**UNITED      STATES**

**SECURITIES      AND EXCHANGE COMMISSION**

**WASHINGTON,      DC 20549**

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**FORM      10-K**

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**(Mark      One)**

| þ | **ANNUAL                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE                ACT OF                1934** |
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**For      the fiscal year ended December 31, 2006**

**or**

| o | **TRANSITION                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE                ACT OF                1934** |
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| **For                  the transition period from****                ****to****                **  |
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| **Commission                File Number: 1-8865**                                                                                                                                                                                                                       |
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|  **SIERRA                HEALTH SERVICES, INC.****(Exact                Name of Registrant as Specified in Its                Charter)** |
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|                                                                                                                                     |   |   |
| **Nevada**                                                                                                                                    |   | **88-0200415** |
| **(State                or Other Jurisdiction****of                Incorporation or Organization)**                                           |   | **(I.R.S.                Employer Identification No.)** |
|                                                                                                                                          |   |
| **2724                North Tenaya Way, Las Vegas, NV**                                                                                       |   | **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:**

| Title                of each class           |   | Name                of each exchange which registered |
|----------------------------------------------|--------|-------------------------------------------------------|
| Common                Stock, par value $.005 |   | New                York Stock Exchange                |

| **Securities                Registered Pursuant to Section 12(g) of the Act:                None**                                                                                                                                                                                                                                                                                                                                                                                                                |
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|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| Indicate                by check mark if the registrant is a well-known seasoned issuer,                as                defined in Rule 405 of the Securities Act. YesR                No࿠                                                                                                                                                                                                                                                                                                                     |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| Indicate                by check mark if the registrant is not required to file reports pursuant                to Section 13 or Section 15(d) of the Act. Yes ࿠ No R                                                                                                                                                                                                                                                                                                                                  |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 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 R 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. ྈ                                                 |
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| Indicate                by check mark whether the registrant is a large accelerated filer,                an                accelerated filer, or a non-accelerated filer. See definition of                “accelerated filer” and “large accelerated filer” in Rule 12b-2 of                the Exchange Act (check one).                                                                                                                                                               |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| Large                accelerated filerR   Accelerated                filer ࿠   Non-accelerated                filer࿠                                                                                                                                                                                                                                                                                                                                                    |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| Indicate                by check mark whether the registrant is a shell company (as defined                in                Rule 12b-2 of the Exchange Act). Yes࿠NoR                                                                                                                                                                                                                                                                                                                                            |
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| The                aggregate market value of the voting stock held by non-affiliates                of the                registrant at June 30, 2006 was $2,301,974,000 (which represents                shares of 51,121,000 Common Stock held by such non-affiliates multiplied                by $45.03, the closing sales price of such stock on the New York                Stock                Exchange on June 30, 2006).                                                                           |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| The                number of shares outstanding of the registrant’s Common Stock as of                February 23, 2007 was 55,755,000.                                                                                                                                                                                                                                                                                                                                                                     |
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| **Documents                Incorporated By Reference**                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| Part                III of this Form 10-K incorporates by reference certain information                from                the registrant’s definitive proxy statement for the 2007 Annual Meeting of                Stockholders to be filed with the Securities and Exchange Commission                not                later than 120 days after the end of the fiscal                year.                                                                                                                 |

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**Sierra      Health Services, Inc.**

**Annual      Report on Form 10-K**

|                        |   |                                                                                                                                                      | **Page** |
|-----------------------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------|----------|
| **PART                I**   |
| Item                        | 1.     | Business                                                                                                                                                  | 1        |
| Item                        | 1A.    | Risk                Factors                                                                                                                               | 18       |
| Item                        | 1B.    | Unresolved                Staff Comments                                                                                                                  | 25       |
| Item                        | 2.     | Properties                                                                                                                                                | 25       |
| Item                        | 3.     | Legal                Proceedings                                                                                                                          | 26       |
| Item                        | 4.     | Submission                of Matters to a Vote of Security Holders                                                                                        | 27       |
|                        |   |                                                                                                                                                      |
| **PART                II**  |
| Item                        | 5.     | Market                for Registrant's Common Equity, Related                Stockholder Matters and Issuer Purchases of Equity                Securities | 28       |
| Item                        | 6.     | Selected                Financial Data                                                                                                                    | 30       |
| Item                        | 7.     | Management's                Discussion and Analysis of Financial                Condition and Results of Operations                                       | 32       |
| Item                        | 7A.    | Quantitative                and Qualitative Disclosures About Market                Risk                                                                  | 51       |
| Item                        | 8.     | Financial                Statements and Supplementary Data                                                                                                | 52       |
| Item                        | 9.     | Changes                in and Disagreements With Accountants on                Accounting and Financial Disclosure                                        | 85       |
| Item                        | 9A.    | Controls                and Procedures                                                                                                                    | 85       |
| Item                        | 9B.    | Other                Information                                                                                                                          | 88       |
|                        |   |                                                                                                                                                      |
| **PART                III** |
| Item                        | 10.    | Directors,                Executive Officers and Corporate Governance                                                                                     | 89       |
| Item                        | 11.    | Executive                Compensation                                                                                                                     | 89       |
| Item                        | 12.    | Security                Ownership of Certain Beneficial Owners and                Management and Related Stockholder Matters                              | 89       |
| Item                        | 13.    | Certain                Relationships and Related Transactions, and                Director Independence                                                   | 89       |
| Item                        | 14.    | Principal                Accounting Fees and Services                                                                                                     | 89       |
|                        |   |                                                                                                                                                      |
| **PART                IV**  |
| Item                        | 15.    | Exhibits                and Financial Statement Schedules                                                                                                 | 90       |
| Signatures                  |   | 94                                                                                                                                                        |

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Table          of Contents

**PART      I**

**ITEM      1.** **BUSINESS**

**General**

**Overview**

|   | · | a                federally qualified health maintenance organization                (HMO); |
|--------|--------|--------------------------------------------------------------------------------------------|

|   | · | managed                indemnity plans; |
|--------|--------|-----------------------------------------|

|   | · | ancillary                products and services that complement our managed health care product                lines; and |
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|   | · | a                third-party administrative services program for employer-funded health                benefit plans and self-insured workers’ compensation                plans. |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

**Subsidiary      Summary**

|   | · | Southwest                Medical Associates, Inc. (SMA), a Nevada corporation, is Nevada’s largest                multi-specialty medical group serving as the primary care provider                for 73%                of our southern Nevada HMO members. |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Behavioral                Healthcare Options, Inc. (BHO), a Nevada corporation, provides mental                health and substance abuse                services. |
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|   | · | Sierra                Home Medical Products, Inc., a Nevada corporation, provides home                infusion                care and home medical equipment and                supplies. |
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|   | · | Family                Health Care Services, a Nevada corporation, is a Medicare certified                full                service home health agency licensed by the state of Nevada, providing                in-home care and case management. |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Family                Home Hospice, Inc., a Nevada corporation, is a Medicare/Medicaid                certified                agency that provides full-service hospice care and counseling for                the                terminally ill. |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Sierra                Health-Care Options, Inc., a Nevada corporation, operates third-party                network access and utilization review services for employer-funded                health                benefit plans. |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Sierra                Nevada Administrators, Inc., a Nevada corporation, operates as a                third-party administrator of workers’ compensation claims primarily for                self-insured Nevada employers. |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | Sierra                Military Health Services, LLC (SMHS), a Delaware LLC, administered                a                managed care federal contract for the DoD's TRICARE program in Region                1                and its operations were substantially phased-out by June 30,                2005. |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | CII                Financial, Inc. (CII), a California corporation, was the parent company                of                our four workers’ compensation insurance companies that were sold in March                2004. |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

**Managed      Care Products and Services**

*Health      Maintenance Organizations.*

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*Preferred      Provider Organizations.*

*Medicare      Part D Prescription Drug Program.*

*Social      Health Maintenance Organization.*

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*Medicare      Private Fee-For-Service.*

*Ancillary      Medical Services.*

*Administrative      Services.*

**Military      Contract Services**

*Sierra      Military Health Services, LLC. *

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**Discontinued      Workers' Compensation Insurance Operations**

*Workers'      Compensation Subsidiary. *

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**Marketing **

**Membership**

**Period      End Membership:**

|                                   |   | **At                December 31,** |     |
|----------------------------------------|--------|------------------------------------|----------|
|                                   |   |                               | **2006** |   |   | **2005** |   |   | **2004** |   |   | **2003** |   |   | **2002** |   |
| HMO:                                   |   |                               |     |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Commercial                             |   |                               | 279,100  |   |   | 254,200 |   |   | 226,200 |   |   | 202,400 |   |   | 187,300 |   |
| Medicare                               |   |                               | 56,600   |   |   | 56,000 |   |   | 53,300 |   |   | 51,200 |   |   | 47,800 |   |
| Medicaid                               |   |                               | 60,500   |   |   | 55,100 |   |   | 50,500 |   |   | 39,000 |   |   | 36,400 |   |
| PPO:                                   |   |                               |     |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Commercial                             |   |                               | 32,900   |   |   | 27,500 |   |   | 25,900 |   |   | 24,500 |   |   | 26,400 |   |
| Medicare                               |   |                               | 1,900    |   |   | 300 |   |   | ¾ |   |   | ¾ |   |   | ¾ |   |
| Medicare                Part D         |   |                               | 184,900  |   |   | ¾ |   |   | ¾ |   |   | ¾ |   |   | ¾ |   |
| Medicare                supplement     |   |                               | 13,600   |   |   | 15,300 |   |   | 16,400 |   |   | 17,500 |   |   | 19,300 |   |
| Administrative                services |   |                               | 222,000  |   |   | 229,500 |   |   | 188,200 |   |   | 193,100 |   |   | 221,400 |   |
| Subtotal                               |   |                               | 851,500  |   |   | 637,900 |   |   | 560,500 |   |   | 527,700 |   |   | 538,600 |   |
| TRICARE                eligibles       |   |                               | ¾   |   |   | ¾ |   |   | ¾ |   |   | 707,000 |   |   | 678,200 |   |
| Total                Membership        |   |                               | 851,500  |   |   | 637,900 |   |   | 560,500 |   |   | 1,234,700 |   |   | 1,216,800 |   |

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| **Membership                By Commercial Employer Group Size** |   | **Membership                By Commercial Employer Group Type** |
|-----------------------------------------------------------------|--------|-----------------------------------------------------------------|
|                                                            |   |                                                            |   |   |   |   |   |   |   |   |
|                                                            |   | **2006**                                                        |   | **2005** |   |   |   | **2006** |   | **2005** |
|                                                            |   |                                                            |   |   |   |   |   |   |   |   |   |   |
| 1-50                employees (small)                           |   | 7%                                                              |   | 6% |   | Gaming |   | 53,500 | 19% |   | 51,500 | 20% |
| 51-500                employees (mid-size)                      |   | 31%                                                             |   | 33% |   | School                districts |   | 26,400 | 9% |   | 24,800 | 10% |
| 501                + employees (large)                          |   | 62%                                                             |   | 61% |   | Government |   | 30,400 | 11% |   | 31,300 | 12% |
| Total                                                           |   | 100%                                                            |   | 100% |   | National                accounts |   | 25,400 | 9% |   | 24,600 | 10% |
|                                                            |   |                                                            |   |   |   | Unions |   | 31,500 | 12% |   | 26,100 | 10% |
|                                                            |   |                                                            |   |   |   | All                others |   | 111,900 | 40% |   | 95,900 | 38% |
|                                                            |   |                                                            |   |   |   | Total |   | 279,100 | 100% |   | 254,200 | 100% |

**Provider      Arrangements and Cost Management**

*HMO      and Managed Indemnity Products.*

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**Risk      Management**

**Information      Systems**

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**Quality      Assurance and Improvement**

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**Underwriting**

*HMO.*

*Managed      Indemnity. *

**Competition**

*HMO      and Managed Indemnity.*

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**Ratings**

|                                                          |   | A.M.                Best Company, Inc. (1) |   | Fitch                Ratings (2) |
|---------------------------------------------------------------|--------|--------------------------------------------|--------|----------------------------------|
|                                                          |   | Rating                                     |   | Ranking                          |   | Rating |   | Ranking |
| Financial                strength rating:                     |   |                                       |   |                             |   |   |   |   |
| HMO                and health and life insurance subsidiaries |   | B++                Very Good               |   | 5th                of 16         |   | A-                Strong |   | 7th                of 23 |
|                                                          |   |                                       |   |                             |   |   |   |   |
| Issuer                credit ratings:                         |   |                                       |   |                             |   |   |   |   |
| HMO                and health and life insurance subsidiaries |   | bbb+                Very Good              |   | 8th                of 22         |   | n/a |   | n/a |
|                                                          |   |                                       |   |                             |   |   |   |   |
| Parent                company                            |   | bb+                Speculative             |   | 11th                of 22        |   | BBB                Good |   | 9th                of 23 |
|                                                          |   |                                       |   |                             |   |   |   |   |
| Senior                convertible debentures                  |   | bb+                Speculative             |   | 11th                of 22        |   | BBB-                Investment Grade |   | 10th                of 23 |

|                                         |   | Standard                & Poor's Corp. (1) |
|----------------------------------------------|--------|------------------------------------------------|
|                                         |   | Rating                                         |   | Ranking |
|                                         |   |                                           |   |   |
| Counterparty                credit rating    |   | BB+                Speculative                 |   | 11th                of 22 |
|                                         |   |                                           |   |   |
| Senior                convertible debentures |   | BB+                Speculative                 |   | 11th                of 22 |

**Government      Regulation and Recent Legislation**

*HMOs      and Managed Indemnity. *

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*General*

*Deposits.      *

*Dividends.      *

**Employees**

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**Other **

**Forward-Looking      Statements**

|   | · | variation                    from actuarial assumptions used to price our bid proposals for                    the                    Medicare Prescription Drug Program and our Medicare Advantage                    programs can                    lead to higher than expected medical                    costs; |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | failure                to design and price our products appropriately and                competitively; |
|--------|--------|---------------------------------------------------------------------------------------------------------|

|   | · | loss                of health care premium revenues due to heightened pricing competition                or                other factors; |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | loss                of health care premium revenues due to inadequate membership data                provided                by CMS; |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------|

|   | · | inadequate                premium revenues due to heightened competition, miscalculations of                underlying health care cost inflation and other trends, utilization                and                other factors in our rate filings and in underwriting                accounts; |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | significant                reductions in account and member                retention; |
|--------|--------|---------------------------------------------------------------------------------------|

|   | · | inability                or delays in making timely changes to health care benefits to offset                the                impact of inadequate premium rates; |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | loss                of Medicare, Medicaid, or large commercial                contracts; |
|--------|--------|------------------------------------------------------------------------------------------|

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|   | · | a                reduction in the actual proceeds to be realized from the note receivable                related to the sale of our workers’ compensation insurance                business; |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | loss                of or significant changes in our health care provider contracts; |
|--------|--------|--------------------------------------------------------------------------------------|

|   | · | inability                or unwillingness of our contracted providers to provide health care                services to our members; |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------|

|   | · | inability                to control our admissions to non-contracted                facilities; |
|--------|--------|-------------------------------------------------------------------------------------------------|

|   | · | inadequate                capacity at contracted facilities; |
|--------|--------|--------------------------------------------------------------|

|   | · | higher                than expected and unreasonable billed charges at non-contracted                facilities; |
|--------|--------|------------------------------------------------------------------------------------------------------------------|

|   | · | higher                than expected medical costs including utilization of                services; |
|--------|--------|-----------------------------------------------------------------------------------------------------|

|   | · | the                introduction of new medical technologies and                pharmaceuticals; |
|--------|--------|-------------------------------------------------------------------------------------------------|

|   | · | higher                costs of medical malpractice and other insurance, increased claims,                reduced coverage that increases our risk exposure or the unavailability                of                coverage that either affects us or our contracted                providers; |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | unpaid                health care claims and health care costs resulting from insolvencies                of                providers with whom we have capitated                contracts; |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | terrorist                acts that directly affect the operation of our business and/or our                providers, customers, policyholders and                members; |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | a                sustained economic recession, especially in                Nevada; |
|--------|--------|-------------------------------------------------------------------------------------|

|   | · | adverse                loss development on health care payables resulting from unanticipated                increases or changes in our claims                costs; |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | actual                provider settlements that are higher than our recorded estimates; |
|--------|--------|-----------------------------------------------------------------------------------------|

|   | · | adverse                legal judgments that are not covered by insurance or that indirectly                impact our ability to obtain insurance in the future at reasonable                costs; |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | significant                declines in investment rates or a decline in real estate values could                result in an impairment of our investments in trust deed mortgage                notes or                real estate joint ventures; |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | inability                to implement material regulatory requirements on a timely, accurate                and                cost effective basis; |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | a                ratings downgrade from insurance rating agencies, such as A.M. Best                Company and Fitch Ratings, and from health care quality rating                organizations, such as the NCQA or                URAC; |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | changes                in federal or state regulations and laws or programs, including but                not                limited to, health care reform, other initiatives and taxes; |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | inability                to maintain or enhance, as required, our management information systems                to                ensure, among other things, the timely and accurate billing of premiums                and the timely and accurate payment of claims, in compliance with                applicable governmental and contractual                requirements; |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | inability                to expand our e-business initiatives on a timely basis and in compliance                with government regulations; and |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------|

|   | · | other                factors referenced in this Annual Report on Form 10-K, including                those set                forth under the caption “Risk                Factors.” |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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**ITEM        1A.        RISK FACTORS **

*You        should carefully consider the following risks, as well as the other information        contained in this Annual Report on Form 10-K. If any of the following risks        actually occur, our business could be adversely affected. You should refer        to        the other information set forth in this Annual Report on Form 10-K, including        the information set forth in*
*"Forward-Looking        Statements,” and our consolidated financial statements herein. The information        specifically set forth under “Forward-Looking Statements” constitutes additional        risks, which, if they actually occur, could adversely affect our business        as        well.*

**Our      actual experience for our enhanced PDP **
**product      offering for January 2007 has varied materially from the actuarial assumptions      provided by the independent actuaries we retained to develop the plan design      for      our 2007 bid. As a result, our 2007 medical expenses for this program are      expected to be significantly higher than anticipated, thereby materially      adversely affecting our projected operating results, financial position and      cash      flows for 2007.**

**Our      continuing participation in the program beyond 2007 is subject to various risks      including risks that may not be currently evident due to the newness of the      program.**

**The      PDP program was new for 2006 and the final reconciliation of the results of      the      2006 program will not occur with CMS until around the third quarter of 2007.      If      the results of this final reconciliation are not what we have estimated, the      actual results may have a materially adverse effect on our operating      results.**

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**The        phase out of the Social HMO payment methodology for our Medicare Advantage        program could result in a lower premium rate increase, or potentially a        decrease. The Social HMO program is expected to be phased out on December        31,        2007. If we are unable to compensate for this expected decrease in revenues        by        reducing benefits and costs, our operating results could be materially affected.        Additionally, each year our bid to CMS is based on actuarial assumptions,        which        if incorrect, could materially affect our operating results.**

**During      the past 18 months we have had several membership reconciliation issues with      CMS      that impact our Medicare Advantage HMO plan as well as our Medicare Advantage      local and regional PPO plans and our stand-alone PDP. If these membership      reconciliation issues are not able to be resolved and we continue to have these      types of issues, our operating results may be adversely      affected.**

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**As        a        health care company, we and our health care providers may be subject to        increased malpractice costs and claims, which could adversely affect our        business. **

**If        we fail to effectively manage our admissions to non-contracted facilities        or        there is insufficient capacity at **
**contracted        facilities, our operating results may be adversely        affected.**

**If      the billed charges we receive from non-contracted facilities are significantly      higher than expected and are unreasonable, our operating results may be      adversely affected.**

**If      we fail to qualify for the Nevada home office tax credit, our premium tax costs      will increase.**

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**Our        ability to obtain and maintain favorable group benefit agreements with employer        groups affects our profitability. **

**There        can be no assurance that we will be able to maintain and enhance our information        systems.**

**We      operate in a highly competitive environment.**

**The      majority of our business is in southern Nevada and a significant prolonged      economic recession would adversely affect our operating      results.**

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**Our        results of operations could be adversely affected by understatements in our        actual liabilities caused by understatements in our actuarial estimates of        incurred but not reported health care claims**

**Our      failure to comply with corporate practice of medicine laws in states in which      we      operate could result in our being unable to practice medicine in that state      and      possibly lead to penalties and/or higher medical expenses.**

**At      December 31, 200**
**6,      we had $43.5 million of senior convertible debentures outstanding, which we      may      not be able to repay in cash.**

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**Our        debt levels may limit our flexibility in obtaining additional financing and        in        pursuing other business opportunities.**

**Our      senior secured credit facility imposes significant operating and financial      restrictions on us.**

**We      depend on our management for our success and the loss of our founder, Chairman      of the Board and Chief Executive Officer, or other key executives, could have      a      material adverse effect on our business. **

**Terrorist      attacks, such as the attacks that occurred in New York and Washington, D.C.      on      September 11, 2001, and other attacks, acts of war or military actions, such      as      military actions in Iraq or elsewhere, may adversely affect our operating      results and financial condition.**

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**Our        business is subject to substantial government regulation and the impact of        this        regulation may increase our exposure to lawsuits and/or penalties or other        regulatory actions for non-compliance or may otherwise adversely affect our        business. **

**Our      forecasts and forward-looking statements are based on assumptions and subject      to      uncertainties and actual results may be significantly different from those      forecast**

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**We        may not realize the total amount of the net sales proceeds from our sale        of the        workers’ compensation insurance operations.**

**We      are obligated to perform certain services in connection with the sale of the      workers’ compensation insurance operations and the accrual for the estimated      contractual funding shortfall may be insufficient, which could result in a      material adverse effect on our operating results.**

**ITEM      1B.** **UNRESOLVED      STAFF COMMENTS**

**ITEM      2.** **PROPERTIES**

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**ITEM        3. LEGAL        PROCEEDINGS **

*Shane*

*Shane*

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

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**PART      II**

**ITEM      5.** **MARKET      FOR THE REGISTRANT'S COMMON EQUITY, RELATED      STOCKHOLDER****MATTERS      AND ISSUER PURCHASES OF EQUITY      SECURITIES**

**Market      Information**

|                          |   | **High** |   | **Low** |   |
|-------------------------------|--------|----------|--------|---------|--------|
| **200****6**                  |   |     |   |
| First                quarter  |   | $        | 43.30  |    | $      | 37.94 |   |
| Second                quarter |   |     | 45.03  |    |   | 36.12 |   |
| Third                quarter  |   |     | 46.86  |    |   | 37.84 |   |
| Fourth                quarter |   |     | 39.18  |    |   | 30.90 |   |
|                          |   |     |   |    |   |   |   |
| **200****5**                  |   |     |   |    |   |   |   |
| First                quarter  |   | $        | 32.34  |    | $      | 25.75 |   |
| Second                quarter |   |     | 36.08  |    |   | 29.50 |   |
| Third                quarter  |   |     | 37.06  |    |   | 31.53 |   |
| Fourth                quarter |   |     | 41.15  |    |   | 33.90 |   |

**Share      Repurchases**

| **Period**                                                                                           |                                                 | **Total                Number****Of                Shares****Repurchased                (1)** |   | **Average****Price                Paid****Per                Share** |   | **Total                Number****Of                Shares Purchased****As                Part Of Publicly****Announced                Plan****Or                Program** |   | **Approximate                Dollar****Value                Of Shares****That                May Yet Be****Purchased                Under****The                Plan (2)** |   |
|------------------------------------------------------------------------------------------------------|------------------------------------------------------|-----------------------------------------------------------------------------------------------|--------|----------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                      | (In                thousands, except per share data) |
| Beginning                approximate dollar value of shares that may yet be                purchased |  $                                              | 42,125                                                                                        |   |                                                                 |
| January                1, 2006 - January 31, 2006                                                    |                                                 |                                                                                          | 70     |                                                                 | $      | 39.30                                                                                                                                                                     |   |                                                                                                                                                                       | 70     |   |   | 39,392 |   |
| February                1, 2006 - February 28, 2006                                                  |                                                 |                                                                                          | 1,010  |                                                                 |   | 40.35                                                                                                                                                                     |   |                                                                                                                                                                       | 1,010  |   |   | 73,675 |   |
| March                1, 2006 - March 31, 2006                                                        |                                                 |                                                                                          | 1,121  |                                                                 |   | 42.49                                                                                                                                                                     |   |                                                                                                                                                                       | 1,121  |   |   | 26,056 |   |
| April                1, 2006 - April 30, 2006                                                        |                                                 |                                                                                          | 633    |                                                                 |   | 39.97                                                                                                                                                                     |   |                                                                                                                                                                       | 633    |   |   | 75,764 |   |
| May                1, 2006 - May 31, 2006                                                            |                                                 |                                                                                          | 290    |                                                                 |   | 39.15                                                                                                                                                                     |   |                                                                                                                                                                       | 290    |   |   | 64,427 |   |
| June                1, 2006 - June 30, 2006                                                          |                                                 |                                                                                          | ¾ |                                                                 |   | ¾                                                                                                                                                                    |   |                                                                                                                                                                       | ¾ |   |   | 64,427 |   |
| July                1, 2006 - July 31, 2006                                                          |                                                 |                                                                                          | ¾ |                                                                 |   | ¾                                                                                                                                                                    |   |                                                                                                                                                                       | ¾ |   |   | 64,427 |   |
| August                1, 2006 - August 31, 2006                                                      |                                                 |                                                                                          | ¾ |                                                                 |   | ¾                                                                                                                                                                    |   |                                                                                                                                                                       | ¾ |   |   | 64,427 |   |
| September                1, 2006 - September 30, 2006                                                |                                                 |                                                                                          | ¾ |                                                                 |   | ¾                                                                                                                                                                    |   |                                                                                                                                                                       | ¾ |   |   | 64,427 |   |
| October                1, 2006 - October 31, 2006                                                    |                                                 |                                                                                          | 300    |                                                                 |   | 35.51                                                                                                                                                                     |   |                                                                                                                                                                       | 300    |   |   | 128,781 |   |
| November                1, 2006 - November 30, 2006                                                  |                                                 |                                                                                          | 2,608  |                                                                 |   | 32.89                                                                                                                                                                     |   |                                                                                                                                                                       | 2,608  |   |   | 43,030 |   |
| December                1, 2006 - December 31, 2006                                                  |                                                 |                                                                                          | 544    |                                                                 |   | 34.77                                                                                                                                                                     |   |                                                                                                                                                                       | 544    |   |   | 24,142 |   |

|   | (1) | Certain                repurchases were made pursuant to a 10b5                plan. |
|--------|-----|--------------------------------------------------------------------------------------|
|   | (2) | At              January 1, 2006, $42.1 million remained available for purchase under              previously approved plans. On February 16, 2006, April 20, 2006 and              October 19, 2006, our Board of Directors authorized $75.0 million each              in              additional share repurchases for a total of $225.0 million. On January              25,              2007, our Board of Directors authorized an additional $50.0 million              in              share repurchases. The repurchase program has no stated expiration              date. |
|--------|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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Table          of Contents

**Debenture      Conversions**

| **Period**                                            | **Total                Dollar Value of Debentures Converted(1)** | **Average                Price****Paid                Per****Debenture**                                   | **Total                Dollar Value****Of                Debentures****Purchased****As                Part Of Publicly****Announced                Plan****Or                Program** | **Approximate                Dollar****Value                Of Debentures****That                May Yet Be****Purchased                Under****The                Plan** |
|-------------------------------------------------------|------------------------------------------------------------------|------------------------------------------------------------------------------------------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| January                1, 2006 - January 31, 2006     | $500,000                                                         | 109.35                shares of common stock for each $1,000 principal amount of                debentures | none                                                                                                                                                                                   | none                                                                                                                                                                       |
| February                1, 2006 - February 28, 2006   | ¾                                                           | ¾                                                                                                     | ¾                                                                                                                                                                                 | ¾                                                                                                                                                                     |
| March                1, 2006 - March 31, 2006         | ¾                                                           | ¾                                                                                                     | ¾                                                                                                                                                                                 | ¾                                                                                                                                                                     |
| April                1, 2006 - April 30, 2006         | ¾                                                           | ¾                                                                                                     | ¾                                                                                                                                                                                 | ¾                                                                                                                                                                     |
| May                1, 2006 - May 31, 2006             | ¾                                                           | ¾                                                                                                     | ¾                                                                                                                                                                                 | ¾                                                                                                                                                                     |
| June                1, 2006 - June 30, 2006           | ¾                                                           | ¾                                                                                                     | ¾                                                                                                                                                                                 | ¾                                                                                                                                                                     |
| July                1, 2006 - July 31, 2006           | ¾                                                           | ¾                                                                                                     | ¾                                                                                                                                                                                 | ¾                                                                                                                                                                     |
| August                1, 2006 - August 31, 2006       | ¾                                                           | ¾                                                                                                     | ¾                                                                                                                                                                                 | ¾                                                                                                                                                                     |
| September                1, 2006 - September 30, 2006 | 8,000,000                                                        | 109.35                shares of common stock for each $1,000 principal amount of                debentures | none                                                                                                                                                                                   | none                                                                                                                                                                       |
| October                1, 2006 - October 31, 2006     | ¾                                                           | ¾                                                                                                     | ¾                                                                                                                                                                                 | ¾                                                                                                                                                                     |
| November                1, 2006 - November 30, 2006   | ¾                                                           | ¾                                                                                                     | ¾                                                                                                                                                                                 | ¾                                                                                                                                                                     |
| December                1, 2006 - December 31, 2006   | ¾                                                           | ¾                                                                                                     | ¾                                                                                                                                                                                 | ¾                                                                                                                                                                     |

|   | (1) | On                January 18, 2007, we entered into a privately negotiated transaction                with                a holder pursuant to which the holder converted $21.7 million in                debentures for approximately 2.4 million shares of common stock in                accordance with the indenture governing the                debentures. |
|--------|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

**Holders**

**Dividends**

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Table          of Contents

**ITEM      6.** **SELECTED      FINANCIAL DATA**

|                                                                 |   | **Years                Ended December 31,**          |      |
|----------------------------------------------------------------------|--------|------------------------------------------------------|-----------|
|                                                                 |   | **2006**                                             |      | **2005** |   | **2004** |   | **2003** |   | **2002** |   |
| **Statement                of income data:**                         |   | (In                thousands, except per share data) |      |
| Operating                revenues:                                   |   |                                                 |      |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Medical                premiums                                      |   | $                                                    | 1,623,515 |   | $ | 1,291,296 |   | $ | 1,131,185 |   | $ | 962,176 |   | $ | 862,379 |   |
| Military                contract revenues                            |   |                                                 | ¾    |   |   | 16,326 |   |   | 372,608 |   |   | 465,313 |   |   | 373,589 |   |
| Professional                fees                                     |   |                                                 | 52,266    |   |   | 43,186 |   |   | 35,115 |   |   | 37,367 |   |   | 30,923 |   |
| Investment                and other revenues                         |   |                                                 | 43,111    |   |   | 34,228 |   |   | 36,646 |   |   | 20,440 |   |   | 16,535 |   |
| Total                                                                |   |                                                 | 1,718,892 |   |   | 1,385,036 |   |   | 1,575,554 |   |   | 1,485,296 |   |   | 1,283,426 |   |
|                                                                 |   |                                                 |      |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Operating                expenses:                                   |   |                                                 |      |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Medical                expenses                                      |   |                                                 | 1,295,978 |   |   | 1,020,754 |   |   | 877,774 |   |   | 761,063 |   |   | 703,357 |   |
| Military                contract expenses                            |   |                                                 | 138       |   |   | 2,392 |   |   | 317,699 |   |   | 452,554 |   |   | 360,375 |   |
| General                and administrative expenses                   |   |                                                 | 205,342   |   |   | 172,473 |   |   | 181,764 |   |   | 137,887 |   |   | 135,885 |   |
| Asset                impairment, restructuring, reorganization       |   |                                                 |      |   |   |   |   |   |   |   |   |   |   |   |   |   |
| and                other costs                                       |   |                                                 | ¾    |   |   | ¾ |   |   | ¾ |   |   | ¾ |   |   | 5,000 |   |
| Total                                                                |   |                                                 | 1,501,458 |   |   | 1,195,619 |   |   | 1,377,237 |   |   | 1,351,504 |   |   | 1,204,617 |   |
|                                                                 |   |                                                 |      |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Operating                income from continuing operations           |   |                                                 | 217,434   |   |   | 189,417 |   |   | 198,317 |   |   | 133,792 |   |   | 78,809 |   |
| Interest                expense                                      |   |                                                 | (3,901    | ) |   | (8,791 | ) |   | (4,684 | ) |   | (5,491 | ) |   | (7,650 | ) |
| Other                income (expense), net                           |   |                                                 | 1,960     |   |   | 1,099 |   |   | 31 |   |   | 3,176 |   |   | 6,271 |   |
|                                                                 |   |                                                 |      |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Income                from continuing operations before income taxes |   |                                                 | 215,493   |   |   | 181,725 |   |   | 193,664 |   |   | 131,477 |   |   | 77,430 |   |
| Provision                for income taxes                            |   |                                                 | (75,022   | ) |   | (61,708 | ) |   | (70,245 | ) |   | (46,268 | ) |   | (26,650 | ) |
| Income                from continuing operations                     |   |                                                 | 140,471   |   |   | 120,017 |   |   | 123,419 |   |   | 85,209 |   |   | 50,780 |   |
| Loss                from discontinued operations                     |   |                                                 | ¾    |   |   | ¾ |   |   | (682 | ) |   | (22,883 | ) |   | (14,332 | ) |
| Net                income                                            |   | $                                                    | 140,471   |   | $ | 120,017 |   | $ | 122,737 |   | $ | 62,326 |   | $ | 36,448 |   |
|                                                                 |   |                                                 |      |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net                income per common share:                          |   |                                                 |      |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Income                from continuing operations                     |   | $                                                    | 2.49      |   | $ | 2.16 |   | $ | 2.32 |   |  $ | 1.52 |   | $ | 0.88 |   |
| Loss                from discontinued operations                     |   |                                                 | ¾    |   |   | ¾ |   |   | (0.02 | ) |   | (0.41 | ) |   | (0.25 | ) |
| Net                income                                            |   | $                                                    | 2.49      |   | $ | 2.16 |   | $ | 2.30 |   |  $ | 1.11 |   | $ | 0.63 |   |
|                                                                 |   |                                                 |      |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Weighted                average number of common shares outstanding  |   |                                                 | 56,391    |   |   | 55,556 |   |   | 53,262 |   |   | 56,106 |   |   | 57,511 |   |
|                                                                 |   |                                                 |      |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net                income per common share assuming dilution:        |   |                                                 |      |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Income                from continuing operations                     |   | $                                                    | 2.25      |   | $ | 1.81 |   | $ | 1.80 |   | $ | 1.21 |   | $ | 0.82 |   |
| Loss                from discontinued operations                     |   |                                                 | ¾    |   |   | ¾ |   |   | (0.01 | ) |   | (0.32 | ) |   | (0.23 | ) |
| Net                income                                            |   | $                                                    | 2.25      |   | $ | 1.81 |   | $ | 1.79 |   | $ | 0.89 |   | $ | 0.59 |   |
|                                                                 |   |                                                 |      |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Weighted                average number of common shares              |   |                                                 |      |   |   |   |   |   |   |   |   |   |   |   |   |   |
| outstanding                assuming dilution                         |   |                                                 | 62,712    |   |   | 67,149 |   |   | 69,643 |   |   | 71,265 |   |   | 62,283 |   |

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Table          of Contents

|                                                   |   | **December                31,** |    |
|--------------------------------------------------------|--------|---------------------------------|---------|
|                                                   |   | **2006**                        |    | **2005** |   | **2004** |   | **2003** |   | **2002** |   |
|                                                   |   | (In                thousands)   |    |
| **Balance                Sheet Data:**                 |   |                            |
| Working                capital                         |   | $                               | 141,000 |   | $ | 171,261 |   | $ | 151,166 |   | $ | 170,118 |   | $ | 121,147 |   |
| Total                assets                            |   |                            | 809,412 |   |   | 668,846 |   |   | 689,780 |   |   | 1,134,121 |   |   | 1,065,966 |   |
| Long-term                debt (net of current portion) |   |                            | 118,734 |   |   | 52,307 |   |   | 125,395 |   |   | 116,645 |   |   | 75,671 |   |
| Cash                dividends per common share         |   |                            | none    |   |   | none |   |   | none |   |   | none |   |   | none |   |
| Stockholders’                equity              |   |                            | 216,718 |   |   | 284,252 |   |   | 201,697 |   |   | 150,764 |   |   | 156,565 |   |

**Ratio      of Earnings to Fixed Charges**

|                                                                 |   | **Years                Ended December 31,**            |    |
|----------------------------------------------------------------------|--------|--------------------------------------------------------|---------|
|                                                                 |   | **2006**                                               |    | **2005** |   | **2004** |   | **2003** |   | **2002** |   |
|                                                                      |   | (In                thousands, except ratio data)  |
| Income                from continuing operations before income taxes |   | $                                                      | 215,493 |   | $ | 181,725 |   | $ | 193,664 |   | $ | 131,477 |   | $ | 77,430 |   |
| Fixed                Charges:                                        |   |                                                   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest                expense (including capitalized interest)(1)  |   |                                                   | 3,901   |   |   | 8,791 |   |   | 4,698 |   |   | 5,506 |   |   | 7,700 |   |
| Interest                relating to rental expense(2)                |   |                                                   | 6,321   |   |   | 6,603 |   |   | 7,695 |   |   | 6,795 |   |   | 5,205 |   |
| Total                Fixed Charges                                   |   |                                                   | 10,222  |   |   | 15,394 |   |   | 12,393 |   |   | 12,301 |   |   | 12,905 |   |
|                                                                 |   |                                                   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Earnings                Available For Fixed Charges                  |   | $                                                      | 225,715 |   | $ | 197,119 |   | $ | 206,057 |   | $ | 143,778 |   | $ | 90,335 |   |
|                                                                 |   |                                                   |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Ratio                Of Earnings To Fixed Charges                    |   |                                                   | 22.08   |   |   | 12.80 |   |   | 16.63 |   |   | 11.69 |   |   | 7.00 |   |

----

Table        of Contents

**MANAGEMENT’S      DISCUSSION AND ANALYSIS OF      FINANCIAL**

**CONDITION      AND RESULTS OF      OPERATIONS**

**ITEM      7.**

|                                                          |   |                                          |                                                                    |                                          |   |           |   |                                    |      |         |   |     |   |                               |   |                               |   |
|---------------------------------------------------------------|--------|-----------------------------------------------|-------------------------------------------------------------------------|-----------------------------------------------|--------|----------------|--------|-----------------------------------------|-----------|--------------|--------|----------|--------|------------------------------------|--------|------------------------------------|--------|
|                                                          |   |                                          |                                                                    |                                          |   |           |   | **Percent                  Of Revenue** |      | **Increase** |   |
|                                                          |   | **Years                  Ended December 31,** |                                                                    | **Years                  Ended December 31,** |   | **(Decrease)** |   |
|                                                          |   | **2006**                                      |                                                                    | **2005**                                      |   | **2004**       |   | **2006**                                |      | **2005**     |   | **2004** |   | **2006                  vs. 2005** |   | **2005                  vs. 2004** |   |
|                                                          |   |                                          | (In                  thousands, except per share and percentages)  |                                          |
| Operating                    revenues:                        |   |                                          |                                                                    |                                          |   |           |   |                                    |      |         |   |     |   |                               |   |                               |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Medical                  premiums                             |   | $                                             | 1,623,515                                                               |                                          | $      | 1,291,296      |   | $                                       | 1,131,185 |         |   | 94.5     | %      |                               | 93.2   | %                                  |   | 71.8 | % | $ | 332,219 |   |   | 25.7 | % | $ | 160,111 |   |   | 14.2 | % |
| Military                  contract revenues                   |   |                                          | ¾                                                                  |                                          |   | 16,326         |   |                                    | 372,608   |         |   | ¾   |   |                               | 1.2    |                               |   | 23.7 |   |   | (16,326 | ) |   | (100.0 | ) |   | (356,282 | ) |   | (95.6 | ) |
| Professional                  fees                            |   |                                          | 52,266                                                                  |                                          |   | 43,186         |   |                                    | 35,115    |         |   | 3.0      |   |                               | 3.1    |                               |   | 2.2 |   |   | 9,080 |   |   | 21.0 |   |   | 8,071 |   |   | 23.0 |   |
| Investment                  and other revenues                |   |                                          | 43,111                                                                  |                                          |   | 34,228         |   |                                    | 36,646    |         |   | 2.5      |   |                               | 2.5    |                               |   | 2.3 |   |   | 8,883 |   |   | 26.0 |   |   | (2,418 | ) |   | (6.6 | ) |
| Total                                                         |   |                                          | 1,718,892                                                               |                                          |   | 1,385,036      |   |                                    | 1,575,554 |         |   | 100.0    |   |                               | 100.0  |                               |   | 100.0 |   |   | 333,856 |   |   | 24.1 |   |   | (190,518 | ) |   | (12.1 | ) |
|                                                          |   |                                          |                                                                    |                                          |   |           |   |                                    |      |         |   |     |   |                               |   |                               |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Operating                  expenses:                          |   |                                          |                                                                    |                                          |   |           |   |                                    |      |         |   |     |   |                               |   |                               |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Medical                  expenses                             |   |                                          | 1,295,978                                                               |                                          |   | 1,020,754      |   |                                    | 877,774   |         |   | 75.4     |   |                               | 73.7   |                               |   | 55.7 |   |   | 275,224 |   |   | 27.0 |   |   | 142,980 |   |   | 16.3 |   |
| Medical                  care ratio                           |   |                                          | 77.3                                                                    | %                                             |   | 76.5           | %      |                                    | 75.3      | %            |   |     |   |                               |   |                               |   |   |   |   |   |   |   | 0.8 |   |   |   |   |   | 1.2 |   |
| Military                  contract expenses                   |   |                                          | 138                                                                     |                                          |   | 2,392          |   |                                    | 317,699   |         |   | ¾   |   |                               | 0.2    |                               |   | 20.2 |   |   | (2,254 | ) |   | (94.2 | ) |   | (315,307 | ) |   | (99.3 | ) |
| General                  and administrative expenses          |   |                                          | 205,342                                                                 |                                          |   | 172,473        |   |                                    | 181,764   |         |   | 12.0     |   |                               | 12.5   |                               |   | 11.5 |   |   | 32,869 |   |   | 19.1 |   |   | (9,291 | ) |   | (5.1 | ) |
| Total                                                         |   |                                          | 1,501,458                                                               |                                          |   | 1,195,619      |   |                                    | 1,377,237 |         |   | 87.4     |   |                               | 86.4   |                               |   | 87.4 |   |   | 305,839 |   |   | 25.6 |   |   | (181,618 | ) |   | (13.2 | ) |
|                                                          |   |                                          |                                                                    |                                          |   |           |   |                                    |      |         |   |     |   |                               |   |                               |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Operating                    income from                      |   |                                          |                                                                    |                                          |   |           |   |                                    |      |         |   |     |   |                               |   |                               |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| continuing                  operations                        |   |                                          | 217,434                                                                 |                                          |   | 189,417        |   |                                    | 198,317   |         |   | 12.6     |   |                               | 13.6   |                               |   | 12.6 |   |   | 28,017 |   |   | 14.8 |   |   | (8,900 | ) |   | (4.5 | ) |
| Interest                  expense                             |   |                                          | (3,901                                                                  | )                                             |   | (8,791         | )      |                                    | (4,684    | )            |   | (0.2     | )      |                               | (0.6   | )                                  |   | (0.3 | ) |   | 4,890 |   |   | (55.6 | ) |   | (4,107 | ) |   | 87.7 |   |
| Other                  income (expense), net                  |   |                                          | 1,960                                                                   |                                          |   | 1,099          |   |                                    | 31        |         |   | 0.1      |   |                               | 0.1    |                               |   | ¾ |   |   | 861 |   |   | 78.3 |   |   | 1,068 |   |   | 3,445.2 |   |
|                                                          |   |                                          |                                                                    |                                          |   |           |   |                                    |      |         |   |     |   |                               |   |                               |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Income                  from continuing operations            |   |                                          |                                                                    |                                          |   |           |   |                                    |      |         |   |     |   |                               |   |                               |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Before                  income taxes                          |   |                                          | 215,493                                                                 |                                          |   | 181,725        |   |                                    | 193,664   |         |   | 12.5     |   |                               | 13.1   |                               |   | 12.3 |   |   | 33,768 |   |   | 18.6 |   |   | (11,939 | ) |   | (6.2 | ) |
| Provision                  for income taxes                   |   |                                          | (75,022                                                                 | )                                             |   | (61,708        | )      |                                    | (70,245   | )            |   | (4.3     | )      |                               | (4.4   | )                                  |   | (4.5 | ) |   | (13,314 | ) |   | 21.6 |   |   | 8,537 |   |   | (12.2 | ) |
| Tax                  rate                                     |   |                                          | 34.8                                                                    | %                                             |   | 34.0           | %      |                                    | 36.3      | %            |   |     |   |                               |   |                               |   |   |   |   |   |   |   | 0.8 |   |   |   |   |   | (2.3 | ) |
| Income                  from continuing operations            |   |                                          | 140,471                                                                 |                                          |   | 120,017        |   |                                    | 123,419   |         |   | 8.2      |   |                               | 8.7    |                               |   | 7.8 |   |   | 20,454 |   |   | 17.0 |   |   | (3,402 | ) |   | (2.8 | ) |
| Loss                  from discontinued operations            |   |                                          | ¾                                                                  |                                          |   | ¾         |   |                                    | (682      | )            |   | ¾   |   |                               | ¾ |                               |   | ¾ |   |   | ¾ |   |   |   |   |   | 682 |   |   | (100.0 | ) |
| Net                  income                                   |   | $                                             | 140,471                                                                 |                                          | $      | 120,017        |   | $                                       | 122,737   |         |   | 8.2      | %      |                               | 8.7    | %                                  |   | 7.8 | % | $ | 20,454 |   |   | 17.0 | % | $ | (2,720 | ) |   | (2.2 | )% |
|                                                          |   |                                          |                                                                    |                                          |   |           |   |                                    |      |         |   |     |   |                               |   |                               |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Earnings                  per common share assuming dilution: |   |                                          |                                                                    |                                          |   |           |   |                                    |      |         |   |     |   |                               |   |                               |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Income                  from continuing operations            |   | $                                             | 2.25                                                                    |                                          | $      | 1.81           |   | $                                       | 1.80      |         |   |     |   |                               |   |                               |   |   |   | $ | 0.44 |   |   | 24.3 | % | $ | 0.01 |   |   | 0.6 | % |
| Loss                  from discontinued operations            |   |                                          | ¾                                                                  |                                          |   | ¾         |   |                                    | (0.01     | )            |   |     |   |                               |   |                               |   |   |   |   | ¾ |   |   |   |   |   | 0.01 |   |   | (100.0 | ) |
| Net                  income                                   |   | $                                             | 2.25                                                                    |                                          | $      | 1.81           |   | $                                       | 1.79      |         |   |     |   |                               |   |                               |   |   |   | $ | 0.44 |   |   | 24.3 | % | $ | 0.02 |   |   | 1.1 | % |
|                                                          |   |                                          |                                                                    |                                          |   |           |   |                                    |      |         |   |     |   |                               |   |                               |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |

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Table          of Contents

|                                   |                                        |    |           |      |    |   |      |    | **Increase**                     |   |
|----------------------------------------|---------------------------------------------|---------|----------------|-----------|---------|--------|-----------|---------|----------------------------------|--------|
|                                   | **Years                Ended December 31,** |    | **(Decrease)** |      |
|                                   | **2006**                                    |    |           | **2005**  |    |   | **2004**  |    | **2006                vs. 2005** |   |   |   | **2005                vs. 2004** |   |
| Membership                             |                                        |    |           |      |    |   |      |    |                             |   |   |   |   |   |   |   |   |   |
| HMO:                                   |                                        |    |           |      |    |   |      |    |                             |   |   |   |   |   |   |   |   |   |
|                                   | Commercial                                  | 279,100 |           |      | 254,200 |   |      | 226,200 |                             | 24,900 |   | 9.8 | % |   |   | 28,000 |   | 12.4 | % |
|                                   | Medicare                                    | 56,600  |           |      | 56,000  |   |      | 53,300  |                             | 600    |   | 1.1 |   |   |   | 2,700 |   | 5.1 |   |
|                                   | Medicaid                                    | 60,500  |           |      | 55,100  |   |      | 50,500  |                             | 5,400  |   | 9.8 |   |   |   | 4,600 |   | 9.1 |   |
| Subtotal                HMO            | 396,200                                     |    |           | 365,300   |    |   | 330,000   |    | 30,900                           |   | 8.5 |   |   |   | 35,300 |   | 10.7 |   |
| PPO:                                   |                                        |    |           |      |    |   |      |    |                             |   |   |   |   |   |   |   |   |   |
| Commercial                             | 32,900                                      |    |           | 27,500    |    |   | 25,900    |    | 5,400                            |   | 19.6 |   |   |   | 1,600 |   | 6.2 |   |
| Medicare                               | 1,900                                       |    |           | 300       |    |   | ¾    |    | 1,600                            |   | 533.3 |   |   |   | 300 |   | ¾ |   |
| Subtotal                PPO            | 34,800                                      |    |           | 27,800    |    |   | 25,900    |    | 7,000                            |   | 25.2 |   |   |   | 1,900 |   | 7.3 |   |
| Medicare                Part D         | 184,900                                     |    |           | ¾    |    |   | ¾    |    | 184,900                          |   | ¾ |   |   |   | ¾ |   | ¾ |   |
| Medicare                supplement     | 13,600                                      |    |           | 15,300    |    |   | 16,400    |    | (1,700)                          |   | (11.1) |   |   |   | (1,100) |   | (6.7) |   |
| Administrative                services | 222,000                                     |    |           | 229,500   |    |   | 188,200   |    | (7,500)                          |   | (3.3) |   |   |   | 41,300 |   | 21.9 |   |
| Total                membership        | 851,500                                     |    |           | 637,900   |    |   | 560,500   |    | 213,600                          |   | 33.5 | % |   |   | 77,400 |   | 13.8 | % |
|                                   |                                        |    |           |      |    |   |      |    |                             |   |   |   |   |   |   |   |   |   |
| Member                months           |                                        |    |           |      |    |   |      |    |                             |   |   |   |   |   |   |   |   |   |
| HMO:                                   |                                        |    |           |      |    |   |      |    |                             |   |   |   |   |   |   |   |   |   |
| Commercial                             | 3,208,000                                   |    |           | 2,949,600 |    |   | 2,612,100 |    | 258,400                          |   | 8.8 | % |   |   | 337,500 |   | 12.9 | % |
| Medicare                               | 679,700                                     |    |           | 656,400   |    |   | 628,500   |    | 23,300                           |   | 3.5 |   |   |   | 27,900 |   | 4.4 |   |
| Medicaid                               | 684,300                                     |    |           | 629,200   |    |   | 586,600   |    | 55,100                           |   | 8.8 | % |   |   | 42,600 |   | 7.3 | % |

**Overview**

**Executive      Summary**

| · | Total                operating revenues increased by 24.1%. This improvement was primarily                driven by a 25.7% increase in medical premiums due to our participation                in                the new Medicare Part D prescription drug program (PDP), an increase                in                our HMO membership and premium rate increases. Also contributing                to the                improvement in operating revenues was a 26.0% increase in investment                and                other revenues, which increased due to an increase in yield during                2006                and higher average invested                balances. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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| · |   | Commercial and Medicaid HMO membership increased                9.8% as                a result of new accounts and in-case growth on commercial membership                and                continued growth in Medicaid                  membership. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · |   | Medical expenses, as a percentage of medical                  premiums                  and professional fees, or medical care ratio, increased by 80 basis                  points                  as a result of the higher medical care ratio related to the                  PDP. |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | General                and administrative (G&A) expenses as a percentage of medical premiums                decreased to 12.7% in 2006 from 13.4% in 2005. G&A expenses increased                19.1% primarily due to PDP related expenses, higher employee compensation                related expenses, premium taxes, and brokers’ fees. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | Operating                income from our managed care and corporate operations improved 24.3%                primarily driven by our participation in the PDP, medical premium                revenue                growth from new members and premium rate increases. Our operating                margin                from our managed care and corporate operations, which is operating                income                divided by total revenues, decreased 10 basis points as a result                of the                lower operating margin for the PDP. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | We                repurchased 6.6 million shares of our common stock during 2006. Our                weighted average common shares outstanding assuming dilution has                decreased                from 67.1 million in 2005 to 62.7 million in 2006, or 6.6%. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | Our                net income per common share assuming dilution increased                24.3%. |
|--------|--------------------------------------------------------------------------------------------------|

| · | Our                contract with our 2006 primary Las Vegas area contracted hospital                group,                HCA Inc. (HCA) expired on December 31, 2006. While we believe our                efforts                to move the majority of our HCA hospital days to other contracted                hospitals will be successful, there will be emergency situations                that will                require us to use the HCA hospitals in 2007. See Medical Expenses                below                for more details. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | Cash                flows from operating activities increased to $190.4 million from                $166.8                million during 2005. This increase is mostly due to the fact that                we had a                $13.5 million increase in income taxes payable due to the timing                of tax                payments, recorded an $11.8 million payable to the Centers for Medicare                and Medicaid Services (CMS) as a result of favorable pharmacy utilization                in our Medicare Advantage PDP, and had an increase in our non-PDP                medical                claims payable during 2006 compared to 2005. This was partially offset                by                negative cash flow of $7.9 million related to our stand-alone PDP.                The                negative cash flow is primarily due to insufficient funding from                CMS for                our reimbursable low-income subsidy and reinsurance costs. These                costs                should be fully reimbursed after CMS performs their year-end                reconciliation, which is currently expected to be completed by the                third                quarter of 2007. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

**Year      Ended December 31, 2006 Compared to 2005**

***Medical      Premiums.***

|   | The              increase in medical premiums for 2006 includes $197.1 million from              our              stand-alone PDP described below, which was effective January 1, 2006.              We              recognize medical premiums from the PDP as earned over the contract              period. The increase in medical premiums for 2006 also reflects the              annual              Medicare increase described below and a 3.5% increase in HMO Medicare              member months. The growth in Medicare member months contributes              significantly to the increase in medical premiums as the Medicare per              member premium rates are more than three times the |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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Table            of Contents

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Table          of Contents

***Professional        Fees***

***Investment        and Other Revenue***

***Medical        Expenses.***
* *

**.      **
** **

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Table            of Contents

***General        and Administrative Expenses**.*

***Interest      Expense.***

***Provision      for Income Taxes.***

**Year      Ended December 31, 2005 Compared to 2004**

***Medical      Premiums.***

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Table            of Contents

***Military        Contract Revenues***
***.***

***Professional        Fees***

***Investment        and Other Revenues.***

***Medical      Expenses.***
* *

**.      **
** **

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Table            of Contents

***Military        Contract Expenses***

***General        and Administrative Expenses***

***Interest        Expense***

***Other      Income (Expense), Net***
*.      *

***Provision      for Income Taxes***
**.**

***Discontinued      Operations***
*.      *

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Table            of Contents

**LIQUIDITY      AND CAPITAL RESOURCES**

|                                                               |   | **Years                Ended December 31,** |     |
|--------------------------------------------------------------------|--------|---------------------------------------------|----------|
|                                                               |   | **2006**                                    |     | **2005** |   |
|                                                               |   | (In                thousands)               |     |
| Sources                of cash:*** ***                        |   |                                        |     |   |   |   |   |
| Cash                provided by operating activities               |   | $                                           | 190,371  |   | $ | 166,832 |   |
| Exercise                of stock in connection with stock plans    |   |                                        | 14,464   |   |   | 22,346 |   |
| Proceeds                from other long-term debt, net of payments |   |                                        | 75,000   |   |   | ¾ |   |
| Other                                                              |   |                                        | 9,853    |   |   | ¾ |   |
| Total                cash sources                                  |   |                                        | 289,688  |   |   | 189,178 |   |
|                                                               |   |                                        |     |   |   |   |   |
| Uses                of cash:                                       |   |                                        |     |   |   |   |   |
| Purchase                of investments, net of proceeds       |   |                                        | (59,263  | ) |   | (131,220 | ) |
| Purchase                of treasury stock                          |   |                                        | (243,136 | ) |   | (154,382 | ) |
| Other                                                              |   |                                        | (16,430  | ) |   | (23,136 | ) |
| Total                cash uses                                     |   |                                        | (318,829 | ) |   | (308,738 | ) |
|                                                               |   |                                        |     |   |   |   |   |
| Net                decrease in cash                                |   | $                                           | (29,141  | ) | $ | (119,560 | ) |

**Sierra      Debentures **

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Table          of Contents

**Revolving      Credit Facility**

**Sierra      Share Repurchase Program**

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Table          of Contents

**Statutory      Capital and Deposit Requirements**

**Contractual      Obligations, Commitments and Off-Balance Sheet      Arrangements**

|                                             |   | **Long-Term**   |    | **Capital** |   | **Operating** |   | **Purchase**           |    |      |   |
|--------------------------------------------------|--------|-----------------|---------|-------------|--------|---------------|--------|------------------------|---------|-----------|--------|
|                                             |   | **Debt****(1)** |    | **Leases**  |   | **Leases**    |   | **Obligations****(2)** |    | **Total** |   |
| Payments                due in less than 1 year  |   | $               | 979     |        | $      | 144           |   | $                      | 18,976  |      | $      | 10,984 |   | $ | 31,083 |   |
| Payments                due in 1 to 3 years      |   |            | 1,957   |        |   | 176           |   |                   | 35,909  |      |   | ¾ |   |   | 38,042 |   |
| Payments                due in 3 to 5 years      |   |            | 76,957  |        |   | 74            |   |                   | 33,425  |      |   | ¾ |   |   | 110,456 |   |
| Payments                due in more than 5 years |   |            | 54,756  |        |   | 31            |   |                   | 64,211  |      |   | ¾ |   |   | 118,998 |   |
| Total                                            |   | $               | 134,649 |        | $      | 425           |   | $                      | 152,521 |      | $      | 10,984 |   | $ | 298,579 |   |

| (1) | The                senior convertible debentures mature in March 2023; however, holders                of                the debentures may require us to repurchase all or a portion of their                debentures on March 15 in 2008, 2013 and 2018 or upon certain corporate                events including a change in control. In either case, we may choose                to pay                the purchase price of such debentures in cash or common stock or                a                combination of cash and common stock. Since December 2003, our share                price                has exceeded 120% of the conversion price, which provides debenture                holders the option to convert their debentures into our common stock.                We                can redeem the debentures for cash beginning on or after March 20,                2008.                See Note 8 - "Long-Term Debt" in the Notes to Consolidated Financial                Statements for additional information related to our senior convertible                debentures. |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (2) | Purchase                obligations include a $10.0 million investment commitment to purchase                a                limited partnership interest in a private equity group and purchase                obligations totaling $984,000 that have a remaining commitment in                excess                of $100,000 at December 31, 2006. |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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**Other      **

**.      **

**Inflation**

**Government        Regulation **

----

Table          of Contents

**Recently      Issued Accounting Standards**

*.      *

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Table              of Contents

**Critical      Accounting Policies and Estimates**

***Medical      Claims Payable.***
** **

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Table          of Contents

| **Completion                Factor (a)**          |   | **PMPM                Factor (b)** |   |
|---------------------------------------------------|--------|------------------------------------|--------|
|                                              |   | Increase                           |   |   |   | Increase |   |
| Increase                                          |   | (Decrease)                In       |   | Increase |   | (Decrease)                In |   |
| (Decrease)                                        |   | Medical                Claims      |   | (Decrease) |   | Medical                Claims |   |
| In                Factor                          |   | Payable                            |   | In                Factor |   | Payable |   |
| (In                thousands, except percentages) |
|                                              |   |                               |   |   |   |   |   |   |   |   |
| (3)                %                              |   | $                                  | 29,975 |   |   | (3) | % | $ | (4,528 | ) |
| (2)                %                              |   |                               | 19,777 |   |   | (2) | % |   | (3,018 | ) |
| (1)                %                              |   |                               | 9,787  |   |   | (1) | % |   | (1,509 | ) |
| 1                %                                |   |                               | (5,707 | ) |   | 1 | % |   | 1,509 |   |
| 2                %                                |   |                               | (7,995 | ) |   | 2 | % |   | 3,018 |   |
| 3                %                                |   |                               | (9,338 | ) |   | 3 | % |   | 4,528 |   |

|   | (a) | Reflects                estimated potential changes in medical claims payable caused by changes                in                the completion factors for claims incurred in months prior to the                most                recent three months. Completion factors are not increased beyond                100%. |
|--------|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (b) | Reflects                estimated potential changes in medical claims payable caused by changes                in                PMPM factors for claims incurred in the most recent three                months. |
|--------|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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|                                                        |   | **Years                Ended December 31,** |      |
|-------------------------------------------------------------|--------|---------------------------------------------|-----------|
|                                                        |   | **2006**                                    |      | **2005** |   | **2004** |   |
|                                                        |   | (In                thousands)               |
| Medical                claims payable, beginning of period  |   | $                                           | 135,867   |   | $ | 119,337 |   | $ | 103,951 |   |
| Add:                components of incurred medical expenses |   |                                        |      |   |   |   |   |   |   |   |
| Current                period medical claims                |   |                                        | 1,311,854 |   |   | 1,034,089 |   |   | 889,921 |   |
| Changes                in prior periods’ estimates    |   |                                        | (15,876   | ) |   | (13,335 | ) |   | (12,147 | ) |
| Total                incurred medical expenses              |   |                                        | 1,295,978 |   |   | 1,020,754 |   |   | 877,774 |   |
|                                                        |   |                                        |      |   |   |   |   |   |   |   |
| Less:                medical claims paid                    |   |                                        |      |   |   |   |   |   |   |   |
| Current                period                               |   |                                        | 1,104,093 |   |   | 912,806 |   |   | 780,934 |   |
| Prior                period                                 |   |                                        | 104,857   |   |   | 91,418 |   |   | 81,454 |   |
| Total                claims paid                            |   |                                        | 1,208,950 |   |   | 1,004,224 |   |   | 862,388 |   |
|                                                        |   |                                        |      |   |   |     |   |
| Medical                claims payable, end of period        |   | $                                           | 222,895   |   | $ | 135,867 |   | $ | 119,337 |   |

**.**

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Table          of Contents

***Litigation      and Legal Accruals.***

***Note      Receivable From the Sale of Cal Indemnity.***

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***Other.***
* *

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Table          of Contents

**ITEM      7A.** **QUANTITATIVE      AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

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**ITEM      8.** **FINANCIAL      STATEMENTS AND SUPPLEMENTARY DATA**

|                                                                                                                               | Page   |
|------------------------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                                               |   |
| Report                of Independent Registered Public Accounting                Firm                                              | 53     |
| Consolidated                Balance Sheets at December 31, 2006 and                2005                                            | 54     |
| Consolidated                Statements of Income for the Years Ended                December 31, 2006, 2005 and 2004               | 55     |
| Consolidated                Statements of Stockholders' Equity for the                Years Ended December 31, 2006, 2005 and 2004 | 56     |
| Consolidated                Statements of Cash Flows for the Years Ended                December 31, 2006, 2005 and 2004           | 57     |
| Notes                to Consolidated Financial                Statements                                                           | 58     |

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REPORT      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

*Share-Based        Payment*
*Employers’        Accounting for Defined Benefit Pension and Other Postretirement        Plans*

*Internal        Control—Integrated Framework*

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Table          of Contents

**SIERRA      HEALTH SERVICES, INC. AND SUBSIDIARIES**

**CONSOLIDATED      BALANCE SHEETS**

**December      31, 200**
**6      and 2005**

**(In      thousands, except per share data)**

|                                                                                              |   | **2006** |     | **2005** |   |
|---------------------------------------------------------------------------------------------------|--------|----------|----------|----------|--------|
| **Assets**                                                                                        |   |     |     |     |   |
| Current                assets:                                                                    |   |     |     |     |   |   |   |
| Cash                and cash equivalents                                                          |   | $        | 58,918   |     | $      | 88,059 |   |
| Investments                                                                                       |   |     | 323,846  |     |   | 281,250 |   |
| Accounts                receivable (less allowance for doubtful accounts:                         |   |     |     |     |   |   |   |
| 2006                - $5,518; 2005 - $5,792)                                                      |   |     | 21,308   |     |   | 14,501 |   |
| Current                portion of deferred tax asset                                              |   |     | 29,861   |     |   | 23,949 |   |
| Prepaid                expenses and other current assets                                          |   |     | 110,020  |     |   | 30,596 |   |
| Total                current assets                                                               |   |     | 543,953  |     |   | 438,355 |   |
|                                                                                              |   |     |     |     |   |   |   |
| Property                and equipment, net                                                        |   |     | 71,893   |     |   | 71,357 |   |
| Restricted                cash and investments                                                    |   |     | 19,428   |     |   | 18,252 |   |
| Goodwill                (less accumulated amortization: 2006 and 2005 - $6,972)                   |   |     | 14,782   |     |   | 14,782 |   |
| Deferred                tax asset (less current portion)                                          |   |     | 18,656   |     |   | 13,266 |   |
| Note                receivable (less valuation allowance: 2006 and 2005 -                $15,000) |   |     | 47,000   |     |   | 47,000 |   |
| Other                assets                                                                       |   |     | 93,700   |     |   | 65,834 |   |
| Total                assets                                                                       |   | $        | 809,412  |     | $      | 668,846 |   |
|                                                                                              |   |     |     |     |   |   |   |
| **Liabilities                and stockholders’ equity**                                     |   |     |     |     |   |   |   |
| Current                liabilities:                                                               |   |     |     |     |   |   |   |
| Accrued                and other current liabilities                                              |   | $        | 100,390  |     | $      | 58,238 |   |
| Trade                accounts payable                                                             |   |     | 1,552    |     |   | 2,347 |   |
| Accrued                payroll and taxes                                                          |   |     | 25,925   |     |   | 21,469 |   |
| Medical                claims payable                                                             |   |     | 222,895  |     |   | 135,867 |   |
| Unearned                premium revenue                                                           |   |     | 52,075   |     |   | 49,067 |   |
| Current                portion of long-term debt                                                  |   |     | 116      |     |   | 106 |   |
| Total                current liabilities                                                          |   |     | 402,953  |     |   | 267,094 |   |
|                                                                                              |   |     |     |     |   |   |   |
| Long-term                debt (less current portion)                                              |   |     | 118,734  |     |   | 52,307 |   |
| Other                liabilities                                                                  |   |     | 71,007   |     |   | 65,193 |   |
| Total                liabilities                                                                  |   |     | 592,694  |     |   | 384,594 |   |
|                                                                                              |   |     |     |     |   |   |   |
| Commitments                and contingencies                                                      |   |     |     |     |   |   |   |
|                                                                                              |   |     |     |     |   |   |   |
| Stockholders’                equity:                                                        |   |     |     |     |   |   |   |
| Preferred                stock, $.01 par value, 1,000 shares authorized;                          |   |     |     |     |   |   |   |
| none                issued or outstanding                                                         |   |     | ¾   |     |   | ¾ |   |
| Common                stock, $.005 par value, 120,000 shares authorized;                          |   |     |     |     |   |   |   |
| 2006                - 70,835; 2005 - 69,136 shares issued                                         |   |     | 354      |     |   | 346 |   |
| Treasury                stock: 2006 - 17,011; 2005 - 11,006 common stock shares                   |   |     | (600,539 | )        |   | (377,190 | ) |
| Additional                paid-in capital                                                         |   |     | 436,643  |     |   | 400,287 |   |
| Accumulated                other comprehensive loss                                               |   |     | (8,635   | )        |   | (1,750 | ) |
| Retained                earnings                                                             |   |     | 388,895  |     |   | 262,559 |   |
| Total                stockholders’ equity                                                   |   |     | 216,718  |     |   | 284,252 |   |
| Total                liabilities and stockholders’ equity                                   |   | $        | 809,412  |     | $      | 668,846 |   |

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**SIERRA      HEALTH SERVICES, INC. AND      SUBSIDIARIES**

**CONSOLIDATED      STATEMENTS OF INCOME**

**For      the Years Ended December 31, 2006, 2005 and 2004**

**(In      thousands, except per share data)**

|                                                                    |   |     |      |     |   |
|-------------------------------------------------------------------------|--------|----------|-----------|----------|--------|
|                                                                    |   | **2006** |      | **2005** |   | **2004** |   |
| Operating                revenues:                                      |   |     |      |     |   |   |   |   |   |   |
| Medical                premiums                                         |   | $        | 1,623,515 |     | $      | 1,291,296 |   | $ | 1,131,185 |   |
| Military                contract revenues                               |   |     | ¾    |     |   | 16,326 |   |   | 372,608 |   |
| Professional                fees                                        |   |     | 52,266    |     |   | 43,186 |   |   | 35,115 |   |
| Investment                and other revenues                            |   |     | 43,111    |     |   | 34,228 |   |   | 36,646 |   |
| Total                                                                   |   |     | 1,718,892 |     |   | 1,385,036 |   |   | 1,575,554 |   |
|                                                                    |   |     |      |     |   |   |   |   |   |   |
| Operating                expenses:                                      |   |     |      |     |   |   |   |   |   |   |
| Medical                expenses                                         |   |     | 1,295,978 |     |   | 1,020,754 |   |   | 877,774 |   |
| Military                contract expenses                               |   |     | 138       |     |   | 2,392 |   |   | 317,699 |   |
| General                and administrative expenses                      |   |     | 205,342   |     |   | 172,473 |   |   | 181,764 |   |
| Total                                                                   |   |     | 1,501,458 |     |   | 1,195,619 |   |   | 1,377,237 |   |
|                                                                    |   |     |      |     |   |   |   |   |   |   |
| Operating                income from continuing operations              |   |     | 217,434   |     |   | 189,417 |   |   | 198,317 |   |
| Interest                expense                                         |   |     | (3,901    | )        |   | (8,791 | ) |   | (4,684 | ) |
| Other                income (expense), net                              |   |     | 1,960     |     |   | 1,099 |   |   | 31 |   |
|                                                                    |   |     |      |     |   |   |   |   |   |   |
| Income                from continuing operations before income taxes    |   |     | 215,493   |     |   | 181,725 |   |   | 193,664 |   |
| Provision                for income taxes                               |   |     | (75,022   | )        |   | (61,708 | ) |   | (70,245 | ) |
| Income                from continuing operations                        |   |     | 140,471   |     |   | 120,017 |   |   | 123,419 |   |
| Loss                from discontinued operations (net of                |   |     |      |     |   |   |   |   |   |   |
| income                tax benefit of 2006 - $0; 2005 - $0; 2004 - $839) |   |     | ¾    |     |   | ¾ |   |   | (682 | ) |
| Net                income                                               |   | $        | 140,471   |     | $      | 120,017 |   | $ | 122,737 |   |
|                                                                    |   |     |      |     |   |   |   |   |   |   |
| Net                income per common share:                             |   |     |      |     |   |   |   |   |   |   |
| Income                from continuing operations                        |   | $        | 2.49      |     | $      | 2.16 |   | $ | 2.32 |   |
| Loss                from discontinued operations                        |   |     | ¾    |     |   | ¾ |   |   | (0.02 | ) |
| Net                income                                               |   | $        | 2.49      |     | $      | 2.16 |   | $ | 2.30 |   |
|                                                                    |   |     |      |     |   |   |   |   |   |   |
| Net                income per common share assuming dilution:           |   |     |      |     |   |   |   |   |   |   |
| Income                from continuing operations                        |   | $        | 2.25      |     | $      | 1.81 |   | $ | 1.80 |   |
| Loss                from discontinued operations                        |   |     | ¾    |     |   | ¾ |   |   | (0.01 | ) |
| Net                income                                               |   | $        | 2.25      |     | $      | 1.81 |   | $ | 1.79 |   |

----

Table          of Contents

**SIERRA      HEALTH SERVICES, INC. AND      SUBSIDIARIES**

**CONSOLIDATED      STATEMENTS OF STOCKHOLDERS' EQUITY**

**For      the Years Ended December 31, 2006, 2005 and 2004**

**(In      thousands)**

|                                                              |   |                        |   |                       |   |    |   |    |   |          |   |     |   | Accumulated                |    |     |   | Total  |   |
|-------------------------------------------------------------------|--------|-----------------------------|--------|----------------------------|--------|---------|--------|---------|--------|---------------|--------|----------|--------|----------------------------|---------|----------|--------|--------|--------|
|                                                              |   |                        |   |                       |   |    |   |    |   | Additional    |   | Deferred |   | Other                      |    |     |   | Stock- |   |
|                                                              |   | Common                Stock |   | In                Treasury |   | Paid-in |   | Compen- |   | Comprehensive |   | Retained |   | holders’             |    |
|                                                              |   | Shares                      |   | Amount                     |   | Shares  |   | Amount  |   | Capital       |   | sation   |   | Gain                (Loss) |    | Earnings |   | Equity |   |
|                                                              |   |                        |   |                       |   |    |   |    |   |          |   |     |   |                       |    |     |   |   |   |   |   |   |   |   |   |   |   |   |
| Balance,                January 1, 2004                           |   |                        | 60,125 |                       | $      | 301     |   |    | 6,221  |          | $      | (112,737 | )      | $                          | 227,282 |     | $      | (22    | )      | $ | (479 | ) | $ | 36,419 |   | $ | 150,764 |   |
| Common                stock issued in connection                  |   |                        |   |                       |   |    |   |    |   |          |   |     |   |                       |    |     |   |   |   |   |   |   |   |   |   |   |   |   |
| with                stock plans                                   |   |                        | 4,800  |                       |   | 24      |   |    | (415   | )             |   | 8,670    |   |                       | 30,268  |     |   | (6,313 | )      |   | ¾ |   |   | (5,799 | ) |   | 26,850 |   |
| Stock-based                compensation expense                   |   |                        | ¾ |                       |   | ¾  |   |    | ¾ |          |   | ¾   |   |                       | 1,602   |     |   | 6,047  |   |   | ¾ |   |   | ¾ |   |   | 7,649 |   |
| Tax                benefits from share-based                      |   |                        |   |                       |   |    |   |    |   |          |   |     |   |                       |    |     |   |   |   |   |   |   |   |   |   |   |   |   |
| payment                arrangement                                |   |                        | ¾ |                       |   | ¾  |   |    | ¾ |          |   | ¾   |   |                       | 27,287  |     |   | ¾ |   |   | ¾ |   |   | ¾ |   |   | 27,287 |   |
| Repurchase                of common stock shares                  |   |                        | ¾ |                       |   | ¾  |   |    | 3,386  |          |   | (133,809 | )      |                       | ¾  |     |   | ¾ |   |   | ¾ |   |   | ¾ |   |   | (133,809 | ) |
| Treasury                shares not included in stock              |   |                        |   |                       |   |    |   |    |   |          |   |     |   |                       |    |     |   |   |   |   |   |   |   |   |   |   |   |   |
| dividend                                                          |   |                        | (2,971 | )                          |   | (15     | )      |    | ¾ |          |   | ¾   |   |                       | ¾  |     |   | ¾ |   |   | ¾ |   |   | ¾ |   |   | (15 | ) |
| Comprehensive                income:                              |   |                        |   |                       |   |    |   |    |   |          |   |     |   |                       |    |     |   |   |   |   |   |   |   |   |   |   |   |   |
| Net                income                                         |   |                        | ¾ |                       |   | ¾  |   |    | ¾ |          |   | ¾   |   |                       | ¾  |     |   | ¾ |   |   | ¾ |   |   | 122,737 |   |   | 122,737 |   |
| Other                comprehensive income:                        |   |                        |   |                       |   |    |   |    |   |          |   |     |   |                       |    |     |   |   |   |   |   |   |   |   |   |   |   |   |
| Net                unrealized holding gain on                     |   |                        |   |                       |   |    |   |    |   |          |   |     |   |                       |    |     |   |   |   |   |   |   |   |   |   |   |   |   |
| available-for-sale                investments                     |   |                        |   |                       |   |    |   |    |   |          |   |     |   |                       |    |     |   |   |   |   |   |   |   |   |   |   |   |   |
| ($359                pretax)                                      |   |                        | ¾ |                       |   | ¾  |   |    | ¾ |          |   | ¾   |   |                       | ¾  |     |   | ¾ |   |   | 234 |   |   | ¾ |   |   | 234 |   |
| Total                comprehensive income                         |   |                        | ¾ |                       |   | ¾  |   |    | ¾ |          |   | ¾   |   |                       | ¾  |     |   | ¾ |   |   | 234 |   |   | 122,737 |   |   | 122,971 |   |
| Balance,                December 31, 2004                         |   |                        | 61,954 |                       |   | 310     |   |    | 9,192  |          |   | (237,876 | )      |                       | 286,439 |     |   | (288   | )      |   | (245 | ) |   | 153,357 |   |   | 201,697 |   |
| Common                stock issued in connection                  |   |                        |   |                       |   |    |   |    |   |          |   |     |   |                       |    |     |   |   |   |   |   |   |   |   |   |   |   |   |
| with                stock plans                                   |   |                        | 2,106  |                       |   | 11      |   |    | (511   | )             |   | 15,068   |   |                       | 18,089  |     |   | (7     | )      |   | ¾ |   |   | (10,815 | ) |   | 22,346 |   |
| Stock-based                compensation expense                   |   |                        | ¾ |                       |   | ¾  |   |    | ¾ |          |   | ¾   |   |                       | 7,096   |     |   | 295    |   |   | ¾ |   |   | ¾ |   |   | 7,391 |   |
| Common                stock issued in connection                  |   |                        |   |                       |   |    |   |    |   |          |   |     |   |                       |    |     |   |   |   |   |   |   |   |   |   |   |   |   |
| with                conversion of debentures                      |   |                        | 6,890  |                       |   | 34      |   |    | ¾ |          |   | ¾   |   |                       | 62,966  |     |   | ¾ |   |   | ¾ |   |   | ¾ |   |   | 63,000 |   |
| Tax                benefits from share-based                      |   |                        |   |                       |   |    |   |    |   |          |   |     |   |                       |    |     |   |   |   |   |   |   |   |   |   |   |   |   |
| payment                arrangement                                |   |                        | ¾ |                       |   | ¾  |   |    | ¾ |          |   | ¾   |   |                       | 25,697  |     |   | ¾ |   |   | ¾ |   |   | ¾ |   |   | 25,697 |   |
| Repurchase                of common stock shares                  |   |                        | ¾ |                       |   | ¾  |   |    | 2,325  |          |   | (154,382 | )      |                       | ¾  |     |   | ¾ |   |   | ¾ |   |   | ¾ |   |   | (154,382 | ) |
| Treasury                shares not included in stock              |   |                        |   |                       |   |    |   |    |   |          |   |     |   |                       |    |     |   |   |   |   |   |   |   |   |   |   |   |   |
| dividend                                                          |   |                        | (1,814 | )                          |   | (9      | )      |    | ¾ |          |   | ¾   |   |                       | ¾  |     |   | ¾ |   |   | ¾ |   |   | ¾ |   |   | (9 | ) |
| Comprehensive                income:                              |   |                        |   |                       |   |    |   |    |   |          |   |     |   |                       |    |     |   |   |   |   |   |   |   |   |   |   |   |   |
| Net                income                                         |   |                        | ¾ |                       |   | ¾  |   |    | ¾ |          |   | ¾   |   |                       | ¾  |     |   | ¾ |   |   | ¾ |   |   | 120,017 |   |   | 120,017 |   |
| Other                comprehensive income:                        |   |                        |   |                       |   |    |   |    |   |          |   |     |   |                       |    |     |   |   |   |   |   |   |   |   |   |   |   |   |
| Net                unrealized holding loss on                     |   |                        |   |                       |   |    |   |    |   |          |   |     |   |                       |    |     |   |   |   |   |   |   |   |   |   |   |   |   |
| available-for-sale                investments                     |   |                        |   |                       |   |    |   |    |   |          |   |     |   |                       |    |     |   |   |   |   |   |   |   |   |   |   |   |   |
| ($2,315                pretax)                                    |   |                        | ¾ |                       |   | ¾  |   |    | ¾ |          |   | ¾   |   |                       | ¾  |     |   | ¾ |   |   | (1,505 | ) |   | ¾ |   |   | (1,505 | ) |
| Total                comprehensive income                         |   |                        | ¾ |                       |   | ¾  |   |    | ¾ |          |   | ¾   |   |                       | ¾  |     |   | ¾ |   |   | (1,505 | ) |   | 120,017 |   |   | 118,512 |   |
| Balance,                December 31, 2005                         |   |                        | 69,136 |                       |   | 346     |   |    | 11,006 |          |   | (377,190 | )      |                       | 400,287 |     |   | ¾ |   |   | (1,750 | ) |   | 262,559 |   |   | 284,252 |   |
| Common                stock issued in connection                  |   |                        |   |                       |   |    |   |    |   |          |   |     |   |                       |    |     |   |   |   |   |   |   |   |   |   |   |   |   |
| with                stock plans                                   |   |                        | 770    |                       |   | 3       |   |    | (571   | )             |   | 19,755   |   |                       | 8,847   |     |   | ¾ |   |   | ¾ |   |   | (14,141 | ) |   | 14,464 |   |
| Stock-based                compensation expense                   |   |                        | ¾ |                       |   | ¾  |   |    | ¾ |          |   | 32       |   |                       | 9,161   |     |   | ¾ |   |   | ¾ |   |   | 6 |   |   | 9,199 |   |
| Common                stock issued in connection                  |   |                        |   |                       |   |    |   |    |   |          |   |     |   |                       |    |     |   |   |   |   |   |   |   |   |   |   |   |   |
| with                conversion of debentures                      |   |                        | 929    |                       |   | 5       |   |    | ¾ |          |   | ¾   |   |                       | 8,495   |     |   | ¾ |   |   | ¾ |   |   | ¾ |   |   | 8,500 |   |
| Excess                tax benefits from share-based               |   |                        |   |                       |   |    |   |    |   |          |   |     |   |                       |    |     |   |   |   |   |   |   |   |   |   |   |   |   |
| payment                arrangements                               |   |                        | ¾ |                       |   | ¾  |   |    | ¾ |          |   | ¾   |   |                       | 9,853   |     |   | ¾ |   |   | ¾ |   |   | ¾ |   |   | 9,853 |   |
| Repurchase                of common stock shares                  |   |                        | ¾ |                       |   | ¾  |   |    | 6,576  |          |   | (243,136 | )      |                       | ¾  |     |   | ¾ |   |   | ¾ |   |   | ¾ |   |   | (243,136 | ) |
| Adjustment                to initially apply SFAS 158, net of tax |   |                        | ¾ |                       |   | ¾  |   |    | ¾ |          |   | ¾   |   |                       | ¾  |     |   | ¾ |   |   | (6,024 | ) |   | ¾ |   |   | (6,024 | ) |
| Comprehensive                income:                              |   |                        |   |                       |   |    |   |    |   |          |   |     |   |                       |    |     |   |   |   |   |   |   |   |   |   |   |   |   |
| Net                income                                         |   |                        | ¾ |                       |   | ¾  |   |    | ¾ |          |   | ¾   |   |                       | ¾  |     |   | ¾ |   |   | ¾ |   |   | 140,471 |   |   | 140,471 |   |
| Other                comprehensive income:                        |   |                        |   |                       |   |    |   |    |   |          |   |     |   |                       |    |     |   |   |   |   |   |   |   |   |   |   |   |   |
| Net                unrealized holding loss on                     |   |                        |   |                       |   |    |   |    |   |          |   |     |   |                       |    |     |   |   |   |   |   |   |   |   |   |   |   |   |
| available-for-sale                investments                     |   |                        |   |                       |   |    |   |    |   |          |   |     |   |                       |    |     |   |   |   |   |   |   |   |   |   |   |   |   |
| ($224                pretax)                                      |   |                        | ¾ |                       |   | ¾  |   |    | ¾ |          |   | ¾   |   |                       | ¾  |     |   | ¾ |   |   | (146 | ) |   | ¾ |   |   | (146 | ) |
| Unfunded                portion of defined benefit                |   |                        |   |                       |   |    |   |    |   |          |   |     |   |                       |    |     |   |   |   |   |   |   |   |   |   |   |   |   |
| pension                plan ($1,100 pretax)                       |   |                        | ¾ |                       |   | ¾  |   |    | ¾ |          |   | ¾   |   |                       | ¾  |     |   | ¾ |   |   | (715 | ) |   | ¾ |   |   | (715 | ) |
| Total                comprehensive income                         |   |                        | ¾ |                       |   | ¾  |   |    | ¾ |          |   | ¾   |   |                       | ¾  |     |   | ¾ |   |   | (861 | ) |   | 140,471 |   |   | 139,610 |   |
| Balance,                December 31, 2006                         |   |                        | 70,835 |                       | $      | 354     |   |    | 17,011 |          | $      | (600,539 | )      | $                          | 436,643 |     | $      | ¾ |   | $ | (8,635 | ) | $ | 388,895 |   | $ | 216,718 |   |

----

Table          of Contents

**SIERRA      HEALTH SERVICES, INC. AND      SUBSIDIARIES**

**CONSOLIDATED      STATEMENTS OF CASH FLOWS**

**For      the Years Ended December 31, 200**
**6,      2005 and 2004**

**(In      thousands)**

|                                                                                                                             |   |     |     |     |   |
|----------------------------------------------------------------------------------------------------------------------------------|--------|----------|----------|----------|--------|
|                                                                                                                             |   | **2006** |     | **2005** |   | **2004** |   |
| Cash                flows from operating activities:                                                                             |   |     |     |     |   |   |   |   |   |   |
| Net                income                                                                                                        |   | $        | 140,471  |     | $      | 120,017 |   | $ | 122,737 |   |
| Adjustments                to reconcile net income to net cash provided by operating                activities:                  |   |     |     |     |   |   |   |   |   |   |
| Loss                from discontinued operations                                                                                 |   |     | ¾   |     |   | ¾ |   |   | 682 |   |
| Depreciation                                                                                                                     |   |     | 16,570   |     |   | 14,951 |   |   | 17,084 |   |
| Stock                based compensation expense                                                                                  |   |     | 9,199    |     |   | 7,391 |   |   | 7,332 |   |
| Excess                tax benefits from share-based payment arrangements                                                         |   |     | (9,853   | )        |   | ¾ |   |   | ¾ |   |
| Provision                for doubtful accounts                                                                                   |   |     | 2,715    |     |   | 2,017 |   |   | 1,667 |   |
| Loss                (gain) on property and equipment dispositions                                                                |   |     | 256      |     |   | (2,110 | ) |   | (136 | ) |
| Valuation                allowance on note receivable                                                                            |   |     | ¾   |     |   | ¾ |   |   | 15,000 |   |
| Change                in operating assets and liabilities:                                                                       |   |     |     |     |   |   |   |   |   |   |
| Military                accounts receivable                                                                                      |   |     | 75       |     |   | 25,171 |   |   | 21,937 |   |
| Deferred                tax asset                                                                                                |   |     | 2,257    |     |   | 20,124 |   |   | 41,588 |   |
| Other                current assets                                                                                              |   |     | (90,127  | )        |   | 4,679 |   |   | 11,364 |   |
| Other                assets                                                                                                      |   |     | (7,217   | )        |   | 1,671 |   |   | (7,757 | ) |
| Accrued                payroll and taxes                                                                                         |   |     | 4,456    |     |   | (6,199 | ) |   | 11,095 |   |
| Medical                claims payable                                                                                            |   |     | 87,028   |     |   | 16,530 |   |   | 15,386 |   |
| Military                healthcare payable                                                                                       |   |     | ¾   |     |   | (17,061 | ) |   | (59,544 | ) |
| Other                current liabilities                                                                                         |   |     | 31,462   |     |   | (19,466 | ) |   | (36,149 | ) |
| Unearned                premium revenue                                                                                          |   |     | 3,008    |     |   | (1,696 | ) |   | 4,875 |   |
| Other                liabilities                                                                                                 |   |     | 71       |     |   | 813 |   |   | (2,631 | ) |
| Net                cash provided by operating activities of continuing                operations                                 |   |     | 190,371  |     |   | 166,832 |   |   | 164,530 |   |
|                                                                                                                             |   |     |     |     |   |   |   |   |   |   |
| Cash                flows from investing activities:                                                                             |   |     |     |     |   |   |   |   |   |   |
| Capital                expenditures                                                                                              |   |     | (16,749  | )        |   | (13,946 | ) |   | (26,237 | ) |
| Property                and equipment dispositions                                                                               |   |     | 430      |     |   | 919 |   |   | 3,135 |   |
| Purchase                of available-for-sale investments, including restricted                investments                       |   |     | (814,737 | )        |   | (870,143 | ) |   | (561,190 | ) |
| Proceeds                from sales/maturities of available-for-sale investments, including                restricted investments |   |     | 799,691  |     |   | 755,843 |   |   | 631,951 |   |
| Purchase                of other investments                                                                                     |   |     | (63,449  | )        |   | (39,420 | ) |   | (30,825 | ) |
| Proceeds                from sales/maturities of other investments                                                               |   |     | 19,232   |     |   | 22,500 |   |   | 2,750 |   |
| Net                cash (used for) provided by investing activities of continuing                operations                      |   |     | (75,582  | )        |   | (144,247 | ) |   | 19,584 |   |
|                                                                                                                             |   |     |     |     |   |   |   |   |   |   |
| Cash                flows from financing activities:                                                                             |   |     |     |     |   |   |   |   |   |   |
| Payments                on debt and capital leases                                                                               |   |     | (111     | )        |   | (10,109 | ) |   | (1,775 | ) |
| Proceeds                from other long-term debt                                                                                |   |     | 75,000   |     |   | ¾ |   |   | 10,000 |   |
| Purchase                of treasury stock                                                                                        |   |     | (243,136 | )        |   | (154,382 | ) |   | (133,809 | ) |
| Excess                tax benefits from share-based payment arrangements                                                         |   |     | 9,853    |     |   | ¾ |   |   | ¾ |   |
| Exercise                of stock options in connection with stock plans                                                          |   |     | 14,464   |     |   | 22,346 |   |   | 26,849 |   |
| Net                cash used for financing activities of continuing operations                                                   |   |     | (143,930 | )        |   | (142,145 | ) |   | (98,735 | ) |
|                                                                                                                             |   |     |     |     |   |   |   |   |   |   |
| Net                cash (used for) provided by continuing operations                                                             |   |     | (29,141  | )        |   | (119,560 | ) |   | 85,379 |   |
|                                                                                                                             |   |     |     |     |   |   |   |   |   |   |
| Cash                flows of discontinued operations                                                                             |   |     |     |     |   |   |   |   |   |   |
| Operating                cash flows                                                                                              |   |     | ¾   |     |   | ¾ |   |   | (9,866 | ) |
| Investing                cash flows                                                                                              |   |     | ¾   |     |   | ¾ |   |   | 13,586 |   |
| Financing                cash flows                                                                                              |   |     | ¾   |     |   | ¾ |   |   | ¾ |   |
| Net                cash provided by discontinued operations                                                                      |   |     | ¾   |     |   | ¾ |   |   | 3,720 |   |
|                                                                                                                             |   |     |     |     |   |   |   |   |   |   |
| Net                (decrease) increase in cash and cash equivalents                                                              |   |     | (29,141  | )        |   | (119,560 | ) |   | 89,099 |   |
| Cash                and cash equivalents at beginning of year                                                                    |   |     | 88,059   |     |   | 207,619 |   |   | 118,520 |   |
| Cash                and cash equivalents at end of year                                                                          |   | $        | 58,918   |     | $      | 88,059 |   | $ | 207,619 |   |

| Cash                paid during the year for interest (net of amount                capitalized)                 |   | $      | (2,564  | )      | $      | (8,600  | )      | $      | (3,025  | )      |
|------------------------------------------------------------------------------------------------------------------|--------|--------|---------|--------|--------|---------|--------|--------|---------|--------|
| Cash                paid during the year for income taxes                                                        |   |   | (55,748 | )      |   | (44,732 | )      |   | (12,900 | )      |
|                                                                                                             |   |   |    |   |   |    |   |   |    |   |
| Non-cash                investing and financing activities:                                                      |   |   |    |   |   |    |   |   |    |   |
| Senior                convertible debentures converted into Sierra common stock                                  |   |   | 8,500   |   |   | 63,000  |   |   | ¾  |   |
| Tax                benefits from share-based payment arrangements                                           |   |   | ¾  |   |   | 25,697  |   |   | 27,287  |   |
| Assets                and liabilities recorded in conjunction with the sale of the                workers’ |   |   |    |   |   |    |   |   |    |   |
| compensation                operations                                                                           |   |   | ¾  |   |   | ¾  |   |   | 54,060  |   |
| Additions                to capital leases                                                                       |   |   | 47      |   |   | 19      |   |   | 253     |   |
| Investments                purchased but not settled                                                             |   |   | 9,900   |   |   | 3,330   |   |   | 1,851   |   |

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Table          of Contents

**SIERRA      HEALTH SERVICES, INC. AND      SUBSIDIARIES**

**NOTES      TO CONSOLIDATED FINANCIAL STATEMENTS**

**For      the Years Ended December 31, 2006, 2005 and 2004**

**1.**
**BUSINESS**

*Business*

*Reclassifications.      *

**2.**
**SUMMARY      OF SIGNIFICANT ACCOUNTING POLICIES**

*Principles      of Consolidation*

*Medical      Premiums*

*Medicare      Part D Prescription Drug Program (“PDP”).*

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Table          of Contents

*Professional      Fees. *

*Investment      and Other Revenues.*

*Medical      Expenses. *

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Table          of Contents

*Cash      and Cash Equivalents*

*Investments*

*Restricted      Cash and Investments*

*Reinsurance      Recoverable.*

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Table          of Contents

*Property      and Equipment.*

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

*Goodwill.*

*Treasury      Stock.*

*Premium        Deficiency Reserves.*

*Income      Taxes.*

*Concentration      of Credit Risk.*

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Table            of Contents

*Recently      Issued Accounting Standards*
***.***
* *

*Use      of Estimates and Assumptions in the Preparation of Financial Statements.*

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Table            of Contents

**3. CASH        AND        INVESTMENTS **

|                                            |   |                          |    | **Gross**      |   | **Gross**      |   |      |   |
|-------------------------------------------------|--------|-------------------------------|---------|----------------|--------|----------------|--------|-----------|--------|
|                                            |   | **Amortized**                 |    | **Unrealized** |   | **Unrealized** |   | **Fair**  |   |
|                                            |   | **Cost**                      |    | **Gains**      |   | **Losses**     |   | **Value** |   |
|                                            |   | (In                thousands) |    |
| Available-for-sale                investments:  |   |                          |    |           |   |           |   |      |   |   |   |   |   |
| Classified                as current:           |   |                          |    |           |   |           |   |      |   |   |   |   |   |
| U.S.                government and its agencies |   | $                             | 41,134  |           | $      | 6              |   | $         | 1,051  |   | $ | 40,089 |   |
| Municipal                obligations            |   |                          | 196,522 |           |   | 124            |   |      | 341    |   |   | 196,305 |   |
| Mortgage                backed securities       |   |                          | 6,745   |           |   | 51             |   |      | 73     |   |   | 6,723 |   |
| Corporate                bonds                  |   |                          | 19,498  |           |   | 24             |   |      | 1,234  |   |   | 18,288 |   |
| Other                                           |   |                          | 236     |           |   | ¾         |   |      | 90     |   |   | 146 |   |
| Total                current                    |   |                          | 264,135 |           |   | 205            |   |      | 2,789  |   |   | 261,551 |   |
|                                            |   |                          |    |           |   |           |   |      |   |   |   |   |   |
| Classified                as restricted:        |   |                          |    |           |   |           |   |      |   |   |   |   |   |
| U.S.                government and its agencies |   |                          | 12,529  |           |   | 4              |   |      | 339    |   |   | 12,194 |   |
| Municipal                obligations            |   |                          | 3,244   |           |   | 20             |   |      | 16     |   |   | 3,248 |   |
| Other                debt securities            |   |                          | 3,986   |           |   | ¾         |   |      | ¾ |   |   | 3,986 |   |
| Total                restricted                 |   |                          | 19,759  |           |   | 24             |   |      | 355    |   |   | 19,428 |   |
| Total                available-for-sale         |   | $                             | 283,894 |           | $      | 229            |   | $         | 3,144  |   | $ | 280,979 |   |

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Table          of Contents

|                                            |   |                          |    | **Gross**      |   | **Gross**      |   |      |   |
|-------------------------------------------------|--------|-------------------------------|---------|----------------|--------|----------------|--------|-----------|--------|
|                                            |   | **Amortized**                 |    | **Unrealized** |   | **Unrealized** |   | **Fair**  |   |
|                                            |   | **Cost**                      |    | **Gains**      |   | **Losses**     |   | **Value** |   |
|                                            |   | (In                thousands) |    |
| Available-for-sale                investments:  |   |                          |    |           |   |           |   |      |   |   |   |   |   |
| Classified                as current:           |   |                          |    |           |   |           |   |      |   |   |   |   |   |
| U.S.                government and its agencies |   | $                             | 70,847  |           | $      | 44             |   | $         | 1,384  |   | $ | 69,507 |   |
| Municipal                obligations            |   |                          | 152,796 |           |   | 94             |   |      | 519    |   |   | 152,371 |   |
| Mortgage                backed securities       |   |                          | 298     |           |   | ¾         |   |      | 2      |   |   | 296 |   |
| Corporate                bonds                  |   |                          | 11,840  |           |   | 14             |   |      | 562    |   |   | 11,292 |   |
| Total                debt securities            |   |                          | 235,781 |           |   | 152            |   |      | 2,467  |   |   | 233,466 |   |
| Preferred                stock                  |   |                          | 3,871   |           |   | ¾         |   |      | 82     |   |   | 3,789 |   |
| Total                current                    |   |                          | 239,652 |           |   | 152            |   |      | 2,549  |   |   | 237,255 |   |
|                                            |   |                          |    |           |   |           |   |      |   |   |   |   |   |
| Classified                as restricted:        |   |                          |    |           |   |           |   |      |   |   |   |   |   |
| U.S.                government and its agencies |   |                          | 12,000  |           |   | 2              |   |      | 308    |   |   | 11,694 |   |
| Municipal                obligations            |   |                          | 2,722   |           |   | 34             |   |      | 23     |   |   | 2,733 |   |
| Other                debt securities            |   |                          | 3,825   |           |   | ¾         |   |      | ¾ |   |   | 3,825 |   |
| Total                restricted                 |   |                          | 18,547  |           |   | 36             |   |      | 331    |   |   | 18,252 |   |
| Total                available-for-sale         |   | $                             | 258,199 |           | $      | 188            |   | $         | 2,880  |   | $ | 255,507 |   |

|                                      |   |                          |   |     |   |
|-------------------------------------------|--------|-------------------------------|--------|----------|--------|
|                                      |   | **2006**                      |   | **2005** |   |
| Other                investments:         |   | (In                thousands) |
| Classified                as current      |   |                          |   |     |   |   |   |
| Trust                deed mortgage notes  |   | $                             | 62,295 |     | $      | 43,995 |   |
| Classified                as long-term    |   |                          |   |     |   |   |   |
| Trust                deed mortgage notes  |   |                          | 6,270  |     |   | 1,000 |   |
| Real                estate joint ventures |   |                          | 19,897 |     |   | ¾ |   |
| Total                long-term            |   |                          | 26,167 |     |   | 1,000 |   |
| Total                other investments    |   | $                             | 88,462 |     | $      | 44,995 |   |

|                                                 |   | **Less                Than 12 Months** |    | **12                Months Or More** |   | **Total** |   |
|------------------------------------------------------|--------|----------------------------------------|---------|--------------------------------------|--------|-----------|--------|
|                                                 |   | **Fair**                               |    | **Unrealized**                       |   | **Fair**  |   | **Unrealized** |   | **Fair** |   | **Unrealized** |   |
|                                                 |   | **Value**                              |    | **Losses**                           |   | **Value** |   | **Losses** |   | **Value** |   | **Losses** |   |
|                                                 |   | (In                thousands)          |    |
| Description                of securities:            |   |                                   |    |                                 |   |      |   |   |   |   |   |   |   |   |   |   |   |   |   |
| U.S.                government and its agencies      |   | $                                      | 12,950  |                                 | $      | 549       |   | $ | 20,804 |   | $ | 841 |   | $ | 33,754 |   | $ | 1,390 |   |
| Municipal                obligations                 |   |                                   | 118,758 |                                 |   | 331       |   |   | 6,379 |   |   | 26 |   |   | 125,137 |   |   | 357 |   |
| Mortgage                backed securities            |   |                                   | 728     |                                 |   | 14        |   |   | 249 |   |   | 59 |   |   | 977 |   |   | 73 |   |
| Corporate                bonds                       |   |                                   | 9,704   |                                 |   | 445       |   |   | 2,918 |   |   | 789 |   |   | 12,622 |   |   | 1,234 |   |
| Other                                                |   |                                   | 146     |                                 |   | 90        |   |   | ¾ |   |   | ¾ |   |   | 146 |   |   | 90 |   |
| Total                temporarily impaired securities |   | $                                      | 142,286 |                                 | $      | 1,429     |   | $ | 30,350 |   | $ | 1,715 |   | $ | 172,636 |   | $ | 3,144 |   |

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|                                                     |   | **Amortized**                       |    | **Fair**  |   |
|----------------------------------------------------------|--------|-------------------------------------|---------|-----------|--------|
|                                                     |   | **Cost**                            |    | **Value** |   |
|                                                          |   | (In                thousands)  |
| Due                in one year or less                   |   | $                                   | 80,727  |      | $      | 80,685 |   |
| Due                after one year through five years     |   |                                | 115,587 |      |   | 113,506 |   |
| Due                after five years through ten years    |   |                                | 28,866  |      |   | 28,655 |   |
| Due                after ten years through fifteen years |   |                                | 25,949  |      |   | 25,932 |   |
| Due                after fifteen years                   |   |                                | 32,765  |      |   | 32,201 |   |
| Total                                                    |   | $                                   | 283,894 |      | $      | 280,979 |   |

**4.**
**PROPERTY      AND EQUIPMENT**

|                                                                |   | **2006**                            |     | **2005** |   |
|---------------------------------------------------------------------|--------|-------------------------------------|----------|----------|--------|
|                                                                |   | (In                thousands)  |
| Land                                                                |   | $                                   | 15,220   |     | $      | 15,010 |   |
| Buildings                and improvements                           |   |                                | 31,632   |     |   | 28,079 |   |
| Furniture,                fixtures and equipment                    |   |                                | 40,589   |     |   | 39,964 |   |
| Data                processing equipment and software               |   |                                | 102,870  |     |   | 98,910 |   |
| Software                in development and construction in progress |   |                                | 358      |     |   | 518 |   |
| Less:                accumulated depreciation                       |   |                                | (118,776 | )        |   | (111,124 | ) |
| Property                and equipment, net                          |   | $                                   | 71,893   |     | $      | 71,357 |   |

|                                             |   | **2006**                      |   | **2005** |   |
|--------------------------------------------------|--------|-------------------------------|--------|----------|--------|
|                                                  |   | (In                thousands) |
| Buildings                and improvements        |   | $                             | 278    |     | $      | 278 |   |
| Furniture,                fixtures and equipment |   |                          | 475    |     |   | 428 |   |
| Less:                accumulated depreciation    |   |                          | (452   | )        |   | (355 | ) |
| Property                and equipment, net       |   | $                             | 301    |     | $      | 351 |   |

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**5. INCOME      TAXES**

|                                       |   |                          |   | **2006** |   | **2005** |   | **2004** |   |
|--------------------------------------------|--------|-------------------------------|--------|----------|--------|----------|--------|----------|--------|
|                                       |   | (In                thousands) |   |
| Provision                for income taxes: |   |                          |   |     |   |     |   |     |   |   |   |   |   |
| Current                                    |   |                          |   |     | $      | 84,229   |   | $        | 69,466 |   | $ | 52,035 |   |
| Deferred                                   |   |                          |   |     |   | (9,207   | )      |     | (7,758 | ) |   | 18,210 |   |
| Total                                      |   |                          |   |     | $      | 75,022   |   | $        | 61,708 |   | $ | 70,245 |   |

|                                                      |   |   | **2006** |   |   | **2005** |   |   | **2004** |   |
|-----------------------------------------------------------|--------|--------|----------|--------|--------|----------|--------|--------|----------|--------|
| Statutory                rate                             |   |   | 35       | %      |   | 35       | %      |   | 35       | %      |
| State                income taxes, net of federal benefit |   |   | ¾   |   |   | ¾   |   |   | 1        |   |
| Tax                preferred investments                  |   |   | (1       | )      |   | (1       | )      |   | (1       | )      |
| Change                in valuation allowance              |   |   | ¾   |   |   | ¾   |   |   | 1        |   |
| Compensation                and benefit plans             |   |   | ¾   |   |   | 1        |   |   | ¾   |   |
| Intangibles                                               |   |   | ¾   |   |   | (1       | )      |   | ¾   |   |
| Other                                                     |   |   | 1        |   |   | ¾   |   |   | ¾   |   |
| Effective                rate                             |   |   | 35       | %      |   | 34       | %      |   | 36       | %      |

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|                                                             |   | **2006**                      |   | **2005** |   |
|------------------------------------------------------------------|--------|-------------------------------|--------|----------|--------|
|                                                             |   | (In                thousands) |   |
| Deferred                tax assets:                              |   |                          |   |     |   |   |   |
| Medical                claims payable                            |   | $                             | 9,196  |     | $      | 8,106 |   |
| Accruals                not currently deductible                 |   |                          | 11,867 |     |   | 10,970 |   |
| Compensation                accruals                             |   |                          | 27,521 |     |   | 18,332 |   |
| Bad                debt allowances                               |   |                          | 1,017  |     |   | 911 |   |
| Loss                carryforwards and credits                    |   |                          | 15,192 |     |   | 15,192 |   |
| Depreciation                and amortization                     |   |                          | 758    |     |   | ¾ |   |
| Other                                                            |   |                          | 1,381  |     |   | 1,337 |   |
| Total                                                            |   |                          | 66,932 |     |   | 54,848 |   |
|                                                             |   |                          |   |     |   |   |   |
| Deferred                tax liabilities:                         |   |                          |   |     |   |   |   |
| Prepaid                expenses                                  |   |                          | 2,756  |     |   | 2,470 |   |
| Depreciation                and amortization                     |   |                          | ¾ |     |   | 881 |   |
| Other                                                            |   |                          | 1,177  |     |   | 1,172 |   |
| Total                                                            |   |                          | 3,933  |     |   | 4,523 |   |
| Net                deferred tax asset before valuation allowance |   |                          | 62,999 |     |   | 50,325 |   |
| Less:                valuation allowance                         |   |                          | 14,842 |     |   | 15,082 |   |
| Net                deferred tax asset                            |   | $                             | 48,157 |     | $      | 35,243 |   |

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**6.**
**MEDICAL      CLAIMS PAYABLE**

|                                                        |   | **Years                Ended December 31,** |      |
|-------------------------------------------------------------|--------|---------------------------------------------|-----------|
|                                                        |   | **2006**                                    |      | **2005** |   | **2004** |   |
|                                                        |   | (In                thousands)          |
| Medical                claims payable, beginning of period  |   | $                                           | 135,867   |   | $ | 119,337 |   | $ | 103,951 |   |
| Add:                components of incurred medical expenses |   |                                        |      |   |   |   |   |   |   |   |
| Current                period medical claims                |   |                                        | 1,311,854 |   |   | 1,034,089 |   |   | 889,921 |   |
| Changes                in prior periods’ estimates    |   |                                        | (15,876   | ) |   | (13,335 | ) |   | (12,147 | ) |
| Total                incurred medical expenses              |   |                                        | 1,295,978 |   |   | 1,020,754 |   |   | 877,774 |   |
|                                                        |   |                                        |      |   |   |   |   |   |   |   |
| Less:                medical claims paid                    |   |                                        |      |   |   |   |   |   |   |   |
| Current                period                               |   |                                        | 1,104,093 |   |   | 912,806 |   |   | 780,934 |   |
| Prior                period                                 |   |                                        | 104,857   |   |   | 91,418 |   |   | 81,454 |   |
| Total                claims paid                            |   |                                        | 1,208,950 |   |   | 1,004,224 |   |   | 862,388 |   |
|                                                        |   |                                        |      |   |   |   |   |   |   |   |
| Medical                claims payable, end of period        |   | $                                           | 222,895   |   | $ | 135,867 |   | $ | 119,337 |   |

**7.**
**MILITARY      HEALTH CARE PAYABLE**

|                                                             |   | **Years                Ended December 31,** |                                |
|------------------------------------------------------------------|--------|---------------------------------------------|-------------------------------------|
|                                                             |   |                                        | **2005**                            |   |   | **2004** |   |
|                                                             |   |                                        | (In                thousands)  |   |
| Military                health care payable, beginning of period |   | $                                           | 17,061                              |   | $ | 76,605 |   |
| Add:                components of incurred medical expenses      |   |                                        |                                |   |   |   |   |
| Current                period medical claims                     |   |                                        | ¾                              |   |   | 220,710 |   |
| Changes                in prior periods’ estimates:        |   |                                        |                                |   |   |   |   |
| Earnings                related charges                          |   |                                        | (4,539                              | ) |   | (14,118 | ) |
| Non-earnings                related charges                      |   |                                        | 853                                 |   |   | (6,462 | ) |
| Total                incurred medical expenses                   |   |                                        | (3,686                              | ) |   | 200,130 |   |
|                                                             |   |                                        |                                |   |   |   |   |
| Less:                military contract claims paid               |   |                                        |                                |   |   |   |   |
| Current                period                                    |   |                                        | ¾                              |   |   | 201,950 |   |
| Prior                period                                      |   |                                        | 13,375                              |   |   | 57,724 |   |
| Total                military contract claims paid               |   |                                        | 13,375                              |   |   | 259,674 |   |
|                                                             |   |                                        |                                |   |   |   |   |
| Military                health care payable, end of period       |   | $                                           | ¾                              |   | $ | 17,061 |   |

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**8.**
**LONG-TERM      DEBT**

|                                                  |   | **2006**                            |    | **2005** |   |
|-------------------------------------------------------|--------|-------------------------------------|---------|----------|--------|
|                                                  |   | (In                thousands)  |
| 2¼%                Senior convertible debentures |   | $                                   | 43,500  |     | $      | 52,000 |   |
| Revolving                credit facility              |   |                                | 75,000  |     |   | ¾ |   |
| Capital                leases                         |   |                                | 350     |     |   | 413 |   |
| Total                                                 |   |                                | 118,850 |     |   | 52,413 |   |
| Less                current portion                   |   |                                | (116    | )        |   | (106 | ) |
| Long-term                debt                         |   | $                                   | 118,734 |     | $      | 52,307 |   |

*Sierra      Debentures*

*Revolving      Credit Facility - *

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*Other.*

|                                                   |   |                                |    | **Obligations**                  |   |
|--------------------------------------------------------|--------|-------------------------------------|---------|----------------------------------|--------|
|                                                   |   | **Long-Term**                       |    | **Under                Capital** |   |
|                                                   |   | **Debt**                            |    | **Leases**                       |   |
|                                                        |   | (In                thousands)  |
| **Years                Ending December 31,**           |   |                                |    |                             |   |   |   |
| 2007                                                   |   | $                                   | ¾  |                             | $      | 144 |   |
| 2008                                                   |   |                                | ¾  |                             |   | 104 |   |
| 2009                                                   |   |                                | ¾  |                             |   | 72 |   |
| 2010                                                   |   |                                | ¾  |                             |   | 43 |   |
| 2011                                                   |   |                                | 75,000  |                             |   | 31 |   |
| Thereafter                                             |   |                                | 43,500  |                             |   | 31 |   |
| Total                                                  |   | $                                   | 118,500 |                             |   | 425 |   |
| Less:                amounts representing interest     |   |                                |    |                             |   | (75 | ) |
| Present                value of minimum lease payments |   |                                |    |                             | $      | 350 |   |

**9.      EMPLOYEE AND DIRECTOR BENEFIT PLANS**

*Stock-Based      Compensation *

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|                                                                     |   | **Years                Ended December 31,** |   |
|--------------------------------------------------------------------------|--------|---------------------------------------------|--------|
|                                                                     |   | **2006**                                    |   | **2005** |   | $2004 |   |
|                                                                     |   | (In                thousands)          |
| Medical                expenses                                     |   | $                                           | 1,074  |   | $ | ¾ |   | $ | ¾ |   |
| General                and administrative expenses                       |   |                                        | 8,125  |   |   | 7,391 |   |   | 7,332 |   |
| Stock-based                compensation expense before income taxes      |   |                                        | 9,199  |   |   | 7,391 |   |   | 7,332 |   |
| Income                tax benefit                                   |   |                                        | (3,220 | ) |   | (2,587 | ) |   | (2,566 | ) |
| Total                stock-based compensation expense after income taxes |   | $                                           | 5,979  |   | $ | 4,804 |   | $ | 4,766 |   |

|                                                  |   | **Year                Ended December 31, 2006**            |     |
|-------------------------------------------------------|--------|------------------------------------------------------------|----------|
|                                                  |   | **Under****APB                25**                         |     | **As                Reported Under****SFAS                123R** |   | **Difference** |   |
|                                                  |   | (In                thousands, except per share data)  |
| Operating                income                       |   | $                                                          | 221,243  |   | $ | 217,434 |   | $ | (3,809 | ) |
|                                                  |   |                                                       |     |   |   |   |   |   |   |   |
| Income                before income taxes             |   | $                                                          | 219,302  |   | $ | 215,493 |   | $ | (3,809 | ) |
|                                                  |   |                                                       |     |   |   |   |   |   |   |   |
| Net                income                             |   | $                                                          | 142,947  |   | $ | 140,471 |   | $ | (2,476 | ) |
|                                                  |   |                                                       |     |   |   |   |   |   |   |   |
| Net                income per share                   |   | $                                                          | 2.53     |   | $ | 2.49 |   | $ | (0.04 | ) |
| Net                income per share assuming dilution |   |                                                       | 2.29     |   |   | 2.25 |   |   | (0.04 | ) |
|                                                  |   |                                                       |     |   |   |   |   |   |   |   |
| Cash                flow from operating activities    |   | $                                                          | 200,224  |   | $ | 190,371 |   | $ | (9,853 | ) |
| Cash                flow from financing activities    |   |                                                       | (153,783 | ) |   | (143,930 | ) |   | 9,853 |   |

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|                                                                                                                 |   | **2005**                                                   |   | **2004** |    |
|----------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------------------------|--------|----------|---------|
|                                                                                                                      |   | (In                thousands, except per share data)  |
| Net                income, as reported                                                                          |   |                                                       |   | $        | 120,017 |   | $ | 122,737 |   |
| Add:                stock-based employee compensation expense                                                        |   |                                                       |   |     |    |   |   |   |   |
| for                restricted stock and stock awards included                in reported net income, net of tax |   |                                                       |   |     | 4,804   |   |   | 4,766  |   |
|                                                                                                                 |   |                                                       |   |     |    |   |   |   |   |
| Less:                  total stock-based employee compensation expense                                               |   |                                                       |   |     |    |   |   |   |   |
| determined                  under fair value based methods for all awards, net of tax                           |   |                                                       |   |     | (12,724 | ) |   | (13,420 | ) |
| Pro                forma net income                                                                             |   |                                                       |   | $        | 112,097 |   | $ | 114,083 |   |
|                                                                                                                 |   |                                                       |   |     |    |   |   |   |   |
| Net                income per share, as reported                                                                |   |                                                       |   | $        | 2.16    |   | $ | 2.30 |   |
| Pro                forma net income, per share                                                                  |   |                                                       |   |     | 2.02    |   |   | 2.14 |   |
|                                                                                                                 |   |                                                       |   |     |    |   |   |   |   |
| Net                income per share assuming dilution, as reported                                              |   |                                                       |   | $        | 1.81    |   | $ | 1.79 |   |
| Pro                forma net income, per share                                                                  |   |                                                       |   |     | 1.69    |   |   | 1.66 |   |

*Stock      Options and Employee Stock Purchase Plan*

|                                                     |   |   | **2006****(1)** |   |   | **2005** |   |   | **2004** |   |
|----------------------------------------------------------|--------|--------|-----------------|--------|--------|----------|--------|--------|----------|--------|
| Average                expected term (years)             |   |   | ¾          |   |   | 3.37     |   |   | 4.63     |   |
| Risk-free                interest rates                  |   |   | ¾          |   |   | 3.94     | %      |   | 3.48     | %      |
| Expected                volatility                       |   |   | ¾          |   |   | 45.09    | %      |   | 74.27    | %      |
| Dividend                yield                            |   |   | ¾          |   |   | ¾   |   |   | ¾   |   |
| Weighted-average                fair value at grant date |   |   | ¾          |   | $      | 23.29    |   | $      | 20.65    |   |

|   | (1) | No                stock options were granted during the                period. |
|--------|-----|--------------------------------------------------------------------------------|

----

Table          of Contents

|                                                     |   |   | **2006** |   |   | **2005** |   |   | **2004** |   |
|----------------------------------------------------------|--------|--------|----------|--------|--------|----------|--------|--------|----------|--------|
| Average                expected term (years)             |   |   | .50      |   |   | .50      |   |   | .50      |   |
| Risk-free                interest rates                  |   |   | 4.32     | %      |   | 2.95     | %      |   | 1.32     | %      |
| Expected                volatility                       |   |   | 34.70    | %      |   | 21.25    | %      |   | 40.77    | %      |
| Dividend                yield                            |   |   | ¾   |   |   | ¾   |   |   | ¾   |   |
| Weighted-average                fair value at grant date |   | $      | 9.95     |   | $      | 10.83    |   | $      | 8.99     |   |

|                                            |   | **Number** |                                | **Weighted**                         |   | **Weighted**                           |   | **Aggregate** |                      |
|-------------------------------------------------|--------|------------|-------------------------------------|--------------------------------------|--------|----------------------------------------|--------|---------------|---------------------------|
|                                            |   | **Of**     |                                | **Average**                          |   | **Average                Contractual** |   | **Intrinsic** |                      |
|                                            |   | **Shares** |                                | **Exercisable                Price** |   | **Life                Remaining**      |   | **Value**     |                      |
|                                            |   |       | (In                thousands)  |                                 |   |                                   |   |          | (In                years) |   |   | (In                thousands) |   |
| Outstanding,                January 1, 2006     |   |       | 2,844                               |                                 | $      | 11.09                                  |   |          |                      |   |   |   |   |
| Granted                                         |   |       | ¾                              |                                 |   | ¾                                 |   |          |                      |   |   |   |   |
| Exercised                                       |   |       | (1,003                              | )                                    |   | 7.91                                   |   |          |                      |   |   |   |   |
| Canceled                                        |   |       | (66                                 | )                                    |   | 9.95                                   |   |          |                      |   |   |   |   |
| Outstanding,                December 31, 2006   |   |       | 1,775                               |                                 |   | 12.94                                  |   |          | 5.58                      |   | $ | 40,992 |   |
|                                            |   |       |                                |                                 |   |                                   |   |          |                      |   |   |   |   |
| Exercisable                At December 31, 2006 |   |       | 808                                 |                                 | $      | 11.31                                  |   |          | 5.13                      |   | $ | 19,987 |   |

|                                                         |   | **Number** |                                | **Weighted-Average**          |   |
|--------------------------------------------------------------|--------|------------|-------------------------------------|-------------------------------|--------|
|                                                         |   | **Of**     |                                | **Grant                Date** |   |
|                                                         |   | **Shares** |                                | **Fair                Value** |   |
|                                                         |   |       | (In                thousands)  |                          |   |   |   |
| Nonvested                shares, January 1, 2006 (1)    |   |       | 1,558                               |                          | $      | 6.44 |   |
| Granted                                                 |   |       | ¾                              |                          |   | ¾ |   |
| Vested                                                  |   |       | (714                                | )                             |   | 5.47 |   |
| Canceled                                                |   |       | (41                                 | )                             |   | 5.80 |   |
| Nonvested                shares, December 31, 2006 (1)  |   |       | 803                                 |                          | $      | 7.34 |   |

| (1) | Excludes                172,000 and 164,000 shares at January 1, 2006 and December 31, 2006,                respectively, which vested in 2005, but are not exercisable until                2008. |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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Table          of Contents

*Restricted      Stock Units -*

|                                                 |   | **Number**                          |   | **Aggregate** |   |
|------------------------------------------------------|--------|-------------------------------------|--------|---------------|--------|
|                                                 |   | **Of**                              |   | **Intrinsic** |   |
|                                                 |   | **Shares**                          |   | **Value**     |   |
|                                                 |   | (In                thousands)  |
| Outstanding,                January 1, 2006(1)  |   |                                | ¾ |          |   |   |   |
| Granted                                         |   |                                | 234    |          |   |   |   |
| Vested                                          |   |                                | (130   | )             |   |   |   |
| Canceled                                        |   |                                | ¾ |          |   |   |   |
| Outstanding,                December 31, 2006(2)(3)  |   |                                | 104    |          | $      | 3,748 |   |

----

Table          of Contents

*Defined      Contribution Plan - *

*Supplemental      Retirement Plans - *

*Executive      Split Dollar Life Insurance Plan - *

*Supplemental      Executive Retirement Plan (“SERP”) - *

----

Table          of Contents

|                                                          |   | **Years                Ended December 31,** |    |
|---------------------------------------------------------------|--------|---------------------------------------------|---------|
|                                                          |   | **2006**                                    |    | **2005** |   | **2004** |   |
|                                                          |   | (In                thousands)          |
| **Change                in benefit obligation**               |   |                                        |    |   |   |   |   |   |   |   |
| Benefit                obligation at beginning of year        |   | $                                           | 28,695  |   | $ | 23,097 |   | $ | 29,896 |   |
| Service                cost                                   |   |                                        | 504     |   |   | 377 |   |   | 425 |   |
| Interest                cost                                  |   |                                        | 1,596   |   |   | 1,283 |   |   | 1,674 |   |
| Actuarial                loss (gain)                          |   |                                        | 1,321   |   |   | 4,998 |   |   | (8,114 | ) |
| Benefits                paid                                  |   |                                        | (730    | ) |   | (1,060 | ) |   | (784 | ) |
| Benefit                obligation at end of year              |   | $                                           | 31,386  |   | $ | 28,695 |   | $ | 23,097 |   |
|                                                          |   |                                        |    |   |   |   |   |   |   |   |
| **Change****in                plan assets**                   |   |                                        |    |   |   |   |   |   |   |   |
| Fair                value of plan assets at beginning of year |   | $                                           | ¾  |   | $ | ¾ |   | $ | ¾ |   |
| Employer                contributions                         |   |                                        | 730     |   |   | 1,060 |   |   | 784 |   |
| Benefits                paid                                  |   |                                        | (730    | ) |   | (1,060 | ) |   | (784 | ) |
| Fair                value of plan assets at end of year       |   | $                                           | ¾  |   | $ | ¾ |   | $ | ¾ |   |
|                                                          |   |                                        |    |   |   |   |   |   |   |   |
| Funded                status                                  |   | $                                           | (31,386 | ) | $ | (28,695 | ) | $ | (23,097 | ) |
| Unrecognized                prior service cost (1)            |   |                                        | 4,515   |   |   | 5,725 |   |   | 6,936 |   |
| Unrecognized                net actuarial loss (1)            |   |                                        | 5,853   |   |   | 4,660 |   |   | (338 | ) |
| Accrued                net benefit cost                       |   |                                        | (21,018 | ) |   | (18,310 | ) |   | (16,499 | ) |
|                                                          |   |                                        |    |   |   |   |   |   |   |   |
| Unfunded                accumulated benefit obligation        |   |                                        | (31,386 | ) |   | (22,936 | ) |   | (17,581 | ) |
| Additional                liability                           |   |                                        | (10,368 | ) |   | (4,626 | ) |   | (1,082 | ) |
|                                                          |   |                                        |    |   |   |   |   |   |   |   |
| Intangible                asset                               |   |                                        | ¾  |   |   | 4,626 |   |   | 1,082 |   |
| Benefit                liability                              |   | $                                           | (31,386 | ) | $ | (22,936 | ) | $ | (17,581 | ) |
|                                                          |   |                                        |    |   |   |   |   |   |   |   |
| Discount                rate                                  |   |                                        | 5.60    | % |   | 5.75 | % |   | 5.75 | % |
| Rate                of compensation increase                  |   |                                        | 3.00    | % |   | 3.00 | % |   | 3.00 | % |
|                                                          |   |                                        |    |   |   |   |   |   |   |   |
| Components                of net periodic benefit cost:       |   |                                        |    |   |   |   |   |   |   |   |
| Service                cost                                   |   | $                                           | 504     |   | $ | 377 |   | $ | 425 |   |
| Interest                cost                                  |   |                                        | 1,596   |   |   | 1,283 |   |   | 1,674 |   |
| Amortization                of prior service credits          |   |                                        | 1,211   |   |   | 1,211 |   |   | 1,211 |   |
| Recognized                actuarial loss                      |   |                                        | 128     |   |   | ¾ |   |   | 435 |   |
| Net                periodic benefit cost                      |   | $                                           | 3,439   |   | $ | 2,871 |   | $ | 3,745 |   |

|   | (1) | Included                in accumulated comprehensive income for                2006. |
|--------|-----|--------------------------------------------------------------------------------------|

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Table          of Contents

|                                                      |   | **Before****SFAS                158 adjustment** |    | **SFAS                158 adjustment** |   | **After                application of SFAS 158** |   |
|-----------------------------------------------------------|--------|--------------------------------------------------|---------|----------------------------------------|--------|--------------------------------------------------|--------|
|                                                      |   | (In                thousands)                    |
| Deferred                tax asset - LT                    |   | $                                                | 15,412  |                                   | $      | 3,244                                            |   | $ | 18,656 |   |
| Other                assets                               |   |                                             | 98,215  |                                   |   | (4,515                                           | )      |   | 93,700 |   |
| Total                assets                               |   | $                                                | 810,683 |                                   | $      | (1,271                                           | )      | $ | 809,412 |   |
|                                                      |   |                                             |    |                                   |   |                                             |   |   |   |   |
| Other                liabilities                          |   | $                                                | 66,254  |                                   | $      | 4,753                                            |   | $ | 71,007 |   |
| Total                liabilities                          |   |                                             | 587,941 |                                   |   | 4,753                                            |   |   | 592,694 |   |
| Accumulated                other comprehensive loss       |   |                                             | (2,611  | )                                      |   | (6,024                                           | )      |   | (8,635 | ) |
| Total                stockholders' equity                 |   |                                             | 222,742 |                                   |   | (6,024                                           | )      |   | 216,718 |   |
| Total                liabilities and stockholders' equity |   | $                                                | 810,683 |                                   | $      | (1,271                                           | )      | $ | 809,412 |   |

|                             |   |   | (In                thousands)  |   |
|----------------------------------|--------|--------|-------------------------------------|--------|
| 2007                             |   | $      | 947                                 |   |
| 2008                             |   |   | 2,301                               |   |
| 2009                             |   |   | 2,395                               |   |
| 2010                             |   |   | 2,602                               |   |
| 2011                             |   |   | 2,602                               |   |
| 2012                through 2042 |   |   | 62,230                              |   |
| Total                            |   | $      | 73,077                              |   |

**10.**
**STOCKHOLDERS'      EQUITY**

*Stock      Split - *

*Share      Repurchase Program - *

----

Table          of Contents

**11.**
**EARNINGS      PER SHARE**

|                                                              |   | **Years                Ended December 31,**                |    |
|-------------------------------------------------------------------|--------|------------------------------------------------------------|---------|
|                                                              |   | **2006**                                                   |    | **2005** |   | **2004** |   |
|                                                              |   | (In                thousands, except per share data)  |
| Basic                income (loss) per share:                     |   |                                                       |    |   |   |   |   |   |   |   |
| Income                from continuing operations                  |   | $                                                          | 140,471 |   | $ | 120,017 |   | $ | 123,419 |   |
| Loss                from discontinued operations                  |   |                                                       | ¾  |   |   | ¾ |   |   | (682 | ) |
| Net                income                                         |   | $                                                          | 140,471 |   | $ | 120,017 |   | $ | 122,737 |   |
|                                                              |   |                                                       |    |   |   |   |   |   |   |   |
| Weighted                average common shares outstanding         |   |                                                       | 56,391  |   |   | 55,556 |   |   | 53,262 |   |
|                                                              |   |                                                       |    |   |   |   |   |   |   |   |
| Earnings                per common share:                         |   |                                                       |    |   |   |   |   |   |   |   |
| Income                from continuing operations                  |   | $                                                          | 2.49    |   | $ | 2.16 |   | $ | 2.32 |   |
| Loss                from discontinued operations                  |   |                                                       | ¾  |   |   | ¾ |   |   | (0.02 | ) |
| Net                income                                         |   | $                                                          | 2.49    |   | $ | 2.16 |   | $ | 2.30 |   |
|                                                              |   |                                                       |    |   |   |   |   |   |   |   |
| Diluted                income (loss) per share:                   |   |                                                       |    |   |   |   |   |   |   |   |
| Income                from continuing operations                  |   | $                                                          | 140,471 |   | $ | 120,017 |   | $ | 123,419 |   |
| Loss                from discontinued operations                  |   |                                                       | ¾  |   |   | ¾ |   |   | (682 | ) |
| Net                income                                         |   |                                                       | 140,471 |   |   | 120,017 |   |   | 122,737 |   |
| Interest                expense on Sierra debentures, net of tax  |   |                                                       | 721     |   |   | 1,256 |   |   | 1,682 |   |
| Income                for purposes of computing diluted net       |   |                                                       |    |   |   |   |   |   |   |   |
| income                per share                                   |   | $                                                          | 141,192 |   | $ | 121,273 |   | $ | 124,419 |   |
|                                                              |   |                                                       |    |   |   |   |   |   |   |   |
| Weighted                average common shares outstanding         |   |                                                       | 56,391  |   |   | 55,556 |   |   | 53,262 |   |
| Dilutive                options and restricted shares outstanding |   |                                                       | 935     |   |   | 2,266 |   |   | 3,806 |   |
| Dilutive                impact of conversion of Sierra debentures |   |                                                       | 5,386   |   |   | 9,327 |   |   | 12,575 |   |
| Weighted                average common shares outstanding         |   |                                                       |    |   |   |   |   |   |   |   |
| assuming                dilution                                  |   |                                                       | 62,712  |   |   | 67,149 |   |   | 69,643 |   |
|                                                              |   |                                                       |    |   |   |   |   |   |   |   |
| Earnings                per common share assuming dilution:       |   |                                                       |    |   |   |   |   |   |   |   |
| Income                from continuing operations                  |   | $                                                          | 2.25    |   | $ | 1.81 |   | $ | 1.80 |   |
| Loss                from discontinued operations                  |   |                                                       | ¾  |   |   | ¾ |   |   | (0.01 | ) |
| Net                income                                         |   | $                                                          | 2.25    |   | $ | 1.81 |   | $ | 1.79 |   |

**12.**
**CII      FINANCIAL, INC. DISCONTINUED OPERATIONS**

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Table          of Contents

----

Table          of Contents

|                                                               |   | **2004** |                                |
|--------------------------------------------------------------------|--------|----------|-------------------------------------|
|                                                               |   |     | (In                thousands)  |   |
| Operating                revenues:                                 |   |     |                                |   |
| Specialty                product revenues                          |   | $        | 19,015                              |   |
| Investment                and other revenues                       |   |     | 1,290                               |   |
| Total                                                              |   |     | 20,305                              |   |
|                                                               |   |     |                                |   |
| Operating                expenses:                                 |   |     |                                |   |
| Specialty                product expenses                          |   |     | 21,917                              |   |
| Interest                expense and other, net                     |   |     | (91                                 | ) |
| Total                                                              |   |     | 21,826                              |   |
|                                                               |   |     |                                |   |
| Loss                from discontinued operations before income tax |   |     | (1,521                              | ) |
| Income                tax benefit                                  |   |     | 839                                 |   |
| Net                loss from discontinued operations               |   | $        | (682                                | ) |

**13.**
**COMMITMENTS      AND CONTINGENCIES**

*Leases.*

| **Years                Ended December 31,** |   |   | (In                thousands) |   |
|---------------------------------------------|--------|--------|-------------------------------|--------|
| 2007                                        |   | $      | 18,976                        |   |
| 2008                                        |   |   | 18,347                        |   |
| 2009                                        |   |   | 17,562                        |   |
| 2010                                        |   |   | 16,677                        |   |
| 2011                                        |   |   | 16,748                        |   |
| Thereafter                                  |   |   | 64,211                        |   |
| Total                                       |   | $      | 152,521                       |   |

*Litigation      and Legal Matters.*

*Shane*

----

Table          of Contents

*Shane*

*Shane*

*Subsequent        Events.*

----

Table            of Contents

**14. RELATED        PARTY TRANSACTIONS**

**15.**
**SEGMENT      REPORTING **

----

Table          of Contents

|                                             |   | **Managed                Care And Corporate Operations** |      | **Military                Health Services Operations** |   | **Total** |   |
|--------------------------------------------------|--------|----------------------------------------------------------|-----------|--------------------------------------------------------|--------|-----------|--------|
|                                             |   | (In                thousands)                            |      |
| **Year                Ended December 31, 2006**  |   |                                                     |
| Medical                premiums                  |   | $                                                        | 1,623,515 |                                                   | $      | ¾    |   | $ | 1,623,515 |   |
| Military                contract revenues        |   |                                                     | ¾    |                                                   |   | ¾    |   |   | ¾ |   |
| Professional                fees                 |   |                                                     | 52,266    |                                                   |   | ¾    |   |   | 52,266 |   |
| Investment                and other revenues     |   |                                                     | 43,062    |                                                   |   | 49        |   |   | 43,111 |   |
| Total                revenue                     |   | $                                                        | 1,718,843 |                                                   | $      | 49        |   | $ | 1,718,892 |   |
|                                             |   |                                                     |      |                                                   |   |      |   |   |   |   |
| Segment                operating profit (loss)   |   | $                                                        | 217,523   |                                                   | $      | (89       | )      | $ | 217,434 |   |
| Interest                expense                  |   |                                                     | (3,901    | )                                                      |   | ¾    |   |   | (3,901 | ) |
| Other                income (expense), net       |   |                                                     | 1,960     |                                                   |   | ¾    |   |   | 1,960 |   |
| Income                (loss) before income taxes |   | $                                                        | 215,582   |                                                   | $      | (89       | )      | $ | 215,493 |   |
|                                             |   |                                                     |      |                                                   |   |      |   |   |   |   |
| Segment                assets                    |   | $                                                        | 809,331   |                                                   | $      | 81        |   | $ | 809,412 |   |
| Capital                expenditures              |   |                                                     | (16,749   | )                                                      |   | ¾    |   |   | (16,749 | ) |
| Depreciation                                     |   |                                                     | 16,570    |                                                   |   | ¾    |   |   | 16,570 |   |
|                                             |   |                                                     |      |                                                   |   |      |   |   |   |   |
| **Year                Ended December 31, 2005**  |   |                                                     |      |                                                   |   |      |   |   |   |   |
| Medical                premiums                  |   | $                                                        | 1,291,296 |                                                   | $      | ¾    |   | $ | 1,291,296 |   |
| Military                contract revenues        |   |                                                     | ¾    |                                                   |   | 16,326    |   |   | 16,326 |   |
| Professional                fees                 |   |                                                     | 43,186    |                                                   |   | ¾    |   |   | 43,186 |   |
| Investment                and other revenues     |   |                                                     | 33,698    |                                                   |   | 530       |   |   | 34,228 |   |
| Total                revenue                     |   | $                                                        | 1,368,180 |                                                   | $      | 16,856    |   | $ | 1,385,036 |   |
|                                             |   |                                                     |      |                                                   |   |      |   |   |   |   |
| Segment                operating profit          |   | $                                                        | 174,953   |                                                   | $      | 14,464    |   | $ | 189,417 |   |
| Interest                expense                  |   |                                                     | (8,779    | )                                                      |   | (12       | )      |   | (8,791 | ) |
| Other                income (expense), net       |   |                                                     | 1,407     |                                                   |   | (308      | )      |   | 1,099 |   |
| Income                before income taxes        |   | $                                                        | 167,581   |                                                   | $      | 14,144    |   | $ | 181,725 |   |
|                                             |   |                                                     |      |                                                   |   |      |   |   |   |   |
| Segment                assets                    |   | $                                                        | 667,618   |                                                   | $      | 1,228     |   | $ | 668,846 |   |
| Capital                expenditures              |   |                                                     | (13,946   | )                                                      |   | ¾    |   |   | (13,946 | ) |
| Depreciation                                     |   |                                                     | 14,735    |                                                   |   | 216       |   |   | 14,951 |   |
|                                             |   |                                                     |      |                                                   |   |      |   |   |   |   |
| **Year                Ended December 31, 2004**  |   |                                                     |      |                                                   |   |      |   |   |   |   |
| Medical                premiums                  |   | $                                                        | 1,131,185 |                                                   | $      | ¾    |   | $ | 1,131,185 |   |
| Military                contract revenues        |   |                                                     | ¾    |                                                   |   | 372,608   |   |   | 372,608 |   |
| Professional                fees                 |   |                                                     | 35,115    |                                                   |   | ¾    |   |   | 35,115 |   |
| Investment                and other revenues     |   |                                                     | 35,144    |                                                   |   | 1,502     |   |   | 36,646 |   |
| Total                revenue                     |   | $                                                        | 1,201,444 |                                                   | $      | 374,110   |   | $ | 1,575,554 |   |
|                                             |   |                                                     |      |                                                   |   |      |   |   |   |   |
| Segment                operating profit          |   | $                                                        | 141,906   |                                                   | $      | 56,411    |   | $ | 198,317 |   |
| Interest                expense                  |   |                                                     | (4,624    | )                                                      |   | (60       | )      |   | (4,684 | ) |
| Other                income (expense), net       |   |                                                     | 136       |                                                   |   | (105      | )      |   | 31 |   |
| Income                before income taxes        |   | $                                                        | 137,418   |                                                   | $      | 56,246    |   | $ | 193,664 |   |
|                                             |   |                                                     |      |                                                   |   |      |   |   |   |   |
| Segment                assets                    |   | $                                                        | 630,090   |                                                   | $      | 59,690    |   | $ | 689,780 |   |
| Capital                expenditures              |   |                                                     | (26,214   | )                                                      |   | (23       | )      |   | (26,237 | ) |
| Depreciation                                     |   |                                                     | 15,904    |                                                   |   | 1,180     |   |   | 17,084 |   |

----

Table          of Contents

**16.**
**UNAUDITED      QUARTERLY INFORMATION**

|                                       |   | **March**                                            |    | **June** |   | **September** |   | **December** |    |
|--------------------------------------------|--------|------------------------------------------------------|---------|----------|--------|---------------|--------|--------------|---------|
|                                       |   | **31**                                               |    | **30**   |   | **30**        |   | **31**       |    |
|                                       |   | (In                thousands, except per share data) |    |
| **Quarter                ended 2006:**     |   |                                                 |    |     |   |          |   |         |    |   |   |   |   |
| Operating                revenues          |   | $                                                    | 438,248 |     | $      | 424,438       |   | $            | 429,997 |   | $ | 426,209 |   |
| Operating                income            |   |                                                 | 50,390  |     |   | 52,471        |   |         | 55,012  |   |   | 59,561 |   |
| Net                income                  |   |                                                 | 32,671  |     |   | 33,534        |   |         | 34,929  |   |   | 39,337 |   |
|                                       |   |                                                 |    |     |   |          |   |         |    |   |   |   |   |
| Basic                earnings per share:   |   |                                                 |    |     |   |          |   |         |    |   |   |   |   |
| Net                income                  |   | $                                                    | 0.57    |     | $      | 0.60          |   | $            | 0.62    |   | $ | 0.71 |   |
|                                       |   |                                                 |    |     |   |          |   |         |    |   |   |   |   |
| Diluted                earnings per share: |   |                                                 |    |     |   |          |   |         |    |   |   |   |   |
| Net                income                  |   | $                                                    | 0.51    |     | $      | 0.54          |   | $            | 0.56    |   | $ | 0.65 |   |
|                                       |   |                                                 |    |     |   |          |   |         |    |   |   |   |   |
| **Quarter                ended 2005:**     |   |                                                 |    |     |   |          |   |         |    |   |   |   |   |
| Operating                revenues          |   | $                                                    | 335,859 |     | $      | 348,027       |   | $            | 347,443 |   | $ | 353,707 |   |
| Operating                income            |   |                                                 | 45,324  |     |   | 56,370        |   |         | 44,509  |   |   | 43,214 |   |
| Net                income                  |   |                                                 | 29,405  |     |   | 33,836        |   |         | 28,442  |   |   | 28,334 |   |
|                                       |   |                                                 |    |     |   |          |   |         |    |   |   |   |   |
| Basic                earnings per share:   |   |                                                 |    |     |   |          |   |         |    |   |   |   |   |
| Net                income                  |   | $                                                    | 0.55    |     | $      | 0.62          |   | $            | 0.50    |   | $ | 0.49 |   |
|                                       |   |                                                 |    |     |   |          |   |         |    |   |   |   |   |
| Diluted                earnings per share: |   |                                                 |    |     |   |          |   |         |    |   |   |   |   |
| Net                income                  |   | $                                                    | 0.44    |     | $      | 0.51          |   | $            | 0.43    |   | $ | 0.44 |   |

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Table          of Contents

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

**ITEM      9A.** **CONTROLS      AND PROCEDURES**

**Evaluation      of Disclosure Controls and Procedures**

**Management’s      Report on Internal Control over Financial Reporting**

**Change      in Internal Control over Financial Reporting**

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Table          of Contents

*Internal      Control—Integrated Framework*

*Internal      Control—Integrated Framework*

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Table          of Contents

*Share-Based      Payment*
*Employers’      Accounting for Defined Benefit Pension and Other Postretirement      Plans*

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Table          of Contents

**ITEM      9B.** **OTHER      INFORMATION**

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Table          of Contents

**PART      III**

**ITEM      10.** **DIRECTORS,      EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE**

**ITEM      11.** **EXECUTIVE      COMPENSATION**

**ITEM      12.** **SECURITY      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER      MATTERS**

**ITEM      13.** **CERTAIN      RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR      INDEPENDENCE**

**ITEM      14.** **PRINCIPAL      ACCOUNTING FEES AND SERVICES**

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Table          of Contents

**PART      IV**

**ITEM      15.** **EXHIBITS****AND FINANCIAL STATEMENT SCHEDULES**

| (a)(1)                                                                                                                                                                                                                                       | Financial                Statements. See Index to Financial Statements and Schedule on page                51.                                                                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
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| (a)(2)                                                                                                                                                                                                                                       | Financial                Statement Schedules:                                                                                                                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
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|                                                                                                                                                                                                                                         | Schedule                I                                                                                                                                                           | Condensed                Financial Information of                Registrant                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                | S-1                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |   |
|                                                                                                                                                                                                                                         | Schedule                II                                                                                                                                                          | Valuation                and Qualifying Accounts                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           | S-5                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |   |
|                                                                                                                                                                                                                                         |                                                                                                                                                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   |
| 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, as amended through September 10, 2003, incorporated                by                reference to Exhibit 3.1 to the Registrant’s Annual Report on Form 10-K                for the fiscal year ended December 31, 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|                                                                                                                                                                                                                                         |                                                                                                                                                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   |
|                                                                                                                                                                                                                                         | (3.2)                                                                                                                                                                               | Articles                of Incorporation, together with amendments thereto to date, incorporated                by reference to Exhibit 4 (b) to the Registrant’s Registration Statement                on Form S-8 (No. 33-41543) effective July 3, 1991.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|                                                                                                                                                                                                                                         |                                                                                                                                                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   |
|                                                                                                                                                                                                                                         | (3.3)                                                                                                                                                                               | Certificate                of Change pursuant to NRS 78.209 incorporated by reference to Exhibit                3.1                to the Registrant’s Current Report on Form 8-K filed on December 9,                2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|                                                                                                                                                                                                                                         |                                                                                                                                                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   |
|                                                                                                                                                                                                                                         | (3.4)                                                                                                                                                                               | Amended                and Restated Bylaws of the Registrant, as amended through March 21,                2002,                incorporated by reference to Exhibit 3.3 to the Registrant’s Annual Report                on Form 10-K for the fiscal year ended December 31, 2001.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|                                                                                                                                                                                                                                         |                                                                                                                                                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   |
|                                                                                                                                                                                                                                         | (3.5)                                                                                                                                                                               | Amendment                No. 8 to the Amended and Restated Bylaws of Sierra Health Services,                Inc.,                incorporated by reference to Exhibit 3.2 to the Registrant’s Current                Report on Form 8-K filed on December 9, 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|                                                                                                                                                                                                                                         |                                                                                                                                                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   |
|                                                                                                                                                                                                                                         | (4.1)                                                                                                                                                                               | Specimen                Common Stock Certificate, incorporated by reference to Exhibit 4.3                to the                Registrant’s Annual Report on Form 10-K for the fiscal year ended December                31, 2001.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|                                                                                                                                                                                                                                         |                                                                                                                                                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   |
|                                                                                                                                                                                                                                         | (10.1)                                                                                                                                                                              | Form                of Contract With Eligible Medicare Part D Prescription Drug Contractor                and                the Centers for Medicare and Medicaid Services for the period January                1,                2006 to December 31, 2006.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|                                                                                                                                                                                                                                         |                                                                                                                                                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   |
|                                                                                                                                                                                                                                         | (10.2)                                                                                                                                                                              | Form                of Contract With Eligible Medicare+Choice Organization and the Centers                for                Medicare and Medicaid Services for the period January 1, 2005 to                December                31, 2005, renewable annually and incorporated by reference to Exhibit                10.5                to the Registrant’s Annual Report on Form 10-K for the fiscal year ended                December 31, 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|                                                                                                                                                                                                                                         |                                                                                                                                                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   |
|                                                                                                                                                                                                                                         | (10.3)                                                                                                                                                                              | Form                of Medicaid Contract between Health Plan of Nevada and the State                of Nevada                Department of Health and Human Services Health Care Financing and                Policy                Division effective November 1, 2006 to June 30, 2009, and incorporated                by                reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K                filed on August 16, 2006.                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|                                                                                                                                                                                                                                         |                                                                                                                                                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   |
|                                                                                                                                                                                                                                         | (10.4)                                                                                                                                                                              | Credit                Agreement dated as of March 3, 2003, among Sierra Health Services,                Inc. as                Borrower, Bank of America N.A. as Administrative Agent and L/C Issuer,                Credit Lyonnais New York Branch as Syndication Agent, U.S. Bank National                Association as Documentation Agent and Banc of America as Sole Lead                Arranger and Sole Book Manager, incorporated by reference to Exhibit                10.5                to the Registrant’s Annual Report on Form 10-K for the fiscal year ended                December 31, 2002.                                                                                                                                                                                                                                                                                                   |
|                                                                                                                                                                                                                                         |                                                                                                                                                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   |
|                                                                                                                                                                                                                                         | (10.5)                                                                                                                                                                              | First                Amendment to the Credit Agreement dated as of March 3, 2003, among                Sierra                Health Services, Inc. as Borrower, Bank of America N.A. as Administrative                Agent and L/C Issuer, Credit Lyonnais New York Branch as Syndication                Agent, U.S. Bank National Association as Documentation Agent and                Banc of                America                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|   90                                                                                                                                                                                                                               |
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| Table                of Contents                                                                                                                                                                                                             |                                                                                                                                                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|                                                                                                                                                                                                                                         |                                                                                                                                                                                | as              Sole Lead Arranger and Sole Book Manager, incorporated by reference              to              Exhibit 10.3 to the Registrant’s Annual Report on Form 10-K for the fiscal              year ended December 31, 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   |
|                                                                                                                                                                                                                                         |                                                                                                                                                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   |
|                                                                                                                                                                                                                                         | (10.6)                                                                                                                                                                              | Second                Amendment to the Credit Agreement dated as of March 3, 2003, among                Sierra                Health Services, Inc. as Borrower, Bank of America N.A. as Administrative                Agent and L/C Issuer, Credit Lyonnais New York Branch as Syndication                Agent, U.S. Bank National Association as Documentation Agent and                Banc of                America as Sole Lead Arranger and Sole Book Manager, incorporated                by                reference to Exhibit 10.4 to the Registrant’s Annual Report on Form 10-K                for the fiscal year ended December 31, 2003.                                                                                                                                                                                                                                                            |
|                                                                                                                                                                                                                                         |                                                                                                                                                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   |
|                                                                                                                                                                                                                                         | (10.7)                                                                                                                                                                              | Fourth                Amendment to the Credit Agreement dated as of March 3, 2003, among                Sierra                Health Services, Inc. as Borrower, Bank of America N.A. as Administrative                Agent and L/C Issuer, Calyon New York Branch (formerly known as Credit                Lyonnais New York Branch) and U.S. Bank National Association as                Syndication Agents, Banc of America Securities LLC, Calyon New York                Branch                and U.S. Bank National Association as Joint Book Managers and Banc                of                America Securities LLC as Sole Lead Arranger, incorporated by reference                to                Exhibit 10.1 to the Registrant’s Current Report on Form 8-K on October 19,                2004.                                                                                                    |
|                                                                                                                                                                                                                                         |                                                                                                                                                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   |
|                                                                                                                                                                                                                                         | (10.8)                                                                                                                                                                              | Fifth                Amendment to the Credit Agreement dated as of March 3, 2003, among                Sierra                Health Services, Inc. as Borrower, and lenders including, among others,                Bank of America, N.A., as administrative agent and US Bank, N.A.                and                Calyon New York Branch as syndication agents. Documentation agents                include                The Bank of New York, JPMorgan Chase Bank, N.A., Harris, N.A. and                Wells                Fargo Bank, N.A. Banc of America Securities LLC is serving as the                sole                lead arranger and book manager under this amended credit                facility                and incorporated by reference to Exhibit 10.1 to the Registrant's                Quarterly Report on Form 10-Q for the fiscal quarter ended June 30,                2006.  |
|                                                                                                                                                                                                                                         |                                                                                                                                                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   |
|                                                                                                                                                                                                                                         | (10.9)                                                                                                                                                                              | Compensatory                Plans, Contracts and Arrangements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|                                                                                                                                                                                                                                         |                                                                                                                                                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   |
|                                                                                                                                                                                                                                         |                                                                                                                                                                                | (a)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | Employment                Agreement with Jonathon W. Bunker dated August 16, 2006, and incorporated                by reference to Exhibit 10.1 to the Registrant’s Current                  Report on Form 8-K filed on August 16,                  2006.                                                                                                                                                                                                                                                                                                                                                                                                                           |
|                                                                                                                                                                                                                                         |                                                                                                                                                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   |
|                                                                                                                                                                                                                                         |                                                                                                                                                                                | (b)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | Employment                Agreement with Frank E. Collins dated August 16, 2006, and incorporated                by                reference to Exhibit 10.2 to the Registrant’s Current                  Report on Form 8-K filed on August 16, 2006.                                                                                                                                                                                                                                                                                                                                                                                                                               |
|                                                                                                                                                                                                                                         |                                                                                                                                                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|                                                                                                                                                                                                                                         |                                                                                                                                                                                | (c)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | Employment                Agreement with Darren G.D. Sivertsen dated August 16, 2006, and                incorporated by reference to Exhibit 10.3 to the Registrant’s                 Current Report on Form 8-K filed on August 16, 2006.                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|                                                                                                                                                                                                                                         |                                                                                                                                                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|                                                                                                                                                                                                                                         |                                                                                                                                                                                | (d)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | Employment                Agreement with Donald J. Giancursio dated August 16, 2006, and                incorporated by reference to Exhibit 10.4 to the Registrant’s Current                Report on Form 8-K filed on August 16, 2006.                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|                                                                                                                                                                                                                                         |                                                                                                                                                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|                                                                                                                                                                                                                                         |                                                                                                                                                                                | (e)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | Employment                Agreement with Marc R. Briggs dated August 16, 2006, and incorporated                by                reference to Exhibit 10.5 to the Registrant’s Current Report on Form 8-K                filed on August 16, 2006.                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|                                                                                                                                                                                                                                         |                                                                                                                                                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   |
|                                                                                                                                                                                                                                         |                                                                                                                                                                                | (f)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | Employment                Agreement with Anthony M. Marlon, M.D. dated November 16, 2000,                incorporated by reference to Exhibit 10.5 to the Registrant’s Annual                Report on Form 10-K for the fiscal year ended December 31, 2000,                and as                further amended on December 13, 2004, and incorporated by reference                to                Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on                December 16, 2004.                                                                                                                                                                 |
|                                                                                                                                                                                                                                         |                                                                                                                                                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   |
|                                                                                                                                                                                                                                         |                                                                                                                                                                                | (g)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | Employment                Agreement with Paul H. Palmer dated December 1, 2001, incorporated                by                reference to Exhibit 10.5 to the Registrant’s Annual Report on Form 10-K                for the fiscal year ended December 31, 2001, and as further amended                on                December 13, 2004, and incorporated by reference to Exhibit 10.5                to the                Registrant’s Current Report on Form 8-K filed on December 16,                2004.                                                                                                                                                            |
|                                                                                                                                                                                                                                         |                                                                                                                                                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   |
|                                                                                                                                                                                                                                         |                                                                                                                                                                                | (h)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | Form                of Split Dollar Life Insurance Agreement effective as of August 25,                1998,                by and between Sierra Health Services, Inc., and Jonathon W. Bunker,                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, incorporated by                reference                to Exhibit 10.5 to the Registrant's Annual Report on Form 10-K for                the                fiscal year ended December 31, 2000. |
|                                                                                                                                                                                                                                         |                                                                                                                                                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   |
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|  Table              of Contents                                                                                                                                                                                                         |                                                                                                                                                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|                                                                                                                                                                                                                                         |                                                                                                                                                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   |
|                                                                                                                                                                                                                                         |                                                                                                                                                                                | (i)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | Sierra                Health Services, Inc. Deferred Compensation Plan effective May 1,                1996, as                Amended and Restated Effective January 1, 2006.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|                                                                                                                                                                                                                                         |                                                                                                                                                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   |
|                                                                                                                                                                                                                                         |                                                                                                                                                                                | (j)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | Sierra                Health Services, Inc. Supplemental Executive Retirement Plan effective                July 1, 1997, as Amended and Restated August 10, 2006, incorporated                by                reference to Exhibit 10.6 to the Registrant’s Current Report on Form 8-K                filed on August 16, 2006.                                                                                                                                                                                                                                                                                                                                                   |
|                                                                                                                                                                                                                                         |                                                                                                                                                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   |
|                                                                                                                                                                                                                                         |                                                                                                                                                                                | (k)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | Sierra                Health Services, Inc. Supplemental Executive Retirement Plan effective                as                of March 1, 1998, as Amended and Restated August 10, 2006, incorporated                by                reference to Exhibit 10.7 to the Registrant’s Current Report on Form 8-K                filed on August 16, 2006.                                                                                                                                                                                                                                                                                                                             |
|                                                                                                                                                                                                                                         |                                                                                                                                                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   |
|                                                                                                                                                                                                                                         |                                                                                                                                                                                | (l)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | Sierra                Health Services, Inc. Supplemental Executive Retirement Plan III                effective                January 1, 2005 and incorporated by reference to Exhibit 10.1 to                the                Registrant's Quarterly Report on Form 10-Q for the fiscal quarter                ended                September 30, 2006.                                                                                                                                                                                                                                                                                                                                |
|                                                                                                                                                                                                                                         |                                                                                                                                                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   |
|                                                                                                                                                                                                                                         |                                                                                                                                                                                | (m)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | Sierra                Health Services, Inc. Management Incentive Compensation Plan for                the year                ended December 31, 2006.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|                                                                                                                                                                                                                                         |                                                                                                                                                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   |
|                                                                                                                                                                                                                                         |                                                                                                                                                                                | (n)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | Sierra                Health Services, Inc. 1995 Long-Term Incentive Plan, as amended and                restated through December 11, 2001, incorporated by reference to                Exhibit                10.5 to the Registrant’s Annual Report on Form 10-K for the fiscal year                ended December 31, 2001.                                                                                                                                                                                                                                                                                                                                                      |
|                                                                                                                                                                                                                                         |                                                                                                                                                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   |
|                                                                                                                                                                                                                                         |                                                                                                                                                                                | (o)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | 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.                                                                                                                                                                                                                                                                                                                              |
|                                                                                                                                                                                                                                         |                                                                                                                                                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   |
|                                                                                                                                                                                                                                         |                                                                                                                                                                                | (p)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | Form                of Sierra Health Services, Inc. 1995 Long-Term Incentive Plan                Non-Qualified Stock Option Agreement, incorporated by reference to                Exhibit                10.6 to the Registrant's Annual Report on Form 10-K for the fiscal                year                ended December 31, 2004.                                                                                                                                                                                                                                                                                                                                                   |
|                                                                                                                                                                                                                                         |                                                                                                                                                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   |
| .                                                                                                                                                                                                                                            |                                                                                                                                                                                | (q)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | Form                of Sierra Health Services, Inc. 1995 Non-Employee Directors’ Stock Plan                Non-Qualified Stock Option Agreement, incorporated by reference to                Exhibit                10.6 to the Registrant's Annual Report on Form 10-K for the fiscal                year                ended December 31, 2004.                                                                                                                                                                                                                                                                                                                                   |
|                                                                                                                                                                                                                                         |                                                                                                                                                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|                                                                                                                                                                                                                                         |                                                                                                                                                                                | (r)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | Form                of Sierra Health Services, Inc. 1995 Long-Term Incentive Plan Restricted                Stock Units Agreement, incorporated by reference to Exhibit 10.6                to the                Registrant's Annual Report on Form 10-K for the fiscal year ended                December                31, 2004.                                                                                                                                                                                                                                                                                                                                                       |
|                                                                                                                                                                                                                                         |                                                                                                                                                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   |
|                                                                                                                                                                                                                                         | (10.10)                                                                                                                                                                             | Stock                Purchase Agreement, dated as of November 25, 2003, as amended on                December                17, 2003, as further amended on December 29, 2003 and as further                amended                on January 12, 2004, among Sierra Health Services, Inc., CII Financial,                Inc. and Folksamerica Holding Company, Inc., incorporated by reference                to                Exhibit 10.6 to the Registrant’s Annual Report on Form 10-K for the fiscal                year ended December 31, 2003.                                                                                                                                                                                                                                                                                                                                                           |
|                                                                                                                                                                                                                                         |                                                                                                                                                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   |
|                                                                                                                                                                                                                                         | (10.11)                                                                                                                                                                             | Form                of Contingent Purchase Price Note Agreement among Folksamerica Holding                Company, Inc., Sierra Health Services, Inc., CII Financial, Inc.,                and,                with respect to Article 5 only, Folksamerica Reinsurance Company,                incorporated by reference to Exhibit 10.7 to the Registrant’s Annual                Report on Form 10-K for the fiscal year ended December 31,                2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|                                                                                                                                                                                                                                         |                                                                                                                                                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|                                                                                                                                                                                                                                         |  (12.1)                                                                                                                                                                        |  Statement              re: Computation of Ratios.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|  92                                                                                                                                                                                                                                     |
|                                                                                                                                                                                                                                              |
|  Table              of Contents                                                                                                                                                                                                         |                                                                                                                                                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|                                                                                                                                                                                                                                         |                                                                                                                                                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   |
|                                                                                                                                                                                                                                         | (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 |
|------------------------------------------------------------------------------------------------------------------------------|-------------------------------------------------------------|
| Behavioral                Healthcare Options, Inc.                                                                           | Nevada                                                      |
| CII                Financial, Inc.                                                                                           | California                                                  |
| Family                Health Care Services                                                                                   | Nevada                                                      |
| Family                Home Hospice, Inc.                                                                                     | Nevada                                                      |
| Health                Plan of Nevada, Inc.                                                                                   | Nevada                                                      |
| Northern                Nevada Health Network, Inc.                                                                          | Nevada                                                      |
| Sierra                Health and Life Insurance Company, Inc.                                                                | California                                                  |
| Sierra                Health Holdings, Inc. (Sierra                Military Health Services, LLP, Texas Health Choice, L.C.) | Nevada                                                      |
| Sierra                Health-Care Options, Inc.                                                                              | Nevada                                                      |
| Sierra                Home Medical Products, Inc.                                                                            | Nevada                                                      |
| Sierra                Medical Management, Inc. and Subsidiaries                                                              | Nevada                                                      |
| Sierra                Nevada Administrators, Inc.                                                                            | Nevada                                                      |
| Southwest                Medical Associates, Inc.                                                                            | Nevada                                                      |
| Southwest                Realty, Inc.                                                                                        | Nevada                                                      |

|   | (23.1) | Consent                of Deloitte & Touche LLP.                                                                                                                                                                                      |   |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|   |   |                                                                                                                                                                                                                                      |   |
|   | (31.1) | Rule                13a - 14(a) Certification of Chief Executive Officer.                                                                                                                                                                 |   |
|   |   |                                                                                                                                                                                                                                      |   |
|   | (31.2) | Rule                13a - 14(a) Certification of Chief Financial Officer.                                                                                                                                                                 |   |
|   |   |                                                                                                                                                                                                                                      |   |
|   | (32.1) | Certification                pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section                906 of                the Sarbanes-Oxley Act of 2002 of Principal Executive Officer dated                February 27, 2007. |
|   |   |                                                                                                                                                                                                                                      |   |
|   | (32.2) | Certification                pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section                906 of                the Sarbanes-Oxley Act of 2002 of Principal Financial Officer dated                February 27, 2007. |
|   |   |  All                other Exhibits are omitted because they are not                applicable.                                                                                                                                       |   |
| (c)    |   | Financial                Statement Schedules                                                                                                                                                                                              |   |

----

Table          of Contents

| **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. |   |
| Date:                February 27, 2007                                                                                                                                                                                                                                              |   |   | Anthony                M. Marlon, M.D. |   |
|                                                                                                                                                                                                                                                                                |   |   |   |   |
|                                                                                                                                                                                                                                                                                |   |   |   |   |
| 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.           |
|                                                                                                                                                                                                                                                                                |   |   |   |   |
| Signature                                                                                                                                                                                                                                                                           |   | Title |   | Date |
|                                                                                                                                                                                                                                                                                |   |   |   |   |
|                                                                                                                                                                                                                                                                                |   |   |   |   |
| /s/                Anthony M. Marlon, M.D.Anthony                M. Marlon, M.D.                                                                                                                                                                                                    |   | Chief                Executive Officerand                Chairman of the Board(Chief                Executive Officer) |   | February                27, 2007 |
|                                                                                                                                                                                                                                                                                |   |   |   |   |
| /s/                Paul H. PalmerPaul                H. Palmer                                                                                                                                                                                                                      |   | Senior                Vice President of Finance, Chief                Financial Officer and                Treasurer |   | February                27, 2007 |
|                                                                                                                                                                                                                                                                                |   |   |   |   |
| /s/                Marc R. BriggsMarc                R. Briggs                                                                                                                                                                                                                      |   | Vice                President of Finance(Chief                Accounting Officer) |   | February                27, 2007 |
|                                                                                                                                                                                                                                                                                |   |   |   |   |
| /s/                Thomas Y. HartleyThomas                Y. Hartley                                                                                                                                                                                                                |   | Lead                Director |   | February                27, 2007 |
|                                                                                                                                                                                                                                                                                |   |   |   |   |
| /s/                Charles L. RutheCharles                L. Ruthe                                                                                                                                                                                                                  |   | Director |   | February                27, 2007 |
|                                                                                                                                                                                                                                                                                |   |   |   |   |
| /s/                Albert L. GreeneAlbert                L. Greene                                                                                                                                                                                                                  |   | Director |   | February                27, 2007 |
|                                                                                                                                                                                                                                                                                |   |   |   |   |
| /s/                Michael E. Luce                                                                                                                                                                                                                                                  |   | Director |   | February                27, 2007 |
| Michael                E. Luce                                                                                                                                                                                                                                                      |   |   |   |   |
|                                                                                                                                                                                                                                                                                |   |   |   |   |
| /s/                Anthony L. WatsonAnthony                L. Watson                                                                                                                                                                                                                |   | Director |   | February                27, 2007 |

----

Table          of Contents

**SIERRA      HEALTH SERVICES, INC. AND      SUBSIDIARIES**

**SCHEDULE      I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT**

**CONDENSED      BALANCE SHEETS - Parent Company Only**

|                                                                  |   | **December                31,** |     |
|-----------------------------------------------------------------------|--------|---------------------------------|----------|
|                                                                  |   | **2006**                        |     | **2005** |   |
|                                                                  |   | (In                thousands)   |     |
| **Assets**                                                            |   |                            |     |   |   |
| Current                assets:                                        |   |                            |     |   |   |   |   |
| Cash                and cash equivalents                         |   | $                               | 17,379   |   | $ | 29,302 |   |
| Short-term                investments                            |   |                            | 27,147   |   |   | 47,532 |   |
| Current                portion of deferred tax asset             |   |                            | 8,617    |   |   | 4,713 |   |
| Prepaid                expenses and other current assets         |   |                            | 22,550   |   |   | 26,451 |   |
| Total                current assets                              |   |                            | 75,693   |   |   | 107,998 |   |
|                                                                  |   |                            |     |   |   |   |   |
| Property                and equipment, net                       |   |                            | 23,959   |   |   | 25,425 |   |
| Restricted                cash and investments                   |   |                            | 727      |   |   | 613 |   |
| Equity                in net assets of subsidiaries              |   |                            | 232,834  |   |   | 199,770 |   |
| Notes                receivable from subsidiaries                |   |                            | 8,732    |   |   | 8,880 |   |
| Goodwill                                                         |   |                            | 2,154    |   |   | 2,154 |   |
| Deferred                tax asset                                |   |                            | 21,393   |   |   | 13,932 |   |
| Other                assets                                      |   |                            | 70,578   |   |   | 54,223 |   |
| Total                assets                                      |   | $                               | 436,070  |   | $ | 412,995 |   |
|                                                                  |   |                            |     |   |   |   |   |
| **Liabilities                and stockholders’ equity**         |   |                            |     |   |   |   |   |
| Current                liabilities:                                   |   |                            |     |   |   |   |   |
| Accounts                payable and other accrued liabilities    |   | $                               | 33,278   |   | $ | 19,669 |   |
| Current                portion of long-term debt                 |   |                            | 42       |   |   | 29 |   |
| Total                current liabilities                         |   |                            | 33,320   |   |   | 19,698 |   |
|                                                                  |   |                            |     |   |   |   |   |
| Long-term                debt (less current portion)             |   |                            | 118,588  |   |   | 52,086 |   |
| Other                liabilities                                 |   |                            | 67,444   |   |   | 56,959 |   |
| Total                liabilities                                 |   |                            | 219,352  |   |   | 128,743 |   |
|                                                                  |   |                            |     |   |   |   |   |
| Commitments                and contingencies                          |   |                            |     |   |   |   |   |
|                                                                  |   |                            |     |   |   |   |   |
| Stockholders’                equity:                            |   |                            |     |   |   |   |   |
| Common                stock                                      |   |                            | 354      |   |   | 346 |   |
| Treasury                stock                                    |   |                            | (600,539 | ) |   | (377,190 | ) |
| Additional                paid-in capital                        |   |                            | 436,643  |   |   | 400,287 |   |
| Accumulated                other comprehensive loss              |   |                            | (8,635   | ) |   | (1,750 | ) |
| Retained                earnings                                 |   |                            | 388,895  |   |   | 262,559 |   |
| Total                stockholders’ equity                  |   |                            | 216,718  |   |   | 284,252 |   |
| Total                liabilities and stockholders’ equity  |   | $                               | 436,070  |   | $ | 412,995 |   |

----

Table            of Contents

**SIERRA      HEALTH SERVICES, INC. AND SUBSIDIARIES**

**SCHEDULE      I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT      (Continued)**

**CONDENSED      STATEMENTS OF INCOME - Parent Company Only**

|                                                                                                    |   | **Years                Ended December 31,** |    |
|---------------------------------------------------------------------------------------------------------|--------|---------------------------------------------|---------|
|                                                                                                    |   | **2006**                                    |    | **2005** |   | **2004** |   |
|                                                                                                    |   | (In                thousands)               |    |
| Revenues:                                                                                               |   |                                        |
| Management                fees                                                                          |   | $                                           | 157,116 |   | $ | 147,698 |   | $ | 142,178 |   |
| Subsidiary                dividends                                                                     |   |                                        | 35,500  |   |   | 55,307 |   |   | 52,250 |   |
| Investment                and other income                                                              |   |                                        | 11,552  |   |   | 10,026 |   |   | 6,934 |   |
| Total                revenues                                                                           |   |                                        | 204,168 |   |   | 213,031 |   |   | 201,362 |   |
|                                                                                                    |   |                                        |    |   |   |   |   |   |   |   |
| Expenses:                                                                                               |   |                                        |    |   |   |   |   |   |   |   |
| Depreciation                                                                                            |   |                                        | 6,805   |   |   | 6,798 |   |   | 9,161 |   |
| Other                                                                                                   |   |                                        | 53,078  |   |   | 44,780 |   |   | 53,113 |   |
| Interest                expense and other, net                                                          |   |                                        | 348     |   |   | 6,166 |   |   | 1,164 |   |
| Total                expenses                                                                           |   |                                        | 60,231  |   |   | 57,744 |   |   | 63,438 |   |
|                                                                                                    |   |                                        |    |   |   |   |   |   |   |   |
| Income                before income taxes                                                               |   |                                        | 143,937 |   |   | 155,287 |   |   | 137,924 |   |
| Provision                for income taxes                                                               |   |                                        | (40,094 | ) |   | (34,488 | ) |   | (22,363 | ) |
| Income                of parent company                                                                 |   |                                        | 103,843 |   |   | 120,799 |   |   | 115,561 |   |
|                                                                                                    |   |                                        |    |   |   |   |   |   |   |   |
| Equity                in undistributed income of subsidiaries from continuing                operations |   |                                        | 36,628  |   |   | (782 | ) |   | 7,858 |   |
| Income                from continuing operations                                                        |   |                                        | 140,471 |   |   | 120,017 |   |   | 123,419 |   |
| Loss                from discontinued operations                                                        |   |                                        | ¾  |   |   | ¾ |   |   | (682 | ) |
| Net                income                                                                               |   | $                                           | 140,471 |   | $ | 120,017 |   | $ | 122,737 |   |

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Table            of Contents

**SIERRA      HEALTH SERVICES, INC. AND SUBSIDIARIES**

**SCHEDULE      I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT      (Continued)**

**CONDENSED      STATEMENTS OF CASH FLOWS - Parent Company Only**

|                                                                                                          |   | **Years                Ended December 31,** |     |
|---------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------|----------|
|                                                                                                          |   | **2006**                                    |     | **2005** |   | **2004** |   |
|                                                                                                          |   | (In                thousands)               |     |
| Cash                flows from operating activities:                                                          |   |                                        |     |   |   |   |   |   |   |   |
| Income                from continuing operations                                                         |   | $                                           | 140,471  |   | $ | 120,017 |   | $ | 123,419 |   |
| Adjustments                to reconcile net income to net cash provided by                                    |   |                                        |     |   |   |   |   |   |   |   |
| Operating                Activities:                                                                          |   |                                        |     |   |   |   |   |   |   |   |
| Depreciation                                                                                        |   |                                        | 6,805    |   |   | 6,798 |   |   | 9,161 |   |
| Stock                based compensation expense                                                          |   |                                        | 9,199    |   |   | 7,391 |   |   | 7,332 |   |
| Excess                tax benefits from share-based payment arrangements                                      |   |                                        | (9,853   | ) |   |   |   |   |   |   |
| Loss                (gain) on property and equipment dispositions                                        |   |                                        | 55       |   |   | (2,272 | ) |   | (89 | ) |
| Equity                in undistributed income of subsidiaries from continuing                operations  |   |                                        | 36,628   |   |   | (782 | ) |   | 7,858 |   |
| Change                in assets and liabilities                                                          |   |                                        | (88,196  | ) |   | (46,142 | ) |   | (17,281 | ) |
| Net                cash provided by operating activities                                                 |   |                                        | 95,109   |   |   | 85,010 |   |   | 130,400 |   |
|                                                                                                          |   |                                        |     |   |   |   |   |   |   |   |
| Cash                flows from investing activities:                                                          |   |                                        |     |   |   |   |   |   |   |   |
| Capital                expenditures                                                                      |   |                                        | (5,273   | ) |   | (2,034 | ) |   | (9,495 | ) |
| Property                and equipment dispositions                                                       |   |                                        | (74      | ) |   | 988 |   |   | 1,750 |   |
| Decrease                (increase) in investments                                                        |   |                                        | 6,666    |   |   | (15,785 | ) |   | (32,501 | ) |
| Dividends                from subsidiaries                                                               |   |                                        | 35,500   |   |   | 55,307 |   |   | 52,250 |   |
| Net                cash provided by investing activities                                            |   |                                        | 36,819   |   |   | 38,476 |   |   | 12,004 |   |
|                                                                                                          |   |                                        |     |   |   |   |   |   |   |   |
| Cash                flows from financing activities:                                                          |   |                                        |     |   |   |   |   |   |   |   |
| Payments                on debt and capital leases                                                       |   |                                        | (32      | ) |   | (10,029 | ) |   | (55 | ) |
| Proceeds                from other long-term debt                                                        |   |                                        | 75,000   |   |   | ¾ |   |   | 10,000 |   |
| Purchase                of treasury stock                                                                |   |                                        | (243,136 | ) |   | (154,382 | ) |   | (133,809 | ) |
| Excess                tax benefits from share-based payment arrangements                                      |   |                                        | 9,853    |   |   |   |   |   |   |   |
| Exercise                of stock in connection with stock plans                                          |   |                                        | 14,464   |   |   | 22,338 |   |   | 26,834 |   |
| Net                cash used for financing activities                                               |   |                                        | (143,851 | ) |   | (142,073 | ) |   | (97,030 | ) |
|                                                                                                          |   |                                        |     |   |   |   |   |   |   |   |
| Net                (decrease) increase in cash and cash equivalents                                      |   |                                        | (11,923  | ) |   | (18,587 | ) |   | 45,374 |   |
| Cash                and cash equivalents at beginning of year                                            |   |                                        | 29,302   |   |   | 47,889 |   |   | 2,515 |   |
| Cash                and cash equivalents at end of year                                                  |   | $                                           | 17,379   |   | $ | 29,302 |   | $ | 47,889 |   |

| Supplemental                condensed statements of cash flows information:                      |   |
|--------------------------------------------------------------------------------------------------|--------|
|                                                                                             |   |   | **2006** |   |   | **2005** |   |   | **2004** |   |
| Cash                paid during the year for interest (net of amount                capitalized) |   | $ | (2,535 | ) | $ | (8,557 | ) | $ | (2,979 | ) |
| Cash                paid during the year for income taxes                                        |   |   | (55,750 | ) |   | (44,924 | ) |   | (12,620 | ) |
|                                                                                             |   |   |   |   |   |   |   |   |   |   |
| Non-cash                investing and financing activities:                                      |   |   |   |   |   |   |   |   |   |   |
| Senior                convertible debentures converted into Sierra common stock                  |   |   | 8,500 |   |   | 63,000 |   |   | ¾ |   |
| Tax                benefits from share-based payment arrangements                                |   |   | ¾ |   |   | 25,697 |   |   | 27,287 |   |
| Additions                to capital leases                                                       |   |   | 47 |   |   | 19 |   |   | 120 |   |

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Table          of Contents

**SIERRA      HEALTH SERVICES, INC. AND SUBSIDIARIES**

**SCHEDULE      I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT      (Continued)**

**NOTES      TO CONDENSED INFORMATION OF REGISTRANT**

**For      the Years Ended December 31, 2006 and 2005**

**1.**
**LONG-TERM      DEBT**

| **December                31,** |   |   | (In                thousands) |   |
|---------------------------------|--------|--------|-------------------------------|--------|
| 2007                       |   | $      | 42                            |   |
| 2008                       |   |   | 44                            |   |
| 2009                       |   |   | 33                            |   |
| 2010                       |   |   | 12                            |   |
| 2011                       |   |   | 75,000                        |   |
| Thereafter                 |   |   | 43,500                        |   |
| Total                      |   | $      | 118,631                       |   |

**2.**
**OTHER**

*Management      Fees. *

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Table          of Contents

**SIERRA      HEALTH SERVICES, INC. AND      SUBSIDIARIES**

**SCHEDULE      II - VALUATION AND QUALIFYING ACCOUNTS**

**Note      Receivable Valuation Allowance**

| (In                thousands)               |   |   |                                              | **Additions                Charged To** |   |
|---------------------------------------------|--------|--------|---------------------------------------------------|-----------------------------------------|--------|
| **Years                Ended December 31,** |   |   | **Balance                At Beginning Of Period** |                                    |   | **Costs                And Expenses** |   |   | **Other** |   |   | **Deductions** |   |
| 2006                                        |   | $      | 15,000                                            |                                    | $      | ¾ |   | $ | ¾ |   | $ | ¾ |   |
| 2005                                        |   |   | 15,000                                            |                                    |   | ¾ |   |   | ¾ |   |   | ¾ |   |
| 2004                                        |   |   | ¾                                            |                                    |   | 15,000 |   |   | ¾ |   |   | ¾ |   |

**Deferred      Income Tax Asset Valuation Allowance**

| (In                thousands)               |   |   |                                              | **Additions                Charged To** |   |
|---------------------------------------------|--------|--------|---------------------------------------------------|-----------------------------------------|--------|
| **Years                Ended December 31,** |   |   | **Balance                At Beginning Of Period** |                                    |   | **Costs                And Expenses** |   |   | **Other** |   |   | **Deductions** |   |
| 2006                                        |   | $      | 15,082                                            |                                    | $      | (240 | ) | $ | ¾ |   | $ | ¾ |   |
| 2005                                        |   |   | 15,082                                            |                                    |   | ¾ |   |   | ¾ |   |   | ¾ |   |
| 2004                                        |   |   | 15,082                                            |                                    |   | ¾ |   |   | ¾ |   |   | ¾ |   |