To Our Shareholders

Our Company again achieved record financial results in 1997, while completing a number of significant acquisition and expansion efforts that will further contribute to our momentum in the years ahead.

In 1997, net income grew to $67.3 million, up from $50.7 million in 1996, an increase of 33%. Earnings per share increased to $2.03, up 23% from 1996. And the Company's net revenues grew to $1.4 billion, a 23% increase from 1996.

As a result of these strong financial results, the Company's shares, which are listed on the New York Stock Exchange under the symbol "UHS," reached new highs during 1997. Our consistent performance earned UHS a place on The Wall Street Journal's "Honor Roll," which recognizes superior financial results:

UHS ranked ninth best of all the top companies over a five-year period. To be included, the Company had to have shareholder returns in the top 20% of all companies for the past one, three, five and ten years, through December 31, 1997.

Universal Health Services is the third-largest investor-owned hospital management company in the nation, with 67 facilities: 20 acute care hospitals, 22 behavioral health facilities, and 25 ambulatory and specialized centers. Our manageable size sets us apart from our two larger competitors, both of which number their hospitals in the hundreds, because it enables UHS to provide a high degree of personal attention to each of our facilities. Some in our industry have encountered serious management and legal problems which have received much attention from government agencies and the media. We, though, have concentrated on quality and performance rather than sheer size. This focus on providing high-quality care in the communities we serve has strengthened our market share over time. Each of our facilities is managed to the highest standards in the industry, and each provides superior service to patients at a reasonable cost.

What's more, UHS facilities are leaders in their local communities, with over 93% of the company's operating income being derived from facilities that enjoy either the first or second largest market share. In addition, admission and patient day growth at both our acute care and behavioral health care facilities are the highest in the industry, attesting to our ability to expand local market share.

With an exemplary record for quality management, UHS has had opportunities materialize that may not have been available otherwise. In 1997, these included our exciting new partnership at The George Washington University Hospital, one of America's most prestigious academic teaching hospitals. Under the terms of the partnership, finalized in July, UHS will build a new hospital at GWU with the facilities, staffing, and equipment necessary to meet the healthcare challenges of the next century.

In early 1998, UHS acquired Hospital San Pablo, Inc., a three hospital group with 770 licensed beds and a surgery center. This highly-respected company, whose corporate culture is similar to UHS's, consists of the 430-bed Hospital San Pablo in Bayamon, the 160-bed Hospital San Francisco in Rio Piedras, and the 180-bed Hospital San Pablo del Este, the largest private hospital east of San Juan. These outstanding facilities form the largest privately owned health system in Puerto Rico and have earned a sterling reputation for quality service. These hospitals provide UHS with a strong position in the rapidly-growing Puerto Rican market, and position us well for future expansion in the Caribbean and Central America.

During 1997, we opened two newly constructed hospitals: Edinburg Regional Medical Center in Edinburg, Texas, and Summerlin Hospital Medical Center in Las Vegas. We also completed major expansions at Chalmette Medical Center, Manatee Memorial Hospital, Aiken Regional Medical Center, and Northwest Texas Healthcare System. The emphasis in these building projects is on developing new services that generate additional revenues, while building on our reputation for quality care in each market.

As the year ended, we negotiated a joint venture with Quorum Health Group to merge facilities in the fast growing Las Vegas market. Under the agreement, UHS has become the majority owner and manager of three hospitals, including our own Valley and Summerlin facilities, as well as Desert Springs Hospital. This venture will greatly strengthen our position in Las Vegas and enhance our negotiating posture with insurers.

In our behavioral health division, same-store admissions grew by 8%, while census grew by 4% during 1997. The division continues to generate excellent financial results despite challenging reimbursement trends nationwide. This continued growth is largely attributable to the fact that most of our facilities are considered the premier institutions in their respective markets. As a result, referral sources prefer UHS facilities for their patients.

Among the most notable performers in the behavioral health division are our five Pennsylvania hospitals, which comprise the largest comprehensive integrated behavioral health network in the state. Margins at these facilities have remained strong, while growth opportunities have been created by adding services and expanding contract management relationships.

The Company's entry in the specialized healthcare services market continues to meet with success. Our radiation and ambulatory surgery centers saw significant improvements during 1997, as did our Renaissance Women's Centers.

Of course, none of our recent expansion would have been possible without a strong capital position. And I am pleased to report that, even with the extensive investments in new hospitals, acquisitions, and continued investment in our leading edge information system in 1997, UHS actually improved its credit ratios and remained one of only a few publicly traded investment-grade rated companies in the industry.

Looking ahead, UHS recognizes that the vital healthcare industry will remain subject to new legislation and public controversies. Therefore, we continue to take a leadership role in the national debate, advancing our positions on topics such as Medicare reimbursement, patients' bill of rights, and acquisitions of not-for-profit hospitals by private companies. Our proactive involvement was exemplified by the election of our general counsel, Bruce Gilbert, as chairman of our industry's trade association, the Federation of American Health Systems, and of our behavioral health division president, Tom Bender, as president-elect of the National Association of Psychiatric Health Systems.

We are also pleased to welcome Ms. Lee Ducat to our Board of Directors. Ms. Ducat is the founder of the Juvenile Diabetes Foundation International. She is currently the president of both the National Disease Research Interchange and the Human Biological Data Interchange, pioneers in organ transplantation. And we welcome Milton Cruz and the management and staff of our new Puerto Rican operations to the UHS family. We are so very pleased to have them.

I want to congratulate all of my fellow employees and thank them for their contribution to the enviable record of the Company. Being included in The Wall Street Journal shareholder honor roll and deemed a straight A performer is a distinction we will carry with great pride. I thank our shareholders too for their support and confidence in the Company's management.

We are optimistic that the coming year will be one of continued growth for our Company and continued positive results for our investors.

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

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