TO OUR SHAREHOLDERS

This past year was truly an exceptional one for Universal Health Services, Inc. In addition to record financial results, we achieved several milestones in 1996, among them exceeding $1 billion in net revenue. We also completed several significant transactions in both our acute care division and behavioral health division, diversifying the Company's sources of income.

In 1996, net income increased to $50.7 million from $35.5 million in 1995, an increase of 43%. Earnings per share increased to $1.64, up 30% from 1995. And the Company's net revenues increased to $1.2 billion, a 28% increase from 1995.

The company is well-positioned among investor-owned hospital companies. The industry now includes two huge companies with hundreds of facilities each, and several smaller, regional companies. UHS stands proudly in the middle: As the third largest publicly traded company, we have substantial financial capabilities and have established important networks. But with 35 hospitals and 27 ambulatory and specialized centers, we are able to offer personal attention to each of our facilities, along with superior management skills and technical expertise. Community hospitals and medical centers which are looking to sell, yet maintain their identities, are now finding UHS a most attractive option.

One such medical center which selected UHS is Northwest Texas Healthcare System in Amarillo, Texas. As the largest facility purchased by UHS in 1996, this 357-bed medical complex is a full-service acute care hospital which includes an 85-bed behavioral health facility. It is the leading provider of hospital services in Amarillo and maintains an outstanding medical staff. The story of the company's purchase of Northwest Texas is set forth on the pages which follow this letter. The story details how one city --Amarillo -- dealt with the very important issue of deciding whether to sell its community hospital and why the people of that city decided to put their trust in UHS. The story not only highlights important issues considered in the sale of a health system, but also provides insight into the significant attributes of UHS.

The acquisition of Northwest Texas is consistent with our ongoing growth strategy. The hospital and medical system is located in a fast-growing, medium-sized city. And like our other recent acquisitions in Bradenton, Florida, and Aiken, South Carolina, Northwest Texas Healthcare System is an important facility in its community, providing high-quality services while enjoying a meaningful market share. The results at Northwest Texas since our acquisition in May have been gratifying.

Our behavioral health division completed two significant transactions in 1996. In June we purchased four hospitals in Pennsylvania along with the contracts to manage seven additional facilities.

The largest hospital of the group is the Horsham Clinic located in Ambler, Pennsylvania, just outside of Philadelphia. It is a 138-bed facility which provides a full range of behavioral health care services and has long been considered one of Philadelphia's premier psychiatric hospitals.

The acquisition also brought to UHS the Clarion Psychiatric Center, a 52-bed facility located in Clarion, Pennsylvania; the Meadows Psychiatric Center, a 101-bed facility located in Centre Hall, Pennsylvania; and Roxbury, a 46-bed facility located in Shippensburg, Pennsylvania.

In August, we bought the Timberlawn Mental Health System, a 164-bed facility located in Dallas, Texas. Established in 1917, Timberlawn became the first behavioral health facility west of the Mississippi River, and has a reputation as one of the finest behavioral health facilities in the nation.

In addition to acquisitions, the company is also developing new hospitals. We have nearly completed construction of a new 130-bed hospital in Edinburg, Texas, to expand and replace the existing facility. We expect this facility to be open in July, at which time we will convert the existing building into a hospital specializing in rehabilitation and long-term care services. In November, we opened the ambulatory surgery, diagnostic and radiation treatment components of the Summerlin Medical Center in Las Vegas, Nevada. Construction is expected to be complete for the 150-bed hospital in early October, at which time the facility featuring comprehensive inpatient services will be placed in service.

In February, we opened our first Renaissance Center for Women in Edmond, Oklahoma. This facility, specializes in women's services. We are developing additional Renaissance Centers in Austin, Texas, and Oklahoma City, Oklahoma, both of which are expected to open in late summer.

Our facilities consistently have been well-managed and efficiently run. In 1997, we further strengthened our management skills by introducing a company wide service excellence program, intended to increase the skills and motivation of all UHS employees. Led by a group of our hospital CEOs, this program should assist us in improving service and increasing the satisfaction of our patients and other customers.

To finance our growth and provide the financial base for new projects, the Company sold 4,000,000 shares of its Class B Common Stock in June. This resulted in net proceeds of approximately $100,000,000. We also completed a two-for-one stock split, which increased the number of shares outstanding to 32.4 million. Following these transactions, the price of shares of the company's stock continued to increase and, recently, reached an all time high. The Company's shares are listed on the New York Stock Exchange under the symbol "UHS."

Although we are proud of our past success, we are equally excited about our future. We have a strong portfolio of facilities and a talented group of employees. We are confident that in 1997 and beyond we will continue to provide superior service for our patients, and substantial growth and a healthy return for our investors.

Alan B. Miller
Chairman of the Board
President and Chief Executive Officer