
described in Article 5 shall be delivered by the respective parties. The
Closing shall be scheduled to occur on the date set for the Stockholders
Meeting as described in Section 4.1(m) hereof and immediately after the
Stockholders Meeting but in no event later than 3:00 p.m., Eastern time (the
"Scheduled Closing Date"). The Closing shall occur on the Scheduled Closing
Date unless, on such date, any party has a right not to close the Merger and
refuses to close, in which event the Closing shall be adjourned from Business
Day to Business Day thereafter until the Closing occurs or until 5:01 p.m.,
Eastern time, on November 30, 1998. As used in this Agreement, the term
"Business Day" shall mean any day on which the NYSE is open for trading.
 
3. REPRESENTATIONS, WARRANTIES AND AGREEMENTS.
 
  3.1 Representations, Warranties and Agreements of the Company. The Company
represents and warrants to the Parent and the Merger Subsidiary as follows:
 
  (a) Organization, Standing and Power.
 
    (i) The Company is a corporation duly organized, validly existing and in
  good standing under the laws of the State of Delaware with all requisite
  corporate power and authority to own, operate and lease its properties, to
  carry on its business as now being conducted, to enter into this Agreement
  and, subject to the approval of the Company's stockholders in accordance
  with the DGCL, to perform its obligations hereunder. The Company is duly
  qualified or licensed to do business and in good standing in the state of
  California and in each other jurisdiction which the property owned, leased
  or operated by it or the nature of the business conducted by it makes such
  qualification or licensing necessary, except where the failure to be so
  qualified or so licensed would not, individually or in the aggregate, have
  a Material Adverse Effect on the Company. For purposes of this Agreement,
  "Material Adverse Change" or "Material Adverse Effect" means, when used
  with respect to the Parent or the Company, as the case may be, any event,
  circumstance, change or effect that is or could reasonably be expected (as
  far as can be foreseen at the time) to be so adverse as to result in a
  severe and critical impairment of the business, assets, liabilities,
  financial condition or results of operations of the Parent and its
  Subsidiaries, taken as a whole, or the Company and PL, taken as a whole, as
  the case may be.
 
    (ii) The Company has only one subsidiary, Penederm Limited (Company No.
  3076653), a company incorporated in England and Wales ("PL"). PL is a
  corporation duly organized and validly existing under the laws of England
  and Wales with all corporate power and authority to own, operate and lease
  its properties and to carry on its business as now being conducted. The
  authorized share capital of PL is (Pounds)1,000 divided into 1,000 shares
  of (Pounds)1 each. All of the issued and outstanding shares of PL are
  allotted to the Company free and clear of all security interests, liens,
  claims, pledges, charges or other encumbrances of any nature whatsoever,
  and all such shares have been validly issued, fully paid and nonassessable
  and free of preemptive rights. There are no outstanding rights, options,
  warrants, conversion rights or agreements for the purchase or acquisition
  from, or the sale or issuance by, PL of any of its shares.
 
  (b) Capital Structure.
 
    (i) As of the date hereof, the authorized capital stock of the Company
  consists of 30,000,000 shares of Company Common Stock and 10,000,000 shares
  of preferred stock, par value $.01 per share (the "Company Preferred
  Stock"). At the close of business on June 15, 1998, 8,620,203 shares of
  Company Common Stock were issued and outstanding, all of which were validly
  issued, fully paid and nonassessable, and free of preemptive rights. As of
  the date hereof: (A) no shares of Company Common Stock are held in the
  treasury of the Company or PL; (B) 1,487,664 shares of Company Common Stock
  are reserved for future issuance pursuant to the Company Stock Option
  Plans; (C) 25,000 shares are reserved for issuance under the Company
  Warrant; (D) 727,518 shares are reserved for issuance under that certain
  Common Stock Investment Agreement dated as of January 21, 1998 between
  Promethean Investment Group L.L.C. (the "Investor") and the Company (the
  "Common Stock Investment Agreement"); (E) 70,516 shares are
 
                                      A-6
<PAGE>
 
  reserved for issuance under the Company Employee Stock Purchase Plan; and
  (F) 30,000 shares are reserved for issuance under the 401(k) Plan of the
  Company (the "Company 401(k) Plan"). The Company Stock Option Plans, the
  Company Warrant, the Common Stock Investment Agreement, the Company
  Employee Stock Purchase Plan and the Company 401(k) Plan are the only
  benefit plans or arrangements of the Company or PL under which any
  securities of the Company or PL are issuable. No shares of Company
  Preferred Stock are issued and outstanding. As of the date of this
  Agreement, except as set forth above, no shares of capital stock or other
  voting securities of the Company or PL are issued, reserved for issuance or
  outstanding. As of the date of this Agreement, except for stock options
  covering not in excess of 1,220,097 shares of Company Common Stock issued
  under the Company Stock Option Plans (collectively, the "Company Stock
  Options"), the Company Warrant and rights to purchase covering
  approximately 10,000 shares of Company Common Stock under the Company
  Employee Stock Purchase Plans and the Company's matching contribution
  obligations under the 401(k) Plan, there are no options, warrants, calls,
  rights or agreements to which the Company or PL is a party or by which
  either of them is bound obligating the Company or PL to issue, deliver or
  sell, or cause to be issued, delivered or sold, additional shares of
  capital stock of the Company or PL or obligating the Company or PL to
  grant, extend or enter into any such option, warrant, call, right or
  agreement. The Company does not have any outstanding bonds, debentures,
  notes or other obligations the holders of which have the right to vote (or
  convertible into or exercisable for securities having the right to vote)
  with the stockholders of the Company on any matter. There are no
  obligations, contingent or otherwise, of the Company to (x) repurchase,
  redeem or otherwise acquire any shares of Company Common Stock or other
  capital stock of the Company, or the capital stock or other equity
  interests of PL; (y) (other than advances to PL in the ordinary course of
  business) provide material funds to, or make any material investment in (in
  the form of a loan, capital contribution or otherwise), or provide any
  guarantee with respect to the obligations of, PL or any other Person; or
  (z) make payment of any Shortfall Compensation (as defined in the Common
  Stock Investment Agreement) to the Investor. The Company contributed 4,651
  shares of Company Common Stock to the Company 401(k) Plan in respect of the
  plan year ended December 31, 1997.
 
    (ii) The Company has made available to the Parent complete and correct
  copies of the Company Stock Option Plans, the Company Employee Stock
  Purchase Plan, the Common Stock Investment Agreement, the Company 401(k)
  Plan and the Company Warrant. Schedule 3.1(b) sets forth a complete and
  accurate list of (A) all Company Stock Options outstanding as of the date
  of this Agreement and (B) the exercise price of each outstanding Company
  Stock Option.
 
  (c) Authority. On or prior to the date of this Agreement, the Board of
Directors of the Company has determined the Merger to be advisable and fair to
and in the best interest of the Company and its stockholders, approved this
Agreement in accordance with the DGCL, resolved (subject to its fiduciary
duties) to recommend the approval of this Agreement by the Company's
stockholders and directed that this Agreement be submitted to the Company's
stockholders for approval. The Company has all requisite corporate power and
authority to enter into this Agreement and the Company Option Agreement, to
consummate the transactions contemplated by the Company Option Agreement and,
subject to approval by the stockholders of the Company of this Agreement, to
consummate the transactions contemplated hereby. The execution and delivery of
this Agreement and the Company Option Agreement by the Company and the
consummation by the Company of the transactions contemplated hereby and
thereby have been duly authorized by all necessary corporate action on the
part of the Company, subject, in the case of this Agreement, to (x) approval
of this Agreement by the stockholders of the Company and (y) the filing of a
Certificate of Merger as required by the DGCL. This Agreement and the Company
Option Agreement have been duly executed and delivered by the Company and
(assuming the valid authorization, execution and delivery of this Agreement by
the Parent and the Merger Subsidiary and the Company Option Agreement by the
Parent and the validity and binding effect of this Agreement on the Parent and
the Merger Subsidiary and the Company Option Agreement on the Parent)
constitute the valid and binding obligation of the Company enforceable against
the Company in accordance with their respective terms, except to the extent
that enforceability thereof may be limited by applicable bankruptcy,
insolvency, reorganization or other similar laws affecting the enforcement of
creditors' rights generally and by principles of equity regarding
 
                                      A-7
<PAGE>
 
the availability of remedies. The Company has taken all necessary action to
render its Shareholders Rights Plan dated November 20, 1996 (the "Company
Rights Plan") inapplicable to the transactions contemplated by this Agreement.
The filing of a combined prospectus and proxy statement to be included in the
Registration Statement (together with any amendments or supplements thereto,
the "Prospectus/Proxy Statement") with the SEC and the issuance of the shares
of Company Common Stock pursuant to the Company Option Agreement have been
duly authorized by the Company's Board of Directors.
 
  (d) Consents and Approvals; No Violation. Assuming that all consents,
approvals, authorizations and other actions described in this Section 3.1(d)
have been obtained and all filings and obligations described in this Section
3.1(d) have been made, except as set forth on Schedule 3.1(d), the execution
and delivery of this Agreement and the Company Option Agreement do not, and
the consummation of the transactions contemplated hereby and thereby and
compliance with the provisions hereof and thereof will not, result in any
violation of, or default (with or without notice or lapse of time, or both)
under, or give to others a right of termination, cancellation or acceleration
of any obligation or the loss of a material benefit under, or result in the
creation of any lien, security interest, charge or encumbrance upon any of the
properties or assets of the Company or PL under, any provision of (i) the
Certificate of Incorporation or Bylaws of the Company, (ii) any provision of
the charter or organization documents of PL, (iii) any loan or credit
agreement, note, bond, mortgage, indenture, lease or other agreement,
instrument, permit, concession, franchise or license applicable to the Company
or PL, including, without limitation, the intellectual property listed on
Schedule 3.1(x) and the in-licenses, out-licenses, co-promotion and co-
marketing agreements listed on Schedule 3.1(bb), or (iv) any judgment, order,
decree, statute, law, ordinance, rule or regulation applicable to the Company
or PL or any of their respective properties or assets, other than, in the case
of clauses (ii), (iii) or (iv), any such violations, defaults, rights, liens,
security interests, charges or encumbrances that, individually or in the
aggregate, would not have a Material Adverse Effect on the Company, materially
impair the ability of the Company to perform its obligations hereunder or
under the Company Option Agreement or prevent the consummation of any of the
transactions contemplated hereby or thereby. No filing or registration with,
or authorization, consent or approval of, any domestic (federal and state),
foreign or supranational court, commission, governmental body, regulatory
agency, authority or tribunal (a "Governmental Entity") is required by or with
respect to the Company or PL in connection with the execution and delivery of
this Agreement or the Company Option Agreement by the Company or is necessary
for the consummation of the Merger and the other transactions contemplated by
this Agreement or the Company Option Agreement, except for (i) in connection,
or in compliance, with the provisions of the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended (the "HSR Act"), the Securities Act of
1933, as amended (together with the rules and regulations promulgated
thereunder, the "Securities Act") and the Securities Exchange Act of 1934, as
amended (together with the rules and regulations promulgated thereunder, the
"Exchange Act"), (ii) the filing of the Certificate of Merger with the
Secretary of State of the State of Delaware and appropriate documents with the
relevant authorities of other states in which the Company is qualified to do
business, (iii) such filings, registrations, authorizations, consents or
approvals as may be required with respect to PL, (iv) applicable requirements,
if any, of the National Association of Securities Dealers ("NASD") and the
National Association of Securities Dealers Automated Quotation National System
("NASDAQ"), (v) as may be required under foreign laws, (vi) the consents and
approvals listed on Schedule 3.1(d), and (vii) such other consents, orders,
authorizations, registrations, declarations and filings the failure of which
to be obtained or made would not, individually or in the aggregate, have a
Material Adverse Effect on the Company, materially impair the ability of the
Company to perform its obligations hereunder or under the Company Option
Agreement or prevent the consummation of any of the transactions contemplated
hereby or thereby.
 
  (e) SEC Documents and Other Reports. The Company has filed all required
documents with the SEC since January 1, 1995 (the "Company SEC Documents"). As
of their respective dates, the Company SEC Documents complied in all material
respects with the requirements of the Securities Act or the Exchange Act, as
the case may be, and, at the respective times they were filed, none of the
Company SEC Documents contained any untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they
were made, not misleading. The consolidated financial statements (including,
in each case, any notes thereto) of the Company included in the
 
                                      A-8
<PAGE>
 
Company SEC Documents (the "Company Financial Statements") as of their
respective dates complied as to form in all material respects with applicable
accounting requirements and the published rules and regulations of the SEC
with respect thereto, were prepared in accordance with generally accepted
accounting principles (except, in the case of the unaudited statements, as
permitted by Form 10-Q of the SEC) applied on a consistent basis during the
periods involved (except as may be indicated therein or in the notes thereto)
and fairly presented in all material respects the consolidated financial
position of the Company and PL as at the respective dates thereof and the
consolidated results of their operations and their consolidated cash flows for
the periods then ended. Except as disclosed in the Company SEC Documents or as
required by generally accepted accounting principles, the Company has not,
since March 31, 1998, made any change in the accounting practices or policies
applied in the preparation of the Company Financial Statements. Neither the
Company nor PL had as of March 31, 1998 any liabilities or obligations of any
nature, whether or not accrued, contingent or otherwise, that would be
required by generally accepted accounting principles to be reflected on the
consolidated balance sheet of the Company and PL at March 31, 1998 (including
the notes thereto) included in the Company Financial Statements that are not
so reflected.
 
  (f) Registration Statement and Prospectus/Proxy. None of the information to
be supplied by the Statement Company (as to the Company) for inclusion or
incorporation by reference in the Registration Statement or the
Prospectus/Proxy Statement will (i) in the case of the Registration Statement,
at the time it becomes effective, contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary in order to make the statements therein not misleading or (ii) in
the case of the Prospectus/Proxy Statement, at the time of the mailing of the
Prospectus/Proxy Statement, at the time of the Stockholders Meeting and at the
Effective Time, contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary in order to
make the statements therein, in light of the circumstances under which they
are made, not misleading. If, at any time prior to the Effective Time, any
event with respect to the Company, its officers and directors or PL shall
occur which is required at that time to be described in the Prospectus/Proxy
Statement, such event shall be so described, and an appropriate amendment or
supplement shall be promptly filed with the SEC and, as required by law,
disseminated to the stockholders of the Company. The Prospectus/Proxy
Statement will comply (with respect to the Parent) as to form in all material
respects with the provisions of the Securities Act, and (with respect to the
Company) as to form in all material respects with the provisions of the
Exchange Act.
 
  (g) Absence of Certain Changes or Events. Except as disclosed in the Company
SEC Documents filed with the SEC prior to the date of this Agreement, since
March 31, 1998 and except as set forth on Schedule 3.1(g), (i) the Company and
PL have not incurred any material liability or obligation (indirect, direct or
contingent), or entered into any material oral or written agreement or other
transaction, that is not in the ordinary course of business consistent with
past practice or that would result in a Material Adverse Effect on the
Company; (ii) the Company and PL have not sustained any loss or interference
with their business or properties from fire, flood, windstorm, accident or
other calamity (whether or not covered by insurance) that has had a Material
Adverse Effect on the Company; (iii) there has been no change in the capital
stock of the Company except for the issuance of shares of Company Common Stock
pursuant to Company Stock Options and the Company Employee Stock Purchase Plan
and no dividend or distribution of any kind declared, paid or made by the
Company on any class of its stock; (iv) there has not been (A) any granting by
the Company or PL to any executive officer of the Company or PL of any
increase in compensation, except in the ordinary course of business consistent
with prior practice or as was required under employment agreements in effect
as of the date of the most recent audited financial statements included in the
Company SEC Documents, (B) any granting by the Company or PL to any such
executive officer of any increase in severance or termination agreements in
effect as of the date of the most recent audited financial statements included
in the Company SEC Documents, or (C) any entry by the Company or PL into any
employment, severance or termination agreement with any such executive
officer; (v) any delivery of a "put notice," as defined in the Common Stock
Investment Agreement, or any issuance of any shares of Company Common Stock
pursuant to the Common Stock Investment Agreement; and (vi) there has been no
event causing a Material Adverse Effect on the Company or any developments
that would, individually or in the aggregate, result in a Material Adverse
Effect on the Company.
 
                                      A-9
<PAGE>
 
  (h) Permits and Compliance. Each of the Company and PL is in possession of
all franchises, grants, authorizations, licenses, permits, easements,
variances, exceptions, consents, certificates, approvals and orders of any
Governmental Entity necessary for the Company or PL to own, lease and operate
its properties or to carry on its business as it is now being conducted (the
"Company Permits"), except where the failure to have any of the Company
Permits would not, individually or in the aggregate, have a Material Adverse
Effect on the Company, and, as of the date of this Agreement, no suspension or
cancellation of any of the Company Permits is pending or, to the knowledge of
the Company, threatened, except where the suspension or cancellation of any of
the Company Permits would not, individually or in the aggregate, have a
Material Adverse Effect on the Company. Neither the Company nor PL is in
violation of (i) its charter, by-laws or other organizational documents, (ii)
any applicable law, ordinance, administrative or governmental rule or
regulation, or (iii) any order, decree or judgment of any Governmental Entity
having jurisdiction over the Company or PL, except, in the case of clauses
(i), (ii) and (iii), for any violations that, individually or in the
aggregate, would not have a Material Adverse Effect on the Company. Except as
set forth in the Company SEC Documents filed prior to the date of this
Agreement, no event of default or event that, but for the giving of notice or
the lapse of time or both, would constitute an event of default exists or,
upon the consummation by the Company of the transactions contemplated by this
Agreement or the Company Option Agreement, will exist under any indenture,
mortgage, loan agreement, note or other agreement or instrument for borrowed
money, any guarantee of any agreement or instrument for borrowed money or any
lease, contractual license or other agreement or instrument to which the
Company or PL is a party or by which the Company or PL is bound or to which
any of the properties, assets or operations of the Company or PL is subject,
other than any defaults that, individually or in the aggregate, would not have
a Material Adverse Effect to on the Company. On May 13, 1998, the Company's
revolving credit facility with Silicon Valley Bank terminated in accordance
with the terms thereof, the Company having satisfied in full all of its
obligations thereunder.
 
  (i) Tax Matters. Except as set forth on Schedule 3.1(i), (i) the Company and
PL have filed all federal, and all material state, local, foreign and
provincial, Tax Returns required to have been filed or appropriate extensions
therefor have been properly obtained, and such Tax Returns are correct and
complete, except to the extent that any failure to so file or any failure to
be correct and complete would not, individually or in the aggregate, have a
Material Adverse Effect on the Company; (ii) all Taxes shown to be due on such
Tax Returns have been timely paid or extensions for payment have been properly
obtained; (iii) the Company and each of its Subsidiaries have complied in all
material respects with all rules and regulations relating to the withholding
of Taxes except to the extent that any failure to comply with such rules and
regulations would not, individually or in the aggregate, have a Material
Adverse Effect on the Company; (iv) neither the Company nor PL has waived or
extended any statute of limitations in respect of its Taxes; (v) to the
knowledge of the Company, no Tax Returns referred to in clause (i) relating to
federal and state income Taxes have been examined by the Internal Revenue
Service ("IRS") or the appropriate state taxing authority for any period; (vi)
no issues have been raised in writing by the relevant taxing authority in
connection with the examination of the Tax Returns referred to in clause (i);
(vii) all deficiencies asserted or assessments made as a result of any
examination of such Tax Returns by any taxing authority have been paid in full
or are being timely and properly contested; and (viii) the Company is not a
"United States real property holding company" as defined in Section 897(c) of
the Code. The Company has not filed a consent of the type described in Section
341(f) of the Code. The Company is not and has never been a member of an
affiliated group of corporations (within the meaning of Section 1504 of the
Code). The Company is not a party to, is not bound by and does not have any
obligation under any tax sharing, tax indemnity or similar agreement. For
purposes of this Agreement: (i) "Taxes" means any federal, state, local,
foreign or provincial income, gross receipts, property, sales, use, license,
excise, franchise, employment, payroll, withholding, alternative or added
minimum, ad valorem, value-added, transfer or excise tax, or other tax,
custom, duty, governmental fee or other like assessment or charge of any kind
whatsoever, together with any interest or penalty imposed by any Governmental
Entity, and (ii) "Tax Return" means any return, report or similar statement
(including the attached schedules) required to be filed with respect to any
Tax, including, without limitation, any information return, claim for refund,
amended return or declaration of estimated Tax.
 
  (j) Actions and Proceedings. Except as set forth in the Company SEC
Documents filed prior to the date of this Agreement or on Schedule 3.1(j),
there are no outstanding orders, judgments, injunctions, awards or decrees
 
                                     A-10
<PAGE>
 
of any Governmental Entity against or involving the Company or PL, or against
or involving any of its or their present or, to the knowledge of the Company,
former directors, officers, employees, consultants or agents of the Company or
PL, in their capacities as such, any of its or their properties, assets or
business or any Employee Benefit Plan of the Company that, individually or in
the aggregate, would have a Material Adverse Effect on the Company or
materially impair the ability of the Company to perform its obligations
hereunder or under the Company Option Agreement. As of the date of this
Agreement, there are no actions, suits, labor disputes or claims or legal,
administrative or arbitrative proceedings or governmental investigations
pending or, to the knowledge of the Company, threatened against or involving
the Company or PL or any of its or their present or, to the knowledge of the
Company, former directors, officers, employees, consultants or agents in their
capacities, as such, or any of its or their properties, assets or business or
any Employee Benefit Plan of the Company that, individually or in the
aggregate, would have a Material Adverse Effect on the Company or materially
impair the ability of the Company to perform its obligations hereunder or
under the Company Option Agreement. As of the date hereof, there are no
actions, suits, labor disputes or other litigation, legal or administrative
proceedings or governmental investigations pending or, to the knowledge of the
Company, threatened against or affecting the Company or PL or any of its or
their present or, to the knowledge of the Company, former officers, directors,
employees, consultants or agents, in their capacities as such, or any of its
or their properties, assets or business relating to the transactions
contemplated by this Agreement and the Company Option Agreement. For purposes
of this Agreement, the term "knowledge of the Company" shall mean the actual
knowledge of the officers and directors of the Company.
 
  (k) FDA and Related Matters.
 
    (i) Schedule 3.1(k) sets forth a list, for the period between January 1,
  1993 and the date hereof, of (A) all Regulatory or Warning Letters, Notices
  of Adverse Findings and Section 305 Notices and similar letters or notices
  issued by the Food and Drug Administration ("FDA") (or any other federal,
  state, local or foreign governmental entity that is concerned with the
  safety, efficacy, reliability or manufacturing of drug products (each, a
  "Drug Regulatory Agency")) to the Company or PL that, individually or in
  the aggregate, would have a Material Adverse Effect on the Company, (B) all
  product recalls, notifications and safety alerts conducted by the Company
  or PL, whether or not required by the FDA, and any request from the FDA or
  any Drug Regulatory Agency requesting the Company or PL to cease to
  investigate, test or market any product, which recalls, notifications,
  safety alerts or requests would, individually or in the aggregate, have a
  Material Adverse Effect on the Company, and (C) any criminal, injunctive,
  seizure or civil penalty actions begun or threatened by the FDA or any Drug
  Regulatory Agency against the Company or PL and known by the Company or PL
  and all related consent decrees (including plea agreements) issued with
  respect to the Company or PL. Copies of all documents referred to in
  Schedule 3.1(k) have been made available to the Parent.
 
    (ii) The Company has made submissions to obtain material approvals,
  certifications, authorizations, clearances and permits for marketing, and
  has made filings with, or notifications to, the FDA and Drug Regulatory
  Agencies (or has documented a basis for not making such filings or
  notifications) pursuant to applicable requirements of the Federal Food,
  Drug and Cosmetics Act, as amended (the "FDA Act"), and applicable laws,
  regulations and rules with respect to each of the products sold by the
  Company or PL that is listed on Schedule 3.1(k). The products listed on
  Schedule 3.1(k) collectively constitute in excess of 95% of the gross
  revenues generated during the twelve (12)-month period ending December 31,
  1997 by that portion of the business of the Company and PL which is subject
  to the jurisdiction of the FDA or any Drug Regulatory Agency. The Company
  and PL have no reason to believe that any of the material approvals,
  clearances, authorizations, registrations, certifications, permits, filings
  or notifications that it or any of its Subsidiaries has received or made to
  the FDA or any Drug Regulatory Agency that relate to the marketing of the
  products listed on Schedule 3.1(k) have been or are being revoked;
  provided, however, the FDA or any other Drug Regulatory Agency may disagree
  with the Company's or PL's assessment and undertake actions, at any time,
  to remove from commercial distribution any such product.
 
                                     A-11
<PAGE>
 
    (iii) Except as disclosed on Schedule 3.1(k), neither the Company nor PL
  has knowledge (or has been notified by the Contract Manufacturer) of any
  pending regulatory action of any sort (other than non-material routine or
  periodic inspections or reviews) against any of the Company, PL or the
  contract manufacturer of the Company's products (the "Contract
  Manufacturer") by the FDA or any Drug Regulatory Agency or any other duly
  authorized governmental authority which regulates the sale of drugs in any
  jurisdiction which could have a Material Adverse Effect on the Company or
  in any material way limit or restrict the ability of the Company or PL to
  market existing products. Except as set forth on Schedule 3.1(k), none of
  the Company, PL or, to the knowledge of the Company, the Contract
  Manufacturer has knowingly committed or permitted to exist any violation of
  the rules and regulations of the FDA or any Drug Regulatory Agency or any
  other duly authorized governmental authority which regulates the sale of
  drugs which has not been cured by the Company, PL or, to the knowledge of
  the Company, the Contract Manufacturer or waived by the FDA or any such
  regulatory authority; provided, however, the FDA or any other Drug
  Regulatory Agency may disagree with the Company's assessment and undertake
  enforcement actions at any time.
 
  (l) Certain Agreements. Except as set forth in Schedule 3.1(l), neither the
Company nor PL is a party to any oral or written employment agreement or plan,
including any employment agreement, severance agreement, stock option plan,
stock appreciation rights plan, restricted stock plan or stock purchase plan,
any of the benefits of which shall be increased, or the vesting of the
benefits of which will be accelerated, by the occurrence of any of the
transactions contemplated by this Agreement or the Company Option Agreement or
the value of any of the benefits of which will be calculated on the basis of
any of the transactions contemplated by this Agreement or the Company Option
Agreement (collectively, "Transaction Agreements"). No holder of any option to
purchase shares of Company Common Stock, or shares of Company Common Stock
granted in connection with the performance of services for the Company or PL,
is or will be entitled to receive cash from the Company or PL in lieu of or in
exchange for such option or shares as a result of the transactions
contemplated by this Agreement or the Company Option Agreement. Schedule
3.1(l) sets forth (i) for each officer, director or employee who is a party
to, or will receive benefits (other than as a result of Section 2.3) under,
any Transaction Agreement, the total amount that each such Person may receive,
or is eligible to receive, assuming that the transactions contemplated by this
Agreement are consummated on the date hereof, and (ii) the total amount of
indebtedness owed to the Company or PL from each officer or director of the
Company and PL. Except as set forth in the Certificate of Incorporation and
Bylaws of the Company or PL, neither the Company nor PL is a party to any
indemnification agreement with any of its present or future directors,
officers, employees, agents or other Persons who serve or served in any other
capacity with any other enterprise at the request of the Company or of PL.
 
  (m) Material Contracts. Except as set forth in Schedule 3.1(m) or on any
other Schedule hereto, as of the date hereof, neither the Company nor PL is a
party to, or is bound by, (i) any material agreement, indenture or other
instrument relating to the borrowing of money by the Company or PL or the
guarantee by the Company or PL of any such obligation (other than trade
payables and instruments relating to transactions entered into in the ordinary
course of business) or (ii) any other material contract or agreement or
amendment thereto that (A) is not described in, or filed as an exhibit to, a
Form 10-K, a Form 10-Q or a Form 8-K filed by the Company with the SEC, (B)
places any material restrictions on the ability of the Company to engage in
any material business activity currently conducted, or (C) is material to the
business, properties, assets, liabilities, financial condition, results of
operations or prospects of the Company and PL, taken as a whole (collectively,
the "Company Contracts"). Neither the Company nor PL is in default under any
Company Contract, which default is reasonably likely to have, either
individually or in the aggregate, a Material Adverse Effect on the Company,
and there has not occurred any event that with the lapse of time or the giving
of notice or both would constitute such a default.
 
  (n) Opinion of Financial Advisor. The Company has received the written
opinion of Lehman Brothers Inc., dated the date hereof, to the effect that, as
of the date hereof, from a financial point of view, the Exchange Ratio to be
offered to the stockholders of the Company is fair to the Company's
stockholders, a copy of which opinion has been delivered to the Parent.
 
  (o) Takeover Provisions Inapplicable. As of the date hereof and at all times
on or prior to the Effective Time, Section 203 of the DGCL is, and shall be,
inapplicable to the Merger, the Company Option Agreement, the Voting
Agreements and the transactions contemplated thereby.
 
                                     A-12
<PAGE>
 
  (p) Required Vote of the Company Stockholders. The affirmative vote of the
holders of a majority of the outstanding shares of Company Common Stock is
required to adopt this Agreement. No other vote of the securityholders of the
Company is required by law, the Certificate of Incorporation or Bylaws of the
Company or otherwise in order for the Company to consummate the Merger and the
transactions contemplated hereby and in the Company Option Agreement.
 
  (q) Finders and Investment Bankers. Except for Lehman Brothers, Inc., whose
fees will be paid by the Company, there is no investment banker, broker,
finder or other intermediary which has been retained by or is authorized to
act on behalf of the Company or PL who might be entitled to any fee or
commission in connection with the transactions contemplated by this Agreement.
 
  (r) Authorized Stock. The Company has taken all necessary corporate and
other action to authorize and reserve and to permit it to issue, and, at all
times from the date hereof until the obligation to deliver Common Stock when
the Company Option Agreement terminates, will have reserved for issuance, upon
exercise of the Option (as defined in the Company Option Agreement), shares of
Common Stock necessary for the Parent to exercise the Option, and the Company
shall take all necessary corporate action to authorize and reserve for
issuance all additional shares of Common Stock or other securities which may
be issued pursuant to the Company Option Agreement upon exercise of the
Option. The shares of Common Stock to be issued upon due exercise of the
Option, including all additional shares of Common Stock or other securities
which may be issuable pursuant to the Company Option Agreement, upon issuance
pursuant thereto, shall be duly and validly issued, fully paid and
nonassessable and shall be delivered free and clear of all liens or
encumbrances of any kind or nature whatsoever, including any preemptive rights
of any stockholder.
 
  (s) Company Affiliates. Schedule 3.1(s) contains a list (reasonably
satisfactory to counsel for the Parent) identifying all Persons who may be
deemed to be "affiliates" of the Company on the date hereof as that term is
used in paragraphs (c) and (d) of Rule 145 under the Securities Act (the
"Company Affiliates").
 
  (t) Owned Real Property. The Company owns no real property.
 
  (u) Leased Real Estate. The Company is the lessee under the real estate
leases described on Schedule 3.1(u). Schedule 3.1(u) contains the number of
square feet leased by the Company under each lease, the current rent payable
thereunder and the expiration date of each lease. True, correct and complete
copies of said leases have been delivered by the Company to the Parent. The
Company now enjoys quiet and undisturbed possession under each of said leases.
To the knowledge of the Company, such leased real estate is free and clear of
any zoning, use or building restriction or any pending, proposed or threatened
zoning or use or building restriction which would, either singly or in the
aggregate, adversely interfere with the present or any intended use of any of
such leased real estate. To the knowledge of the Company, said leases are
valid and binding and in full force and effect. The Company is not in default
as to the payment of rent and has not received written notice of any other
default thereunder.
 
  (v) Owned and Leased Tangible Personal Property. Title to all of the
Company's owned equipment, vehicles, furniture and fixtures and other items of
owned tangible personal property is held by the Company free and clear of any
claim, lease, mortgage, security interest, conditional sale agreement or other
title retention agreement, restriction or lien or encumbrance of any kind or
nature whatsoever, except as set forth on Schedule 3.1(v). The Company has a
valid leasehold interest in all tangible personal property material to its
business held by it under lease, and true, correct and complete copies of said
leases have been delivered by the Company to the Parent. To the knowledge of
the Company, said leases are valid and binding and in full force and effect.
The Company is not in default as to the payment of rent and has not received
written notice of any other default thereunder.
 
  (w) Physical Condition of Property. To the knowledge of the Company, all of
the leased real estate of the Company and the structures erected thereon and
all of the owned and leased tangible personal property of the Company are in
good repair and condition and are suitable for the conduct of the present
business of the Company.
 
                                     A-13
<PAGE>
 
  (x) Patents and Certain Other Intellectual Property Rights.
 
    (i) Schedule 3.1(x) lists all of the patents (including all reissues,
  divisions, continuations and extensions thereof), patent applications,
  patent disclosures, docketed inventions, trademarks, trademark
  applications, trade names and copyrights owned by the Company.
 
    (ii) The Company owns, or possesses the right to use, all of the
  intellectual property rights necessary to the conduct of the business of
  the Company as presently conducted except for rights which, if not so owned
  or possessed, would not individually or in the aggregate have a Material
  Adverse Effect on the Company. Such ownership or right to use, as the case
  may be, is free and clear of all liens, security interests, claims and
  rights to use of third parties except those which would not, individually
  or in the aggregate, have a Material Adverse Effect on the Company.
 
    (iii) Except pursuant to licenses listed in Schedule 3.1(bb) or in the
  Company SEC Documents, there are no material royalties, honoraria, fees or
  other payments payable as of the date hereof by the Company to any person
  by reason of the ownership, use, license, sale or disposition of any of the
  Company's intellectual property rights.
 
    (iv) The Company is not, to the knowledge of the Company, infringing the
  right of any other party with respect to any intellectual property rights
  which would, individually or in the aggregate, be reasonably likely to have
  a Material Adverse Effect on the Company.
 
  (y) Accounts Receivable. No customer(s) representing 10% or more of the
total revenues of the Company is (are) delinquent in the payment of its
(their) accounts with the Company.
 
  (z) Insurance and Bonds. Attached hereto, made part hereof and marked
Schedule 3.1(z) is a true and correct listing of all of the policies of
insurance and all surety and other bonds to which the Company now is a party,
or during the immediately preceding sixty (60) months was a party. All of such
policies and bonds which have expired were valid and in full force and effect
during their respective terms, all other of such policies and bonds are valid
and in full force and effect at the present time, and no claim has been made,
or notice given, to cancel or avoid any of said policies or bonds or to reduce
the coverage provided thereby, except where the existence of any claim or
notice of cancellation, avoidance or reduction of coverage, or invalidity,
unenforceability or ineffectiveness, would not have a Material Adverse Effect
on the Company.
 
  (aa) Product Warranties and Liability.
 
    (i) No reserves have been provided for by the Company to cover potential
  claims under existing customer indemnification agreements.
 
    (ii) Except as to claims, actions, proceedings or investigations which
  have been asserted but as to which no notice has been given to the Company,
  and except as set forth on Schedule 3.1(aa), there are no product liability
  claims, actions, proceedings or investigations pending or, to the knowledge
  of the Company, threatened against the Company or its assets or state of
  facts existing which could give rise to any such product liability claim,
  action, proceeding or investigation.
 
    (iii) To the knowledge of the Company, no claims have been made that the
  products sold by the Company are not effective for the uses such products
  purport to serve. To its knowledge, the Company has not received any
  written notice that any product manufactured by it has not been
  manufactured in accordance with "current Good Manufacturing Practices" (as
  such term is commonly understood within the Company's industry) or has not
  been properly labeled for its approved use.
 
  (bb) Contracts, Proposals and Bids. Schedule 3.1(bb) is a list of all of the
in-license, out-license, co-promotion and co-marketing agreements and similar
agreements relating to the intellectual property rights of the Company
necessary for the conduct of the business of the Company as currently
conducted, customer contracts for product sales and all bids or proposals for
product or customer contracts not yet received, bid or awarded.
 
                                     A-14
<PAGE>
 
  (cc) Labor and Employment Matters. Except as set forth on Schedule 3.1(cc):
 
    (i) The Company is not a party to or obligated to contribute to any
  employee benefit plan as defined in Section 3(3) of the Employee Retirement
  Income Security Act of 1974 ("ERISA") (an "Employee Benefit Plan"),
  guaranteed annual income plan, fund or arrangement, or any incentive,
  bonus, profit sharing, deferred compensation, stock option or purchase
  plan, agreement or arrangement, or any written or, to the knowledge of the
  Company, oral employment or consulting agreement (except employment offer
  letters), or any non-competition agreement, or any severance or written, or
  to the knowledge of Company, oral termination pay plans or policies, any
  hospitalization, disability or other insurance plans, or any other employee
  fringe benefit plans, or any collective bargaining agreement, or any other
  agreement, plan or arrangement similar to or in the nature of the
  foregoing, oral or written, whether or not an Employee Benefit Plan, except
  those set forth on Schedule 3.1(cc). True, correct and complete copies of
  all of the written Employee Benefit Plans and other written plans and
  agreements and true, correct and complete written descriptions of all of
  such oral arrangements described in Schedule 3.1(cc) have heretofore been
  delivered by the Company to the Parent. The Company does not have any
  unfunded liabilities on account of or in connection with any such Employee
  Benefit Plan, other plan, agreement or arrangement which is a non-
  multiemployer plan.
 
    (ii) With respect to any non-multiemployer Employee Benefit Plan, (A)
  neither such Employee Benefit Plan nor any fiduciary has engaged in a
  prohibited transaction as defined in Section 406 of ERISA (for which no
  individual or class exemption exists under Section 408 of ERISA) or any
  prohibited transaction as defined in Section 4975 of the Code (for which no
  individual or class exemption exists under Section 4975 of the Code), which
  may reasonably be expected to have a Material Adverse Effect on the
  Company; (B) all filings and reports as to such Employee Benefit Plan
  required to have been made on or before the date hereof to the IRS, to the
  United States Department of Labor or, if applicable, to the Pension Benefit
  Guaranty Corporation have been made on or before the date hereof (to the
  extent not granted a valid extension of the date of filing); (C) all
  disclosures to plan participants relating to such Employee Benefit Plan
  required by ERISA to have been made on or before the date hereof have been
  or will be duly made on or before that date; (D) there is no litigation,
  disputed claim (other than routine claims for benefits), governmental
  proceeding or investigation pending or threatened with respect to any such
  Employee Benefit Plan, its related trust or any fiduciary, administrator or
  sponsor of such Employee Benefit Plan; (E) each Employee Benefit Plan has
  been established, maintained, funded and administered materially in
  accordance with its governing documents and any applicable provisions of
  ERISA, the Code, other applicable law and all regulations and rulings
  promulgated thereunder; and (F) the Company has delivered to the Parent a
  true, correct and complete copy of (1) the most recent Form 5500 for each
  such Employee Benefit Plan filed with the IRS and the Department of Labor
  and, with respect to each Employee Benefit Plan which is an "employee
  pension benefit plan" within the meaning of Section 3(2) of ERISA, the most
  recent determination letter received from the IRS, (2) each trust or
  custodial agreement and each deposit administration, group annuity,
  insurance or other funding contract associated with such Employee Benefit
  Plan, (3) the most recent financial information for each Employee Benefit
  Plan, (4) where applicable, the most recent actuarial report or valuation
  relating to each such Employee Benefit Plan which has been delivered to the
  Company by its actuaries, and (5) where applicable, a summary of any
  "reportable event" within the meaning of Section 4043(b) of ERISA.
 
    (iii) The Company has never been a party to or obligated to contribute to
  any multiemployer Employee Benefit Plan.
 
    (iv) There has not been any (A) termination or partial termination of any
  Employee Pension Benefit Plan maintained by the Company (or by any Person
  which is or was under common control, within the meaning of Section 414(b),
  (c), (m) or (o) of the Code, with the Company (a "Section 414 Affiliate")
  during the period of such common control, at a time when Title IV of ERISA
  applied to such Plan, (B) commencement of any proceeding to terminate any
  such Plan pursuant to ERISA or otherwise, or (C) written notice given to
  the Company or any affiliate of the intention to commence or seek the
  commencement of any such proceeding, which (under (A)) resulted or (under
  (B) or (C)) would result in an
 
                                     A-15
<PAGE>
 
  insufficiency of plan assets necessary to satisfy benefit commitments under
  Title IV of ERISA or benefits vested under the Plan. Neither the Company
  nor any Section 414 Affiliate has incurred withdrawal liability, complete
  or partial, contingent or otherwise, under the Multiemployer Pension Plan
  Amendments Act of 1980.
 
    (v) The Company (A) is not a party to any collective bargaining agreement
  or discussions or negotiations with any Person or group looking toward any
  such agreement, (B) has not within the last three (3) years experienced any
  strike, lockout, work stoppage, slowdown, unfair labor practice claim or
  other labor difficulty (other than grievances and unfair labor practice
  claims in which the Company's only exposure was to monetary damages of
  $50,000 or less), and (C) to the knowledge of the Company, is not aware of
  a threatened strike, lockout, work stoppage, slowdown, unfair labor
  practice claim or other such labor difficulty. The Company has no knowledge
  of any facts which would form the basis for the assertion of any grievance
  or unfair labor practice claim or other charge or complaint against the
  Company by or before the National Labor Relations Board or any state labor
  relations board or commission or representative thereof, and is not aware
  of any filing by any employee or employee group seeking recognition as a
  collective bargaining representative or unit.
 
  (dd) Insider Contracts. Except as set forth in the Company SEC Documents or
on Schedule 3.1(dd) or as set forth and identified as such on any other
Schedule hereto, there are no contracts, agreements, purchase orders,
commitments, leases, understandings or arrangements, including loan
arrangements, between the Company and any of its respective officers (except
employment offer letters), directors or shareholders, or any related or
affiliated Person, corporation or other entity (a true, correct and complete
copy of each such written document and a true, correct and complete written
description of each such oral relationship having heretofore been delivered by
the Company to the Parent).
 
  (ee) Other Material Contracts. Schedule 3.1(ee) is a true, correct and
complete list of all other (i.e., not identified on one or more of the
foregoing Schedules hereto) material contracts, agreements, understandings and
arrangements, oral and written, to which the Company is a party or by which
the Company is bound. For purposes of this Section 3.1(ee), "material" shall
mean containing an obligation (i) requiring, or reasonably anticipated to
require, payment of more than $100,000 in any one (1) year period, or (ii) not
terminable by or on the Company's behalf, without penalty, within ninety (90)
days after the Closing, or (iii) terminable by or on behalf of the other party
on ninety (90) days' notice or less, or (iv) having a term of more than
twenty-four (24) months, or (v) of guaranty or suretyship, irrespective of the
term or amount involved. True, correct and complete copies of such written
material contracts have heretofore been delivered by the Company to the
Parent. All material contracts are valid and binding, in full force and effect
and enforceable in accordance with their terms, and there exists no default,
and to the knowledge of the Company, no event has occurred which through
notice or the passage of time or otherwise may result in a default, under the
terms of any of the material contracts, except as set forth on Schedule
3.1(ee) and except where the invalidity, nonbinding nature, unenforceability,
ineffectiveness or default would not have a Material Adverse Effect on the
operations or financial condition of the Company taken as a whole.
 
  (ff) Export of Products and Technologies. To the knowledge of the Company,
there are no United States government restrictions prohibiting or, except for
export licensing requirements which the Company has fulfilled or satisfied to
date, otherwise affecting the Company in exporting its existing products and
know-how to the foreign countries to which such are currently being exported
(a description of all of such products and know-how and foreign countries
being listed on Schedule 3.1(ff)).
 
  (gg) Absence of Illegal Payments. The Company has not authorized any of its
officers, directors, employees or non-employee agents to make, and to the
knowledge of the Company, no officer, director, employee or non-employee agent
of the Company has authorized or made, any offer, payment or promise to pay
any money, or offered, given or promised to give anything of value, to any
domestic or foreign government official, political party or official thereof
or any candidate for political office (domestic or foreign), or to any other
Person, while knowing or having reason to know that all or a portion of such
money or thing of value would be offered, given
 
                                     A-16
<PAGE>
 
or promised, directly or indirectly, to any of such Person(s) for purposes of
(A) influencing any act or decision of such entity or Person, including a
decision to fail to perform his or her official functions, or (B) inducing
such entity or Person to use his or her influence with a domestic or foreign
government or instrumentality thereof to affect or influence any act or
decision of such government or instrumentality in order to assist the Company
in obtaining or retaining business for or with, or directing business to, any
Person, which offer, payment or promise constitutes a violation by the Company
of the Foreign Corrupt Practices Act of 1977, as amended.
 
  (hh) Absence of Anti-Boycott Violations. To the knowledge of the Company,
the Company has not violated or is not in violation of any statute, law,
decree, order, rule or regulation of any governmental body of the United
States which prohibits or regulates the boycotting of or refusal to deal with
any Person or entity, including without limitation the Export Administration
Amendments of 1977 (50 U.S.C. App. (S) 2401 et seq.), the Ribicoff Amendments
to the Tax Reform Act of 1976 (Internal Revenue Code (S) 999) or the Sherman
Act (15 U.S.C. (S) l et seq.), or any rule or regulation promulgated pursuant
thereto.
 
  (ii) Environmental Matters.
 
    (i) Except as disclosed in Schedule 3.1(ii): (A) the Company is currently
  in compliance with all applicable Environmental Laws, and has obtained all
  permits and other authorizations needed to operate its facilities, except
  where failure to comply with applicable Environmental Laws or where failure
  to obtain such permits and other authorizations would not have a Material
  Adverse Effect on the Company; (B) the Company has not violated any
  applicable Environmental Law, except where such violation would not have a
  Material Adverse Effect; (C) there are no present requirements of any
  applicable Environmental Laws which will increase materially the Company's
  costs of complying with the Environmental Laws nor to the Company's
  knowledge are any such requirements currently threatened to be imposed; (D)
  all past on-site generation, treatment, storage, disposal and other
  management of Regulated Substances by the Company and, to the knowledge of
  Company, by any prior owner, operator or occupant of any property presently
  or previously owned, leased or occupied by the Company was, when done, in
  compliance with then applicable Environmental Laws, except where failure of
  compliance would not have a Material Adverse Effect on the Company; (E) no
  past on-site generation, treatment, storage, disposal or other management
  of Regulated Substances: (1) has resulted in the presence of Regulated
  Substances on, in, under or migrating from any property of the Company in
  violation of applicable Environmental Laws, except where such violation
  would not have a Material Adverse Effect on the Company; or (2) requires
  the investigation, cleanup, removal or remediation of any Regulated
  Substances, in order to comply with Environmental Laws, except where such
  investigation, cleanup, removal or remediation would not have a Material
  Adverse Effect on the Company; (F) all past off-site transportation,
  treatment, storage, disposal and other management of Regulated Substances
  generated by the Company was, when done, in compliance with then applicable
  Environmental Laws, except where failure of compliance would not have a
  Material Adverse Effect on the Company; (G) the Company did not, directly
  or indirectly, arrange for the treatment, storage or disposal of any
  Regulated Substances at any property or facility identified or, to the
  knowledge of the Company, is proposed to be identified on any list of
  contaminated properties or other properties which pursuant to Environmental
  Laws are the subject of an investigation or remediation action by any
  federal, state or, to the knowledge of the Company, local, government
  agency or instrumentality; (H) no property currently owned, leased or
  otherwise occupied by the Company and no property previously owned, leased
  or otherwise occupied by the Company is identified, or to the knowledge of
  the Company is proposed to be identified, on any list of contaminated
  properties or other properties which pursuant to Environmental Laws are the
  subject of an investigation or remediation action by any federal, state or,
  to the knowledge of the Company, local government agency or
  instrumentality; (I) the Company has not received any notice of any kind
  that the Company is or may be considered a party with potential
  responsibility under Environmental Laws for the costs of responding to a
  release or threatened release of any Regulated Substance which has not been
  resolved; (J) the Company has not filed or failed to file any notice
  required under any applicable Environmental Law reporting a release of any
  Regulated Substance; (K) no environmental lien and no unrecorded
  environmental lien has attached to any property of the Company, nor, to the
  knowledge of the Company, is there a reasonable basis to believe that such
  a lien may be attached to any property of the
 
                                     A-17
<PAGE>
 
  Company; and (L) during the period when the Company occupied any property
  now or formerly owned, leased or operated by the Company or, to the
  knowledge of the Company, during any period prior to its ownership,
  occupation or operation of such property: (1) there were no underground
  storage tanks or surface impoundments, (2) there was no asbestos-containing
  material in friable form, and (3) there were no polychlorinated biphenyls
  ("PCBs") other than those used, maintained or disposed of in compliance
  with all applicable Environmental Laws.
 
    (ii) As used in this Section 3.1(ii), the following terms shall be
  defined as follows: (A) "Environmental Laws" include but are not limited to
  any federal, state, local or foreign laws (including the common law),
  statutes, charters, ordinances, codes, rules or regulations, permits or
  permit conditions, licenses or authorizations, consent or administrative
  orders, agreements or understandings (whether previously existing, now
  existing or hereafter enacted, promulgated, issued or entered into) which
  pertain to the protection of human health or the environment or worker
  safety, including, without limitation, the Comprehensive Environmental
  Response, Compensation and Liability Act, 42 U.S.C. (S) 9601 et seq.; the
  Resource Conservation and Recovery Act, 42 U.S.C. (S) 6901 et seq.; the
  Hazardous Materials Transportation Act, 49 U.S.C. (S) 1801 et seq.; the
  Toxic Substance Control Act, 15 U.S.C. (S) 2601 et seq.; the Federal Water
  Pollution Control Act, 33 U.S.C. (S) 1251 et seq.; the Federal Safe
  Drinking Water Act, 42 U.S.C. (S)(S) 300f-300j; the Federal Air Pollution
  Control Act, 42 U.S.C. (S) 7401 et seq.; the Oil Pollution Act, 33 U.S.C.
  (S) 2701 et seq.; the Federal Insecticide, Fungicide and Rotenticide Act, 7
  U.S.C. (S)(S) 136-136y; and the Occupational Safety and Health Act, 29
  U.S.C. (S) 651 et seq., as each may be amended from time to time,
  regulations promulgated under the foregoing or any equivalent state
  statutes and regulation, and any judicial or administrative interpretation
  of such laws, statutes, charters, ordinances, codes, rules or regulations,
  permits or permit conditions, consent or administrative orders, agreements
  or understandings, including, without limitation, any judicial or
  administrative orders or judgments; and (B) "Regulated Substance" includes
  any substance the manufacturing, processing, sale, generation, treatment,
  storage, disposal, transportation, labeling, removal, remediation or other
  management of which is regulated by any applicable Environmental Law.
 
  (jj) No Adverse Actions. There is no existing, pending or, to the knowledge
of the Company, threatened termination, cancellation, limitation, modification
or change in the business relationship of the Company with any supplier,
customer or other Person or entity, except such actions which would not have a
Material Adverse Effect on the Company.
 
  3.2 Representations, Warranties and Agreements of the Parent.
 
  The Parent represents and warrants to the Company as follows:
 
  (a) Organization, Standing and Power. The Parent is a corporation duly
organized, validly existing and in good standing under the laws of the
Commonwealth of Pennsylvania with all requisite corporate power and authority
to own, operate and lease its properties, to carry on its business as now
being conducted and to enter into this Agreement and perform its obligations
hereunder. Each Subsidiary of the Parent is duly organized, validly existing
and in good standing under the laws of the jurisdiction in which it is
organized and has the requisite corporate power and authority to carry on its
business as now being conducted, except where the failure to be so organized,
existing or in good standing or to have such power or authority would not,
individually or in the aggregate, have a Material Adverse Effect on the
Parent. The Parent and each of its Subsidiaries are duly qualified to do
business, and are in good standing, in each jurisdiction where the character
of their properties owned or held under lease or the nature of their
activities makes such qualification necessary, except where the failure to be
so qualified would not, individually or in the aggregate, have a Material
Adverse Effect on the Parent. For purposes of this Agreement, a "Subsidiary"
of the Parent means any corporation, partnership, limited liability company,
joint venture or other legal entity of which the Parent (either alone or
through or together with any other Subsidiary) owns, directly or indirectly,
50% or more of the stock or other equity interests the holders of which are
generally entitled to vote for the election of the board of directors or other
governing body of such corporation, partnership, limited liability company,
joint venture or other legal entity.
 
                                     A-18
<PAGE>
 
  (b) Capital Structure.
 
    (i) The Parent. As of the date hereof, the authorized capital stock of
  the Parent consists of 300,000,000 shares of Parent Common Stock, par value
  $.50 per share, and 5,000,000 shares of preferred stock, par value $.50 per
  share ("Parent Preferred Stock"). At the close of business on May 29, 1998,
  (A) 122,341,004 shares of Parent Common Stock were issued and outstanding,
  all of which were validly issued, fully paid and nonassessable, and free of
  preemptive rights, (B) 850,328 shares of Parent Common Stock were held in
  the treasury of the Parent, and (C) 12,576,826 shares of Parent Common
  Stock were reserved for future issuance pursuant to stock option
  arrangements of the Parent (collectively, the "Parent Stock Option Plans"),
  of which 3,512,826 shares were reserved for future issuance under stock
  options granted as of May 29, 1998. The Parent Stock Option Plans are the
  only benefit plans of the Parent or its Subsidiaries under which any
  securities of the Parent or any of its Subsidiaries are issuable. No shares
  of Parent Preferred Stock are outstanding. As of the date of this
  Agreement, except as set forth above, no shares of capital stock or other
  voting securities of the Parent were issued, reserved for issuance or
  outstanding. As of the date of this Agreement, except for stock options
  covering not in excess of 3,512,826 shares of Parent Common Stock issued
  under the Parent Stock Option Plans (collectively, the "Parent Stock
  Options"), there are no options, warrants, calls, rights or agreements to
  which the Parent or any of its Subsidiaries is a party or by which any of
  them is bound obligating the Parent or any of its Subsidiaries to issue,
  deliver or sell, or cause to be issued, delivered or sold, additional
  shares of capital stock of the Parent or any of its Subsidiaries or
  obligating the Parent or any of its Subsidiaries to grant, extend or enter
  into any such option, warrant, call, right or agreement. Each outstanding
  share of capital stock of each Subsidiary of the Parent that is a
  corporation is duly authorized, validly issued, fully paid and
  nonassessable, and each such share is owned by the Parent or another
  Subsidiary of the Parent free and clear of all security interests, liens,
  claims, pledges, options, rights of first refusal, agreements, limitations
  on voting rights, charges and other encumbrances of any nature whatsoever.
  The Parent does not have any outstanding bonds, debentures, notes or other
  obligations the holders of which have the right to vote (or convertible
  into or exercisable for securities having the right to vote) with the
  stockholders of the Parent on any matter.
 
    (ii) The Merger Subsidiary. The Merger Subsidiary has, as of the date
  hereof, authorized capital stock consisting of 1,000 shares of Subsidiary
  Common Stock, of which 1,000 shares are issued and outstanding and owned by
  the Parent. The Merger Subsidiary is a corporation duly organized, validly
  existing and in good standing under the laws of the State of Delaware. All
  of the issued and outstanding shares of the Merger Subsidiary have been
  validly issued, are fully paid and nonassessable and are free of preemptive
  rights. There are no outstanding rights, options, warrants, conversion
  rights or agreements for the purchase or acquisition from, or the sale or
  issuance by, the Merger Subsidiary of any shares of its capital stock,
  other than this Agreement. Since its organization, the Merger Subsidiary
  has conducted no business activities, except such as are related to this
  Agreement and the performance of its obligations hereunder.
 
  (c) Authority. On or prior to the date of this Agreement, the Board of
Directors of the Parent has declared the Merger advisable and fair to and in
the best interest of the Parent and its shareholders. The Parent has all
requisite corporate power and authority to enter into this Agreement and the
Company Option Agreement, to consummate the transactions contemplated by the
Company Option Agreement and to consummate the transactions contemplated
hereby. The execution and delivery of this Agreement and the Company Option
Agreement by the Parent and the consummation by the Parent of the transactions
contemplated hereby and thereby have been duly authorized by all necessary
corporate action on the part of the Parent, subject, in the case of this
Agreement, to the filing of a Certificate of Merger as required by the DGCL.
This Agreement and the Company Option Agreement have been duly executed and
delivered by the Parent and (assuming the valid authorization, execution and
delivery of this Agreement and the Company Option Agreement by the Company and
the validity and binding effect of this Agreement and the Company Option
Agreement on the Company) constitute the valid and binding obligation of the
Parent enforceable against the Parent in accordance with their respective
terms, except to the extent that enforceability thereof may be limited by
applicable bankruptcy, insolvency, reorganization or other similar laws
affecting the enforcement of creditors' rights generally and by principles of
equity regarding the availability of remedies. The issuance of shares of
Parent Common Stock to be
 
                                     A-19
<PAGE>
 
issued in the Merger and the filing of a registration statement on Form S-4
with the SEC by the Parent under the Securities Act for the purpose of
registering the shares of Parent Common Stock to be issued in the Merger
(together with any amendments or supplements thereto, whether prior to or
after the effective date thereof, the "Registration Statement") have been duly
authorized by the Parent's Board of Directors.
 
  (d) Consents and Approvals; No Violation. Assuming that all consents,
approvals, authorizations and other actions described in this Section 3.2(d)
have been obtained and all filings and obligations described in this Section
3.2(d) have been made, the execution and delivery of this Agreement and the
Company Option Agreement do not, and the consummation of the transactions
contemplated hereby and thereby and compliance with the provisions hereof and
thereof will not, result in any violation of, or default (with or without
notice or lapse of time, or both) under, or give to others a right of
termination, cancellation or acceleration of any obligation or the loss of a
material benefit under, or result in the creation of any lien, security
interest, charge or encumbrance upon any of the properties or assets of the
Parent or any of its Subsidiaries under, any provision of (i) the Articles of
Incorporation or Bylaws of the Parent, (ii) any provision of the comparable
charter or organization documents of any of the Parent's Subsidiaries, (iii)
any loan or credit agreement, note, bond, mortgage, indenture, lease or other
agreement, instrument, permit, concession, franchise or license applicable to
the Parent or any of its Subsidiaries, or (iv) any judgment, order, decree,
statute, law, ordinance, rule or regulation applicable to the Parent or any of
its Subsidiaries or any of their respective properties or assets, other than,
in the case of clauses (ii), (iii) or (iv), any such violations, defaults,
rights, liens, security interests, charges or encumbrances that, individually
or in the aggregate, would not have a Material Adverse Effect on the Parent,
materially impair the ability of the Parent to perform its obligations
hereunder or under the Company Option Agreement or prevent the consummation of
any of the transactions contemplated hereby or thereby. No filing or
registration with, or authorization, consent or approval of, any Governmental
Entity is required by or with respect to the Parent or any of its Subsidiaries
in connection with the execution and delivery of this Agreement or the Company
Option Agreement by the Parent or is necessary for the consummation of the
Merger and the other transactions contemplated by this Agreement or the
Company Option Agreement, except for (i) in connection, or in compliance, with
the provisions of the HSR Act, the Securities Act and the Exchange Act, (ii)
the filing of the Certificate of Merger with the Secretary of State of the
State of Delaware, (iii) applicable requirements, if any, of state securities
or "blue sky" laws and the NYSE, (iv) approval for listing the Parent Common
Stock to be issued in the Merger on the NYSE, and (v) such other consents,
orders, authorizations, registrations, declarations and filings the failure of
which to be obtained or made would not, individually or in the aggregate, have
a Material Adverse Effect on the Parent, materially impair the ability of the
Parent to perform its obligations hereunder or under the Company Option
Agreement or prevent the consummation of any of the transactions contemplated
hereby or thereby.
 
  (e) SEC Documents and Other Reports. The Parent has filed all required
documents with the SEC since January 1, 1995 (the "Parent SEC Documents"). As
of their respective dates, the Parent SEC Documents complied in all material
respects with the requirements of the Securities Act or the Exchange Act, as
the case may be, and, at the respective times they were filed, none of the
Parent SEC Documents contained any untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they
were made, not misleading. The consolidated financial statements (including,
in each case, any notes thereto) of the Parent included in the Parent SEC
Documents (the "Parent Financial Statements") complied as to form in all
material respects with applicable accounting requirements and the published
rules and regulations of the SEC with respect thereto, were prepared in
accordance with generally accepted accounting principles (except, in the case
of the unaudited statements, as permitted by Form 10-Q of the SEC) applied on
a consistent basis during the periods involved (except as may be indicated
therein or in the notes thereto) and fairly presented in all material respects
the consolidated financial position of the Parent and its consolidated
Subsidiaries as at the respective dates thereof and the consolidated results
of their operations and their consolidated cash flows for the periods then
ended. Except as disclosed in the Parent SEC Documents or as required by
generally accepted accounting principles, the Parent has not, since March 31,
1998, made any change in the accounting practices or policies applied in the
preparation of the Parent Financial Statements. Neither the Parent nor any of
its Subsidiaries had as of March 31, 1998 any liabilities or
 
                                     A-20
<PAGE>
 
obligations of any nature, whether or not accrued, contingent or otherwise,
that would be required by generally accepted accounting principles to be
reflected on the consolidated balance sheet of the Parent and its Subsidiaries
(including the notes thereto) included in the Financial Statements that are
not so reflected.
 
  (f) Registration Statement and Prospectus/Proxy Statement. None of the
information to be supplied by the Parent for inclusion or incorporation by
reference in the Registration Statement or the Prospectus/Proxy Statement will
(i) in the case of the Registration Statement, at the time it becomes
effective, contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary in order to make
the statements therein not misleading or (ii) in the case of the
Prospectus/Proxy Statement, at the time of the mailing of the Prospectus/Proxy
Statement, at the time of each of the Stockholders Meeting and at the
Effective Time, contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary in order to
make the statements therein, in light of the circumstances under which they
are made, not misleading. If at any time prior to the Effective Time any event
with respect to the Parent, its officers and directors or any of its
Subsidiaries shall occur which is required at that time to be described in the
Prospectus/Proxy Statement or the Registration Statement, such event shall be
so described, and an appropriate amendment or supplement shall be promptly
filed with the SEC and, as required by law, disseminated to the stockholders
of the Parent. The Registration Statement will comply (with respect to the
Parent) as to form in all material respects with the provisions of the
Securities Act, and the Prospectus/Proxy Statement will comply (with respect
to the Parent) as to form in all material respects with the provisions of the
Exchange Act.
 
  (g) Absence of Certain Changes or Events. Except as disclosed in the Parent
SEC Documents filed with the SEC prior to the date of this Agreement, since
March 31, 1998, there has been no event causing a Material Adverse Effect on
the Parent, or any development that would, individually or in the aggregate,
result in a Material Adverse Effect on the Parent.
 
  (h) Permits and Compliance. The Parent is in possession of all franchises,
grants, authorizations, licenses, permits, easements, variances, exceptions,
consents, certificates, approvals and orders of any Governmental Entity
necessary for the Parent to own, lease and operate its properties or to carry
on its business as it is now being conducted (the "Parent Permits"), except
where the failure to have any of the Parent Permits would not, individually or
in the aggregate, have a Material Adverse Effect on the Parent, and, as of the
date of this Agreement, no suspension or cancellation of any of the Parent
Permits is pending or, to the knowledge of the Parent, threatened, except
where the suspension or cancellation of any of the Parent Permits would not,
individually or in the aggregate, have a Material Adverse Effect on the
Parent. Parent is not in violation of (i) its charter, by-laws or other
organizational documents, (ii) any applicable law, ordinance, administrative
or governmental rule or regulation, or (iii) any order, decree or judgment of
any Governmental Entity having jurisdiction over the Parent, except, in the
case of clauses (i), (ii) and (iii), for any violations that, individually or
in the aggregate, would not have a Material Adverse Effect on the Parent. As
of the date hereof, there is no contract or agreement, not entered into in the
ordinary course of business, that is material to the business, properties,
assets, liabilities, financial condition, results of operations or prospects
of the Parent and its Subsidiaries, taken as a whole. Except as set forth in
the Parent SEC Documents filed prior to the date of this Agreement, no event
of default or event that, but for the giving of notice or the lapse of time or
both, would constitute an event of default exists or, upon the consummation by
the Parent of the transactions contemplated by this Agreement or the Company
Option Agreement, will exist under any indenture, mortgage, loan agreement,
note or other agreement or instrument for borrowed money, any guarantee of any
agreement or instrument for borrowed money or any lease, contractual license
or other agreement or instrument to which the Parent is a party or by which
the Parent is bound or to which any of the properties, assets or operations of
the Parent is subject, other than any defaults that, individually or in the
aggregate, would not have a Material Adverse Effect on the Parent.
 
  (i) Actions and Proceedings. Except as set forth in the Parent SEC Documents
filed prior to the date of this Agreement, there are no outstanding orders,
judgments, injunctions, awards or decrees of any Governmental Entity against
or involving the Parent or any of its Subsidiaries, or against or involving
any of the present or, to the knowledge of the Parent, former directors,
officers, employees, consultants or agents of the Parent or any of
 
                                     A-21
<PAGE>
 
its Subsidiaries, in their capacities as such, any of its or their properties,
assets or business or employee benefit plan of the Parent that, individually
or in the aggregate, would have a Material Adverse Effect on the Parent or
materially impair the ability of the Parent to perform its obligations
hereunder or under the Company Option Agreement. As of the date of this
Agreement, there are no actions, suits, labor disputes or claims or legal,
administrative or arbitrative proceedings or governmental investigations
pending or, to the knowledge of the Parent, threatened against or involving
the Parent or any of its Subsidiaries or any of its or their present or, to
the knowledge of the Parent, former directors, officers, employees,
consultants, agents or stockholders, in their capacities as such, or any of
its or their properties, assets or business or any employee benefit plan of
the Parent that, individually or in the aggregate, would have a Material
Adverse Effect on the Parent or materially impair the ability of the Parent to
perform its obligations hereunder or under the Company Option Agreement. As of
the date hereof, there are no actions, suits, labor disputes or other
litigation, legal or administrative proceedings or governmental investigations
pending or, to the knowledge of the Parent, threatened against or affecting
the Parent or any of its Subsidiaries or any of its or their present or, to
the knowledge of the Parent, former officers, directors, employees,
consultants, agents or stockholders, in their capacities as such, or any of
its or their properties, assets or business relating to the transactions
contemplated by this Agreement and the Company Option Agreement. For purposes
of this Agreement, the term "knowledge of the Parent" shall mean the actual
knowledge of the officers and directors of the Parent.
 
  (j) FDA Matters. Neither the Parent nor any of its Subsidiaries (i) is a
party to any pending investigation or proceeding by or before the FDA or any
other duly authorized Drug Regulatory Agencies or any other duly authorized
governmental authority which regulates the sale of drugs and controlled
substances in any jurisdiction; (ii) has knowledge of any pending regulatory
action of any sort (other than non-material routine or periodic inspections or
reviews) against the Parent or any of its Subsidiaries by the FDA or any other
duly authorized Drug Regulatory Agencies or any other governmental authority
which regulates the sale of drugs and controlled substances in any
jurisdiction which could have a Material Adverse Effect on the Parent, or in
any material way limit or restrict the ability of the Parent or any of its
Subsidiaries to market existing products; (iii) has knowingly committed or
permitted to exist any violation of the rules and regulations of the FDA or
any other duly authorized Drug Regulatory Agencies or any other governmental
authority which regulates the sale of drugs and controlled substances in any
jurisdiction which has not been cured by the Parent or any of its Subsidiaries
or waived by the FDA or any such regulatory authority; (iv) has received
notice from any third party (whether or not in writing), or has knowledge of,
any claim, dispute or controversy relating to the supply of regulated
materials used in the products of the Parent or any of its Subsidiaries, or
the quality, formulation, potency, toxicity or efficacy of such materials; or
(v) anticipates, or knows of any pending, threatened or potential action by
any duly authorized Drug Regulatory Agencies or any other governmental
authority which regulates the sale of drugs and controlled substances in any
jurisdiction which could have a Material Adverse Effect on the Parent or in
any material way limit or restrict the ability of the Parent or any of its
Subsidiaries to market existing products. To the knowledge of the Parent, it
and each of its Subsidiaries have fulfilled in all material respects all
regulatory requirements necessary or requisite to the continued marketing of
their existing products.
 
  (k) Labor Relations. To the knowledge of the Parent, the Parent has a good
relationship with its employees and has no reason to believe that there will
be any adverse change in any such relationship, whether as a result of the
consummation of the transactions provided for by this Agreement or otherwise.
 
  (l) Patents and Certain Other Intellectual Property Rights.
 
    (i) The Parent owns, or possesses the right to use, all of the necessary
  intellectual property rights to the conduct of the business of the Parent
  as presently conducted except for rights to which, if not so owned or
  possessed, would not individually or in the aggregate have a Material
  Adverse Effect on the Parent. Such ownership or right to use, as the case
  may be, is free and clear of all liens, security interests, claims and
  rights to use of third parties except those which would not, individually
  or in the aggregate have a Material Adverse Effect on the Parent.
 
                                     A-22
<PAGE>
 
    (ii) There are no material royalties, honoraria, fees or other payments,
  incurred outside the ordinary course of business, payable as of the date
  hereof by the Parent to any person by reason of the ownership, use,
  license, sale or disposition of any of the Parent's intellectual property
  rights.
 
    (iii) The Parent is not, to the knowledge of the Parent, infringing the
  right of any other party with respect to any intellectual property rights
  which would, individually or in the aggregate, be reasonably likely to have
  a Material Adverse Effect on the Parent.
 
  (m) Parent Common Stock. The shares of Parent Common Stock to be issued in
accordance with this Agreement will be, upon issuance, duly authorized,
validly issued, fully paid and nonassessable, with no personal liability
attaching to the ownership thereof. Such issuance of shares of Parent Common
Stock will be free of any restrictions on transfer imposed by the Parent,
other than those contemplated by this Agreement. There are no preemptive
rights or other anti-dilution rights which would become effective upon or
prohibit such issuance of shares of Parent Common Stock.
 
  (n) Opinion of Financial Advisor. The Parent has received the written
opinion of SBC Warburg Dillon Read Inc. ("Dillon Read"), dated the date
hereof, to the effect that, as of the date hereof, the Exchange Ratio is fair
to the Parent from a financial point of view, a copy of which opinion has been
delivered to the Company.
 
  (o) Finders and Investment Bankers. Except for Dillon Read, whose fees will
be paid by the Parent, there is no investment banker, broker, finder or other
intermediary which has been retained by or is authorized to act on behalf of
the Parent or the Merger Subsidiary who might be entitled to any fee or
commission in connection with the transactions contemplated by this Agreement.
 
  (p) Parent Affiliate Agreements. Schedule 3.2(p) contains a list (reasonably
satisfactory to counsel for the Company) identifying those Persons who may be
deemed to be "affiliates" of the Parent on the date hereof, as that term is
used in paragraphs (c) and (d) of Rule 145 under the Securities Act (the
"Parent Affiliates").
 
  3.3 Representations and Warranties as to the Merger Subsidiary. The Parent
and the Merger Subsidiary represent and warrant to the Company as follows:
 
  (a) Organization, Standing, Power and Capitalization of the Merger
Subsidiary. The Merger Subsidiary is a corporation duly organized, validly
existing and in good standing under the laws of the state of Delaware with all
requisite corporate power and authority to carry on the business to be
conducted by it prior to the Effective Date and to enter into this Agreement
and perform its obligations hereunder. The Merger Subsidiary is not, and is
not required to be, qualified to do business in any jurisdiction other than
the state of Delaware. The Merger Subsidiary has duly authorized capital stock
consisting of 1,000 shares of common stock, par value $.50 per share, all of
which are issued and outstanding and owned by the Parent. All of such issued
and outstanding shares have been validly issued, are fully paid and
nonassessable, and are free of preemptive rights. There are no outstanding
rights, options, warrants, conversion rights or agreements for the purchase or
acquisition from, or the sale or issuance by, the Merger Subsidiary of any
shares of its capital stock other than in connection with this Agreement.
 
  (b) Business of the Merger Subsidiary. Since its organization, the Merger
Subsidiary has not engaged in any business activities, entered into any
transactions or incurred any liabilities whatsoever, except such as are
related to the transactions contemplated by this Agreement. The Merger
Subsidiary has no subsidiaries.
 
  (c) Authorization; Binding Agreement. Pursuant to its Certificate of
Incorporation, the Merger Subsidiary has requisite corporate power and
authority to execute and deliver this Agreement and to consummate the
transactions contemplated hereby. The execution and delivery of this Agreement
and the consummation of the transactions contemplated hereby, including but
not limited to the Merger, have been duly and validly authorized by the Parent
as sole stockholder of the Merger Subsidiary and by the Merger Subsidiary's
Board of Directors and no other corporate proceedings on the part of the
Merger Subsidiary are necessary to authorize the execution
 
                                     A-23
<PAGE>
 
and delivery of this Agreement or to consummate the transactions so
contemplated. This Agreement has been duly and validly authorized, executed
and delivered by the Merger Subsidiary and constitutes the legal, valid and
binding agreement of the Merger Subsidiary, enforceable against it in
accordance with its terms, except to the extent that enforceability thereof
may be limited by applicable bankruptcy, insolvency, reorganization or other
similar laws affecting the enforcement of creditors' rights generally and by
principles of equity regarding the availability of remedies.
 
  (d) Compliance With Other Instruments, Etc. Neither the execution or
delivery of this Agreement nor the consummation of the transactions
contemplated hereby will conflict with, result in any violation of or
constitute a default under the Certificate of Incorporation or Bylaws of the
Merger Subsidiary or any judgment, decree, order or any material law or
regulation by which the Merger Subsidiary is bound or affected.
 
  (e) Governmental and Other Consents, Etc. No consent, approval or
authorization of or designation, declaration or filing with any Governmental
Entity on the part of the Merger Subsidiary is required in connection with the
execution or delivery of this Agreement by the Merger Subsidiary or the Merger
Subsidiary's consummation of the transactions contemplated hereby other than
(i) filings in the State of Delaware in accordance with the DGCL and (ii)
filings under the HSR Act.
 
4. COVENANTS.
 
  4.1 Covenants of the Company. The Company agrees that prior to the Effective
Date:
 
  (a) Action in Furtherance of Merger. Subject to the terms and conditions
herein provided, the Company agrees to use commercially reasonable efforts to
take, or cause to be taken, such action, and to do, or cause to be done, such
things as are necessary, proper or advisable to consummate and make effective
as promptly as practicable the Merger and the transactions contemplated by
this Agreement, including (i) the defending of any lawsuits or other legal
proceedings, whether judicial or administrative, challenging this Agreement or
the consummation of the transactions contemplated hereby, (ii) obtaining all
governmental consents required for the consummation of the Merger and the
transactions contemplated thereby, and (iii) making all necessary filings
under the HSR Act. Upon the terms and subject to the conditions hereof, the
Company agrees to use commercially reasonable efforts to take, or cause to be
taken, such actions and to do, or cause to be done, such things as are
necessary to satisfy the other conditions of the Closing set forth herein. The
Company shall consult with counsel for the Parent as to, and shall permit such
counsel, at the Parent's expense, to participate in the decision-making
process as to the strategy to be employed in, any lawsuits or proceedings
referred to in clause (i) above brought against the Company, but not against
the Parent, provided that counsel for the Company shall retain control of any
such lawsuits or proceedings.
 
  (b) Maintenance of Properties. The Company shall, and shall cause PL to,
maintain all of its and their respective properties in customary repair, order
and condition, reasonable wear and use and damage by fire or other casualty
excepted, and shall maintain, and shall cause PL to maintain, insurance upon
all of its and their properties and with respect to the conduct of its and
their businesses in amounts and kinds comparable to that in effect on the date
of this Agreement.
 
  (c) Access and Information. Between the date of this Agreement and the
Effective Date, upon reasonable notice, the Company and PL shall give the
Parent and its authorized representatives (including its financial advisors,
accountants and legal counsel) access, at all reasonable times and in a manner
which shall not cause unreasonable disturbance, to all plants, offices,
warehouses and other facilities and to all contracts, agreements, commitments,
books and records (including Tax Returns) of the Company and PL (except to the
extent any such agreements or contracts by their terms restrict access to
third parties and the consent of the other party(ies) thereto cannot be
obtained after commercially reasonable efforts to do so), shall permit the
Parent to make such inspections as it may reasonably require and shall cause
its officers and those of PL promptly to furnish the Parent with such
financial and operating data and other information with respect to the
business and properties of the Company and PL, as may from time to time be
reasonably requested. All data and information so received
 
                                     A-24
<PAGE>
 
from the Company shall be deemed received pursuant to the Confidentiality
Agreement, and the Parent shall cause its officers, directors, employees,
auditors, counsel, financial advisors and agents to comply with the provisions
of the Confidentiality Agreement with respect to such data and information.
 
  (d) Conduct of Business. Except as expressly contemplated by this Agreement
or as otherwise agreed in writing by the Parent, during the period from the
date of this Agreement through the Effective Time, the Company shall, and the
Company shall cause PL to, conduct its business in the ordinary course
consistent with past practice, and the Company shall, and the Company shall
cause PL to, use commercially reasonable efforts to (i) preserve intact its
business organization, (ii) keep available the services of its officers and
employees, (iii) preserve its relationships with customers and suppliers, and
(iv) maintain satisfactory relationships with all other Persons with which it
does business. Without limiting the generality of the foregoing, and except as
otherwise expressly provided in this Agreement or otherwise agreed to in
writing by the Parent, prior to the Effective Time, neither the Company nor PL
shall, without the prior written consent of the Parent:
 
    (i) amend or propose to amend its Certificate of Incorporation or Bylaws;
 
    (ii) other than in the ordinary course of business consistent with past
  practice: (A) create, incur or assume any indebtedness for borrowed money
  or obligations in respect of capital leases; (B) assume, guarantee, endorse
  or otherwise become liable or responsible (whether directly, indirectly,
  contingently or otherwise) for the obligations of any other Person except
  the Company or PL; (C) make any loans, advances or capital contributions
  to, or investments in, any other Person (other than customary travel or
  business advances to employees made in the ordinary course of business
  consistent with past practice); (D) make any capital expenditure or
  expenditures which, individually, is in excess of $10,000 or, in the
  aggregate, are in excess of $50,000; (E) enter into or amend any agreement
  or contract material to the Company; or (F) incur any material liability or
  obligation (absolute, accrued, contingent or otherwise);
 
    (iii) sell, transfer, lease, license or otherwise dispose of, or mortgage
  or encumber, or agree to sell, transfer, lease, license or otherwise
  dispose of, or mortgage or encumber, any assets or properties, real,
  personal, intangible or mixed, other than the sale, transfer or disposition
  of the Company's products in the ordinary course of business;
 
    (iv) in the case of the Company, except as expressly provided in this
  Agreement, amend or terminate the Company Rights Plan prior to the earlier
  of the Effective Time or the termination of this Agreement, unless required
  to do so by a court of competent jurisdiction;
 
    (v) in the case of the Company, deliver any "put notices" under the
  Common Stock Investment Agreement or issue any shares of Company Common
  Stock pursuant thereto; or
 
    (vi) authorize, recommend, propose or announce an intention to do any of
  the foregoing, or enter into any contract, agreement, commitment or
  arrangement to do any of the foregoing.
 
  (e) Capital Stock. Between the date hereof and the Effective Time, except as
specifically contemplated by this Agreement or the Company Option Agreement,
neither the Company nor PL shall, unless otherwise agreed to in writing by
Parent, (i) make any changes in its authorized capital stock; (ii) authorize
or issue any securities convertible into, or exchangeable with, the capital
stock of the Company or PL; (iii) issue any stock options, warrants or other
rights calling for the issue, transfer, sale or delivery of its capital stock
or other securities except pursuant to the Company Stock Option Plans, the
Company Employee Stock Purchase Plan or the Company 401(k) Plan consistent
with past practice; provided, however, the Company shall not issue any
"performance share awards" and "stock purchase rights" under the Equity
Incentive Plan of the Company; (iv) declare or pay any stock dividend or
effect any recapitalization, split-up, combination, exchange of shares or
other reclassification in respect of its outstanding shares of capital stock;
(v) issue, transfer, sell or deliver any shares of its capital stock, except
Company Common Stock to be issued: (A) upon the exercise of stock options
previously granted pursuant to existing Company Stock Option Plans or granted
in accordance with this Section 4.1(e), (B) pursuant to the exercise of the
Company Warrant, or (C) as required by the terms of the Company Employee Stock
Purchase Plan or the Company 401(k) Plan; (vi) purchase, redeem or otherwise
acquire any
 
                                     A-25
<PAGE>
 
outstanding shares of its capital stock or any other securities of the Company
or any rights, warrants or options to acquire any such shares or securities;
or (vii) declare, pay or set apart for payment any dividends on, or make any
other actual, constructive or deemed distributions in respect of its capital
stock or otherwise make any payments to its stockholders in their capacity as
such. Except in a manner consistent with past practice, no award or grant
under the Company Stock Option Plans or any other benefit plan or program
shall be made without the consent of the Parent. Except as specifically
contemplated by this Agreement, the Company shall not make any material
amendment to any of (i) the Company Stock Option Plans or options outstanding
thereunder, or (ii) any other option or warrant agreement, including, without
limitation, the Company Warrant.
 
  (f) No Solicitation.
 
    (i) The Company shall cease, and shall cause PL to cease and shall use
  commercially reasonable efforts to cause its and PL's respective officers,
  directors, employees, counsel, investment bankers, financial advisers,
  accountants, other representatives and agents (collectively, the "Company
  Representatives") to cease, in each case immediately after the date hereof,
  any discussions or negotiations with any parties that may be ongoing with
  respect to a Takeover Proposal. Neither the Company nor the Board of
  Directors of the Company shall, nor shall either of them authorize or
  permit PL or any Company Representative to: (A) solicit, initiate or
  encourage (including by way of furnishing information), or take any other
  action to facilitate, any inquiries or the making of any proposal which
  constitutes, or may reasonably be expected to lead to, any Takeover
  Proposal; (B) participate in any discussion or negotiations regarding any
  Takeover Proposal; (C) approve or agree to or endorse any Takeover
  Proposal; (D) enter into any agreement with respect to any Takeover
  Proposal; or (E) other than as permitted by Section 4.1(m), withdraw or
  modify, or propose to withdraw or modify in a manner adverse to Parent, the
  approval or recommendation of this Agreement or the Merger; provided,
  however, that, notwithstanding any other provision hereof, the Company and
  the Board of Directors of the Company may, at any time prior to the time
  the stockholders of the Company shall have approved the Merger, engage in
  the actions prohibited by this Section 4.1(f)(i) in response to an
  unsolicited Takeover Proposal which did not result from a breach of this
  Section 4.1(f)(i) and subject to compliance with Section 4.1(f)(ii) if, and
  only to the extent that, (x) the Board of Directors of the Company
  determines in good faith, based upon the advice of its legal counsel as to
  legal matters, that it is necessary to do so in order to comply with its
  fiduciary duties to the Company's shareholders under applicable law, (y)
  the Board of Directors of the Company determines that the Takeover Proposal
  is a Superior Proposal, and (z) the party who submitted the Takeover
  Proposal executes a customary confidentiality agreement (as determined by
  the Company after receiving such Takeover Proposal and after consultation
  with its outside legal counsel), the benefits of the terms of which if more
  favorable to the other party than those contained in the confidentiality
  agreement in place with Parent, shall be extended to Parent,
 
    (ii) In addition to the obligations of the Company set forth in Section
  4.1(f)(i), the Company shall promptly advise Parent orally and in writing
  of any Takeover Proposal received by Company or any request for information
  stated by the proponent to be in contemplation of any Takeover Proposal, or
  any inquiry which could reasonably be expected to lead to any Takeover
  Proposal, the material terms and conditions of such Takeover Proposal or
  request or inquiry and the identity of the Person making such Takeover
  Proposal, request or inquiry. The Company shall keep the Parent reasonably
  informed of any material amendment or modification to such Takeover
  Proposal, request or inquiry.
 
    (iii) "Takeover Proposal" means any inquiry, proposal or offer from any
  Person relating to any: (A) tender or exchange offer, merger, consolidation
  or similar transaction involving the Company or PL, (B) sale, lease or
  other disposition directly or indirectly by merger, consolidation, or share
  exchange of assets of the Company or PL representing 10% or more of the
  consolidated assets of the Company or PL, (C) issuance, sale or other
  disposition of (including by way of merger, consolidation, share exchange
  or similar transaction) securities (or options, rights or warrants to
  purchase, or securities convertible into, such securities) representing 10%
  or more of the voting power of the Company, (D) transaction in which any
  Person shall acquire beneficial ownership (as such term is defined in Rule
  13d-3 under the Exchange Act), or the right to acquire beneficial ownership
  or any "group" (as such term is defined under the Exchange
 
                                     A-26
<PAGE>
 
  Act) shall have been formed which beneficially owns or has the right to
  acquire beneficial ownership of 25% or more of the outstanding Common
  Stock, in each case, other than the transactions with Parent contemplated
  by this Agreement or the Company Option Agreement referred to in the
  recitals to this Agreement.
 
    (iv) "Superior Proposal" means any Takeover Proposal on terms which the
  Board of Directors of the Company determines in its good-faith judgment,
  based in part on the advice of a financial advisor of nationally recognized
  reputation (which opinion shall be provided promptly to Parent), to be more
  favorable to the stockholders of the Company than the Merger from a
  financial point of view and for which financing is then committed or
  reasonably likely to be available.
 
    (v) For purposes of this Agreement, the term "Person" shall mean any
  individual, corporation, partnership, trust, unincorporated association,
  limited liability company, governmental agency or any other entity.
 
  (g) No Final Put Notice. The Company shall refrain from delivering a "final
put notice" in respect of the "put notice" delivered under the Common Stock
Investment Agreement on June 4, 1998.
 
  (h) Compensation Matters. Except with the prior written consent of the
Parent, neither the Company nor PL shall (i) pay, agree to pay or accelerate
the payment of any bonus, severance or other compensation to any officer or
employee not currently required under an existing agreement or employee
benefit plan or arrangement (and with respect to officers and directors, only
to the extent such agreement, plan or arrangement is described in the
Company's 1998 Proxy Statement) except for increases in compensation of
employees who are not officers or directors of the Company consistent with
past practices, (ii) make payment of any bonus, severance or other
compensation to any officer or employee which is permitted hereunder in any
property other than cash, (iii) create any new employee benefit plan or
arrangement, (iv) modify any existing employee benefit plan, arrangement or
agreement in any respect which would materially increase the compensation
payable thereunder to employees, or (v) enter into any new employment
agreement or modify any existing employment agreement of any employee who is
an officer or director of the Company or PL.
 
  (i) Contracts. Except as otherwise agreed to in writing by the Parent,
neither the Company nor PL shall enter into, terminate or modify in any
material respect any contract, agreement or commitment material to the Company
without the prior written consent of the Parent, which consent shall not be
unreasonably withheld.
 
  (j) Tax Matters. The Company and PL shall continue to file when due all
federal, state, local, foreign and other tax returns, reports and declarations
required to be filed by them, and shall pay or make full and adequate
provision for the payment of all taxes and governmental charges due or payable
by them. Neither the Company nor PL shall prepare or file any Tax Return
inconsistent with past practice or, on any such Tax Return, take any position,
make any election, or adopt any method that is inconsistent with positions
taken, elections made or methods used in preparing or filing similar Tax
Returns in prior periods or make any tax election or settle or compromise any
material federal, state, local or foreign income tax liability.
 
  (k) Amendments to the Schedules. The Company shall make such amendments to
the Schedules referred to in Section 3.1 as are necessary to reflect therein
the occurrence of events or transactions occurring after the date hereof and
shall deliver a copy of each such amendment to the Parent on the same date as
the date of the amendment. The Company shall deliver such additional
amendments from time to time as are necessary to reflect any material event
occurring between the date hereof and the Effective Date.
 
  (l) Notification of Certain Matters. The Company shall give prompt notice to
the Parent of: (i) any notice of, or other communication relating to, a
default or event which, with notice or lapse of time or both, would become a
default under any agreement, indenture or instrument to which the Company or
PL is a party or is subject which default could reasonably be expected to have
a Material Adverse Effect on the Company; (ii) any notice or other
communication from any third party alleging that the consent of such third
party is or may be required in connection with the transactions contemplated
by this Agreement including the Merger; (iii) any
 
                                     A-27
<PAGE>
 
notice or other communication from any regulatory authority or national
securities exchange in connection with the transactions contemplated by this
Agreement; (iv) any Material Adverse Change suffered by the Company, or the
occurrence of an event which would be reasonably expected to have a Material
Adverse Effect on the Company; and (v) any claims, actions, proceedings or
investigations commenced or threatened in writing involving or affecting the
Company or PL, or any of their respective property or assets, or any employee,
consultant, director or officer, in his or her capacity as such, of the
Company or PL, which, if pending on the date hereof, would have been required
to have been disclosed pursuant to this Agreement or which relates to the
consummation of the Merger.
 
  (m) Stockholder Approval. The Company shall take all steps necessary to duly
call, give notice of, convene and hold, no later than thirty-five (35) days
after the Registration Statement has been declared effective by the SEC, a
special meeting of its stockholders in accordance with the DGCL to consider
and vote upon the adoption and approval of this Agreement and the Merger and
the transactions contemplated hereby (the "Stockholders Meeting"). The
Company, through its Board of Directors, shall adopt a recommendation to the
stockholders of the Company that they adopt and approve this Agreement, shall
use commercially reasonable efforts, consistent with its legal obligations, to
obtain any necessary approval by its stockholders of the transactions
contemplated hereby and shall not withdraw or modify such recommendation,
except as permitted by Section 4.1(f)(i) or on the basis of the occurrence of
a Material Adverse Change with respect to the Parent or the occurrence of an
event which has, or can reasonably be expected to have, a Material Adverse
Effect on the Parent and the Board of Directors of the Company determines in
good faith, based upon the advice of its counsel as to legal matters, that it
is necessary to do so in order to comply with its fiduciary duties to the
Company's stockholders under applicable law. Without limiting the generality
of the foregoing, the Company agrees that its obligations pursuant to the
first sentence of this Section 4.1(m) shall not be affected by the
commencement, public proposal, public disclosure or communication to the
Company of a Takeover Proposal.
 
  (n) Financial Statements. The Company, promptly after the preparation
thereof, shall send to the Parent any financial statements prepared by or on
behalf of it for periods subsequent to March 31, 1998 as to which the
representations and warranties regarding the Company Financial Statements set
forth in Section 3.1(e) shall apply.
 
  (o) Proxy Statement. The Company shall deliver to the Parent the final form
of proxy statement which the Company intends to distribute to its stockholders
in connection with the adoption and approval of this Agreement and the Merger.
 
  (p) Company Affiliates. The Company shall deliver to the Parent an updated
Schedule 3.1(s) reflecting any change in the identity of the Company
Affiliates within five (5) days of the Company having knowledge of such
change. In the event additional Persons become Company Affiliates after the
date hereof, the Company shall use commercially reasonable efforts to cause
each such Person to deliver to the Parent a written agreement in substantially
the form of Exhibit C hereto with each such Person within ten (10) days after
the Company has knowledge that such Person has become a Company Affiliate.
 
  (q) Takeover Statutes. If any "business combination," "fair price," "control
share acquisition" or "moratorium" statute or other similar statute or
regulation or any state "blue sky" or securities law statute shall become
applicable to the transactions contemplated hereby, the Company and the Board
of Directors of the Company shall, to the extent consistent with applicable
law, grant such approvals and take such actions as are reasonably necessary so
that the transactions contemplated hereby and thereby may be consummated as
promptly as practicable on the terms contemplated hereby and otherwise act to
minimize the effects of such statute or regulations on the transactions
contemplated hereby.
 
  (r) Prohibited Transactions. The Company shall not acquire or agree to
acquire by merging or consolidating with, or by purchasing a substantial
portion of the assets of or equity in, or by any other manner, any business or
any corporation, limited liability company, partnership, association or other
business organization or division thereof or otherwise acquire or agree to
acquire any assets, other than transactions that are in the ordinary course
 
                                     A-28
<PAGE>
 
of business consistent with past practice and not material to the Company and
PL taken as a whole. The Company shall not alter (through merger, liquidation,
reorganization, restructuring or in any other fashion) the corporate structure
or ownership of the Company or PL.
 
  (s) Accounting Changes. The Company shall not make any change to accounting
policies or procedures (other than actions required to be taken by generally
accepted accounting principles).
 
  (t) Compliance With Law. The Company shall not knowingly violate or
knowingly fail to perform any obligation or duty imposed upon it or PL by any
applicable federal or state law or regulation, guideline or ordinance.
 
  (u) Company Affiliates Agreements. The Company shall use commercially
reasonable efforts to cause each Company Affiliate to deliver to the Parent
within ten (10) days of the date hereof a written agreement in substantially
the form of Exhibit C hereto, executed by each such Person.
 
  4.2 Covenants of the Parent. The Parent agrees that prior to the Effective
Date:
 
  (a) Action in Furtherance of Merger. Subject to the terms and conditions
herein provided, the Parent agrees to use commercially reasonable efforts to
take, or cause to be taken, such actions, and to do, or cause to be done, such
things as are necessary, proper or advisable to consummate and make effective
as promptly as practicable the Merger and the transactions contemplated by
this Agreement, including (i) defending any lawsuits or other legal
proceedings, whether judicial or administrative, challenging this Agreement or
the consummation of the transactions contemplated hereby, (ii) obtaining all
governmental consents required for the consummation of the Merger and the
transactions contemplated thereby, (iii) making all necessary filings under
the HSR Act, (iv) filing the Registration Statement and causing the same to
become effective; and (v) to the extent that the shares of Company Common
Stock are not voted in accordance with the terms of the Voting Agreements,
voting the irrevocable proxies granted to the Parent in the Voting Agreements
in favor of approving this Agreement and the transactions contemplated hereby,
all on the terms and conditions provided for herein. Upon the terms and
subject to the conditions hereof, the Parent agrees to use commercially
reasonable efforts to take, or cause to be taken, such actions and to do, or
cause to be done, such things as are necessary to satisfy the other conditions
of the Closing set forth herein. The Parent shall consult with counsel for the
Company as to, and shall permit such counsel, at the Company's expense, to
participate in the decision-making process as to the strategy to be employed
in any lawsuits or proceedings referred to in clause (i) above (which shall
not include any such lawsuits or proceedings to the extent that they relate to
the Registration Statement) brought against the Parent, but not against the
Company, provided that counsel for the Parent shall retain control of any such
lawsuits or proceedings. In case at any time after the Effective Date any
further action is necessary or desirable to carry out the purposes of this
Agreement, the officers and directors of the Surviving Corporation shall take
such necessary action and the Parent shall cause them to do so.
 
  (b) Maintenance of Properties. The Parent shall, and shall cause each of its
Subsidiaries to, maintain all of its and their respective properties in
customary repair, order and condition, reasonable wear and use and damage by
fire or other casualty excepted, and shall maintain, and shall cause each of
its Subsidiaries to maintain, insurance upon all of its and their properties
and with respect to the conduct of its and their businesses in amounts and
kinds comparable to that in effect on the date of this Agreement.
 
  (c) Access and Information. Between the date of this Agreement and the
Effective Date, upon reasonable notice, the Parent shall give the Company and
its authorized representatives (including its financial advisors, accountants
and legal counsel) access, at all reasonable times and in a manner which shall
not cause unreasonable disturbance, to officers and senior executives of the
Parent as well as to financial and operating data and other information as may
from time to time be reasonably requested by the Company. All data and
information so received from the Parent shall be deemed received pursuant to
the Reciprocal Confidentiality Agreement, and the Company shall cause its
officers, directors, employees, auditors, counsel, financial advisors and
agents to comply with the provisions of the Reciprocal Confidentiality
Agreement with respect to such data and information.
 
                                     A-29
<PAGE>
 
  (d) Listing Application. The Parent shall use commercially reasonable
efforts to effect listing of the Parent Common Stock to be delivered in
accordance with this Agreement on the NYSE upon notice of issuance.
 
  (e) Public Filings. The Parent shall promptly file all periodic reports
required to be filed with the SEC and provide the Company with a copy of such
reports promptly after such filing.
 
  (f) Registration Statement. The Parent shall deliver to the Company the
final form of Registration Statement which the Parent intends to have declared
effective by the SEC.
 
  (g) Conduct of Business. Except as expressly contemplated by this Agreement,
during the period from the date of this Agreement to the Effective Date, the
Parent shall, and the Parent shall cause each of its Subsidiaries to, conduct
its business in the ordinary course and consistent with past practice.
 
  4.3 Covenants as to the Merger Subsidiary. The Parent and the Merger
Subsidiary agree that prior to the Effective Date:
 
  (a) No Business. The Merger Subsidiary shall not engage in any business
activities or enter into any transaction whatsoever, except such as are
related to this Agreement and the performance of its obligations hereunder.
 
  (b) Access. Until the Effective Date or until the abandonment of the Merger
as permitted by this Agreement, the Merger Subsidiary shall give to the
Company and its representatives full access, during normal business hours and
upon reasonable notice, to all of its properties, books, contracts, documents
and records, and shall furnish to the Company such financial and other
information concerning the Merger Subsidiary as the Company and its
representatives may from time to time reasonably request.
 
  (c) Actions in Furtherance of Merger. The Merger Subsidiary shall use
commercially reasonable efforts to obtain such consents and authorizations of
third parties, to make such filings, and to give such notices to third
parties, which may be necessary or reasonably required on the part of the
Merger Subsidiary in order to effect, or in connection with, the transactions
contemplated by this Agreement.
 
  4.4 Covenants of the Company and the Parent.
 
  (a) Registration Statement. The Company shall cooperate with the Parent in
the preparation by the Parent of, and the Parent shall file, the Registration
Statement with the SEC and shall use commercially reasonable efforts to cause
it to become effective. The Parent shall use commercially reasonable efforts
to qualify such securities, if required, under applicable state securities
laws and to cause the shares of Parent Common Stock which are to be delivered
pursuant to this Agreement to be listed on the NYSE. The Prospectus/Proxy
Statement shall include the prospectus which forms a part of the Registration
Statement. The obligations of the Company pursuant to this Section 4.4 shall
be limited to providing the information required by items 15 and 18 of Form
S-4, and the expense of providing such information shall be borne by the
Company.
 
  (b) Tax-Free Reorganization Treatment. Each of the Company and the Parent
shall use commercially reasonable efforts to cause the Merger to be treated as
a "reorganization" within the meaning of Section 368 of the Code.
 
5. CONDITIONS TO CLOSING; ABANDONMENT AND TERMINATION.
 
  5.1 Conditions to Each Party's Obligation to Effect the Merger. The
respective obligations of each party to this Agreement to effect the Merger
shall be subject to the satisfaction prior to the Effective Date of the
following conditions, and the Company or the Parent shall (x) not be required
to close the Merger if any of the following shall not be true or shall not
have occurred and (y) have the right to abandon the Merger and terminate this
Agreement if any of the following shall not be true or shall not have
occurred, as the case may be, by 5:00 p.m., Eastern time, on November 30,
1998:
 
  (a) Company Stockholder Approval. This Agreement and the Merger shall have
been approved and adopted by the affirmative vote of at least a majority of
the votes cast by holders of the Company Common Stock entitled to vote
thereon.
 
                                     A-30
<PAGE>
 
  (b) Consents. Except to the extent such consents are not required at the
Effective Date: (i) the Company shall have received the consents or
exemptions, or made the filings, as the case may be, which are referred to in
Section 3.1(d); (ii) the Parent shall have received the consents or
exemptions, or made the filings, as the case may be, which are referred to in
Section 3.2(d) hereof; and (iii) all notification and report forms required to
be filed on behalf of the parties to this Agreement with the Federal Trade
Commission and the Department of Justice under the HSR Act and rules
thereunder shall have been filed, and the waiting period required to expire
under the HSR Act and rules thereunder, including any extension thereof, shall
have expired or early termination of the waiting period shall have been
granted.
 
  (c) Effectiveness. The Registration Statement shall have become effective
under the Securities Act and shall not be the subject of any stop order or
proceeding seeking a stop order.
 
  (d) Listing. The Parent Common Stock to be issued in the Merger shall have
been approved for listing on the NYSE upon notice of issuance.
 
  (e) No Legal Restraints. No temporary restraining order, preliminary or
permanent injunction or other order issued by a court of competent
jurisdiction or other legal restraint or prohibition preventing the
consummation of the Merger shall be in effect.
 
  5.2 Conditions to the Company's Closing and Its Right to Abandon. The
Company shall (x) not be required to close the Merger if any of the following
shall not be true or shall not have occurred or shall not have been waived in
writing by the Company at the Closing and (y) have the right to abandon the
Merger and terminate this Agreement if any of the following shall not be true
or shall not have occurred, or shall not have been waived in writing by the
Company, as the case may be, by 5:00 p.m., Eastern time, on November 30, 1998:
 
  (a) No Material Adverse Effect. No event or circumstance shall have occurred
which has, or is reasonably expected to have, a Material Adverse Effect on the
Parent, including, without limitation, any Material Adverse Effect caused by
any of the following:
 
    (i) The failure of the representations and warranties of the Parent and
  Merger Subsidiary herein contained to be true and correct in all respects
  on and as of the Effective Date with the same force and effect as though
  made on and as of the Effective Date except as affected by transactions
  specifically contemplated by this Agreement;
 
    (ii) The failure of either the Parent or the Merger Subsidiary to have
  performed all its obligations and agreements and complied with all
  covenants contained in this Agreement to be performed and complied with by
  it on or prior to the Effective Date; and
 
    (iii) The execution, delivery and performance by the Parent of this
  Agreement and the consummation of the Merger having, directly or
  indirectly, resulted in a breach of, constituted an event of default under
  or resulted in the acceleration of, with or without the giving of notice,
  lapse of time or both, an obligation under any agreement of the Parent.
 
  (b) No Material Adverse Change. Between the date hereof and the Effective
Date, there shall have been no Material Adverse Change with respect to the
Parent.
 
  (c) Officer's Certificate. The Company shall have received a certificate of
the Chairman of the Board, the President or any Vice-President of each of the
Parent and the Merger Subsidiary, dated the Effective Date, certifying as to
the absence of any of the matters mentioned in Sections 5.2(a) and (b).
 
  (d) Tax Opinion. The Company shall have received an opinion of Heller Ehrman
White & McAuliffe, in form and substance reasonably satisfactory to the
Company, dated the Effective Time, substantially to the effect that on the
basis of facts, representations and assumptions set forth in such opinion
which are consistent with the state of facts existing as of the Effective
Time, for federal income tax purposes:
 
                                     A-31
<PAGE>
 
    (i) the Merger shall constitute a "reorganization" within the meaning of
  Section 368(a) of the Code, and the Company, the Merger Subsidiary and the
  Parent shall each be a party to that reorganization within the meaning of
  Section 368(b) of the Code;
 
    (ii) no gain or loss shall be recognized by the Parent, the Merger
  Subsidiary or the Company as a result of the Merger;
 
    (iii) no gain or loss shall be recognized by stockholders of the Company
  who exchange their shares of Company Common Stock solely for shares of
  Parent Common Stock pursuant to the Merger, except to the extent of cash,
  if any, received in lieu of fractional shares of Parent Common Stock;
 
    (iv) the aggregate tax basis of the shares of Parent Common Stock
  received in exchange for shares of Company Common Stock pursuant to the
  Merger (including any fractional share of Parent Common Stock deemed to
  have been received) shall be the same as the aggregate tax basis of such
  shares of Company Common Stock surrendered in exchange therefor;
 
    (v) the holding period for shares of Parent Common Stock received in
  exchange for shares of Company Common Stock pursuant to the Merger shall
  include the holder's holding period for such shares of Company Common Stock
  surrendered in exchange therefor, provided such shares of Company Common
  Stock were held as capital assets by the holder at the Effective Time; and
 
    (vi) the receipt of cash in lieu of a fractional share of Parent Common
  Stock by a stockholder of the Company will be treated as if the fractional
  share were distributed as part of the exchange and then redeemed by the
  Parent, and the cash payment will be treated as having been received as a
  distribution in full payment in exchange for the fractional shares redeemed
  and taxed as provided in Section 302(a) of the Code.
 
  In rendering such opinion, Heller Ehrman White & McAuliffe may rely as to
matters of fact upon the representations contained herein and may require and
rely upon representations from the Parent, the Company and others.
 
  (e) Tax Certificate. The Parent shall have delivered to the Company a
certificate confirming the accuracy of the representations and warranties and
the performance of the covenants on the part of the Parent and the Merger
Subsidiary as set forth in Section 8.4(a) hereof.
 
  5.3 Conditions to the Parent's and the Merger Subsidiary's Closing and Right
of the Parent and the Merger Subsidiary to Abandon. The Parent and Merger
Subsidiary shall (x) not be required to close the Merger if any of the
following shall not be true or shall not have occurred or shall not have been
waived in writing by the Parent at the Closing and (y) have the right to
abandon the Merger and terminate this Agreement if any of the following shall
not be true or shall not have occurred, or shall not have been waived in
writing by the Parent, as the case may be, by 5:00 p.m., Eastern time, on
November 30, 1998:
 
  (a) No Material Adverse Effect. No event or circumstance shall have occurred
which has, or is reasonably expected to have, a Material Adverse Effect on the
Company, including, without limitation, any Material Adverse Effect caused by
any of the following:
 
    (i) The failure of the representations and warranties of the Company
  herein contained to be true and correct in all respects on and as of the
  Effective Date;
 
    (ii) The failure of the Disclosure Schedules, as amended immediately
  prior to, but on the same day as, the Merger on the Effective Date for
  events or transactions occurring after the date of this Agreement, to be
  true and correct in all respects on and as of the Effective Date with the
  same force and effect as though made on and as of the Effective Date;
 
    (iii) The disclosure by any amendment to the Disclosure Schedules of the
  existence of any adverse change in the business, assets, financial
  condition or the results of operation of the Company and PL, taken as a
  whole;
 
                                     A-32
<PAGE>
 
    (iv) The failure of the Company to have performed all its obligations and
  agreements and complied with all covenants contained in this Agreement to
  be performed and complied with by it on or prior to the Effective Date; and
 
    (v) The execution, delivery and performance by the Company of this
  Agreement and the consummation of the Merger having, directly or
  indirectly, resulted in a breach of, constituted an event of default under
  or resulted in the acceleration of, with or without the giving of notice,
  lapse of time, or both, an obligation under any agreement of the Company.
 
  (b) No Material Adverse Change. Between the date hereof and the Effective
Date, there shall have been no Material Adverse Change with respect to the
Company.
 
  (c) Officer's Certificate. The Parent and the Merger Subsidiary shall have
received a certificate of the Chairman of the Board, the President or any
Vice-President of the Company, dated the Effective Date, certifying as to:
 
    (i) the absence of any of the matters mentioned in Sections 5.3(a) and
  (b);
 
    (ii) the number of shares of Company Preferred Stock issued and
  outstanding;
 
    (iii) the number of Outstanding Shares of Company Common Stock; and
 
    (iv) the information relating to the Company supplied by the Company in
  writing specifically for inclusion in the Registration Statement.
 
  (d) Tax Opinion. The Parent shall have received an opinion of Buchanan
Ingersoll Professional Corporation, in form and substance reasonably
satisfactory to the Parent, dated the Effective Date, substantially to the
effect that on the basis of facts, representations and assumptions set forth
in such opinion which are consistent with the state of facts existing as of
the Effective Time, for federal income tax purposes:
 
    (i) the Merger shall constitute a "reorganization" within the meaning of
  Section 368(a) of the Code, and the Company, the Merger Subsidiary and the
  Parent shall each be a party to that reorganization within the meaning of
  Section 368(b) of the Code;
 
    (ii) no gain or loss shall be recognized by the Parent, the Merger
  Subsidiary or the Company as a result of the Merger;
 
    (iii) no gain or loss shall be recognized by stockholders of the Company
  who exchange their shares of Company Common Stock solely for shares of
  Parent Common Stock pursuant to the Merger, except to the extent of cash,
  if any, received in lieu of fractional shares of Parent Common Stock;
 
    (iv) the aggregate tax basis of the shares of Parent Common Stock
  received in exchange for shares of Company Common Stock pursuant to the
  Merger (including any fractional share of Parent Common Stock deemed to
  have been received) shall be the same as the aggregate tax basis of such
  shares of Company Common Stock surrendered in exchange therefor;
 
    (v) the holding period of the shares of Parent Common Stock received in
  exchange for shares of Company Common Stock pursuant to the Merger shall
  include the holder's holding period for such shares of Company Common Stock
  surrendered in exchange therefor, provided such shares of Company Common
  Stock were held as capital assets by the holder at the Effective Time; and
 
    (vi) the receipt of cash in lieu of a fractional share of Parent Common
  Stock by a stockholder of the Company will be treated as if the fractional
  share were distributed as part of the exchange and then redeemed by the
  Parent, and the cash payment will be treated as having been received as a
  distribution in full payment in exchange for the fractional shares redeemed
  and taxed as provided in Section 302(a) of the Code.
 
                                     A-33
<PAGE>
 
  In rendering such opinion, Buchanan Ingersoll Professional Corporation may
rely as to matters of fact upon the representations contained herein and may
require and rely upon representations from the Parent, the Company and others.
 
  (e) Tax Certificate. The Company shall have delivered to the Parent a
certificate confirming the accuracy of the representations and warranties and
the performance of the covenants on the part of the Company and the Surviving
Corporation as set forth in Section 8.4(b) hereof.
 
  (f) Outstanding Shares of Preferred Stock. No shares of the Company
Preferred Stock shall be issued or outstanding.
 
  (g) FIRPTA Statement. The Company shall have delivered to the Parent a
statement that the interest in Company is not a United States real property
interest as contemplated by Section 1.1445-2(c)(3) of the regulations
promulgated under the Code.
 
6. ADDITIONAL PROVISIONS FOR ABANDONMENT AND TERMINATION.
 
  6.1 Provisions of Abandonment and Termination. In addition to the provisions
of Article 5 hereof, the Merger may be abandoned and this Agreement may be
terminated at any time on or before the Effective Time, whether before or
after approval by the stockholders of the Company:
 
  (a) Mutual Agreement. By mutual agreement of the Boards of Directors of the
Parent, the Merger Subsidiary and the Company pursuant to resolutions adopted
by such Boards, notwithstanding any prior adoption of this Agreement or
approval of the Merger by the respective stockholders of the Merger Subsidiary
or the Company;
 
  (b) Violation of Order. By either the Parent or the Merger Subsidiary, on
the one hand, or the Company, on the other, if consummation of the Merger
would violate any preliminary injunction or restraining order or final,
nonappealable order, decree, injunction, restraining order or judgment of any
United States court or other tribunal of competent jurisdiction;
 
  (c) Other Transactions Involving the Company. By the Parent if any of the
following shall have occurred:
 
    (i) Any Person (other than the Parent or any Subsidiary of the Parent)
  shall have commenced (as such term is defined in Rule 14d-2 under the
  Exchange Act), a tender offer or exchange offer to purchase any Company
  Common Stock or securities convertible into such shares such that, upon
  consummation of such offer, such Person would own or control 50% or more of
  the then outstanding Company Common Stock and the Board of Directors of the
  Company, within ten (10) Business Days after such tender or exchange offer
  shall have been so commenced, fails to recommend against acceptance of such
  tender or exchange offer by its stockholders;
 
    (ii) The Company or PL shall have authorized, recommended, proposed or
  publicly announced an intention to authorize, recommend or propose, or
  entered into, an agreement with any Person (other than the Parent or any
  Subsidiary of the Parent) to (A) effect a merger, consolidation or similar
  transaction involving the Company or PL, (B) sell, lease or otherwise
  dispose of assets of the Company or PL representing 10% or more of the
  consolidated assets of the Company and PL, (C) issue, sell or otherwise
  dispose of (including by way of merger, consolidation, share exchange or
  any similar transaction) securities (or options, rights or warrants to
  purchase), or securities convertible into, such securities) representing
  10% or more of the voting power of the Company, or (D) grant to such Person
  a license of any intellectual property of the Company other than licenses
  in the ordinary course of business relating to the sale of the Company's
  products;
 
    (iii) Any Person (other than the Parent or any Subsidiary of the Parent)
  shall have acquired beneficial ownership (as such term is defined in Rule
  13d-3 under the Exchange Act) or the right to acquire beneficial ownership
  of, or any "group" (as such term is defined under the Exchange Act) shall
  have been formed which beneficially owns or has the right to acquire
  beneficial ownership of, 25% or more of the then outstanding Company Common
  Stock; or
 
                                     A-34
<PAGE>
 
    (iv) The Company's Board of Directors shall have withdrawn or modified in
  a manner adverse to the Parent the recommendation of the Company's Board of
  Directors that the stockholders approve this Agreement and the Merger (it
  being understood and agreed that any communication by the Company or its
  Board of Directors to the stockholders of the Company that the Company's
  Board of Directors had determined not to withdraw or modify such
  recommendation, in whole or in part, because such action would or might
  give rise to a right on the part of the Parent to terminate this Agreement
  and/or obligate the Company to pay the Termination Fee shall nevertheless
  be deemed an adverse modification of such recommendation for purposes of
  this Section 6.1(c)(iv)).
 
  (d) Superior Proposal. By the Company, in connection with entering into an
agreement for a Superior Proposal as expressly permitted by Section 4.1(f),
provided that: (i) the Company has complied with all provisions thereof; (ii)
immediately following such termination the Company executes a definitive
agreement to consummate the Superior Proposal; (iii) prior to any such
termination: (x) the Company shall have provided the Parent with four (4)
days' notice of the terms of the Superior Proposal, and (y) the Company shall
have, and shall have caused the Company Representatives to have, negotiated in
good faith, during such four (4) day period, with respect to any proposal made
by the Parent to adjust the terms and conditions of this Agreement as would
enable the Company, consistent with the fiduciary duties of its Board of
Directors, to proceed with the Merger; and (iv) the Company shall have paid
the Parent the Termination Fee.
 
  (e) By either the Parent or the Company if the Merger shall have not been
consummated on or before November 30, 1998 (the "Termination Date"); provided,
however, that the right to terminate this Agreement under this Section 6.1(e)
shall not be available to any party whose failure to fulfill any obligation
under this Agreement has been the cause of, or resulted in, the failure of the
Effective Time to occur on or before Termination Date.
 
  (f) By the Company ten (10) days after the Stockholders Meeting (including
any adjournment thereof) if at the Stockholders Meeting (including any
adjournment thereof) this Agreement and the Merger shall fail to be approved
and adopted by the affirmative vote of the stockholders of the Company as
required under DGCL.
 
  6.2 Termination of Agreement. Subject to the provisions of Section 6.1(e),
the Merger shall be abandoned and this Agreement shall be automatically
terminated on the Termination Date, or such later date as the Board of
Directors of the Parent, the Merger Subsidiary and the Company may mutually
agree pursuant to resolutions adopted by such Boards.
 
  6.3 Effect of Abandonment or Termination. In the event of termination of
this Agreement by either the Parent or the Company, as provided in Section
6.1, Section 6.2 or in Article 5 of this Agreement, this Agreement shall
forthwith become void and of no further force and effect; provided, however,
that: (a) each of the parties shall be entitled to pursue, exercise and
enforce any and all remedies, rights, powers and privileges available to it at
law or in equity for any breach of this Agreement ("Remedies") which occurred
prior to such termination, which, in the case of the Parent, shall be in
addition to its rights under Section 7.1(b); and (b) Sections 3.1(d), 3.1(o)
and 4.1(a) (insofar as such representations and warranties relate to the
Company Option Agreement and the transactions contemplated thereby), Section
4.1(c), Section 4.2(c), Article 7, Section 8.7, Section 8.9, Section 8.10,
Section 8.11 and Section 8.12 shall survive the termination of this Agreement.
 
7. EXPENSES.
 
  7.1 Costs and Expenses.
 
  (a) Payment of Own Expenses. Except as set forth in Section 7.1(b), whether
or not the Merger is consummated, all costs and expenses incurred in
connection with this Agreement and the transactions contemplated hereby shall
be paid by the party incurring such expense, and in connection therewith, each
of the Parent and the Company shall pay, with its own funds, any and all
property or transfer taxes imposed on such party, except that expenses
incurred in connection with printing and mailing the Prospectus/Proxy
Statement to
 
                                     A-35
<PAGE>
 
the holders of Company Common Stock shall be shared equally by the Parent and
the Company and that the expenses incurred by either the Parent or the Company
pursuant to the Company Option Agreement shall be borne as provided therein.
 
  (b) Termination Fee.
 
    (i) If this Agreement is terminated by the Parent pursuant to Section
  6.1(c)(i) or (iii) or, at the time of the termination of this Agreement,
  the Parent had the right to so terminate, and within 12 months after such
  termination the Company executes a definitive agreement to implement a
  Takeover Proposal (whether or not such Takeover Proposal triggered the
  termination right), then the Company shall pay to the Parent Termination
  Fee in an amount equal to $9 million (the "Termination Fee") within two (2)
  Business Days after the execution of such definitive agreement.
 
    (ii) If this Agreement is terminated by the Parent pursuant to Section
  6.1(c)(ii), or, at the time of the termination of this Agreement, the
  Parent had the right to so terminate, then within two (2) Business Days
  after any of the conditions set forth in Section 6.1(c)(ii) are satisfied,
  the Company shall pay to the Parent the Termination Fee.
 
    (iii) If this Agreement is terminated by the Parent pursuant to Section
  6.1(c)(iv), or at the time of the termination of this Agreement, the Parent
  had the right to so terminate, then within two (2) Business Days after such
  termination, the Company shall pay to the Parent the Termination Fee;
  provided, however, that the Company shall not be obligated to pay the
  Parent the Termination Fee pursuant to this Section 7.1(b)(iii) in the
  event that (y) the actions of Board of Directors of the Company that gave
  rise to the Parent's right to terminate under Section 6.1(c)(iv) were the
  result of the occurrence of an event which had, or was reasonably expected
  to have, a Material Adverse Effect on the Parent or had caused, or was
  reasonably expected to cause, the Parent to suffer a Material Adverse
  Change and (z) the Board of Directors of the Company made a good faith
  determination, based upon the advice of its legal counsel as to legal
  matters, that such actions were necessary in order to comply with its
  fiduciary duties to the Company stockholders under applicable law.
 
    (iv) If this Agreement is terminated by the Company pursuant to Section
  6.1(d), then the Company shall pay to the Parent the Termination Fee prior
  to such termination as provided in Section 6.1(d).
 
    (v) If following a Takeover Proposal, this Agreement is terminated by
  either the Parent or the Company pursuant to Section 6.1(e), and within 12
  months after such termination the Company executes with a third party a
  definitive agreement to implement a Takeover Proposal, then the Company
  shall pay to the Parent the Termination Fee within two (2) Business Days
  after the execution of such agreement.
 
    (vi) If following a Takeover Proposal, this Agreement is terminated by
  the Company pursuant to Section 6.1(f), and within 12 months after such
  termination the Company executes with a third party a definitive agreement
  to implement a Takeover Proposal, then the Company shall pay to the Parent
  the Termination Fee within two (2) Business Days after the execution of
  such agreement.
 
    (vii) For purposes of this Section 7.1(b), whenever the Company shall be
  obligated to pay the Termination Fee, the Company shall pay the Parent by
  wire transfer to an account specified by the Parent.
 
8. MISCELLANEOUS.
 
  8.1 Certification of the Company's Shareholder Votes, Etc. Prior to the
Effective Date, the Company shall deliver to the Parent and the Merger
Subsidiary a certificate of its Secretary or Assistant Secretary setting forth
(a) the number of shares of its capital stock outstanding and entitled to vote
on the adoption of this Agreement, (b) the number of votes pertaining to such
shares of capital stock, and (c) the number of votes cast in favor of and
against the approval of this Agreement.
 
  8.2 Certification of the Parent's Stockholder Votes, Etc. Prior to the
Effective Date, the Parent shall deliver to the Company and the Merger
Subsidiary a certificate of its Secretary or Assistant Secretary setting forth
that the Parent, in its capacity as sole stockholder of the Merger Subsidiary,
has adopted this Agreement and approved the Merger in accordance with the
DGCL.
 
                                     A-36
<PAGE>
 
  8.3 Termination of Covenants, Representations and Warranties. The respective
covenants, representations and warranties of the parties hereto contained in
Articles 3 and 4 hereof and in the Schedules shall expire and be terminated
and extinguished at the Effective Time, and none of the parties hereto shall
thereafter be under any liability whatsoever with respect to such covenants,
representations and warranties. This Section 8.3 shall have no effect upon any
other obligations hereunder of any of the parties hereto, whether to be
performed before or after the effectiveness of the Merger.
 
  8.4 Certain Tax Matters.
 
  (a) The Parent and the Merger Subsidiary hereby jointly and severally
represent, warrant and covenant to the Company and the Surviving Corporation
as follows:
 
    (i) The fair market value of Parent Common Stock and other consideration
  received by each Company stockholder will be approximately equal to the
  fair market value of Company Common Stock surrendered in the exchange;
 
    (ii) Following the Merger, the Surviving Corporation will hold at least
  90 percent of the fair market value of the Company's net assets and at
  least 70 percent of the fair market value of the Company's gross assets and
  at least 90 percent of the fair market value of the Merger Subsidiary's net
  assets and at least 70 percent of the fair market value of the Merger
  Subsidiary's gross assets held immediately prior to the Merger. For
  purposes of the preceding sentence, amounts paid by the Company or the
  Merger Subsidiary to stockholders who receive cash or other property,
  amounts used by the Company or the Merger Subsidiary to pay reorganization
  expenses and all redemptions and distributions (except for regular, normal
  dividends) made by the Company will be included as assets of the Company or
  the Merger Subsidiary, respectively, immediately prior to the Merger;
 
    (iii) Prior to the Merger, the Parent will be in control of the Merger
  Subsidiary within the meaning of Section 368(c) of the Code;
 
    (iv) The Surviving Corporation has no plan or intention to issue
  additional shares of its stock that would result in the Parent's losing
  control of the Surviving Corporation within the meaning of Section
  368(c)(1) of the Code;
 
    (v) The Parent has no plan or intention to reacquire any of the shares of
  Parent Common Stock to be issued in the Merger, nor does the Parent have
  any knowledge of a plan or intention on the part of a "related party" to
  the Parent (as such term is defined in the regulations under Section 368 of
  the Code) to acquire any of the shares of Parent Common Stock to be issued
  in the Merger;
 
    (vi) The Parent has no plan or intention to liquidate the Surviving
  Corporation, to merge the Surviving Corporation with or into another
  corporation, to sell or otherwise dispose of the stock of the Surviving
  Corporation, except for transfers of stock to corporations controlled by
  the Parent, or to cause the Surviving Corporation to sell or otherwise
  dispose of any of its assets or of any of the assets acquired from the
  Merger Subsidiary, except for dispositions made in the ordinary course of
  business or transfers of assets to a corporation controlled by the
  Surviving Corporation;
 
    (vii) The Merger Subsidiary will have no liabilities assumed by the
  Surviving Corporation, and it will not transfer to the Surviving
  Corporation any assets subject to liabilities, in the Merger;
 
    (viii) Following the Merger, the Surviving Corporation will continue the
  historic business of the Company or use a significant portion of its
  historic business assets in a business;
 
    (ix) The Parent, the Merger Subsidiary, the Company and the shareholders
  of the Company will pay their respective expenses, if any, incurred in
  connection with the Merger;
 
    (x) There is no intercorporate indebtedness existing between the Parent
  and the Company or between the Merger Subsidiary and the Company that was
  issued, acquired or will be settled at a discount;
 
                                     A-37
<PAGE>
 
    (xi) The Parent does not own, nor has it owned during the past five (5)
  years, any shares of the stock of the Company;
 
    (xii) No two parties to the Merger are investment companies as defined in
  Sections 368(a)(2)(F)(iii) and (iv) of the Code; and
 
    (xiii) None of the compensation to be received by any shareholder-
  employees of the Company under any employment agreement will be separate
  consideration for, or allocable to, any of their shares of Company Common
  Stock; none of the shares of Parent Common Stock received by any
  shareholder-employees will be separate consideration for, or allocable to,
  any employment agreement; and the compensation paid to any shareholder-
  employees under any employment agreement will be for services actually
  rendered and will be commensurate with amounts paid to third parties
  bargaining at arm's length for similar services.
 
  (b) The Company and PL hereby jointly and severally represent, warrant and
covenant to the Parent and the Merger Subsidiary as follows:
 
    (i) The fair market value of Parent Common Stock and other consideration
  received by each Company stockholder will be approximately equal to the
  fair market value of Company Common Stock surrendered in the exchange;
 
    (ii) Following the Merger, the Surviving Corporation will hold at least
  90 percent of the fair market value of the Company's net assets and at
  least 70 percent of the fair market value of the Company's gross assets and
  at least 90 percent of the fair market value of Merger Subsidiary's net
  assets and at least 70 percent of the fair market value of Merger
  Subsidiary's gross assets held immediately prior to the Merger. For
  purposes of the preceding sentence, amounts paid by the Company or the
  Merger Subsidiary to stockholders who receive cash or other property,
  amounts used by the Company or the Merger Subsidiary to pay reorganization
  expenses and all redemptions and distributions (except for regular, normal
  dividends) made by the Company will be included as assets of the Company or
  the Merger Subsidiary, respectively, immediately prior to the Merger;
 
    (iii) Prior to the Merger, neither the Company nor PL will take any
  action which would disqualify the Merger for treatment as a tax-free
  transaction under the Code;
 
    (iv) Neither the Company nor PL has any knowledge of a plan or intention
  on the part of the holders of Company Common Stock to sell or transfer to
  the Parent or to a "related party" to the Parent (as such term is defined
  in the regulations under Section 368 of the Code) any of the shares of
  Parent Common Stock to be received by such holders in the Merger;
 
    (v) The Parent, the Merger Subsidiary, the Company and the shareholders
  of the Company will pay their respective expenses, if any, incurred in
  connection with the Merger;
 
    (vi) There is no intercorporate indebtedness existing between the Parent
  and the Company or between the Merger Subsidiary and the Company that was
  issued, acquired or will be settled at a discount;
 
    (vii) At the time of the Merger, the Company will not have outstanding
  any warrants, options, convertible securities or any other type of right
  pursuant to which any person could acquire stock in the Company that, if
  exercised or converted, would affect the Parent's acquisition or retention
  of control of the Company, as defined in Section 368(c) of the Code;
 
    (viii) On the date of the Merger, the fair market value of the assets of
  the Company will exceed the sum of its liabilities, plus the amount of
  liabilities, if any, to which the assets are subject; and
 
    (ix) No two parties to the Merger are investment companies as defined in
  Sections 368(a)(2)(F)(iii) and (iv) of the Code.
 
                                     A-38
<PAGE>
 
  (c) Neither the Parent nor the Surviving Corporation shall have any
liability to the holders of the Company Common Stock with respect to the tax
consequences resulting from the transactions contemplated by this Agreement
except to the extent that: (A) the representations and warranties of the
Parent and the Merger Subsidiary set forth in Section 8.4(a) hereof are not
true and correct on the Effective Date or (B) the covenants of the Parent and
the Merger Subsidiary set forth in Section 8.4(a) are not performed on and
after the Effective Date.
 
  8.5 Execution in Counterparts. For the convenience of the parties, this
Agreement and any amendments, supplements, waivers and modifications may be
executed in one or more counterparts, each of which shall be deemed an
original, but all of which together shall constitute one and the same
document.
 
  8.6 Waivers and Amendments. Prior to the Effective Date, this Agreement may
be amended, modified and supplemented in writing by the parties hereto, and
any failure of any of the parties hereto to comply with any of its
obligations, agreements or conditions as set forth herein may be expressly
waived in writing by the other parties hereto.
 
  8.7 Confidentiality. The Company and the Parent agree that they shall abide
by the terms of the Confidentiality Agreement between them dated March 27,
1998 (as supplemented) (the "Confidentiality Agreement") and the Reciprocal
Confidentiality Agreement between them dated             , 1998 (the
"Reciprocal Confidentiality Agreement"), respectively, and such
confidentiality agreements shall continue in effect notwithstanding the
execution of this Agreement.
 
  8.8 Indemnification; Directors and Officers Insurance. For six (6) years
from and after the Effective Time, the Parent agrees to cause the Surviving
Corporation to, and shall guarantee the obligation of the Surviving
Corporation to, indemnify and hold harmless all past and present officers and
directors of the Company to the same extent such Persons are indemnified as of
the date of this Agreement by the Company and PL pursuant to their Company's
Certificate of Incorporation, Bylaws or agreements in existence on the date
hereof for acts or omissions occurring at or prior to the Effective Time
(including, without limitation, acts or omissions relating to the negotiation,
execution and performance of this Agreement and the Company Option Agreement
and the transactions contemplated hereby and thereby). The Parent shall
provide, or shall cause the Surviving Corporation to provide, for an aggregate
period of not less than six (6) years from the Effective Time, the Company's
current directors and officers an insurance and indemnification policy that
provides coverage for events occurring prior to the Effective Time (the "D&O
Insurance") that is substantially similar (with respect to limits and
deductibles) to the Company's existing policy or, if substantially equivalent
insurance coverage is unavailable, the best available coverage; provided,
however, that the Surviving Corporation shall not be required to pay any
annual premium for D&O Insurance which is greater than 200% of the most recent
annual premiums paid by the Company for D&O Insurance.
 
  8.9 Notices. All notices, requests, demands and other communications
required or permitted hereunder shall be in writing and shall be deemed to
have been duly given upon receipt when delivered by hand against receipt,
telecopied (upon confirmation of receipt thereof) or mailed, certified or
registered mail, return receipt requested, postage prepaid:
 
  To the Company:
 
  Lloyd H. Malchow, President and CEO
  320 Lakeside Drive
  Suite A
  Foster City, California
 
    with a copy to:
 
    Henry Lesser, Esquire
    Heller Ehrman White & McAuliffe
    525 University Avenue
    Palo Alto, California 94301-1800
    Telecopy Number: (650) 324-0638
 
                                     A-39
<PAGE>
 
  To the Parent or the Merger Subsidiary:
 
  Roderick P. Jackson, Senior Vice President
  Chestnut Ridge Road
  P.O. Box 4310
  Morgantown, West Virginia 26505
  Telecopy Number: (304) 599-7284
 
    with a copy to:
 
    John R. Previs, Esquire/JoEllen Lyons, Esquire
    Buchanan Ingersoll Professional Corporation
    One Oxford Centre
    301 Grant Street
    Pittsburgh, Pennsylvania 15219
    Telecopy Number: (412) 562-1041
 
or to such other address as specified in a notice given in like manner.
 
  8.10 Entire Agreement; No Third-Party Beneficiaries; Rights of Ownership.
This Agreement (including the documents and the instruments referred to
herein) (a) constitutes the entire agreement and supersedes all prior
agreements and understandings, both written and oral, among the parties with
respect to the subject matter hereof and thereof, and (b) is not intended to
confer upon any Person other than the parties hereto or thereto and the
indemnitees under Section 8.8 any rights or remedies hereunder or thereunder.
 
  8.11 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware without regard to any
applicable conflicts of laws provisions.
 
  8.12 Partial Invalidity. Wherever possible, each provision hereof shall be
interpreted in such a manner as to be effective and valid under applicable
law, but in case any one or more of the provisions contained herein shall, for
any reason, be held to be invalid, illegal or unenforceable in any respect, it
shall, to the extent possible, be construed in such manner as to be legal,
valid and enforceable but so as to most nearly retain the intent of the
parties. The invalidity, illegality or unenforceability of any provision of
this Agreement shall not affect any other provisions of this Agreement and
such provisions shall remain in full force and effect.
 
  8.13 Publicity. Except as otherwise required by law or the rules of the SEC,
the NYSE (with respect to the Parent) or the NASD (with respect to the
Company), for so long as this Agreement is in effect, neither the Parent nor
the Company shall, nor shall either permit any of its respective subsidiaries
to, issue or cause the publication of any press release or other public
announcement with respect to the transactions contemplated by this Agreement
without the consent of the other party as to the nature, contents and
dissemination thereof, in which case the party proposing such publication
shall deliver a copy of such release or announcement to the other party along
with its request for consent, which consent shall not be unreasonably
withheld.
 
  8.14 Defined Terms. All capitalized terms used herein without definition
shall have the meanings given them at the places in this Agreement indicated
in Appendix A.
 
  8.15 Benefit Plans.
 
  (a) The eligibility of each employee of the Company (and his or her spouse
and dependents) to participate in the welfare benefit plans of the Parent or
the Surviving Corporation after the Effective Time and the coverage of each
such participant in each such plan shall be determined without regard to any
preexisting condition, waiting period, actively-at-work or similar exclusion
or condition, except for any such condition or exclusion to which the employee
is subject under the applicable welfare plan of the Company as of the
Effective Time. Participants in such plans of the Company shall receive
credit, under the welfare benefit plans of the Parent or the Surviving
Corporation in which they participate after the Effective Time, toward annual
co-insurance and
 
                                     A-40
<PAGE>
 
deductible limitations and requirements for any payments made for eligible
charges incurred by them during the calendar year in which the Effective Time
occurs under the applicable welfare plans of the Company. In addition,
employees of the Surviving Corporation shall receive credit, for purposes of
determining vesting and eligibility under its retirement, welfare, vacation
and similar plans or policies, for service with the Company prior to the
Effective Time.
 
  (b) The Persons employed by the Company immediately prior to the Effective
Time shall be eligible to participate in the employment severance programs
provided by the Parent or the Surviving Corporation from time to time, and
such persons shall receive credit under such programs for services with the
Company prior to the Effective Date.
 
  8.16 Enforcement of Agreement. The parties hereto agree that irreparable
damage would occur in the event that any of the provisions of this Agreement
was not performed in accordance with its specific terms or was otherwise
breached. It is accordingly agreed that the parties shall be entitled to an
injunction to prevent breaches of this Agreement and to enforce specifically
the terms and provisions hereof in any Delaware Chancery Court, this being in
addition to any other remedy to which they are entitled at law or equity.
Notwithstanding the foregoing, if jurisdiction does not properly lie in the
Delaware Chancery Court, the parties shall submit to the jurisdiction of the
United States Federal District Court for the District of Delaware. The parties
agree that such courts shall have exclusive jurisdiction to consider any
claims hereunder or relating hereto.
 
  8.17 Waiver of Jury Trial. Each party acknowledges and agrees that any
controversy which may arise under this Agreement is likely to involve
complicated and difficult issues, and therefore each such party hereby
irrevocably and unconditionally waives any right such party may have to a
trial by jury in respect of any litigation directly or indirectly arising out
of or relating to this Agreement, or the transactions contemplated by this
Agreement. Each party certifies and acknowledges that (i) no representative,
agent or attorney of any other party has represented, expressly or otherwise,
that such other party would not, in the event of litigation, seek to enforce
the foregoing waiver, (ii) each party understands and has considered the
implications of this waiver, (iii) each party makes this waiver voluntarily,
and (iv) each party has been induced to enter into this Agreement by, among
other things, the mutual waivers and certifications in this Section 8.17.
 
  8.18 No Presumption Against the Draftsman. Each party having been
represented in the negotiation of this Agreement, and having had ample
opportunity to review the language hereof, there shall be no presumption
against any party on the ground that such party was responsible for preparing
this Agreement or any part thereof.
 
                                     A-41
<PAGE>
 
  IN WITNESS WHEREOF, this Agreement has been executed by each of the
Constituent Corporations and the Parent, all on the date first above written.
 
                                          PENEDERM INCORPORATED
 
          /s/ Michael A. Bates                    /s/ Lloyd H. Malchow
Attest: ________________________________  By: _________________________________
 Name:Michael A. Bates                      Name:Lloyd H. Malchow
 Title: Vice President, Finance and         Title:President and CEO
        Administration, Chief Financial
        Officer
 
                                          MLI ACQUISITION CORP.
 
        /s/ Donald C. Schilling                  /s/ Roderick P. Jackson
Attest: ________________________________  By: _________________________________
 Name:Donald C. Schilling                   Name:Roderick P. Jackson
 Title: Vice President Finance              Title:President
 
                                          MYLAN LABORATORIES INC.
 
        /s/ Donald C. Schilling                  /s/ Roderick P. Jackson
Attest: ________________________________  By: _________________________________
 Name:Donald C. Schilling                   Name:Roderick P. Jackson
 Title: Vice President Finance              Title:Senior Vice President
 
                                      A-42
<PAGE>
 
                                                                      APPENDIX A
 
 
                                  GLOSSARY OF
 
                        DEFINED TERMS/SECTION REFERENCES
 
                                       IN
 
                          AGREEMENT AND PLAN OF MERGER
 
                                  BY AND AMONG
 
                             PENEDERM INCORPORATED
 
                                      AND
 
                             MLI ACQUISITION CORP.
 
                                      AND
 
                            MYLAN LABORATORIES INC.
 
                                      A-43
<PAGE>
 
<TABLE>
<CAPTION>
DEFINED TERM                                                  SECTION REFERENCE
- ------------                                                 -------------------
<S>                                                          <C>
Agreement................................................... Preamble
Amended and Restated Certificate of Incorporation........... Section 1.2
Business Day................................................ Section 2.4
Certificates................................................ Section 2.1(b)(ii)
Closing..................................................... Section 2.4
Code........................................................ Recital 5
Common Stock Investment Agreement........................... Section 3.1(b)(i)
Company..................................................... Preamble
Company Affiliates.......................................... Section 3.1(s)
Company Common Stock........................................ Recital 7
Company Contracts........................................... Section 3.1(m)
Company Employee Stock Purchase Plan........................ Section 2.3(d)
Company Financial Statements................................ Section 3.1(e)
Company 401(k) Plan......................................... Section 3.1(b)(i)
Company Option Agreement.................................... Recital 7
Company Permits............................................. Section 3.1(h)
Company Preferred Stock..................................... Section 3.1(b)(i)
Company Representatives..................................... Section 4.1(f)(i)
Company Rights Plan......................................... Section 3.1(c)
Company SEC Documents....................................... Section 3.1(e)
Company Stock Option Plans.................................. Section 2.3(a)
Company Stock Options....................................... Section 3.1(b)(i)
Company Warrant............................................. Section 2.3(b)
Company Warrant Shares...................................... Section 2.3(b)
Confidentiality Agreement................................... Section 8.7
Constituent Corporations.................................... Preamble
Contract Manufacturer....................................... Section 3.1(k)(iii)
D&O Insurance............................................... Section 8.8
DGCL........................................................ Recital 2
Dillon Read................................................. Section 3.2(n)
Drug Regulatory Agency...................................... Section 3.1(k)(i)
Effective Date.............................................. Section 1.4
Effective Time.............................................. Section 1.4
Employee Benefit Plan....................................... Section 3.1(cc)(i)
Environmental Laws.......................................... Section 3.1(ii)(ii)
ERISA....................................................... Section 3.1(cc)(i)
Exchange Act................................................ Section 3.1(d)
Exchange Agent.............................................. Section 2.1(b)(i)
Exchange Fund............................................... Section 2.1(b)(i)
Exchange Ratio.............................................. Section 2.1(a)
FDA......................................................... Section 3.1(k)(ii)
FDA Act..................................................... Section 3.1(k)(i)
Governmental Entity......................................... Section 3.1(d)
HSR Act..................................................... Section 3.1(d)
Investor.................................................... Section 3.1(b)(i)
IRS......................................................... Section 3.1(i)
knowledge of the Company.................................... Section 3.1(j)
knowledge of the Parent..................................... Section 3.2(i)
material.................................................... Section 3.1(ee)
Material Adverse Change..................................... Section 3.1(a)(i)
</TABLE>
 
                                      A-44
<PAGE>
 
<TABLE>
<CAPTION>
DEFINED TERM                                                  SECTION REFERENCE
- ------------                                                 -------------------
<S>                                                          <C>
Material Adverse Effect..................................... Section 3.1(a)(i)
Merger...................................................... Recital 2
Merger Subsidiary........................................... Preamble
NASD........................................................ Section 3.1(d)
NASDAQ...................................................... Section 3.1(d)
NYSE........................................................ Section 2.1(d)
Parent...................................................... Preamble
Parent Affiliates........................................... Section 3.2(p)
Parent Common Stock......................................... Section 2.1(a)
Parent Financial Statements................................. Section 3.2(e)
Parent Permits.............................................. Section 3.2(h)
Parent Preferred Stock...................................... Section 3.2(b)(i)
Parent SEC Documents........................................ Section 3.2(e)
Parent Stock Option Plans................................... Section 3.2(b)(i)
Parent Stock Options........................................ Section 3.2(b)(i)
PCBs........................................................ Section 3.1(ii)(i)
Person...................................................... Section 4.1(f)(v)
PL.......................................................... Section 3.1(a)(ii)
Prospectus/Proxy Statement.................................. Section 3.1(c)
Reciprocal Confidentiality Agreement........................ Section 8.7
Registration Statement...................................... Section 3.2(c)
Regulated Substance......................................... Section 3.1(ii)(ii)
Remedies.................................................... Section 6.3
Scheduled Closing Date...................................... Section 2.4
SEC......................................................... Section 2.3(c)
Section 414 Affiliate....................................... Section 3.1(cc)(iv)
Securities Act.............................................. Section 3.1(d)
Stockholders Meeting........................................ Section 4.1(m)
Subsidiary.................................................. Section 3.2(a)
Subsidiary Common Stock..................................... Section 2.2
Superior Proposal........................................... Section 4.1(f)(iv)
Surviving Corporation....................................... Recital 2
Takeover Proposal........................................... Section 4.1(f)(iii)
Tax Return.................................................. Section 3.1(i)
Taxes....................................................... Section 3.1(i)
Termination Date............................................ Section 6.1(e)
Termination Fee............................................. Section 7.1(b)(i)
Transaction Agreements...................................... Section 3.1(l)
Unexercised Options......................................... Section 2.3(a)
Voting Agreements........................................... Recital 8
Warrant Holder.............................................. Section 2.3(b)
</TABLE>
 
                                      A-45
<PAGE>
 
 
                                                                      APPENDIX B
 
                  AMENDED AND RESTATED STOCK OPTION AGREEMENT
<PAGE>
 
                  AMENDED AND RESTATED STOCK OPTION AGREEMENT
 
  AMENDED AND RESTATED STOCK OPTION AGREEMENT, dated as of June 24, 1998 (the
"Agreement"), by and between Mylan Laboratories Inc., a Pennsylvania
corporation ("Parent"), and Penederm Incorporated, a Delaware corporation (the
"Company").
 
                                   RECITALS
 
  A. Concurrently with the execution and delivery of this Agreement, the
Company, Parent and MLI Acquisition Corp., a Delaware corporation and wholly
owned subsidiary of Parent ("Subsidiary") are entering into an Agreement and
Plan of Merger, dated as of the date hereof (the "Merger Agreement"),
providing for, among other things, the merger of Subsidiary with and into the
Company (the "Merger"), with the Company as the surviving corporation in the
Merger.
 
  B. As a condition and inducement to Parent's and Subsidiary's willingness to
enter into the Merger Agreement, Parent has requested that the Company agree,
and the Company has agreed, to grant Parent an option to purchase shares of
the Company's common stock on the terms and subject to the conditions set
forth herein.
 
  C. Capitalized terms not otherwise defined herein shall have the meanings
ascribed to them in the Merger Agreement.
 
  D. This Amended and Restated Stock Option Agreement amends and restates in
its entirety the Stock Option Agreement dated June 24, 1998 by and between
Parent and the Company.
 
  NOW, THEREFORE, in consideration of the foregoing and the respective
representations, warranties, covenants and agreements set forth herein and in
the Merger Agreement and for other good and valuable consideration, the
receipt and adequacy of which are hereby acknowledged, the parties hereto,
intending to be legally bound, agree as follows:
 
  1. Grant of Option. Subject to the terms and conditions set forth herein,
the Company hereby grants to Parent an unconditional, irrevocable option (the
"Option") to purchase up to 1,717,878 (as adjusted as set forth herein) fully
paid and nonassessable shares (individually an "Option Share" and collectively
the "Option Shares") of Common Stock, par value $.01 per share of Company
("Company Common Stock"), at a purchase price of $20 (as adjusted as set forth
herein) per Option Share (the "Purchase Price") payable in cash; provided,
however, that in no event shall the number of Option Shares for which the
Option is exercisable together with the number of shares owned by Parent, if
any, exceed 19.9% of the Company's issued and outstanding shares of Company
Common Stock without giving effect to any shares subject or issued pursuant to
the Option. The number of Option Shares that may be received upon exercise of
the Option and the Purchase Price are each subject to adjustment as set forth
in Section 9 hereof and as otherwise provided herein.
 
  2. Exercise of Option. (a) Subject to any applicable requirements of law,
Parent may exercise the Option, in whole or in part, at any time or from time
to time after the occurrence of any one of the following events (a "Purchase
Event"): (A) any of the following occurs prior to the earlier of the Effective
Time or the termination of the Merger Agreement in accordance with its terms:
(i) any Person (other than Parent or any of its subsidiaries) shall have
commenced (as such term is defined in Rule 14d-2 under the Securities Exchange
Act of 1934 (the "Exchange Act")) a tender offer, or shall have filed a
registration statement under the Securities Act of 1933 (the "Securities Act")
with respect to an exchange offer, to purchase any shares of Company Common
Stock such that, upon consummation of such offer, such person or a "group" (as
such term is defined under the Exchange Act) of which such person is a member
shall have acquired beneficial ownership (as such term is defined in Rule 13d-
3 of the Exchange Act), or the right to acquire beneficial ownership, of 25%
or more of the then outstanding Company Common Stock; (ii) the Company or any
of its subsidiaries shall have authorized, recommended, proposed or publicly
announced an intention to authorize, recommend or propose, or entered into, an
agreement, including without limitation, an agreement in principle, with any
person (other than
 
                                      B-1
<PAGE>
 
Parent or any of its subsidiaries) to effect or provide for the consummation
of a Takeover Proposal; (iii) any Person (other than Parent or any of its
subsidiaries) shall solicit proxies or consents or announce a bona fide
intention to solicit proxies or consents from the Company's stockholders (y)
in opposition to the Merger, the Merger Agreement or any related transactions
or (z) relating to a Takeover Proposal (other than solicitations of
stockholders seeking approval of the Merger, the Merger Agreement or any
related transactions), and the stockholders of the Company shall have failed
to approve the Merger; or (iv) any Person (other than Parent or any of its
subsidiaries) shall have acquired beneficial ownership (as such term is
defined in Rule 13d-3 under the Exchange Act) or the right to acquire
beneficial ownership of, or any "group" (as such term is defined under the
Exchange Act) shall have been formed which beneficially owns or has the right
to acquire beneficial ownership of, shares of Company Common Stock (other than
trust account shares) aggregating 25% or more of the then outstanding Company
Common Stock; or (B) the termination of the Merger Agreement under
circumstances entitling Parent to payment of the Termination Fee within 2
Business Days of such termination under any of the provisions of Section
7.1(b) of the Merger Agreement; or (C) within twelve (12) months after the
Merger Agreement is terminated pursuant to Section 6.1(e) or (f) thereof, the
Company executes a definitive agreement to implement a Takeover Proposal with
a third party who had submitted a Takeover Proposal prior to the Termination
Date (a "Proponent"); or (D) within six (6) months after the Merger Agreement
is terminated pursuant to Section 6.1(e) or (f) thereof, the Company executes
a definitive agreement to implement a Takeover Proposal with a third party
other than a Proponent provided that the Company received a Takeover Proposal
prior to the Termination Date.
 
  (b) Except as provided in the last sentence of this Section 2(b) the Option
shall terminate and be of no further force and effect upon the earliest to
occur (the "Expiration Date") of (A) the Effective Time, (B) 12 months after
the first occurrence of a Purchase Event, of the type described in subclauses
(A)(i) through (iv) of Section 2(a) hereof or subclause (B) of Section 2(a)
hereof and (C) six months after the first occurrence of a Purchase Event of
the type described in subclauses (C) or (D) of Section 2(a) hereof.
Notwithstanding the termination of the Option, Parent shall be entitled to
purchase the Option Shares if it has exercised the Option in accordance with
the terms hereof prior to the termination of the Option and the termination of
the Option shall not affect any rights hereunder which by their terms do not
terminate or expire prior to or as of such termination.
 
  (c) In the event that Parent wishes to exercise the Option, it shall send to
the Company a written notice (the date of which being herein referred to as
the "Notice Date") specifying (i) the total number of Option Shares it wishes
to purchase pursuant to such exercise and (ii) a date not earlier than three
business days nor later than 20 business days from the Notice Date for the
closing of such purchase (the "Option Closing Date"); provided, however, that
(i) if the closing of the purchase and sale pursuant to the Option (the
"Option Closing") cannot be consummated by reason of any applicable judgment,
decree, order, law or regulation, the period of time that otherwise would run
pursuant to this sentence shall run instead from the date on which such
restriction on consummation has expired or been terminated and (ii) without
limiting the foregoing, if prior notification to or approval of any regulatory
authority is required in connection with such purchase, Parent and the Company
shall promptly file the required notice or application for approval and shall
cooperate in the expeditious filing of such notice or application, and the
period of time that otherwise would run pursuant to this sentence shall run
instead from the date on which, as the case may be, (A) any required
notification period has expired or been terminated or (B) any required
approval has been obtained, and in either event, any requisite waiting period
has expired or been terminated. Except as otherwise agreed in writing by the
parties, the place of the Option Closing shall be at the offices of Buchanan
Ingersoll Professional Corporation, One Oxford Centre, 301 Grant Street, 20th
Floor, Pittsburgh, PA 15219-1410, and the time of the Option Closing shall be
10:00 a.m. (Eastern Time) on the Option Closing Date.
 
  3. Payment and Delivery of Certificates. (a) At the Option Closing, Parent
shall deliver to the Company the Purchase Price for the Option Shares so
designated and being purchased in immediately available funds by wire transfer
to a bank account designated in writing by the Company or by certified check
or bank check in an amount equal to the Purchase Price multiplied by the
number of Option Shares being purchased. At any Option Closing, Parent shall
also deliver a letter, in form and substance reasonable acceptable to the
Company, agreeing
 
                                      B-2
<PAGE>
 
that Parent will not offer to sell or otherwise dispose of such Option Shares
in violation of applicable law or the provisions of this Agreement.
 
  (b) At any Option Closing, simultaneously with the delivery of the Purchase
Price as provided in Section 3(a), the Company shall deliver to Parent (i) a
certificate or certificates representing the Option Shares to be purchased at
the Option Closing, which Option Shares shall be free and clear of all liens,
claims, charges and encumbrances of any kind whatsoever and (ii) if the Option
should be exercised in part only, a new Option evidencing the rights of the
Parent to purchase the balance of the Option Shares purchasable hereunder in
the form of a Stock Option Agreement identical to this Agreement save only the
number of Option Shares subject thereto. If at the time of issuance of the
Option Shares pursuant to the exercise of the Option hereunder, the Company
shall not have redeemed any rights issued under the Company Shareholders
Rights Plan dated November 20, 1996 (the "Company Rights Plan"), or shall have
issued any similar rights, then each Option Share issued pursuant to such
exercise shall also represent a corresponding right or security or new rights
with terms substantially the same as and at least as favorable to Parent as
are provided under the Company Rights Plan or any similar agreement then in
effect.
 
  (c) Certificates for the Option Shares delivered at the Option Closing shall
have typed or printed thereon a restrictive legend which shall read
substantially as follows:
 
  "THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
  UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY BE REOFFERED OR SOLD
  ONLY IF SO REGISTERED OR IF AN EXEMPTION FROM SUCH REGISTRATION IS
  AVAILABLE. SUCH SECURITIES ARE ALSO SUBJECT TO ADDITIONAL RESTRICTIONS ON
  TRANSFER AS SET FORTH IN THE STOCK OPTION AGREEMENT, DATED JUNE 24, 1998, A
  COPY OF WHICH MAY BE OBTAINED FROM THE SECRETARY OF PENEDERM INCORPORATED
  CORPORATION AT ITS PRINCIPAL EXECUTIVE OFFICES."
 
  (d) It is understood and agreed that: (i) the reference to the resale
restrictions of the Securities Act of 1933, as amended (the "Securities Act"),
in the above legend shall be removed by delivery of substitute certificate(s)
without such reference if the Parent shall have delivered to the Company a
copy of a letter from the staff of the Securities and Exchange Commission (the
"SEC"), or an opinion of counsel, in form and substance satisfactory to the
Company, to the effect that such legend is not required for purposes of the
Securities Act; (ii) the reference to the provisions of this Agreement in the
above legend shall be removed by delivery of substitute certificate(s) without
such reference if the shares have been sold or transferred in compliance with
the provisions of this Agreement and under circumstances that do not require
the retention of such reference; and (iii) the legend shall be removed in its
entirety as to those Option Shares with respect to which the conditions in the
preceding clauses (i) and (ii) are both satisfied. In addition, such
certificates shall bear any other legend as may be required by law.
 
  4. Representations and Warranties of the Company. The Company hereby
represents and warrants to Parent as follows:
 
    (a) Due Authorization. The Company has all requisite corporate power and
  authority to enter into this Agreement and to consummate the transactions
  contemplated hereby. The execution and delivery of this Agreement by the
  Company and the consummation by the Company of the transactions
  contemplated hereby have been duly authorized by all necessary corporate
  action on the part of the Company. This Agreement has been duly executed
  and delivered by the Company and constitutes a legal, valid and binding
  obligation of the Company, enforceable against the Company in accordance
  with its terms.
 
    (b) Authorized Stock. The Company's representations and warranties in
  Section 3.1(a) of the Merger Agreement are incorporated herein by
  reference. Without limiting the generality or effect of the foregoing, the
  Company has taken all necessary corporate and other action to authorize and
  reserve and, to permit it to issue, and, at all times from the date hereof
  until the obligation to deliver Option Shares upon the exercise of the
  Option terminates, shall have reserved for issuance, upon exercise of the
  Option, shares of Company Common Stock necessary for Parent to exercise the
  Option, and the Company shall take all necessary
 
                                      B-3
<PAGE>
 
  corporate action to authorize and reserve for issuance all additional
  shares of Company Common Stock or other securities which may be issued
  pursuant to Section 9 upon exercise of the Option. The shares of Company
  Common Stock to be issued upon due exercise of the Option, including all
  additional shares of Company Common Stock or other securities which may be
  issuable upon exercise of the Option or any Substitute Option pursuant to
  Section 9, upon issuance pursuant hereto, shall be duly and validly issued,
  fully paid and nonassessable, and shall be delivered free and clear of all
  liens, claims, charges and encumbrances of any kind or nature whatsoever,
  including without limitation any preemptive rights of any stockholder of
  the Company.
 
    (c) No Conflicts. The execution and delivery of this Agreement does not,
  and the consummation of the transactions contemplated by this Agreement and
  compliance with the provisions of this Agreement shall not, conflict with,
  or result in any violation of, or default (with or without notice or lapse
  of time or both) under, or give rise to a right of termination,
  cancellation or acceleration of any obligation or loss of a material
  benefit under, or result in the creation of any Lien upon any of the
  properties or assets of the Company or any of its subsidiaries under, (i)
  the certificate of incorporation or by-laws of the Company or the
  comparable organizational documents of any subsidiary of the Company, (ii)
  any loan or credit agreement, note, bond, mortgage, indenture, lease or
  other agreement, instrument, permit, concession, franchise or license
  applicable to the Company or any subsidiary of the Company or their
  respective properties or assets, or (iii) any judgment, order, decree,
  statute, law, ordinance, rule or regulation applicable to the Company or
  any subsidiary of the Company or their respective properties or assets,
  other than, in the case of clauses (ii) and (iii), any such conflicts,
  violations, defaults, rights, losses or Liens that individually or in the
  aggregate would not (x) have a Material Adverse Effect on the Company, (y)
  impair the ability of the Company to perform its obligations under this
  Agreement or the Merger Agreement, or (z) prevent or materially delay the
  consummation of any of the transactions contemplated by this Agreement.
 
    (d) State Takeover Statutes. Neither Section 203 of the Delaware General
  Corporation Act, nor any similar provision contained in the charter or by-
  laws of the Company, is applicable to the acquisition of Option Shares
  pursuant to this Agreement.
 
  5. Representations and Warranties of Parent. Parent hereby represents and
warrants to the Company that:
 
    (a) Due Authorization. Parent has all requisite corporate power and
  authority to enter into this Agreement and to consummate the transactions
  contemplated hereby. The execution and delivery of this Agreement by Parent
  and the consummation by Parent of the transactions contemplated hereby have
  been duly authorized by all necessary corporate action on the part of
  Parent. This Agreement has been duly executed and delivered by Parent and
  constitutes a legal, valid and binding obligation of Parent, enforceable
  against Parent in accordance with its terms.
 
    (b) No Conflicts. The execution and delivery of this Agreement does not,
  and the consummation of the transactions contemplated by this Agreement and
  compliance with the provisions of this Agreement hereby shall not, conflict
  with or result in any violation of, or default (with or without notice or
  lapse of time or both) under, or give rise to a right of termination,
  cancellation or acceleration of any obligation or loss of a material
  benefit under, or result in the creation of any Lien upon any of the
  properties or assets of Parent under, (i) the certificate of incorporation
  or by-laws of Parent or the comparable organizational documents of Parent,
  (ii) any loan or credit agreement, note, bond, mortgage, indenture, lease
  or other agreement, instrument, permit, concession, franchise or license
  applicable to Parent or its properties or assets, or (iii) any judgment,
  order, decree, statute, law, ordinance, rule or regulation applicable to
  Parent or its properties or assets, other than, in the case of clauses (ii)
  and (iii), any such conflicts, violations, defaults, rights, losses or
  Liens that individually or in the aggregate would not (x) have a material
  adverse effect on Parent, (y) impair the ability of Parent to perform its
  obligations under this Agreement or the Merger Agreement, or (z) prevent or
  materially delay the consummation of any of the transactions contemplated
  by this Agreement.
 
                                      B-4
<PAGE>
 
    (c) Purchase Not for Distribution. Any Option Shares or other securities
  acquired by Parent upon exercise of the Option shall not be transferred or
  otherwise disposed of except in a transaction registered, or exempt from
  registration, under the Securities Act.
 
  6. Repurchase of Option at Request of Parent. (a) At the request of Parent
and in Parent's sole discretion, at any time during the period beginning upon
the first occurrence of a Repurchase Event (as defined in Section 6(c)) and
ending 6 months thereafter, the Company shall repurchase from Parent the
Option (unless the Option shall have expired or been terminated) and all
shares of Common Stock purchased by Parent upon exercise of the Option that
are beneficially owned by Parent on the date upon which Parent requests that
the Company repurchase the Option or Option Shares under this Section 6(a)
(the "Request Date"). Such repurchase shall be at an aggregate price (the "Put
Price") equal to the sum of:
 
    (x) the aggregate Purchase Price paid by Parent for all Option Shares
  previously purchased upon exercise of the Option that are beneficially
  owned by Parent on the Request Date;
 
    (y) the excess, if any, of the average of the last sales price for
  Company Common Stock for the ten trading days ending on the day immediately
  preceding the Put Closing Date (the "Market Price") over the Option Price
  paid by Parent for each share of Company Common Stock with respect to which
  the Option has been exercised that are beneficially owned by Parent on the
  Request Date, multiplied by the number of such shares; and
 
    (z) the excess, if any, of the Market Price of Company Common Stock at
  the Put Closing Date over the Option Price (determined as if the Put
  Closing Date were the Option Closing Date) multiplied by the number of
  Option Shares with respect to which the Option has not been exercised;
  provided that, in the case of Option Shares with respect to which the
  Option has been exercised but the Option Closing Date has not occurred, the
  Option Closing Date shall be suspended and the Option shall be treated, for
  purposes of this clause (z), as if it had not been exercised.
 
  (b) If Parent exercises its rights under this Section 6, the Company shall,
within 10 business days after the Request Date (the "Put Closing Date"), pay
the Put Price to Parent in immediately available funds, by wire transfer to a
bank account designated by Parent, Parent shall, against receipt of the
payment therefore, surrender to the Company the Option and the certificates
evidencing Option Shares previously purchased upon exercise of the Option that
are beneficially owned by Parent on the Request Date; and Parent shall be
deemed to have represented and warranted that it has sole ownership of such
Option Shares, free and clear of all liens, claims, charges, and encumbrances
of any kind. Notwithstanding the foregoing, if the Company is prohibited from
paying all or any portion of the Put Price by reason of any applicable
judgment, decree, order, law, or regulation, the Company shall immediately pay
that portion of the Put Price that it is not prohibited from paying, shall
from time to time thereafter immediately pay such further portion of the Put
Price that it is not then prohibited from paying, and, in all cases, shall pay
the balance of the Put Price within 10 business days after such prohibition
has expired or been terminated. Upon receipt of a partial payment of the Put
Price, Parent shall surrender a portion of the Option and/or Option Shares, as
selected by Parent, corresponding (as closely as practicable) to the portion
of the Put Price received by Parent.
 
  (c) As used herein, a "Repurchase Event" means any of the following: (i) a
termination of the Merger Agreement by the Board of Directors of the Company
under Section 6.1(d) of the Merger Agreement; (ii) an occurrence of both (A) a
Purchase Event of the type described in subclauses (A), or (C) of Section 2(a)
hereof other than a termination of the Merger Agreement referred to in clause
(i) of this sentence and (B) consummation of a Takeover Proposal within twelve
(12) months after termination of the Merger Agreement; (or) (iii) an
occurrence of both (A) a Purchase Event of the type described in subclause (D)
of Section 2(a) hereof and (B) consummation of a Takeover Proposal within six
(6) months after the termination of the Merger Agreement. A Repurchase Event
referred to in clause (ii) or (iii) of the preceding sentence will occur when
the last of the events referred to in clauses (ii) (A) and (ii) (B) occurs.
 
  7. Registration Rights. Parent may, by written notice (the "Registration
Notice") request the Company to register under the Securities Act all or any
part of the capital stock of the Company acquired under this Agreement and
beneficially owned by Parent (the "Registrable Securities"). The Company
(and/or any Person
 
                                      B-5
<PAGE>
 
designated by the Company) shall thereupon have the option exercisable by
written notice delivered to Parent within 10 business days after the receipt
of the Registration Notice, irrevocably to agree to purchase all or any part
of the Registrable Securities for cash at a price equal to the product of (i)
the number of Registrable Securities and (ii) the fair market value of such
shares. Any such purchase of Registrable Securities by the Company hereunder
shall take place at a closing to be held at the principal executive offices of
the Company or its counsel at any reasonable date and time designated by the
Company and/or such designee in such notice within 20 business days after
delivery of such notice. Any payment of the shares to be purchased shall be
made by delivery at the time of such closing of the purchase price for the
Registrable Securities in immediately available funds. For purposes of his
Agreement the term Registrable Securities shall not include shares of capital
stock acquired under this Agreement that may be sold pursuant to Rule 144(k)
of the Securities Act.
 
  If the Company does no elect to exercise its option pursuant to this Section
7 with respect to all Registrable Securities, it shall use its best efforts to
effect, as promptly as practicable, the registration under the Securities Act
of the unpurchased Registrable Securities; provided, however, that (i) Parent
shall be entitled to no more than an aggregate of two effective registration
statements hereunder and (ii) the Company will not be required to file any
such registration statement during any period of time (not to exceed 40 days
after such request in the case of clause (A) below or 90 days in the case of
clauses (B) and (C) below) and (A) the Company is in possession of material
non-public information which it reasonably believes would be detrimental to be
disclosed at such time and, in the written opinion of counsel to such Company,
such information would have to be disclosed if a registration statement were
filed at that time; (B) such Company is required under the Securities Act to
include audited financial statements for any period in such registration
statement and such financial statements are not yet available for inclusion in
such registration statement; or (C) such Company determines, in its reasonable
judgment, that such registration would interfere with any financing,
acquisition or other material transaction involving the Company or any of its
affiliates. If consummation of the sale of any Registrable Securities pursuant
to a registration hereunder does not occur within 90 days after the filing
with the Securities and Exchange Commission of the registration statement
becomes effective, the provisions of this Section 7 shall again be applicable
to any proposed registration, provided, however, that neither party shall be
entitled to request more than two registrations pursuant to this Section 7.
The Company shall use its reasonable best efforts to cause any Registrable
Securities registered pursuant to this Section 7 to be qualified for sale
under the securities or Blue Sky laws of such jurisdictions as Parent may
reasonably request and shall continue such registration or qualification in
effect in such jurisdiction; provided, however, that the Company shall not be
required to qualify to do business in, or consent to general service of
process in, any jurisdiction by reason of this provision.
 
  The registration rights set forth in this Section 7 are subject to the
condition that Parent shall provide the Company with such information with
respect to such holder's Registrable Securities, the plans for the
distribution thereof, and such other information with respect to such holder,
as, in the reasonable judgment of counsel for the Company, is necessary to
enable the Company to include in such registration statement all material
facts required to be disclosed with respect to a registration thereunder.
 
  A registration effected under this Section 7 shall be effected at the
Company's expense, except for underwriting discounts and commissions and the
fees and expenses of counsel to Parent, and the Company shall provide to any
underwriter such documentation (including certificates, opinions of counsel
and "comfort" letters from auditors) as are customary in connection with
underwritten public offerings as such underwriters may reasonably require. In
connection with any such registration, the parties agree (i) to indemnify each
other and any underwriters in the customary manner and (ii) to enter into an
underwriting agreement in form and substance customary to transactions of this
type with any underwriters participating in such offering.
 
  8. Listing. If shares of Company Common Stock or any other securities to be
acquired upon exercise of the Option are then listed on the Nasdaq National
Market (or any other national securities exchange or national securities
quotation system), the Company, upon the request of Parent, shall promptly
file an application to list the shares of Company Common Stock or other
securities to be acquired upon exercise of the Option on the Nasdaq National
Market (or such other national securities exchange or national securities
quotation system) and shall use reasonable efforts to obtain approval of such
listing as promptly as practicable.
 
                                      B-6
<PAGE>
 
  9. Adjustment Upon Changes in Capitalization, Etc. (a) In the event of any
change in Company Common Stock by reason of a stock dividend, split-up,
merger, recapitalization, combination, exchange of shares or similar
transaction, the type and number of shares or securities subject to the
Option, and the Purchase Price therefor, shall be adjusted appropriately, and
proper provision shall be made in the agreements governing such transaction,
so that Parent shall receive upon exercise of the Option the number and class
of shares or other securities or property that Parent would have received in
respect of Company Common Stock if the Option had been exercised immediately
prior to such event or the record date therefor, as applicable. Subject to
Section 1, and without limiting the parties' relative rights and obligations
under the Merger Agreement, if any additional shares of Company Common Stock
are issued after the date of this Agreement (other than pursuant to an event
described in the first sentence of this Section 9(a)), the number of shares of
Company Common Stock subject to the Option shall be adjusted so that, after
such issuance, it equals 19.9% of the number of shares of Company Common Stock
then issued and outstanding, without giving effect to any shares subject to or
issued pursuant to the Option.
 
  (b) Without limiting the parties' relative rights and obligations under the
Merger Agreement, in the event that the Company enters into an agreement (i)
to consolidate with or merge into any person, other than Parent or one of its
subsidiaries, and the Company shall not be the continuing or surviving
corporation in such consolidation or merger, (ii) to permit any person, other
than Subsidiary or one of Parent's other subsidiaries, to merge into the
Company and the Company shall be the continuing or surviving corporation, but
in connection with such merger, the shares of Company Common Stock outstanding
immediately prior to the consummation of such merger shall be changed into or
exchanged for stock or other securities of the Company or any other person or
cash or any other property, or the shares of Company Common Stock outstanding
immediately prior to the consummation of such merger shall, after such merger,
represent less than 50% of the outstanding voting securities of the merged
company, or (iii) to sell or otherwise transfer all or substantially all of
its assets to any person, other than Parent or one of its subsidiaries, then,
and in each such case, the agreement governing such transaction shall make
proper provision so that the Option shall, upon the consummation of any such
transaction and upon the terms and conditions set forth herein, be converted
into, or exchanged for, an option with identical terms appropriately adjusted
to acquire the number and class of shares or other securities or property that
Parent would have received in respect of Company Common Stock if the Option
had been exercised immediately prior to such consolidation, merger, sale or
transfer, or the record date therefor, as applicable.
 
  (c) If, prior to the termination of the Option in accordance with Section 2
or the Notice Date, the Company enters into any agreement pursuant to which
all outstanding shares of Company Common Stock are to be purchased for, or
converted into the right to receive in whole or in part (other than in respect
of fractional shares), cash (a "Transaction"), the Company covenants that
proper provision shall be made in such agreement to provide that, if the
Option shall not therefore have been exercised, then upon the consummation of
a Transaction (which in the case of a Transaction involving a tender offer
shall be when shares of Company Common Stock are accepted for payment), Parent
shall receive in exchange for the cancellation of the Option an amount in cash
equal to the Cash Consideration and if proper provision is so made the Option
shall be cancelled. For purposes of this Agreement, the term "Cash
Consideration" means the number of Option Shares multiplied by the difference
between (A) the closing market price per share of Company Common Stock on the
day immediately prior to the consummation of a Transaction and (B) the
Purchase Price.
 
  (d) Whenever the number of Option Shares purchasable upon exercise hereof is
adjusted as provided in this Section 9, the Purchase Price shall be adjusted
by multiplying the Purchase Price by a fraction, the numerator of which shall
be equal to the number of shares of Company Common Stock purchasable prior to
the adjustment and the denominator of which shall be equal to the number of
shares of Company Common Stock purchasable after the adjustment.
 
  10. Exchange Loss or Mutilation. This Agreement (and the Option granted
hereby) are exchangeable, without expense, at the option of the Parent, upon
presentation and surrender of this Agreement at the principal office of the
Company, for other agreements providing for Options of different denominations
entitling the Parent
 
                                      B-7
<PAGE>
 
to purchase, on the same terms and subject to the same conditions as are set
forth herein, in the aggregate the same number of Option Shares hereunder. The
terms "Stock Option Agreement" and "Option" as used herein include any Stock
Option Agreements and related options for which this Agreement (and the Option
granted hereby) may be exchanged. Upon receipt by the Company of evidence
reasonably satisfactory to it of the loss, theft, destruction or mutilation of
this Agreement, and (in the case of loss, theft or destruction) of reasonably
satisfactory indemnification, and upon surrender and cancellation of this
Agreement, if mutilated, the Company shall execute and deliver a new Agreement
of like tenor and date. Any such new Agreement executed and delivered shall
constitute an additional contractual obligation on the part of the Company,
whether or not the Agreement so lost, stolen, destroyed or mutilated shall at
any time be enforceable by anyone.
 
  11. Certain Covenants of the Company. The Company agrees: (i) that it shall
at all times maintain, free from preemptive rights, sufficient authorized but
unissued or treasury shares of Common Stock so that the Option may be
exercised without additional authorization of Common Stock after giving effect
to all other options, warrants, convertible securities and other rights to
purchase Company Common Stock; (ii) that it will not, by charter amendment or
through reorganization, consolidation, merger, dissolution or sale of assets,
or by any other voluntary act, avoid or seek to avoid the observance or
performance of any of the covenants, stipulations or conditions to be observed
or performed hereunder by the Company; (iii) promptly to take all action as
may from time to time be required (including complying with all premerger
notification, reporting and waiting period requirements specified in 15 U.S.C.
Section 18a and regulations promulgated thereunder or to any other
governmental entity is necessary before the Option may be exercised,
cooperating fully with the Parent in preparing such applications or notices
and providing such information to each such governmental entity as they may
require) in order to permit the Parent to exercise the Option and the Company
duly and effectively to issue Option Shares pursuant hereto; and (iv) to take
all action provided herein to protect the rights of the Parent against
dilution.
 
  12. Specific Performance. The Company acknowledges that if the Company fails
to perform any of its obligations under this Agreement immediate and
irreparable harm or injury would be caused to Parent for which money damages
would not be an adequate remedy. In such event, the Company agrees that Parent
shall have the right, in addition to any other rights it may have, to specific
performance of this Agreement.
 
  13. Profit Limitation. (a) Notwithstanding any other provision of this
Agreement, in no event shall Parent's Total Profit (as hereinafter defined)
exceed $24 million (the "Cap") and, if it otherwise would exceed such amount,
Parent, at its sole election, shall either (a) deliver to the Company for
cancellation Shares previously purchased by Parent (valued at the average of
the last sales price for Company Common Stock for the ten trading days ending
on the day immediately preceding such delivery), (b) pay cash to the Company
or (c) undertake any combination thereof, so that Parent's Total Profit shall
not exceed the Cap after taking into account the foregoing actions.
 
  As used herein, the term "Total Profit" shall mean the aggregate amount
(before taxes) of the following: (i) the amount of cash paid or payable by
Parent pursuant to Section 7.1(b) of the Merger Agreement, (ii) (x) the amount
paid or payable by Parent pursuant to the Company's repurchase of Option
Shares pursuant to Section 7 hereof, less (y) Parent's purchase price for such
Option Shares, and (iii) (x) the net cash amounts received by Parent pursuant
to the sale of Option Shares (or any other securities into which such Option
Shares are converted or exchanged) to any unaffiliated party, less (y)
Parent's purchase price for such Option Shares.
 
  14. Miscellaneous.
 
  (a) Expenses. Except as otherwise provided in the Sections 6 and 7, each of
the parties hereto shall bear and pay all costs and expenses incurred by it or
on its behalf in connection with the transactions contemplated hereunder,
including fees and expenses of its own financial consultants, investment
bankers, accountants and counsel.
 
                                      B-8
<PAGE>
 
  (b) Waiver and Amendment. Any provision of this Agreement may be waived at
any time by the party that is entitled to the benefits of such provision, but
such waiver shall only be effective if in writing and signed by the party
entitled to the benefits of such provision. This Agreement may not be amended,
except by an instrument in writing signed on behalf of each of the parties.
The failure of any party to this Agreement to assert any of its rights under
this Agreement or otherwise shall not constitute a waiver of such rights.
 
  (c) Descriptive Headings. The descriptive headings contained herein are for
convenience of reference only and shall not affect in any way the meaning or
interpretation of this Agreement.
 
  (d) Entire Agreement; No Third-Party Beneficiaries. Except as otherwise
provided, in this Agreement, the Merger Agreement (including the documents and
instruments referred to therein), the Confidentiality Agreement by and between
the Company and Parent, dated May 27, 1998, the Supplement to the
Confidentiality Agreement by and between the Company and Parent, dated May 6,
1998 and that certain Reciprocal Confidentiality Agreement by and between the
Company and Parent (i) constitute the entire agreement, and supersede all
prior agreements and understandings, both written and oral, between the
parties with respect to the subject matter of this Agreement, and (ii) not
intended to confer upon any person other than the parties any rights or
remedies. If any term, provision, covenant, or restriction of this Agreement
is held by a court of competent jurisdiction or a federal or state regulatory
agency to be invalid, void, or unenforceable, the other terms, provisions,
covenants, and restrictions of this Agreement shall remain in full force and
effect and shall not be affected, impaired, or invalidated. If for any reason
such court or regulatory agency determines that the Option does not permit
Parent to acquire, or does not require the Company to repurchase, the full
number of Option Shares provided herein (as adjusted pursuant to Section 9),
it is the express intention of the Company to allow Parent to acquire, or to
require the Company to repurchase, such lesser number of shares as may be
permissible without any amendment or modification hereof.
 
  (e) GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware (regardless of the laws that
might otherwise govern under applicable Delaware principles of conflicts of
law). Each of the parties hereto waives any right to trial by jury with
respect to any claim or proceeding related to or arising out of this Agreement
or any of the transactions contemplated hereby. THE GRANTOR AGREES THAT, IN
CONNECTION WITH ANY LEGAL SUIT OR PROCEEDING ARISING WITH RESPECT TO THIS
AGREEMENT, IT SHALL SUBMIT TO THE JURISDICTION OF THE UNITED STATES DISTRICT
COURT FOR THE DISTRICT OF DELAWARE AND AGREES TO VENUE IN SUCH COURTS. THE
GRANTOR HEREBY APPOINTS THE SECRETARY OF THE GRANTOR AS ITS AGENT FOR SERVICE
OF PROCESS FOR PURPOSES OF THE FOREGOING SENTENCE ONLY.
 
  (f) Notices. All notices, requests, claims, demands and other communications
under this Agreement must be in writing and shall be deemed given if delivered
personally, telecopied (which is confirmed) or sent by overnight courier
(providing proof of delivery) to the parties at the following addresses (or at
such other address for a party as shall be specified by like notice):
 
    (i) if to Company, to:
 
     Penederm Incorporated
     320 Lakeside Drive
     Foster City, California 94404
 
     Telecopy No.: (650) 358-0547
 
     Attention: Lloyd H. Malchow
                 President & Chief Executive Officer
 
                                      B-9
<PAGE>
 
     with copies to:
 
     Heller Ehrman White & McAuliffe
     525 University Avenue
     Palo Alto, CA 94301-1300
 
     Telecopy No.: (650) 324-0638
 
     Attention: Henry Lesser; and
 
    (ii) if to Parent, to:
 
     Mylan Laboratories Inc.
     781 Chestnut Ridge Road
     P.O. Box 4310
     Morgantown, WV 26505
 
     Telecopy No.: (304) 599-7284
 
     Attention: Roderick P. Jackson
                 Senior Vice President
 
     with a copy to:
 
     Buchanan Ingersoll Professional Corporation
     One Oxford Centre
     301 Grant Street, 20th Floor
     Pittsburgh, PA 15219-1420
 
     Telecopy No.: (412) 562-1041
 
     Attention: JoEllen Lyons/John R. Previs
 
  (g) Counterparts. This Agreement and any amendments hereto may be executed
in two counterparts, each of which shall be considered one and the same
agreement and shall become effective when both counterparts have been signed
by each of the parties and delivered to the other party, it being understood
that both parties need not sign the same counterparts.
 
  (h) Assignment. Neither this Agreement nor any of the rights, interests or
obligations hereunder or under the Option shall be assigned by any of the
parties hereto (whether by operation of law or otherwise) without the prior
written consent of the other party except that Parent may assign this
Agreement and its rights hereunder to any of its subsidiaries. Subject to the
preceding sentence, this Agreement shall be binding upon, inure to the benefit
of and be enforceable by the parties and their respective successors and
assigns.
 
  (i) Further Assurances. In the event of any exercise of the Option by
Parent, the Company and Parent shall execute and deliver all other documents
and instruments and take all other actions that may be reasonably necessary in
order to consummate the transactions provided for by such exercise.
 
                                     B-10
<PAGE>
 
  In Witness Whereof, the parties hereto have caused this Agreement to be
signed by their respective officers thereunto duly authorized as of the day and
year first written above.
 
                                          PENEDERM INCORPORATED
 
                                                 /s/ Lloyd H. Malchow
                                          By:  ________________________________
                                                    LLOYD H. MALCHOW
                                              PRESIDENT AND CHIEF EXECUTIVE
                                                         OFFICER
 
                                          MYLAN LABORATORIES INC.
 
                                                /s/ Roderick P. Jackson
                                          By:  ________________________________
                                                   RODERICK P. JACKSON
                                                  SENIOR VICE PRESIDENT
<PAGE>
 
 
                                                                      APPENDIX C
 
                               VOTING AGREEMENTS
<PAGE>
 
                               VOTING AGREEMENT
 
  Voting Agreement, dated as of June 24, 1998, between Mylan Laboratories
Inc., a Pennsylvania corporation ("Parent"), and the persons listed on
Schedule A hereto (individually, a "Stockholder" and collectively, the
"Stockholders").
 
  Whereas, Parent and Penederm Incorporated, a Delaware corporation (the
"Company"), propose to enter into an Agreement and Plan of Merger, dated the
date hereof (as the same may be amended or supplemented, the "Merger
Agreement") providing for the merger of MLI Acquisition Corp., a Delaware
corporation and wholly-owned subsidiary of Parent ("Subsidiary"), with the
Company (the "Merger");
 
  Whereas, each Stockholder is the record and beneficial owner of the number
of shares of common stock, par value $.01 per share, of the Company (the
"Company Common Stock") set forth opposite such Stockholder's name on Schedule
A hereto; such securities, as they may be adjusted by stock dividend, stock
split, recapitalization, combination or exchange of shares, merger,
consolidation, reorganization or other change or transaction of or by the
Company, together with securities that may be acquired after the date hereof
by such Stockholder, including Company Common Stock issuable upon the exercise
of options to purchase Company Common Stock (as the same may be adjusted as
aforesaid), being collectively referred to herein as the "Securities"; and
 
  Whereas, as a condition to their willingness to enter into the Merger
Agreement, Parent and Subsidiary have requested that the Stockholders enter
into this Agreement (capitalized terms not otherwise defined herein shall have
the meanings set forth in the Merger Agreement);
 
  Now, Therefore, to induce Parent and Subsidiary to enter into, and in
consideration of them entering into, the Merger Agreement, and in
consideration of the premises and the representations, warranties and
agreements contained herein and intending to be legally bound hereby, the
parties hereby agree as follows:
 
  1. Covenants of the Stockholders. Each Stockholder, severally and not
jointly, agrees as follows:
 
    (a) Each Stockholder shall not, except as contemplated by the terms of
  this Agreement, (i) sell, transfer, pledge, assign or otherwise dispose of,
  or enter into any agreement, option or other arrangement (including any
  profit sharing arrangement) or understanding with respect to the sale,
  transfer, pledge, assignment or other disposition of, the Securities to any
  person other than Parent or Parent's designee, (ii) enter into any voting
  arrangement, whether by proxy, voting agreement, voting trust, power-of-
  attorney or otherwise, with respect to the Securities or (iii) take any
  other action that would in any way restrict, limit or interfere with the
  performance of its obligations hereunder or the transactions contemplated
  hereby; provided, however, that any Stockholder that is an individual may
  transfer all or any part of his or her Securities to any sibling or any
  other member of his or her immediate family, any of his or her lineal
  descendants or any trust for the benefit of any of them, if the recipient
  of the Securities agrees in advance in writing delivered to Parent to be
  bound by this Agreement.
 
    (b) Until the Merger is consummated or the Merger Agreement is
  terminated, the Stockholder shall not, nor shall the Stockholder permit any
  investment banker, financial adviser, attorney, accountant or other
  representative or agent acting on behalf of or at the direction of the
  Stockholder (a "Stockholder Representative") to, directly or indirectly (i)
  solicit, initiate or encourage (including by way of furnishing
  information), or take any other action designed or reasonably likely to
  facilitate, any inquiries or the making of any proposal which constitutes,
  or may reasonably be expected to lead to, any Takeover Proposal (as defined
  in the Merger Agreement) or (ii) participate in any discussions or
  negotiations regarding any Takeover Proposal. Without limiting the
  foregoing, it is understood that any violation of the restrictions set
  forth in the preceding sentence by a Stockholder Representative shall be
  deemed to be a violation of this Section 1(b) by the Stockholder.
 
                                      C-1
<PAGE>
 
    (c) At any meeting of stockholders of the Company called to vote upon the
  Merger and the Merger Agreement or at any adjournment thereof or in any
  other circumstances upon which a vote, consent or other approval (including
  by written consent) with respect to the Merger and the Merger Agreement is
  sought from the stockholders of the Company, each Stockholder shall,
  including by initiating a written consent solicitation if requested by
  Parent, vote (or cause to be voted) such Stockholder's Securities in favor
  of approving the Merger, the adoption of the Merger Agreement and the
  approval of the other transactions contemplated by the Merger Agreement and
  the calling of a special meeting of the stockholders of the Company to
  consider any of the foregoing. At any meeting of stockholders of the
  Company or at any adjournment thereof or in any other circumstances upon
  which the Stockholder's vote, consent or other approval is sought, such
  Stockholder shall vote (or cause to be voted) such Stockholder's Securities
  against (i) any merger agreement or merger (other than the Merger Agreement
  and the Merger), consolidation, combination, sale or license of substantial
  assets, reorganization, recapitalization, dissolution, liquidation or
  winding up of or by the Company or any other Takeover Proposal (as defined
  in the Merger Agreement) (collectively, "Alternative Transactions"), or
  (ii) any amendment of the Company's Certificate of Incorporation or by-laws
  or other proposal or transaction involving the Company or any of its
  subsidiaries or any motion at a meeting of stockholders of the Company,
  which amendment or other proposal or transaction or motion would in any
  manner impede, frustrate, prevent or nullify, the Merger, the Merger
  Agreement or any of the other transactions contemplated by the Merger
  Agreement including any consent to the treatment of any Securities in or in
  connection with such transaction (collectively, "Frustrating
  Transactions").
 
  2. Grant of Irrevocable Proxy Coupled with an Interest; Appointment of
Proxy.
 
  (a) Each Stockholder hereby irrevocably grants to, and appoints, any
individual who shall be designated by Parent, and each of them, such
Stockholder's proxy and attorney-in-fact (with full power of substitution),
for and in the name, place and stead of such Stockholder, to vote such
Stockholder's Securities, or grant a consent or approval in respect of such
Securities, at any meeting of stockholders of the Company or at any
adjournment thereof or in any other circumstances upon which their vote,
consent or other approval is sought, (i) in favor of the Merger, the adoption
by the Company of the Merger Agreement and the approval of the other
transactions contemplated by the Merger Agreement and the calling of a special
meeting of the stockholders of the Company to consider any of the foregoing,
and (ii) against any Alternative Transaction or Frustrating Transaction.
 
  (b) Each Stockholder represents that any proxies heretofore given in respect
of such Stockholder's Securities are not irrevocable, and that any such
proxies are hereby revoked.
 
  (c) EACH STOCKHOLDER HEREBY AFFIRMS THAT THE PROXY SET FORTH IN THIS
SECTION 2 IS COUPLED WITH AN INTEREST AND IS IRREVOCABLE UNTIL SUCH TIME AS
THIS AGREEMENT TERMINATES IN ACCORDANCE WITH ITS TERMS. Such Stockholder
hereby further affirms that such irrevocable proxy is given in connection with
the execution of the Merger Agreement, and that such irrevocable proxy is
given to secure the performance of the duties of such Stockholder under this
Agreement. Such Stockholder hereby ratifies and confirms all that the
individual voting such irrevocable proxy may lawfully do or cause to be done
by virtue hereof. Such irrevocable proxy is executed and intended to be
irrevocable in accordance with the provisions of Section 212 of the DGCL. Such
irrevocable proxy shall be valid until the later to occur of (i) one year from
the date hereof or (ii) the termination of this Agreement in accordance with
its terms.
 
  3. Representations and Warranties of the Stockholders. Each Stockholder
hereby, severally and not jointly, represents and warrants to Parent as
follows:
 
    (a) Authorization. The Stockholder has the legal capacity to execute,
  deliver and perform this Agreement. This Agreement constitutes a valid and
  binding obligation of the Stockholder enforceable against the Stockholder
  in accordance with its terms. If the Stockholder is married and the
  Securities constitute community property under applicable law, this
  Agreement has been duly authorized, executed
 
                                      C-2
<PAGE>
 
  and delivered by, and constitutes the valid and binding agreement of, the
  Stockholder's spouse enforceable against such spouse in accordance with its
  terms.
 
    (b) No Conflict. The execution, delivery and performance by the
  Stockholder of this Agreement and the consummation of the transactions
  contemplated hereby do not and will not (i) result in any breach or
  violation of or be in conflict with or constitute a default under any law
  or agreement or arrangement to which the Stockholder is a party or by which
  the Stockholder is bound, (ii) require any filing with or authorization by
  any governmental entity or (iii) require any consent or other action by any
  person under, constitute a default under, or give rise to any right of
  termination, cancellation or acceleration of a loss of any benefit to which
  the Stockholder is entitled under any provision of any agreement or other
  instrument binding on the Stockholder.
 
    (c) Ownership of Securities. Each Stockholder's Securities and the
  certificates representing such Securities are now, and at all times during
  the term hereof will be, held by each Stockholder, or by a nominee or
  custodian for the benefit of such Stockholder, and the Stockholder has good
  and marketable title to such Securities, free and clear of any (i) liens,
  proxies, voting trusts or agreements, understandings or arrangements and
  (ii) pledges, restrictions, charges or other adverse claims of any kind or
  nature. Each Stockholder owns of record or beneficially no securities of
  the Company, or any options, warrants or rights exercisable for securities
  of the Company, other than the Securities set forth opposite the
  Stockholder's name on Schedule A hereto.
 
    (d) Merger Agreement. Each Stockholder understands and acknowledges that
  Parent and Subsidiary are entering into the Merger Agreement in reliance
  upon the Stockholder's execution and delivery of this Agreement.
 
  4. Further Assurances. Each Stockholder will, from time to time, execute and
deliver, or cause to be executed and delivered, such additional or further
transfers, assignments, endorsements, consents and other instruments as Parent
may reasonably request for the purpose of effectively carrying out the
transactions contemplated by this Agreement and to vest the power to vote such
Stockholder's Securities as contemplated by Section 2.
 
  5. Assignment; Binding Effect. Neither this Agreement nor any of the rights,
interests or obligations hereunder shall be assigned by any of the parties
hereto (whether by operation of law or otherwise) without the prior written
consent of the other parties. Subject to the preceding sentence, this
Agreement shall be binding upon, inure to the benefit of, and be enforceable
by, the parties hereto and their respective successors and assigns.
Notwithstanding anything contained in this Agreement to the contrary, nothing
in this Agreement, expressed or implied, is intended to confer on any person
other than the parties hereto or their respective heirs, successors,
executors, administrators and assigns any rights, remedies, obligations or
liabilities under or by reason of this Agreement.
 
  6. Termination. This Agreement, and all rights and obligations of the
parties hereunder, shall terminate upon the earliest to occur of the Effective
Time or the termination of the Merger Agreement in accordance with its terms.
Nothing in this Section 6 shall relieve any party from liability for willful
breach of this Agreement.
 
  7. Stop Transfer. The Company agrees with, and covenants to, Parent that the
Company shall not register the transfer of any certificate representing any
Stockholder's Securities unless such transfer is made in accordance with the
terms of this Agreement.
 
  8. General Provisions.
 
  (a) Expenses. All costs and expenses incurred by Parent in connection with
this Agreement and the transactions contemplated hereby shall be paid by
Parent. All costs and expenses incurred by the Stockholders in connection with
this Agreement and the transactions contemplated hereby shall be paid by the
Company.
 
                                      C-3
<PAGE>
 
  (b) Amendments. This Agreement may not be amended except by an instrument in
writing signed by each of the parties hereto.
 
  (c) Notice. All notices and other communications hereunder shall be in
writing and shall be deemed given upon receipt to the parties at the following
addresses (or at such other address for a party as shall be specified by like
notice):
 
  (i) if to Parent, to:
 
  Mylan Laboratories Inc.
  781 Chestnut Ridge Road
  Post Office Box 4310
  Morgantown, WV 26505
  Telecopy Number (304) 599-7284
 
  with a copy to:
 
  John R. Previs, Esquire
  Buchanan Ingersoll Professional Corporation
  One Oxford Centre
  301 Grant Street, 20th Floor
  Pittsburgh, PA 15219-1410
  Telecopy Number (412) 562-1041
 
  and
 
  (ii) if to a Stockholder, to the address set forth under the name of such
  Stockholder on Schedule A hereto:
 
  with a copy to:
 
  Henry Lesser, Esquire
  Heller Ehrman White & McAuliffe
  525 University Avenue
  Palo Alto, CA 94301-1300
  Telecopy Number (650) 324-0638
 
  (d) Interpretation. When a reference is made in this Agreement to a Section,
such reference shall be to a Section of this Agreement unless otherwise
indicated. The headings contained in this Agreement are for reference purposes
only and shall not affect in any way the meaning or interpretation of this
Agreement. Wherever the words "include", "includes" or "including" are used in
this Agreement, they shall be deemed to be followed by the words "without
limitation".
 
  (e) Counterparts. This Agreement may be executed in two or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when two or more counterparts have been signed by each
of the parties and delivered to the other parties, it being understood that
all parties need not sign the same counterpart.
 
  (f) Entire Agreement; No Third-Party Beneficiaries. This Agreement
(including the documents and instruments referred to herein) (i) constitutes
the entire agreement and supersedes all prior agreements and understandings,
both written and oral, among the parties with respect to the subject matter
hereof and (ii) is not intended to confer upon any person other than the
parties hereto any rights or remedies hereunder.
 
  (g) Governing Law. This Agreement shall be governed and construed in
accordance with the laws of the State of Delaware without regard to any
applicable conflicts of law.
 
  9. Stockholder Capacity. As of the date of this Agreement, each of the
Stockholders is a director of the Company. None of the Stockholders makes any
agreement or understanding herein in his or her capacity as a
 
                                      C-4
<PAGE>
 
director or officer of the Company. Each Stockholder signs solely in his or
her capacity as the record holder and beneficial owner of, or the trustee of a
trust whose beneficiaries are the beneficial owners of, such Stockholder's
Securities and nothing herein shall limit or affect any actions taken by a
Stockholder in his or her capacity as an officer or director of the Company to
the extent specifically permitted by the Merger Agreement.
 
  10. Enforcement. The parties agree that irreparable damage would occur in
the event that any of the provisions of this Agreement were not performed in
accordance with their specific terms or were otherwise breached. It is
accordingly agreed that the parties shall be entitled to an injunction or
injunctions to prevent breaches of this Agreement and to enforce specifically
the terms and provisions of this Agreement in a court of the United States.
This being in addition to any other remedy to which they are entitled at law
or in equity. In addition, each of the parties hereto waives any right to
trial by jury with respect to any claim or proceeding related to or arising
out of this Agreement or any of the transactions contemplated hereby.
 
  EACH STOCKHOLDER AGREES THAT, IN CONNECTION WITH ANY LEGAL SUIT OR
PROCEEDING ARISING WITH RESPECT TO THIS AGREEMENT, IT SHALL SUBMIT TO THE
JURISDICTION OF THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF DELAWARE
AND AGREES TO VENUE IN SUCH COURTS. EACH STOCKHOLDER HEREBY APPOINTS THE
SECRETARY OF THE COMPANY AS HIS OR HER AGENT FOR SERVICE OF PROCESS FOR
PURPOSES OF THE FOREGOING SENTENCE ONLY. EACH PARTY HERETO WAIVES ANY RIGHT TO
JURY TRIAL IN CONNECTION WITH ANY SUCH SUIT OR PROCEEDING.
 
                                      C-5
<PAGE>
 
  In Witness Whereof, the parties have executed this Agreement as of the date
first written above.
 
                                          MYLAN LABORATORIES INC.
 
                                                /s/ Roderick P. Jackson
                                          By: _________________________________
                                          NAME:RODERICK P. JACKSON
                                          TITLE:SENIOR VICE PRESIDENT
 
                                          STOCKHOLDERS
 
                                                 /s/ Gerald Weinstein
                                          _____________________________________
                                                    GERALD WEINSTEIN
 
                                                 /s/ Marcia Weinstein
                                          _____________________________________
                                                    MARCIA WEINSTEIN
 
                                                  /s/ David Collins
                                          _____________________________________
                                                      DAVID COLLINS
 
                                                  /s/ Harvey S. Sadow
                                          _____________________________________
                                               DR. HARVEY S. SADOW, PH.D.
 
                                                   /s/ Lloyd Malchow
                                          _____________________________________
                                                      LLOYD MALCHOW
 
                                                /s/ Robert F. Allnutt
                                          _____________________________________
                                                    ROBERT F. ALLNUTT
 
                                                /s/ William E. Bergman
                                          _____________________________________
                                                   WILLIAM E. BERGMAN
 
                                                 /s/ Joseph E. Smith
                                          _____________________________________
                                                     JOSEPH E. SMITH
 
                                      C-6
<PAGE>
 
                                   SCHEDULE A
 
<TABLE>
<CAPTION>
                                                                      SECURITIES
STOCKHOLDER                                                              HELD
- -----------                                                           ----------
<S>                                                                   <C>
Gerald and Marcia Weinstein..........................................   27,725
 c/o Penederm Incorporated
 320 Lakeside Drive
 Foster City, CA 94404
David Collins........................................................   15,000
 c/o Penederm Incorporated
 320 Lakeside Drive
 Foster City, CA 94404
Dr. Harvey S. Sadow, Ph.D............................................   10,000
 c/o Penederm Incorporated
 320 Lakeside Drive
 Foster City, CA 94404
Lloyd Malchow........................................................    7,840
 c/o Penederm Incorporated
 320 Lakeside Drive
 Foster City, CA 94404
Robert F. Allnutt....................................................    1,000
 c/o Penederm Incorporated
 320 Lakeside Drive
 Foster City, CA 94404
William E. Bergman...................................................        0
 c/o Penederm Incorporated
 320 Lakeside Drive
 Foster City, CA 94404
Joseph E. Smith......................................................        0
 c/o Penederm Incorporated
 320 Lakeside Drive
 Foster City, CA 94404
</TABLE>
 
                                      C-7
<PAGE>
 
                           
                        ALTERNATE VOTING AGREEMENT     
   
  Voting Agreement, dated as of June 24, 1998, between Mylan Laboratories
Inc., a Pennsylvania corporation ("Parent"), and Mark J. Gabrielson,
individually and in his capacity as the general partner of Prince Ventures
L.P. ("Ventures"), the general partner of Prince Venture Partners III, L.P.
(the "Stockholder").     
   
  Whereas, Parent and Penederm Incorporated, a Delaware corporation (the
"Company"), propose to enter into an Agreement and Plan of Merger, dated the
date hereof (as the same may be amended or supplemented, the "Merger
Agreement") providing for the merger of MLI Acquisition Corp., a Delaware
corporation and wholly-owned subsidiary of Parent ("Subsidiary"), with the
Company (the "Merger");     
   
  Whereas, the Stockholder is the beneficial owner of the number of shares of
common stock, par value $.01 per share, of the Company (the "Company Common
Stock") set forth on Schedule A hereto; such securities, as they may be
adjusted by stock dividend, stock split, recapitalization, combination or
exchange of shares, merger, consolidation, reorganization or other change or
transaction of or by the Company, together with securities that may be
acquired after the date hereof by the Stockholders, including Company Common
Stock issuable upon the exercise of options to purchase Company Common Stock
(as the same may be adjusted as aforesaid), being collectively referred to
herein as the "Securities"; and     
   
  Whereas, as a condition to their willingness to enter into the Merger
Agreement, Parent and Subsidiary have requested that the Stockholder enter
into this Agreement (capitalized terms not otherwise defined herein shall have
the meanings set forth in the Merger Agreement);     
   
  Now, Therefore, to induce Parent and Subsidiary to enter into, and in
consideration of them entering into, the Merger Agreement, and in
consideration of the premises and the representations, warranties and
agreements contained herein and intending to be legally bound hereby, the
parties hereby agree as follows:     
   
  1. Covenants of the Stockholder. Stockholder agrees as follows:     
     
    (a) Except as contemplated by the terms of this Agreement (including,
  without limitation to Section 1(d)), Stockholder shall not, (i) sell,
  transfer, pledge, assign or otherwise dispose of, or enter into any
  agreement, option or other arrangement (including any profit sharing
  arrangement) or understanding with respect to the sale, transfer, pledge,
  assignment or other disposition of, the Securities to any person other than
  Parent or Parent's designee, (ii) enter into any voting arrangement,
  whether by proxy, voting agreement, voting trust, power-of-attorney or
  otherwise, with respect to the Securities or (iii) take any other action
  that would in any way restrict, limit or interfere with the performance of
  its obligations hereunder or the transactions contemplated hereby;
  provided, however, that the Stockholder may transfer all or any part of his
  Securities to any sibling or any other member of his immediate family, any
  of his lineal descendants or any trust for the benefit of any of them, if
  the recipient of the Securities agrees in advance in writing delivered to
  Parent to be bound by this Agreement.     
     
    (b) Until the Merger is consummated or the Merger Agreement is
  terminated, the Stockholder shall not, nor shall the Stockholder permit any
  investment banker, financial adviser, attorney, accountant or other
  representative or agent acting on behalf of or at the direction of the
  Stockholder (a "Stockholder Representative") to, directly or indirectly (i)
  solicit, initiate or encourage (including by way of furnishing
  information), or take any other action designed or reasonably likely to
  facilitate, any inquiries or the making of any proposal which constitutes,
  or may reasonably be expected to lead to, any Takeover Proposal (as defined
  in the Merger Agreement) or (ii) participate in any discussions or
  negotiations regarding any Takeover Proposal. Without limiting the
  foregoing, it is understood that any violation of the restrictions set
  forth in the preceding sentence by a Stockholder Representative shall be
  deemed to be a violation of this Section 1(b) by the Stockholder.     
 
                                      C-8
<PAGE>
 
     
    (c) At any meeting of stockholders of the Company called to vote upon the
  Merger and the Merger Agreement or at any adjournment thereof or in any
  other circumstances upon which a vote, consent or other approval (including
  by written consent) with respect to the Merger and the Merger Agreement is
  sought from the stockholders of the Company, Stockholder shall, including
  by initiating a written consent solicitation if requested by Parent, vote
  (or cause to be voted) such Stockholder's Securities in favor of approving
  the Merger, the adoption of the Merger Agreement and the approval of the
  other transactions contemplated by the Merger Agreement and the calling of
  a special meeting of the stockholders of the Company to consider any of the
  foregoing. At any meeting of stockholders of the Company or at any
  adjournment thereof or in any other circumstances upon which Stockholder's
  vote, consent or other approval is sought, Stockholder shall vote (or cause
  to be voted) Stockholder's Securities against (i) any merger agreement or
  merger (other than the Merger Agreement and the Merger), consolidation,
  combination, sale or license of substantial assets, reorganization,
  recapitalization, dissolution, liquidation or winding up of or by the
  Company or any other Takeover Proposal (as defined in the Merger Agreement)
  (collectively, "Alternative Transactions"), or (ii) any amendment of the
  Company's Certificate of Incorporation or by-laws or other proposal or
  transaction involving the Company or any of its subsidiaries or any motion
  at a meeting of stockholders of the Company, which amendment or other
  proposal or transaction or motion would in any manner impede, frustrate,
  prevent or nullify, the Merger, the Merger Agreement or any of the other
  transactions contemplated by the Merger Agreement including any consent to
  the treatment of any Securities in or in connection with such transaction
  (collectively, "Frustrating Transactions").     
     
    (d) Notwithstanding Sections 1(a) and (c), Parent and Subsidiary in
  reliance upon Stockholder's representations and warranties contained in
  Section 3(e), agree that: (i) Stockholder may cause the Distribution (as
  defined in Section 3(e)) to be made; and (ii) upon the effective date of
  the Distribution (or such earlier date, if any, as any Securities are
  required to be distributed in the event of an amendment of the Prince
  Partnership Agreement), Stockholder shall cease to be bound by Section
  1(c), and the irrevocable proxy granted by Section 2 shall terminate, with
  respect to any vote or consent that has not yet occurred (whether or not
  the applicable record date has passed) and each Distributee (as defined in
  Section 3(e)) shall be free to vote or consent as such Distributee chooses;
  provided, however, that Stockholder shall continue to be bound by all
  provisions of this Agreement with respect to any other Securities over
  which he retains the power to vote after the effective date of the
  Distribution.     
   
  2. Grant of Irrevocable Proxy Coupled with an Interest; Appointment of
Proxy.     
     
    (a) Stockholder hereby irrevocably grants to, and appoints, any
  individual who shall be designated by Parent, and each of them,
  Stockholder's proxy and attorney-in-fact (with full power of substitution),
  for and in the name, place and stead of Stockholder, to vote Stockholder's
  Securities, or grant a consent or approval in respect of such Securities,
  at any meeting of stockholders of the Company or at any adjournment thereof
  or in any other circumstances upon which their vote, consent or other
  approval is sought, (i) in favor of the Merger, the adoption by the Company
  of the Merger Agreement and the approval of the other transactions
  contemplated by the Merger Agreement and the calling of a special meeting
  of the stockholders of the Company to consider any of the foregoing, and
  (ii) against any Alternative Transaction or Frustrating Transaction.     
     
    (b) Stockholder represents that any proxies heretofore given in respect
  of Stockholder's Securities are not irrevocable, and that any such proxies
  are hereby revoked.     
     
    (c) STOCKHOLDER HEREBY AFFIRMS THAT THE PROXY SET FORTH IN THIS SECTION 2
  IS COUPLED WITH AN INTEREST AND IS IRREVOCABLE UNTIL SUCH TIME AS THIS
  AGREEMENT OR SUCH PROXY TERMINATES IN ACCORDANCE WITH ITS TERMS.
  Stockholder hereby further affirms that such irrevocable proxy is given in
  connection with the execution of the Merger Agreement, and that such
  irrevocable proxy is given to secure the performance of the duties of
  Stockholder under this Agreement. Stockholder hereby ratifies and confirms
  all that the individual voting such irrevocable proxy may lawfully do or
  cause to be done by virtue hereof. Such irrevocable proxy is executed
      
                                      C-9
<PAGE>
 
          
  and intended to be irrevocable in accordance with the provisions of Section
  212 of the DGCL. Such irrevocable proxy shall be valid until the later to
  occur of (i) one year from the date hereof or (ii) the termination of this
  Agreement in accordance with its terms.     
   
  3. Representations and Warranties of Stockholder. Stockholder hereby,
severally and not jointly, represents and warrants to Parent as follows:     
     
    (a) Authorization. The Stockholder has the legal capacity to execute,
  deliver and perform this Agreement. This Agreement constitutes a valid and
  binding obligation of the Stockholder enforceable against the Stockholder
  in accordance with its terms. If the Stockholder is married and the
  Securities constitute community property under applicable law, this
  Agreement has been duly authorized, executed and delivered by, and
  constitutes the valid and binding agreement of, the Stockholder's spouse
  enforceable against such spouse in accordance with its terms.     
     
    (b) No Conflict. The execution, delivery and performance by the
  Stockholder of this Agreement and the consummation of the transactions
  contemplated hereby do not and will not (i) result in any breach or
  violation of or be in conflict with or constitute a default under any law
  or agreement or arrangement to which the Stockholder is a party or by which
  the Stockholder is bound, (ii) require any filing with or authorization by
  any governmental entity or (iii) require any consent or other action by any
  person under, constitute a default under, or give rise to any right of
  termination, cancellation or acceleration of a loss of any benefit to which
  the Stockholder is entitled under any provision of any agreement or other
  instrument binding on the Stockholder.     
     
    (c) Ownership of Securities. Stockholder's Securities and the
  certificates representing such Securities are now, and at all times during
  the term hereof will be, held by Stockholder, or by a nominee or custodian
  for the benefit of Stockholder, and Stockholder has good and marketable
  title to such Securities, free and clear of any (i) liens, proxies, voting
  trusts or agreements, understandings or arrangements and (ii) pledges,
  restrictions, charges or other adverse claims of any kind or nature, except
  as described in Section 3(e). Stockholder owns of record or beneficially no
  securities of the Company, or any options, warrants or rights exercisable
  for securities of the Company, other than the Securities set forth opposite
  the Stockholder's name on Schedule A hereto.     
     
    (d) Merger Agreement. Stockholder understands and acknowledges that
  Parent and Subsidiary are entering into the Merger Agreement in reliance
  upon the Stockholder's execution and delivery of this Agreement.     
     
    (e) Other Matters. All of the Securities that constitute currently
  outstanding shares of Company Common Stock (the "Current Securities") are
  owned by Prince Venture Partners III, L.P. ("Prince"). The general partner
  of Prince is Ventures. Stockholder is the general partner of Ventures and
  his beneficial ownership of the Current Securities derives solely from his
  status as the general partner of Ventures. Under the terms of the
  Partnership Agreement governing Prince, Prince must be wound up on
  September 15, 1998 and all of the assets of Prince are required to be
  distributed to the individual partners of Prince (the "Distributees") by
  that date (the "Distribution"), assuming that the Distributees have not
  previously taken action to amend the terms of the Partnership Agreement
  prior to that date. Stockholder, as the general partner of Ventures,
  intends to cause Ventures, as the general partner of Prince, to effect the
  Distribution as close in time to September 15, 1998 as is consistent with
  the obligations of Ventures to ensure that the Distribution is timely made.
  The Current Securities are included in the assets that will be the subject
  of the Distribution.     
   
  4. Further Assurances. Stockholder will, from time to time, execute and
deliver, or cause to be executed and delivered, such additional or further
transfers, assignments, endorsements, consents and other instruments as Parent
may reasonably request for the purpose of effectively carrying out the
transactions contemplated by this Agreement and to vest the power to vote
Stockholder's Securities as contemplated by Section 2.     
 
 
                                     C-10
<PAGE>
 
   
  5. Assignment; Binding Effect. Neither this Agreement nor any of the rights,
interests or obligations hereunder shall be assigned by any of the parties
hereto (whether by operation of law or otherwise) without the prior written
consent of the other parties. Subject to the preceding sentence, this
Agreement shall be binding upon, inure to the benefit of, and be enforceable
by, the parties hereto and their respective successors and assigns.
Notwithstanding anything contained in this Agreement to the contrary, nothing
in this Agreement, expressed or implied, is intended to confer on any person
other than the parties hereto or their respective heirs, successors,
executors, administrators and assigns any rights, remedies, obligations or
liabilities under or by reason of this Agreement.     
   
  6. Termination. Except as otherwise provided in Section 1(d), this
Agreement, and all rights and obligations of the parties hereunder, shall
terminate upon the earliest to occur of the Effective Time or the termination
of the Merger Agreement in accordance with its terms. Nothing in this Section
6 shall relieve any party from liability for willful breach of this Agreement.
       
  7. Stop Transfer. The Company agrees with, and covenants to, Parent that the
Company shall not register the transfer of any certificate representing any
Stockholder's Securities unless such transfer is made in accordance with the
terms of this Agreement.     
   
  8. General Provisions.     
   
  (a) Expenses. All costs and expenses incurred by Parent in connection with
this Agreement and the transactions contemplated hereby shall be paid by
Parent. All costs and expenses incurred by Stockholder in connection with this
Agreement and the transactions contemplated hereby shall be paid by the
Company.     
   
  (b) Amendments. This Agreement may not be amended except by an instrument in
writing signed by each of the parties hereto.     
   
  (c) Notice. All notices and other communications hereunder shall be in
writing and shall be deemed given upon receipt to the parties at the following
addresses (or at such other address for a party as shall be specified by like
notice):     
     
  (i) if to Parent, to:     
     
  Mylan Laboratories Inc.
         
  781 Chestnut Ridge Road
         
  Post Office Box 4310
         
  Morgantown, WV 26505
         
  Telecopy Number (304) 599-7284     
     
  with a copy to:     
     
  John R. Previs, Esquire
         
  Buchanan Ingersoll Professional Corporation
         
  One Oxford Centre
         
  301 Grant Street, 20th Floor
         
  Pittsburgh, PA 15219-1410
         
  Telecopy Number (412) 562-1041     
     
  and     
     
  (ii) if to a Stockholder, to the address set forth under the name of such
  Stockholder on Schedule A hereto:     
     
  with a copy to:     
 
 
                                     C-11
<PAGE>
 
     
  Henry Lesser, Esquire
         
  Heller Ehrman White & McAuliffe
         
  525 University Avenue
         
  Palo Alto, CA 94301-1300
         
  Telecopy Number (650) 324-0638     
   
  (d) Interpretation. When a reference is made in this Agreement to a Section,
such reference shall be to a Section of this Agreement unless otherwise
indicated. The headings contained in this Agreement are for reference purposes
only and shall not affect in any way the meaning or interpretation of this
Agreement. Wherever the words "include", "includes" or "including" are used in
this Agreement, they shall be deemed to be followed by the words "without
limitation".     
   
  (e) Counterparts. This Agreement may be executed in two or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when two or more counterparts have been signed by each
of the parties and delivered to the other parties, it being understood that
all parties need not sign the same counterpart.     
   
  (f) Entire Agreement; No Third-party Beneficiaries. This Agreement
(including the documents and instruments referred to herein) (i) constitutes
the entire agreement and supersedes all prior agreements and understandings,
both written and oral, among the parties with respect to the subject matter
hereof and (ii) is not intended to confer upon any person other than the
parties hereto any rights or remedies hereunder.     
   
  (g) Governing Law. This Agreement shall be governed and construed in
accordance with the laws of the State of Delaware without regard to any
applicable conflicts of law.     
   
  9. Stockholder Capacity. As of the date of this Agreement, Stockholder is a
director of the Company. Stockholder makes no agreement or understanding
herein in his capacity as a director or officer of the Company. Each
Stockholder signs solely in his capacity as the record holder and beneficial
owner of, or the trustee of a trust whose beneficiaries are the beneficial
owners of, Stockholder's Securities and nothing herein shall limit or affect
any actions taken by Stockholder in his capacity as an officer or director of
the Company to the extent specifically permitted by the Merger Agreement.     
   
  10. Enforcement. The parties agree that irreparable damage would occur in
the event that any of the provisions of this Agreement were not performed in
accordance with their specific terms or were otherwise breached. It is
accordingly agreed that the parties shall be entitled to an injunction or
injunctions to prevent breaches of this Agreement and to enforce specifically
the terms and provisions of this Agreement in a court of the United States.
This being in addition to any other remedy to which they are entitled at law
or in equity. In addition, each of the parties hereto waives any right to
trial by jury with respect to any claim or proceeding related to or arising
out of this Agreement or any of the transactions contemplated hereby.     
   
  STOCKHOLDER AGREES THAT, IN CONNECTION WITH ANY LEGAL SUIT OR PROCEEDING
ARISING WITH RESPECT TO THIS AGREEMENT, STOCKHOLDER SHALL SUBMIT TO THE
JURISDICTION OF THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF DELAWARE
AND AGREES TO VENUE IN SUCH COURTS. STOCKHOLDER HEREBY APPOINTS THE SECRETARY
OF THE COMPANY AS HIS AGENT FOR SERVICE OF PROCESS FOR PURPOSES OF THE
FOREGOING SENTENCE ONLY. EACH PARTY HERETO WAIVES ANY RIGHT TO JURY TRIAL IN
CONNECTION WITH ANY SUCH SUIT OR PROCEEDING.     
       
                                     C-12
<PAGE>
 
   
  In Witness Whereof, the parties have executed this Agreement as of the date
first written above.     
                                             
                                          MYLAN LABORATORIES INC.     
                                             
                                          By:     
                                                  
                                               /s/ Roderick P. Jackson     
                                             ----------------------------------
                                             
                                          NAME: RODERICK P. JACKSON     
                                             
                                          TITLE: SENIOR VICE PRESIDENT     
                                             
                                          PRINCE VENTURE PARTNERS III L.P.
                                                  
                                          PRINCE VENTURES L.P.     
                                             
                                          General Partner     
                                             
                                          By:     
                                                   
                                                /s/ Mark J. Gabrielson     
                                             ----------------------------------
                                                    
                                                 MARK J. GABRIELSON,     
                                                      
                                                   GENERAL PARTNER     
                                                   
                                                /s/ Mark J. Gabrielson     
                                             ----------------------------------
                                                    
                                                 MARK J. GABRIELSON,     
 
                                      C-13
<PAGE>
 
                                   
                                SCHEDULE A     
 
<TABLE>   
<CAPTION>
                                                                      SECURITIES
STOCKHOLDER                                                              HELD
- -----------                                                           ----------
<S>                                                                   <C>
Mark J. Gabrielson...................................................  270,091*
 c/o Penederm Incorporated
 320 Lakeside Drive
 Foster City, CA 94404
</TABLE>    
   
* Held as indicated in Section 3(e) of the foregoing Agreement.     
 
                                      C-14
<PAGE>
 
 
                                                                      APPENDIX D
 
                        OPINION OF LEHMAN BROTHERS INC.
 
                                      D-1
<PAGE>
 
                                
                             LEHMAN BROTHERS     
 
 
                                                                  June 23, 1998
 
Board of Directors
Penederm Incorporated
320 Lakeside Drive, Suite A
Foster City, California 94404
 
Members of the Board:
 
  We understand that Penederm Incorporated (the "Company") is proposing to
enter into an agreement with Mylan Laboratories, Inc. ("Mylan") pursuant to
which a subsidiary of Mylan ("Mylan sub") will merge with and into the Company
(the "Merger") and, upon effectiveness of the Merger, each share of the common
stock of the Company will be converted into the right to receive 0.68 shares
(the "Exchange Ratio") of Mylan common stock ("the Transaction"). The terms
and conditions of the Transaction are set forth in more detail in the
Agreement and Plan of Merger to be dated June 24, 1998 (the "Agreement") among
the Company, Mylan and Mylan sub.
 
  We have been requested by the Board of Directors of the Company to render
our opinion with respect to the fairness, from a financial point of view, to
the Company's stockholders of the Exchange Ratio to be offered to such
stockholders in the Transaction. We have not been requested to opine as to,
and our opinion does not in any manner address, the Company's underlying
business decision to proceed with or effect the Transaction.
 
  In arriving at our opinion, we reviewed and analyzed: (1) the Agreement and
the specific terms of the Transaction, (2) the Company's annual report on Form
10-K for the year ended December 31, 1997 and such other publicly available
information concerning the Company and Mylan that we believe to be relevant to
our analysis, (3) financial and operating information with respect to the
business, operations, and prospects of the Company furnished to us by the
Company, (4) financial and operating information with respect to the business,
operations, and prospects of Mylan furnished to us by Mylan, (5) a trading
history of the Company's common stock over the last two years to the present,
and a comparison of that trading history with those of other companies that we
deemed relevant, (6) a trading history of Mylan's common stock over the last
two years to the present and a comparison of that trading history with those
of other companies that we deemed relevant, (7) a comparison of the historical
financial results and present financial condition of the Company with those of
other companies that we deemed relevant, (8) a comparison of the historical
financial results and present financial condition of Mylan with those of other
companies that we deemed relevant, (9) a comparison of the financial terms of
the Transaction with the financial terms of certain other transactions that we
deemed relevant, and (10) published estimates of third party research analysts
with respect to the future financial performance of Mylan. In addition, we
have had discussions with the managements of the Company and Mylan concerning
their respective businesses, operations, assets, financial conditions,
prospects and operating synergies expected by such managements to result from
the Transaction and have undertaken such other studies, analyses and
investigations as we deemed appropriate.
 
  In arriving at our opinion, we have assumed and relied upon the accuracy and
completeness of the financial and other information used by us without
assuming any responsibility for independent verification of such information
and have further relied upon the advice of managements of the Company and
Mylan that they are not aware of any facts or circumstances that would make
such information inaccurate or misleading. With respect to the financial
projections of the Company, upon advice of the Company, we have assumed that
such projections
 
                                      D-2
<PAGE>
 
have been reasonably prepared on a basis reflecting the best currently
available estimates and judgments of the management of the Company as to the
future financial performance of the Company and we relied upon such
projections in arriving at our opinion. With respect to the future financial
performance of Mylan, upon advice of Mylan we have assumed that the published
estimates of third party research analysts are a reasonable basis upon which
to evaluate the future financial performance of Mylan. In arriving at our
opinion, we have not conducted a physical inspection of the properties and
facilities of the Company or Mylan, and have not made or obtained any
evaluations or appraisals of the assets or liabilities of the Company. In
addition, you have not authorized us to solicit, and we have not solicited,
any indications of interest from any third party with respect to the purchase
of all or a part of the business of the Company. In addition, we have assumed
that, as contemplated by the Agreement, the Transaction will qualify as a
reorganization within the meaning of Section 368(a) of the Internal Revenue
Code of 1986, as amended, and therefore as a tax-free transaction to the
stockholders of the Company. Our opinion necessarily is based upon market,
economic and other conditions as they exist on, and can be evaluated as of,
the date of this letter.
 
  Based upon and subject to the foregoing, we are of the opinion as of the
date hereof that, from a financial point of view, the Exchange Ratio to be
offered to the Company's stockholders in the Transaction is fair to such
stockholders.
 
  We have acted as financial advisor to the Company in connection with the
Transaction and will receive a fee for our services which is contingent upon
the consummation of the Transaction. In addition, the Company has agreed to
indemnify us for certain liabilities that may arise out of the rendering of
this opinion. In the ordinary course of our business, we may actively trade in
the equity securities of the Company and Mylan for our own account and for the
accounts of our customers and, accordingly, may at any time hold a long or
short position in such securities.
 
  This opinion is for the use and benefit of the Board of Directors of the
Company and is rendered to the Board of Directors in connection with its
consideration of the Transaction. This opinion is not intended to be and does
not constitute a recommendation to any stockholder of the Company as to how
such stockholder should vote with respect to the Transaction.
 
                                          Very truly yours,
 
                                          LEHMAN BROTHERS
 
                                                     /s/ Ted Breck
                                          By: _________________________________
                                                     Managing Director
 
                                      D-3
<PAGE>
 
                                    PART II
 
                    INFORMATION NOT REQUIRED IN PROSPECTUS
 
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
 
  In accordance with the PBCL, Mylan's Bylaws provide that a director of Mylan
shall not be personally liable for monetary damages for any action taken, or
any failure to take any action, unless the director has breached or failed to
perform the duties required under Pennsylvania law and the breach or failure
to perform constitutes self-dealing, willful misconduct or recklessness.
   
  As permitted by the PBCL, Mylan's Bylaws provide that directors and officers
of Mylan are indemnified under certain circumstances for expenses, judgments,
fines or settlements incurred in connection with suits and other legal
proceedings. The PBCL allows indemnification in cases where the person "acted
in good faith and in a manner he reasonably believed to be in, or not opposed
to the best interests of the corporation and, with respect to any criminal
proceeding, had no reasonable cause to believe his conduct was unlawful."     
 
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
 
  (a) Exhibits. The following is a list of Exhibits filed as part of this
Registration Statement.
 
<TABLE>   
<CAPTION>
 EXHIBIT
  NO.                                                     REFERENCE
 -------                                                  ---------
 <C>      <S>                                  <C>
 2(a)     Merger Agreement (attached as                 Filed herewith
          Appendix A to the Proxy
          Statement/Prospectus included in
          this Registration Statement)
 2(b)     Stock Option Agreement (attached              Filed herewith
          as Appendix B to the Proxy
          Statement/Prospectus included in
          this Registration Statement)
 3(a)     Amended and Restated Articles of     Incorporated herein by reference
          Incorporation, as amended, of        to Exhibit 3(a) to Mylan's Form
          Mylan                                10-Q for the quarter ended
                                               June 30, 1992.
 3(b)     Bylaws of Mylan                      Incorporated herein by reference
                                               to Exhibit 3(b) to Mylan's Form
                                               10-Q for the quarter ended
                                               June 30, 1992
 5(a)     Opinion of Buchanan Ingersoll                Previously filed
          Professional Corporation regarding
          the validity of the Mylan Common
          Stock to be issued in the Merger
 8(a)     Tax opinion of Heller Ehrman White            Filed herewith
          & McAuliffe
 8(b)     Tax opinion of Buchanan Ingersoll             Filed herewith
          Professional Corporation
 23(a)(1) Consent of Deloitte & Touche LLP              Filed herewith
 23(a)(2) Consent of Deloitte & Touche LLP              Filed herewith
 23(b)    Consent of Ernst & Young LLP                  Filed herewith
 23(c)    Consent of Buchanan Ingersoll                Previously filed
          Professional Corporation (included
          in Exhibit 5(a))
 23(d)    Consent of Heller Ehrman White &              Filed herewith
          McAuliffe (included in Exhibit
          8(a))
 23(e)    Consent of Buchanan Ingersoll                 Filed herewith
          Professional Corporation (included
          in Exhibit 8(b))
 24(a)    Powers of Attorney (appearing on             Previously filed
          signature page)
 99(a)    Opinion of Lehman Brothers Inc.               Filed herewith
          (attached as Appendix D to the
          Proxy Statement/Prospectus
          included in this Registration
          Statement)
 99(b)    Consent of Lehman Brothers Inc.              Previously filed
 99(c)    Penederm Form of Proxy for Common             Filed herewith
          Stock
</TABLE>    
 
                                     II-1
<PAGE>
 
  (b) Financial Statement Schedules. No financial statement schedules of the
Registrant are required to be included herein.
 
  (c) Opinions. The opinion of Lehman Brothers Inc. is included as Appendix D
to the Proxy Statement/Prospectus.
 
ITEM 22. UNDERTAKINGS.
 
  (a) The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
Registrant's annual report pursuant to Section 13(a) or 15(d) of the Exchange
Act (and, where applicable, each filing of an employee benefit plan's annual
report pursuant to Section 15(d) of the Exchange Act) that is incorporated by
reference in the Registration Statement shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
 
  (b) The undersigned Registrant hereby undertakes as follows: that prior to
any public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this Registration Statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c),
the issuer undertakes that such reoffering prospectus will contain the
information called for by the applicable registration form with respect to
reofferings by persons who may be deemed underwriters, in addition to the
information called for by the other Items of the applicable form.
 
  (c) The Registrant undertakes that every prospectus (i) that is filed
pursuant to paragraph (b) immediately preceding, or (ii) that purports to meet
the requirements of Section 10(a)(3) of the Securities Act and is used in
connection with an offering of securities subject to Rule 415, will be filed
as part of an amendment to the Registration Statement and will not be used
until such amendment is effective, and that, for purposes of determining any
liability under the Securities Act, each such post-effective amendment shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
 
  (d) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities
being registered, the Registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
 
  (e) The undersigned Registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the Proxy
Statement/Prospectus pursuant to Items 4, 10(b), 11 or 13 of this Form, within
one business day of receipt of such request, and to send the incorporated
documents by first class mail or other equally prompt means. This includes
information contained in documents filed subsequent to the effective date of
the Registration Statement through the date of responding to the request.
 
  (f) The undersigned Registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the Registration Statement when it became effective.
 
  (g) The undersigned Registrant hereby undertakes:
 
                                     II-2
<PAGE>
 
      (1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
 
         (A) To include any prospectus required by Section 10(a)(3) of the
Securities Act;
 
         (B) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent post-
effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range may
be reflected in the form of prospectus filed with the Commission pursuant to
Rule 424(b) if, in the aggregate, the changes in volume and price represent no
more than a 20% change in the maximum aggregate offering price set forth in
the "Calculation of Registration Fee" table in the effective registration
statement; and
 
         (C) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement.
 
      (2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to
be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
 
      (3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination
of the offering.
 
                                     II-3
<PAGE>
 
                                  SIGNATURES
   
  Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Amendment No. 1 to Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of
Pittsburgh, on August 28, 1998.     
 
                                          MYLAN LABORATORIES INC.
                                             
                                          /s/ Donald C. Schilling
                                          -------------------------
                                          Name: Donald C. Schilling
                                          Title: Vice President-Finance     

          
  Pursuant to the requirements of the Securities Act, this Amendment No. 1 to
Registration Statement has been signed by the following persons in the
capacities indicated on August 28, 1998.     
 
          SIGNATURES                                TITLE
 
                                    Chairman, Chief Executive Officer,
    /s/ Milan Puskar*               President, Director (Principal Executive 
- -------------------------------     Officer)
         Milan Puskar               
 
                                    
      /s/ C.B. Todd*                Senior Vice President and Director
- -------------------------------
           C.B. Todd

                                    
   /s/ Dana G. Barnett*             Executive Vice President and Director
- -------------------------------
        Dana G. Barnett

                                                                       
 /s/ Patricia A. Sunseri*           Vice President--Investor and Public
- -------------------------------     Relations and Director             
      Patricia A. Sunseri

                                    
  /s/ Robert W. Smiley*             Secretary and Director
- -------------------------------
       Robert W. Smiley

                                    
 /s/ Laurence S. DeLynn*            Director
- -------------------------------
      Laurence S. DeLynn

                                    
  /s/ John C. Gaisford, M.D.*       Director       
- -------------------------------
      John C. Gaisford, M.D.

                                    
 /s/ Donald C. Schilling            Vice President-Finance (Principal      
- -------------------------------     Financial and Accounting Officer)
   Donald C. Schilling     

   
*By
   /s/ Donald C. Schilling
  ---------------------------
     Donald C. Schilling
      Attorney-in-Fact     
 
                                     II-4
<PAGE>
 
                                  
                               EXHIBIT INDEX     
 
<TABLE>   
<CAPTION>
 EXHIBIT
  NO.                 DESCRIPTION                         REFERENCE
 -------              -----------                         ---------
 <C>      <S>                                  <C>
 2(a)     Merger Agreement (attached as                 Filed herewith
          Appendix A to the Proxy
          Statement/Prospectus included in
          this Registration Statement)
 2(b)     Stock Option Agreement (attached              Filed herewith
          as Appendix B to the Proxy
          Statement/Prospectus included in
          this Registration Statement)
 3(a)     Amended and Restated Articles of     Incorporated herein by reference
          Incorporation, as amended, of        to Exhibit 3(a) to Mylan's Form
          Mylan                                10-Q for the quarter ended
                                               June 30, 1992.
 3(b)     Bylaws of Mylan                      Incorporated herein by reference
                                               to Exhibit 3(b) to Mylan's Form
                                               10-Q for the quarter ended
                                               June 30, 1992
 5(a)     Opinion of Buchanan Ingersoll                Previously filed
          Professional Corporation regarding
          the validity of the Mylan Common
          Stock to be issued in the Merger
 8(a)     Tax opinion of Heller Ehrman White            Filed herewith
          & McAuliffe
 8(b)     Tax opinion of Buchanan Ingersoll             Filed herewith
          Professional Corporation
 23(a)(1) Consent of Deloitte & Touche LLP              Filed herewith
 23(a)(2) Consent of Deloitte & Touche LLP              Filed herewith
 23(b)    Consent of Ernst & Young LLP                  Filed herewith
 23(c)    Consent of Buchanan Ingersoll                Previously filed
          Professional Corporation (included
          in Exhibit 5(a))
 23(d)    Consent of Heller Ehrman White &              Filed herewith
          McAuliffe (included in Exhibit
          8(a))
 23(e)    Consent of Buchanan Ingersoll                 Filed herewith
          Professional Corporation (included
          in Exhibit 8(b))
 24(a)    Powers of Attorney (appearing on             Previously filed
          signature page)
 99(a)    Opinion of Lehman Brothers Inc.               Filed herewith
          (attached as Appendix D to the
          Proxy Statement/Prospectus
          included in this Registration
          Statement)
 99(b)    Consent of Lehman Brothers Inc.              Previously filed
 99(c)    Penederm Form of Proxy for Common             Filed herewith
          Stock
</TABLE>    

<PAGE>
 
                                                                 
                                                              Exhibit 8(a)     
 
                          [Heller Ehrman Letterhead]
 
                                August 28, 1998
 
Penederm Incorporated
320 Lakeside Drive, Suite A
Foster City, California 94404
 
Ladies and Gentlemen:
 
  You have requested our opinion regarding certain federal income tax
consequences of the proposed merger (the "Merger") of MLI Acquisition Corp.
("Merger Sub"), a wholly-owned subsidiary of Mylan Laboratories, Inc.
("Mylan"), with and into Penederm Incorporated ("Penederm"). Unless otherwise
defined, capitalized terms used herein have the meanings ascribed to them in
the Prospectus contained in Amendment No. 1 dated August 28, 1998, to the
Registration Statement of Mylan on Form S-4 (Registration Statement No. 333-
61959) (the "Registration Statement") filed with the Securities and Exchange
Commission. We have acted as counsel to Penederm in connection with the Merger
and have examined and relied upon the Merger Agreement dated June 24, 1998,
among Merger Sub, Penederm and Mylan (the "Agreement"), the exhibits and
attachments thereto, and the Registration Statement. In addition, we have
relied upon the "Tax Certificates" from each of Penederm and Mylan confirming
the accuracy of certain representations given in the Agreement. Our opinions
are based upon the understanding that the material facts are as described in
the Registration Statement, that the representations and warranties in the
Agreement and the Tax Certificates are true, correct and complete, and that
the Merger will be effected in accordance with the terms set forth in the
Agreement. In rendering our opinions we have relied upon such documents and
the foregoing representations without undertaking independently to verify the
accuracy and completeness of the matters covered thereby.
 
  Based upon the foregoing, it is our opinion that:
 
1. The Merger will constitute a "reorganization" within the meaning of Section
   368(a) of the Internal Revenue Code of 1986, as amended (the "Code").
 
2. Each of Mylan, Penederm and Merger Sub will be a party to the
   reorganization within the meaning of Section 368(b) of the Code.
 
3. By virtue of 1. and 2., above, for federal income tax purposes:
 
  a.No gain or loss will be recognized by Mylan, Penederm or Merger Sub as a
  result of the Merger;
 
  b. Shareholders of Penederm exchanging their shares of Penederm Common
     Stock solely for shares of Mylan Common Stock pursuant to the Merger
     will not recognize gain or loss, except to the extent of cash, if any,
     received in lieu of fractional shares of Mylan Common Stock;
 
  c. An exchanging Penederm shareholder will have the same aggregate tax
     basis in the Mylan stock received pursuant to the Merger (including any
     fractional shares of Mylan Common Stock deemed to have been received) as
     such shareholder had in the Penederm Common Stock surrendered in
     exchange therefor;
 
  d. The period for which a Penederm shareholder has held his or her Penederm
     Common Stock will be included in computing such shareholder's holding
     periods for the Mylan Common Stock received in the Merger, provided such
     shares of Penederm Common Stock were held as capital assets at the
     Effective Time;
 
<PAGE>
 
Penederm Incorporated                                                    Page 2
August 28, 1998
 
  e. The receipt of cash in lieu of a fractional share of Mylan Common Stock
     by a shareholder of Penederm will be treated as if the fractional share
     were distributed as part of the Merger and then redeemed by Mylan, and
     the cash payment will be treated as having been received as a
     distribution in full payment in exchange for the fractional share
     received and taxed as provided in Section 302(a) of the Code.
 
4. The statements under the caption "Certain Income Tax Consequences" in the
   Registration Statement, insofar as they constitute statements of United
   States federal income tax law or legal conclusions, accurately summarize
   the material United States income tax consequences of the Merger to a
   Penederm shareholder.
 
                                   * * * * *
 
  Our opinion is subject to certain assumptions and qualifications, and is
based on the truth and accuracy of the representations of the parties in the
Agreement and in the Tax Certificates, including representations related to
the continued conduct of the historic business of Penederm.
 
  Our opinions are limited to the federal income tax consequences of the
Merger and do not address the tax consequences of transactions effected prior
to or after the Merger (whether or not in connection with the Merger), nor the
effect of the Merger under the laws of the various state and local governments
or under the laws of any other jurisdiction. Moreover, they do not address
special rules which may be applicable to particular shareholders of Penederm,
such as shareholders who acquired their shares pursuant to the exercise of
statutory stock options, shareholders which are dealers or foreign persons, or
shareholders who exercise dissenter's rights. We express no opinion regarding
any tax aspect or ramification of the Merger apart from the opinions
specifically set forth above.
 
  An opinion of counsel does not bind the Internal Revenue Service or preclude
it or a court from taking a position contrary to the opinion. Our opinion
represents merely our best judgment as to the likely outcome of the matters
described above if litigated in an appropriate forum. This opinion is based
upon the Code, the Treasury Regulations issued thereunder, and judicial and
administrative interpretations thereof, all as in effect on the date of this
opinion. All of such authority is subject to change, including retroactive
change. We disclaim any obligation to advise of any developments in areas
covered by this opinion that occur after the date of this opinion.
 
  This opinion is rendered in connection with the Agreement and has been
delivered to you for the purposes of satisfying the requirements of Section
5.2(d) of the Agreement. We hereby consent to the filing of this opinion as an
exhibit to the Registration Statement and to the reliance on the opinion by
stockholders of Penederm receiving Mylan stock in the Merger. In giving this
consent, however, we do not admit that we are in the category of persons whose
consent is required under Section 7 of the Securities Act of 1933, as amended.
This opinion may not be relied upon for any other purpose without our written
consent.
 
                                          Very truly yours,
 
                                          /s/ Heller Ehrman White & McAuliffe
 
                                          Heller Ehrman White & McAuliffe

<PAGE>
 
                 
                 [Buchanan Ingersoll Professional Corporation]

                                                              Exhibit 8(b)     
 
                                August 28, 1998
 
Mylan Laboratories Inc.
130 Seventh Street
1030 Century Building
Pittsburgh, Pennsylvania 15222
 
Ladies and Gentlemen:
 
  We have acted as special counsel to Mylan Laboratories Inc., a Pennsylvania
corporation ("Mylan"), in connection with its Registration Statement on Form
S-4 (No. 333-61959) (the "Registration Statement") filed with the Securities
and Exchange Commission.
 
  For purposes of this opinion, we have reviewed the discussion set forth in
the Registration Statement under the caption "The Merger--Certain Federal
Income Tax Consequences" (the "Tax Discussion"). We have also reviewed a copy
of the Agreement and Plan of Merger by and among Mylan, MLI Acquisition Corp.,
a Delaware corporation and wholly owned subsidiary of Mylan, and Penederm
Incorporated, a Delaware corporation ("Penederm"), dated June 24, 1998, filed
as Appendix A to the Registration Statement (the "Merger Agreement"), the
exhibits and schedules to the Merger Agreement, and such certificates and
other documents we have deemed necessary or advisable for the purpose of
expressing the opinion contained herein.
 
  With respect to the documents which we have reviewed, we have assumed,
without investigation, the genuineness of all signatures, the authenticity of
all documents submitted to us as originals and the conformity to originals of
all documents submitted to us as certified or reproduced copies. We have also
assumed the continued accuracy of the facts and representations of the parties
to the Merger Agreement set forth in Sections 8.4(a) and 8.4(b) of the Merger
Agreement and that the transactions described in the Merger Agreement will be
consummated in the manner contemplated thereby.
 
  Based upon and subject to the accuracy of the foregoing, we are of the
opinion that the Tax Discussion, insofar as it constitutes a statement of
United States federal income tax law, is accurate in all material respects.
 
  This opinion is rendered solely to you and may not be relied upon or
furnished to any other person without our prior written consent.
 
  We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the references to our firm under the captions
"The Merger--Certain Federal Income Tax Consequences" and "Legal Matters" in
the Registration Statement. In providing our consent, we do not thereby admit
that we are within the category of persons whose consent is required under
Section 7 of the Securities Act of 1933, as amended, or the rules and
regulations of the Securities and Exchange Commission thereunder.
 
                                                  Very truly yours,
                                                     
                                                  /s/ Buchanan Ingersoll     
                                                     
                                                  Buchanan Ingersoll     
                                                     
                                                  Professional Corporation
                                                      

<PAGE>
 
                                                               EXHIBIT 23(A)(1)
 
                         INDEPENDENT AUDITORS' CONSENT
   
  We consent to the incorporation by reference in Amendment No. 1 to the
Registration Statement (No. 333-61959) of Mylan Laboratories Inc. on Form S-4
of our report dated May 7, 1998, incorporated by reference in the Annual
Report on Form 10-K of Mylan Laboratories Inc. for the year ended March 31,
1998 and to the reference to us under the heading "Experts" in the Prospectus,
which is part of this Registration Statement.     
 
                                              /s/ Deloitte & Touche LLP
                                              -------------------------
                                              DELOITTE & TOUCHE LLP
 
Pittsburgh, Pennsylvania
   
August 28, 1998     

<PAGE>
 
                                                               EXHIBIT 23(A)(2)
 
                         INDEPENDENT AUDITORS' CONSENT
   
  We consent to the incorporation by reference in Amendment No. 1 to the
Registration Statement (No. 333-61959) of Mylan Laboratories Inc. on Form S-4
of our report dated February 4, 1998 relating to the consolidated financial
statements of Somerset Pharmaceuticals, Inc. and subsidiaries as of December
31, 1997 and 1996 and for each of the three years in the period ended December
31, 1997, appearing in the Annual Report on Form 10-K of Mylan Laboratories
Inc. for the year ended March 31, 1998 and to the reference to us under the
heading "Experts" in the Prospectus, which is part of this Registration
Statement.     
 
                                              /s/ Deloitte & Touche LLP
                                              -------------------------
                                              DELOITTE & TOUCHE LLP
 
Pittsburgh, Pennsylvania
   
August 28, 1998     

<PAGE>
 
                                                                  EXHIBIT 23(B)
 
              CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
   
  We consent to the reference to our firm under the caption "Experts" in
Amendment No. 1 to the Registration Statement (Form S-4 No. 333-61959) and
related Proxy Statement of Penederm Incorporated ("Penederm") and Prospectus
of Mylan Laboratories Inc. and to the incorporation by reference therein of
our report dated January 27, 1998 with respect to the consolidated financial
statements of Penederm included in its Annual Report (Form 10-K) for the year
ended December 31, 1997, filed with the Securities and Exchange Commission.
    
/s/ Ernst & Young LLP
 
Palo Alto, California
   
August 28, 1998     

<PAGE>
 
                                                                  EXHIBIT 99(C)
 
                                [FORM OF PROXY]
 
P R O X Y
 
                             PENEDERM INCORPORATED
                   PROXY FOR SPECIAL MEETING OF STOCKHOLDERS
                           
                        TO BE HELD OCTOBER 2, 1998     
 
          THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
   
  The undersigned stockholder of PENEDERM INCORPORATED, a Delaware
corporation, hereby acknowledges receipt of the Notice of Special Meeting of
Stockholders and Proxy Statement/Prospectus, each dated August 31, 1998, and
hereby appoints Lloyd H. Malchow and Michael A. Bates, and each of them,
proxies and attorneys-in-fact, with full power to each of substitution, on
behalf of the undersigned, to represent the undersigned at the Special Meeting
of Stockholders of Penederm Incorporated to be held at the Westin Hotel--San
Francisco Airport, at 9:30 a.m., local time on October 2, 1998, and at all
adjournments or postponements thereof, and to vote shares of Common Stock that
the undersigned would be entitled to vote if then and there personally
present, on all matters set forth on the reverse side hereof.     
 
  THE SHARES REPRESENTED BY THIS PROXY WILL BE VOTED IN ACCORDANCE WITH THE
SPECIFICATIONS MADE HEREIN. IF NO SPECIFICATION IS INDICATED, THE SHARES
REPRESENTED BY THIS PROXY WILL BE VOTED FOR EACH OF THE PROPOSALS ON THE
REVERSE SIDE HEREOF.
 
                  CONTINUED AND TO BE SIGNED ON REVERSE SIDE
<PAGE>
 
                                                        [X] Please mark votes
                                                           as in this example
 
                THE BOARD OF DIRECTORS RECOMMENDED A VOTE "FOR"
                            THE FOLLOWING PROPOSAL:
 
PROPOSAL:
        To approve and adopt the Agreement and Plan of Merger, dated June 24,
        1998, by and among Penederm Incorporated ("Penederm"), Mylan
        Laboratories Inc. ("Mylan") and MLI Acquisition Corp. and the
        transactions contemplated thereby.
 
                      For          Against        Abstain
                      [_]           [_]             [_]
 
OTHER BUSINESS:
        In their discretion, the proxy holders are hereby authorized to vote
        on such other business as may properly come before the Special
        Meeting, including, among other things, a motion to adjourn the
        Special Meeting to another time and/or place for, among other things,
        the purpose of soliciting additional proxies.
 
              [_]  MARK HERE FOR ADDRESS CHANGE AND NOTE AT LEFT
 
            Note: Please sign exactly as your name appears on your
            stock certificate. If the stock is registered in the
            names of two or more persons, each should sign.
            Executors, administrators, trustees, guardians, attorneys
            and corporate officers should insert their titles.
   
The undersigned acknowledges receipt of the Notice of Special Meeting and
Proxy Statement/Prospectus dated August 31, 1998.     
 
Signature(s)                                               Date
     --------------------------------------------------        -------
NOTE: Please mark, sign, and date and return the proxy card promptly using the
enclosed envelope.


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