UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K
       (Mark One)

  X     ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
        EXCHANGE ACT OF 1934

                   For the fiscal year ended December 31, 2000

                                       OR


        TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
        SECURITIES EXCHANGE ACT OF 1934

           For the transition period from ------------ to ------------


                         Commission file number: 1-8865

                          SIERRA HEALTH SERVICES, INC.
             (Exact name of Registrant as specified in its charter)

           NEVADA                                      88-0200415
(State or other jurisdiction of          (I.R.S. Employer Identification Number)
incorporation or organization)

                              2724 NORTH TENAYA WAY
                             LAS VEGAS, NEVADA 89128
               (Address of principal executive offices) (Zip Code)

       Registrant's telephone number, including area code: (702) 242-7000
           Securities registered pursuant to Section 12(b) of the Act:
                                             Name of each exchange on
                  Title of each class           which registered
             Common Stock, par value $.005    New York Stock Exchange

         Securities Registered Pursuant to Section 12(g) of the Act:  None

         Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days. YES X NO

         Indicate by check mark if disclosure of delinquent  filers  pursuant to
Item 405 of Regulation S-K is not contained  herein,  and will not be contained,
to the best of  registrant's  knowledge,  in  definitive  proxy  or  information
statements  incorporated  by  reference  in Part  III of this  Form  10-K or any
amendment to this Form 10-K. [ ]

         The aggregate  market value of the voting stock held by  non-affiliates
of the registrant on March 15, 2001 was $111,308,000.

The number of shares of the registrant's  common stock  outstanding on March 15,
2001 was 27,513,000.

                                         DOCUMENTS INCORPORATED BY REFERENCE
  DOCUMENT                                          WHERE INCORPORATED

  Registrant's Current Report on                              Part I
  Form 8-K dated March 20, 2001.                              Part II, Item 7

Portions of the registrant's definitive                       Part III
proxy statement for its 2001 annual
meeting to be filed with the SEC not later
than 120 days after the end of the fiscal year.










<PAGE>


                          SIERRA HEALTH SERVICES, INC.

                          2000 FORM 10-K ANNUAL REPORT

                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                                                               Page
                                                       PART I

<S>   <C>                                                                                                         <C>
Item  1.      Description of Business ..................................................................          1

Item  2.      Description of Properties.................................................................         16

Item  3.      Legal Proceedings.........................................................................         17

Item  4.      Submission of Matters to a Vote of Security Holders.......................................         17


                                                       PART II

Item  5.      Market for Registrant's Common Stock and
                 Related Stockholder Matters............................................................         18

Item  6.      Selected Financial Data...................................................................         19

Item  7.      Management's Discussion and Analysis of Financial Condition
                 and Results of Operations .............................................................         20

Item 7a.      Quantitative and Qualitative Disclosures about Market Risk ...............................         36

Item  8.      Financial Statements and Supplementary Data...............................................         38

Item  9.      Changes in and Disagreements with Accountants on
                 Accounting and Financial Disclosure....................................................         72


                                                      PART III

Item 10.      Directors and Executive Officers of the Registrant........................................         72

Item 11.      Executive Compensation....................................................................         72

Item 12.      Security Ownership of Certain Beneficial Owners and Management............................         72

Item 13.      Certain Relationships and Related Transactions............................................         72


                                                       PART IV

Item 14.      Exhibits, Financial Statement Schedules and Reports on Form 8-K...........................         73
</TABLE>









<PAGE>


                                     PART I

ITEM 1.       DESCRIPTION OF BUSINESS
                                     GENERAL

Unless otherwise indicated, "Sierra," "we," "us," and "our" refer to Sierra
Health Services, Inc. and its subsidiaries.

We are a managed  health care  organization  that provides and  administers  the
delivery of comprehensive health care and workers' compensation programs with an
emphasis on quality care and cost  management.  Our strategy has been to develop
and offer a portfolio of managed health care and workers'  compensation products
to  employer  groups and  individuals.  Our broad  range of managed  health care
services is provided through the following:

o    federally  qualified  health  maintenance  organizations  or HMOs

o    managed indemnity plans

o    a third-party  administrative  services program for employer-funded  health
     benefit plans

o    workers' compensation medical management and fully insured programs

o    ancillary products and services that complement our managed health care and
     workers' compensation product lines

o    a subsidiary  that  administers  a managed  care  federal  contract for the
     Department of Defense's TRICARE program in Region 1

Fiscal year 2000 was a difficult  year for us. In the first and second  quarters
of 2000 we evaluated and then announced and adopted  restructuring plans related
primarily to our Texas operations.  This  restructuring  involved a reduction in
staff and the closing of some of our Texas clinic facilities,  which resulted in
our  recording  of  significant  goodwill and fixed asset  impairment  and other
charges of approximately $220 million.

As a result of the asset impairment and other non-recurring charges, we were not
in  compliance  with the  financial  covenants in our bank credit  facility.  We
subsequently entered into an amended $185 million credit facility with the banks
on December 15, 2000. As of December 31, 2000,  the facility was reduced to $135
million as a result of our payment of $50 million that we received from the sale
and leaseback of the majority of our administrative  and clinical  properties in
Las Vegas on December 28, 2000.  We are required to make  semi-annual  principal
payments,  ranging  from $2  million  to $10  million,  on the  credit  facility
starting in June 2001. These payments result in permanent reductions in the size
of the  credit  facility.  The  amount  outstanding  under the  credit  facility
fluctuates with our working capital needs.

In addition, CII Financial,  our wholly-owned workers' compensation  subsidiary,
has outstanding approximately $47 million of convertible subordinated debentures
due September 15, 2001.  These  debentures are  subordinated  obligations of CII
Financial and are not guaranteed by us. CII Financial, as a holding company, has
limited  sources for cash and is  dependent on  dividends  from its  subsidiary,
California  Indemnity Insurance Company,  to meet its debt payment  obligations.
CII Financial, as sole obligor under the debentures,  currently has no available
source of cash with which to pay the  debentures  when they mature on  September
15, 2001.  Due to the foregoing,  in December  2000, CII Financial  commenced an
exchange offer in which it offered to exchange all of the debentures for cash or
new debentures.  There can be no assurance that CII Financial will be successful
in its exchange offer.

We  filed a  Current  Report  on  Form  8-K  dated  March  20,  2001,  which  is
incorporated by reference, that sets forth cautionary statements pursuant to the
"safe harbor" provisions of the Private Securities Litigation Reform Act of 1995
and  identifies  important  risk factors that could cause our actual  results to
differ   materially  from  those  expressed  in  any  projected,   estimated  or
forward-looking statements relating to Sierra.

Our principal executive offices are located at 2724 North Tenaya Way, Las Vegas,
Nevada 89128, and our telephone number is (702) 242-7000.

Our fiscal year  period is the same as the  calendar  year and unless  otherwise
indicated, any year designated will refer to the year ended December 31.

Managed Care Products and Services

Our primary types of health care  coverage are HMO plans,  HMO Point of Service,
or POS plans, and managed  indemnity plans,  which include a preferred  provider
organization, or PPO option. The POS products allow members to choose one of the
various  coverage options when medical services are required instead of one plan
for the entire  year.  As of December  31,  2000,  we provided  HMO  products to
approximately  196,600  members in Nevada and 81,200 in Texas.  We also  provide
managed indemnity products to approximately 31,000 members,  Medicare supplement
products  to  approximately  28,100  members,  and  administrative  services  to
approximately 273,200 members. Medical premiums account for approximately 62% of
total revenues.  Approximately  73% and 27% of our medical premiums were derived
from our Nevada HMO and insurance  subsidiaries and our Texas HMO, respectively,
in 2000.

Health  Maintenance  Organizations.  We operate a mixed  model HMO in Las Vegas,
Nevada,  which means that we use our own  specialty  medical  group as well as a
network of  independently  contracted  providers.  We also operate network model
HMOs in Reno, Nevada and Dallas,  Texas.  Independently  contracted primary care
physicians  and  specialists  for the HMOs are  compensated  on a capitation  or
modified  fee-for-service  basis.  Contracts with our primary hospitals are on a
discounted per diem basis. Members receive a wide range of coverage after paying
a nominal co-payment and are eligible for preventive care coverage.  The HMOs do
not require deductibles or claim forms when the member receives HMO benefits.

     Most of our managed health care services in Nevada are provided through our
independently  contracted  network  of  approximately  2,000  providers  and  13
hospitals.  These Nevada  networks  include our  multi-specialty  medical group,
which provides medical services to approximately  74% of our southern Nevada HMO
members and employs over 160 primary care and other providers in various medical
specialties. Through our affiliates the following services are offered:

o        three urgent care centers
o        home health care
o        hospice care
o        behavioral health care
o        home infusion, oxygen and durable medical equipment
o        a free-standing,  state-licensed and  Medicare-approved  ambulatory
         surgery center
o        radiology
o        vision
o        occupational medicine

We believe that this vertical  integration of our health care delivery system in
southern Nevada  provides a competitive  advantage as it helps us to effectively
manage health care costs while delivering quality care.

Texas  Health  Choice,  L.C.,  or TXHC,  has  contracts  with 32  hospitals  for
inpatient  care in Dallas/Ft.  Worth.  Shortly after we acquired the  Dallas/Ft.
Worth membership of Kaiser Foundation Health Plan of Texas, or Kaiser-Texas,  we
changed the provider  model in Dallas/Ft.  Worth from a group model to a network
model by overlaying individual practice association, or IPA, delivery systems on
top of the existing  group model to provide  members  with more  choice.  During
2000, we terminated the  contractual  relationship  with our affiliated  medical
group. Currently, the Dallas/Ft. Worth members are served by approximately 2,250
independently contracted providers.

On October 24, 2000,  TXHC entered into an agreement with AmCare Health Plans of
Texas,  Inc.,  or AmCare,  for the sale and  transfer  of TXHC's  membership  in
Houston. Effective December 1, 2000, AmCare assumed the risk associated with the
commercial HMO and Medicare+Choice, or M+C, member contracts under an assumption
reinsurance  agreement  with TXHC.  The initial term of the  agreement was for a
period of three  months,  which  began on December 1, 2000 and ended on February
28, 2001. As of March 1, 2001, the commercial HMO membership has been assumed by
AmCare. The reinsurance agreement is continuing for the M+C members until AmCare
receives  approval from the Health Care Financing  Administration,  or HCFA, and
the Texas  Department  of  Insurance  for an  assignment  or novation of the M+C
members.  The sale price is based on the number of members  retained at March 1,
2001 and is adjusted based on the medical care ratio of those members. We do not
expect to receive material sales proceeds from this transaction.  In addition to
the assumption  reinsurance  agreements,  AmCare entered into an  Administrative
Services  Agreement  with  TXHC.  In  consideration  for TXHC's  performance  of
administrative  services related to the  aforementioned  membership,  AmCare has
agreed to pay a monthly fee based on a per member per month rate.

Our  commercial  plans offer  traditional  HMO  benefits  and POS  benefits.  At
December 31, 2000,  we had  approximately  213,400  commercial  members of which
approximately  140,100  were  located  in  Nevada,  73,200  in Texas  and 100 in
Arizona.

We offer a Medicare  risk  product for  Medicare-eligible  beneficiaries  called
Senior  Dimensions  in Nevada and Golden Choice in Texas.  Senior  Dimensions is
marketed directly to Medicare-eligible beneficiaries in our Nevada service area.
In the first quarter of 2000, we went to a passive sales mode for Golden Choice.
We continued to offer the plan to potential  customers who contacted us, as well
as provide  service to existing  members.  We have been  actively  marketing the
Golden Choice product again since December  2000. The monthly  payment  received
from HCFA for Medicare  members is determined by formula  established by Federal
law.

As of December 31, 2000, we had approximately  49,900 Medicare members, of which
approximately  41,900 were  located in Nevada and 8,000 in Texas.  Approximately
36,000 of the Nevada Medicare  members were enrolled in the Social HMO, which is
discussed below.

In addition,  as of December  31,  2000,  we had  approximately  14,600  members
enrolled in our Nevada HMO Medicaid risk products.  To enroll in these products,
an individual must be eligible for Medicaid  benefits in the state of Nevada. We
are paid a monthly fee for each Medicaid  member enrolled by the state's managed
care division.

Social Health Maintenance  Organization.  Effective November 1, 1996, we entered
into a Social HMO II contract with HCFA pursuant to which a large portion of our
Nevada Medicare risk enrollees will receive certain  expanded  benefits.  We are
one of six HMOs  nationally to be awarded this contract and are the only company
to have  implemented the program as of December 31, 2000. We receive  additional
revenues for providing  these expanded  benefits.  The  additional  revenues are
determined based on health risk assessments that have been, and will continue to
be,  performed on our eligible  Medicare risk members.  The additional  benefits
include,  among other things,  assisting the eligible Medicare risk members with
typical  daily living  functions  such as bathing,  dressing and walking.  These
members,  as identified in the health risk assessments,  are those who currently
have  difficulty  performing  daily  living  functions  because  of a health  or
physical problem.  HCFA may consider adjusting the reimbursement factors for the
Social HMO members in the future. At this time, however, the final reimbursement
per member has not been  determined and there is no guaranty that the Social HMO
contract  will be renewed  beyond 2003. If the  reimbursement  for these members
decreases  significantly and related benefit changes are not made timely,  there
could be a material adverse effect on our business.

Preferred  Provider  Organizations.  Our managed indemnity plans generally offer
insureds a PPO option of receiving their medical care from either  contracted or
non-contracted  providers.  Insureds pay higher  deductibles and co-insurance or
co-payments when they receive care from non-contracted providers.  Out-of-pocket
costs are  lowered by  utilizing  contracted  providers  who are part of our PPO
network. As of December 31, 2000,  approximately 31,000 members were enrolled in
our managed indemnity plans.

We currently  provide managed  indemnity,  accidental death and disability,  and
Medicare  supplement services to individuals in Arizona,  California,  Colorado,
Iowa, Louisiana, Maryland, Mississippi,  Missouri, Nevada, New Mexico and Texas.
We have  provided  enrollees  with  notice of the  intent to  withdraw  from the
Colorado  and Arizona  service  areas  effective  April 1, 2001 and May 1, 2001,
respectively.  As of December 31, 2000,  our managed  indemnity  subsidiary  was
licensed in a total of 43 states and the District of Columbia.

Ancillary Medical Services.  Among the ancillary medical services we offer in
Nevada are the following:

o        outpatient surgical care
o        diagnostic testing
o        medical and surgical procedures
o        x-ray
o        CAT scans
o        mental health and substance abuse services
o        home health care services
o        hospice program
o        vision services
o        home infusion
o        oxygen
o        durable medical equipment services

These  services  are  provided  to members  of our HMO,  managed  indemnity  and
administrative  service  plans.  Mental health and substance  abuse services are
also provided to approximately 145,000 participants from non-affiliated employer
groups and insurance companies.

Administrative  Services.  Our administrative  services products provide,  among
other things,  utilization review and PPO services to large employer groups that
are usually self-insured. As of December 31, 2000, approximately 273,200 members
were enrolled in our  administrative  services plans.  The results of operations
for these  services are included in specialty  product  revenues and expenses in
the Consolidated Statements of Operations.

Military Contract Services

Sierra Military Health  Services,  Inc. On September 30, 1997, the Department of
Defense, or DoD, awarded us a triple-option  health benefits contract,  known as
TRICARE to provide  managed  health care coverage to eligible  beneficiaries  in
Region  1.  This  region  has  approximately  621,000  eligible  individuals  in
Connecticut,  Delaware,  Maine,  Maryland,  Massachusetts,  New  Hampshire,  New
Jersey, New York, Pennsylvania,  Rhode Island, Vermont,  Virginia, West Virginia
and Washington,  D.C. Sierra Military Health Services,  Inc., or SMHS, completed
an eight month  implementation phase in May 1998 and began providing health care
benefits on June 1, 1998 under the TRICARE contract.

Under the TRICARE contract,  SMHS provides health care services to dependents of
active duty  military  personnel  and  military  retirees  and their  dependents
through  subcontractor  partnerships and individual  providers.  We also perform
specific administrative services,  including health care appointment scheduling,
enrollment,  network management and health care management services.  We perform
these services  using DoD  information  systems.  If all five option periods are
exercised  by the DoD and no  extensions  of the  performance  period  are made,
health care delivery will end on May 31, 2003,  followed by an additional  eight
month phase out of the Region 1 managed care support contract.

In June 1996, the DoD awarded a TRICARE contract to TriWest Healthcare Alliance,
a consortium consisting of Sierra and 13 other health care companies, to provide
health  services to Regions 7 and 8, which include a total of 16 states.  During
the first quarter of 2000, we sold our interest in TriWest  Healthcare  Alliance
in exchange for a $3.7 million note,  which  approximated  the carrying value of
our investment.

Workers' Compensation Operations

Workers'  Compensation  Subsidiary.   On  October  31,  1995,  we  acquired  CII
Financial,  Inc., or CII, for  approximately  $76.3 million of common stock in a
transaction  accounted  for as a pooling of interests.  Through CII's  insurance
subsidiaries,  we  write  workers'  compensation  insurance  in  the  states  of
California,  Colorado, Kansas, Missouri, Nebraska, Nevada, New Mexico, Texas and
Utah. CII's insurance  subsidiaries  have licenses in 35 states and the District
of  Columbia  and have  applications  pending  for  licenses  in  other  states.
California,  Colorado  and  Nevada  represent  approximately  77%,  8%,  and 8%,
respectively, of CII's fully insured workers' compensation insurance premiums in
2000. Workers'  compensation  insurance premiums account for approximately 9% of
our total revenue. The workers'  compensation  subsidiary applies the discipline
of managed care concepts to its operations.  These concepts include, but are not
limited to, the use of  specialized  preferred  provider  networks,  utilization
reviews by an employed board certified  occupational  medicine physician as well
as nurse case managers, medical bill reviewers and job developers who facilitate
early return to work.

Marketing

Our marketing efforts for our commercial  managed care products usually involves
a  multi-step  process.  First  we  make a  presentation  to  employers.  Once a
relationship  with a  group  has  been  established  and a  group  agreement  is
negotiated and signed, we focus our marketing  efforts on individual  employees.
During a  designated  "open  enrollment"  period  each year,  usually  the month
preceding the annual renewal of the agreement with the group,  employees  choose
whether to remain  with,  join or  terminate  their  membership  with a specific
health plan offered by the employer. New employees decide whether to join one of
the  employers'  health  insurance  options  at the  time of  their  employment.
Although  contracts with  employers are generally  terminable on 60 days notice,
changes in membership occur primarily during open enrollment periods.

Media  communications  convey our emphasis on preventive  care,  ready access to
health care providers and service.  Other  communications  to customers  include
employer  and  member   newsletters,   member  education   brochures,   prenatal
information packets,  employer/broker seminars, certain Internet information and
direct mail advertising to clients.  Members' satisfaction with our benefits and
services is monitored by customer surveys.  Results from these surveys and other
primary  and  secondary  research  guide  the  sales  and  advertising   efforts
throughout the year.

Medicare  risk  products are  primarily  marketed by the HMOs' sales  employees.
Retention of employer groups and membership growth is accomplished through print
advertising directed to employers and through consumer media campaigns.

Our  workers'  compensation  insurance  policies  are sold  through  independent
insurance agents and brokers,  who may also represent other insurance companies.
We believe that  independent  insurance  agents and brokers choose to market our
insurance  policies  primarily  because of the price we charge,  the  quality of
service that we provide and the  commissions we pay. We employ  full-time  field
underwriters in selected  geographic  areas who meet with agents and advise them
of our  services  and who can  provide  an  immediate  quote on a policy.  As of
December 31, 2000, we had relationships  with  approximately 800 agents and paid
our agents  commissions  based on a percentage of the gross written premium they
produced. We also have various agency incentive programs that enable an agent to
earn additional  compensation if certain premium  production  and/or agency loss
ratio  goals  are met.  We  utilize  a number of  promotional  media,  including
advertising  in  publications  and at trade  fairs to support the efforts of our
independent agents.

SMHS administers  marketing  initiatives in accordance with the TRICARE Region 1
managed  care  support  contract.  SMHS'  dedicated  marketing  division  uses a
multi-faceted  marketing approach to ensure that all beneficiaries within Region
1 have the opportunity to learn about the health care benefits under TRICARE and
have the  opportunity  to make health care choices that best fit their  specific
needs. Marketing initiatives include direct beneficiary briefings,  direct mail,
newspaper advertising, newsletters and Internet web page briefs.

Membership

Period End Membership:
<TABLE>
<CAPTION>
                                                                              At December 31,
                                             --------------------------------------------------------------------------
<S>                                                  <C>           <C>          <C>           <C>         <C>
                                                     2000          1999         1998          1997        1996
                                                   --------      --------     --------      -------     --------
HMO:
    Commercial (1)..........................         213,000      263,000      272,000      154,000      147,000
    Medicare (2)............................          50,000       53,000       47,000       36,000       30,000
    Medicaid................................          15,000       11,000        5,000        2,000
Managed Indemnity...........................          31,000       37,000       41,000       64,000       46,000
Medicare Supplement.........................          28,000       28,000       26,000       25,000       23,000
Administrative Services (3) ................         273,000      298,000      318,000      328,000      338,000
TRICARE Eligibles...........................         621,000      610,000      606,000
                                                  ----------   ----------   --------------------------------------
    Total Membership........................       1,231,000    1,300,000    1,315,000      609,000      584,000
                                                   =========    =========    =========      =======      =======
</TABLE>

(1) The 2000 Commercial  membership does not include 12,000 Houston members sold
and transferred to AmCare on December 1, 2000. (2) The 2000 Medicare  membership
does not include 5,000 Houston  members that AmCare  assumed under a reinsurance
agreement on
     December 1, 2000.
(3)  For  comparability  purposes,  enrollment  information has been restated to
     reflect the September  30, 1997  termination  of our workers'  compensation
     administrative  services  contract with the state of Nevada.  Enrollment in
     the terminated plan was 163,000 at December 31, 1996.

During 2000, 1999 and 1998, we received  approximately  24.2%,  23.5% and 23.0%,
respectively,  of our total  revenues  from our  contract  with HCFA to  provide
health care services to Medicare enrollees. Our contract with HCFA is subject to
annual  renewal at the  election of HCFA and  requires us to comply with federal
HMO and  Medicare  laws  and  regulations  and may be  terminated  if we fail to
comply.  The termination of our contract with HCFA would have a material adverse
effect on our business.  In addition,  there have been, and we expect that there
will  continue  to be, a  number  of  legislative  proposals  to limit  Medicare
reimbursements and to require additional  benefits.  Future levels of funding of
the  Medicare  program  by the  federal  government  cannot  be  predicted  with
certainty. (See Government Regulation and Recent Regulation).

Our ability to obtain and  maintain  favorable  group  benefit  agreements  with
employer  groups  affects  our  profitability.   The  agreements  are  generally
renewable  on an annual  basis but are subject to  termination  on 60 days prior
notice.  For the fiscal  year ended  December  31,  2000,  our ten  largest  HMO
employer  groups were, in the  aggregate,  responsible  for less than 10% of our
total revenues.  Although none of our employer groups accounted for more than 2%
of total  revenues  during  that  period,  the loss of one or more of the larger
employer groups would, if not replaced with similar membership,  have a material
adverse effect upon our business. We have generally been successful in retaining
these employer groups in Nevada. However, there can be no assurance that we will
be able to renew our agreements  with our employer  groups in the future or that
we will not  experience  a decline in  enrollment  within our  employer  groups.
Additionally,  revenues received under certain government  contracts are subject
to audit and retroactive adjustment.


<PAGE>



Provider Arrangements and Cost Management

HMO and Managed Indemnity Products. A significant distinction between our health
care delivery  system and that of many other managed care  providers is the fact
that approximately 73% of our southern Nevada HMO members receive primary health
care  through  our owned  multi-specialty  medical  group.  We make  health care
available   through   independently   contracted   providers   employed  by  the
multi-specialty  medical group and other  independently  contracted  networks of
physicians, hospitals and other providers.

Under our HMOs,  the member  selects a primary  care  physician  who provides or
authorizes any  non-emergency  medical care given to that member.  These primary
care physicians and some  specialists are compensated to a limited extent on the
basis of how well they coordinate  appropriate medical care. We have a system of
limited incentive risk  arrangements and utilization  management with respect to
our  independently  contracted  primary  care  physicians.   We  compensate  our
independently  contracted  primary care physicians and specialists by using both
capitation and modified  fee-for-service  payment methods. In Nevada,  under the
modified  fee-for-service  method,  an incentive risk arrangement is established
for institutional services.  Additional amounts may be made available to certain
capitated  physicians if hospital  costs are less than  anticipated  for our HMO
members.  For those  primary care  physicians  receiving  payments on a modified
fee-for-service basis, portions of the payments otherwise due the physicians are
withheld.  The amounts  withheld are available for payment to the physicians if,
at year-end,  the  expenditures  for both  institutional  and  non-institutional
medical services are within predetermined,  contractually agreed upon ranges. It
is believed that this method of limited  incentive risk payment is  advantageous
to the physician,  our company and the members because all share in the benefits
of managing  health care costs.  We have,  however,  negotiated  capitation  and
reduced  fee-for-service  agreements  with certain  specialists and primary care
providers who do not participate in the incentive risk arrangements.  We monitor
certain  health care  utilization,  including  evaluation  of elective  surgical
procedures,  quality of care and financial  stability of our capitated providers
to facilitate access to service and to ensure member satisfaction.

We provide or negotiate  discounted  contracts  with hospitals for inpatient and
outpatient hospital care, including room and board, diagnostic tests and medical
and surgical procedures.  We believe that we currently have a favorable contract
with our primary southern Nevada contracted hospital,  Columbia Sunrise Hospital
or Sunrise  Hospital.  Subject to certain  limitations,  the contract  provides,
among other things,  guaranteed  contracted per diem rate increases on an annual
basis.  The per diem rate  increased  3% in 2000 and is  scheduled  to  increase
approximately  4% in 2001. Since a majority of our southern Nevada hospital days
are at Sunrise Hospital and another Columbia/HCA facility, this contract assists
us in managing a significant  portion of our medical  costs.  We can be and have
been affected by Sunrise  Hospital's  limited capacity and have had to place our
members in other facilities, with a higher cost to us, due to a shortage of beds
at these  two  hospitals.  In  Texas,  we have  contracts  with 18  Columbia/HCA
hospitals and  approximately 14 other hospitals for inpatient care in Dallas/Ft.
Worth.

We  believe  that  we  have  negotiated  favorable  rates  with  our  contracted
hospitals.  For hospitals  other than Sunrise  Hospital,  our contracts with our
hospital providers  typically renew  automatically with both parties granted the
right to terminate  after a notice period  ranging from three to twelve  months.
Reimbursement   arrangements   with  other  health  care  providers,   including
pharmacies,  generally renew  automatically  or are negotiated  annually and are
based on several  different  payment  methods,  including  per diems  (where the
reimbursement  rate is based on a per day of service charge for specified  types
of care),  capitation or modified  fee-for-service  arrangements.  To the extent
possible,  when  negotiating  non-physician  provider  arrangements,  we solicit
competitive bids.

We utilize  two  reimbursement  methods  for  health  care  providers  rendering
services  under our  indemnity  plans.  For services to members  utilizing a PPO
plan, we reimburse participating  physicians on a modified fee-for-service basis
which incorporates a limited fee schedule and reimburses hospitals on a per diem
or discounted  fee-for-service  basis.  For services  rendered  under a standard
indemnity plan,  pursuant to which a member may select a non-plan  provider,  we
reimburse non-contracted physicians and hospitals at pre-established rates, less
deductibles and co-insurance amounts.

We manage health care costs through our large case  management  program,  urgent
care centers and by educating our members on how and when to use the services of
our plans and how to manage chronic disease conditions.  We audit hospital bills
and review  hospital  and high  volume  providers  claims to ensure  appropriate
billing and utilization  patterns. We also monitor the referral process from the
primary care physician to the specialty network for appropriateness. Further, in
Nevada,  we utilize our home health care agency and our  hospice,  which help to
minimize hospital admissions and the length of stay.

Military Health Services. Under the TRICARE contract,  dependents of active duty
military  personnel  and military  retirees and their  dependents  choose one of
three option plans available to them for health care services: (1) TRICARE Prime
(an  HMO  style  option  with  a  self-selected  primary  care  manager  and  no
deductibles),  (2) TRICARE Extra (a PPO style option with  deductibles  and cost
shares) or (3) TRICARE  Standard (an indemnity style option with deductibles and
cost shares).  Approximately 35% of eligible beneficiaries receive their primary
care through existing military treatment facilities.  SMHS negotiated discounted
contracts with approximately 32,000 individual providers, 2,000 institutions and
7,000  pharmacies to provide  supplemental  network access for TRICARE Prime and
Extra  beneficiaries.   SMHS'  contracts  with  providers  are  primarily  on  a
discounted  fee-for-service  basis with renewal and termination terms similar to
our commercial practice. SMHS is at-risk for and manages the health care service
cost  of all  TRICARE  Extra  and  Standard  beneficiaries  as  well  as a small
percentage of TRICARE Prime beneficiaries.

Risk Management

We  maintain  general and  professional  liability  and  property  and  fidelity
insurance  coverage in amounts that we believe are adequate for our  operations.
Our multi-specialty medical groups maintain excess malpractice insurance for the
providers  presently  employed  by the  group.  In Nevada and  Arizona,  we have
assumed the risk for the first  $250,000 per  malpractice  claim,  not to exceed
$1.5 million in the aggregate per contract year up to our limits of coverage. In
Texas,  we have  assumed no  self-insured  retention  per claim.  The  aggregate
maximum  limits for each of these policies is $30 million per year. In addition,
we  require  all of our  independently  contracted  provider  physician  groups,
individual practice  physicians,  specialists,  dentists,  podiatrists and other
health care  providers  (with the  exception of certain  hospitals)  to maintain
professional liability coverage. Certain of the hospitals with which we contract
are  self-insured.  We also  maintain  stop-loss  insurance  that  reimburses us
between 50% and 90% of hospital charges for each individual member of our HMO or
managed  indemnity  plans  whose  hospital  expenses  exceed,  depending  on the
contract,  $75,000 to $200,000,  during the contract year and up to $2.0 million
per member per lifetime.

We also maintain excess catastrophic  coverage for one of our wholly-owned HMOs,
Health Plan of Nevada, Inc., or HPN, that reimburses us for amounts by which the
ultimate net loss exceeds  $400,000,  but does not exceed the annual  maximum of
$19.6 million per  occurrence  and $39.2  million per contract.  In the ordinary
course of our business,  however, we are subject to claims that are not insured,
principally claims for punitive damages.

Effective  July 1,  1998,  workers'  compensation  claims  with  dates of injury
occurring on or after that date,  were reinsured  under a quota share and excess
of loss agreement, which we refer to as "low level" reinsurance,  with Travelers
Indemnity Company of Illinois,  which is rated A+ by the A.M. Best Company.  The
low level  reinsurance  provided  quota  share  protection  for 30% of the first
$10,000 of each loss,  excess of loss  protection  of 75% of the next $40,000 of
each loss and 100% of the next $450,000 on a per occurrence  basis.  The maximum
net loss retained on any one claim, up to $500,000,  ceded under this treaty was
$17,000.  This  agreement  continued  until June 30,  2000,  when we executed an
option for a twelve month extension relating to the run-off of policies in force
as of June 30, 2000,  which covers claims arising under our policies  during the
term of the extension.

In addition to the low level  reinsurance,  effective January 1, 2000 we entered
into a reinsurance  contract that provides  statutory  (unlimited)  coverage for
workers' compensation claims in excess of $500,000 per occurrence.  The contract
is in effect for claims  occurring on or after January 1, 2000 through  December
31, 2002. The reinsurer,  National Union Fire Insurance Company,  which is rated
A+ by the A.M. Best Company, has a limited ability to cancel this treaty on each
anniversary of inception during that period.  Effective July 1, 2000, we entered
into a reinsurance  contract,  also with National Union Fire Insurance  Company,
that provides $250,000 of coverage for workers' compensation claims in excess of
$250,000  per  occurrence.  The  contract is in effect for claims  occurring  on
policies  with  effective  dates  beginning  July 1,  2000 and  thereafter.  The
reinsurer has the ability to cancel the treaty if written  notice is provided 90
days prior to each anniversary of inception.

Information Systems

We use data processing systems,  which assist us in, among other things, pricing
our services,  monitoring utilization and other cost factors, providing bills on
a timely  basis,  identifying  accounts  for  collection  and  handling  various
accounting and reporting functions. Our imaging and workflow systems are used to
process  and track  claims and  coordinate  customer  service.  Where it is cost
efficient, our systems are connected to large provider groups, doctors' offices,
payors  and   brokers  to  enable   efficient   transfer  of   information   and
communication.  In 2000, we began to provide secure access to basic  eligibility
and claims information to selected  providers via an Internet pilot web site. In
2001, this Internet-based access will be expanded, with security, so members can
access more  information  and  perform  self-service  transactions.  We view our
information  systems  capability  as  critical  to the  performance  of  ongoing
administrative  functions and integral to quality assurance and the coordination
of patient  care.  We are  continually  modifying or improving  our  information
systems capabilities in an effort to improve operating  efficiencies and service
levels.

Quality Assurance and Improvement

We promote  continuous  improvement  in the  quality of member  care and service
through our quality programs.  Our quality programs are a combination of quality
assurance activities, including the retrospective monitoring and problem solving
associated with the quality of care delivered,  continuous  quality  improvement
activities,  and analysis of ongoing  aggregate data for purposes of prospective
planning.

Our quality  assurance  methodology  is based on (i)  reviews of adverse  health
outcomes as well as appropriateness and quality of care; (ii) focused reviews of
high volume/high risk diagnoses or procedures; (iii) monitoring for trends; (iv)
peer review of the clinical process of care; (v) development and  implementation
of corrective action plans, as appropriate; (vi) monitoring compliance/adherence
to corrective  action plans;  and (vii)  assessment of the  effectiveness of the
corrective action plans.

Our quality  improvement  methodology is based on (i) collection and analysis of
data;  (ii)  analysis of barriers to achieving  goals and/or  benchmarks;  (iii)
development  and  implementation  of  interventions  to address  barriers;  (iv)
remeasurement of data to assess effectiveness of interventions;  (v) development
and implementation of new or additional interventions,  as appropriate; and (vi)
follow-up remeasurement of data to assess effectiveness or sustained impact.

Several independent organizations have been formed for the purpose of responding
to external  demands for  accountability  in the health care  industry.  We have
voluntarily elected to be evaluated by one of these external organizations,  the
National  Committee  for Quality  Assurance,  or NCQA.  NCQA is an  independent,
not-for-profit organization that evaluates managed care organizations.

The NCQA accreditation process includes rigorous evaluations conducted by a team
of  physicians  and managed  care  experts.  According  to NCQA  officials,  the
standards  are  purposely  set high to encourage  health  plans to  continuously
enhance their  quality.  No  comparable  evaluation  exists for  fee-for-service
health care. NCQA evaluates  plans on  approximately  50 quality  standards that
fall  into  six  categories:  Quality  Management  and  Improvement;   Physician
Credentials;  Members' Rights and Responsibilities;  Preventive Health Services;
Utilization Management; and Medical Records. In 2000, HPN earned an "Accredited"
status from the NCQA for its HMO and Medicare  products.  The NCQA accreditation
for  TXHC  expired  in  April  of  2000.  We  have  voluntarily   postponed  our
accreditation  renewal process for TXHC and intend to seek NCQA accreditation in
early 2002.

There  can be no  assurance,  however,  that we  will  maintain  NCQA  or  other
accreditations  in the future and there is no basis to predict what  effect,  if
any,  the lack of NCQA or other  accreditations  could  have on HPN's or  TXHC's
competitive positions in southern Nevada and Dallas/Fort Worth respectively.

Underwriting

HMO. We structure  premium rates for our various health plans primarily  through
community  rating and  community  rating by class  methods.  Under the community
rating  method,  all  costs of basic  benefit  plans for our  entire  membership
population  are  aggregated.  These  aggregated  costs are  calculated on a "per
member per month"  basis and  converted  to premium  rates for various  coverage
types,  such as single or family coverage.  The community rating by class method
is based on the same  principles  as  community  rating  except  that  actuarial
adjustments  to premium rates are made for  demographic  variations  specific to
each employer group including the average age and sex of their employees,  group
size and  industry.  All  employees  of an  employer  group are charged the same
premium rate if the same coverage is selected.

In addition to premiums paid by employers,  members also pay  co-payments at the
time  certain  services are  provided.  We believe  that  co-payments  encourage
appropriate  utilization  of health  care  services  while  allowing us to offer
competitive  premium  rates.  We also  believe  that the  capitation  method  of
provider compensation  encourages physicians to provide only medically necessary
and appropriate care.

Managed Indemnity. Premium charges for our managed indemnity products are set in
a manner similar to the community rating by class method  described above.  This
rate calculation utilizes similar demographic  adjustment factors including age,
sex and industry factors to develop group-specific  adjustments from a given per
member per month base rate by plan.  Actual  health claim  experience is used in
whole or in part to develop  premium rates for larger  insurance  member groups.
This  process  includes  the  use of  utilization  experience,  adjustments  for
incurred but not reported claims, inflationary factors, credibility and specific
reinsurance pooling levels for large claims.

Workers'  Compensation.  Prior to insuring a particular  risk, we review,  among
other  factors,  the  employer's  prior  loss  experience  and  other  pertinent
underwriting  information.  Additionally,  we determine  whether the  employer's
employment classifications are among the classifications that we have elected to
insure and if the amounts of the premiums for the classifications are within our
guidelines.  We review these  classifications  periodically to evaluate  whether
they are profitable.  Of the  approximately  550 employment  classifications  in
California,  we are willing to insure  approximately  two-thirds.  The remaining
classifications are either excluded by our reinsurance treaty or are believed by
us to be  too  hazardous  or  not  profitable.  In  addition,  we  increase  our
requirements  for  certain   classifications   to  increase  the  likelihood  of
profitability.

Once an employer has been insured by us, our loss control  department may assist
the insured in developing  and  maintaining  safety  programs and  procedures to
minimize on-the-job injuries and industrial health hazards.  The safety programs
and  procedures  vary  from  insured  to  insured.   Depending  upon  the  size,
classifications and loss experience of the employer, our loss control department
will  periodically  inspect the employer's  places of business and may recommend
changes  that  could  prevent  industrial  accidents.  In  addition,  severe  or
recurring injuries may also warrant on-site  inspections.  In certain instances,
members of our loss control department may conduct special educational  training
sessions  for  insured  employees  to assist  in the  prevention  of  on-the-job
injuries.  For  example,  employers  engaged  in  contracting  may be  offered a
training  session on general first aid and  prevention of injuries from specific
work exposures.

Competition

HMO and Managed  Indemnity.  Managed care companies and HMOs operate in a highly
competitive  environment.  Our major  competition is from  self-funded  employer
plans, PPO networks,  other HMOs, such as Nevada Care, Inc.,  Pacificare  Health
Systems,  Inc.,  Aetna and United  Healthcare  Corp. and  traditional  indemnity
carriers,  such  as  Blue  Cross/Blue  Shield.  Many  of  our  competitors  have
substantially larger total enrollments,  greater financial resources and offer a
broader  range  of  products.  Additional  competitors  with  greater  financial
resources  may  enter  our  markets  in the  future.  We  believe  that the most
important  competitive  factors are the delivery of reasonably  priced,  quality
medical  benefits to members and the  adequacy and  availability  of health care
delivery services and facilities.  We depend on a large PPO network and flexible
benefit  plans to  attract  new  members.  Competitive  pressures  may result in
reduced membership levels. Any reductions could materially affect our results of
operations.

Workers'  Compensation.  Our workers'  compensation  business is concentrated in
California,  a state  where the  workers'  compensation  insurance  industry  is
extremely  competitive.  Since open rating became effective for policyholders in
1995,  there have been  substantial  reductions  in  premiums.  The premium rate
increases on policies renewed in California during 2000 were  approximately 26%.
For the second half of the year,  rate  increases  averaged  approximately  36%.
Based on public information,  other California workers'  compensation  companies
are issuing  year 2000  policies  at rates 20% to 40% in excess of the  expiring
rates.  For the first two months of 2001, the average  renewal rate increase for
our California policies was approximately 42%.

Approximately 180 companies wrote workers' compensation  insurance in California
in 2000,  including the State Compensation  Insurance Fund, which is the largest
writer in California. Many of our competitors have been in business longer, have
a larger volume of business, offer a more diversified line of insurance coverage
and have greater financial resources and distribution capability than we do.

Losses and Loss Adjustment Expenses

In  workers'  compensation  insurance,  several  years may  elapse  between  the
occurrence  of a loss  and  the  final  settlement  of the  loss.  To  recognize
liabilities for unpaid losses,  we establish  reserves,  which are balance sheet
liabilities  representing  estimates of future  amounts needed to pay claims and
related  expenses for insured  events,  including  reserves for events that have
been incurred but not reported or IBNR.

When a claim is reported, our claims personnel initially establish reserves on a
case-by-case  basis for the  estimated  amount of the  ultimate  payment.  These
estimates reflect the judgment of the claims personnel based on their experience
and  knowledge  of the  nature and value of the  specific  type of claim and the
available  facts at the time of  reporting  as to severity of injury and initial
medical  prognosis.  Included in these reserves are estimates of the expenses of
settling  claims,  including legal and other fees.  Claims  personnel adjust the
amount of the case reserves as the claim develops and as the facts warrant.

IBNR  reserves  are  established  for  unreported  claims  and loss  development
relating to current  and prior  accident  years.  In the event that a claim that
occurred  during  a prior  accident  year was not  reported  until  the  current
accident year, the case reserve for the claim  typically will be established out
of  previously   established   IBNR  reserves  for  that  prior  accident  year.
Unallocated  loss adjustment  expense reserves are established for the estimated
costs related to the general administration of the claims adjustment process.

The National  Association of Insurance  Commissioners  requires that we submit a
formal  actuarial  opinion  concerning loss reserves with each statutory  annual
report. The annual report must be filed with each applicable state department of
insurance on or before March 1 of the  succeeding  year.  The actuarial  opinion
must be signed by a qualified  actuary as  determined  by the  applicable  state
insurance regulators.  We retain the services of a qualified independent actuary
to periodically review our loss reserves.

We review the adequacy of our reserves on a periodic basis and consider external
forces including changes in the rate of inflation,  the regulatory  environment,
the judicial  administration  of claims,  medical  costs and other  factors that
could  cause  actual  losses  and loss  adjustment  expenses,  or LAE to change.
Reserves  are  reviewed  with our  independent  actuary at least  annually.  The
actuarial projections include a range of estimates reflecting the uncertainty of
projections. We evaluate the reserves in the aggregate, based upon the actuarial
indications,  and make adjustments where appropriate. Our Consolidated Financial
Statements  provide  for  reserves  based on the  anticipated  ultimate  cost of
losses.  We also  supplement  our  analyses  by  comparing  our paid  losses and
incurred losses to similar data provided by the California Workers' Compensation
Insurance  Rating  Bureau for all  California  workers'  compensation  insurance
companies.

Government Regulation and Recent Legislation

HMOs and Managed Indemnity.  Federal and state governments have enacted statutes
that extensively  regulate the activities of HMOs. Growing  government  concerns
over  increasing  health care costs and  quality of care could  result in new or
additional state or federal legislation that would impact health care companies,
including  HMOs,  PPOs and other health  insurers.  Among the areas regulated by
federal and state law are the scope of benefits available to members, grievances
and appeals, prompt payment of claims, premium structure,  procedures for review
of quality assurance,  enrollment requirements,  the relationship between an HMO
and its health care providers and members, licensing and financial condition.

Government  regulation  of health  care  coverage  products  and  services  is a
changing area of law that varies from  jurisdiction to jurisdiction.  Changes in
applicable  laws  and  regulations   are   continually   being   considered  and
interpretation  of  existing  laws and rules also may change  from time to time.
Regulatory  agencies  generally have broad  discretion in interpreting  laws and
promulgating regulations to enforce their interpretations.

While we are unable to predict what  regulatory  changes may occur or the impact
on us of any particular  change,  our operations and financial  results could be
negatively  affected by  regulatory  revisions.  For example,  any  proposals to
eliminate or reduce the Employee Retirement Income Security Act, or ERISA, which
regulates  insured and self-insured  health coverage plans offered by employers,
pre-emption  of state  laws that  would  increase  litigation  exposure,  affect
underwriting practices, limit rate increases, require new or additional benefits
or affect contracting arrangements (including proposals to require HMOs and PPOs
to  accept  any  health  care  provider  willing  to  abide by an HMO's or PPO's
contract  terms)  may  have a  material  adverse  effect  on our  business.  The
continued   consideration   and  enactment  of  "anti-managed   care"  laws  and
regulations  by federal and state  bodies may make it more  difficult  for us to
control medical costs and may adversely affect financial results.

In addition to changes in  applicable  laws and  regulations,  we are subject to
various audits,  investigations and enforcement actions.  These include possible
government actions relating to ERISA, the Federal Employees Health Benefit Plan,
federal  and  state  fraud  and  abuse  laws and laws  relating  to  utilization
management  and the  delivery  and  payment of health  care.  In  addition,  our
Medicare  business  is  subject to  Medicare  regulations  promulgated  by HCFA.
Violation of government  laws and  regulations  could result in an assessment of
damages,  civil or criminal fines or penalties,  or other  sanctions,  including
exclusion from participation in government programs. In addition,  disclosure of
any adverse  investigation or audit results or sanctions could negatively affect
our reputation in various  markets and make it more difficult for us to sell our
products and services.

We have HMO  licenses  in Nevada,  Texas and  Arizona.  Our HMO  operations  are
subject to  regulation  by the Nevada  Division of  Insurance,  the Nevada State
Board of Health, the Texas Department of Insurance and the Arizona Department of
Insurance.  Our health  insurance  subsidiary is domiciled and  incorporated  in
California  and is licensed in 43 states and the  District  of  Columbia.  It is
subject to licensing  and other  regulations  of the  California  Department  of
Insurance as well as the insurance  departments  of the other states in which it
operates or holds  licenses.  Our HMO and insurance  premium rate  increases are
subject to various  state  insurance  department  approvals.  Our Nevada HMO and
health insurance  subsidiaries  currently  maintain a home office and a regional
home  office,  respectively,  in Las Vegas and,  accordingly,  are  eligible for
certain premium tax credits in Nevada. This property was not sold as part of our
December 2000 sale-leaseback  transaction. We intend to take all necessary steps
to continue to comply  with  eligibility  requirements  for these  credits.  The
elimination or reduction of the premium tax credit would have a material adverse
effect on our results of operations.

We are  subject  to the  Federal  HMO Act  and its  regulations.  Our  HMOs  are
federally qualified under this Act. In order to obtain federal qualification, an
HMO must,  among other things,  provide its members certain services on a fixed,
prepaid fee basis and set its premium  rates in accordance  with certain  rating
principles  established  by federal law and  regulation.  The HMO must also have
quality  assurance  programs in place with respect to our health care providers.
Furthermore, an HMO may not refuse to enroll an employee, in most circumstances,
because  of a  person's  health,  and may  not  expel  or  refuse  to  re-enroll
individual members because of their health or their need for health services.

Under the "corporate  practice of medicine" doctrine,  in most states,  business
organizations,  other  than  those  authorized  to do so,  are  prohibited  from
providing, or holding themselves out as providers of, medical care. Some states,
including  Nevada,  exempt HMOs from this  doctrine.  The laws  relating to this
doctrine are subject to numerous conflicting  interpretations.  Although we seek
to structure our operations to comply with  corporate  practice of medicine laws
in all states in which we operate,  there can be no  assurance  that,  given the
varying and uncertain  interpretations of those laws, we would be found to be in
compliance  with those laws in all states.  A  determination  that we are not in
compliance with applicable  corporate  practice of medicine laws in any state in
which we operate could have a material adverse effect on us if we were unable to
restructure our operations to comply with the laws of that state.

Certain Medicare and Medicaid  antifraud and abuse provisions are codified at 42
U.S.C.  Sections  1320a-7(b) (the  Anti-kickback  Statute) and 1395nn (the Stark
Amendments).  Many states have similar  anti-kickback  and  anti-referral  laws.
These statutes prohibit certain business  practices and relationships  involving
the  referral of  patients  for the  provision  of health care items or services
under certain  circumstances.  Violations of the  Anti-kickback  Statute and the
Stark Amendments include criminal penalties, civil sanctions, fines and possible
exclusion  from the Medicare,  Medicaid and other federal  health care programs.
Similar  penalties  are  provided  for  violation  of  state  anti-kickback  and
anti-referral  laws.  The  Department  of Health and Human  Services  or HHS has
issued regulations  establishing and defining "safe harbors" with respect to the
Anti-kickback  Statute and the Stark  Amendments.  We believe  that our business
arrangements and operations are in compliance with the Anti-kickback Statute and
the Stark Amendments as defined by the relevant safe harbors. However, there can
be no assurance that (i) government  officials charged with  responsibility  for
enforcing the prohibitions of the Anti-kickback Statute and the Stark Amendments
or Qui Tam  relators  purporting  to act on  behalf of the  Government  will not
assert that we, or certain conduct in which we are involved, are in violation of
those  statutes;  and (ii) such statutes will  ultimately be  interpreted by the
courts in a manner consistent with our interpretation.

In 1997,  Congress  passed the Balanced  Budget Act, or BBA,  which  revised the
structure  of and  reimbursement  for private  health plan  options for Medicare
enrollees.  Premiums paid by HCFA to health plans were adjusted to (i) take into
account a blend of national and local health care cost factors, rather than only
local costs,  starting  with a 10%  national  factor in 1998 and moving to a 50%
national  factor by 2003;  (ii)  provide  for  gradual  removal of the  graduate
medical  education  factor  from  health plan  payments;  (iii)  provide for the
gradual phase-in of a risk adjustment  payment  methodology;  and (iv) provide a
minimum increase of 2% annually in health plan reimbursement  through 2003. As a
result,  since  1998,  health plan  reimbursement  from HCFA has  generally  not
matched the rate of increase for medical costs.  The BBA also  established a new
Medicare  managed care  program,  entitled  Medicare+Choice,  or M+C,  which was
effective  January  1,  1999.  Under  M+C,  we are  required  to  implement  new
requirements including,  but not limited to, discharge notices,  encounter data,
additional  provider  contract  language and extensive  new quality  improvement
programs.  The restructured payments and additional obligations contained in the
BBA increased the burden of administering our Medicare plans. In 1999,  Congress
sought to lessen the  adverse  impact on health  plans of the BBA by  changing a
number of M+C  provisions  in the Balanced  Budget  Refinement  Act, or BBRA. In
December 2000, Congress enacted the Beneficiary  Improvement and Protection Act,
or BIPA,  which,  like the BBRA,  was an effort to improve  the M+C  program and
reduce  the  number  of  non-renewals   by  companies  that  were   experiencing
significant  difficulties  in operating a viable M+C program.  In part, this law
revises  actions taken in BBA and BBRA that have impacted our  operations.  With
respect to us, BIPA primarily  impacts our Medicare  programs.  BIPA freezes the
inpatient data risk adjustment payment methodology at the 10% level through 2003
and  increases our  capitation by a minimum of 3% per member per month  starting
March 1, 2001.  Subsequent to 2001, the minimum  payment reverts to 2%. This law
also extends our Social HMO demonstration program, which has been in place since
1996, an additional  year through 2003.  Despite BBRA and BIPA,  the M+C program
continues to  experience  difficulties  and  participation  in it may  adversely
impact our  operations.  Because of the  potential  impact  that  changes in the
overall  Medicare program could have on our various  operations,  we monitor all
federal  activities  associated with the Medicare  program.  The risk adjustment
factors  described  above have not been  applied  to the  Social HMO  capitation
payments  for the Year  2000  and we do not  believe  that  the risk  adjustment
mechanism will be applied to Social HMO capitation payments in the near future.

The Health Insurance  Portability and  Accountability Act of 1996, or HIPAA, was
passed by Congress on August 21, 1996 and was effective  beginning July 1, 1997.
While HIPAA contains provisions regarding health insurance or health plans, such
as portability and limitations on pre-existing condition exclusions,  guaranteed
availability and renewability, it also contains several anti-fraud measures that
significantly  change  health  care  fraud  and  abuse  provisions.  Some of the
provisions  include  (i)  creation  of an  anti-fraud  and abuse  trust fund and
coordination of fraud and abuse efforts by federal, state and local authorities;
(ii)  extension  of the  criminal  anti-kickback  statues to all federal  health
programs;  (iii)  expansion  of and  increase  in the  amount of civil  monetary
penalties and establishment of a knowledge  standard for individuals or entities
potentially subject to civil monetary  penalties;  and (iv) revisions to current
sanctions for fraud and abuse, including mandatory and permissive exclusion from
participation in the Medicare or Medicaid  programs.  These provisions and other
factors have resulted in significantly  increased  enforcement actions involving
the healthcare industry.

HIPAA also contained  provisions  which mandated the  establishment of standards
and  requirements   for  electronic   transactions   involving   certain  health
information. Accordingly, on August 17, 2000, the Department of Health and Human
Services, or HHS, issued final regulations establishing standards for electronic
transactions.  On December 28, 2000, HHS issued final  regulations  establishing
standards for the privacy of individually  identifiable  health  information and
the compliance  dates under these  regulations  for health plans,  providers and
clearinghouses   were  originally  October  16,  2002  and  February  28,  2003,
respectively.  However,  on February 28, 2001, HHS published a notice  reopening
these final privacy regulations.  Currently, they are due to become effective on
April 14, 2001,  and compliance is required two years  thereafter,  or April 14,
2003, for health plans, heath care providers and health care clearinghouses.  In
view of the reopening of the final privacy  regulations,  the current compliance
date may be changed.  Final  regulations  establishing  a unique  identifier for
health plans and standards for security of  electronic  information  systems are
expected  to be  issued  by HHS in  2001  and  the  compliance  date  for  those
regulations will be established  when they are published in final form.  Failure
to  comply  with  the  standards  and  implementation  specifications  of  these
regulations  could result in  investigation by the Office of Civil Rights of HHS
and the imposition of criminal  penalties and civil sanctions,  including fines.
At this time,  we cannot  quantify the cost of  compliance or the impact it will
have on our business.  There can be no assurance that the costs to implement and
to  comply  will  not  adversely  affect  our  operating  results  or  financial
condition.

In November  2000,  the  Department of Labor  published the final  regulation on
ERISA  claims  procedures.  The first  major  revision  of the  existing  claims
procedure  requirements  since  1977,  the  regulation  applies to all  employee
benefit  plans  governed by ERISA,  whether the benefits  are  provided  through
insurance  products  or are  self-funded.  Some of the  provisions  require  (i)
compressed  timeframes for decisions on urgent care and pre-service claims; (ii)
safeguards to ensure that decisions are made consistently and in

<PAGE>


accordance with plan provisions; and (iii) two levels of internal appeal and the
use  of  mandatory   arbitration,   voluntary  arbitration  and,  under  certain
conditions,  other forms of alternative dispute resolution. This regulation does
not preempt  state laws unless the state laws  prevent  the  application  of the
regulation's requirements. This regulation impacts our third party administrator
services and potentially  other operations and will apply to all claims filed on
or after January 1, 2002.

Workers' Compensation.  We are subject to extensive governmental  regulation and
supervision in each state in which we conduct  workers'  compensation  business.
The primary purpose of the regulation and  supervision is to provide  safeguards
for  policyholders  and injured  workers  rather than  protect the  interests of
shareholders.  The extent and form of the  regulation may vary, but generally it
has its source in statutes that  establish  regulatory  agencies and delegate to
the  regulatory  agencies  broad  regulatory,   supervisory  and  administrative
authority.  Typically,  state  regulations  extend to matters  such as licensing
companies; restricting the types or quality of investments;  requiring triennial
financial  examinations  and  market  conduct  surveys of  insurance  companies;
licensing  agents;  regulating  aspects  of a  company's  relationship  with its
agents; restricting use of some underwriting criteria; regulating premium rates,
forms and  advertising;  limiting the grounds for  cancellation or nonrenewal of
policies;  solicitation  and  replacement  practices;  and specifying what might
constitute unfair practices.

Typically,  states mandate  participation  in insurance  guaranty  associations,
which  assess   solvent   insurance   companies  in  order  to  fund  claims  of
policyholders of insolvent insurance companies. Under this arrangement, insurers
can be  assessed  up to 1%, or 2% in certain  states,  of  premiums  written for
workers' compensation insurance in that state each year to pay losses and LAE on
covered  claims of insolvent  insurers.  In California and certain other states,
insurance  companies are allowed to recoup such assessments  from  policyholders
while several  states allow an offset  against  premium  taxes.  The  California
Insurance  Guaranty  Association  has  issued an  assessment  as a result of the
insolvency  of the insurers  owned by Superior  National  Insurance  Group.  The
assessment is 1% of 1999 written premium to be paid in  installments.  The first
installment  was paid on December  31, 2000 and the second is due June 30, 2001.
The payments of approximately $1.2 million will be recouped during 2001 and 2002
through   assessments  to  policyholders.   It  is  likely  that  guaranty  fund
assessments related to this insolvency will continue.

General.  Besides state insurance  laws, we are subject to general  business and
corporation laws, federal and state securities laws,  consumer  protection laws,
fair credit  reporting acts and other laws  regulating the conduct and operation
of our subsidiaries.

In the normal  course of  business,  we may  disagree  with  various  government
agencies  that  regulate  our   activities  on   interpretations   of  laws  and
regulations,  policy  wording and  disclosures  or other related  issues.  These
disagreements,  if left  unresolved,  could  result in  administrative  hearings
and/or  litigation.  We  attempt  to  resolve  all  issues  with the  regulatory
agencies,  but are willing to litigate  issues where we believe we have a strong
position.  The ultimate outcome of these disagreements could result in sanctions
and/or  penalties  and  fines  assessed  against  us.  Currently,  there  are no
litigation matters pending with any government agencies.

Deposits.  Our HMO and insurance  subsidiaries  are required by state regulatory
agencies to maintain  certain  deposits  and meet  certain net worth and reserve
requirements.  We have  restricted  assets on deposit in various  states ranging
from $20,000 to $2.6 million and  totaling  $24.7  million at December 31, 2000.
Our HMO and  insurance  subsidiaries  are  required by statute to meet a minimum
Risk-Based Capital requirement on a statutory accounting basis. In addition,  in
conjunction  with  the  Kaiser-Texas  acquisition,  TXHC  entered  into a letter
agreement with the Texas Department of Insurance whereby TXHC agreed to maintain
a net worth of $20.0  million,  on a  statutory  basis,  until it  achieves  two
consecutive quarters of break-even status.

Dividends.  Our HMO and insurance  subsidiaries are also restricted by state law
as to the amount of dividends that can be declared and paid. Moreover, insurance
companies and HMOs domiciled in Texas,  Nevada and California  generally may not
pay extraordinary  dividends without providing the state insurance  commissioner
with 30 days prior notice,  during which period the  commissioner may disapprove
the payment.  An  "extraordinary  dividend"  is generally  defined as a dividend
whose fair market value together with that of other  dividends or  distributions
made within the  preceding  12 months  exceeds the greater of (i) ten percent of
the insurer's surplus as of the preceding  December 31 or (ii) the net gain from
operations  of the  insurer  for the  12-month  period  ending on the  preceding
December 31.

In addition,  our workers'  compensation  insurance  subsidiaries  may not pay a
dividend  without the prior approval of the state insurance  commissioner to the
extent the cumulative  amount of dividends or distributions  paid or proposed to
be paid in any year exceeds the amount shown as unassigned funds (reduced by any
unrealized gains included in such amount) on the insurer's  statutory  statement
as of the previous December 31. California Indemnity Insurance Company, a direct
subsidiary of CII, can pay a dividend of $174,000  without the prior approval of
the California  Department of Insurance.  We are not in a position to assess the
likelihood of obtaining  future approval for the payment of dividends other than
those  specifically  allowed  by  law in  each  of our  subsidiaries'  state  of
domicile.  In connection  with CII's proposed  exchange offer to exchange all of
CII's  debentures that mature on September 15, 2001 with cash or new debentures,
California  Indemnity  filed an application  with the  California  Department of
Insurance to pay an extraordinary  dividend of up to $5 million. On February 22,
2001, the California Department of Insurance approved the request for payment by
California Indemnity of an extraordinary dividend of up to $5 million.

No prediction can be made as to whether any  legislative  proposals  relating to
dividend rules in the  domiciliary  states of our  subsidiaries  will be made or
adopted in the future,  whether the  insurance  departments  of such states will
impose either  additional  restrictions  in the future or a  prohibition  on the
ability of our regulated  subsidiaries to declare and pay dividends or as to the
effect of any such proposals or restrictions on our regulated subsidiaries.

Employees

We had  approximately  3,800  employees  as of  March  20,  2001.  None of these
employees are covered by a collective bargaining agreement.  We believe that our
relations with our employees are good.


ITEM 2. DESCRIPTION OF PROPERTIES

On December 28, 2000, we finalized a  sale-leaseback  transaction  that included
the majority of our administrative and clinical properties in Las Vegas totaling
approximately  478,000 square feet. The lease is for a term of fifteen years and
we have the option of five 5-year renewal periods.  We lease  additional  office
and clinical space in Nevada totaling  approximately  134,000 and 124,000 square
feet,  respectively.  HPN and Sierra Health and Life  Insurance Co. Inc., or SHL
have  retained  ownership of a 134,000  square foot  administrative  building at
their Las Vegas  headquarters,  which  serves as the home  office and a regional
home office for our Nevada HMO and health insurance subsidiaries, respectively.

In conjunction with the Kaiser-Texas acquisition, we purchased eight medical and
office facilities with approximately  323,000 square feet of clinical facilities
and  approximately  175,000  square  feet of  administrative  facilities.  These
buildings are subject to a deed of trust note with an original  balance of $35.2
million  and a balance of $34.2  million on  December  31,  2000.  Approximately
81,000 square feet of the clinical and 67,000 square feet of the  administrative
space are subleased by us to outside parties. The Texas assets have been written
down to market value and are  classified  as held for sale on our balance  sheet
while we actively seek a buyer for the properties.

The workers'  compensation  subsidiary is  headquartered in Nevada and subleases
space from us in one of the buildings included in the sale-leaseback transaction
as  well  as  approximately  77,000  square  feet  of  leased  office  space  in
California, Colorado and Texas.

We lease  approximately  150,000  square feet of office  space in other  various
states as needed  for the  military  subsidiary's  administrative  headquarters,
TRICARE service centers and other regional operations.

We believe  that  current and planned  clinical  space will be adequate  for our
present needs. However,  additional clinical space may be required if membership
expands in southern Nevada.

ITEM 3.   LEGAL PROCEEDINGS

We are subject to various claims and other  litigation in the ordinary course of
business.  Such litigation  includes claims of medical  malpractice,  claims for
coverage or payment for medical  services  rendered to HMO members and claims by
providers  for payment  for  medical  services  rendered  to HMO  members.  Also
included in such litigation are claims for workers'  compensation  and claims by
providers for payment of medical services  rendered to injured  workers.  In the
opinion of our management,  the ultimate resolution of pending legal proceedings
should not have a material adverse effect on our financial  condition or results
of operations.

ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None


<PAGE>





                                                       PART II

ITEM 5.     MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
            MATTERS

Market Information

Our common  stock,  par value  $.005 per share (the  "Common  Stock"),  has been
listed on the New York Stock  Exchange under the symbol SIE since April 26, 1994
and,  prior to that,  had been listed on the American  Stock  Exchange since our
initial public  offering on April 11, 1985.  The following  table sets forth the
high and low sales  prices  for the  Common  Stock for each  quarter of 2000 and
1999.
<TABLE>

<CAPTION>
         Period                                                                     High               Low
         ------                                                                     ----               ---

         2000
<S>                                                                                <C>               <C>
             First Quarter........................................                 $8.25             $4.31
             Second Quarter.......................................                  5.13              2.75
             Third Quarter........................................                  4.75              2.44
             Fourth Quarter.......................................                  6.00              2.75

         1999
             First Quarter........................................                $22.13            $11.56
             Second Quarter.......................................                 16.25             10.44
             Third Quarter........................................                 14.56             10.06
             Fourth Quarter.......................................                 10.00              4.63
</TABLE>


On March 15, 2001, the closing sale price of Common Stock was $4.52 per share.

Holders

The number of record  holders of Common  Stock at March 15, 2001 was 224.  Based
upon  information  available  to us, we believe  there are  approximately  5,300
beneficial holders of the Common Stock.

Dividends

No cash  dividends  have been paid on the Common Stock since our  inception.  We
currently  intend to retain  our  earnings  for use in our  business  and do not
anticipate  paying any cash dividends in the  foreseeable  future.  As a holding
company,  our ability to declare and to pay  dividends  is  dependent  upon cash
distributions from our operating  subsidiaries.  The ability of our HMOs and our
insurance  subsidiaries  to  declare  and pay  dividends  is  limited  by  state
regulations applicable to the maintenance of minimum deposits,  reserves and net
worth.  (See  Management's  Discussion  and Analysis of Financial  Condition and
Results of Operations - Liquidity and Capital Resources). The declaration of any
future  dividends  will be at the  discretion of our Board of Directors and will
depend on, among other things,  future  earnings,  debt  covenants,  operations,
capital requirements, our financial condition and general business conditions.


<PAGE>




ITEM 6.   SELECTED FINANCIAL DATA

The table below presents our selected consolidated financial information for the
years  indicated.  The table should be read in conjunction with the Consolidated
Financial Statements and the related Notes thereto, "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and other information
which  appears  elsewhere  in this  Annual  Report on Form  10-K.  The  selected
consolidated financial data below has been derived from our audited Consolidated
Financial Statements.

<TABLE>
<CAPTION>
                                                                                               Years Ended December 31,
                                                                    ----------------------------------------------------------------
                                                              2000          1999           1998         1997            1996
                                                           ----------    ----------     ----------   ----------     -----------
                                                                          (In thousands, except per share data)
Statements of Operation Data:
OPERATING REVENUES:
<S>                                                         <C>           <C>          <C>             <C>            <C>
   Medical Premiums....................................     $  869,875    $  827,779   $   609,404     $ 513,857      $ 386,968
   Military Contract Revenues .........................        330,352       287,398       204,838         4,346
   Specialty Product Revenues .........................        135,844        94,221       148,368       146,211        133,324
   Professional Fees...................................         35,607        51,842        45,363        31,238         28,836
   Investment and Other Revenues.......................         21,300        22,571        29,230        26,072         26,283
                                                          ------------  ------------ -------------    ----------     ----------
     Total.............................................      1,392,978     1,283,811     1,037,203       721,724        575,411
                                                            ----------    ----------   -----------     ---------      ---------

OPERATING EXPENSES:
   Medical Expenses....................................        810,390       749,797       513,209       419,272        315,915
   Military Contract Expenses  ........................        323,265       276,493       196,625         4,193
   Specialty Product Expenses..........................        152,733        96,487       142,258       143,082        130,758
   General, Administrative and Marketing Expenses......        136,660       137,812       110,687        93,919         72,237
   Asset Impairment, Restructuring,
      Reorganization and Other Costs (1) ..............        220,440        18,808        13,851        29,350         12,064
                                                           -----------  ------------    ----------   -----------     ----------
     Total.............................................      1,643,488     1,279,397       976,630       689,816        530,974
                                                            ----------    ----------     ---------    ----------      ---------

OPERATING (LOSS) INCOME ...............................       (250,510)        4,414        60,573        31,908         44,437

INTEREST EXPENSE AND OTHER, NET........................        (23,630)      (14,980)       (7,181)       (4,433)        (2,823)
                                                           -----------  -------------   ----------   -----------     ----------

(LOSS) INCOME FROM OPERATIONS
     BEFORE INCOME TAXES ..............................       (274,140)      (10,566)       53,392        27,475         41,614
BENEFIT (PROVISION) FOR INCOME TAXES...................         74,225         5,935       (13,796)       (3,234)       (10,471)
                                                           -----------  ------------   -----------   -----------     ----------

NET (LOSS) INCOME .....................................      $(199,915)  $    (4,631)   $   39,596     $  24,241      $  31,143
                                                             =========   ===========    ==========     =========      =========

EARNINGS PER COMMON SHARE (2):
Net (Loss) Income Per Share ...........................       $(7.37)        $(.17)        $1.45          $.90          $1.17
                                                              ======         =====         =====          ====          =====

   Weighted Average Number of Common
     Shares Outstanding ...............................         27,142        26,927        27,391        27,013        26,589
                                                                ======        ======        ======        ======        ======

EARNINGS PER COMMON SHARE ASSUMING
     DILUTION (2):
Net (Loss) Income Per Share ...........................       $(7.37)        $(.17)        $1.43          $.88         $1.15
                                                              ======         =====         =====          ====         =====

   Weighted Average Number of Common
     Shares Outstanding Assuming Dilution .............       27,142        26,927        27,747        27,426         27,191
                                                              ======        ======        ======        ======         ======
</TABLE>


<PAGE>




<TABLE>
<CAPTION>
                                                                                               December 31,
------------------------------------------------------------------------------------------------------------------------------------
                                                                      2000           1999           1998         1997         1996
                                                                   ----------     ----------     ----------   ----------   ---------
                                                                                               (In thousands)

Balance Sheet Data:
<S>                                                                <C>            <C>            <C>            <C>         <C>
   Working Capital .............................................   $    76,414    $   112,105    $  198,092     $211,911    $189,943
   Total Assets.................................................     1,165,100      1,130,112     1,045,120      723,936     629,462
   Long-term Debt (Net of Current Maturities)...................       225,355        258,854       242,398       90,841      66,189
   Cash Dividends Per Common Share..............................         none            none          none         none        none
   Stockholders' Equity.........................................        90,473        278,412       303,714      265,682     234,482
</TABLE>

(1)  We  recorded  certain   identifiable   asset   impairment,   restructuring,
     reorganization  and other costs.  See Note 16 of Notes to the  Consolidated
     Financial Statements.

(2)  Adjusted to account for  three-for-two  stock split of our common  stock to
     stockholders of record as of May 18, 1998.



<PAGE>




ITEM 7. MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS


The following  discussion and analysis  provides  information  which  management
believes is relevant for an assessment  and  understanding  of our  consolidated
financial condition and results of operations.  The discussion should be read in
conjunction  with  the  Consolidated  Financial  Statements  and  related  Notes
thereto.  Any  forward-looking   information   contained  in  this  Management's
Discussion and Analysis of Financial Condition and Results of Operations and any
other  sections of this 2000 Annual  Report on Form 10-K should be considered in
connection with certain cautionary statements contained in our Current Report on
Form 8-K  filed  March  20,  2001,  which is  incorporated  by  reference.  Such
cautionary  statements are made pursuant to the "safe harbor"  provisions of the
Private  Securities  Litigation  Reform Act of 1995 and identify  important risk
factors  that could  cause our actual  results to differ  materially  from those
expressed in any projected,  estimated or forward-looking statements relating to
us.

Overview

We derive revenues from our health maintenance organizations, managed indemnity,
military health care services and workers' compensation insurance  subsidiaries.
To a lesser extent,  we also derive  additional  specialty product revenues from
non-HMO and insurance  products  (consisting  of fees for workers'  compensation
administration,   utilization   management  services  and  ancillary  products),
professional  fees  (consisting  primarily  of fees for  providing  health  care
services  to  non-members  and  co-payment  fees  received  from  members),  and
investment and other revenue.

Our principal expenses consist of medical expenses,  military contract expenses,
specialty product expenses, and general,  administrative and marketing expenses.
Medical expenses represent  capitation fees and other  fee-for-service  payments
paid to  independently  contracted  physicians,  hospitals and other health care
providers to cover  members,  as well as the  aggregate  expenses to operate and
manage our multi-specialty medical groups and other provider subsidiaries.  As a
provider  of health  care  management  services,  we seek to  positively  affect
quality of care and  expenses  by  employing  or  contracting  with  physicians,
hospitals  and other  health care  providers  at  negotiated  price  levels,  by
adopting  quality  assurance  programs,  monitoring and managing  utilization of
physicians and hospital services and providing  incentives to use cost-effective
providers.  Military  contract  expenses  represent  the expenses of  delivering
health care, as agreed to in the TRICARE  contract with the federal  government,
as well as administrative  costs to operate the military health care subsidiary.
Specialty  product  expenses  primarily  consist of losses  and loss  adjustment
expenses,  policy  acquisition  expenses  and other  general and  administrative
expenses  associated  with our  workers'  compensation  insurance  subsidiaries.
General,  administrative and marketing expenses generally represent  operational
costs other than those  associated  with the  delivery of health care  services,
military contract services and specialty product services.

Calendar year 2000 was one of  significant  challenges and successes for Sierra.
In the first  quarter,  we engaged a consulting  firm to assist us in evaluating
our Texas operations.  One of the results of this evaluation was the development
of action  plans to improve  our Texas  operations.  This  started  with a major
restructuring  of the Dallas/Ft.  Worth HMO  operations of TXHC,  which included
replacement  of  the  senior  management,   reduction  in  staffing  along  with
consolidation  of  certain  services  to Las Vegas  and a  revision  of  product
strategy.  In the second  quarter,  we  implemented  another part of the plan by
closing  certain of our Texas clinic  facilities  and reducing the physician and
support staff. We initiated plans to terminate our contracting relationship with
our  affiliated  medical  provider  operations in Dallas/Ft.  Worth.  We stopped
actively  marketing our Medicare HMO product in Texas while we assessed its cost
structure.  We  then  re-evaluated  our  goodwill  asset  related  to our  Texas
operations  and  determined  that  future cash flows  would be  insufficient  to
recover this asset and we  completely  wrote-off  the asset.  We also decided to
sell our Texas real estate.  The market valuations we received resulted in fixed
asset impairment  charges of approximately $37 million.  Concurrently,  our real
estate  holdings in Arizona  and one of our  underperforming  Las Vegas,  Nevada
clinics were also  determined to be impaired based on market  valuations,  which
resulted  in fixed asset  impairment  charges  and a  re-evaluation  of goodwill
related  to our  Prime  Holdings,  Inc.  acquisition  of 1997  and a  subsequent
goodwill impairment charge.

As a result of the asset  impairment  and other  changes in estimate  charges we
took in the  second  quarter,  we were not in  compliance  with our bank line of
credit facility  financial  covenants.  We were able to obtain temporary waivers
from the banks by paying  additional  fees,  pledging  certain assets and having
some of our  subsidiaries  guarantee the credit facility debt, which at June 30,
2000,  was $185 million.  While  continuing to negotiate with the banks on a new
credit  agreement,   we  undertook  steps  to  conserve  our  cash  by  delaying
non-essential  capital  expenditures  and  reducing  our  corporate  general and
administrative  expenses.  We also  commenced  initiatives  to sell our non-core
assets  including the majority of our Las Vegas real estate in a  sale-leaseback
transaction,  our corporate  airplane,  our corporate  residence in Utah used to
entertain clients and our Houston HMO membership.

In the third quarter,  we completed the sale of our affiliated  medical provider
group in  Dallas/Ft.  Worth and our  corporate  residence in Utah. In the fourth
quarter,  we  completed  the sale of our  corporate  airplane,  the  Houston HMO
membership and the  sale-leaseback of the majority of our Las Vegas real estate.
In addition,  we were able to renegotiate the credit facility agreement with the
banks in December and we are now in compliance with all financial covenants.  We
used $50  million of the  sale-leaseback  proceeds to  permanently  pay down the
credit  facility debt and at December 31, 2000, our credit facility debt balance
was $135 million.


<PAGE>



Results of Operations

The  following  table sets forth  selected  operating  data as a  percentage  of
revenues for the periods indicated:

<TABLE>
<CAPTION>
                                                                            Years Ended December 31,
                                                                            ------------------------
                                                                     2000              1999            1998
                                                                  ----------        ----------      ----------

OPERATING REVENUES:
<S>                                                                   <C>              <C>              <C>
     Medical Premiums........................................         62.4%            64.5%            58.8%
     Military Contract Revenues..............................         23.7             22.4             19.7
     Specialty Product Revenues .............................          9.8              7.3             14.3
     Professional Fees.......................................          2.6              4.0              4.4
     Investment and Other Revenues ..........................          1.5              1.8              2.8
                                                                   --------         -------          -------
        Total................................................        100.0            100.0            100.0
                                                                     -----            -----            -----

OPERATING EXPENSES:
     Medical Expenses........................................         58.2             58.4             49.5
     Military Contract Expenses .............................         23.2             21.6             19.0
     Specialty Product Expenses..............................         11.0              7.5             13.7
     General, Administrative and Marketing Expenses..........          9.8             10.7             10.7
     Asset Impairment, Restructuring,
        Reorganization and Other Costs.......................         15.8              1.5              1.3
                                                                    ------            -----           ------

        Total................................................        118.0             99.7             94.2
                                                                     -----             ----            -----

OPERATING (LOSS) INCOME .....................................        (18.0)              .3              5.8

INTEREST EXPENSE AND OTHER, NET..............................         (1.7)            (1.1)             (.7)
                                                                    ------            -----           ------

(LOSS) INCOME FROM OPERATIONS
     BEFORE INCOME TAXES ....................................        (19.7)             (.8)             5.1

BENEFIT (PROVISION) FOR INCOME TAXES.........................          5.3               .4            ( 1.3)
                                                                    ------            -----            -----

NET (LOSS) INCOME ...........................................        (14.4)%          (.4)%              3.8%
                                                                     =====          =====              =====
</TABLE>



<PAGE>


Year Ended December 31, 2000 Compared to 1999

Total Operating Revenues for 2000 increased  approximately 8.5% to $1.39 billion
from  $1.28  billion  for  1999.   Medical   premium   revenues   accounted  for
approximately 62.4% and 64.5% of our total revenues for the years ended December
31,  2000  and  1999,  respectively.  The  decrease  in  medical  premiums  as a
percentage  of  total  revenues  in 2000 is  primarily  due to the  increase  in
specialty  product  and  military  contract  revenues  and  a  decrease  in  HMO
membership in Texas.  Continued  medical  premium  revenue growth is principally
dependent upon  continued  enrollment in our products and upon  competitive  and
regulatory factors.

The change in operating revenues was comprised of the following:

o An  increase in medical  premiums  of $42.1  million
o An increase in military contract  revenues of $43.0 million
o An increase in specialty  product revenues of $41.6 million
o A decrease in professional fees of $16.2 million
o A decrease in investment and other revenues of $1.3 million

Medical  premiums  from our HMO and  managed  indemnity  insurance  subsidiaries
increased  $42.1 million or 5.1%. The $42.1 million  increase in premium revenue
reflects a 5.3% increase in Medicare member months (the number of months of each
year that an  individual  is  enrolled in a plan)  offset by a 6.2%  decrease in
commercial  member  months.  The growth in Medicare  member  months  contributes
significantly  to the  increase in premium  revenues as the  Medicare per member
premium  rates are over three times higher than the average  commercial  premium
rate.  HMO premium rates for commercial  groups  increased  approximately  4% in
Nevada, 17% in Dallas/Ft.  Worth and 4% in Houston.  Our managed indemnity rates
increased  approximately 12% and Medicare rates increased approximately 2%. Over
95% of our Las Vegas,  Nevada  Medicare  members are  enrolled in the Social HMO
Medicare  program.  The  Health  Care  Financing  Administration,  or HCFA,  may
consider  adjusting  the  reimbursement  factor or changing  the program for the
Social  HMO  members  in the  future.  If the  reimbursement  for these  members
decreases  significantly and related benefit changes are not made timely,  there
could be a material adverse effect on our business.

Military  contract  revenues  increased $43.0 million or 14.9%. The increase was
primarily  attributable  to  additional  accrued bid price  adjustment  revenues
related to a true-up of prior periods'  information received from the government
in the third quarter of 2000.  Partially offsetting this was a decrease recorded
in the first  quarter for a reduction in the at-risk  health care  population of
beneficiaries  as additional  beneficiaries  enrolled  with  military  treatment
facility primary care managers.  We are not at-risk for those TRICARE  eligibles
and receive less revenue related to them from the government.  Military contract
revenue is  recorded  based on the  contract  price as agreed to by the  federal
government,  adjusted  for certain  provisions  based on actual  experience.  In
addition,  we record  revenue  based on estimates  of the earned  portion of any
contract change orders not originally specified in the contract.

Specialty product revenues  increased $41.6 million or 44.2%.  Revenue increased
in the  workers'  compensation  insurance  segment by $42.7  million,  which was
offset by a slight decrease in administrative  services revenue of $1.1 million.
The increase in the workers' compensation insurance segment was primarily due to
a larger amount of direct  written  premiums  with an 18% composite  increase in
premium rates for all states and a 24% increase in production growth.

Net earned  premiums  are the end result of direct  written  premiums,  plus the
change in unearned premiums,  less premiums ceded to reinsurers.  Direct written
premiums  increased  by 37% due  primarily to growth in  California  and Nevada.
Partially  offsetting the growth in direct  written  premiums was an increase in
premiums  ceded to  reinsurers,  which  increased  by 22%.  The  growth in ceded
reinsurance  premiums  was lower  than the  growth in  direct  written  premiums
primarily due to the expiration of our low level  reinsurance  agreement on June
30, 2000 and new lower cost  reinsurance  agreements,  all of which  reduced the
percentage of premiums being ceded.

As  compared to the low level  reinsurance  agreement  that  expired on June 30,
2000,  the new lower  cost  reinsurance  agreements  result in higher net earned
premium  revenues,  as we retain more of the premium dollars,  but also leads to
our keeping  more of the incurred  losses.  This may result in a higher loss and
loss  adjustment  expense,  or LAE,  ratio  if the  percentage  increase  in the
additional incurred losses should be greater than the percentage increase in the
additional premiums we retained.  The effect on the balance sheet will result in
a lower amount of reinsurance  recoverables.  However, due to the length of time
that it  typically  takes to fully pay a claim,  we should  see an  increase  in
operating cash flow and amounts available to be invested.

Professional  fees  decreased  $16.2  million  or 31.3%.  The  revenue  for 1999
included the pharmacy operations in Texas until they were sold during the fourth
quarter of 1999 and the inpatient operations at the Mohave Valley Hospital until
they were closed during the first quarter of 1999. The fees in 2000 also reflect
staffing  reductions  and subsequent  closure or sale of our affiliated  medical
groups in Texas and Arizona.

Investment and other revenues decreased $1.3 million or 5.6%, due primarily to a
decrease in the average invested balance during the year.

Medical  Expenses  increased  $60.6  million or 8.1%.  Excluding  the effects of
changes in estimate  charges,  medical expenses  increased  approximately  $16.9
million or 2.2%.  Medical  expenses  as a  percentage  of medical  premiums  and
professional  fees decreased from 86.1% to 85.5%,  excluding changes in estimate
charges and premium  deficiency as described below. The improvement is primarily
due to the  closing and sale of  operations  with higher  medical  care  ratios,
primarily in Texas and rural Nevada,  offset by an increase in Medicare  members
as a percentage of fully-insured  members. The cost of providing medical care to
Medicare  members  generally  requires  a  greater  percentage  of the  premiums
received.

Medical expenses  reported in the first quarter of 2000 included $1.0 million of
prior period reserve  strengthening.  In the second quarter of 2000, we recorded
changes in estimate charges of $29.5 million for reserve strengthening primarily
due to adverse  development  on prior years'  medical  claims,  $15.5 million in
premium  deficiency  medical expenses for the Texas operations and $10.2 million
for other changes in estimate charges.

In the first quarter of 1999, we recorded a premium  deficiency  medical  charge
accrual of $8.1 million related to losses in underperforming markets,  primarily
in Arizona and rural  Nevada,  all of which was used during 1999.  In the fourth
quarter  of 1999,  we  recorded  a premium  deficiency  charge  accrual of $21.0
million for estimated  deficient premiums  associated with 2000 contracts in the
Texas market of which,  $10.0 million was included in premium deficiency medical
expenses  and $11.0  million was  recorded in asset  impairment,  restructuring,
reorganization  and other costs.  During the fourth quarter of 1999, we recorded
changes in estimate charges of $11.2 million  primarily related to an adjustment
to the estimate for medical expenses recorded in previous years and $6.8 million
primarily related to contractual settlements with providers of medical services

The medical  expenses  for 2000  include  the  utilization  of $20.3  million of
premium  deficiency  reserve to offset losses on contracts in Texas  compared to
the  utilization  of  $43.9  million  in  1999.  (See  Note 15 of  Notes  to the
Consolidated Financial Statements).

We  believe  that the  remaining  premium  deficiency  medical  reserve  of $5.2
million,  as of  December  31,  2000,  is  adequate  and that no revision to the
estimate is necessary at this time.

Military  Contract  Expenses  increased $46.8 million or 16.9%.  The increase is
consistent  with the  increase in  revenues  discussed  previously.  Health care
delivery  expense  consists  primarily of costs to provide  managed  health care
services to eligible beneficiaries in accordance with Sierra's TRICARE contract.
Under the contract,  SMHS provides health care services to approximately 621,000
dependents  of active duty military  personnel  and military  retirees and their
dependents through subcontractor  partnerships and individual providers.  Health
care costs are  recorded in the period when  services  are  provided to eligible
beneficiaries,  including estimates for provider costs, which have been incurred
but not reported to us. Also,  included in military  contract expenses are costs
incurred  to  perform  specific  administrative  services,  such as health  care
appointment  scheduling,  enrollment,  network management and health care advice
line services,  and other  administrative  functions of the military health care
subsidiary.

Specialty  Product  Expenses  increased $56.2 million or 58.3%. Of the increase,
approximately  $32.1 million is a direct result of the costs associated with the
increase  in  workers'  compensation  premiums  and  associated  loss  and  loss
adjustment expenses.

We recorded  net adverse  loss  development  for prior  accident  years of $23.3
million in 2000  compared to $9.9 million in 1999.  The net adverse  development
recorded in 1999 and 2000 for prior accident years was largely  attributable  to
higher costs per claim, or claim severity, in California.  Higher claim severity
has  had a  negative  impact  on the  entire  California  workers'  compensation
industry.  The  majority of the adverse  loss  development  occurred on accident
years that were not covered by our low level  reinsurance  agreement.  While the
low level reinsurance agreement is in run-off effective July 1, 2000, California
premium rates have been  increasing,  which we believe will largely mitigate the
loss of this very favorable reinsurance  protection.  The premium rate increases
on policies  renewed in California  during the year ended December 31, 2000 were
approximately  26%  and  for  the  second  half  of  the  year  alone,  averaged
approximately  36%. In the first two months of 2001,  the average  renewal  rate
increase for our California policies was approximately 42%.

We  recorded  a higher  loss and LAE ratio  for the 2000  accident  year,  which
resulted in an increase  of  approximately  $8.6  million in  specialty  product
expense. The majority of the increase is due to the termination of the low level
reinsurance  agreement on June 30, 2000, which results in a higher risk exposure
on policies  effective  after that date and a higher amount of net incurred loss
and LAE. In addition, in light of the lower premium rates on policies written in
1999,  inflationary  trends in health care costs, the fact that we have seen our
reserves develop  adversely for the past two years and that projecting  ultimate
reserves cannot be done with 100% accuracy,  we believed it prudent to establish
reserves at a higher loss ratio to mitigate any future adverse loss  development
that may occur.

The loss and LAE  reserves  booked as of  December  31,  2000  reflect  our best
estimate of the ultimate loss costs for reported and unreported claims occurring
in accident year 2000 as well as those occurring in accident years prior to 2000
and is slightly in excess of our independent  actuary's  estimate.  Loss and LAE
reserves  have a  significant  degree  of  uncertainty  when  related  to  their
subsequent  payments.  Although  reserves  are  established  on the  basis  of a
reasonable estimate,  it is not only possible but probable that current reserves
will differ from their related subsequent developments. Any subsequent change in
loss and LAE reserves established in a prior year would be reflected in the year
when the change is  identified.  Workers'  compensation  claim payments are made
over  several  years from the date of the claim.  Until the final  payments  for
reported claims are made, reserves are invested to generate investment income.

Under our low level reinsurance agreement,  we reinsure 30% of the first $10,000
of each  claim,  75% of the next  $40,000  and 100% of the  next  $450,000.  The
maximum  net loss  retained  on any one claim  ceded  under  this  agreement  is
$17,000.  This  agreement  covered  all  policies  in force at July 1,  1998 and
continued  until June 30, 2000 when we executed an option to extend  coverage to
all policies in force as of June 30, 2000.  For policies  effective from July 1,
2000,  we  obtained  excess of loss  reinsurance  for 100% of the  losses  above
$250,000  and less than  $500,000.  We already  had an  existing  excess of loss
reinsurance agreement that covered 100% of the losses above $500,000.  (See Note
6 of Notes to the Consolidated Financial Statements).

The combined  ratio is a measurement of  underwriting  profit or loss and is the
sum of the loss and LAE ratio,  underwriting  expense  ratio and  policyholders'
dividend  ratio. A combined  ratio of less than 100%  indicates an  underwriting
profit.  Our combined ratio was 115.8% compared to 105.5% for 1999. The increase
was primarily due to a higher loss and LAE ratio of 13.4  percentage  points and
policyholders'  dividend ratio of 1.6 percentage  points,  offset  slightly by a
decrease  in the  underwriting  expense  ratio  of 4.7  percentage  points.  The
increase in the loss and LAE ratio was due to an  increase  in net adverse  loss
development which represents 6.6 percentage points of the change in the loss and
LAE ratio;  and a higher  loss and LAE ratio on the 2000  accident  year of $8.6
million,  which  represents 6.8 percentage  points of the change in the loss and
LAE ratio.

General,  Administrative and Marketing Expenses,  or G&A, decreased $1.2 million
or .8%. As a percentage  of revenues,  G&A costs for 2000 were 9.8%  compared to
10.7% in 1999 due  primarily  to higher  revenues in 2000.  As a  percentage  of
medical  premium  revenue,  G&A costs improved from 16.6% for 1999 down to 15.7%
for  2000.   Excluding  the  utilization  of  premium  deficiency  reserves  for
maintenance  costs of $12.1  million for 2000 and $20.9  million  for 1999,  G&A
costs decreased  $10.1 million or 8.7% for the year. The $10.1 million  decrease
was  primarily  attributable  to the  consolidation  of  much of the  Texas  G&A
services with our existing operations in Las Vegas as well as overall reductions
in the Texas  operations.  This was offset by an  increase in  depreciation  and
amortization expense of $1.8 million.

Asset Impairment, Restructuring, Reorganization and Other Costs consist of the
following:

Asset  Impairments.  During the first  quarter of 1999,  we closed all inpatient
operations at Mohave Valley  Hospital,  a 12-bed acute care facility in Bullhead
City,  Arizona,  and terminated over 40 employees.  We recorded a charge of $3.5
million for the write-off of goodwill associated with these operations.

In the first  quarter  of 2000,  we engaged a  consultant  to help us assess our
Texas  operations.  In late February,  the  consultant  issued its report and we
implemented  strategic action plans to turn around the Texas  operations.  These
actions included the replacement of the Texas senior management,  a reduction in
staffing  along  with a  consolidation  of certain  services  to Las Vegas and a
revision  of product  strategy.  The new  management  was charged  with  further
assessing the Dallas/Ft.  Worth health care delivery system.  In May, we decided
that the delivery system,  which emphasized our affiliated  medical group as the
primary provider network, would be replaced by an expanded network of contracted
physician groups and individuals.  In addition,  the contracted hospital network
would be significantly expanded. As a result, during the second quarter of 2000,
we  adopted  and  announced  a further  restructuring  of the  Dallas/Ft.  Worth
operations,  which entailed a significant  reduction of physicians and staff and
the closing of several clinic sites.  In addition,  management  decided that the
real estate assets would be sold.

Management  also  adopted a plan in the second  quarter  of 2000 to  discontinue
medical  delivery  operations  in Mohave  County,  Arizona  and to sell the real
estate assets located there, as well as an underperforming medical clinic in Las
Vegas.

In  connection  with the  restructuring  plans we adopted and  announced  in the
second quarter of 2000, we re-evaluated the recoverability of certain long-lived
assets,  primarily  associated  with the Texas  operations,  in accordance  with
Statement  of  Financial  Accounting  Standards  No.  121,  "Accounting  for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of", or
SFAS No. 121,  and  Accounting  Principles  Board  Opinion  No. 17,  "Intangible
Assets",  or APB No.  17, and  determined  that the  carrying  values of certain
goodwill and other long-lived assets were impaired.

In assessing the asset impairment of the long-lived assets, we first allocated a
portion of related goodwill to the fixed assets to be disposed of, in accordance
with SFAS No. 121. The fixed  assets were then  written down to their  estimated
fair value less costs to sell, which was determined from independent valuations.
The remainder of the related  goodwill was then assessed for  recoverability  in
accordance with APB No. 17 based on projected discounted cash flows.

The charges  recorded for the write-off of goodwill  totaled  $126.4 million for
the Texas operations and $15.1 million related  primarily to the Prime Holdings,
Inc. acquisition.

The charges  recorded for fixed asset  impairment  totaled $36.5 million for the
Texas operations and $9.5 million for the Arizona and Nevada operations.

During  the second  quarter  of 2000,  we  wrote-off  capitalized  costs of $3.0
million related to the application development of an information system software
project for the workers' compensation operations,  that was canceled because the
vendor was unable to fulfill its  contractual  obligations.  The amounts written
off included  software  and  consulting  costs of $1.6  million and  capitalized
internal personnel costs of $1.4 million.

Restructuring  and  Reorganization.  In the first  quarter of 1999,  we incurred
$450,000 for certain legal and  contractual  settlements and $400,000 to provide
for our  portion of the  write-off  of  start-up  costs at our equity  investee,
TriWest Healthcare Alliance.

In the first quarter of 2000, we announced a restructuring of our managed health
care  operations  in  Texas.  As a result  of this  restructuring,  we  incurred
approximately  $1.4 million of severance pay for employees who were  terminated.
The restructuring  involved changes in senior management at our Texas facilities
and the  centralization  of key services to Las Vegas. Also in the first quarter
of 2000, we incurred $1.5 million of costs,  consisting  primarily of consulting
fees,  in  conjunction  with a review and  reorganization  of our  managed  care
operations in Texas.

In the  second  quarter  of 2000,  we  adopted a plan and  announced  additional
restructuring  of our managed  health care  operations,  primarily  in Texas and
Arizona.  As a result of this  restructuring,  we recorded charges in accordance
with  Emerging  Issues Task Force Issue No.  94-3,  "Liability  Recognition  for
Certain  Employee  Termination  Benefits  and  Other  Costs to Exit an  Activity
(Including  Certain Costs Incurred in a Restructuring)"  of approximately  $10.6
million. Of the costs recorded, $5.9 million was for severance, $2.9 million was
related to clinic closures and lease terminations and $1.8 million was for other
costs.  The severance  charge  resulted from the termination of 315 employees at
our subsidiaries and affiliated medical groups.

As  compared  to  the  quarter  ended  June  30,  2000,  the  restructuring  and
reorganization activities resulted in cash flow savings of approximately $2.0 to
$3.0 million per quarter beginning in the fourth quarter of 2000.

Premium  Deficiency  Maintenance.  Based on financial  projections  for 2000, we
recorded a $21.0 million premium deficiency at the end of 1999,  relative to our
Texas operations. Of this amount, $10.0 million was recorded in medical expenses
and  $11.0   million   was   recorded   in  asset   impairment,   restructuring,
reorganization  and other costs. The $11.0 million was an estimate of G&A costs,
in excess of those  covered by premiums,  expected to be incurred to service the
Dallas/Ft. Worth contracts.

The  premium  deficiency  maintenance  costs of $10.4  million,  recorded in the
second quarter of 2000, were an estimate of general and administrative costs, in
excess  of those  covered  by  premiums,  we would  incur to  service  the Texas
contracts.   The  amount   reflects   anticipated   cost   reductions  from  the
restructuring and reorganization actions noted above.

Other.  During  the fourth  quarter of 1998,  we  incurred  settlement  expenses
totaling $8.0 million  related to the settlement of a  competitor's  protest for
the  Region 1 TRICARE  contract.  Also  during the  fourth  quarter of 1998,  we
incurred integration, transition and other charges totaling $3.1 million related
primarily to our acquisition of the Texas operations of Kaiser Foundation Health
Plan of Texas.  In addition,  we incurred  certain legal expenses  totaling $2.7
million,  resulting  primarily  from the  TRICARE  settlement,  acquisition  and
integration activity.

The $3.4 million of charges in the fourth quarter of 1999 consisted primarily of
legal and contractual settlements.

The  remaining  $6.1  million of costs  recorded  in the second  quarter of 2000
relate  primarily to the  write-down of certain  receivables  and an accrual for
legal settlements.

The  table  below  presents  a  summary  of  asset  impairment,   restructuring,
reorganization and other costs for the years indicated.


<TABLE>
<CAPTION>
                                                         Restructuring         Premium
                                            Asset             and             Deficiency
(In thousands)                            Impairment    Reorganization       Maintenance         Other           Total
--------------                            ----------    --------------       -----------         -----           -----

Balance, January 1, 1998
<S>                                    <C>                  <C>             <C>                 <C>           <C>
Charges recorded...................    $          0         $       0       $       0           $ 13,851      $   13,851
Cash used..........................                                                              (11,032)        (11,032)
Noncash activity...................                                                                                  -
Changes in estimate................                                                                _____             -
Balance, December 31, 1998.........                                                                2,819           2,819

Charges recorded...................           3,509               850          11,000              3,449          18,808
Cash used..........................                              (850)                            (2,819)         (3,669)
Noncash activity...................          (3,509)                                                              (3,509)
Changes in estimate................         _______             _____         _______             ______             -

Balance, December 31, 1999.........                                            11,000              3,449          14,449

Charges recorded...................         190,490            13,492          10,358              6,100         220,440
Cash used..........................                            (9,143)        (12,080)              (502)        (21,725)
Noncash activity...................        (190,490)                                              (3,800)       (194,290)
Changes in estimate................        ________            ______          ______             ______             -
Balance, December 31, 2000.........    $      -             $   4,349       $   9,278           $  5,247      $   18,874
                                           ========          ========        ========           ========      ==========
</TABLE>

The  remaining  restructuring  and  reorganization  costs  of $4.3  million  are
primarily  related  to  the  cost  to  provide  malpractice   insurance  on  our
discontinued  affiliated medical groups,  clinic closures and lease terminations
in Houston and Arizona.  The remaining other costs of $5.2 million are primarily
related to legal claims.  We believe that the remaining  reserves as of December
31, 2000 are adequate and that no revisions to the  estimates  are  necessary at
this time.

Interest  Expense and Other,  Net increased $8.7 million or 57.7%, due primarily
to an increase in the average balance of outstanding debt and an increase in the
average cost of  borrowing.  Our average  credit  facility debt balance was $183
million in 2000  compared to $164 million in 1999 and our average  interest rate
on the credit facility was 9.9% in 2000 compared to 7.8% in 1999.

Benefit for Income  Taxes was recorded at $74.2  million for 2000  compared to a
tax benefit of $5.9 million  recorded for 1999.  During 1999, due to a change in
tax law, we were able to utilize a $1.6  million net  operating  loss  carryover
that had  previously  not been  recognized  in the financial  statements  due to
uncertainty  about its  realization.  The  effective tax rate for 2000 was 27.1%
compared to 41.3% for 1999 which is exclusive of the effect of the change in tax
law described  above. The decrease in tax rate is due primarily to the impact of
the charge for goodwill  impairment  combined with the magnitude of the loss for
2000 compared to 1999. The difference between the effective tax rate,  excluding
the change in the deferred tax valuation  allowance,  and the statutory  rate is
due primarily to non-deductible  goodwill  amortization.  The effective tax rate
for 2001 is  projected  to range from 33% to 35%.  The  difference  between  the
anticipated  tax  rate  and  the  statutory  tax  rate is due  primarily  to tax
preferred investments offset by state income taxes.

Year Ended December 31, 1999 Compared to 1998

Total Operating Revenues for 1999 increased approximately 23.8% to $1.28 billion
from $1.04  billion for 1998.  The  increase was  primarily  due to increases in
premium  revenue of $218.4  million  and  military  contract  revenues  of $82.6
million,  offset by a decrease in specialty  product  revenue of $54.1  million.
Medical  premium  revenues  accounted for  approximately  64.5% and 58.8% of our
total revenues for the years ended December 31, 1999 and 1998, respectively. The
increase in the percentage of medical premiums as a percentage of total revenues
in 1999 was primarily due to acquisitions.

Medical  premiums  from the HMO and  managed  indemnity  insurance  subsidiaries
increased  $218.4  million or 35.8%.  Excluding  the effect of the  Kaiser-Texas
acquisition, premium revenue increased $84.9 million or 14.6%. The $84.9 million
increase  in  premium  revenue  reflects  a  7.9%  increase  in  member  months.
Additionally,  Medicare member months increased 16.2%. Growth in Medicare member
months  contributes  significantly  to the  increase in premium  revenues as the
Medicare per member  premium  rates are over three times higher than the average
commercial  premium rate. The HMO premium rates increased  approximately  4% for
the  Nevada HMO  commercial  groups and 11% for the  Houston,  Texas  commercial
groups.  Compared to the fourth quarter of 1998,  the  commercial  rates for the
Dallas/Ft.  Worth  operations  have  increased  approximately  8%.  Our  managed
indemnity  rates  increased   approximately  8%  and  Medicare  rates  increased
approximately  2%. Over 90% of the Nevada  Medicare  members are enrolled in the
Social HMO Medicare program.

Military  contract  revenues  increased  $82.6  million  or 40.3%.  The  revenue
recorded in 1999 is a result of the provision of health care services for twelve
months. Revenue recorded in 1998 was comprised of revenue earned for five months
of contract implementation and seven months of health care delivery.

Specialty  product  revenues  decreased $54.1 million or 36.5%. Of the decrease,
$51.1  million  was due to a decrease  in revenue in the  workers'  compensation
insurance  segment  and $3.0  million  was due to a decrease  in  administrative
services revenue.  The decrease in the workers'  compensation  insurance segment
was primarily due to a full year of additional ceded reinsurance premiums on the
low level reinsurance  agreement effective July 1, 1998, totaling $60.7 million.
This  agreement  was entered  into in the fourth  quarter of 1998.  In addition,
ongoing price  competition,  especially in California,  was  contributing to the
reduction  in revenue.  The  decrease  in  administrative  services  revenue was
primarily attributable to a decrease in membership.

Professional fees increased $6.5 million or 14.3%,  primarily due to our medical
group operations in Dallas/Ft. Worth related to the Kaiser-Texas acquisition.

Investment and other revenues decreased $6.7 million or 22.8%. Of this decrease,
$2.7  million  was due  primarily  to  capital  gains  realized  on the  sale of
investments in the prior year period.  The remaining  decrease was primarily due
to a decrease in invested balances.

Medical  Expenses  increased  $236.6 million or 46.1%.  The following costs were
included in 1999 medical expenses:

Premium  Deficiency.  In the  first  quarter  of 1999,  we  recorded  a  premium
deficiency charge of $8.1 million related to losses in  underperforming  markets
primarily  in  Arizona  and rural  Nevada.  This  deficiency  reserve  was fully
utilized during 1999 to offset losses as they occurred. In the fourth quarter of
1999, we recorded $21.0 million for estimated deficient premiums associated with
2000 contracts in the Texas market. Of this amount $10.0 million was included in
medical  expenses and $11.0 million of  maintenance  costs was recorded in asset
impairment, restructuring, reorganization and other costs.

Adverse Development and Contractual Adjustments.  In the fourth quarter of 1999,
we recorded $18.0 million in medical expenses,  of which $11.2 million primarily
related to an  adjustment  to the  estimate  for  medical  expenses  recorded in
previous  periods.   The  remaining  amount  primarily  relates  to  contractual
settlements  with  providers of medical  services.  (See Note 15 of Notes to the
Consolidated Financial Statements).

Excluding the effect of the Dallas/Ft.  Worth operations, as well as the changes
in estimate charges,  medical expenses increased $83.4 million or 17.0% compared
to the prior year.  Medical  expenses as a  percentage  of medical  premiums and
professional  fees increased from 78.4% to 85.2%, or 81.1% excluding the changes
in  estimate  charges.  The  increase  in the medical  care ratio  reflects  the
Kaiser-Texas membership,  which has a higher medical care ratio, and the charges
discussed previously, as well as an increase in Medicare members as a percentage
of fully-insured members, and higher pharmacy costs. Pharmacy costs increased as
the  management  of the  pharmacy  benefit  was  transitioned  from a  capitated
pharmacy benefits contract to in-house  management in the third quarter of 1998.
The costs under  capitation  contracts  were  substantially  below actual claims
experience.  Included in medical expenses is the utilization of $43.9 million of
premium  deficiency  reserve to offset losses on contracts from the Kaiser-Texas
acquisition.  Although not  reflected  in earnings,  $20 million of these losses
were funded by Kaiser-Texas as agreed to in the purchase agreement.

Military  Contract  Expenses  increased  $79.9  million or 40.6%.  The  military
contract expenses in 1999 are a result of twelve months of health care delivery.
Expense in 1998 was for five months of contract  implementation and seven months
of health care delivery.  Under the contract, SMHS provided health care services
to  approximately  610,000  dependents  of active duty  military  personnel  and
military retirees and their dependents  through  subcontractor  partnerships and
individual providers in 1999.

Specialty  Product  Expenses  decreased $45.8 million or 32.2%, due primarily to
the  implementation  of  the  low  level  reinsurance  agreement,  as  discussed
previously,  offset by adverse  development  of $9.9  million on prior  accident
years in our workers' compensation business.  During 1999, workers' compensation
claims were 100% reinsured between $500,000 and $100 million per occurrence. For
claims  occurring in 1999 that are below  $500,000,  we obtained low level quota
share and  excess  of loss  reinsurance.  Under  this  agreement,  which was not
reflected  in the  financial  statements  until the fourth  quarter of 1998,  we
reinsure  30% of the first  $10,000 of each claim,  75% of the next  $40,000 and
100% of the next  $450,000.  Claims  occurring in the third quarter of 1998 were
accounted  for  as  retroactive  reinsurance.  (See  Note  6  of  Notes  to  the
Consolidated Financial Statements).

The combined ratio for the workers'  compensation  insurance business was 105.5%
in 1999  compared to 98.7% for the prior  year.  The  increase  was due to a 380
basis point  increase in the net loss and LAE ratio,  a 290 basis point increase
in the underwriting expense ratio and 10 basis points of policyholders' dividend
expense  incurred in 1999.  The increase in the loss and LAE ratio was primarily
due to 1999 net adverse loss development of $9.9 million on prior accident years
compared to 1998 net favorable loss development of $9.6 million. The increase in
the underwriting expense ratio was primarily due to the lower net earned premium
base that resulted from higher ceded reinsurance premiums in 1999.

The  adverse  development  recorded  in 1999 for the  prior  accident  years was
primarily  attributable to increased  California  claim  severity.  Higher claim
severity  has  had  a  negative  impact  on  the  entire   California   workers'
compensation  industry. The historical claim frequency development patterns have
not significantly changed in 1999. In addition,  continuing price competition in
California has negatively affected operating ratios.

General,  Administrative and Marketing Expenses, or G&A, increased $27.1 million
or 24.5%. As a percentage of revenues,  G&A costs for 1999 were 10.7%, which was
consistent  with 1998. Of the $27.1 million  increase in G&A,  $14.3 million was
due to  additional  G&A related to the acquired  HMO business in the  Dallas/Ft.
Worth  area,  net of  premium  deficiency  utilization  of  $20.9  million.  The
remaining  increase  of  $12.8  million  included  a $6.9  million  increase  in
compensation  expense,  resulting primarily from additional employees supporting
expanded services.  Broker and premium tax expense increased  approximately $2.2
million due to increased membership. In addition, depreciation expense increased
$2.4 million.

Asset  Impairment,  Restructuring,  Reorganization  and Other Costs for 1998 and
1999 were previously discussed.

Interest  Expense and Other,  Net  increased  $7.8 million or 108.6%,  due to an
increase in debt primarily as a result of the Kaiser-Texas  acquisition,  offset
by a net gain of $1.8 million on the sale of certain  pharmacy assets  purchased
in conjunction with the Kaiser-Texas acquisition.

Benefit for Income Taxes was recorded at $5.9 million  compared to a tax expense
of $13.8  million  in the prior  year.  Due to a change in tax law,  which  took
effect  in 1999,  we were able to  utilize a $1.6  million  net  operating  loss
carryover that had previously  not been  recognized in the financial  statements
due to uncertainty  about its realization.  Excluding the effect of this change,
the effective tax rate was 41.3% compared to 25.8% in 1998. Including the effect
of this  change,  the  effective  tax rate for 1999 was  56.2%.  The  difference
between  the  effective  tax rate,  excluding  the  change in the  deferred  tax
valuation  allowance,  and the  statutory  rate is due to  income  earned on tax
preferred investments.

LIQUIDITY AND CAPITAL RESOURCES

We had cash  in-flows  from  operating  activities of $41.1 million for the year
ended  December 31, 2000 compared to cash out-flows of $7.7 million in 1999. The
improvement  over 1999 is primarily  attributable  to cash from earnings and the
change in assets and liabilities.

The increase in cash flow resulting from the change in assets and liabilities of
$5.3 million was primarily due to the following:

o    a source of cash due to the  increase in reserve for loss and LAE of $130.2
     million in our workers' compensation business

o    a source of cash due to the increase in medical claims  payable,  including
     military  claims,  of $54.7 million as a result of the overall  increase in
     medical premiums and military contract revenues

o    a source  of cash due to the  decrease  in other  current  assets  of $15.4
     million

o    a use of cash  due to the  increase  in the  deferred  tax  asset  of $54.5
     million

o    a use of cash due to the  increase  in  reinsurance  recoverable  of $116.2
     million primarily in our workers' compensation business

o    a use of cash due to the  decrease in other  liabilities  of $15.6  million
     primarily related to the decrease in the deferred tax liability

o    a use of cash due to an increase in military  accounts  receivable of $11.5
     million

o    various  other  changes  in  assets  and  liabilities  accounting  for  the
     remaining source of cash of $2.8 million

SMHS receives  monthly cash payments  equivalent  to  one-twelfth  of its annual
contractual  price with the  Department of Defense,  or DoD. SMHS accrues health
care  revenue on a monthly  basis for any monies  owed  above its  monthly  cash
receipt based on the number of at-risk eligible  beneficiaries  and the level of
military direct care system  utilization.  The contractual bid price adjustment,
or BPA, process serves to adjust the DoD's monthly payments to SMHS, because the
payments are based in part on 1996 DoD estimates for beneficiary  population and
beneficiary  population baseline health care cost, inflation and military direct
care system  utilization.  As actual information becomes available for the above
items,  quarterly  adjustments  are made to SMHS' monthly health care payment in
addition to lump sum  adjustments  for past months.  In  addition,  SMHS accrues
change order revenue for DoD-directed  contract  changes.  During the second and
fourth   quarters  of  2000,   SMHS   received  $13  million  and  $37  million,
respectively,  as partial payments from the BPA process covering the period June
1, 1998 through  December 31, 2000. As a result of preliminary  data accumulated
from the BPA process, SMHS received a partial upward adjustment of approximately
$2.2 million to its monthly DoD payments for January 2001 through December 2001.
Our business and cash flows could be adversely  affected if the timing or amount
of  the  BPA  and  change  order  reimbursements  vary  significantly  from  our
expectations.  SMHS is in the process of finalizing a financing  arrangement for
its accounts  receivable  balance in order to improve the  availability of cash.
The military  accounts  receivable  balance was $71.4 million as of December 31,
2000. (See Note 2 of Notes to the Consolidated Financial Statements).

During January 2001, SMHS reached an agreement with DoD on a settlement of $58.2
million  related to contract  modifications  issued prior to July 1, 2000.  SMHS
received an immediate  payment of $21.3 million for outstanding  receivables and
the  remainder of the  settlement  is to be paid evenly on a monthly basis until
the  end  of  the  contract.  Of  the  total  settlement,  SMHS  estimates  that
approximately $18 million is owed to subcontractors.

Net cash used for investing  activities  during 2000  included  $17.5 million in
capital  expenditures  associated with continued  implementation of new computer
systems, as well as construction,  furniture,  equipment and other capital needs
to support our growth,  offset by net proceeds of $10.5 million for property and
equipment  dispositions.  The net cash change in investments  for the year was a
decrease  of $21.6  million as  investments  were sold to fund  working  capital
needs.

Cash flows from  financing  activities  included  net  proceeds  from  long-term
borrowings  (proceeds  less  payments)  of $48.1  million  and  proceeds of $1.6
million related to the sale of stock through our employee stock purchase plan.

On December 28, 2000, we sold the majority of our Las Vegas real estate holdings
in a  sale-leaseback  transaction.  The  transaction was recorded as a financing
obligation  of $113.7  million  offset by  mortgage  notes  receivable  of $22.2
million,  a payoff of  related  real  estate  mortgages  of $9.9  million  and a
permanent  reduction on our revolving  credit  facility of $50 million for a net
increase in liabilities of $31.6 million.

Revolving Credit Facility

Our  revolving  credit  facility  balance  decreased  from $160  million to $135
million  during the year. As a result of the asset  impairment and other changes
in estimate  charges we took in the second  quarter,  we were not in  compliance
with our financial  covenants at June 30, 2000. On December 15, 2000, we entered
into an Amended and Restated  Credit  Agreement and have been in compliance with
all  covenants  since that date. At December 31, 2000,  the credit  facility was
reduced  to $135  million  as a result of our  payment  of $50  million  that we
received  from  the  sale-leaseback   transaction.   We  are  required  to  make
semi-annual  principal payments,  ranging from $2 million to $10 million, on the
credit  facility  starting  in June 2001.  These  payments  result in  permanent
reductions  in the  size of the  credit  facility.  Interest  under  the  credit
facility is  variable  and is based on the Bank of America  "prime  rate" plus a
margin. The rate was 10.125% at December 31, 2000 which is a combination of the
prime  rate of 9.5% plus a margin  of .625%.  We can  reduce  the  margin in the
future by completing certain  transactions and meeting certain financial ratios.
Of the  outstanding  balance,  $25 million is covered by an  interest-rate  swap
agreement.  To mitigate  the risk of  interest  rate  fluctuation  on the credit
facility,  we entered into a five-year $50 million  interest-rate swap agreement
during the fourth  quarter of 1998.  The intent of the agreement was to keep our
interest-rate  on $50 million of the borrowing  relatively  fixed. In the fourth
quarter of 2000, $25 million of the interest-rate swap agreement was terminated.
The average cost of borrowing on this credit  facility for 2000,  including  the
impact of the interest-rate swap agreements, was approximately 9.9%.

Going  forward,  under  certain  circumstances,  we  will  be  required  to make
prepayments  on the credit  facility  and the amount  available  to us under the
credit facility will be reduced.  For example,  80% of any excess cash flow that
we have in each year must be applied to a repayment of the credit  facility.  In
addition,  if we or one of our subsidiaries  (other than a regulated  subsidiary
and other specified  subsidiaries)  engage in an asset sale or a  sale-leaseback
transaction   (with  the  exception  of  assets  specified  in  the  new  credit
agreement),  80% of the net cash  proceeds must be applied to a repayment of the
credit  facility  and a  reduction  of the  amount  available  under the  credit
facility.  In  addition,  100%  of the  net  cash  proceeds  of a debt  issuance
(excluding  issuances  by CII  Financial,  a  wholly-owned  subsidiary)  must be
applied to a repayment  of the credit  facility  and a  reduction  in the amount
available under the credit facility.  We are also limited in the amount of funds
we can  transfer  to our Texas and  Military  operations  with a maximum  of $12
million  and $5  million,  respectively.  Subject to normal  qualifications  and
exceptions,  Sierra and CII Financial  have covenants that, among other things,
will  restrict  our  ability  to  dispose of  assets,  incur  indebtedness,  pay
dividends,  make investments,  loans or advances,  make acquisitions,  engage in
mergers or  consolidations,  or make capital  expenditures  and which  otherwise
restrict certain corporate activities. At February 26, 2001, our credit facility
had outstanding borrowings of $102 million.  Unused credit facility balances are
primarily reserved for our working capital purposes.  Any availability under the
credit facility  generated from our excess cash flow must be converted  annually
to permanent reductions in accordance with the terms of the credit facility.

Convertible Subordinated Debentures

In September  1991,  CII  Financial,  Inc.,  or CII,  the workers'  compensation
holding company, issued convertible subordinated debentures.  As of December 31,
2000, $47 million in Debentures were outstanding. The Debentures pay interest at
7 1/2% per annum,  which is due  semi-annually on March 15 and September 15, and
mature  September 15, 2001. Each $1,000 in principal is convertible  into 25.382
shares of common stock of Sierra at a conversion price of $39.398 per share. The
Debentures have no financial ratio covenants.  The primary covenants include the
timely  payment of  principal,  premium,  interest  and taxes.  Other  covenants
include CII's agreement to maintain their existence,  business properties and an
office  where  the  Debentures  can be  surrendered  for  payment,  transfer  or
conversion.  There are also covenants  regarding  CII's offering to purchase the
Debentures upon specified non-approved mergers and changes in control. Since our
acquisition of CII was approved by CII's board of directors and shareholders, we
were not  required to offer to  purchase  the  Debentures.  The  Debentures  are
obligations of CII only and are not guaranteed by us.

CII is a holding  company and its only  significant  asset is its  investment in
California  Indemnity  Insurance Company.  Of the $28.7 million in cash and cash
equivalents  it held at December  31,  2000,  approximately  $27.4  million were
designated for use only by the regulated  insurance  companies.  CII has limited
sources of cash and is dependent upon  dividends  paid by California  Indemnity.
The payment of stockholders'  dividends by California  Indemnity is regulated by
the  California  Insurance  Code and, at a minimum,  requires a 10 workday prior
notice to the California Department of Insurance.  If a payment of a dividend or
distribution  whose fair market value,  together with that of other dividends or
distributions  made within the  preceding 12 months,  exceeds the greater of ten
percent of the insurer's  surplus or its net income for the preceding  year end,
then  the  insurance  commissioner  has up to 30  days  to  disapprove  it.  The
California  Insurance  Department  will not allow a  payment  of a  dividend  or
distribution  if  it  will  cause  an  insurer's  policyholders'  surplus  to be
unreasonable  in relation to the insurer's  liabilities  and the adequacy of the
insurer's  financial  needs.  In making this  determination,  the  Department of
Insurance considers a variety of factors including, but not limited to, the size
of the insurer,  the amount,  type and geographic  concentration of insurance it
writes,  the  quality of its  assets and  reinsurance  programs,  and  operating
trends.

In  addition,  California  law  provides  that an insurer may not pay a dividend
without the prior approval of the state insurance commissioner to the extent the
cumulative  amount of dividends or distributions  paid or proposed to be paid in
any year exceeds the amount shown as unassigned funds (reduced by any unrealized
gains  included in such amount) on the insurer's  statutory  statement as of the
previous  December  31.  As of  December  31,  2000,  California  Indemnity  had
unassigned  funds of $174,000  from which it could pay a dividend  without prior
approval.  California  Indemnity declared and paid no dividends to CII Financial
in 1998 but paid $6.0  million of  dividends  to it in 1999 and $6.8  million in
2000.

We advanced CII $365,000 in order to enable them to make the  September 15, 2000
interest  payment on the  Debentures.  Our  amended  and  restated  bank  credit
facility will limit our ability to make any future advances to CII . Since we do
not believe that CII will have sufficient  readily  available sources of cash to
pay the maturing Debentures,  CII has filed a registration statement on Form S-4
with the  Securities  and  Exchange  Commission,  or SEC,  and is  proposing  to
exchange the Debentures for a combination of cash and/or new senior subordinated
debentures.  The sources for the cash  portion of the  proposed  exchange  offer
include a  dividend  by  California  Indemnity  to CII of up to $5  million.  On
February 22, 2001, the California  Department of Insurance  approved the payment
by California  Indemnity of an extraordinary  dividend of up to $5 million.  CII
will depend on loans from us and/or other affiliates for the balance of the cash
portion of the exchange consideration. However, these types of loans are limited
by our  credit  facility.  In  addition,  in  order  to  issue  the  new  senior
subordinated debentures in the proposed exchange offer, we will need the consent
of a  two-thirds  majority in principal  amount of the lenders  under our credit
facility.

On March 16, 2001, CII announced that the interest payment due March 15, 2001 on
the  Debentures was not made as scheduled.  The  Debentures  have a 30-day grace
period that applies to the  scheduled  March 15 interest  payment and are not in
default  unless  payment is not made during the grace period.  CII is working to
complete the proposed exchange offer.

If the proposed  exchange offer is  unsuccessful  and CII were to default on the
payment of interest or the  Debentures  when they  mature,  then there will be a
cross  default on our  credit  facility  debt and the banks may demand  that CII
perform  on  its  payment  guaranty.  If CII  then  had to  sell  its  insurance
subsidiaries, the net cash proceeds would probably be substantially less than if
the sale were to occur when they were not in a default situation.  Under certain
circumstances, the California Department of Insurance could, among other things,
exercise its oversight powers to preserve the assets of the insurance  companies
for the  benefit  of the  policyholders  and  claimants  and  could  prevent  or
significantly delay a possible sale of the insurance subsidiaries.

CII's only significant short-term  non-insurance liquidity need is the repayment
of the $47  million  in  Debentures,  which  are due on  September  15,  2001 as
discussed above. If the proposed exchange offer for the Debentures is successful
and CII Financial  issues new senior  subordinated  debentures  with an extended
maturity date,  then their  long-term  non-insurance  liquidity needs will be to
service  this new debt.  CII  Financial  expects to  service  this new debt from
future cash flows, primarily from dividends that will be paid by their insurance
subsidiaries from their future earnings.

Statutory Capital and Deposit Requirements

Our HMO and insurance  subsidiaries are required by state regulatory agencies to
maintain  certain  deposits  and must also meet  certain  net worth and  reserve
requirements.  The HMO and  insurance  subsidiaries  had  restricted  assets  on
deposit in various  states  totaling $24.7 million at December 31, 2000. The HMO
and  insurance  subsidiaries  must also meet  requirements  to maintain  minimum
stockholders'  equity,  on a  statutory  basis,  as well as  minimum  risk-based
capital   requirements,   which  are  determined  annually.   Additionally,   in
conjunction  with  the  Kaiser-Texas  acquisition,  TXHC  entered  into a letter
agreement with the Texas Department of Insurance whereby TXHC agreed to maintain
a net worth of $20.0 million, on a statutory basis.

Of the $161.3  million in cash and cash  equivalents  held at December 31, 2000,
$104.1  million  was  designated  for use  only by the  regulated  subsidiaries.
Amounts are  available  for  transfer to the  holding  company  from the HMO and
insurance  subsidiaries  only  to  the  extent  that  they  can be  remitted  in
accordance  with the terms of existing  management  agreements and by dividends.
The holding company will not receive  dividends from its regulated  subsidiaries
if such  dividend  payment  would cause  violation  of  statutory  net worth and
reserve requirements.

Other

We have a 2001 capital budget of $18 million as limited by our revolving  credit
facility.  The planned  expenditures  are primarily for the expansion of clinics
and other leased  facilities,  the purchase of computer  hardware and  software,
furniture  and equipment and other normal  capital  requirements.  Our liquidity
needs over the next 12 months  will  primarily  be for the  capital  items noted
above,  debt  service  and  expansion  of our  operations.  We believe  that our
existing  working  capital,  operating  cash flow and, if  necessary,  equipment
leasing,   divestitures  of  certain  non-core  assets,   restructuring  of  the
convertible  subordinated  debentures  and  amounts  available  under our credit
facility should be sufficient to fund our capital expenditures and debt service.
Additionally,  subject to unanticipated cash  requirements,  we believe that our
existing  working  capital and operating  cash flow should enable us to meet our
liquidity needs on a long-term basis.

In the second quarter of 1997, our Board of Directors  authorized a $3.0 million
line of credit from us to our Chief  Executive  Officer,  or CEO. In April 2000,
our Board of Directors authorized an additional $2.5 million loan from us to the
CEO. The entire principal balance along with accrued interest is due on June 30,
2002.  At the end of 2000,  the  aggregate  principal  balance  outstanding  and
accrued  interest for both  instruments was $5.4 million.  All amounts  borrowed
bear interest at a rate equal to the rate at which we could have borrowed  funds
under our revolving  credit  facility at the time of the borrowing plus 10 basis
points.  The  amounts  outstanding  are  collateralized  by certain of the CEO's
assets and rights to compensation from us.

Inflation

Health care costs  continue to rise at a rate  faster  than the  Consumer  Price
Index. We use various strategies to mitigate the negative effects of health care
cost inflation,  including setting commercial  premiums based on our anticipated
health  care  costs,  risk-sharing  arrangements  with our  various  health care
providers  and other  health care cost  containment  measures  including  member
co-payments. There can be no assurance, however, that in the future, our ability
to  manage  medical  costs  will not be  negatively  impacted  by items  such as
technological advances, competitive pressures, applicable regulations, increases
in pharmacy costs,  utilization  changes and catastrophic items, which could, in
turn, result in medical cost increases equaling or exceeding premium increases.

Government Regulation

Our business,  offering health care coverage,  health care management  services,
workers'  compensation programs and, to a lesser extent, the delivery of medical
services, is heavily regulated at both the federal and state levels.

Government  regulation  of health  care  coverage  products  and  services  is a
changing area of law that varies from  jurisdiction to jurisdiction.  Changes in
applicable  laws and regulations are  continually  being  considered,  including
legislative  proposals to eliminate or reduce ERISA  pre-emption  of state laws,
that would increase potential litigation exposure and interpretation of existing
laws and rules also may change from time to time.  Regulatory agencies generally
have broad  discretion  in  promulgating  regulations  and in  interpreting  and
enforcing laws and regulations.

While we are unable to predict what  regulatory  changes may occur or the impact
on us of any particular  change,  our operations and financial  results could be
negatively  affected  by  regulatory  revisions.   For  example,  any  proposals
affecting underwriting practices, limiting rate increases, increasing litigation
exposure,   requiring  new  or  additional  benefits  or  affecting  contracting
arrangements  (including proposals to require HMOs and PPOs to accept any health
care providers  willing to abide by an HMO's or PPO's contract terms) may have a
material  adverse  effect  on our  business.  The  continued  consideration  and
enactment  of  "anti-managed  care" laws and  regulations  by federal  and state
bodies  may  make it more  difficult  for us to  manage  medical  costs  and may
adversely affect financial results.

In addition to changes in  applicable  laws and  regulations,  we are subject to
various audits,  investigations and enforcement actions.  These include possible
government   actions  relating  to  the  ERISA,   which  regulates  insured  and
self-insured  health coverage plans offered by employers,  the Federal Employees
Health  Benefit Plan,  federal and state fraud and abuse laws, and laws relating
to utilization  management and the delivery of health care. Any such  government
action  could  result in  assessment  of  damages,  civil or  criminal  fines or
penalties,  or  other  sanctions,  including  exclusion  from  participation  in
government  programs.  In addition,  disclosure of any adverse  investigation or
audit results or sanctions  could  negatively  affect our  reputation in various
markets and make it more difficult for us to sell our products and services.

Recently Issued Accounting Standards

In June 1998,  the  Financial  Accounting  Standards  Board issued  Statement of
Financial Accounting  Standards No. 133, "Accounting for Derivative  Instruments
and Hedging Activities", or SFAS 133, which, as amended, is effective for fiscal
years beginning after June 15, 2000. SFAS 133 establishes  additional accounting
and reporting standards for derivative instruments and hedging activities.  SFAS
133  requires  that an entity  recognize  all  derivatives  as either  assets or
liabilities in the statement of financial position.  This statement also defines
and allows  companies to apply hedge  accounting to its  designated  derivatives
under certain  instances.  It also requires  that all  derivatives  be marked to
market on an ongoing basis. This applies whether the derivatives are stand-alone
instruments,  such as warrants or interest-rate swaps, or embedded  derivatives,
such as call options contained in convertible debt  investments.  Along with the
derivatives,  in the case of qualifying  hedges, the underlying hedged items are
also to be marked to market.  These market value  adjustments are to be included
either in the income statement or other comprehensive  income,  depending on the
nature of the hedged  transaction.  The fair value of financial  instruments  is
generally  determined by reference to market values  resulting from trading on a
national securities  exchange or in an  over-the-counter  market. In cases where
derivatives relate to financial  instruments of non-public  companies,  or where
quoted  market  prices  are  otherwise  not  available,  such as for  derivative
financial  instruments,  fair value is based on estimates using present value or
other  valuation  techniques.  We do not  believe  that we have any  significant
derivative  instruments or any significant hedging  activities.  The majority of
our investments are held by insurance  companies,  which are regulated as to the
types of investments they may hold.

In December 1999,  the SEC issued Staff  Accounting  Bulletin No. 101,  "Revenue
Recognition  in Financial  Statements",  or SAB 101. SAB 101 clarifies  existing
accounting principles related to revenue recognition in financial statements. We
were  required to comply  with the  provisions  of SAB 101 in our quarter  ended
December 31, 2000 and it did not have any impact on our results of operations.

ITEM 7a.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As of December 31, 2000, we have  approximately  $411.3 million in cash and cash
equivalents  and  current,   long-term  and  restricted   investments.   Of  the
investments,  approximately  $228.7 million is classified as  available-for-sale
investments  and $21.2 million is classified  as  held-to-maturity  investments.
These  investments are primarily in fixed income,  investment grade  securities.
Our  investment  policy  emphasizes  return of principal  and  liquidity  and is
focused on fixed returns that limit volatility and risk of principal. Because of
our investment  policies,  the primary market risk associated with our portfolio
is interest rate risk.

Assuming  interest  rates  were  to  increase  by  a  factor  of  1.1,  the  net
hypothetical  loss in fair value of  stockholders'  equity  related to financial
instruments  is estimated to be  approximately  $5.1 million  after tax (5.6% of
total stockholders'  equity). We believe that such an increase in interest rates
would not have a material  impact on future  earnings  or cash  flows,  as it is
unlikely that we would need or choose to substantially  liquidate our investment
portfolio.

The effect of interest rate risk on potential  near-term  net income,  cash flow
and fair value was determined  based on commonly used interest rate  sensitivity
analyses. The models project the impact of interest rate changes on a wide range
of factors, including duration and prepayment. Fair value was estimated based on
the net present value of cash flows or duration estimates, assuming an immediate
10% increase in interest  rates.  Because  duration is estimated,  rather than a
known  quantity,  for certain  securities,  other  market  factors may impact
security valuations and there can be no
assurance that our portfolio would perform
in line with the estimated values.

As of December 31, 2000, we had $135 million in borrowings  outstanding  under a
revolving credit facility. The average cost of borrowing on this credit facility
for  2000,  including  the  impact of the  interest-rate  swap  agreements,  was
approximately  9.9%. If the average cost of borrowing on the amount  outstanding
as of  December  31, 2000 were to  increase  by a factor of 1.1,  annual  income
before tax would decrease by approximately $1.3 million.

As of December 31, 2000, CII had convertible subordinated Debentures outstanding
of $47,059,000,  of which $18,000 were held by Sierra Health Services,  Inc. and
is eliminated on consolidation. Purchase activity for the Debentures, to parties
other than CII or Sierra, is believed to be minimal and there is no known market
quotation  system  for the  Debentures.  The  fair  value of the  Debentures  at
December 31, 2000 and 1999 was  estimated  to be  $23,530,000  and  $35,601,000,
respectively.  The  December  31, 2000 value is our best estimate and was based
on $18,000  stated  value Debentures  that we purchased  for $9,000 in
September 2000 and may not be indicative of the actual market
value since we are not aware of any other recent  Debenture  purchases or market
quotes.  The December 31, 1999 price is based on the  estimated  market price on
December 31, 1999. If interest rates were to fluctuate by a factor of 1.1, we do
not anticipate a material  change in the fair value of the  Debentures  based on
the current market for them.

Our outstanding financing obligations related to the sale-leaseback  transaction
are not publicly traded and are not subject to fluctuations in interest rates.


<PAGE>






ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                          INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
                                                                                                          Page

<S>                                                                                                          <C>
Management Report on Consolidated Financial Statements....................................................   39
Report of Independent Auditors............................................................................   40
Consolidated Balance Sheets at December 31, 2000 and 1999.................................................   41
Consolidated Statements of Operations for the Years Ended
   December 31, 2000, 1999 and 1998.......................................................................   42
Consolidated Statements of Stockholders' Equity
   for the Years Ended December 31, 2000, 1999 and 1998...................................................   43
Consolidated Statements of Cash Flows for the Years Ended
   December 31, 2000, 1999 and 1998.......................................................................   44
Notes to Consolidated Financial Statements................................................................   45
</TABLE>



<PAGE>


MANAGEMENT REPORT ON CONSOLIDATED FINANCIAL STATEMENTS


The management of Sierra Health Services,  Inc. is responsible for the integrity
and  objectivity of the  accompanying  consolidated  financial  statements.  The
statements have been prepared in conformity with accounting principles generally
accepted in the United States of America  applied on a consistent  basis and are
not  misstated  due to fraud or material  error.  The  statements  include  some
amounts that are based upon the Company's best estimates and judgment.

The  accounting  systems and  controls  of the  Company are  designed to provide
reasonable   assurance  that   transactions  are  executed  in  accordance  with
management's  authorization,   that  the  financial  records  are  reliable  for
preparing  financial  statements and maintaining  accountability for assets, and
that assets are safeguarded against losses from unauthorized use or disposition.
Management  believes that for the year ended December 31, 2000, such systems and
controls were adequate to meet the objectives discussed herein.

The  accompanying   consolidated  financial  statements  have  been  audited  by
independent  certified  public  accountants,  whose audits  thereof were made in
accordance with auditing  standards  generally  accepted in the United States of
America  and  included a review of  internal  accounting  controls to the extent
necessary to design audit procedures aimed at gathering  sufficient  evidence to
provide a reasonable  basis for their opinion on the fairness of presentation of
the consolidated financial statements taken as a whole.

The Audit  Committee of the Board of  Directors,  comprised  solely of directors
from outside the Company,  meets  regularly with  management and the independent
auditors to review the work  procedures of each. The  independent  auditors have
free access to the Audit Committee, without management being present, to discuss
the  results of their  opinions  on the  adequacy  of the  Company's  accounting
controls  and the quality of the  Company's  financial  reporting.  The Board of
Directors,  upon  the  recommendation  of  the  Audit  Committee,  appoints  the
independent auditors, subject to stockholder ratification.





Anthony M. Marlon, M.D.
Chairman and Chief Executive Officer




Paul H. Palmer
Vice President, Finance
     Chief Financial Officer and Treasurer


<PAGE>




REPORT OF INDEPENDENT AUDITORS


To the Board of Directors and Stockholders of
Sierra Health Services, Inc.:

We have audited the  accompanying  consolidated  balance sheets of Sierra Health
Services,  Inc. and its  subsidiaries  as of December 31, 2000 and 1999, and the
related  consolidated  statements of operations,  stockholders'  equity and cash
flows for each of the three years in the period ended  December  31,  2000.  Our
audits also included the financial  statement  schedules  listed in the index at
Item 14 (a)(2). These financial statements and financial statement schedules are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and financial statement schedules based
on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the  United  States of  America.  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,  such consolidated  financial  statements present fairly, in all
material respects,  the financial  position of Sierra Health Services,  Inc. and
its  subsidiaries  at  December  31,  2000 and 1999,  and the  results  of their
operations  and their cash flows for each of the three years in the period ended
December 31, 2000 in conformity with accounting principles generally accepted in
the United States of America.  Also, in our opinion,  such  financial  statement
schedules  when  considered  in  relation  to the basic  consolidated  financial
statements  taken  as a whole,  present  fairly  in all  material  respects  the
information set forth therein.



DELOITTE & TOUCHE LLP
Las Vegas, Nevada
February 13, 2001
(except for Note 8, as to which the date is March 16, 2001)


<PAGE>




                  SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                           December 31, 2000 and 1999
                     (In thousands, except per share data)

                                     ASSETS

<TABLE>
<CAPTION>
                                                                                            2000                 1999
                                                                                            ----                 ----
CURRENT ASSETS:
<S>                                                                                     <C>                  <C>
      Cash and Cash Equivalents...............................................          $   161,306          $     55,936
      Investments.............................................................              207,143               218,951
      Accounts Receivable (Less:  Allowance for Doubtful
           Accounts 2000 - $17,996; 1999 - $15,551)...........................               33,094                43,036
      Military Accounts Receivable (Less: Allowance for Doubtful
           Accounts 2000 - $1,212; 1999 - $800)...............................               71,390                60,340
      Current Portion of Deferred Tax Asset ..................................               46,702                40,199
      Reinsurance Recoverable.................................................               92,867                54,563
      Other Current Receivables...............................................               17,941                36,641
      Prepaid Expenses and Other Current Assets...............................               15,618                12,292
      Assets Held for Sale....................................................               22,942             _________
                                                                                      -------------
           Total Current Assets...............................................              669,003               521,958

PROPERTY AND EQUIPMENT, NET...................................................              173,031               264,549
LONG-TERM INVESTMENTS.........................................................               18,093                14,862
RESTRICTED CASH AND INVESTMENTS...............................................               24,724                21,705
REINSURANCE RECOVERABLE, Net of Current Portion...............................              160,227                82,300
GOODWILL (Less:  Accumulated Amortization
       2000 - $6,167; 1999 - $8,828)..........................................               15,587               159,514
DEFERRED TAX ASSET (Less Current Portion).....................................               68,253                25,834
OTHER ASSETS..................................................................               36,182                39,390
                                                                                      -------------         -------------
TOTAL ASSETS..................................................................           $1,165,100            $1,130,112
                                                                                         ==========            ==========

                                             LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
    Accrued Liabilities.......................................................         $     62,127          $     59,556
    Trade Accounts Payable....................................................               28,431                21,052
    Premium Deficiency Reserve................................................               14,466                21,000
    Accrued Payroll and Taxes.................................................               19,138                21,965
    Medical Claims Payable....................................................              112,296                91,607
    Current Portion of Reserve for
         Losses and Loss Adjustment Expenses .................................              134,676                93,768
    Unearned Premium Revenue..................................................               48,373                45,333
    Military Health Care Payable..............................................               84,859                50,831
    Current Portion of Long-term Debt.........................................               88,223                 4,741
                                                                                       ------------        --------------
         Total Current Liabilities............................................              592,589               409,853

RESERVE FOR LOSSES AND
    LOSS ADJUSTMENT EXPENSE (Less Current Portion) ...........................              239,878               150,626
LONG-TERM DEBT (Less Current Portion) ........................................              225,355               258,854
OTHER LIABILITIES ............................................................               16,805                32,367
                                                                                      -------------         -------------
TOTAL LIABILITIES.............................................................            1,074,627               851,700
                                                                                        ------------         ------------

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY:
    Preferred Stock, $.01 Par Value, 1,000
         Shares Authorized; None Issued or Outstanding
    Common Stock, $.005 Par Value, 60,000 Shares Authorized;
         Shares Issued: 2000 - 28,815; 1999 - 28,400..................                  144                   142
    Additional Paid-in Capital................................................              177,493               175,915
    Treasury Stock: 2000 and 1999 - 1,523 Common Stock Shares.............              (22,789)              (22,789)
    Accumulated Other Comprehensive Loss......................................               (5,667)              (16,063)
    (Accumulated Deficit) Retained Earnings...................................              (58,708)              141,207
                                                                                       ------------          ------------
TOTAL STOCKHOLDERS' EQUITY....................................................               90,473               278,412
                                                                                       ------------          ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY....................................           $1,165,100            $1,130,112
                                                                                         ==========            ==========
</TABLE>

        See the accompanying notes to consolidated financial statements.

<PAGE>


                  SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
              For the Years Ended December 31, 2000, 1999 and 1998
                      (In thousands, except per share data)

<TABLE>
<CAPTION>
                                                                            2000             1999               1998
                                                                            ----             ----               ----
OPERATING REVENUES:
<S>                                                                      <C>             <C>               <C>
Medical Premiums.....................................................    $  869,875      $   827,779       $   609,404
Military Contract Revenues ..........................................       330,352          287,398           204,838
Specialty Product Revenues ..........................................       135,844           94,221           148,368
Professional Fees....................................................        35,607           51,842            45,363
Investment and Other Revenues .......................................        21,300           22,571            29,230
                                                                        -----------     ------------      ------------
   Total.............................................................     1,392,978        1,283,811         1,037,203
                                                                          ---------       ----------        ----------

OPERATING EXPENSES:
Medical Expenses.....................................................       810,390          749,797           513,209
Military Contract Expenses ..........................................       323,265          276,493           196,625
Specialty Product Expenses...........................................       152,733           96,487           142,258
General, Administrative and Marketing Expenses.......................       136,660          137,812           110,687
Asset Impairment, Restructuring,
     Reorganization and Other Costs..................................       220,440           18,808            13,851
                                                                         ----------     ------------       -----------
   Total.............................................................     1,643,488        1,279,397           976,630
                                                                          ---------       ----------        ----------

OPERATING (LOSS) INCOME..............................................      (250,510)           4,414            60,573

INTEREST EXPENSE AND OTHER, NET......................................       (23,630)         (14,980)           (7,181)
                                                                        -----------      -----------       -----------

(LOSS) INCOME FROM OPERATIONS
BEFORE INCOME TAXES .................................................      (274,140)         (10,566)           53,392

BENEFIT (PROVISION) FOR INCOME TAXES.................................        74,225            5,935           (13,796)
                                                                        -----------     ------------        ----------

NET (LOSS) INCOME ...................................................     $(199,915)     $    (4,631)       $   39,596
                                                                          =========      ===========        ==========

EARNINGS PER COMMON SHARE:
    Net (Loss) Income Per Share .....................................      $(7.37)           $(.17)            $1.45
                                                                           ======            =====             =====

EARNINGS PER COMMON SHARE ASSUMING DILUTION:
    Net (Loss) Income Per Share .....................................      $(7.37)           $(.17)            $1.43
                                                                           ======            =====             =====
</TABLE>


        See the accompanying notes to consolidated financial statements.


<PAGE>


                  SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
              For the Years Ended December 31, 2000, 1999 and 1998
                                 (In thousands)



<TABLE>
<CAPTION>
                                                                               Accumu-
                                                                                lated
                                                                               Other
                                                       Addi-                  Compre-      Compre-     Retained       Total
                                                      tional                   hensive     hensive     Earnings       Stock-
                                 Common Stock         Paid-In     Treasury    Income       Income     (Accumulated    holders'
                             Shares       Amount      Capital       Stock       (Loss)     (Loss)        Deficit)     Equity
                            --------     --------    ---------   ----------- -----------   ------  -----------------------------


BALANCE,
<S>     <C>                  <C>            <C>      <C>          <C>            <C>     <C>            <C>             <C>
JANUARY 1, 1998 .....        27,709         $139     $164,247     $(5,601)       $655                   $106,242        $265,682

Comprehensive Income:
     Net Income..........                                                                $ 39,596         39,596          39,596
     Other Comprehensive
        Income, Net of Tax:
          Unrealized Holding
            Loss on Available-
            for-sale Investments                                                 (201)       (201)                          (201)
          Reclassification Adjustment for
               Gains Included in Net Income                                    (1,481)     (1,481)                        (1,481)
                                                                                         ----------

Comprehensive Income.....                                                                $ 37,914
                                                                                         ========
Common Stock Issued
        in Connection with
        Stock Plans....         527            2        8,052                                                              8,054
Purchase of Treasury Stock                                        (9,220)                                                 (9,220)
Income Tax Benefit Realized
        Upon Exercise of
        Stock Options                                   1,284                                                              1,284
                          ----------     --------      ------    --------      ------                      --------      --------
BALANCE, DECEMBER 31, 1998   28,236          141      173,583     (14,821)     (1,027)                      145,838      303,714

Comprehensive Income:
     Net Loss............                                                               $  (4,631)           (4,631)      (4,631)
     Other Comprehensive
        Loss, Net of Tax:
          Unrealized Holding
            Loss on Available-
            for-sale Investments                                               (15,295)   (15,295)                       (15,295)
          Reclassification Adjustment for
               Losses Included in Net Loss                                         259        259                            259
                                                                                        ---------
Comprehensive Loss.......                                                                $(19,667)
                                                                                         ========
Common Stock Issued
        in Connection with
        Stock Plans....         164            1        2,331                                                              2,332
Purchase of Treasury Stock                                         (7,968)                                                (7,968)
Income Tax Benefit Realized
        Upon Exercise of
        Stock Options                                      1                                                                   1
                          ----------       ------     --------     --------     ---------               -------------     -------

BALANCE, DECEMBER 31, 1999   28,400          142      175,915     (22,789)     (16,063)                     141,207      278,412

Comprehensive Income:
     Net Loss............                                                               $(199,915)      (199,915)       (199,915)
     Other Comprehensive Loss, Net of Tax:
          Unrealized Holding Gain on Available-
                 for-sale Investments                                           11,092     11,092                         11,092
          Reclassification Adjustment for
               Gains Included in Net Loss                                         (696)      (696)                          (696)
                                                                                          ---------

Comprehensive Loss.......                                                               $(189,519)
                                                                                        =========
Common Stock Issued in Connection
     with Stock Plans....        415          2        1,578                                                               1,580
                            --------    -------     --------    --------     --------                     ---------     ---------
BALANCE, DECEMBER 31,
           2000               28,815       $144     $177,493    $(22,789)    $(5,667)                     $(58,708)      $90,473
                              ======       ====     ========    ========     =======                      ========      ========
</TABLE>


        See the accompanying notes to consolidated financial statements.




<PAGE>


                  SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
              For the Years Ended December 31, 2000, 1999 and 1998
                                 (In thousands)
<TABLE>
<CAPTION>
                                                                            2000                1999               1998
                                                                            ----                ----               ----

CASH FLOWS FROM OPERATING ACTIVITIES:
<S>                                                                        <C>                <C>              <C>
      Net (Loss) Income ........................................           $(199,915)         $  (4,631)       $   39,596
      Adjustments to Reconcile Net (Loss) Income to Net Cash
         Provided by (used for) Operating Activities:
          Depreciation and Amortization.........................              29,915             28,079            19,263
          Provision for Doubtful Accounts.......................               2,857              7,201             6,379
          Provision for Asset Impairment........................             202,951              3,509
      Change in Assets and Liabilities, Net of
         Effects from Acquisitions:
          Other Assets..........................................               2,634              9,578            (1,798)
          Deferred Tax Asset....................................             (54,519)           (19,373)           (2,380)
          Reinsurance Recoverable ..............................            (116,231)           (69,841)          (41,618)
          Reserve for Losses and Loss Adjustment Expenses.......             130,160             32,131             9,564
          Other Liabilities ....................................               5,129             11,921             4,603
          Accounts Receivable...................................              (4,964)           (11,810)           (2,870)
          Other Current Assets..................................              15,375             (5,166)          (11,858)
          Military Accounts Receivable..........................             (11,462)             8,857           (69,552)
          Military Health Care Payable..........................              34,028             (2,989)           53,820
          Medical Claims Payable................................              20,689             13,585            12,333
         Other Current Liabilities..............................             (15,562)            (8,755)           34,606
                                                                          ----------         ----------       -----------
         Net Cash Provided by (Used for)
            Operating Activities ...............................              41,085             (7,704)           50,088
                                                                          ----------         ----------       -----------

CASH FLOWS FROM INVESTING ACTIVITIES:
      Capital Expenditures......................................             (17,528)           (58,512)          (40,743)
      Property and Equipment Dispositions.......................              10,535              1,018
      Purchase of Available-for-Sale Investments................            (209,234)          (357,810)         (901,542)
      Proceeds from Sales/Maturities of
          Available-for-Sale Investments........................             226,980            358,792           884,288
      Purchase of Held-to-Maturity Investments..................              (1,662)            (7,133)          (51,887)
      Proceeds from Maturities of Held-to-Maturity Investments..               5,466             36,077            44,964
      Corporate Acquisitions, Net of Cash Acquired..............                                 (3,000)         (111,408)
      Corporate Disposition, Net of Cash Disposed...............                                                    1,373
                                                                     --------------      --------------      ------------
          Net Cash Provided by (Used for) Investing Activities..              14,557            (30,568)         (174,955)
                                                                          ----------          ---------        ----------

CASH FLOWS FROM FINANCING ACTIVITIES:
      Proceeds from Long-term Borrowing.........................              91,459             79,000           172,200
      Payments on Debt and Capital Leases.......................             (43,311)           (63,066)          (59,098)
      Purchase of Treasury Stock ...............................                                 (7,968)           (9,220)
      Exercise of Stock in Connection with Stock Plans..........               1,580              2,332             8,054
                                                                         -----------        -----------      ------------
          Net Cash Provided by Financing Activities.............              49,728             10,298           111,936
                                                                          ----------         ----------        ----------

NET INCREASE (DECREASE) IN CASH AND
  CASH EQUIVALENTS..............................................             105,370            (27,974)          (12,931)

CASH AND CASH EQUIVALENTS AT BEGINNING
       OF YEAR..................................................              55,936             83,910            96,841
                                                                            --------          ---------        ----------
CASH AND CASH EQUIVALENTS AT END OF YEAR........................            $161,306          $  55,936        $   83,910
                                                                            ========          =========        ==========
</TABLE>

              See the accompanying notes to consolidated financial
statements.



<PAGE>



                  SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
              For the Years Ended December 31, 2000, 1999 and 1998


1.   BUSINESS

Business.  The consolidated  financial statements include the accounts of Sierra
Health Services, Inc. and its subsidiaries (collectively referred to as "Sierra"
or the "Company").  Sierra is a managed health care  organization  that provides
and  administers  the  delivery  of  comprehensive   health  care  and  workers'
compensation  programs  with an  emphasis on quality  care and cost  management.
Sierra's  broad range of managed  health care  services is provided  through its
health maintenance  organizations  ("HMOs"),  managed indemnity plans,  military
health  services  programs,  third-party  administrative  services  programs for
employer-funded  health  benefit  plans and its  workers'  compensation  medical
management  programs.  Ancillary  products  and  services  that  complement  the
Company's managed health care product lines are also offered.

In June 1996,  the Department of Defense  awarded a TRICARE  contract to TriWest
Healthcare Alliance, a consortium  consisting of the Company and 13 other health
care companies,  to provide health services to Regions 7 and 8, which includes a
total of 16 states.  During  the first  quarter of 2000,  the  Company  sold its
interest in TriWest  Healthcare  Alliance in exchange for a $3.7  million  note,
which approximated the carrying value of the Company's investment.

2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of  Consolidation.  All  significant  intercompany  transactions  and
balances  have been  eliminated.  Sierra's  consolidated  subsidiaries  include:
Health Plan of Nevada,  Inc.  ("HPN") and Texas Health  Choice,  L.C.  ("TXHC"),
licensed HMOs; Sierra Health and Life Insurance Company,  Inc. ("SHL"), a health
and life insurance  company;  Southwest  Medical  Associates,  Inc.  ("SMA"),  a
multi-specialty  medical provider group;  Sierra Military Health Services,  Inc.
("SMHS"),  a company that  provides  and  administers  managed care  services to
certain TRICARE eligible beneficiaries;  CII Financial,  Inc. ("CII"), a holding
company primarily engaged in writing workers' compensation insurance through its
wholly-owned subsidiaries; administrative services companies; a home health care
agency;  a hospice;  a home  medical  products  subsidiary;  and a company  that
provides and manages mental health and substance abuse services.

Medical Premiums.  Membership  contracts are generally  established on an annual
basis subject to cancellation by the employer group or Sierra  generally upon 60
days written  notice.  Premiums,  including  premiums from both  commercial  and
governmental  programs, are due monthly and are recognized as revenue during the
period in which Sierra is  obligated to provide  services to members and are net
of estimated retroactive terminations of members and groups. Non-Medicare member
enrollment is  represented  principally  by employer  groups.  HPN and TXHC also
offer a prepaid health care program to Medicare recipients.  Revenues associated
with Medicare  recipients  were  approximately  $337,545,000,  $301,141,000  and
$238,913,000  in 2000,  1999 and 1998,  respectively.  Unearned  premium revenue
includes  payments  under  prepaid  Medicare  contracts  with  the  Health  Care
Financing  Administration  ("HCFA") and prepaid HPN and TXHC  commercial and SHL
indemnity premiums.

Military  Contract  Revenues.  Revenue under the  Department of Defense  TRICARE
contract is  recorded  based on the  contract  price as agreed to by the federal
government.  The contract  also  contains  provisions  which adjust the contract
price based on actual experience and for government-directed  change orders. The
estimated  effects of these  adjustments  are recognized on a monthly basis.  In
addition,  the Company  records revenue based on estimates of the earned portion
of any contract change orders not originally specified in the contract.

Specialty  Product  Revenues.  These  revenues  consist  primarily  of  workers'
compensation premiums.  Premiums are calculated by formula such that the premium
written  is  earned  pro rata  over the term of the  policy.  Also  included  in
specialty  product  revenues  are  administrative   services  fees  and  certain
ancillary product revenues.  Such revenues are recognized in the period in which
the service is performed  or the period that  coverage for services is provided.
Premiums  written in excess of  premiums  earned  are  recorded  as an  unearned
premium  revenue  liability.  Premiums earned include an estimate for earned but
unbilled premiums.

Professional Fees. Revenue for professional  medical services is recorded on the
accrual basis in the period in which the services are provided.  Such revenue is
recorded  at  established  rates net of  provisions  for  estimated  contractual
allowances and a provision for estimated uncollectible amounts.

Medical  Expenses.  The Company  contracts with hospitals,  physicians and other
independently  contracted providers of health care under capitated or discounted
fee-for-service  arrangements  including  hospital per diems to provide  medical
care  services to  enrollees.  Capitated  providers  are at risk for the cost of
medical  care  services  provided to the  Company's  enrollees  in the  relevant
geographic  areas;  however,  the  Company  is  ultimately  responsible  for the
provision of services to its enrollees  should the capitated  provider be unable
to provide the contracted services. Health care costs are recorded in the period
when services are provided to enrolled members, including estimates for provider
costs which have been  incurred as of the balance sheet date but not reported to
the  Company.  Any  subsequent  changes  in  estimate  for a prior year would be
reflected in the current year's operating results.

Military Contract Expenses.  This expense consists primarily of costs to provide
managed health care services to eligible  beneficiaries  in accordance  with the
Company's  TRICARE  contract.  Under the  contract,  SMHS  provides  health care
services to approximately  621,000  dependents of active duty military personnel
and military retirees and their dependents  through  subcontractor  partnerships
and  individual  providers.  Health  care costs are  recorded in the period when
services are provided to eligible beneficiaries including estimates for provider
costs which have been  incurred as of the balance sheet date but not reported to
the Company.  Also included in military  contract expenses are costs incurred to
perform  specific  administrative  services,  such as  health  care  appointment
scheduling,  enrollment, network management and health care advice line services
and other administrative functions of the military health care subsidiary.

Specialty Product Expenses.  This expense consists  primarily of losses and loss
adjustment  expense  ("LAE"),  policy  acquisition  costs and other  general and
administrative  expenses associated with issued workers' compensation  policies.
Losses and LAE are based upon the  accumulation  of cost  estimates for reported
claims  occurring  during the period as well as an estimate for losses that have
occurred but have not yet been  reported.  Policy  acquisition  costs consist of
commissions,  premium  taxes and other  underwriting  costs,  which are directly
related to the  production  and  retention  of new and renewal  business and are
deferred  and  amortized  as the  related  premiums  are  earned.  Should  it be
determined  that future policy  revenues and earnings on invested funds relating
to existing insurance  contracts will not be adequate to cover related costs and
expenses,  deferred  costs are  expensed.  Also  included in  specialty  product
expenses are costs associated with administrative services and certain ancillary
products.  These costs are recorded when incurred.  Loss and LAE reserves have a
significant  degree of uncertainty  when related to their  subsequent  payments.
Although reserves are established on the basis of a reasonable  estimate,  it is
not only  possible but probable  that  reserves  will differ from their  related
subsequent developments. Underlying causes for this uncertainty include, but are
not  limited  to,   uncertainty  in  development   patterns  and   unanticipated
inflationary  trends affecting the services  covered by the insurance  contract.
This uncertainty can result in both adverse as well as favorable  development of
actual  subsequent  activity  when  compared  to the  reserve  established.  Any
subsequent change in loss and LAE reserves  established in a prior year would be
reflected in the current year's operating results.

Cash and Cash  Equivalents.  The Company  considers cash and cash equivalents as
all highly liquid instruments with a maturity of three months or less at time of
purchase.  The carrying amount of cash and cash  equivalents  approximates  fair
value because of the short maturity of these instruments.

Investments.  Investments consist principally of U.S. Government  securities and
municipal  bonds,  as well as  corporate  and  mortgage-backed  securities.  All
non-restricted   investments  that  are  designated  as  available-for-sale  are
classified as current  assets.  These  investments  are available for use in the
current  operations  regardless of contractual  maturity  dates.  Non-restricted
investments  designated as held-to-maturity  are classified as current assets if
expected maturity is within one year of the balance sheet date. Otherwise,  they
are  classified  as  long-term  investments.   Realized  gains  and  losses  are
calculated  using the  specific  identification  method and are  included in net
income. Unrealized holding gains and losses on available-for-sale securities are
included as a separate component of stockholders' equity until realized.

Restricted  Cash and  Investments.  Certain  subsidiaries  are required by state
regulatory  agencies  to  maintain  deposits  and must  also  meet net worth and
reserve  requirements.  The Company and its  subsidiaries are in compliance with
the applicable minimum regulatory and capital requirements.

Military Accounts Receivable.  Amounts receivable under government contracts are
comprised  primarily  of estimates of  adjustments  under the contract  based on
actual  experience  and estimates of the earned portion of any change orders not
originally specified in the contract.

Reinsurance Recoverable.  In the normal course of business, the Company seeks to
reduce the effects of catastrophic  and other events that may cause  unfavorable
underwriting results by reinsuring certain levels of risk with other reinsurers.
Reinsurance recoverable for ceded paid claims is recorded in accordance with the
terms of the agreements and  reinsurance  recoverable  for unpaid losses and LAE
and medical  claims payable is estimated in a manner  consistent  with the claim
liability  associated  with the  reinsurance  policy.  Reinsurance  receivables,
including  amounts  related to paid and unpaid  losses,  are  reported as assets
rather than a reduction of the related liabilities.

Property  and  Equipment.  Property  and  equipment  are  stated  at  cost  less
accumulated depreciation.  Maintenance and repairs that do not improve or extend
the life of the respective  assets are charged to operations.  Depreciation  and
amortization  is computed  using the  straight-line  method  over the  estimated
service  lives of the  assets or terms of leases if  shorter.  Estimated  useful
lives are as follows:

               Buildings and Improvements                    10 - 30 years
               Leasehold Improvements                         3 - 10 years
               Furniture, Fixtures and Equipment              3 - 5 years
               Data Processing Hardware and Software          3 - 10 years

Goodwill.  Goodwill has been recorded  primarily as a result of various business
acquisitions  by the Company.  Amortization is provided on a straight line basis
over periods not  exceeding 40 years.  The Company  periodically  evaluates  the
carrying value of its  intangible  assets.  The Company  utilizes the discounted
cash flow method for  evaluating  the  recoverability  of goodwill.  Future cash
flows are estimated based on Company projections and are discounted based on the
interest rates approximating long-term bond yields.

In connection with the restructuring  plans adopted and announced by the Company
in the second quarter of 2000, the Company  re-evaluated the  recoverability  of
certain long-lived assets, primarily those associated with the Texas operations,
in  accordance  with  Statement  of  Financial  Accounting  Standards  No.  121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of" ("SFAS No. 121") and Accounting Principles Board Opinion No. 17,
"Intangible  Assets" ("APB No. 17") and  determined  that the carrying  value of
certain  goodwill  was  impaired.  In  assessing  the  asset  impairment  of the
long-lived  assets, the Company first allocated a portion of related goodwill to
the fixed  assets  to be  disposed  of, in  accordance  with SFAS No.  121.  The
remainder  of the related  goodwill  was then  assessed  for  recoverability  in
accordance  with APB No.  17 based on  projected  discounted  cash  flows and an
impairment of  $141,506,000  was recorded.  See Note 16 for a description of the
primary facts and circumstances related to the impairment.

Amortization  expense  associated with goodwill was  $2,824,000,  $4,345,000 and
$2,321,000 for the years ended December 31, 2000, 1999 and 1998, respectively.

Medical Claims Payable and Military Health Care Payable.  Medical claims payable
and military  health care payable  include the estimated  cost for unpaid claims
for which health care  services  have been  provided to enrollees and to TRICARE
eligibles.  Such  provisions  included an estimate  for the costs of claims that
have been incurred but have not been reported.

Premium Deficiency Reserves.  Premium deficiency expenses are recognized when it
is probable that the future costs associated with a group of existing  contracts
will exceed the  anticipated  future  premiums on those  contracts.  The Company
calculates  expected premium  deficiency  expense based on budgeted revenues and
expenses. Premium deficiency reserves are evaluated quarterly for adequacy.

Reserve  for  Losses and Loss  Adjustment  Expense.  The  reserve  for  workers'
compensation  losses and LAE  consists of  estimated  costs of each unpaid claim
reported to the Company prior to the close of the accounting  period, as well as
those incurred but not yet reported.  The methods for establishing and reviewing
such  liabilities  are  continually  reviewed and  adjustments  are reflected in
current operations. The Company does not discount its losses and LAE reserves.

Income Taxes. The Company accounts for income taxes using the liability  method.
Deferred  income tax assets and  liabilities  result from temporary  differences
between the tax basis of assets and liabilities and the reported  amounts in the
consolidated  financial  statements  that will  result in taxable or  deductible
amounts in future years. The Company's  temporary  differences arise principally
from certain net operating losses, accrued expenses, reserves,  depreciation and
impairment charges.

Concentration  of Credit Risk.  The  Company's  financial  instruments  that are
exposed to credit risk consist primarily of investments and accounts receivable.
The Company  maintains cash and cash  equivalents and  investments  with various
financial  institutions.  These  financial  institutions  are  located  in  many
different  regions and company policy is designed to limit exposure with any one
institution.

Credit risk with respect to accounts receivable is generally  diversified due to
the large number of entities  comprising  the Company's  customer base and their
dispersion  across many  different  industries.  These  customers  are primarily
located in the  states in which the  Company  operates  and are  principally  in
California, Nevada and Texas. However, the Company is licensed and does business
in several other states.  As of December 31, 2000,  the Company has  receivables
outstanding from the federal  government  related to its TRICARE contract in the
amount of $71.4 million.  The Company also has receivables  from its reinsurers.
Reinsurance  contracts  do not  relieve  the  Company  from its  obligations  to
enrollees or  policyholders.  Failure of reinsurers  to honor their  obligations
could  result in losses to the  Company.  The Company  evaluates  the  financial
condition of its reinsurers to minimize its exposure to significant  losses from
reinsurer  insolvencies.  All reinsurers  with whom the Company has  reinsurance
contracts are rated A- or better by the A.M. Best Company.

Recently Issued Accounting  Standards.  The Financial Accounting Standards Board
has issued Statement of Financial  Accounting Standards No. 133, "Accounting for
Derivative  Instruments and Hedging Activities" ("SFAS 133"), as amended,  which
is  effective  for  fiscal  years  beginning  after  June  15,  2000.  SFAS  133
establishes   additional  accounting  and  reporting  standards  for  derivative
instruments and hedging  activities.  SFAS 133 requires that an entity recognize
all  derivatives  as either assets or  liabilities in the statement of financial
position.  This  statement  also  defines  and allows  companies  to apply hedge
accounting  to its  designated  derivatives  under  certain  instances.  It also
requires  that all  derivatives  be marked to market on an ongoing  basis.  This
applies whether the derivatives are stand-alone instruments, such as warrants or
interest-rate swaps, or embedded derivatives,  such as call options contained in
convertible  debt  investments.  Along  with  the  derivatives,  in the  case of
qualifying  hedges, the underlying hedged items are also to be marked to market.
These market value adjustments are to be included either in the income statement
or  other  comprehensive   income,   depending  on  the  nature  of  the  hedged
transaction.  The fair value of financial instruments is generally determined by
reference  to market  values  resulting  from  trading on a national  securities
exchange or in an over-the-counter  market. In cases where derivatives relate to
financial instruments of non-public companies, or where quoted market prices are
otherwise not available,  such as for  derivative  financial  instruments,  fair
value is based on estimates using present value or other  valuation  techniques.
The Company does not believe that it has any significant  derivative instruments
nor  any  significant  hedging   activities.   The  majority  of  the  Company's
investments are held by insurance companies, which are regulated as to the types
of investments they may hold.

In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB 101"). SAB
101 clarifies existing  accounting  principles related to revenue recognition in
financial  statements.  The  Company  has  adopted SAB 101 and it did not have a
material impact on its financial statements.

Use of Estimates and Assumptions in the Preparation of Financial Statements. The
preparation of financial  statements in conformity  with  accounting  principles
generally  accepted in the United States of America requires  management to make
estimates  and  assumptions  that  affect  the  reported  amounts  of assets and
liabilities  and disclosure of contingent  assets and liabilities at the date of
the  financial  statements  and the  reported  amounts of revenues  and expenses
during the reporting  period.  Estimates and  assumptions  include,  but are not
limited  to,  medical  and  specialty  product  expenses,  military  revenue and
expenses and goodwill recoverability.  Actual results may materially differ from
estimates.

Reclassifications.  Certain amounts in the Consolidated Financial Statements for
the years ended  December  31, 1999 and 1998 have been  reclassified  to conform
with the current year presentation.


<PAGE>


3.   EARNINGS PER SHARE

The following table provides a reconciliation  of basic and diluted earnings per
share ("EPS"):

<TABLE>
<CAPTION>
                                                                                   Dilutive
                                                                 Basic           Stock Options         Diluted
                                                                 -----           -------------         -------
(In thousands, except per share data) For the Year Ended December 31, 2000:
<S>                                                             <C>                                  <C>
Net Loss.......................................                 $(199,915)                           $(199,915)
Weighted Average Number of Shares
   Outstanding.................................                    27,142                               27,142
Per Share Amount...............................                 $  (7.37)                            $   (7.37)

For the Year Ended December 31, 1999:
Net Loss.......................................                 $ (4,631)                            $  (4,631)
Weighted Average Number of Shares
   Outstanding.................................                    26,927                               26,927
Per Share Amount...............................                 $    (.17)                           $    (.17)

For the Year Ended December 31, 1998:
Net Income.....................................                 $  39,596                            $  39,596
Weighted Average Number of Shares
   Outstanding.................................                    27,391             356               27,747
Per Share Amount...............................                 $    1.45                            $    1.43
</TABLE>

Options  to  purchase  4,250,000  and  3,904,000  shares  of common  stock  were
outstanding at December 31, 2000 and 1999 respectively, but were not included in
the computation of diluted earnings per share because the Company had a net loss
for both years and their inclusion would have been anti-dilutive.

Stock Split. On May 5, 1998, the Company announced a three-for-two  stock split.
Each  stockholder of record of the Company owning one share of common stock, par
value of $.005,  as of the close of business on the record date of May 18, 1998,
received  an  additional  one-half  share  on  June  18,  1998.  In  lieu of any
fractional  share resulting from the stock split, a stockholder  received a cash
payment based on the closing  price of the Company's  common stock on the record
date. The par value remains $.005 per share. Common stock and earnings per share
amounts have been retroactively adjusted to account for the split.

CII issued convertible  subordinated debentures (the "Debentures") due September
15,  2001.  Each $1,000 in principal is  convertible  into 25.382  shares of the
Company's  common  stock  at a  conversion  price  of  $39.398  per  share.  The
Debentures  were not  included in the  computation  of EPS because  their effect
would be  anti-dilutive.  At December 31, 2000, common stock shares reserved for
potential   issuance  in  connection  with  the  subordinated   debentures  were
1,442,000.


<PAGE>


4.  PROPERTY AND EQUIPMENT

Property and equipment at December 31, consists of the following:


<TABLE>
<CAPTION>
   (In thousands)                                                       2000                      1999
                                                                        ----                      ----
<S>                                                                   <C>                      <C>
   Land...................................................            $ 28,455                 $  28,643
   Buildings and Improvements.............................             126,222                   152,284
   Furniture, Fixtures and Equipment......................              42,917                    61,793
   Data Processing Equipment and Software.................              94,037                    97,204
   Software in Development and Construction
     in Progress..........................................               6,036                    14,157
   Less: Assets Held for Sale.............................             (22,942)
         Accumulated Depreciation ........................            (101,694)                  (89,532)
                                                                      --------                ----------
     Net Property and Equipment...........................            $173,031                  $264,549
                                                                      ========                  ========
</TABLE>

The following is an analysis of property and equipment  under capital  leases by
classification as of December 31:

<TABLE>
<CAPTION>
   (In thousands):                                                       2000                      1999
                                                                         ----                      ----
<S>                                                                     <C>                       <C>
   Data Processing Equipment and Software ................              $6,571                    $4,736
   Furniture, Fixtures and Equipment......................               4,426                     4,426
   Building...............................................                 245                       245
   Less: Accumulated Depreciation.........................              (6,195)                   (4,376)
                                                                         ------                   -------
      Net Property and Equipment..........................              $5,047                    $5,031
                                                                        ======                    ======
</TABLE>

The Company capitalizes  interest expense as part of the cost of construction of
facilities  and  the  implementation  of  computer  systems.   Interest  expense
capitalized  in 2000,  1999 and 1998 was  $67,000,  $2,140,000  and  $1,037,000,
respectively.  Depreciation  expense in 2000,  1999  and 1998 was  $26,921,000,
$23,577,000, and $16,767,000, respectively.

Assets held for sale on the balance  sheet at December  31, 2000 consist of real
estate in Texas and Arizona  for which the  Company is actively  seeking a buyer
and expects to sell within twelve months.  All assets are owned by  subsidiaries
in the managed care and corporate  operations segment. A related mortgage in the
amount of $34.2 million is included in the current  portion of long-term debt on
the balance  sheet.  Because  these assets have been written down to fair market
value,  in  accordance  with SFAS No. 121,  the Company has ceased  depreciating
them.  See Note 16 for a  description  of the  primary  facts and  circumstances
leading to the decision to sell this real estate.  See Note 8 for a  description
of the related long-term debt.

On December  28, 2000,  the Company  sold the majority of its Las Vegas,  Nevada
administrative  and  medical  clinic real  estate  holdings in a  sale-leaseback
transaction.  As part of the transaction,  the Company financed a portion of the
sales  price with  mortgage  notes  receivable  of $22.2  million  and  provided
deposits of $4.3  million.  The  mortgages  and deposits  constitute  continuing
involvement  as defined in Statement of Financial  Accounting  Standards No. 98,
"Accounting for Leases" ("SFAS 98") and as such the transaction does not qualify
as a sale. In accordance with SFAS 98, the Company recorded the transaction as a
financing obligation of $113,659,000, offset by the mortgage notes receivable of
$22,200,000.  The net book value of the assets  included in the  transaction was
$86,890,000 at December 31, 2000.


<PAGE>



The Company  expects that the mortgages and deposits will be repaid to Sierra by
the end of 2001. Once that occurs the  transaction  will qualify as a sale since
the Company no longer will have continuing  involvement.  After  qualifying as a
sale, the assets,  associated accumulated  depreciation and financing obligation
will be retired and a gain on the sale will be recorded and recognized  over the
remaining  term  of the  lease.  Until  the  transaction  qualifies  as a  sale,
depreciation  expense  will  continue to be recorded on the assets and  interest
expense will be recognized on the net financing obligation.

5.   CASH AND INVESTMENTS

Investments  that the Company has the  intention and ability to hold to maturity
are stated at amortized cost and categorized as held-to-maturity.  The remaining
investments have been categorized as available-for-sale  and are stated at their
fair value. Fair value is estimated primarily from published market values as of
the balance sheet date.  Gross realized gains on investments  for 2000, 1999 and
1998 were $497,000, $334,000 and $4,789,000, respectively. Gross realized losses
on investments for 2000, 1999 and 1998 were $1,566,000, $733,000 and $2,511,000,
respectively.



<PAGE>


The following table summarizes the Company's  current,  long-term and restricted
investments as of December 31, 2000:

<TABLE>
<CAPTION>
                                                                                  Gross               Gross
                                                            Amortized          Unrealized          Unrealized            Fair
(In thousands)      Cost                                      Gains               Losses              Value
               --------------                             -------------       -------------        -----------
Available-for-Sale Investments:
Classified as Current:
    U.S. Government
<S>                                                          <C>                    <C>               <C>               <C>
       and its Agencies...........................           $145,638               $284              $6,774            $139,148
    Municipal Obligations.........................             20,504                 41                 557              19,988
    Corporate Bonds...............................             41,040                 62               1,659              39,443
                                                            ---------              -----             -------          ----------
Total Debt Securities.............................            207,182                387               8,990             198,579
    Preferred Stock...............................              7,957                 50                 231               7,776
                                                           ----------              -----             -------          ----------
Total Current ....................................            215,139                437               9,221             206,355
                                                             --------               ----              ------            --------


Classified as Restricted:
    U.S. Government
       and its Agencies...........................             16,125                 69                 207              15,987
    Municipal Obligations.........................              2,637                 49                  27               2,659
    Corporate Bonds...............................              1,192                 16                  16               1,192
    Other.........................................              2,509                                                      2,509
                                                          -----------           --------         -----------          ----------
       Total Restricted ..........................             22,463                134                 250              22,347
                                                           ----------              -----            --------           ---------
          Total Available-for-Sale ...............           $237,602               $571              $9,471            $228,702
                                                             ========               ====              ======            ========

Held-to-Maturity Investments:
Classified as Current:
    U.S. Government
       and its Agencies...........................            $   283              $   3                              $      286
    Municipal Obligations.........................                505                 12                                     517
                                                           ----------              -----                              ----------
Total Current.....................................                788                 15                                     803
                                                           ----------              -----                              ----------

Classified as Long-term:
    U.S.  Government
       and its Agencies...........................             11,230                262               $ 689              10,803
    Municipal Obligations.........................              2,381                 53                                   2,434
    Corporate Bonds...............................              4,482                117                 160               4,439
                                                            ---------               ----              ------           ---------
Total Long-term  .................................             18,093                432                 849              17,676
                                                             --------               ----              ------            --------

Classified as Restricted:
   U.S. Government
       and its Agencies...........................              1,263                 14                                   1,277
Corporate Bonds  .................................499              23                                    522
   Other..........................................                615                                                        615
                                                          -----------            -------                               ---------
       Total Restricted...........................              2,377                 37                                   2,414
                                                           ----------              -----                                --------
          Total Held-to-Maturity..................           $ 21,258               $484               $ 849             $20,893
                                                             ========               ====               =====             =======
</TABLE>


<PAGE>


The following table summarizes the Company's  current,  long-term and restricted
investments as of December 31, 1999:

<TABLE>
<CAPTION>
                                                                                 Gross               Gross
                                                            Amortized         Unrealized          Unrealized            Fair
(In thousands)      Cost                                    Gains              Losses               Value
               --------------                           -------------      -------------         -----------
Available-for-Sale Investments:
Classified as Current:
    U.S. Government
<S>                                                          <C>                <C>                  <C>               <C>
       and its Agencies...........................           $112,211           $  37                $16,294           $  95,954
    Municipal Obligations.........................             60,245              97                  2,316              58,026
    Corporate Bonds...............................             33,756              34                  1,715              32,075
    Other.........................................             20,119            ____                  3,105              17,014
                                                           ----------                              ---------          ----------
       Total Debt Securities......................            226,331             168                 23,430             203,069
    Preferred Stock...............................              8,564              21                    691               7,894
                                                          -----------          ------             ----------         -----------
       Total Current..............................            234,895             189                 24,121             210,963
                                                            ---------           -----               --------           ---------


Classified as Restricted:
    U.S. Government
       and its Agencies...........................             12,021             104                    670              11,455
    Municipal Obligations.........................              2,485              29                    101               2,413
    Corporate Bonds...............................                989              11                     33                 967
    Other.........................................              4,815            ____                    118               4,697
                                                          -----------                             ----------         -----------
       Total Restricted...........................             20,310             144                    922              19,532
                                                           ----------           -----             ----------          ----------
          Total Available-for-Sale................           $255,205            $333                $25,043            $230,495
                                                             ========            ====                =======            ========

Held-to-Maturity Investments:
Classified as Current:
    U.S. Government
       and its Agencies...........................         $    5,129            $341              $     317          $    5,153
    Municipal Obligations.........................              2,759              32                     55               2,736
    Other     ....................................                100            ____                 ______                 100
                                                         ------------                                               ------------
       Total Current..............................              7,988             373                    372               7,989
                                                          -----------           -----              ---------         -----------

Classified as Long-term:
    U.S.  Government
       and its Agencies...........................              7,339                                  1,141               6,198
    Municipal Obligations.........................              2,284              33                                      2,317
    Corporate Bonds...............................              5,239             115                 ______               5,354
                                                          -----------           -----                                -----------
Total Long-term  .................................             14,862             148                  1,141              13,869
                                                           ----------           -----               --------          ----------

Classified as Restricted:
   U.S. Government
       and its Agencies...........................                619                                                        619
   Municipal Obligations..........................                515                                                        515
    Corporate Bonds...............................                499                                                        499
    Other     ....................................                540                                                        540
                                                         ------------                                               ------------
       Total Restricted...........................              2,173                                                      2,173
                                                          -----------                                                -----------
          Total Held-to-Maturity .................          $  25,023            $521               $  1,513           $  24,031
                                                            =========            ====               ========           =========
</TABLE>


<PAGE>




The  contractual  maturities of  available-for-sale  investments at December 31,
2000 are shown below. Expected maturities may differ from contractual maturities
because borrowers may have the right to call or prepay obligations.

<TABLE>
<CAPTION>
                                                                               Amortized
                                                                                  Cost                 Fair Value
(In thousands)
<S>                                                                           <C>                      <C>
Due in one year or less......................................                 $  41,614                $  41,667
Due after one year through five years........................                    43,726                   43,765
Due after five years through ten years.......................                     8,756                    8,697
Due after ten years through fifteen years....................                    15,506                   15,266
Due after fifteen years......................................                   120,043                  111,531
                                                                              ---------                ---------
     Total...................................................                 $ 229,645                $ 220,926
                                                                               ========                 ========
</TABLE>


The contractual maturities of held-to-maturity  investments at December 31, 2000
are shown below.  Expected  maturities  may differ from  contractual  maturities
because borrowers may have the right to call or prepay obligations.
<TABLE>
<CAPTION>
                                                                               Amortized
                                                                                  Cost                 Fair Value
(In thousands)
<S>                                                                            <C>                      <C>
Due in one year or less......................................                  $  1,729                 $  1,741
Due after one year through five years........................                     7,191                    7,240
Due after five years through ten years.......................
Due after ten years through fifteen years....................                     4,915                    5,163
Due after fifteen years......................................                     7,423                    6,749
                                                                               --------                 --------
     Total...................................................                  $ 21,258                 $ 20,893
                                                                                =======                  =======
</TABLE>


Of the cash and cash  equivalents  and  current  investments  that total  $368.4
million in the  accompanying  Consolidated  Balance  Sheet at December 31, 2000,
$308.3 million is limited for use only by the Company's regulated  subsidiaries.
Such  amounts  are   available   for  transfer  to  Sierra  from  the  regulated
subsidiaries  only to the extent that they can be remitted  in  accordance  with
terms of existing management agreements and by dividends, which customarily must
be  approved  by  regulating  state  insurance  departments.  The  remainder  is
available to Sierra on an unrestricted basis.

6.   REINSURANCE

The  Company  is covered  under  medical  reinsurance  agreements  that  provide
coverage  for 50% - 90% of hospital  and other costs in excess of,  depending on
the contract,  $75,000 to $200,000 per case,  up to a maximum of $2,000,000  per
member per  lifetime for both the managed  indemnity  and HMO  subsidiaries.  In
addition,  certain  of the  Company's  HMO  members  are  covered  by an  excess
catastrophe  reinsurance contract and SHL maintains reinsurance on certain other
insurance  products.   Reinsurance   premiums  of  $3,464,000,   $3,269,000  and
$2,860,000,  net  of  reinsurance  recoveries  of  $3,956,000,   $2,904,000  and
$1,185,000,   are  included  in  medical  expenses  for  2000,  1999  and  1998,
respectively.

CII also has  reinsurance  agreements  or  treaties  in  effect  with  unrelated
entities.  In 1999 and 1998,  workers'  compensation claims between $500,000 and
$100,000,000 per occurrence were 100% reinsured. In addition,  effective July 1,
1998, workers'  compensation claims below $500,000 per occurrence were reinsured
under quota share and excess of loss reinsurance agreements (referred to as "low
level reinsurance") with an A+ rated carrier. Under this agreement,  the Company
reinsures  30% of the first  $10,000 of each loss,  75% of the next  $40,000 and
100% of the next $450,000. The Company


<PAGE>


received a 9.25% ceding commission from the reinsurer as a partial reimbursement
of its operating expenses.  The low level reinsurance  agreement expired on June
30, 2000; however the Company opted to continue ceding premiums and losses under
the low level agreement on a run-off basis for all policies in force on June 30,
2000.  Effective  January 1, 2000 we entered into a  reinsurance  contract  that
provides  statutory  (unlimited)  coverage for workers'  compensation  claims in
excess  of  $500,000  per  occurrence.  The  contract  is in effect  for  claims
occurring  on or after  January 1, 2000 through  December  31, 2002.  On July 1,
2000,  the Company  entered into a reinsurance  agreement  that covers losses on
claims in excess of $250,000 up to $500,000 for  policies  issued after June 30,
2000.

The low level reinsurance  agreement was consummated early in the fourth quarter
of 1998 but  coverage  was made  retroactive  to July 1, 1998.  Therefore,  this
agreement  contained both  retroactive  (covering  claims occurring in the third
calendar quarter of 1998) and prospective  reinsurance coverage (covering claims
occurring  after  September  30,  1998) and, in  accordance  with  Statement  of
Financial   Accounting   Standards  No.  113,   "Accounting  and  Reporting  for
Reinsurance of  Short-Duration  and  Long-Duration  Contracts" ("SFAS 113"), the
Company has  bifurcated the low level  reinsurance  agreement to account for the
different  accounting  treatments.  The  amount  by which  the  estimated  ceded
liabilities exceed the amount paid for the retroactive coverage is reported as a
deferred gain and amortized to income as a reduction of incurred losses over the
estimated remaining  settlement period using the interest method. Any subsequent
changes in estimated or actual cash flows  related to the  retroactive  coverage
are  accounted  for by adjusting the  previously  recorded  deferred gain to the
balance that would have existed had the revised  estimate been  available at the
inception of the reinsurance transactions, with a corresponding charge or credit
to income.  During  2000,  the Company  recorded an  adjustment  to increase its
deferred gain related to retroactive reinsurance coverage by $3,662,000 compared
to an increase of  $4,615,000  in 1999.  For the years ended  December 31, 2000,
1999 and 1998, the Company  amortized  deferred gains of $5,199,000,  $3,850,000
and $1,038,000, respectively. Such amortization is included in specialty product
expense on the accompanying consolidated statements of operations.

In accordance with SFAS 113, losses ceded under prospective  reinsurance  reduce
direct  incurred  losses and amounts  recoverable  are reported as an asset.  At
December  31,  2000 and  1999,  the  amount  of  reinsurance  recoverable  under
prospective  reinsurance  contracts for unpaid loss and LAE was $218,757,000 and
$110,089,000,  respectively.  At  December  31,  2000 and  1999,  the  amount of
reinsurance   recoverable  under  the  retroactive   reinsurance   contract  was
$10,863,000 and $14,842,000,  respectively. The amount of reinsurance receivable
for paid loss and LAE was  $17,585,000  and  $6,931,000 at December 31, 2000 and
1999, respectively.

Reinsurance  contracts  do not  relieve  the  Company  from its  obligations  to
enrollees or  policyholders.  Failure of reinsurers  to honor their  obligations
could  result in losses to the  Company.  The Company  evaluates  the  financial
condition of its reinsurers to minimize its exposure to significant  losses from
reinsurer insolvencies.

Substantially all of the reinsurance  recoverables are due from reinsurers rated
A+ by the A.M. Best Company and all amounts are considered to be collectible.



<PAGE>


The following  table  provides  workers'  compensation  prospective  reinsurance
information for the three years ended December 31, 2000:
<TABLE>
<CAPTION>
                                                                                    Change in
                                                                Recoveries         Recoverable
                                                                  on Paid           on Unpaid           Premiums
                                                                Losses/LAE          Losses/LAE            Ceded
                                                                ----------          ----------            -----
(In thousands)
Year Ended December 31, 2000:
<S>                                                               <C>                <C>                 <C>
 Low level reinsurance carrier...................                 $53,408            $100,240            $74,071
 Excess of loss reinsurance carriers.............                   2,324               8,428              3,449
                                                                ---------         -----------          ---------
 Total ..........................................                 $55,732            $108,668            $77,520
                                                                  =======            ========            =======

Year Ended December 31, 1999:
 Low level reinsurance carrier.................                   $21,941           $  69,104            $60,702
 Excess of loss reinsurance carriers...........                     1,730               3,188              3,025
                                                                ----------        -----------          ---------
 Total ........................................                   $23,671           $  72,292            $63,727
                                                                  =======           =========            =======

Year Ended December 31, 1998:
 Low level reinsurance carrier.................                   $ 1,379           $  19,664            $16,095
 Excess of loss reinsurance carriers...........                     3,292              (2,923)             3,672
                                                                 --------          ----------          ---------
 Total ........................................                   $ 4,671           $  16,741            $19,767
                                                                  =======           =========            =======
</TABLE>

7.   LOSSES AND LOSS ADJUSTMENT EXPENSES

The  following  table  provides a  reconciliation  of the  beginning  and ending
reserve  balances  for  workers'  compensation  unpaid  losses and LAE. The loss
estimates are subject to change in subsequent  accounting periods and any change
to the current  reserve  estimates  would be accounted for in future  results of
operations in the period when the change occurs.

While management of the Company believes that current  estimates are reasonable,
significant adverse or favorable loss development could occur in the future.

<TABLE>
<CAPTION>
                                                                                 Year ended December 31,
                                                                      ---------------------------------------------
                                                                         2000              1999             1998
                                                                   ----------------  --------------   ---------------
(In thousands)
<S>                                                                     <C>              <C>               <C>
Net Beginning Losses and LAE Reserve .....................              $134,305         $174,467          $181,643
                                                                        --------         --------          --------

Net Provision for Insured Events Incurred in:
   Current Year ..........................................                86,587           51,541           103,990
   Prior Years............................................                23,293            9,920            (9,643)
                                                                       ---------       ----------        ----------
     Total Net Provision..................................               109,880           61,461            94,347
                                                                        --------        ---------         ---------

Net Payments for Losses and LAE
   Attributable to Insured Events Incurred in:
   Current Year ..........................................                26,867           21,207            29,591
   Prior Years............................................                61,521           80,416            71,932
                                                                       ---------       ----------        ----------
     Total Net Payments ..................................                88,388          101,623           101,523
                                                                       ---------        ---------         ---------

Net Ending Losses and LAE Reserve ........................               155,797          134,305           174,467
Reinsurance Recoverable ..................................               218,757          110,089            37,797
                                                                        --------        ---------        ----------

Gross Ending Losses and LAE Reserve ......................              $374,554         $244,394          $212,264
                                                                        ========         ========          ========
</TABLE>

During the year ended  December 31, 2000,  the Company  experienced  net adverse
loss  development  of $23.3  million  related to accident  years 1999 and prior.
Estimated  losses and LAE incurred in accident years 1996 to 1999 have developed
significantly  due to the continuation of increasing claim severity  patterns on
the Company's California book of business.  Many workers' compensation insurance
carriers  in  California  are also  experiencing  high claim  severity.  Factors
influencing  the  higher  claim  severity   include  rising  average   temporary
disability  costs,  the  increase  in the number of major  permanent  disability
claims, medical inflation and adverse court decisions related to medical control
of a claimant's  treatment.  For claims occurring on and after July 1, 1998, the
Company has  reinsured  a  percentage  of the higher  claim  severity  under the
Company's low level reinsurance  agreement.  The low level reinsurance agreement
expired on June 30, 2000; however, the Company opted to continue ceding premiums
and losses under the low level  agreement on a run-off basis for all policies in
force on June 30, 2000. Effective January 1, 2000, we entered into a reinsurance
contract that provides statutory  (unlimited) coverage for workers' compensation
claims in excess of  $500,000  per  occurrence.  The  contract  is in effect for
claims  occurring on or after January 1, 2000 through December 31, 2002. On July
1, 2000, the Company entered into a reinsurance  agreement that covers losses on
claims in excess of $250,000 up to $500,000 for  policies  issued after June 30,
2000.

For the year ended  December  31,  1999,  the Company  recorded net adverse loss
development  on prior  accident  years of $9.9  million,  primarily for accident
years 1996 to 1998.  This  adverse  development  was  largely  due to the higher
average  California claim severity patterns that the Company  experienced in the
last half of 1999. In the year ended December 31, 1998, the Company recorded net
favorable loss  development of $9.6 million,  which was mainly  attributable  to
lower actual paid claims than were  previously  reserved on accident years prior
to 1996.

8.   LONG-TERM DEBT

Long-term debt at December 31, consists of the following:
<TABLE>
<CAPTION>
                                                                                    2000                     1999
                                                                              ----------------        ----------------
(In thousands)
<S>                                                                               <C>                      <C>
Revolving Credit Facility............................................             $135,000                 $160,000
Net Financing Obligations............................................               91,253
7 1/2% Convertible Subordinated Debentures ..........................               47,041                   50,498
6% Mortgage Note.....................................................               34,230                   34,693
7 1/5% Mortgage Note.................................................                                        11,614
7 3/8% Mortgage Note  ...............................................                                           393
Other................................................................                6,054                    6,397
                                                                                ----------              -----------
  Total..............................................................              313,578                  263,595
Less Current Portion.................................................              (88,223)                  (4,741)
                                                                                 ---------               ----------
Long-term Debt.......................................................             $225,355                 $258,854
                                                                                  ========                 ========
</TABLE>

Revolving Credit  Facility.  On October 31, 1998, the Company replaced its prior
line of credit with a $200  million  credit  facility.  As a result of the asset
impairment  and other  changes  in  estimate  charges,  the  Company  was not in
compliance with its financial  covenants at June 30, 2000. On December 15, 2000,
the Company entered into an amended and restated credit  agreement and is now in
compliance with all covenants.  The Company has $135 million available under the
new agreement  but that will be reduced by amounts  ranging from $2.0 million to
$10.0 million every six months starting in June 2001. The amount available under
the credit  facility  can also be reduced by 80% of net  proceeds  from  certain
asset sales and excess cash flow, as defined in the amended and restated  credit
agreement,  and,  as  well as 100% of net  proceeds  of any new  debt or  equity
issuance,  excluding  any  issuance  by CII.  The amended  and  restated  credit
agreement restricts the amount of funds that can be transferred to the Texas and
SMHS  operations to a maximum of $12 million and $5 million,  respectively.  The
credit  agreement  also requires  that the Company's  purchase of the CII 7 1/2%
convertible subordinated debentures with funds other than those from CII and its
subsidiaries  will require an equal  permanent  reduction in the credit facility
limit.  Interest under the amended and restated credit agreement is variable and
based on the Bank of America "prime rate" plus a margin. The rate was 10.125% at
December  31,  2000,  which is a  combination  of the prime  rate of 9.5% plus a
margin of .625%.  The Company can reduce the margin in the future by  completing
certain  transactions and meeting certain  financial  ratios. Of the outstanding
balance, $25 million is covered by an interest-rate swap agreement.  To mitigate
the risk of  interest  rate  fluctuation  on the credit  facility,  the  Company
entered into a five-year $50 million  interest-rate  swap  agreement  during the
fourth  quarter of 1998.  The intent of the  agreement was to keep the Company's
interest rate on $50 million of the borrowing  relatively  fixed.  In the fourth
quarter of 2000, $25 million of the swap agreement was  terminated.  The average
cost of borrowing on the credit  facility for 2000,  including the impact of the
swap agreements,  was approximately  9.9%. The terms of the amended and restated
credit  agreement  contain  certain  covenants  including a minimum fixed charge
coverage ratio, a minimum  interest  coverage  ratio, a maximum  leverage ratio,
maximum loss ratios and maximum capital expenditure amounts.

Net Financing  Obligations  represent amounts recorded as a financing obligation
of  $113,453,000  offset  by  notes  receivable  of  $22,200,000  as part of the
sale-leaseback  transaction  described  in Note 4.  Amounts  were  recorded as a
financing  obligation  as  required  by SFAS 98 using the  interest  method with
effective interest rates of 8.16% to 8.53%.

7 1/2%  Convertible  Subordinated  Debentures.  In  September  1991,  CII issued
convertible  subordinated  debentures (the "Debentures") due September 15, 2001.
The balance  outstanding at December 31, 2000 was  $47,041,000,  which is net of
$18,000 held by Sierra and is eliminated in  consolidation.  The  Debentures are
included in the current  portion of  long-term  debt and pay interest at 7 1/2%,
which  is due  semi-annually  on March  15 and  September  15.  Each  $1,000  in
principal is convertible  into 25.382 shares of the Company's  common stock at a
conversion price of $39.398 per share. Unamortized issuance costs of $91,000 are
included in other assets on the balance sheet and are amortized over the life of
the Debentures.  Accrued  interest on the Debentures as of December 31, 2000 and
1999 was $993,000 and $1,099,000, respectively. The Debentures are redeemable by
CII,  in whole or in part,  at a  redemption  price  of  100.75%,  plus  accrued
interest.  The Debentures are general unsecured obligations of CII only and were
not assumed or  guaranteed  by Sierra or any of its  subsidiaries.  During 2000,
1999 and 1998, the Company purchased $3,457,000, $753,000 and $3,216,000, of the
debentures  on the open market  resulting in realized  gains,  net of taxes,  of
$654,000, $111,000 and $48,000, respectively.

CII has limited  sources of cash and does not expect to have  readily  available
funds to pay the  Debentures  when  they  mature.  CII is  exploring  strategies
regarding the Debentures including  refinancing,  extending the maturity date or
exchanging the Debentures.  In December 2000, CII filed a registration statement
on Form S-4 with the Securities and Exchange  Commission in which it proposed an
exchange offer to the holders of the Debentures to restructure the debt,  extend
the  maturity  date and reduce the overall  debt of the  Company.  The  offering
proposes  to  exchange  cash  plus  new  subordinated  Debentures,  with a later
maturity  date,  for the  Debentures.  The sources  for the cash  portion of the
proposed  exchange  offer  include a cash  dividend  from  California  Indemnity
Insurance  Company  ("California  Indemnity")  to  CII of up to $5  million.  In
connection  with the proposed  exchange  offer,  California  Indemnity  filed an
application with the California  Department of Insurance to pay an extraordinary
dividend of $5 million to CII. On February 22, 2001, the  California  Department
of Insurance  approved this application.  The balance of the cash portion of the
proposed  exchange  offer is expected to be loans from Sierra  Health  Services,
Inc. and/or other affiliates.  However,  these types of loans are limited by the
Sierra amended and restated credit agreement. In addition, in order to issue the
new senior  subordinated  debentures in the proposed exchange offer, the consent
of  two-thirds  majority in  principal  amount of the  lenders  under the Sierra
credit  facility must be obtained.  On March 16, 2001,  CII  announced  that the
interest payment due March 15, 2001 on the Debentures was not made as scheduled.
The Debentures have a 30-day grace period that applies to the scheduled March 15
interest  payment and are not in default  unless  payment is not made during the
grace period.  CII is working to complete the proposed exchange offer. There can
be no assurances  that CII or the Company will have the cash resources  required
to meet the  obligations  under the  Debentures  or that the CII will be able to
successfully implement a strategy for refinancing of the Debentures.

Sale and purchase activity for the Debentures, to parties other than the Company
and its  subsidiaries,  is believed  to be minimal and there is no known  market
quotation  system  for the  Debentures.  The  fair  value of the  Debentures  at
December 31, 2000 was $23,530,000,  which is the Company's best estimate and was
based on $18,000 stated
value  Debentures  purchased for $9,000 by the Company during September 2000 and
may not be indicative of the actual market value.

6% Mortgage  Note. In  conjunction  with the  acquisition  of Kaiser  Foundation
Health Plan of Texas, the Company executed a deed of trust note for $35,200,000,
which is secured by the  underlying  real estate and fixtures.  The terms of the
note include fixed monthly payments of $211,000 for five years at which time the
remaining  principal is due. As  described in Note 4, the entire  amount of this
note is included in the current  portion of  long-term  debt as it is related to
the assets designated as held for sale.

7 1/5% Mortgage Note. In January 1998, the Company  obtained a $15,000,000  loan
from Bank of America,  Nevada at an interest rate of 7 1/5%. The note balance of
$9,891,000  was paid off in  conjunction  with  the  sale-leaseback  transaction
described above.

7 3/8%  Mortgage  Note.  In December  1993,  the Company  obtained a loan from
Bank of  America,  Nevada.  The note was paid off during 2000.

Other. The Company has obligations under capital leases with interest rates from
6.7% to  13.4%.  In  addition,  the  Company  has  term  loans  with the City of
Baltimore and the State of Maryland. Scheduled maturities of the Company's notes
payable,  net financing  obligations  and future minimum  payments under capital
leases,  together with the present  value of the net minimum  lease  payments at
December 31, 2000, are as follows:

<TABLE>
<CAPTION>
                                                                                              Obligations
     (In thousands)                                                      Notes               Under Capital
     Year ending December 31,                                           Payable                 Leases
     -----------------------------------------------------            -----------        -------------------
<S>      <C>                                                           <C>                        <C>
         2001.................................................         $  86,377                  $2,196
         2002.................................................            12,111                   2,281
         2003.................................................           118,093                   1,081
         2004 ................................................                31                      31
         2005.................................................                32                      31
         Thereafter...........................................            91,834                     216
                                                                      ----------                --------
            Total.............................................          $308,478                   5,836
                                                                        ========
         Less:  Amounts Representing Interest.................                                      (736)
                                                                                                --------

         Present Value of Minimum Lease Payments..............                                    $5,100
                                                                                                  =======
</TABLE>

Excluding  the  Debentures,  the fair value of  long-term  debt,  including  the
current  portion,  is estimated to be  approximately  $249,932,000  based on the
borrowing rates currently available to the Company.

9.   INCOME TAXES

A summary of the provision for income taxes for the years ended  December 31, is
as follows:

<TABLE>
<CAPTION>
     (In thousands)                                           2000                  1999                  1998
                                                          ------------          ------------          ------------
     (Benefit) Provision for Income Taxes:
<S>                                                        <C>                    <C>                    <C>
     Current.....................................          $     (795)            $(12,919)              $12,595
     Deferred....................................             (73,430)               6,984                 1,201
                                                            ---------           ----------              --------
     Total.......................................            $(74,225)           $  (5,935)              $13,796
                                                             ========            =========               =======
</TABLE>


<PAGE>


The  following  reconciles  the  difference  between the reported and  statutory
(benefit) provision for income taxes for the years ended December 31:

<TABLE>
<CAPTION>
                                                             2000                    1999                  1998
                                                         ------------            ------------          ------------

<S>                                                          <C>                     <C>                    <C>
     Statutory Rate .............................            (35)%                   (35)%                  35%
     State Income Taxes .........................              0                      12                     1
     Tax Preferred Investments     ..............              0                     (12)                   (2)
     Change in Valuation Allowance ..............              0                     (15)                   (9)
     Intangible Amortization.....................              9                       3                     0
     Other ......................................             (1)                     (9)                    1
                                                             ---                     ---                    --
     (Benefit) provision for Income Taxes .......            (27)%                   (56)%                  26%
                                                             ===                     ===                    ==
</TABLE>

The tax effects of significant  items  comprising the Company's net deferred tax
assets are as follows at December 31:

<TABLE>
<CAPTION>
                                                                               2000                      1999
                                                                         ----------------          ----------------
(In thousands)
Deferred Tax Assets:
<S>                                                                          <C>                      <C>
    Medical and Losses and LAE Reserves ......................               $ 18,880                 $ 11,699
    Accruals Not Currently Deductible.........................                 14,628                   12,635
    Compensation Accruals ....................................                  9,732                    6,218
    Bad Debt Allowances.......................................                  6,916                    4,373
    Loss Carryforwards and Credits............................                 26,741                   18,886
    Depreciation and Amortization.............................                 30,444
    Unearned Premiums.........................................                  1,954                    1,029
    Deferred Reinsurance Gains................................                  1,917                    2,455
    Unrealized Investment Losses..............................                  3,051                    8,648
    Other ....................................................                    692                       90
                                                                          -----------              -----------
      Total...................................................                114,955                   66,033
                                                                             --------                 --------

Deferred Tax Liabilities:
    Deferred Policy Acquisition Costs ........................                    655                      777
    Depreciation and Amortization ............................                                          17,729
    Other ....................................................                    290                      684
                                                                         ------------               ----------
      Total...................................................                    945                   19,190
                                                                         ------------                 --------

    Net Deferred Tax Asset ...................................               $114,010                  $46,843
                                                                             ========                  =======
</TABLE>

At December 31, 2000, the Company had  approximately  $56,877,000 of regular tax
net operating loss  carryforwards.  The net operating loss  carryforwards can be
used to reduce future taxable income until they expire through the year 2020. In
addition to the net operating loss  carryforwards,  the Company has  alternative
minimum tax  credits of  approximately  $5,198,000,  which can be used to reduce
regular tax  liabilities  in future years.  There is no expiration  date for the
alternative minimum tax credits.

A valuation  allowance was  established  in prior years to reflect the Company's
inability to use tax benefits from certain acquisitions currently or in the near
future.  Due to a change in tax laws and the  Company's  ability to realize  tax
benefits for which a valuation  allowance had been previously  established,  the
Company  reduced its valuation  allowance by $1,575,000  and  $4,691,000 for the
years ended December 31, 1999 and 1998, respectively.  The Company does not have
a  valuation   allowance  at  December  31,  2000.  Included  in  other  current
receivables in the December 31, 2000 and 1999 balance sheets are tax receivables
of $1,326,000 and $10,518,000, respectively.


<PAGE>



10.  COMMITMENTS AND CONTINGENCIES

Leases. The Company is the lessee under several operating leases,  most of which
relate to office  facilities  and  equipment.  The  rentals on these  leases are
charged to expense  over the lease term as the  Company  becomes  obligated  for
payment and, where  applicable,  provide for rent  escalations  based on certain
costs and price index  factors.  The  following is a schedule,  by year,  of the
future minimum lease payments under existing operating leases:

     (In thousands)
     Year Ending December 31,
          2001..........................................               $  6,724
          2002..........................................                  6,227
          2003..........................................                  4,763
          2004..........................................                  3,687
          2005..........................................                  3,332
          Thereafter....................................                  6,085
                                                                      ---------
               Total....................................                $30,818
                                                                        =======

Rent expense totaled $10,133,000, $9,098,000, and $8,763,000 for the years ended
December 31, 2000, 1999 and 1998, respectively.

Litigation and Legal Matters. The Company is subject to various claims and other
litigation in the ordinary course of business.  Such litigation  includes claims
of medical  malpractice,  claims for  coverage or payment  for medical  services
rendered to HMO members and claims by providers for payment for medical services
rendered  to HMO  members.  Also  included  in such  litigation  are  claims for
workers'  compensation  and claims by providers for payment for medical services
rendered to injured  workers.  In the opinion of the Company's  management,  the
ultimate  resolution  of pending  legal  proceedings  should not have a material
adverse effect on the Company's financial condition.

11.  RELATED PARTY TRANSACTIONS

During 1997, the Company's Board of Directors  authorized a $3.0 million line of
credit from the Company to its Chief Executive  Officer ("CEO").  In April 2000,
the Company's Board of Directors authorized an additional $2.5 million loan from
the Company to the CEO which,  along with accrued  interest,  is due on June 30,
2002.  At the end of 2000,  the  aggregate  principal  balance  outstanding  and
accrued interest for both instruments was $5,416,000.  All amounts borrowed bear
interest  at a rate equal to the rate at which the Company  could have  borrowed
funds under the revolving  credit  facility at the time of the borrowing plus 10
basis points. The amounts outstanding are collateralized by certain of the CEO's
assets and rights to compensation from the Company.

The Company  expensed  $4,000,  $289,000 and $78,000 in the years ended December
31, 2000,  1999 and 1998,  respectively,  for legal fees to a Nevada law firm of
which a non-employee Board of Director member is a shareholder.

12.  EMPLOYEE BENEFIT PLANS

Defined  Contribution Plan. The Company has a defined  contribution  pension and
401(k) plan (the "Plan") for its  employees.  The Plan covers all  employees who
meet certain age and length of service requirements. For the year ended December
31, 1998 and for the six months ended June 30, 1999,  the Company  contributed a
maximum  of  2%  of  eligible  employees'  compensation  and  matched  50%  of a
participant's  elective  deferral up to a maximum of either 10% of an employee's
compensation or the maximum  allowable under current IRS regulations.  Effective
July 1, 1999, the Plan was modified such that the Company matches 50%-100% of an
employee's  elective  deferral  and  the  maximum  Company  match  is  6%  of  a
participant's  annual  compensation,  subject to IRS  limits.  The Plan does not
require  additional  Company  contributions.  Expense  under  the  plan  totaled
$4,707,000,  $6,736,000  and  $4,522,000  for the years ended December 31, 2000,
1999 and 1998, respectively.

Supplemental  Retirement  Plans. The Company has  Supplemental  Retirement Plans
(the "SRPs") for certain officers,  directors and highly compensated  employees.
The  SRPs  are   non-qualified   deferred   compensation   plans  through  which
participants  may elect to postpone the receipt and taxation of all or a portion
of their salary and bonuses received from the Company.  The Company also matches
50% of those  contributions that participants are restricted from deferring,  if
any,  under the  Company's  pension  and 401(k)  plan.  As  contracted  with the
Company, the participants or their designated beneficiaries may begin to receive
benefits  under the SRPs upon a  participant's  death,  disability,  retirement,
termination  of employment or certain other  circumstances  including  financial
hardship.

Executive  Life  Insurance  Plan.  The Company has split  dollar life  insurance
agreements  with certain  officers and key executives  (selected and approved by
the  Sierra  Board of  Directors).  The  premiums  paid by the  Company  will be
reimbursed upon the occurrence of certain events as specified in the contract.

Supplemental  Executive  Retirement  Plan  ("SERP").  The  Company has a defined
benefit  retirement plan covering certain key employees.  The Company is funding
the benefits through the purchase of life insurance policies. Benefits are based
on, among other  things,  the  employee's  average  earnings  over the five-year
period  prior to  retirement  or  termination,  and length of service.  Benefits
attributable to service prior to the adoption of the plan are amortized over the
estimated  remaining  service period for those  employees  participating  in the
plan. In 1998, the Company expanded the SERP to include more  participants.  The
effect of adding  these  participants  is  included  in plan  amendments  in the
reconciliation below.


<PAGE>



A reconciliation of ending year balances is as follows:
<TABLE>
<CAPTION>
                                                                                    Years Ended December 31,
                                                                                    ------------------------
                                                                         2000                  1999                  1998
                                                                       --------              --------              ---------
       (In thousands)
     Change in Benefit Obligation:
<S>                                                                      <C>                  <C>                  <C>
       Projected Benefit Obligation at Beginning of Period....           $12,808              $14,198              $ 9,515
       Service Cost ..........................................               365                  365                  408
       Interest Cost .........................................               887                  829                  875
       Plan Amendments........................................               166                                     1,572
       Actuarial (Gains) Losses...............................              (340)              (2,391)               1,925
       Benefits Paid .........................................              (193)                (193)                 (97)
                                                                       ---------            ---------           ----------
       Benefit Obligation at End of Period....................            13,693               12,808               14,198
                                                                         -------              -------              -------

     Change in Plan Assets:
       Fair Value of Plan Assets at Beginning of Period.......             7,295                4,493                1,872
       Actual Return on Plan Assets ..........................              (445)                 123                  (58)
       Company Contributions .................................             1,589                2,679                2,679
                                                                        --------              -------             --------
       Fair Value of Plan Assets at End of Period.............             8,439                7,295                4,493
                                                                        --------              -------             --------

       Funded Status of the Plan .............................            (5,254)              (5,513)              (9,705)
       Unrecognized Actuarial Change..........................              (851)                (532)               1,858
       Unrecognized Prior Service Credit .....................             7,652                8,412                9,334
       Unrecognized Net Loss .................................             2,326                1,150                  748
                                                                        --------             --------            ---------
       Total Recognized ......................................          $  3,873              $ 3,517              $ 2,235
                                                                        ========              =======              =======

     Total Recognized Amounts in the Financial
        Statements Consist of:
       Accrued Benefit Liability .............................          $ (1,912)             $(2,439)             $(3,325)
       Intangible Asset ......................................             5,785                5,956                5,560
                                                                        --------             --------             --------
       Total .................................................           $ 3,873              $ 3,517              $ 2,235
                                                                         =======              =======              =======

     Assumptions:
       Discount Rate .........................................            7.0%                  7.0%                 7.0%
       Expected Return on Plan Assets ........................            8.0%                  8.0%                 8.0%
       Rate of Compensation Increase .........................            3.0%                  3.0%                 5.0%

     Components of Net Periodic Benefit Cost:
       Service Cost...........................................         $     365             $    365             $    408
       Interest Cost .........................................               887                  829                  875
       Expected Return on Plan Assets.........................              (733)                (525)                (295)
       Amortization of Prior Service Credits..................               925                  922                  885
       Recognized Actuarial (Gain) Loss.......................               (20)                  (1)                  68
                                                                      ----------           ----------           ----------
       Net Periodic Benefit Cost..............................          $  1,424              $ 1,590              $ 1,941
                                                                        ========              =======              =======
</TABLE>



<PAGE>


13.  CAPITAL STOCK PLANS

Stockholders'  Rights Plan.  Each share of Sierra common stock,  par value $.005
per share,  contains one right (a "Right").  Each Right  entitles the registered
holder to purchase from Sierra a unit consisting of one one-hundredth  (.001) of
a share of the Sierra Series A Junior Participating Preferred Shares (a "Unit"),
par  value  $.01 per  share,  or a  combination  of  securities  and  assets  of
equivalent  value,  at  a  purchase  price  of  $100.00  per  Unit,  subject  to
adjustment. The Rights have certain anti-takeover effects. The Rights will cause
substantial  dilution to a person or group that  attempts  to acquire  Sierra on
terms not approved by Sierra's Board of Directors,  except  pursuant to an offer
conditioned on a substantial number of Rights being acquired.  The Rights should
not  interfere  with any merger or other  business  combination  approved by the
Board of  Directors  since Sierra may redeem the Rights at the price of $.02 per
Right prior to the time that a person or group has acquired beneficial ownership
of 20% or more of Sierra common stock.

Stock  Option  Plans.   The  Company  has  several  plans  that  provide  common
stock-based awards to employees and to non-employee directors. The plans provide
for the granting of Options,  Stock, and other  stock-based  awards.  Awards are
granted by a  committee  appointed  by the Board of  Directors.  Options  become
exercisable at such times and in such installments as set by the committee.  The
exercise price of each option equals the market price of the Company's  stock on
the date of grant. Stock options generally vest at a rate of 20% - 25% per year.
Options expire from one to five years after the end of the vesting period.

The following table reflects the activity of the stock option plans:

<TABLE>
<CAPTION>
                                                               Number of            Option                Weighted
                                                                 Shares              Price              Average Price
      (Number of shares in thousands)
<S>                       <C>                                     <C>          <C>        <C>              <C>
      Outstanding January 1, 1998                                 2,655        $ 6.31  -  $24.50           $17.53

         Granted.....................................               468         16.94  -   24.83            22.49
         Exercised...................................              (386)         6.31  -   23.33            14.25
         Canceled....................................                (7)         7.13  -   24.50            17.01
                                                              ---------
      Outstanding December 31, 1998..................             2,730          6.31  -   24.83            18.89

         Granted.....................................             1,436          6.69  -   21.00             9.44
         Exercised...................................                (2)         6.31  -   12.08             9.41
         Canceled....................................              (260)        11.71  -   24.83            19.65
                                                                -------
      Outstanding December 31, 1999..................             3,904          6.31  -   24.69            15.37

         Granted.....................................             2,458          3.13  -    7.19             3.87
         Exercised...................................
         Canceled....................................            (2,112)         3.75  -   24.69            18.17
                                                                -------
      Outstanding December 31, 2000 .................             4,250          3.13  -   24.69             7.31
                                                                =======

      Exercisable at December 31, 2000 ..............               674        $ 6.31  -  $24.69           $14.15
                                                               ========

      Available for Grant at
         December 31, 2000 ..........................             2,863
                                                                =======
</TABLE>


<PAGE>



The following table summarizes  information  about stock options  outstanding at
December 31, 2000:

<TABLE>
<CAPTION>
(Number of options in thousands)
                             Weighted Average                                               Weighted Average
     Range of Exercise       Contractual Life                Options                         Exercise Price
                                                 --------------------------------   --------------------------------
        Prices               Remaining in Days      Outstanding      Exercisable       Outstanding      Exercisable

<S>           <C>                  <C>                   <C>                  <C>        <C>              <C>
   $ 3.13  -  $ 7.19               3,353                 2,580                47         $ 4.04           $ 6.57
     8.00  -   17.58               1,718                 1,273               426           9.28            11.20
    19.08  -   21.17               1,367                   173                89          20.74            20.55
    22.17  -   24.69               1,373                   224               112          23.27            23.50
</TABLE>

Employee  Stock  Purchase  Plans.  The Company has employee stock purchase plans
(the  "Purchase  Plans")  whereby  employees may purchase newly issued shares of
common stock through payroll  deductions at 85% of the fair market value of such
shares on specified dates as defined in the Purchase Plans. During 2000, a total
of 415,000 shares were purchased at prices of $5.68 and $2.71 per share.  During
January 2001,  219,000  shares were purchased by employees at $2.92 per share in
connection with the Purchase Plans. In May 2000, the shareholders of the Company
approved an additional 1,250,000 shares and at December 31, 2000 the Company had
1,129,000 shares reserved for purchase under the Purchase Plans.

Accounting for  Stock-Based  Compensation.  The Company uses the intrinsic value
method in accounting for its stock-based  compensation  plans.  Accordingly,  no
compensation  cost has been  recognized  for its employee stock option plans nor
the  Purchase  Plans.  Had  compensation  cost  for  the  Company's  stock-based
compensation  plans been  determined  based on the fair value at the grant dates
for awards under those plans,  the  Company's  net income and earnings per share
for the years  ended  December  31,  would  have been  reduced  to the pro forma
amounts indicated below:

<TABLE>
<CAPTION>
                                                                 2000                  1999                1998
                                                                 ----                  ----                ----
(In thousands, except per share data)
<S>                                                           <C>                     <C>                  <C>
Net (Loss) Income                   As reported               $(199,915)              $(4,631)             $39,596
                                    Pro forma                  (203,293)               (9,204)              37,106

Net (Loss) Income Per Share         As reported            $   (7.37)                 $ (.17)              $ 1.45
                                    Pro forma                  (7.49)                   (.34)                1.35

Net (Loss) Income Per Share
    Assuming Dilution               As reported            $   (7.37)                 $ (.17)              $ 1.43
                                    Pro forma                  (7.49)                   (.34)                1.34
</TABLE>

The fair value of each option  grant is estimated on the date of grant using the
Black-Scholes   option  pricing  model  with  the  following   weighted  average
assumptions used for grants in 2000, 1999 and 1998, respectively: dividend yield
of 0% for all years; expected volatility of 52%, 43% and 37%; risk-free interest
rates of 6.60%,  5.87% and 4.46%;  and expected lives of four to five years. The
weighted average fair value of options granted in 2000, 1999 and 1998 was $2.72,
$3.77 and $9.92, respectively.

The fair value of the look-back option implicit in each offering of the Purchase
Plans is estimated on the date of grant using the  Black-Scholes  option pricing
model with the following  weighted average  assumptions used for grants in 2000,
1999  and  1998,  respectively:  dividend  yield of 0% for all  years;  expected
volatility of 46%, 45% and 32%;  risk-free  interest  rates of 5.79%,  4.66% and
5.30%; and expected lives of six months for all years.

During  1999,  the  Company  extended  by three  years the  expiration  date for
1,035,000  options covering shares that would have expired in 1999 and 2000. The
exercise  price per share for these  options  ranges from  $10.92 to $20.50.  No
expense was recognized in the  consolidated  statement of operations  related to
these  options.  Expense of $1,445,000 is included in the Pro forma  information
presented.

Due to the fact that the  Company's  stock option  programs vest over many years
and  additional  awards are made each year,  the above pro forma numbers are not
indicative of the financial impact had the disclosure provisions of Statement of
Financial   Accounting   Standards   No.  123,   "Accounting   for   Stock-Based
Compensation"  been applicable to all years of previous option grants. The above
numbers do not include the effect of options granted prior to 1995.

14.  CONSOLIDATED STATEMENTS OF CASH FLOWS SUPPLEMENTAL INFORMATION

Supplemental  statements of cash flows  information for the years ended December
31, 2000, 1999 and 1998 is presented below:
<TABLE>
<CAPTION>

                                                                    2000               1999                   1998
                                                                ------------       ------------           ------------
      (In thousands)
Cash Paid During the Year for Interest
<S>                                                                 <C>                 <C>                    <C>
     (Net of Amount Capitalized).........................           $28,811             $17,721                $8,737
Cash (Received) Paid During the Year
     for Income Taxes....................................           (10,923)             (4,590)               15,003

Noncash Investing and Financing Activities:
     Liabilities Assumed in Connection with
       Corporate Acquisitions............................                                                      53,461
     Stock Issued for Exercise of Options
       and Related Tax Benefits..........................                                     1                 1,284
     Additions to Capital Leases.........................             1,835                                     3,070
</TABLE>

Acquisitions.  On October 31, 1998,  TXHC  completed the  acquisition of certain
assets of Kaiser  Foundation  Health Plan of Texas,  a health plan  operating in
Dallas/Ft.  Worth and Permanente  Medical  Association of Texas, a 150 physician
medical group operating in that area. The purchase price was $124 million, which
was net of $20  million  in  operating  cost  support  paid to  Sierra by Kaiser
Foundation Hospitals in four quarterly installments following the closing of the
transaction. The purchase price allocation included a premium deficiency reserve
of approximately $25 million for estimated losses on the contracts acquired from
Kaiser-Texas.

On December 31, 1998, Sierra completed the acquisition of the Nevada health care
business of Exclusive Healthcare,  Inc. ("EHI"),  United of Omaha Life Insurance
Company and United World Life Insurance  Company  ("United"),  all of which were
subsidiaries of Mutual of Omaha Insurance  Company.  Effective June 1, 1999, the
company  completed the purchase of the Texas  operations  of EHI  (approximately
1,000 HMO members) and United's related preferred provider  organization ("PPO")
that is part of the dual option HMO/PPO plan.

In the first quarter of 1998,  the Company  purchased  three medical  clinics in
southern Nevada for approximately $7.3 million.

15.  CERTAIN MEDICAL EXPENSES

During 1999, the Company  reported a premium  deficiency  medical charge of $8.1
million related to losses in  under-performing  markets primarily in Arizona and
rural Nevada,  all of which was used during 1999. In the fourth quarter of 1999,
the Company recorded a premium deficiency charge of $10.0 million related to HMO
contracts  in the Texas  market  for the year  2000.  Also  recorded  in medical
expenses  during the fourth  quarter was $11.2 million  primarily  related to an
adjustment to the estimate for medical expenses  recorded in previous years, and
$6.8 million  primarily  related to  contractual  settlements  with providers of
medical services.

In the first  quarter of 2000,  the  Company  recorded  $1.0  million of adverse
development related to prior years' medical claims. Included in reported medical
expenses for the second quarter of 2000 are changes in estimate charges of $29.5
million of reserve  strengthening  primarily due to adverse development on prior
periods' medical claims, as well as $15.5 million in premium  deficiency medical
expense related to under-performing markets in the Dallas/Ft.  Worth and Houston
areas. The recorded premium  deficiency  reflects  anticipated cost savings from
restructuring  and  reorganization  actions  discussed  below. In addition,  the
Company  recorded $10.2 million of other  non-recurring  medical costs primarily
relating to the write-down of medical subsidiary assets.

The total premium  deficiency  medical  reserve  utilized  during the year ended
December 31, 2000 was $20.3  million.  Management  believes  that the  remaining
premium deficiency medical reserve of $5.2 million,  as of December 31, 2000, is
adequate and that no revision to the estimate is necessary at this time.

 16.  ASSET IMPAIRMENT, RESTRUCTURING, REORGANIZATION AND OTHER COSTS

Asset Impairments:

In the first  quarter of 1999,  the  Company  recorded a charge of $3.5  million
related  to  the  write-off  of  goodwill  associated  with  the  Mohave  Valley
operations.  During the first quarter of 1999,  the Company closed all inpatient
operations at Mohave Valley  Hospital,  a 12-bed acute care facility in Bullhead
City, Arizona, and terminated approximately 45 employees.

 In the first  quarter of 2000,  the  Company  engaged a  consultant  to help it
assess the Texas operations.  In late February, the consultant issued its report
and the  Company  implemented  strategic  action  plans to turn around the Texas
operations.   These  actions  included  the  replacement  of  the  Texas  senior
management,  a  reduction  in  staffing  along with a  consolidation  of certain
services to Las Vegas and a revision of product strategy. The new management was
charged with further assessing the Dallas/Ft. Worth health care delivery system.
In May, the Company  decided  that the delivery  system,  which  emphasized  the
Company's  affiliated  medical group as the primary provider  network,  would be
replaced by an expanded network of contracted  physician groups and individuals.
In addition, the contracted hospital network would be significantly expanded. As
a result, during the second quarter of 2000, the Company adopted and announced a
further  restructuring  of the  Dallas/Ft.  Worth  operations,  which entailed a
significant  reduction of physicians and staff and the closing of several clinic
sites.  In addition,  management  decided  that the real estate  assets would be
sold.

 Management  also  adopted a plan in the second  quarter of 2000 to  discontinue
medical  delivery  operations  in Mohave  County,  Arizona  and to sell the real
estate assets located there, as well as an underperforming medical clinic in Las
Vegas.

In connection with the restructuring  plans adopted and announced by the Company
in the second quarter of 2000, the Company  re-evaluated the  recoverability  of
certain long-lived assets,  primarily  associated with the Texas operations,  in
accordance  with SFAS No. 121 and APB No. 17 and  determined  that the  carrying
values of certain goodwill and other long-lived assets were impaired.

In assessing the asset  impairment of the long-lived  assets,  the Company first
allocated a portion of related  goodwill to the fixed  assets to be disposed of,
in  accordance  with SFAS No. 121.  The fixed  assets were then  written down to
estimated fair value less costs to sell,  which was determined from  independent
valuations.  The  remainder  of the  related  goodwill  was  then  assessed  for
recoverability in accordance with APB No. 17 based on projected  discounted cash
flows.

The charges  recorded for the write-off of goodwill  totaled  $126.4 million for
the Texas operations and $15.1 million related  primarily to the Prime Holdings,
Inc. acquisition.

The charges  recorded for fixed asset  impairment  totaled $36.6 million for the
Texas operations and $9.5 million for the Arizona and Nevada operations.

During the second quarter of 2000, the Company  wrote-off  capitalized  costs of
$3.0 million  related to the  application  development of an information  system
software  project for the workers'  compensation  operations,  that was canceled
because  the  vendor  was unable to fulfill  its  contractual  obligations.  The
amounts written off included  software and consulting  costs of $1.6 million and
capitalized internal personnel costs of $1.4 million.

Restructuring and Reorganization:

In the first quarter of 1999,  the Company  incurred  $450,000 for certain legal
and contractual settlements and $400,000 to provide for the Company's portion of
the  write-off  of start-up  costs at the  Company's  equity  investee,  TriWest
Healthcare Alliance.

In the first  quarter of 2000,  the  Company  announced a  restructuring  of the
managed health care operations in Texas. As a result of this restructuring,  the
Company incurred  approximately  $1.4 million of severance pay for employees who
were terminated.  The restructuring involved changes in senior management at the
Texas facilities and the  centralization  of key services to Las Vegas.  Also in
the  first  quarter  of 2000,  the  Company  incurred  $1.5  million  of  costs,
consisting  primarily  of  consulting  fees,  in  conjunction  with a review and
reorganization of the managed care operations in Texas.

In the  second  quarter  of 2000,  the  Company  adopted  a plan  and  announced
additional  restructuring  of the managed health care  operations,  primarily in
Texas and  Arizona.  As a result of this  restructuring,  the  Company  recorded
charges in accordance with Emerging Issues Task Force Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (Including Certain Costs Incurred in a Restructuring)" of approximately
$10.6  million.  Of the costs  recorded,  $5.9 million was for  severance,  $2.9
million was related to clinic  closures and lease  termination  and $1.8 million
was for other costs.  The severance  charge resulted from the termination of 315
employees at the Company's subsidiaries and affiliated medical groups.

As  compared  to  the  quarter  ended  June  30,  2000,  the  restructuring  and
reorganization activities resulted in cash flow savings of approximately $2.0 to
$3.0 million per quarter beginning in the fourth quarter of 2000.

Premium Deficiency Maintenance:

Based on the Company's  Texas  operations  financial  projections  for 2000, the
Company recorded a $21.0 million premium  deficiency at the end of 1999. Of this
amount,  $10.0  million was recorded in medical  expenses and $11.0  million was
recorded in asset impairment, restructuring, reorganization and other costs. The
$11.0 million was an estimate of general and administrative  costs, in excess of
those  covered by premiums,  the Company  expected to be incurred to service the
Dallas/Ft. Worth contracts.

The premium  deficiency  medical costs of $10.4 million,  recorded in the second
quarter of 2000, was an estimate of general and administrative  costs, in excess
of those  covered by  premiums,  the  Company  would  incur to service the Texas
contracts.   The  amount   reflects   anticipated   cost   reductions  from  the
restructuring and reorganization actions noted above.

Other:

During the fourth  quarter of 1998,  the Company  incurred  settlement  expenses
totaling $8 million related to the settlement of a competitor's  protest for the
Region 1 TRICARE  contract.  Also during the fourth quarter of 1998, the Company
incurred integration, transition and other charges totaling $3.1 million related
primarily to the acquisition of the Texas operations of Kaiser Foundation Health
Plan of Texas. In addition, the Company incurred certain legal expenses totaling
$2.7 million,  resulting  primarily from the TRICARE  settlement and acquisition
and integration activity.

The $3.4 million of charges in the fourth quarter of 1999 consisted primarily of
legal and contractual settlements.

The  remaining  $6.1  million of costs  recorded  in the second  quarter of 2000
relate primarily to the write-down of certain  receivables as well as an accrual
for legal settlements.

The  table  below  presents  a  summary  of  asset  impairment,   restructuring,
reorganization and other costs for the years indicated.


<TABLE>
<CAPTION>
                                                        Restructuring          Premium
                                             Asset            and            Deficiency
(In thousands)                            Impairment    Reorganization       Maintenance       Other             Total
                                          ----------    --------------       -----------       -----             -----

Balance, January 1, 1998
<S>                                    <C>                  <C>             <C>              <C>              <C>
Charges recorded...................    $          0         $       0      $        0        $ 13,851         $  13,851
Cash used..........................                                                           (11,032)          (11,032)
Noncash activity...................                                                                                 -
Changes in estimate................                                                             _____               -
Balance, December 31, 1998.........                                                             2,819             2,819

Charges recorded...................           3,509               850          11,000           3,449            18,808
Cash used..........................                              (850)                         (2,819)           (3,669)
Noncash activity...................          (3,509)                                                             (3,509)
Changes in estimate................         _______             _____         _______          ______               -
Balance, December 31, 1999.........                                            11,000           3,449            14,449

Charges recorded...................         190,490            13,492          10,358           6,100           220,440
Cash used..........................                            (9,143)        (12,080)           (502)          (21,725)
Noncash activity...................        (190,490)                                           (3,800)         (194,290)
Changes in estimate................        ________            ______          ______          ______               -
Balance, December 31, 2000.........$          -              $  4,349        $  9,278        $  5,247        $   18,874
                                    ================          ========        ========        ========        ==========
</TABLE>

The  remaining  restructuring  and  reorganization  costs  of $4.3  million  are
primarily  related  to  the  cost  to  provide  malpractice   insurance  on  our
discontinued  affiliated medical groups,  clinic closures and lease terminations
in Houston and Arizona.  The remaining other costs of $5.2 million are primarily
related to legal claims.  Management  believes that the remaining reserves as of
December  31, 2000 are  adequate  and that no  revisions  to the  estimates  are
necessary at this time.


<PAGE>



17.     UNAUDITED QUARTERLY INFORMATION
        (In thousands, except per share data)
<TABLE>
<CAPTION>
                                                                 March             June              September         December
                                                                  31                30                  30                31
                                                           ---------------   ---------------   ---------------  ---------------
Year Ended December 31, 2000:
<S>                                                              <C>              <C>               <C>               <C>
  Operating Revenues....................................         $327,176         $337,054          $377,482          $351,266
  Operating Income (Loss)...............................            7,928         (279,145)           10,029            10,678
  Income (Loss) Before Income Taxes ....................            2,340         (284,294)            3,938             3,876
  Net Income (Loss).....................................            1,556         (206,717)            2,669             2,577
  Earnings (Loss) Per Share.............................              .06            (7.64)              .10               .09
  Earnings (Loss) Per Share Assuming Dilution...........              .06            (7.64)              .10               .09

Year Ended December 31, 1999:
  Operating Revenues....................................         $318,074         $315,818          $322,570          $327,349
  Operating Income (Loss)...............................            2,989           16,972            17,436           (32,983)
  (Loss) Income Before Income Taxes ....................           (1,060)          12,846            13,267           (35,619)
  Net (Loss) Income.....................................             (706)           8,556             8,863           (21,344)
  (Loss) Earnings Per Share.............................             (.03)             .32               .33              (.79)
  (Loss) Earnings Per Share Assuming Dilution...........             (.03)             .32               .33              (.79)
</TABLE>

18.     SEGMENT REPORTING

The Company has three  reportable  segments  based on the  products and services
offered:  managed  care  and  corporate  operations,  military  health  services
operations  and  workers'  compensation  operations.  The managed  care  segment
includes managed health care services  provided through HMOs,  managed indemnity
plans,  third-party  administrative services programs for employer-funded health
benefit plans,  multi-specialty  medical groups,  other  ancillary  services and
corporate  operations.  The  military  health  services  segment  administers  a
five-year, managed care federal contract for the Department of Defense's TRICARE
program  in  Region  1.  The  workers'  compensation  segment  assumes  workers'
compensation  claims  risk in  return  for  premium  revenues  and  third  party
administrative services.

The Company  evaluates each  segment's  performance  based on segment  operating
profit. The accounting  policies of the operating segments are the same as those
described in the summary of significant accounting policies (except as described
in the notes below).


<PAGE>


Information concerning the operations of the reportable segments is as follows:
(In thousands)
<TABLE>
<CAPTION>
                                                     Managed Care            Military           Workers'
                                                     and Corporate         Health Services     Compensation
                                                     Operations             Operations         Operations         Total
                                                     ----------             ----------         ----------         -----
Year Ended December 31, 2000
<S>                                                     <C>                   <C>                 <C>          <C>
Medical Premiums..............................          $869,875              $                  $             $   869,875
Military Contract Revenues....................                                $330,352                             330,352
Specialty Product Revenues....................             8,822                                  $127,022         135,844
Professional Fees.............................            35,607                                                    35,607
Investment and Other Revenues.................             5,878                   905              14,517          21,300
                                                     -----------          ------------          ----------   -------------
   Total Revenue..............................          $920,182              $331,257            $141,539     $1,392,978
                                                        ========              ========            ========      ==========

Segment Operating Profit (1)..................         $  23,200            $    7,992           $  18,328    $     49,520
Interest Expense and Other....................           (20,445)                 (611)             (2,574)        (23,630)
Changes in Estimate Charges (2)...............           (56,297)                                  (23,293)        (79,590)
Asset Impairment, Restructuring,
     Reorganization and Other Costs...........          (217,440)                                   (3,000)       (220,440)
                                                      ----------       ---------------         -----------    ------------
Net (Loss) Income Before Income Taxes.........         $(270,982)           $    7,381           $ (10,539)    $  (274,140)
                                                       =========            ==========           =========     ===========

Segment Assets................................          $515,978              $115,520            $533,602      $1,165,100
Capital Expenditures..........................            17,807                   717                 839          19,363
Depreciation and Amortization.................            25,451                 2,926               1,538          29,915

Year Ended December 31, 1999
Medical Premiums..............................          $827,779                                               $   827,779
Military Contract Revenues....................                                 $287,398                            287,398
Specialty Product Revenues....................             9,869                                 $  84,352          94,221
Professional Fees.............................            51,842                                                    51,842
Investment and Other Revenues.................             6,445                    706             15,420          22,571
                                                     -----------           ------------         ----------   --------------
   Total Revenue..............................          $895,935               $288,104          $  99,772      $1,283,811
                                                        ========               ========          =========      ==========

Segment Operating Profit (1)..................         $  36,538              $  11,612          $  21,091    $     69,241
Interest Expense and Other....................           (10,814)                  (910)            (3,256)        (14,980)
Changes in Estimate Charges (2)...............           (36,099)                                   (9,920)        (46,019)
Asset Impairment, Restructuring,
     Reorganization and Other Costs...........           (18,808)                                                  (18,808)
                                                       ---------         --------------     --------------   -------------
Net (Loss) Income Before Income Taxes.........         $ (29,183)             $  10,702         $    7,915    $    (10,566)
                                                       =========              =========         ==========    ============

Segment Operating Assets......................          $650,505              $  76,187           $403,420      $1,130,112
Capital Expenditures..........................            53,741                    570              4,201          58,512
Depreciation and Amortization.................            23,891                  2,758              1,430          28,079

Year Ended December 31, 1998
Medical Premiums..............................          $609,404                                               $   609,404
Military Contract Revenues....................                                 $204,838                            204,838
Specialty Product Revenues....................            12,843                                  $135,525         148,368
Professional Fees.............................            45,363                                                    45,363
Investment and Other Revenues.................             8,581                    407             20,242          29,230
                                                     -----------           ------------         ----------   -------------
   Total Revenue..............................          $676,191               $205,245           $155,767      $1,037,203
                                                        ========               ========           ========      ==========

Segment Operating Profit (1)..................         $  43,314             $    8,620          $  12,847    $     64,781
Interest Expense and Other....................            (2,610)                  (573)            (3,998)         (7,181)
Changes in Estimate Charges (2)...............                                                       9,643           9,643
Asset Impairment, Restructuring, Reorganization
   and Other Costs............................                                   (4,869)            (8,982)
                                                                            -----------        ----------- ---------------
      (13,851)
Net Income (Loss) Before Income Taxes.........         $  35,835            $     ( 935)        $   18,492    $     53,392
                                                       =========            ===========         ==========    ============

Segment Assets................................          $593,332              $  73,877           $377,911      $1,045,120
Capital Expenditures..........................            32,520                  5,015              3,208          40,743
Depreciation and Amortization.................            15,545                  2,167              1,551          19,263
</TABLE>

(1)  The segment  operating  profit  excludes the effects of changes in estimate
     charges.
(2)  Represents  changes in estimate charges in the current year for services or
     liabilities  of a prior  year  that  are  reclassified  to  either  Medical
     Expenses or Specialty  Product Expenses for presentation in accordance with
     accounting principles generally accepted in the United States of America.


<PAGE>


ITEM 9.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
          FINANCIAL  DISCLOSURE

      None.

                                    PART III


ITEM 10.      DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information set forth under the caption  "Election of Directors" in Sierra's
Proxy  Statement for its 2001 Annual Meeting of  Stockholders,  is  incorporated
herein by reference.


ITEM 11.      EXECUTIVE COMPENSATION

The information set forth under the caption "Compensation of Executive Officers"
in Sierra's  Proxy  Statement for its 2001 Annual  Meeting of  Stockholders,  is
incorporated herein by reference.


ITEM 12.      SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The  information  set forth under the  caption  "Security  Ownership  of Certain
Beneficial  Owners and  Management"  in Sierra's  Proxy  Statement  for its 2001
Annual Meeting of Stockholders, is incorporated herein by reference.


ITEM 13.      CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information set forth under the caption "Certain  Relationships  and Related
Transactions"  in  Sierra's  Proxy  Statement  for its 2001  Annual  Meeting  of
Stockholders, is incorporated herein by reference.



<PAGE>


                                     PART IV


ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a)(1) The following  consolidated financial statements are included in Part II,
Item 8 of this Report:

<TABLE>
<CAPTION>
                                                                                                     Page
                                                                                                     ----

<S>                                                                                             <C>
        Report of Independent Auditors...........................................................40
        Consolidated Balance Sheets at December 31, 2000 and 1999................................      41
        Consolidated Statements of Operations for the Years Ended
           December 31, 2000, 1999 and 1998......................................................      42
        Consolidated Statements of Stockholders' Equity
           for the Years Ended December 31, 2000, 1999 and 1998..................................      43
        Consolidated Statements of Cash Flows for the Years Ended
           December 31, 2000, 1999 and 1998......................................................      44
        Notes to Consolidated Financial Statements...............................................      45

(a)(2) Financial Statement Schedules:

        Schedule I           -   Condensed Financial Information of Registrant...................     S-1

        Schedule V           -   Supplemental Information Concerning
                                   Property-Casualty Insurance ..................................     S-4
Other Information:

Section 403.04 b             -   Exhibit of Redundancies (Deficiencies) .........................     S-5
</TABLE>

All other schedules are omitted  because they are not applicable,  not required,
or because the required information is in the consolidated  financial statements
or notes thereto.

(a)(3)     The  following  exhibits  are  filed as part of, or  incorporated  by
           reference  into,  this Report as  required by Item 601 of  Regulation
           S-K:

       (3.1)      Articles of Incorporation, together with amendments thereto to
                  date,  incorporated  by reference to the  Registrant's  Annual
                  Report on Form 10-K for the  fiscal  year ended  December  31,
                  1990.

       (3.2)      Certificate  of Division of Shares into Smaller  Denominations
                  of the Registrant, incorporated by reference to Exhibit 3.3 to
                  the  Registrant's  Annual  Report on Form 10-K for the  fiscal
                  year ended December 31, 1992.

       (3.3)      Amended and  Restated  Bylaws of the  Registrant,  as amended
                  through March 1, 2000.

       (4.1)      Rights  Agreement,  dated as of June 14, 1994,  between the
                  Registrant and Continental  Stock Transfer & Trust Company,
                  incorporated  by reference to Exhibit  3.4  to  the
                  Registrant's  Registration  Statement  on  Form  S-3
                  effective October 11, 1994 (Reg. No. 33-83664).

       (4.2)      Specimen   Common  Stock   Certificate,   incorporated  by
                  reference  to  Exhibit  4(e)  to  the Registrant's
                  Registration  Statement on Form S-8 as filed and  effective on
                  August 5, 1994 (Reg. No. 33-82474).

       (4.3)      Form of Indenture of 7 1/2%  convertible  subordinated
                  debentures  due 2001 from CII  Financial, Inc. to
                  Manufacturers  Hanover Trust Company as Trustee dated
                  September 15, 1991,  incorporated by  reference  to  Exhibit
                  4.2 of  Post-Effective  Amendment  No. 1 on Form S-3 to
                  Registration Statement on Form S-4 dated October 6, 1995
                  (Reg. No. 33-60591).

       (4.4)      First  Supplemental  Indenture  between CII Financial,  Inc.,
                  Sierra Health  Services,  Inc. and Chemical Bank as Trustee,
                  dated as of October 31, 1995, to Indenture  dated  September
                  15, 1991, incorporated  by  reference  to  Exhibit  4.3 of
                  Post-Effective  Amendment  No. 2 on Form S-3 to Registration
                  Statement on form S-4 dated October 31, 1995 (Reg. No.
                  33-60591).

      (10.1)      Administrative  Services  agreement between Health Plan of
                  Nevada,  Inc. and the Registrant dated December 1,  1987,
                  incorporated by reference to Exhibit 10.17 to  Registrant's
                  Annual Report on Form 10-K for the fiscal year ended December
                  31, 1991.

      (10.2)      Administrative  Services  agreement  between Sierra Health and
                  Life Insurance Company, Inc. and the Registrant dated April 1,
                  1989,   incorporated   by  reference   to  Exhibit   10.18  to
                  Registrant's  Annual  Report on Form 10-K for the fiscal  year
                  ended December 31, 1991.

      (10.3)      Agreement  between Health Plan of Nevada,  Inc. and the United
                  States  Health Care  Financing  Administration  dated July 24,
                  1992,  incorporated  by  reference  to  Exhibit  10.18  to the
                  Registrant's  Annual  Report on Form 10-K filed for the fiscal
                  year ended December 31, 1992.

      (10.4)      Amended and Restated Credit Agreement dated as of December 15,
                  2000, among Sierra Health Services,  Inc. as Borrower, Bank of
                  America   National   Trust   and   Savings    Association   as
                  Administrative  Agent and Issuing Bank,  First Union  National
                  Bank  as   Syndication   Agent,   and  the   Other   Financial
                  Institutions  Party  Thereto,  incorporated  by  reference  to
                  Exhibit 1 to the Registrant's Current Report on Form 8-K filed
                  December 22, 2000.


      (10.5)      Compensatory Plans, Contracts and Arrangements.

                  (1)   Employment Agreement with Jonathon W. Bunker dated
                        November 16, 2000.

                  (2)   Employment Agreement with Frank E. Collins dated
                        November 16, 2000.

                  (3)   Employment  Agreement  with  William  R.  Godfrey  dated
                        December 10, 1999,  incorporated by reference to Exhibit
                        10.8 to Registrant's  Annual Report on Form 10-K for the
                        fiscal year ended December 31, 1999.

                  (4)   Employment  Agreement  with  Laurence  S.  Howard  dated
                        December 10, 1999  incorporated  by reference to Exhibit
                        10.8 to Registrant's  Annual Report on Form 10-K for the
                        fiscal year ended December 31, 1999.

                  (5)   Employment Agreement with Anthony M. Marlon, M.D. dated
                        November 16, 2000.

                  (6)   Employment Agreement with Erin E. MacDonald dated
                        November 16, 2000.

                  (7)   Employment Agreement with Michael A. Montalvo dated
                        November 16, 2000.

                  (8)   Employment Agreement with Marie H. Soldo dated
                        November 16, 2000.

                  (9)   Employment Agreement with Paul H. Palmer dated
                        November 16, 2000.

                  (10)  Form of Split Dollar Life  Insurance  Agreement
                        effective  as of August 25,  1998,  by and between
                        Sierra Health Services,  Inc., and Jonathon W. Bunker,
                        Ria Marie Carlson,  Frank E. Collins,  William R.
                        Godfrey,  Laurence S. Howard,  Erin E.  MacDonald,
                        Anthony M. Marlon, M.D.,  Kathleen M. Marlon,  Michael
                        A. Montalvo,  John A. Nanson,  M.D., Paul H. Palmer and
                        Marie H. Soldo.

(11)     Sierra Health Services,  Inc.  Deferred  Compensation  Plan effective
                        May 1,  1996 as Amended and Restated Effective January
                        1, 2001.

                  (12)  Sierra Health  Services,  Inc.  Supplemental  Executive
                        Retirement  Plan effective July 1, 1997, as Amended and
                        Restated January 1, 2001.

                  (13)  Sierra  Health  Services,  Inc.  Supplemental  Executive
                        Retirement   Plan   effective   as  of  March  1,  1998,
                        incorporated   by   reference   to  Exhibit  10  to  the
                        Registrant's  Quarterly  Report  on  Form  10-Q  for the
                        fiscal quarter ended March 31, 1998.

                  (14)  The Registrant's  Second Amended and Restated 1986 Stock
                        Option  Plan  as  amended  to  date,   incorporated   by
                        reference to Exhibit  10.24 to the  Registrant's  Annual
                        Report on Form 10-K for the fiscal  year ended  December
                        31, 1992.

                  (15)  The Registrant's  Second Restated  Capital  Accumulation
                        Plan, as amended to date,  incorporated  by reference to
                        Exhibit 10.24 to the Registrant's  Annual Report on Form
                        10-K for the fiscal year ended December 31, 1992.

                  (16)  Sierra  Health  Services,   Inc.  Management   Incentive
                        Compensation  Plan  incorporated by reference to Exhibit
                        10.8 to the Registrant's  Annual Report on Form 10-K for
                        the fiscal year ended December 31, 1999.

                  (17)  Sierra Health  Services,  Inc. 1995 Long-Term  Incentive
                        Plan,  as amended and  restated  through  June 13, 2000,
                        incorporated   by  reference  to  Exhibit  10.6  to  the
                        Registrant's  Quarterly  Report  on  Form  10-Q  for the
                        fiscal quarter ended September 30, 2000.

                  (18)  Sierra   Health   Services,   Inc.   1995   Non-Employee
                        Directors'  Stock Plan, as amended and restated  through
                        August 10,  2000,  incorporated  by reference to Exhibit
                        10.7 to the  Registrant's  Quarterly Report on Form 10-Q
                        for the fiscal quarter ended September 30, 2000.

      (10.6)      Agreement and Plan of Merger dated as of June 12, 1995 among
                  the Registrant,  Health  Acquisition Corp.,  and CII
                  Financial,  Inc.,  incorporated by reference to the Report on
                  Form 8-K dated June 13, 1995, as amended.

      (10.7)      Loan  Agreement  dated August 11, 1997 between the Company and
                  Anthony  M.  Marlon for a  revolving  credit  facility  in the
                  maximum  aggregate  amount  of  $3,000,000,   incorporated  by
                  reference to the  Registrant's  Quarterly  Report on Form 10-Q
                  for the fiscal quarter ended September 30, 1997.

(10.8)   Amendment  No. 1 to Loan  Agreement  dated August 11, 1997 between the
         Company and Anthony M. Marlon for a revolving credit facility in the
         maximum aggregate amount of $3,000,000.

(10.9)   Amendment  No. 2 to Loan  Agreement  dated August 11, 1997 between the
         Company and Anthony M. Marlon for a revolving credit facility in the
         maximum aggregate amount of $3,000,000.

(10.10)           Loan  Agreement  dated April 10, 2000  between the Company and
                  Anthony M. Marlon for a term loan of $2,500,000, incorporated
                  by reference to Exhibit 10.1 to the Registrant's Quarterly
                  Report on Form 10-Q for the fiscal quarter ended June 30,
                  2000.

     (10.11)      Collateral Assignment of Rights dated April 10, 2000 between
                  the Company and Anthony M. Marlon, incorporated by reference
                  to Exhibit 10.2 to the Registrant's Quarterly Report on Form
                  10-Q for the fiscal quarter ended June 30, 2000.

     (10.12)      Master Purchase and Sale Agreement  between Kaiser  Foundation
                  Health  Plan of Texas (as  Seller)  and HMO  Texas,  L.C.  (as
                  Buyer),  dated  June 5, 1998,  incorporated  by  reference  to
                  Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q
                  for the fiscal quarter ended June 30, 1998.*

     (10.13)      Asset Sale and Purchase  Agreement between  Permanente Medical
                  Association of Texas, a Texas Professional Association and HMO
                  Texas, L.C., a Texas Limited Liability Company,  dated June 5,
                  1998,  incorporated  by  reference  to  Exhibit  10.3  to  the
                  Registrant's  Quarterly  Report  on Form  10-Q for the  fiscal
                  quarter ended June 30, 1998.*

     (10.14)      Asset Sale and Purchase  Agreement between  Permanente Medical
                  Association of Texas,  Amendment No. 2 to Asset Sale and
                  Purchase Agreement  between  Kaiser  Foundation  Health  Plan
                  of Texas and Texas  Health   Choice,   L.C.   (formerly   HMO
                  Texas,   L.C.), incorporated  by reference to Exhibit  10.13
                  to the  Registrant's Annual Report on Form 10-K for the fiscal
                  year ended December 31, 1998.

     (10.15)      Amendment No. 2 to Asset Sale and Purchase Agreement between
                  Kaiser Foundation Health Plan of Texas and Texas Health
                  Choice, L.C. (formerly HMO Texas, L.C.), incorporated by
                  reference to Exhibit 10.13 to the Registrant's Annual Report
                  on Form 10-K for the fiscal year ended December 31, 1998.

     (10.16)      Purchase and Sale Agreement dated December 1, 2000 between
                  Sierra Health Services, Inc., Health Plan of Nevada, Inc.,
                  Sierra Health and Life Insurance Company, Inc., 2716 North
                  Tenaya Way Limited Partnership and CB Richard Ellis Corporate
                  Partners, LLC and amendments one through seven thereof.

     (10.17)      Purchase and Sale Agreement dated December 1, 2000 between
                  Sierra Health Services, Inc., Southwest Medical Associates,
                  Inc., Health Plan of Nevada, Inc., 2314 West Charleston
                  Partnership and CB Richard Ellis Corporate Partners, LLC and
                  amendments one through seven thereof.

        (21)      Subsidiaries of the Registrant (listed herein):

                  There is no  parent  of the  Registrant.  The  following  is a
                  listing of the active subsidiaries of the Registrant:

                                                                 Jurisdiction of
                                                                  Incorporation
                                                                  -------------
                  Sierra Health and Life Insurance
                        Company, Inc.                             California
                  Health Plan of Nevada, Inc.                     Nevada
                  Sierra Health-Care Options, Inc.                Nevada
                  Behavioral Healthcare Options, Inc.             Nevada
                  Family Health Care Services                     Nevada
                  Family Home Hospice, Inc.                       Nevada
                  Southwest Medical Associates, Inc.              Nevada
                  Sierra Medical Management, Inc.
                        and Subsidiaries                          Nevada
                  Southwest Realty, Inc.                          Nevada
                  Sierra Health Holdings, Inc.
                        (Texas Health Choice, L.C.)               Nevada (Texas)
                  Sierra Texas Systems, Inc.                      Texas
                  CII Financial, Inc.,
                        and Subsidiaries                          California
                  Northern Nevada Health Network, Inc.            Nevada
                  Intermed, Inc.                                  Arizona
                  Prime Holdings, Inc.
                        and Subsidiaries                          Nevada
                  Sierra Military Health Services, Inc.           Delaware
                  Sierra Home Medical Products, Inc.              Nevada
                  Nevada Administrators, Inc.                     Nevada
                  Med One Health Plan, Inc.                       Nevada

      (23.1)      Consent of Deloitte & Touche LLP

        (99)      Registrant's current report on Form 8-K filed March 20, 2001,
                  incorporated herein.

            All other Exhibits are omitted because they are not applicable.

(b)        Reports on Form 8-K

            Current  Report on Form  8-K,  filed  December  22,  2000,  with the
            Securities and Exchange  Commission in connection with the Company's
            Amended and Restated Credit Agreement.

            Current  Report  on Form  8-K,  filed  January  5,  2001,  with  the
            Securities and Exchange  Commission in connection with the Company's
            sale and leaseback transaction.


(d)        Financial Statement Schedules

           The Exhibits set forth in Item 14 (a)(2) are filed herewith.


*The agreements  contain certain  schedules and exhibits which were not included
in this filing.  The Company will furnish  supplementally  a copy of any omitted
schedule or exhibit to the Commission upon request.


<PAGE>


  SIGNATURES

Pursuant to the  requirements of Section 13 or 15(d) of the Securities  Exchange
Act of 1934, the Registrant has caused this report to be signed on its behalf by
the undersigned thereto duly authorized.

                                          SIERRA HEALTH SERVICES, INC.


                                          By:      /s/ Anthony M. Marlon, M.D.
                                                   ----------------------------
                                                   Anthony M. Marlon, M.D.

Date:  March 27, 2001


Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following  persons on behalf of the  Registrant and
in the capacities and on the dates indicated.


<TABLE>
<CAPTION>
Signature                                          Title                                     Date


<S>                                                                                                <C> <C>
/s/ Anthony M. Marlon, M.D.                        Chief Executive Officer                   March 27, 2001
-----------------------------
   Anthony M. Marlon, M.D.                         and Chairman of the Board
                                                   (Chief Executive Officer)


/s/ Paul H. Palmer                                 Vice President of Finance,                March 27, 2001
--------------------------------
   Paul H. Palmer                                  Chief Financial Officer,
                                                   and Treasurer
                                                   (Chief Accounting Officer)


/s/ Charles L. Ruthe                               Director                                  March 27, 2001
-------------------------------
   Charles L. Ruthe


/s/ William J. Raggio                              Director                                  March 27, 2001
-------------------------------
   William J. Raggio


/s/ Thomas Y. Hartley                              Director                                  March 27, 2001
-----------------------------
   Thomas Y. Hartley
</TABLE>


<PAGE>






                  SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
           SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
                 CONDENSED BALANCE SHEETS - Parent Company Only
                                 (In thousands)


<TABLE>
<CAPTION>
                                                                                               December 31,
                                                                                       2000                   1999
                                                                                 ----------------       ---------------
CURRENT ASSETS:
<S>                                                                                   <C>              <C>
     Cash and Cash Equivalents ..........................................             $  15,230        $        194
     Short-term Investments..............................................                   358               1,149
     Current Portion of Deferred Tax Asset...............................                25,803              22,684
     Prepaid Expenses and Other Current Assets...........................                 8,672               9,922
                                                                                     ----------          ----------
           Total Current Assets..........................................                50,063              33,949

PROPERTY AND EQUIPMENT - NET ............................................               134,394              71,121
EQUITY IN NET ASSETS OF SUBSIDIARIES ....................................               117,964             341,994
NOTES RECEIVABLE FROM SUBSIDIARIES ......................................                 9,435               9,517
GOODWILL   ..............................................................2,259            2,188
DEFERRED TAX ASSET.......................................................                63,829              19,696
OTHER ...................................................................                29,126              30,575
                                                                                      ---------          ----------

TOTAL ASSETS ............................................................              $407,070            $509,040
                                                                                       ========            ========

CURRENT LIABILITIES:
     Accounts Payable and Other Accrued Liabilities .....................             $  30,864           $  41,212
     Current Portion of Long-term Debt ..................................                43,113                 393
                                                                                      ---------         -----------
           Total Current Liabilities ....................................                73,977              41,605

LONG-TERM DEBT (Less Current Portion)....................................               229,804             160,000
OTHER LIABILITIES .......................................................                12,816              29,023
                                                                                      ---------          ----------
TOTAL LIABILITIES .......................................................               316,597             230,628
                                                                                       --------           ---------

STOCKHOLDERS' EQUITY:
     Capital Stock ......................................................                   144                 142
     Additional Paid-in Capital .........................................               177,493             175,915
     Treasury Stock .....................................................               (22,789)            (22,789)
     Accumulated Other Comprehensive Income .............................                (5,667)            (16,063)
     (Accumulated Deficit) Retained Earnings ............................               (58,708)            141,207
                                                                                      ---------           ---------
           Total Stockholders' Equity ...................................                90,473             278,412
                                                                                      ---------           ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY...............................              $407,070            $509,040
                                                                                       ========            ========
</TABLE>


Note:     Scheduled  maturities of long-term  debt,  including the principal
          portion of obligations  under capital leases, are as follows:
          (In thousands)

<TABLE>
<CAPTION>
     Year Ending December 31,
<S>       <C>                                                                         <C>
          2001...........................................................             $  43,113
          2002.............................................................                12,546
          2003.............................................................               118,606
          2004.............................................................
          2005.............................................................
          Thereafter.......................................................                98,652
                                                                                       ----------
              Total......................................................              $272,917
                                                                                       ========
</TABLE>


<PAGE>


                  SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
     SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)
             CONDENSED STATEMENT OF OPERATIONS - Parent Company Only
                                 (In thousands)


<TABLE>
<CAPTION>
                                                                           Year Ended December 31,
                                                               ----------------------------------------------
                                                                    2000                1999           1998
                                                              ----------------    -----------------------------
OPERATING REVENUES:
<S>                                                                  <C>                <C>              <C>
    Management Fees........................................          $ 61,101           $52,109          $52,773
Subsidiary Dividends.......................................             5,137             9,700            4,085
Investment and Other Income................................             7,320             4,600            5,564
                                                                    ---------         ---------         --------
Total Operating Revenues...................................            73,558            66,409           62,422
                                                                     --------          --------          -------

GENERAL AND ADMINISTRATIVE EXPENSES:
     Depreciation..........................................            10,650             6,311            5,329
     Other.................................................            39,746            43,789           34,715
     Asset Impairment, Restructuring,
          Reorganization and Other Costs...................             8,455            14,552            4,569
                                                                      -------          --------          -------
Total General and Administrative...........................            58,851            64,652           44,613

INTEREST EXPENSE AND OTHER, NET............................           (16,117)          (12,741)          (2,566)

EQUITY IN UNDISTRIBUTED
     (LOSS) EARNINGS OF SUBSIDIARIES.......................          (260,382)          (10,461)          28,364
                                                                    ---------          ---------         -------

(LOSS) INCOME BEFORE INCOME TAXES..........................          (261,792)          (21,445)          43,607

BENEFIT (PROVISION) FOR
      INCOME TAXES.........................................            61,877            16,814           (4,011)
                                                                    ---------          --------         ---------

NET (LOSS) INCOME..........................................         $(199,915)         $ (4,631)         $39,596
                                                                    =========          ========          =======
</TABLE>


<PAGE>






                  SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
     SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)
            CONDENSED STATEMENTS OF CASH FLOWS - Parent Company Only
                                 (In thousands)
<TABLE>
<CAPTION>
                                                                                              Year Ended December 31,
                                                                                   -------------------------------------------------
                                                                                       2000               1999              1998
                                                                                  --------------     --------------    -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S>                                                                                  <C>                 <C>               <C>
      Net (Loss) Income....................................................          $(199,915)          $(4,631)          $39,596
Adjustments to Reconcile Net (Loss) Income to Net Cash
          Provided by (Used for) Operating Activities:
          Depreciation and Amortization....................................             10,755             6,398             5,416
          Provision for Property Impairment ...............................              3,604
          Equity in Undistributed Earnings (Loss) of Subsidiaries..........            260,382            10,461           (28,364)
      Change in Assets and Liabilities.....................................            (71,138)          (14,505)            8,021
                                                                                    ----------           --------        ---------
                 Net Cash Provided by (Used for) Operating Activities......              3,688            (2,277)           24,669
                                                                                   -----------          ---------         --------

CASH FLOWS FROM INVESTING ACTIVITIES:
      Capital Expenditures ................................................             (5,527)          (31,804)          (22,294)
      Property and Equipment Dispositions..................................              9,920
      Decrease (Increase) in Investments...................................                836             2,655            (1,492)
Dividends from Subsidiaries................................................              5,137             9,700             4,085
Acquisitions, Net of Cash Acquired ........................................                               (3,000)           (7,500)
      Dispositions, Net of Cash Disposed ..................................                                                  1,373
      Increase in Net Assets in Subsidiaries...............................            (69,800)           (7,080)         (125,488)
                                                                                     ---------          --------          --------
          Net Cash Used for Investing Activities ..........................            (59,434)          (29,529)         (151,316)
                                                                                     ---------           -------          --------

CASH FLOWS FROM FINANCING ACTIVITIES:
      Proceeds from Long-term Borrowing ...................................             91,520            79,000           166,000
      Reductions in Long-term Obligations and
          Payments on Capital Leases.......................................            (22,400)          (49,469)          (45,424)
Proceeds from Note Receivable to Subsidiaries..............................                 82               160                67
      Purchase of Treasury Stock ..........................................                               (7,968)           (9,220)
      Exercise of Stock in Connection with Stock Plans.....................              1,580             2,332             8,054
                                                                                    ----------           -------        ----------
Net Cash Provided by Financing Activities..................................             70,782            24,055           119,477
                                                                                     ---------            ------          --------

Net Increase (Decrease) in Cash and Cash Equivalents.......................             15,036            (7,751)           (7,170)
Cash and Cash Equivalents at Beginning of Year.............................                194             7,945            15,115
                                                                                   -----------          --------          --------
Cash and Cash Equivalents at End of Year...................................           $ 15,230          $    194            $7,945
                                                                                      ========          ========            ======



Supplemental condensed statements of cash flows information:

Cash Paid During the Year for Interest
      (Net of Amount Capitalized)..........................................            $21,734          $ 11,210           $ 2,030
Cash (Received) Paid During the Year for Income Taxes......................            (11,286)           (4,702)           14,788

Noncash Investing and Financing Activities:
      Stock Issued for Exercise of Options
          and Related Tax Benefits.........................................                                    1             1,284
      Liabilities Assumed in Connection
          with Corporate Acquisition.......................................                                                  1,233

      Addition to capital leases...........................................              1,835
</TABLE>



<PAGE>


                          SIERRA HEALTH SERVICES, INC.
                            SUPPLEMENTAL INFORMATION
                    CONCERNING PROPERTY - CASUALTY INSURANCE
                             (In thousands)

<TABLE>
<CAPTION>
                                                Gross
                                               Reserves
                                  Deferred    for Unpaid
                                   Policy     Claims and    Discount if any                  Gross          Net
                                 Acquisition  Adjustment      Deducted in     Unearned      Earned      Investment
Affiliation With Registrant         Costs      Expenses        Column C       Premiums     Premiums       Income
Column A                          Column B     Column C        Column D       Column E     Column F      Column G
--------                          --------     --------        --------       --------     --------      --------

Consolidated Property and
  Casualty Entities of CII
  Financial, Inc. for
Years Ended:
<S>           <C> <C>            <C>           <C>            <C>              <C>          <C>          <C>
     December 31, 2000 ...       $  2,015      $374,554       $      0         $ 13,493     $203,075     $ 15,074
     December 31, 1999 ...          2,378       244,394              0           13,300      146,682       15,776
     December 31, 1998 ...          1,804       212,263              0           11,158      154,104       18,241
</TABLE>
<TABLE>
<CAPTION>
                                      Claims & Claim
                                        Adjustment
                                    Expenses Incurred       Amortization
                                       Related to           of Deferred       Paid Claims
                                   ---------------------      Policy          and Claims    Direct
                                     (1)         (2)        Acquisition       Adjustment   Premiums
                                   Current    Prior Year       Costs           Expenses     Written
Column A                            Year       Column H       Column I         Column J     Column K
--------                            ----       --------       --------         --------     --------

Consolidated Property and
  Casualty Entities of CII
  Financial, Inc. for
Years Ended:
<S>           <C> <C>            <C>           <C>             <C>              <C>          <C>
     December 31, 2000 ...       $ 86,587      $ 23,293        $ 21,386         $ 88,388     $203,268
     December 31, 1999 ...         51,541         9,920          11,260          101,623      148,824
     December 31, 1998 ...        103,990        (9,643)         24,783          101,523      153,914
</TABLE>




<PAGE>





                                       S-5


                  SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
                                SECTION 403.04.b
                     EXHIBIT OF REDUNDANCIES (DEFICIENCIES)
                                 (In thousands)
<TABLE>

<CAPTION>
                             Year ended December 31
--------------------------------------------------------------------------------
<S>                    <C>        <C>        <C>        <C>        <C>        <C>
                       2000       1999       1998       1997       1996       1995
                     --------   --------   --------   --------   --------   --------
Losses and LAE
    Reserve.........  $374,554   $244,394   $212,264   $202,699   $187,776   $182,318
Less Reinsurance
    Recoverables (1)   218,757    110,089     37,797     21,056     15,676     25,871
                       -------   --------   --------   --------   --------   --------

Net Loss and LAE
    Reserves .......   155,797    134,305    174,467    181,643    172,100    156,447

Net Reserve
  Re-estimated as of:
    1 Year Later ...              157,598    184,386    172,000    163,130    141,163
    2 Years Later ..                         204,029    173,596    146,987    132,193
    3 Years Later ..                                    186,794    140,563    113,766
    4 Years Later ..                                               146,266    102,652
    5 Years Later ..                                                          104,249
    6 Years Later ..
    7 Years Later ..
    8 Years Later ..
    9 Years Later ..
    10 Years Later..

Cumulative Redundancy
    (Deficiency) ...              (23,293)   (29,563)    (5,151)    25,834     52,198

Cumulative Net Paid
    as of:
    1 Year Later ...               61,522     80,416     71,933     56,977     45,731
    2 Years Later ..                         124,191    117,794     91,765     70,854
    3 Years Later ..                                    143,369    113,054     83,674
    4 Years Later ..                                               125,024     91,115
    5 Years Later ..                                                           95,609
    6 Years Later ..
    7 Years Later ..
    8 Years Later ..
    9 Years Later ..
    10 Years Later..

Net Reserve.........   155,797    134,305    174,467    181,643    172,100    156,447
Reins. Recoverables.   218,757    110,089     37,797     21,056     15,676     25,871
                       -------   -------- ----------   --------   --------   --------
Gross Reserve ......  $374,554    244,394    212,264    202,699    187,776    182,318
                      ========    -------    -------    -------    -------    -------

Net Re-estimated
  Reserve ..........              157,598    204,029    186,794    146,266    104,249
Re-estimated Reins.
    Recoverables ...              146,890     49,260     22,910     16,847     26,989
                               ----------   --------    -------    -------    -------
Gross Re-estimated
    Reserve ........              304,488    253,289    209,704    163,113    131,238
                                ---------   --------    -------    -------    -------
Gross Cumulative
    Redundancy
      (Deficiency)..             $(60,094) $ (41,025)  $ (7,005)   $24,663   $ 51,080
                                 ========  ==========  =========   =======   ========
</TABLE>



<TABLE>
<CAPTION>
<S>                       <C>        <C>        <C>       <C>          <C>
                          1994       1993       1992      1991         1990
                        --------   --------   --------  ---------   ---------
Losses and LAE
    Reserve.........   $190,962   $200,356   $178,460   $112,749    $67,593
Less Reinsurance        29,342     25,841     20,207
    Recoverables (1)   --------   --------   --------


Net Loss and LAE
    Reserves .......    161,620    174,515    158,253

Net Reserve
  Re-estimated as of:   139,741    160,562    154,388    140,815    83,841
    1 Year Later ...    125,279    141,100    147,167    142,447    96,011
    2 Years Later ..    117,792    126,483    134,747    143,433    97,142
    3 Years Later ..    102,955    122,517    132,193    137,143    97,942
    4 Years Later ..     95,997    114,443    131,112    135,249    94,852
    5 Years Later ..     95,954    112,284    127,258    135,299    93,561
    6 Years Later ..               111,883    125,936    133,729    93,672
    7 Years Later ..                          125,907    132,696    92,851
    8 Years Later ..                                     132,836    92,104
    9 Years Later ..                                                92,120
    10 Years Later..

Cumulative Redundancy    65,666     62,632     32,346    (20,087)  (24,527)
    (Deficiency) ...

Cumulative Net Paid
    as of:               44,519     50,210     50,360     57,611    39,118
    1 Year Later ...     68,619     79,788     84,465     89,177    65,165
    2 Years Later ..     80,645     94,865    104,569    108,849    76,988
    3 Years Later ..     86,381    102,395    114,293    120,539    83,822
    4 Years Later ..     89,601    106,012    119,462    126,100    87,618
    5 Years Later ..     91,676    107,850    122,000    129,060    89,607
    6 Years Later ..               109,201    123,291    130,649    90,721
    7 Years Later ..                          124,220    131,346    91,354
    8 Years Later ..                                     131,898    91,598
    9 Years Later ..                                                91,786
    10 Years Later..

Net Reserve.........    161,620    174,515
Reins. Recoverables.     29,342     25,841
                       --------   --------
Gross Reserve ......    190,962    200,356
                        -------    -------

Net Re-estimated
  Reserve ..........     95,954    111,883
Re-estimated Reins.
    Recoverables ...     30,037     26,092
                        -------    -------
Gross Re-estimated
    Reserve ........    125,991    137,975
                        --------    -------
Gross Cumulative
    Redundancy
      (Deficiency)..   $ 64,971   $ 62,381
                       ========   ========
</TABLE>


         (1)     Amounts  reflect  reinsurance   recoverable  under  prospective
                 reinsurance  contracts  only.  The  Company  adopted  Financial
                 Accounting  Standards  Board  Statement  No.  113 ("FAS  113"),
                 "Accounting and Reporting for  Short-Duration and Long-Duration
                 Reinsurance Contracts" for the year ended December 31, 1992. As
                 permitted,  prior financial  statements have not been restated.
                 Reinsurance  recoverables on unpaid losses and LAE are shown as
                 an asset on the balance  sheets at December  31, 2000 and 1999.
                 However,  for purposes of the  reconciliation  and  development
                 tables, loss and LAE information are shown net of reinsurance.