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PAGE 17 OF PAPER FORMAT ANNUAL REPORT
                                                                    EXHIBIT 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

OVERVIEW

ALZA Corporation ("ALZA" or the "Company") reported net income of $92.4
million in 1996, compared to net income of $72.4 million in 1995 and $58.1
million in 1994.  Included in the 1996 results is the net benefit of
approximately $2.3 million in non-recurring items, which are discussed below.

TOTAL REVENUES (PRESENTED GRAPHICALLY IN PAPER FORMAT ANNUAL REPORT)

 (In millions)
                                1996    1995    1994    1993    1992
                               -----   -----   -----   -----   -----
Royalties and fees             $ 171   $ 145   $ 124   $ 113   $ 115
Research and development         131     104      69      47      39
Net sales                        109      77      68      54      76
Interest & other                  55      24      18      20      21
                               -----   -----   -----   -----   -----
TOTAL REVENUES                 $ 466   $ 351   $ 279   $ 234   $ 251


ROYALTIES AND FEES

Royalties and fees, which are generally derived from sales by client
companies of products developed jointly with ALZA, were $171.4 million in
1996 ($162.2 million before non-recurring items), compared to $145.4 million
($138.0 million before a non-recurring item) in 1995 and $123.8 million in
1994.  Excluding the non-recurring items, the growth in royalties and fees in
1996 was due to increased sales of Adalat CR-Registered Trademark-
(nifedipine), Catapres TTS-Registered Trademark- (clonidine),
Duragesic-Registered Trademark-  (fentanyl) and Glucotrol XL-Registered
Trademark- (glipizide) and royalties from sales of NicoDerm-Registered
Trademark- CQ-TM- (nicotine) following its introduction in the third quarter
of 1996. In addition, despite lower sales of Procardia XL-Registered
Trademark- (nifedipine), royalties from this product increased due to a higher
effective royalty rate, as discussed below.  Reducing royalties and fees in
1996 were lower royalties on sales of Transderm-Nitro-Registered Trademark-
(nitroglycerin).

                                        -1-

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PAGE 17 OF PAPER FORMAT ANNUAL REPORT

Royalties and fees for 1996 include a non-recurring benefit of $7.1 million
from the reversal of a portion of the reserve accrued in 1994 and 1995 to
account for a potential reduction in royalty revenue from Procardia
XL-Registered Trademark-, marketed in the U.S. by Pfizer, Inc. ("Pfizer"),
due to a U.S. patent issued to Bayer AG.  Pfizer and ALZA entered into an
agreement under which the remainder of the reserve was utilized to satisfy
ALZA's potential obligations related to the resolution of this royalty issue.
Under the agreement, the royalty payable by Pfizer to ALZA on sales of
Procardia XL-Registered Trademark- was reset to 7%, retroactive to January 1,
1996.  While ALZA's total royalties from Procardia XL-Registered Trademark-
increased as a result of the higher effective royalty rate, sales of
Procardia XL-Registered Trademark-, as reported by Pfizer, decreased by 11%
during 1996 as compared to 1995.

Royalties and fees for 1996 also include a $6.4 million non-recurring benefit
in connection with the settlement of litigation relating to patent disputes
concerning transdermal nicotine patches.  Under the terms of the settlement
announced in June 1996, Ciba-Geigy Corporation ("Ciba"), now Novartis
Pharmaceuticals Corporation ("Novartis"), made a one-time payment to Hoechst
Marion Roussel Inc. ("HMR") and ALZA, and will pay ongoing royalties on
Novartis' U.S. nicotine patch sales, retroactive to January 1, 1996, to be
shared by HMR and ALZA.

Partially offsetting the additions to royalties and fees discussed above was
a non-recurring charge to establish a reserve of $4 million representing the
unamortized portion of a $5 million advance payment made in 1988 to the
former limited partners of the ALZA OROS-Registered Trademark- Products
Limited Partnership (the "Partnership"). The advance payment was made in
connection with ALZA's exercise of its option to acquire all of the limited
partners' interests in the Partnership.  Under the terms of the partnership
agreement, the advance payment is creditable by ALZA, within specified
limits, against payments otherwise due to the former limited partners on
sales of the OROS-Registered Trademark- cold/allergy products and
Covera-HS-TM- (verapamil).  The reserve was established due to uncertainties
regarding ALZA's ability to utilize the prepayment within the time period
specified in the partnership agreement.

                                        -2-

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PAGE 17-18 OF PAPER FORMAT ANNUAL REPORT

Included in royalties and fees for 1995 is a benefit of $7.4 million
resulting from the reversal of a portion of a reserve established after a
patent infringement suit was filed in 1991 by Ciba against ALZA and HMR
relating to the Nicoderm-Registered Trademark- transdermal nicotine product.
In October 1995 a federal appeals court upheld the most significant portions
of a summary judgment previously granted by a district court in which the
broadest claims of the Ciba patent were held invalid.  This suit was settled
in 1996.

Royalties and fees for 1995 and 1994 reflect reductions of $9 million and $8
million, respectively, resulting from additions to the reserve established in
the third quarter of 1994 to account for the potential reduction in royalty
revenue from Pfizer on sales of Procardia XL-Registered Trademark- discussed
above.  Including the $7.1 million benefit described above, royalties from
Procardia XL-Registered Trademark- accounted for approximately 42% of ALZA's
royalties and fees for 1996.  Excluding non-recurring items, Procardia
XL-Registered Trademark- accounted for approximately 40% of ALZA's royalties
and fees for 1996.  Excluding from total royalties and fees for 1995 the
benefit of the $7.4 million reserve reversal discussed above, royalties from
Procardia XL-Registered Trademark- accounted for more than 40% and 50% of
ALZA's royalties and fees in 1995 and 1994, respectively.

RESEARCH AND DEVELOPMENT

Research and development expenses increased to $141.6 million in 1996
compared to $103.4 million in 1995 and $76.1 million in 1994.  The year over
year increases were due primarily to increased product development activities
undertaken on behalf of Therapeutic Discovery Corporation ("TDC").

INVESTMENT IN RESEARCH AND DEVELOPMENT       (PRESENTED GRAPHICALLY IN PAPER
                                              FORMAT ANNUAL REPORT)
(In millions)
                                    1996    1995    1994    1993    1992
Investment in Research and
Development                        $ 142   $ 103    $ 76    $ 53    $ 52


Research and development revenue was $131.2 million in 1996, compared to
$104.0 million and $68.7 million in 1995 and 1994, respectively.  Reducing
research and development revenue for 1996 were $2.1 million of non-recurring
items consisting of a credit from ALZA to TDC for work that was previously
billed and a charge for certain potentially uncollectable receivables.
ALZA's research and development

                                        -3-

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PAGE 18 OF PAPER FORMAT ANNUAL REPORT

revenue generally represents client reimbursement of costs, including a
portion of general and administrative expenses.  Therefore, product
development activities do not contribute significantly to current net income.

The increase in research and development revenue in 1996 was due to product
development activities undertaken on behalf of TDC.  TDC, which commenced
operations in mid-1993, was formed by ALZA for the purpose of selecting and
developing new human pharmaceutical products combining ALZA's proprietary
drug delivery technologies with various drug compounds, and commercializing
such products, most likely through licensing to ALZA.  ALZA and TDC have a
development agreement pursuant to which ALZA conducts product development
activities on behalf of TDC.  For the years ended 1996, 1995 and 1994, ALZA
had product development revenue from TDC of $100.7 million, $70.1 million and
$31.6 million, respectively.  At the end of 1996 ALZA filed a New Drug
Application for a second-generation transdermal testosterone product under
development with TDC, and a number of additional TDC products were in the
development pipeline, including several in clinical evaluation.

NET SALES   (PRESENTED GRAPHICALLY IN PAPER FORMAT ANNUAL REPORT)

(In millions)                    1996     1995     1994     1993     1992
                                 ----     ----     ----     ----     ----
Contract manufacturing          $  86     $ 63     $ 58     $ 47     $ 68
ALZA-marketed products             23       14       11        7        7
                                 ----     ----     ----     ----     ----
TOTAL NET SALES                 $ 109     $ 77     $ 69     $ 54     $ 75


NET SALES AND COSTS OF PRODUCTS SHIPPED

ALZA's net sales increased by $31.7 million to $108.6 million in 1996
compared to 1995. Included in net sales are sales generated from contract
manufacturing activities for ALZA's client companies, and sales of products
marketed directly by ALZA and through distributors.

                                        -4-

<PAGE>PAGE 18 OF PAPER FORMAT ANNUAL REPORT

Net sales from ALZA's contract manufacturing activities were $85.4 million in
1996, compared to $63.3 million and $57.4 million in 1995 and 1994,
respectively. The increase in net sales from contract manufacturing in 1996
is the result of shipments of launch quantities of NicoDerm-Registered
Trademark- CQ-TM- and Covera-HS-TM-. Shipments of launch quantities are not
indicative of the potential for future sales of a product.  The increase in
net sales from contract manufacturing in 1995 as compared to 1994 was due to
larger orders by client companies in 1995, predominately for transdermal
products .  Because of variability in the mix and volume of clients' product
requirements, the level of contract manufacturing sales fluctuates from
period to period.

ALZA manufactures and directly markets in the U.S. the Testoderm-Registered
Trademark- testosterone transdermal system CIII, the Progestasert-Registered
Trademark- intrauterine progesterone contraceptive system, ALZET-Registered
Trademark- osmotic pumps and the Ocusert-Registered Trademark- pilocarpine
ocular therapeutic system.  In 1996, ALZA began promoting Ethyol-Registered
Trademark-  (amifostine) in the Unites States.  Ethyol-Registered Trademark-
is a unique cytoprotective agent developed by U.S. Bioscience, Inc. ("U.S.
Bioscience"), indicated for the reduction of cumulative renal toxicity
associated with repeated administration of the chemotherapeutic drug
cisplatin in patients with advanced ovarian or non-small cell lung cancer.
U.S. Bioscience co-promotes the product with ALZA.  In 1994, ALZA launched
Testoderm-Registered Trademark-, the first transdermal testosterone
replacement therapy for testosterone deficient men.  ALZA also manufactures
the Actisite-Registered Trademark- (tetracycline hydrochloride) periodontal
fiber, which is marketed in the U.S. by a partnership between ALZA and
Procter & Gamble for adjunctive treatment of periodontitis.  Progestasert
-Registered Trademark-, ALZET-Registered Trademark-, Ocusert-Registered
Trademark- and Actisite-Registered Trademark- are sold internationally
through other companies under distribution agreements.  Net sales of
ALZA-marketed products were $23.2 million in 1996, compared to $13.6 million
in 1995 and $11.1 million in 1994. The increase in sales of ALZA-marketed
products for 1996 from 1995 was due to Ethyol-Registered Trademark- net sales
of $9.4 million from March 1996 through the end of the year.  Sales of
Testoderm-Registered Trademark- were $6.7 million, $6.8 million and $4.2
million for 1996, 1995 and 1994, respectively.

                                        -5-

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PAGE 18-19 OF PAPER FORMAT ANNUAL REPORT

Costs of products shipped increased to $85.2 million in 1996 compared to
$65.4 million in 1995.  Included in costs of products shipped in 1996 are
$2.4 million of non-recurring charges primarily related to costs associated
with a limited recall of two lots of the Duragesic-Registered Trademark-
product.  Gross margin as a precent of net sales increased to 22% for 1996,
primarily due to proportionately greater shipments of higher margin products
and the manufacturing and shipment of launch quantities.  Although net sales
increased in 1995 over 1994, gross margin as a percent of net sales decreased
during the same period due to higher manufacturing overhead costs, including
costs associated with ALZA's ongoing quality assurance activities.

GENERAL, ADMINISTRATIVE AND MARKETING

General, administrative and marketing expenses increased to $47.1 million in
1996, compared to $41.1 million in 1995 and $33.4 million in 1994.  The
increase in 1996 was due primarily to sales and marketing expenses related to
the launch of Ethyol-Registered Trademark-, the amortization of the upfront
payment ALZA made in 1995 to U.S. Bioscience for Ethyol-Registered Trademark-
and an increase in overall general and administrative expenses in support of
increased corporate activities.  The increase in 1995, as compared to 1994,
was primarily due to a charge of approximately $7 million for a portion of
the amount ALZA paid to U.S. Bioscience under the marketing and distribution
agreement for Ethyol-Registered Trademark-.    Without this charge, general,
administrative and marketing expenses for 1995 were essentially flat with
1994.  In 1994, general, administrative and marketing expenses included costs
related to the formation of ALZA Pharmaceuticals (ALZA's sales and marketing
division) and launch expenses related to Testoderm-Registered Trademark-.
ALZA Pharmaceuticals was created for the purpose of expanding ALZA's
marketing capabilities in order to commercialize ALZA-developed products,
including those under development with TDC and licensed-in products.  In
1994, ALZA Pharmaceuticals established a U.S. sales force of approximately 50
people and began actively promoting Testoderm-Registered Trademark-.  In
addition to promoting Ethyol-Registered Trademark- and Testoderm-Registered
Trademark-, ALZA Pharmaceuticals co-promotes Glucotrol XL-Registered
Trademark- with Pfizer and Duragesic-Registered Trademark- with Janssen
Pharmaceutica, Inc. ("Janssen") and in 1996 began promoting Bayer
Corporation's Mycelex-Registered Trademark- (clotrimazole) Troche and
co-promoting U.S. Bioscience's Hexalen-Registered Trademark- (altretamine)
and NeuTrexin-Registered Trademark- (trimetrexate glucuronate) products.  At
the end of 1996, ALZA's U.S. sales force had grown to approximately 60
people.

                                        -6-

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PAGE 19 OF PAPER FORMAT ANNUAL REPORT

INTEREST AND OTHER REVENUE

Interest and other revenue, which consists primarily of interest income, was
$54.8 million in 1996, compared to $24.3 million and $17.8 million in 1995
and 1994, respectively.  The increase in 1996 over 1995 was primarily due to
higher average invested cash balances following ALZA's offering of $500
million of 5% convertible subordinated debentures due 2006 (the "5%
Debentures") in April 1996, which resulted in $489 million in net proceeds to
ALZA, and net realized gains of $8.4 million on sales of investments.  Also
included in interest and other revenue in 1996 was a $2.5 million
non-recurring benefit resulting from the issuance to ALZA of shares of common
stock of Vivus, Inc. in exchange for rights to use certain ALZA technology.
Reducing interest and other revenue in 1996 was a non-recurring charge of
$2.8 million related to ALZA's dental business activities and investments.
Operating results of the ALZA and Procter & Gamble partnership have not met
expectations primarily due to lower than expected sales of the Actisite
-Registered Trademark- periodontal fiber.  The increase in interest and other
revenue in 1995 over 1994 was due in large part to higher invested cash
balances.

INTEREST AND OTHER EXPENSE

ALZA reported total interest expense of $43.0 million in 1996, compared to
$23.9 million in 1995 and $19.4 million in 1994.  The increase reflects the
interest expense on the 5% Debentures and the higher outstanding balance on
ALZA's 5 1/4% zero coupon convertible subordinated debentures due 2014 (the
"5 1/4% Debentures"). In mid-1994, ALZA replaced its $250 million commercial
paper program with approximately $337 million of 5 1/4% Debentures.  The
increase in 1995 interest expense as compared to 1994 was due to higher
average outstanding debt as the 5 1/4% Debentures were outstanding for the
full year and a higher average interest rate on such debt.

LIQUIDITY AND CAPITAL RESOURCES

Cash, cash equivalents and short-term investments at the end of 1996
increased 139% as compared to 1995. Unrealized losses on ALZA's investments
at December 31, 1996  were $0.1 million, net of tax effect. At December 31,
1995, ALZA had unrealized gains on its investments of $1.9 million, net of
tax effect.

                                        -7-

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ALZA invested approximately $48.6 million in 1996 and $46.3 million in 1995
in additions to property, plant and equipment to support its expanding
research and development and manufacturing activities.

NET CASH PROVIDED BY OPERATING ACTIVITIES    (PRESENTED GRAPHICALLY IN PAPER
                                              FORMAT ANNUAL REPORT)

(In millions)
                              1996     1995     1994     1993     1992
                             -----    -----     ----     ----     ----
Net Cash Provided by
Operating Activities         $ 135    $ 111     $ 74     $ 76     $ 97

NET CASH PROVIDED BY OPERATING ACTIVITIES

In April 1996, ALZA completed a $500 million public offering of the 5%
Debentures which resulted in $489 million of net proceeds to ALZA.  The
proceeds of the offering will be used for general corporate purposes, which
may include expansion of ALZA's pharmaceutical business (including sales and
marketing activities); expansion of its research and development and
manufacturing facilities; expenditures under existing or future joint
ventures, partnerships or other similar arrangements; the completion or
continuation of the development of TDC products if ALZA exercises its right
to license any or all of the TDC products or its purchase option with respect
to TDC; the acquisition of assets, technologies, products and businesses to
expand ALZA's operations; and working capital.

In January 1997, ALZA entered into an agreement with U.S. Bioscience under
which U.S. Bioscience will sell approximately 1.2 million of its common
shares to ALZA (4.9% of the outstanding common shares of U.S. Bioscience) at
a purchase price of $18.256 per share, for an aggregate investment of $21.5
million. U.S. Bioscience will spend a portion of the proceeds on programs
supporting the Ethyol-Registered Trademark- product.

In February 1997, ALZA entered into an agreement with Alkermes, Inc.
("Alkermes") under which Alkermes will sell 2.0 million of its common shares
to ALZA (9.7% of the outstanding common shares of Alkermes) at a purchase
price of $25 per share, for an aggregate investment of $50 million.
Separately, ALZA and Alkermes agreed to collaborate on a program for the
development and commercialization of a

                                        -8-

<PAGE>

PAGE 20 OF PAPER FORMAT ANNUAL REPORT

product utilizing Alkermes' drug delivery technology.  ALZA will fund the
development costs of the program and will have worldwide commercialization
rights to the product.  Alkermes will receive royalties based on product
sales and it is anticipated that Alkermes will manufacture the product.

OUTLOOK

The following is intended to provide an outlook for 1997 and beyond.  To the
extent any statements made in this Annual Report, including this section,
deal with information that is not historical, these statements are
necessarily forward-looking.  As such, they are subject to the occurrence of
many events outside ALZA's control and are subject to various risk factors
that could cause ALZA's results to be materially different from those
presented in the outlook.  These factors are described in ALZA's reports on
Forms 10-K and 10-Q filed with the Securities and Exchange Commission and
include, without limitation, the inherent risk of product development
failure, the risk of clinical outcomes, regulatory risks and risks related to
proprietary rights, market acceptance (including third-party reimbursement)
and competition.

ROYALTIES AND FEES

ALZA expects royalties and fees (exclusive of non-recurring items) to
continue to increase in 1997 as a result of sales growth from products
currently marketed by client companies and from the introduction of several
products which have recently received marketing clearance and, to a lesser
extent, products which are awaiting approval by regulatory authorities
outside of the United States.  Sales of Procardia XL -Registered Trademark-
by Pfizer, which accounted for approximately 42% of ALZA's royalties and fees
in 1996, decreased 11% from 1995, and are likely to continue to decline.
ALZA cannot predict 1997 sales levels for this product.

Sales of products from which ALZA derives royalties and fees are affected by
the clients' marketing efforts and the introduction and marketing of
competing products, among other factors.  Most of the factors affecting
royalties and fees are therefore not within ALZA's control.

                                        -9-

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RESEARCH AND DEVELOPMENT

THERAPEUTIC DISCOVERY CORPORATION  At the end of 1996, ALZA filed a New Drug
Application for a second-generation transdermal testosterone product and ALZA
and TDC had a number of products in development, including several in
clinical evaluation.  If 1996 TDC product development expenditure levels
continue in 1997, it can be expected that all TDC funds available for product
development will be exhausted during the second half of 1997.  ALZA has an
option, exercisable at ALZA's sole discretion, to purchase all (but not less
than all) of the outstanding shares of TDC Class A common stock (the
"Purchase Option").  The Purchase Option will expire, if not exercised, on
the 60th day after TDC files a Form 10-K or Form 10-Q with the Securities and
Exchange Commission containing a balance sheet showing less than an aggregate
of $5 million in cash and cash equivalents, short-term investments and
long-term investments.  During any period when TDC no longer has funds
available for product development, but ALZA has not yet made a determination
whether or not to exercise its Purchase Option, ALZA will likely need to
continue funding TDC product development at its own expense in order to keep
the product development programs intact.

Under the formula set forth in TDC's Restated Certificate of Incorporation,
the Purchase Option exercise price is expected to be $100 million.  The
purchase price may be paid in cash, ALZA common stock or any combination of
the two, at the option of ALZA.  If ALZA were to exercise the Purchase
Option, ALZA would incur a one-time charge for the acquisition of in-process
technology and might realize certain tax benefits.  If ALZA were to decide
not to exercise the Purchase Option, ALZA would have the right, for an
additional 90 days, to license any or all TDC products, on a
product-by-product and country-by-country basis.  ALZA would make payments to
TDC, with respect to any licensed products, for countries as to which the
license option is exercised, based on sales of the licensed products by ALZA
in those countries and any up-front fees or sublicensing revenues received by
ALZA from third parties marketing the licensed products in those countries.

                                        -10-

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PAGE 21 OF PAPER FORMAT ANNUAL REPORT

If ALZA were to exercise the Purchase Option, ALZA would need to fund any
continuing development expenses for TDC products.  If ALZA were to choose not
to exercise the Purchase Option, but to license some or all of the products,
ALZA would need to fund the additional product development activities
necessary to complete the licensed products.  If ALZA were to use its own
funds to cover these expenses, the product development activities would
result in research and development expenses without the corresponding
research and development revenues previously provided by TDC.  ALZA could
also choose to fund the expenses by partnering with third parties for the
continued development and commercialization of some or all of the products,
either on a worldwide basis or in specified markets. Alternatively, ALZA
could determine to continue product development through other financing
arrangements.

ALZA has not made a decision as to whether it will exercise the Purchase
Option or its license option for any TDC products (except with respect to the
two products for which ALZA has already exercised the license option), and
ALZA does not anticipate making this decision until TDC has exhausted its
funds available for product development.

PHARMACEUTICAL COMPANY CLIENTS  To maintain or increase 1996 product
development revenue levels, ALZA will need to enter into new arrangements
with client companies to replace revenues lost when programs terminate or
products are submitted for regulatory clearance or are cleared for marketing.
Development agreements with client companies are generally terminable by the
clients on short notice and may be terminated for many reasons, including
technical issues, marketing concerns, reallocation of client resources, and
changes in client priorities.  In addition, revenues from any particular
client program will decrease dramatically once the New Drug Application for
the product has been filed, and could decrease earlier if the client, rather
than ALZA, were to undertake the clinical development of the product. In
addition, to the extent that TDC client revenues are no longer available,
ALZA would need to significantly increase revenues under agreements with
pharmaceutical company clients in order to maintain current research and
development revenue levels.

                                        -11-

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ALZA TECHNOLOGY INSTITUTE  ALZA expects to increase its internal research
expenditures in 1997 through the ALZA Technology Institute in order to
continue strengthening the Company's leadership in the drug delivery field.
Areas of focus for 1997 include the further development of the E-TRANS-TM-
electrotransport, DUROS-TM- implant, D-TRANS-TM- and E-TRANS-TM- skin
interface, Liquid OROS-Registered Trademark- and RingCap-TM- technologies and
the application of ALZA's technologies to the biotechnology and gene therapy
fields.

NET SALES

ALZA expects that contract manufacturing revenues may decrease somewhat in
1997 compared to 1996 levels.  In 1996, ALZA manufactured and shipped
significant quantities of product in anticipation of product launches.  Net
sales of launch quantities are not necessarily indicative of future net sales
and ALZA does not anticipate manufacturing such launch quantities in 1997.
Because many factors affecting contract manufacturing activities are not
within ALZA's control, revenues will fluctuate from period to period
depending on the volume, mix and timing of orders received from client
companies.  However, net sales of ALZA-marketed products are expected to
increase in 1997, primarily due to anticipated increasing sales of Ethyol
-Registered Trademark-.

GENERAL, ADMINISTRATIVE AND MARKETING EXPENSES

General, administrative and marketing expenses are expected to remain flat or
slightly higher than 1996 levels based on currently planned operations.
However, if ALZA were to in-license additional products, or to enter into
additional collaborations, general, administrative and marketing expenses
likely would increase as a result of both the costs involved in the
transactions and the costs of the new activities.

ALZA TTS RESEARCH PARTNERS, LTD.

Duragesic-Registered Trademark- has been a very successful product for ALZA
and Janssen, which markets the product under a distribution agreement with
ALZA.  ALZA developed Duragesic-Registered Trademark- on behalf of the ALZA
TTS Research Partners, Ltd. (the "TTS Partnership"), a limited partnership
from which ALZA licenses the product.  The TTS Partnership receives payments
from ALZA equal to 4% of Janssen's net sales of Duragesic-Registered
Trademark-.

                                        -12-

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PAGE 22 OF PAPER FORMAT ANNUAL REPORT

ALZA's license from the TTS Partnership for Duragesic-Registered Trademark-
will become nonexclusive on December 4, 1998. Once ALZA's license becomes
nonexclusive, the TTS Partnership will need to determine whether to grant
nonexclusive licenses to third parties.  Under ALZA's distribution agreement
with Janssen for the Duragesic-Registered Trademark- product, if ALZA's
license from the TTS Partnership becomes nonexclusive and if the TTS
Partnership licenses the product to a third party and the third party
introduces the product, Janssen's royalty payable to ALZA will drop
significantly, however, ALZA will continue to owe the TTS Partnership 4% of
Janssen's net sales.

ALZA has an option to purchase all of the interests in the TTS Partnership
for $120 million less amounts paid by ALZA to the TTS Partnership under its
license to ALZA prior to the date the option is exercised.  (As of December
31, 1996, ALZA has paid the Partnership $18.3 million under its license).
The exercise price is payable in cash, ALZA common stock, or a combination of
the two at ALZA's option.  Because ALZA's licenses to the Duragesic
-Registered Trademark- (and Testoderm-Registered Trademark- products) will
become nonexclusive in 1998, ALZA will need to consider, in 1997 or 1998,
whether it wishes to exercise its purchase option or otherwise offer to
purchase all of the limited partnership interests in the TTS Partnership.

LIQUIDITY AND CAPITAL RESOURCES

ALZA believes that its existing cash and investment balances are adequate to
fund its cash needs for 1997 and beyond. In addition, should the need arise,
ALZA believes it would be able to borrow additional funds or otherwise raise
additional capital.  ALZA may consider using its capital to make strategic
investments or to acquire or license technology or products.  ALZA may also
enter into strategic alliances with third parties which could provide
additional funding for research and product development and support for
product marketing and sales.

LOOKING BEYOND 1997

Over the longer term, ALZA intends to become less dependent on royalties and
fees as ALZA's sales and marketing activities expand and as ALZA directly
markets more products (including products developed with TDC); however, there
can be no assurance that these expanded activities will be successful due to
factors such as the risks of product

                                        -13-

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PAGE 22 OF PAPER FORMAT ANNUAL REPORT

development, the length of the regulatory approval process and acceptance of
products by the intended markets.

ALZA also expects that gross margins, as a percent of net sales, will
continue to increase over the longer term, although quarter-to-quarter
fluctuations will continue to occur.  Higher gross margins may be achieved
through a proportionate increase in the sales of ALZA-marketed products,
increased utilization of capacity and greater operating efficiencies.

                                        -14-

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PAGE 23 OF PAPER FORMAT ANNUAL REPORT

CONSOLIDATED STATEMENT OF INCOME

<TABLE>
<CAPTION>
Years ended December 31,
(In millions, except per share amounts)                1996      1995      1994
                                                       ----      ----      ----
<S>                                                 <C>       <C>       <C>
REVENUES:

Royalties and fees                                  $ 171.4   $ 145.4   $ 123.8
Research and development, including amounts from
   TDC (1996-$100.7; 1995-$70.1; 1994-$31.6)          131.2     104.0      68.7
Net sales                                             108.6      76.9      68.5
Interest and other                                     54.8      24.3      17.8
                                                    -------   -------   -------
   Total revenues                                     466.0     350.6     278.8

COSTS AND EXPENSES:

Research and development                              141.6     103.4      76.1
Costs of products shipped                              85.2      65.4      56.6
General, administrative and marketing                  47.1      41.1      33.4
Interest and other                                     43.0      23.9      19.4
                                                    -------   -------   -------
   Total costs and expenses                           316.9     233.8     185.5
                                                    -------   -------   -------

Income before income taxes                            149.1     116.8      93.3

Provision for income taxes                             56.7      44.4      35.2
                                                    -------   -------   -------
Net income                                          $  92.4   $  72.4   $  58.1
                                                    -------   -------   -------
                                                    -------   -------   -------
Net income per common and common equivalent share   $  1.08*  $  0.88   $  0.71
                                                    -------   -------   -------
                                                    -------   -------   -------
Weighted average common and dilutive common
   equivalent shares                                   94.2      82.6      82.3
                                                    -------   -------   -------
                                                    -------   -------   -------
</TABLE>

See accompanying notes.

*   Earnings per share calculation uses adjusted net income of $101.6.  See
Note 1 of the Notes to Consolidated Financial Statements.

                                        -15-

<PAGE>

PAGE 24 OF PAPER FORMAT ANNUAL REPORT


CONSOLIDATED BALANCE SHEET

December 31,
(In millions, except per share amounts)                       1996        1995
                                                              ----        ----
ASSETS:
CURRENT ASSETS:

Cash and cash equivalents                               $    187.7    $   88.0
Short-term investments                                       812.1       331.1
Receivables, net of allowance for doubtful accounts
 (1996-$0.6; 1995-$0.2)                                      116.6       108.0
Inventories                                                   39.2        34.5
Prepaid expenses and other current assets                     19.2        16.5
                                                         ---------     -------
   Total current assets                                    1,174.8       578.1

PROPERTY, PLANT AND EQUIPMENT:
Buildings and leasehold improvements                         228.7       178.7
Equipment                                                    144.2       130.0
Construction in progress                                      18.1        33.8
Land and prepaid land leases                                  17.1        17.0
                                                         ---------     -------
                                                             408.1       359.5
Less accumulated depreciation and amortization              (100.3)      (82.5)
                                                         ---------     -------
   Net property, plant and equipment                         307.8       277.0

Other assets                                                 131.1        82.1
                                                         ---------     -------
   TOTAL ASSETS                                          $ 1,613.7     $ 937.2
                                                         ---------     -------
                                                         ---------     -------
LIABILITIES AND STOCKHOLDERS' EQUITY:
CURRENT LIABILITIES:

Accounts payable                                         $    28.7     $  20.0
Accrued liabilities                                           37.2        29.4
Deferred revenue                                               0.4        17.6
Current portion of long-term debt                              0.9         0.9
                                                         ---------     -------
   Total current liabilities                                  67.2        67.9

5% convertible subordinated debentures                       500.0           -
5 1/4% zero coupon convertible subordinated debentures       382.3       362.9
Other long-term liabilities                                   67.5        51.8
Commitments and contingencies

STOCKHOLDERS' EQUITY:
Common stock, $.01 par value,
 300.0 shares authorized; 84.6 and
 82.5 shares issued and outstanding at
 December 31, 1996 and 1995, respectively                      0.8         0.8
Additional paid-in capital                                   362.2       310.5
Unrealized (losses) gains on available-for-sale
 securities, net of tax effect                                (0.1)        1.9
Retained earnings                                            233.8       141.4
                                                         ---------     -------
   Total stockholders' equity                                596.7       454.6
                                                         ---------     -------
   TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY            $ 1,613.7     $ 937.2
                                                         ---------     -------
                                                         ---------     -------


 See accompanying notes.



                                        -16-

<PAGE>



PAGE 25 OF PAPER FORMAT ANNUAL REPORT

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

Years ended December 31, 1996, 1995, and 1994
(In millions)

<TABLE>
<CAPTION>
                                                                     UNREALIZED
                                                                   GAINS (LOSSES)                   TOTAL
                                                   ADDITIONAL       ON AVAILABLE-                   STOCK-
                                       COMMON       PAID-IN           FOR-SALE        RETAINED     HOLDERS'
                                       STOCK        CAPITAL          SECURITIES       EARNINGS      EQUITY
                                      --------    ------------     -------------     ----------   ---------
<S>                                   <C>          <C>             <C>               <C>          <C>
BALANCE, DECEMBER 31, 1993            $    0.8    $      295.0     $           -     $     10.9   $   306.7

Common stock issued                          -             7.2                 -              -         7.2
Unrealized losses on available-for-
    sale securities, net of tax effect       -               -              (7.5)             -        (7.5)
Net income                                   -               -                 -           58.1        58.1
                                      --------    ------------     -------------     ----------   ---------
BALANCE, DECEMBER 31, 1994                 0.8           302.2              (7.5)          69.0       364.5

Common stock issued                          -             8.3                 -              -         8.3
Unrealized gains on available-for-
    sale securities, net of tax effect       -               -               9.4              -         9.4
Net income                                   -               -                 -           72.4        72.4
                                      --------    ------------     -------------     ----------   ---------
BALANCE, DECEMBER 31, 1995                 0.8           310.5               1.9          141.4       454.6

Common stock issued                          -            51.7                 -              -        51.7
Unrealized losses
 on available-for-
   sale securities, net of tax effect        -               -              (2.0)             -        (2.0)
Net income                                   -               -                 -           92.4        92.4
                                      --------    ------------     -------------     ----------   ---------
BALANCE, DECEMBER 31, 1996            $    0.8    $      362.2     $        (0.1)    $    233.8   $   596.7
                                      --------    ------------     -------------     ----------   ---------
                                      --------    ------------     -------------     ----------   ---------

</TABLE>
See accompanying notes.

                                        -17-

<PAGE>


PAGE 26 OF PAPER FORMAT ANNUAL REPORT

CONSOLIDATED STATEMENT OF CASH FLOWS
Years ended December 31,
(In millions)
                                                       1996       1995     1994
                                                       ----       ----     ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income                                        $    92.4    $  72.4  $  58.1
Non-cash adjustments to reconcile net income
   to net cash provided by operating activities:
  Depreciation and amortization                        22.0       15.3     13.7
  Interest on 5 1/4% zero coupon convertible
   subordinated debentures                             19.3       18.4      8.1
  Decrease (increase) in assets:
   Receivables                                         (8.6)     (23.1)   (28.3)
   Inventories                                         (4.7)      (1.1)    (8.3)
   Prepaid expenses and other current assets           (1.2)       6.2     (1.4)
  Increase (decrease) in liabilities:
   Accounts payable                                     8.7          -      8.3
   Accrued liabilities                                  7.8       10.6      1.4
   Deferred revenue                                   (17.2)       1.3      9.6
   Other long-term liabilities                         16.7       11.4     13.1
                                                  ---------    -------  -------
     Total adjustments                                 42.8       39.0     16.2
                                                  ---------    -------  -------
        Net cash provided by operating activities     135.2      111.4     74.3

CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures                                  (48.6)     (46.3)   (37.2)
Purchases of available-for-sale securities         (1,125.2)    (205.2)  (328.9)
Sales of available-for-sale securities                542.6      134.1    147.9
Maturities of available-for-sale securities            98.1       12.0    102.1
Increase in cash surrender
  value-life insurance and prepaid premiums           (20.3)      (4.1)   (12.3)
Decrease (increase) in other assets                   (21.5)     (10.2)     4.4
                                                  ---------    -------  -------
        Net cash used in investing activities        (574.9)    (119.7)  (124.0)

CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from 5% convertible subordinated
   debentures                                         488.8          -        -
Net proceeds from 5 1/4% zero coupon convertible
   subordinated debentures                                -          -    328.1
Maturities of commercial paper, net                       -          -   (249.6)
Principal payments on long-term debt                   (1.1)      (0.8)    (0.9)
Issuances of common stock                              51.7        8.3      7.2
                                                  ---------    -------  -------
        Net cash provided by financing activities     539.4        7.5     84.8
                                                  ---------    -------  -------
Net increase (decrease) in cash and
  cash equivalents                                     99.7       (0.8)    35.1

Cash and cash equivalents at beginning of year         88.0       88.8     53.7
                                                  ---------    -------  -------
Cash and cash equivalents at end of year          $   187.7    $  88.0  $  88.8
                                                  ---------    -------  -------
                                                  ---------    -------  -------
See accompanying notes.

                                        -18-

<PAGE>


PAGE 27 OF PAPER FORMAT ANNUAL REPORT

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 1996, 1995, AND 1994

NOTE 1:  BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

ALZA Corporation ("ALZA" or the "Company") develops a broad range of
pharmaceutical products based on ALZA's proprietary therapeutic systems
technologies, primarily under joint development and commercialization
agreements with ALZA's client companies, including Therapeutic Discovery
Corporation ("TDC").

Royalties and fees include royalty revenue and other payments based on sales
by ALZA's client companies of products developed under joint development and
commercialization agreements, and certain one-time or infrequent fees or
similar payments under such agreements.  Fees for promotion and co-promotion
of certain products which are generally contingent on sales performance are
also included in royalties and fees.

Revenues from development activities with client companies are reported as
research and development revenue.  ALZA's research and development revenue
represents clients' reimbursement to ALZA of costs incurred in product
development and clinical evaluation, including a portion of general and
administrative expenses, and therefore does not contribute significantly to
current net income.  ALZA's policy is to expense all costs of research and
product development related to both costs incurred on its own behalf and on
behalf of its clients.

ALZA manufactures all or a portion of the product requirements for certain of
its client companies, including Duragesic-Registered Trademark- (fentanyl)
for Janssen Pharmaceutica, Inc. ("Janssen"), NicoDerm-Registered Trademark-
CQ-TM- and Nicoderm-Registered Trademark- (nicotine) for Hoechst Marion
Roussel, Inc. ("HMR"), Covera-HS-TM- (verapamil) for G.D. Searle,
Catapres-TTS-Registered Trademark- (clonidine) for Boehringer Ingelheim
Pharmaceutical, Inc., Adalat CR-Registered Trademark- (nifedipine) for Bayer
AG and Procardia XL-Registered Trademark- (nifedipine) for Pfizer Inc.
("Pfizer").  In addition, ALZA manufactures and markets directly in the U.S.
its Progestasert-Registered Trademark- (progesterone) system, ALZET
-Registered Trademark- osmotic pumps, the Ocusert-Registered Trademark-

                                        -19-


<PAGE>

PAGE 27 OF PAPER FORMAT ANNUAL REPORT

pilocarpine ocular therapeutic system and the Testoderm-Registered Trademark-
testosterone transdermal system CIII.  ALZA also manufactures the
Actisite-Registered Trademark- (tetracycline hydrochloride) periodontal
fiber, which is marketed in the U.S. by a partnership between ALZA and
Procter & Gamble.  Internationally, Progestasert-Registered Trademark-,
ALZET-Registered Trademark-, Ocusert-Registered Trademark- and Actisite
-Registered Trademark- are marketed by ALZA through distributors.  ALZA also
markets Ethyol-Registered Trademark- (amifostine) in the United States.
Revenues from all of these activities are reported as net sales.  ALZA
recognizes sales revenues at the time of product shipment; sales are net of
discounts, rebates and allowances.  Export sales, principally to distributors
and client companies in Europe, were $23.0 million, $20.1 million, and $16.9
million in 1996, 1995 and 1994, respectively.

Included in interest and other revenue are revenues from ALZA's co-promotion
arrangements with client companies that are not contingent on sales and net
losses from ALZA's partnership with Procter & Gamble. ALZA earned interest
income, including realized gains and losses on sales of investments, of $54.6
million, $26.0 million, and $17.6 million in 1996, 1995 and 1994,
respectively.

TDC accounted for 22% of ALZA's total revenues in 1996, 20% in 1995 and 11%
in 1994; Pfizer accounted for 20% of ALZA's total revenues in 1996, 23% in
1995 and 30% in 1994; Janssen accounted for 13% of ALZA's total revenues in
1996 and 12% in each of 1995 and 1994; and HMR accounted for 10% of ALZA's
total revenues in each of 1996 and 1995.

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of ALZA and its
wholly-owned subsidiaries, ALZA Development Corporation, ALZA International,
Inc. and ALZA Limited.  All significant intercompany accounts and
transactions have been eliminated.

                                        -20-

<PAGE>

 PAGE 27-28 OF PAPER FORMAT ANNUAL REPORT

USE OF ESTIMATES

The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
notes.  Actual results could differ from those estimates.

CASH AND CASH EQUIVALENTS

ALZA reports all highly liquid debt instruments purchased with a maturity of
three months or less as cash equivalents.  The carrying amount reported on
the balance sheet for cash and cash equivalents approximates their fair value.

SHORT-TERM INVESTMENTS

ALZA has classified its entire investment portfolio, including cash
equivalents of $185.2 million and $82.7 million at December 31, 1996 and
1995, respectively, as available-for-sale.  Although ALZA may not dispose of
all of the securities in its investment portfolio within one year, ALZA's
investment portfolio is available for current operations and, therefore, has
been classified as a current asset.  Investments in the available-for-sale
category are carried at fair value with unrealized gains and losses recorded
as a separate component of stockholders' equity.  At December 31, 1996, net
unrealized losses on available-for-sale securities were $0.1 million, net of
$0.1 million tax effect.  At December 31, 1995, net unrealized gains on
available-for-sale securities were $1.9 million, net of $1.3 million tax
effect.  The cost of securities when sold is based upon specific
identification.  Realized gains and losses for the year ended December 31,
1996 were $9.1 million and $0.7 million, respectively.  Realized gains and
losses were not material for the year ended December 31, 1995.

                                        -21-

<PAGE>

PAGE 28 OF PAPER FORMAT ANNUAL REPORT

The following is a summary of ALZA's investment portfolio at December 31,
1996 and 1995:

<TABLE>
<CAPTION>

(In millions)                               December 31, 1996                                     December 31, 1995
                            ------------------------------------------------     -------------------------------------------------
                                                                   Estimated                                             Estimated
                             Amortized   Unrealized   Unrealized     Fair         Amortized   Unrealized    Unrealized     Fair
                                Cost        Gains       Losses       Value          Cost        Gains         Losses       Value
                            -----------  ----------  -----------   ----------     ----------  -----------   -----------  ---------
<S>                         <C>           <C>           <C>          <C>           <C>          <C>           <C>          <C>
U.S. Treasury securities
  and obligations of
  U.S. government
  agencies                  $     434.1  $      1.0  $       1.8   $    433.3     $    150.9  $       1.4   $       0.6  $   151.7

Collateralized mortgage
  obligations and asset
  backed securities               112.8         0.3          0.4        112.7           43.4          0.3           0.2       43.5

Corporate securities
  (primarily corporate
  notes and commercial
  paper)                          450.6         1.9          1.2        451.3          216.3          2.3             -      218.6
                            -----------  ----------  -----------   ----------     ----------  -----------   -----------  ---------
                            $     997.5  $      3.2  $       3.4   $    997.3     $    410.6  $       4.0   $       0.8  $   413.8
                            -----------  ----------  -----------   ----------     ----------  -----------   -----------  ---------
                            -----------  ----------  -----------   ----------     ----------  -----------   -----------  ---------

</TABLE>

The amortized cost and estimated fair value of debt securities at December
31, 1996 and 1995, by contractual maturity, are shown below.  Expected
maturities will differ from contractual maturities because the issuers of the
securities may have the right to prepay certain of the obligations without
prepayment penalties.
<TABLE>
<CAPTION>


(In millions)                                         1996                                  1995
                                          -----------------------------         ----------------------------
                                                            Estimated                              Estimated
                                           Amortized          Fair               Amortized           Fair
                                              Cost            Value                Cost              Value
                                          -------------   -------------         -------------   ------------
<S>                                         <C>             <C>                   <C>              <C>
Due in one year or less                   $       384.5   $       384.5         $       176.7   $      176.8
Due after one year through four years             428.1           427.8                 138.2          139.6
Due after four years through eight years          184.9           185.0                  95.7           97.4
                                          -------------   -------------         -------------   ------------
                                          $       997.5   $       997.3         $       410.6   $      413.8
                                          -------------   -------------         -------------   ------------
                                          -------------   -------------         -------------   ------------
</TABLE>

CREDIT AND INVESTMENT RISK

Most of ALZA's revenues, comprised primarily of royalties and fees, research
and development revenue and net sales, are derived from agreements with major
pharmaceutical company clients and TDC, all of which have significant cash
resources.  Therefore, ALZA considers its credit risk related to these
transactions to be minimal.

                                        -22-

<PAGE>

PAGE 29 OF PAPER FORMAT ANNUAL REPORT

ALZA invests excess cash in securities of banks and companies from a variety
of industries with strong credit ratings, and in U.S. government obligations.
These securities typically bear minimal risk and ALZA has not experienced any
material losses on its investments due to institutional failure or
bankruptcy.  ALZA's investment policy is designed to limit exposure with any
one institution.

INVENTORIES

Raw materials, work in process and finished goods inventories are stated at
the lower of standard cost (which approximates actual costs on a first-in,
first-out cost method) or market value.

Inventories consist of the following:

(In millions)                        1996      1995
                                   ------    ------
Raw materials                      $ 17.7    $ 15.8
Work in process                      18.0      15.2
Finished goods                        3.5       3.5
                                   ------    ------
     Total inventories             $ 39.2    $ 34.5
                                   ------    ------
                                   ------    ------


PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment are stated at cost, including capitalized
interest additions of $2.2 million in 1996, $1.3 million in 1995 and $0.3
million in 1994.  Additions and improvements are capitalized; maintenance and
repairs are expensed as incurred.  Except for certain manufacturing equipment
that is depreciated on a per unit manufactured basis, depreciation and
amortization are computed on the straight-line method, over estimated useful
lives, as follows:

Buildings                     30 to 40 years
Leasehold improvements        Terms of the leases (1 to 5 years)
Equipment                     3 to 9 years
Prepaid land leases           Remaining terms of the leases (17 to 61 years)


Depreciation and amortization expense was $17.8 million, $14.8 million and
$13.4 milion for 1996, 1995 and 1994, respectively.  Prepaid land leases
represent ALZA's total cost, paid in advance, of leasehold

                                        -23-
<PAGE>

PAGE 29-30 OF PAPER FORMAT ANNUAL REPORT

rights to land upon which certain of ALZA's buildings in Palo Alto,
California are situated.  Included in construction in progress are payments
made in connection with facilities being constructed or modified, and the
installation of related equipment in Mountain View, California (primarily
research and development) and Vacaville, California (primarily commercial
manufacturing).

ACCRUED LIABILITIES

The details of ALZA's accrued liabilities are as follows:

(In millions)                        1996      1995
                                   ------    ------
Accrued compensation               $ 15.4    $ 13.4
Accrued income taxes                  7.3       2.1
Other accrued liabilities            14.5      13.9
                                   ------    ------
     Total accrued liabilities     $ 37.2    $ 29.4
                                   ------    ------
                                   ------    ------

ADVERTISING COSTS

Advertising costs are accounted for as expenses in the period in which they
are incurred.  Advertising expense for the years ended December 31, 1996,
1995 and 1994 was $4.4 million, $3.3 million and $3.7 million, respectively.

PER SHARE INFORMATION

Per share information is based on weighted average common and dilutive common
equivalent shares, including ALZA common stock, warrants and options, for the
period each was outstanding.  The 5 1/4% zero coupon convertible subordinated
debentures are considered common stock equivalent shares, but were not
included in the per share calculation for 1995 or 1994 as their inclusion
would have had an antidilutive effect. Shares issuable upon an assumed
conversion of the 5 1/4% zero coupon convertible subordinated debentures were
dilutive for the last three quarters of 1996.  Consequently, a total of 9.2
million shares are included in weighted average common and dilutive common
equivalent shares for the year ended December 31, 1996. The 5% convertible
subordinated debentures are not considered common stock equivalents.  Fully
diluted earnings per share are not presented since dilution is less than 3%
for each year presented.


                                        -24-

<PAGE>

PAGE 30 OF PAPER FORMAT ANNUAL REPORT

NOTE 2:  U.S. BIOSCIENCE, INC.

In December 1995, ALZA entered into a marketing and distribution agreement
with U.S. Bioscience, Inc. ("U.S. Bioscience") for Ethyol-Registered
Trademark-. Under the terms of the agreement, ALZA has exclusive rights to
market the product in the United States for five years, and is responsible
for sales and marketing; the U.S. Bioscience sales force co-promotes the
product with ALZA.  ALZA launched the product in early 1996.  After the
five-year period, which ALZA has an option to extend for one year, marketing
rights to Ethyol-Registered Trademark- will revert to U.S. Bioscience and
ALZA will receive payments from U.S. Bioscience for ten years based on
continued sales of the product.  ALZA paid U.S. Bioscience an up-front
payment and initial distribution fee totaling $20 million.  Of this amount,
approximately $13 million was capitalized and attributed to the product as
originally cleared for marketing by the Food and Drug Administration.
Approximately $7 million was charged to general, administrative and marketing
expenses and was attributed to potential expanded product indications.  ALZA
expects to pay an additional $15 million in distribution fees through 1999
based on U.S. Bioscience clinical activities relating to Ethyol-Registered
Trademark-. The up-front payment and initial distribution fee are being
amortized on a straight-line basis over the term of the agreement and are
included in general, administrative and marketing expenses.  See Note 11 for
additional information related to U.S. Bioscience.

NOTE 3:  DEBT OBLIGATIONS AND OTHER LONG-TERM LIABILITIES

In April 1996, ALZA completed a $500 million public offering of 5%
convertible subordinated debentures due 2006 (the "5% Debentures").  The
offering resulted in approximately $489 million of net proceeds to ALZA.
Interest is payable semiannually on May 1 and November 1 of each year,
commencing November 1, 1996. Each 5% Debenture is convertible, at the option
of the holder, at any time prior to maturity, unless previously redeemed or
repurchased, into shares of ALZA common stock at a conversion price of $38.19
per share, subject to certain anti-dilution adjustments.  In connection with
the offering, ALZA incurred underwriting fees and other costs of $12.1
million, which are included in other assets and are being amortized over the
term of the 5% Debentures.  The 5% Debentures rank pari passu with ALZA's
outstanding 5 1/4% zero coupon convertible subordinated debentures discussed
below.  The proceeds of the
                                        -25-


<PAGE>



PAGE 30-31 OF PAPER FORMAT ANNUAL REPORT

offering will be used for general corporate purposes, which may include
expansion of ALZA's pharmaceutical business (including its sales and
marketing activities); expansion of its research and development and
manufacturing facilities; expenditures under existing or future joint
ventures, partnerships or other similar arrangements; the completion or
continuation of the development of TDC products if ALZA exercises its right
to license any or all of the TDC products or its purchase option with respect
to TDC; the acquisition of assets, technologies, products and businesses to
expand ALZA's operations; and working capital.  The 5% Debentures are listed
for trading on the New York Stock Exchange.  At December 31, 1996 the fair
value of the 5% Debentures was $490 million.

In July 1994, ALZA completed a public offering of 5 1/4% zero coupon
convertible subordinated debentures due 2014 (the "5 1/4% Debentures").  The
5 1/4% Debentures were issued at a price of $354.71 per $1,000 principal
amount at maturity.  The offering resulted in $328.1 million of net proceeds
to ALZA.  Approximately $250 million of the net proceeds were used to retire
ALZA's outstanding commercial paper; the remainder was available for general
corporate purposes.  The 5 1/4% Debentures, due July 2014, have a principal
amount at maturity of $948.8 million, with a yield to maturity of 5 1/4% per
annum, computed on a semiannual bond equivalent basis.  There are no periodic
interest payments. At the option of the holder, each 5 1/4% Debenture is
convertible into 12.987 shares of common stock at any time.  At the option of
the holder, the 5 1/4% Debentures will be purchased by ALZA on July 14, 1999,
July 14, 2004 or July 14, 2009, at a purchase price equal to the issue price
plus accreted original issue discount to such purchase date.  ALZA, at its
option, may elect to deliver either common stock or cash in the event of
conversion or purchase of the 5 1/4% Debentures. ALZA, at its option, may
redeem any or all of the 5 1/4% Debentures for cash after July 14, 1999 at a
redemption price equal to the issue price plus accreted original issue
discount.  In connection with the offering, ALZA incurred underwriting fees
and other costs of $9.0 million, which are included in other assets and are
being amortized over the term of the 5 1/4% Debentures.  The 5 1/4%
Debentures are listed for trading on the New York Stock Exchange.  At
December 31, 1996 and 1995 the fair value of the 5 1/4% Debentures was $397.3
million and $387.8 million, respectively.

                                        -26-
<PAGE>


PAGE 31 OF PAPER FORMAT ANNUAL REPORT

ALZA's other long-term liabilities are as follows:

(In millions)                                 1996                     1995
                                            ------                   ------
Deferred compensation                       $ 31.2                   $ 26.0
Deferred income taxes                         25.4                     25.7
Long-term debt                                10.9                      0.1
                                            ------                   ------

     Total other long-term liabilities      $ 67.5                   $ 51.8
                                            ------                   ------
                                            ------                   ------


ALZA has deferred compensation arrangements under which selected employees
may defer a portion of their salaries.  ALZA has purchased life insurance
policies that it intends to use to partially finance amounts to be paid in
the future to participants, based on their deferred salary amounts and
interest.

Included in long-term debt are $10.8 million in notes representing the
required future payments under an $11.9 million investment (included in other
assets) in low income housing partnerships.  The aggregate annual maturities
of long-term debt at December 31, 1996, payable in each of the years 1998
through 2002 and thereafter are $2.6 million, $1.7 million, $1.6 million,
$1.6 million, $1.5 million and $1.9 million, respectively.

NOTE 4:  CAPITAL STOCK AND WARRANTS

In January 1996, privately held warrants to purchase 1.0 million shares of
ALZA common stock were exercised.  Net proceeds to ALZA totaled $25 million.

In connection with the formation of TDC, ALZA issued warrants to purchase
approximately 1.0 million shares of common stock at an exercise price of $65
per share.  The warrants, to the extent not exercised, will expire on
December 31, 1999.

ALZA is authorized to issue 100,000 shares of preferred stock, $.01 par
value, none of which was outstanding at December 31, 1996 or 1995.  The Board
of Directors may determine the rights, preferences and privileges of any
preferred stock issued in the future.

                                        -27-

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PAGE 32 OF PAPER FORMAT ANNUAL REPORT

NOTE 5:  ARRANGEMENTS WITH THERAPEUTIC DISCOVERY CORPORATION

In June 1993, ALZA distributed a special dividend of Units to ALZA
stockholders.  Each Unit consisted of one share of Therapeutic Discovery
Corporation Class A common stock and one warrant to purchase one-eighth of
one share of ALZA common stock.  On June 11, 1996, the component parts of the
Units began trading separately on the Nasdaq Stock Market.  The TDC Class A
common stock trades under the symbol TDCA, and the ALZA warrants trade under
the symbol ALZAW.

TDC was formed by ALZA for the purpose of selecting and developing new human
pharmaceutical products combining ALZA's proprietary drug delivery technology
with various drug compounds, and commercializing such products, most likely
through licensing to ALZA.  ALZA and TDC have a development agreement (the
"Development Contract") pursuant to which ALZA conducts research and
development activities on behalf of TDC.  Product development revenue from
TDC during 1996, 1995 and 1994 under the contract was $100.7 million, $70.1
million and $31.6 million, respectively.

ALZA has an option to license all of the products developed by TDC, on a
product-by-product and country-by-country basis, providing ALZA with access
to a potential pipeline of products for worldwide commercialization. If ALZA
exercises its license option for any product, ALZA will make royalty payments
to TDC (if the product is sold by ALZA) up to a maximum of 5% of ALZA's net
sales of such product or, if the product is sublicensed to a third party,
ALZA will pay TDC up to 50% of ALZA's sublicensing revenues with respect to
the product.  The exact percentages of net sales and ALZA's sublicensing
revenue payable to TDC will depend on the amount of TDC's funding of the
product.  ALZA has an option, exercisable on a product-by-product basis, to
buy out its royalty obligation to TDC by making a one-time payment that is a
multiple of royalties and sublicensing fees paid in specified periods.

ALZA also has an option, exercisable at ALZA's sole discretion, to purchase,
according to a predetermined formula, all (but not less than all) of the
outstanding shares of TDC Class A common stock (the "Purchase

                                        -28-
<PAGE>


PAGE 32 OF PAPER FORMAT ANNUAL REPORT

Option").  The Purchase Option is exercisable at any time until December 31,
1999, or later under certain circumstances.  The Purchase Option will expire,
in any event, on the 60th day after TDC files a Form 10-K or Form 10-Q
containing a balance sheet showing less than an aggregate of $5.0 million in
cash and cash equivalents, short-term investments and long-term investments.
At December 31, 1996, TDC reported cash and cash equivalents, short-term
investments and long-term investments of $85.3 million.  Based on TDC's
current rate of expenditures, it can be expected that all TDC funds available
for product development will be exhausted during the second half of 1997.
Under the formula set forth in TDC's Restated Certificate of Incorporation,
the Purchase Option exercise price is expected to be $100 million.  The
purchase price may be paid in cash, in ALZA common stock, or any combination
of the two, at the option of ALZA.

ALZA performs certain administrative services for TDC under an administrative
services agreement (terminable at the option of TDC), for which ALZA is
reimbursed its direct costs, plus certain overhead expenses.  For the years
ended 1996, 1995 and 1994, administrative service revenue under this
agreement was $0.2 million, $0.1 million and $0.2 million, respectively, and
is included in interest and other revenue.

NOTE 6:  EMPLOYEE COMPENSATION AND BENEFIT PROGRAMS

In 1993, ALZA adopted a company-wide bonus program under which substantially
all regular employees are eligible to receive a bonus.  The annual bonus, if
any, is determined by ALZA's Board of Directors, at its discretion, based on
the Company's performance during the year. Bonus and award expenses under
this program for 1996, 1995 and 1994 were $6.9 million, $5.3 million and $2.6
million, respectively.

In 1986, ALZA adopted a company-funded, defined contribution retirement plan
for its employees.  This plan provides for an annual basic contribution and
allows for additional discretionary contributions on a

                                        -29-

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PAGE 32-33 OF PAPER FORMAT ANNUAL REPORT

year-by-year basis. Such contributions are allocated to participants based on
the participant's salary and age. For 1996, 1995 and 1994, the total expense
for such contributions to this plan was $2.9 million, $2.7 million and $2.2
million, respectively.

ALZA has an employee savings plan which permits participants to make
contributions by salary reductions pursuant to section 401(k) of the Internal
Revenue Code.  Beginning in 1996, the Company matched contributions up to a
maximum of $1,000 per participant.  ALZA's contribution to the plan was $0.7
million in 1996.

The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations in accounting for its employee stock options and employee
stock purchase plan because, as discussed below, the alternative fair value
accounting  provided for under Financial Accounting Standards Board Statement
No. 123, "ACCOUNTING FOR STOCK-BASED COMPENSATION" ("SFAS 123"), requires use
of option valuation models that were not developed for use in valuing
employee stock options.  Under APB 25, because the exercise price of the
Company's employee stock options equals the market price of the underlying
stock on the date of grant, no compensation expense is recognized.

ALZA has a stock option plan, adopted in 1992 and amended in 1995, whereby
incentive stock options to purchase shares of ALZA common stock at not less
than the fair market value of the stock at the date of the grant, and
nonstatutory stock options to purchase shares of ALZA common stock at not
less than 85% of the fair market value of the stock at the date of grant,
have been and may be granted to certain present and potential employees,
directors and consultants.  Options typically vest one to three years from
date of grant and generally expire ten years after the date of grant.  Grants
of restricted stock also may be made under the plan; to date no restricted
stock has been granted.  A total of 5,637,621 shares of ALZA's common stock
have been reserved for common shares issuable under its stock option plan
which was adopted in 1992 and amended in 1995.  To date, all options granted
have had exercise prices equal to the

                                        -30-

<PAGE>


PAGE 33 OF PAPER FORMAT ANNUAL REPORT

fair market value of common stock on the date of grant.  Options granted
under previous plans also remain outstanding, but no additional options may
be granted under such plans.

Pro forma information regarding net income and net income per share is
required by SFAS 123, and has been determined as if the Company had accounted
for its employee stock options under the fair value method of SFAS 123.  The
fair value for these options was estimated at the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions for 1996 and 1995:  risk-free interest rates in the range of
4.78% to 7.48%; dividend yields of zero; an expected volatility factor of the
market price of the Company's common stock of 0.30; and an expected life of
the option in the range of 2.3 to 5.3 years.

The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable.  In addition, option valuation models require the input
of highly subjective assumptions including the expected stock price
volatility and expected option life.  Because the Company's employee stock
options have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a reliable single measure of the
fair value of its employee stock options.

ALZA has an employee stock purchase plan under which essentially all ALZA's
employees may participate and purchase stock at 85% of its fair market value
at certain specified dates.  Employee contributions are limited to 15% of
compensation and no more than 300,000 shares may be purchased by all
participants in any plan year.  In 1996, 1995 and 1994 an aggregate of
237,950, 165,314 and 157,075 shares, respectively, of ALZA common stock were
purchased by the participants under the terms of this plan.  Since adoption
of this plan in 1984, 1,405,398 shares have been issued under this plan and
644,602 shares are available for issuance.  The fair value of the employees'
purchase rights was estimated using the Black-Scholes option pricing model
with the following weighted-average assumptions for 1996 and

                                        -31-

<PAGE>


PAGE 33-34 OF PAPER FORMAT ANNUAL REPORT

1995:  risk free interest rate in the range of 4.78% to 5.87%; dividend
yields of zero; an expected votality factor of the market price of the
Company's common stock of 0.30; and an expected life of 6 months.  The
weighted-average fair value for shares issued under the employee stock
purchase plan for 1996 and 1995 was $6.21 and $5.62, respectively.

For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the option vesting periods.  The
Company's pro forma net income would have been $85.8 million and $70.0
million for 1996 and 1995, respectively.  Pro forma net income per common and
common equivalent share would have been $1.01 and $0.85 for 1996 and 1995,
respectively.  Because SFAS 123 is applicable only to options granted
subsequent to December 31, 1994, its pro forma effect will not be fully
realized until 1998. A summary of the Company's stock option activity, and
related information for the years ended December 31 follows:

<TABLE>
<CAPTION>


                                        1996                                        1995
                            ------------------------------------    -------------------------------------
                               Options        Weighted-Average          Options         Weighted-Average
                            (in millions)      Exercise Price        (in millions)       Exercise Price
                            ---------------  -------------------    ----------------  -------------------
<S>                           <C>                 <C>                  <C>               <C>
Outstanding-beginning
  of year                               5.7          $23                         4.4          $21
Granted                                 0.9           27                         1.8           23
Exercised                              (0.9)          20                        (0.3)          14
Forfeited                              (0.2)          25                        (0.2)          21
                            ---------------                         ----------------
Outstanding-end of year                 5.5           24                         5.7           23
                            ---------------                         ----------------
                            ---------------                         ----------------
Exercisable - end of year               2.2           23                         1.8           23

Weighted-average fair value
 of options granted during
 the year                                 $8.13                                    $7.75


</TABLE>
                                        -32-
<PAGE>


PAGE 34-35 OF PAPER FORMAT ANNUAL REPORT
<TABLE>
<CAPTION>

                                         OPTIONS OUTSTANDING                            OPTIONS EXERCISABLE
                          ------------------------------------------------------  ---------------------------------
                               Number      Weighted-Average                            Number
    Range of                Outstanding       Remaining        Weighted-Average     Exercisable    Weighted-Average
    Exercise                at 12/31/96    Contractual life        Exercise         at 12/31/96        Exercise
     Prices                (in millions)      (in years)            Price          (in millions)        Price
-------------------       ----------------  ---------------    -----------------  ---------------   ---------------
<S>                          <C>               <C>                 <C>              <C>                <C>

$12.00-18.75                    0.1             2.08           $     13.01             0.1          $     13.01

 19.00-25.88                    4.8             7.67                 22.71             1.8                21.63

 27.50-34.00                    0.5             7.35                 30.20             0.2                31.05

 44.50-49.25                    0.1             5.28                 45.72             0.1                45.73


</TABLE>

NOTE 7:  COMMITMENTS AND CONTINGENCIES

ALZA leases certain buildings and equipment under operating leases.  Rent
expense under these leases during the years ended 1996, 1995 and 1994 was
$3.7 million, $1.7 million and $1.6 million, respectively. Aggregate minimum
rental commitments under non-cancelable operating lease arrangements as of
December 31, 1996 were $8.0 million and are payable as follows:  $3.2 million
in 1997, $2.3 million in 1998, $2.0 million in 1999, $0.4 million in 2000 and
$0.1 million in 2001.

NOTE 8:  INCOME TAXES

The provision for income taxes is as follows for each of the three years
ended December 31:

(In millions)                      1996             1995              1994
                                 ------           ------            ------
Federal:
 Current                         $ 47.9           $ 30.1            $ 23.4
 Deferred                          (2.4)             5.6               4.1
                                 ------           ------            ------
                                   45.5             35.7              27.5
State:
 Current                           11.2              6.4               6.2
 Deferred                             -              2.3               1.5
                                 ------           ------            ------
                                   11.2              8.7               7.7
                                 ------           ------            ------
Provision for income taxes       $ 56.7           $ 44.4            $ 35.2
                                 ------           ------            ------
                                 ------           ------            ------
                                        -33-

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PAGE 35 OF PAPER FORMAT ANNUAL REPORT


Tax benefits associated with employee stock option transactions reduced
accrued income taxes by $3.3 million for 1996 and $1.0 million for each of
1995 and 1994.

The provision for income taxes differs from the amount computed by applying
the statutory federal income tax rate to income before income taxes.  The
sources and tax effects of the differences are as follows:

(In millions)                            1996        1995       1994
                                       ------      ------     ------
Expected federal tax at 35%            $ 52.2      $ 40.9     $ 32.7
State income taxes, net of
 federal benefit                          7.3         5.7        5.0
Investment and research
 tax credits                             (2.3)       (1.3)      (2.0)
Other                                    (0.5)       (0.9)      (0.5)
                                       ------      ------     ------
Provision for income taxes             $ 56.7      $ 44.4     $ 35.2
                                       ------      ------     ------
                                       ------      ------     ------


Temporary differences which give rise to a significant portion of deferred
tax assets and liabilities for 1996 and 1995 are as follows:

(In millions)                                     1996                 1995
                                                 ------              ------
Deferred tax assets:
  Inventories                                    $  5.7              $  6.2
  Compensation                                     14.5                13.0
  Capitalized intangibles                           6.1                 5.8
  Deferred revenue                                  0.1                 7.2
  State income taxes                                4.8                 2.4
  Other                                             3.3                 2.1
                                                 ------              ------
        Total deferred tax assets                  34.5                36.7

Deferred tax liabilities:
  Property, plant and equipment                    39.8                38.2
  Unrealized gains (losses) on available-for-
     sale securities                               (0.1)                1.3
  Other                                             2.5                 2.1
                                                 ------              ------
        Total deferred tax liabilities             42.2                41.6
                                                 ------              ------
Net deferred tax liabilities                     $  7.7              $  4.9
                                                 ------              ------
                                                 ------              ------

                                        -34-

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PAGE 36 OF PAPER FORMAT ANNUAL REPORT


NOTE 9:  LITIGATION

In December 1991, a patent infringement suit was filed by Ciba-Geigy Inc.
("Ciba-Geigy"), now Novartis Pharmaceuticals Corportation, against Marion
Merrell Dow Inc. (now Hoechst Marion Roussel, Inc.) and ALZA in connection
with the commercialization of Nicoderm-Registered Trademark-.  In October
1994, the Court granted a motion for summary judgment brought by ALZA and
HMR, ruling the Ciba-Geigy patent invalid.  During October 1995, the Court of
Appeals for the Federal Circuit upheld the most significant portions of the
summary judgment decision, and sent back to the District Court the issue of
validity of certain other more limited claims.  ALZA believed that these
narrower claims were invalid and did not cover the Nicoderm-Registered
Trademark- product; therefore, ALZA reversed a portion of a reserve that was
established after the patent infringement suit was filed.  The effect of the
reversal increased royalties and fees by approximately $7.4 million during
the fourth quarter of 1995.  During January 1995, ALZA and HMR filed a
separate suit against Ciba-Geigy and LTS Lohmann Therapy Systems Corporation
for infringement of two U.S. patents issued to ALZA in 1994 relating to the
transdermal administration of nicotine.  In June 1996, ALZA and HMR entered
into a settlement agreement with Ciba-Geigy which resolved these disputes.
Ciba-Geigy made a one-time settlement payment to HMR and ALZA, and is paying
ongoing royalties on its U.S. nicotine patch sales, retroactive to January 1,
1996.  ALZA and HMR share the royalty payments in accordance with the
agreements between them.

During January 1994, a suit was filed against ALZA by Cygnus Therapeutic
Systems ("Cygnus") seeking a declaration of unenforceability and invalidity
of an ALZA patent relating to transdermal administration of fentanyl (which
patent covers Duragesic-Registered Trademark-) and alleging violation of
antitrust laws.  In April 1995, the court granted ALZA's motion to dismiss
the  lawsuit;  Cygnus appealed that ruling.  During 1996, the Court of
Appeals of the Federal Circuit upheld the District Court's dismissal of
Cygnus' claims against ALZA. Cygnus has no further right of appeal.

                                        -35-

<PAGE>


PAGE 36-37 OF PAPER FORMAT ANNUAL REPORT

Pharmaceutical companies are subject to product liability claims from time to
time.  Product liability suits have been filed against Janssen and ALZA from
time to time relating to the Duragesic-Registered Trademark- product.
Janssen is managing the defense of these suits in consultation with ALZA
under an agreement between the parties.

Historically, the cost of resolution of ALZA's liability (including product
liability) claims has not been significant, and ALZA is not aware of any
asserted or unasserted claims pending against it, including the suits
mentioned above, the resolution of which would have a material adverse impact
on the operations or financial position of the Company.

NOTE 10:  STATEMENT OF CASH FLOWS

Supplemental disclosures of cash flow information:

(In millions)                            1996     1995       1994
                                       ------   ------     ------
Cash paid during the year for:
     Income taxes                      $ 42.2   $ 37.0     $ 25.7
     Interest                            16.3      2.6        6.3


Supplemental schedule of noncash investing and financing activities:

(In millions)                                1996    1995     1994
                                           ------   -----  -------
     Net unrealized gains (losses)
     on available-for-sale
     securities, net of tax effect         $ (2.0)  $ 9.4  $  (7.5)

     Deferred issuance costs -
     5 1/4% Debentures                          -       -      8.4

     Deferred issuance costs -
     5% Debentures                           11.2       -        -


NOTE 11:  SUBSEQUENT EVENTS

Subsequent to year end, ALZA entered into an agreement with U.S. Bioscience
under which U.S. Bioscience will sell approximately 1.2 million of its common
shares to ALZA (4.9% of the outstanding common shares of U.S. Bioscience) at
a purchase price of $18.256 per share, for an aggregate investment

                                        -36-

<PAGE>


PAGE 37 OF PAPER FORMAT ANNUAL REPORT

of $21.5 million. U.S. Bioscience will spend a portion of the proceeds on
programs supporting the Ethyol-Registered Trademark- product.

Also subsequent to year end, ALZA announced that it had entered into an
agreement under which Alkermes, Inc. ("Alkermes") will sell 2.0 million of
its common shares (9.7% of the outstanding common shares of Alkermes) to ALZA
at a purchase price of $25 per share, for an aggregate investment of $50
million. Separately, ALZA and Alkermes agreed to collaborate on a program for
the development and commercialization of a product utilizing Alkermes' drug
delivery technology.  ALZA will fund the development costs of the program and
will have worldwide commercialization rights to the product.  Alkermes will
receive royalties based on product sales and it is anticipated that Alkermes
will manufacture the product.

                                        -37-

<PAGE>


PAGE 37 OF PAPER FORMAT ANNUAL REPORT


REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

THE BOARD OF DIRECTORS AND STOCKHOLDERS
ALZA CORPORATION


We have audited the accompanying consolidated balance sheet of ALZA
Corporation as of December 31, 1996 and 1995, and the related consolidated
statements of income, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 1996.  These financial
statements are the responsibility of the Company's management.  Our
responsibility is to express an opinion on these financial statements based
on our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of ALZA
Corporation at December 31, 1996 and 1995, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1996, in conformity with generally accepted accounting
principles.

                                        Ernst & Young LLP


Palo Alto, California
February 14, 1997


                                        -38-


<PAGE>


PAGE 38 OF PAPER FORMAT ANNUAL REPORT


ALZA COMMON STOCK

ALZA common stock is listed for trading (symbol AZA) on the New York Stock
Exchange and ALZA warrants are listed for trading (symbol ALZAW) on the
Nasdaq Stock Market ("Nasdaq").  Both securities are reported in the WALL
STREET JOURNAL and other newspapers.  As of December 31, 1996, there were
9,022 holders of record of ALZA common stock and 5,968 holders of record of
ALZA warrants.  ALZA has never paid cash dividends on its common stock and
has no plan to do so in the foreseeable future.  The quarterly high and low
sales prices of ALZA common stock for the calendar years 1996 and 1995, as
reported on the composite tape, and ALZA warrants from the date of initial
trading (June 11, 1996) as quoted on Nasdaq, are shown below:
<TABLE>
<CAPTION>

                                       ALZA COMMON STOCK                      ALZA WARRANTS
                      -------------------------------------------------    ------------------
                                 1996                     1995                    1996
                      ------------------------   ----------------------    ------------------
                           High        Low           High      Low           High      Low
<S>                   <C>           <C>           <C>        <C>           <C>       <C>
  First quarter        $34 7/8       $24 3/8       $24 1/8    $18 1/8       $   -     $  -

  Second quarter        32 1/2        26 3/8        24 5/8     18 3/8        3/16      1/8

  Third quarter         27 3/4        24            27         22 1/8        3/16      1/16

  Fourth quarter        29            25 1/8        25 1/8     20 1/4        1/8       1/16



</TABLE>

                                        -39-

<PAGE>


PAGE 38 OF PAPER FORMAT ANNUAL REPORT


SELECTED CONSOLIDATED QUARTERLY FINANCIAL DATA (UNAUDITED)

(In millions, except per share amounts)
<TABLE>
<CAPTION>

                                             1996                                     1995
                            -------------------------------------     -----------------------------------
                             Fourth     Third    Second    First        Forth    Third    Second    First
<S>                          <C>      <C>       <C>        <C>        <C>       <C>      <C>       <C>
---------------------------------------------------------------------------------------------------------------
Total revenues               $126.2    $114.9    $128.1    $96.8       $101.8    $85.6    $83.0     $80.2

Operating income               36.2      33.2      36.7     31.2         31.5     30.0     27.6      27.3

Net income                     25.7      23.1      23.2     20.4         19.7     18.2     17.5      17.0

Net income per share           0.30      0.27      0.27     0.24         0.24     0.22     0.21      0.21
---------------------------------------------------------------------------------------------------------------

</TABLE>


                                        -40-
<PAGE>

PAGE 39 OF PAPER FORMAT ANNUAL REPORT


SELECTED CONSOLIDATED FINANCIAL DATA
(In millions, except per share amounts)
<TABLE>
<CAPTION>

                              1996     1995     1994    1993      1992    1991      1990     1989     1988    1987
<S>                        <C>       <C>      <C>     <C>      <C>      <C>       <C>      <C>      <C>      <C>
------------------------------------------------------------------------------------------------------------------------
Total revenues              $466.0   $350.6   $278.8  $234.2    $250.5  $162.3    $109.4    $92.7    $84.2   $70.8

Net income (loss)             92.4     72.4     58.1    45.6(1)   72.2   (62.1)(2)  24.7     18.8     17.0    14.0

Net income (loss) per share   1.08(3)  0.88     0.71    0.57      0.90   (0.88)     0.35     0.27     0.25    0.21

Cash, cash equivalents,
 short-term and long-term
 investments                 999.8    419.1    344.9   257.5(4)  338.5   296.6     302.4    109.0    121.1   142.8

Total assets               1,613.7    937.2    806.3   621.8(4)  698.4   580.5     530.9    288.4    261.6   243.5

Convertible debentures       882.3    362.9    344.6       -(5)  229.0   213.2     273.2     75.0     75.0    75.0

Total stockholders' equity   596.7    454.6    364.5   306.7(4)  407.5   322.9     219.6    186.6    159.8   139.0

------------------------------------------------------------------------------------------------------------------------

</TABLE>

(1) Includes pre-tax charges and allowances of $28.1 million
    ($0.23 per share on an after-tax basis) related primarily to
    manufacturing activities.  Also includes $6.6  million ($0.08
    per share) in one-time benefits resulting from the adoption of
    Statement of Financial Accounting Standards No. 109,
    "Accounting for Income Taxes", and a $3.8 million ($0.05 per
    share) extraordinary charge relating to the redemption of
    ALZA's 7 1/2% zero coupon convertible subordinated debentures.

(2) Includes the effects of a one-time charge of $101.3 million ($1.38 per
    share) related to the purchase of in-process technology.

(3) Net income per share calculation uses adjusted net income of $101.6
    million.

(4) Includes the effect of the $250 million contribution to Therapeutic
    Discovery Corporation and the related special dividend to ALZA stockholders.

(5) Approximately $249.5 million of commercial paper (including accrued
    interest) was outstanding.

                                              -41-