UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549

                                    FORM 10-K

(Mark One)

    X

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

                   For the fiscal year ended December 31, 1999

                                       OR

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

     For the transition period from              to

                         Commission file number: 1-8865

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

             NEVADA

     (State or other jurisdiction of
     incorporation or organization)
                                                    88-0200415

                                      (I.R.S. Employer Identification Number)
                                               2724 NORTH TENAYA WAY
                                             LAS VEGAS, NEVADA  89128

               (Address of principal executive offices) (Zip Code)

         Registrant's  telephone  number,  including  area code:  (702) 242-7000
         Securities registered pursuant to Section 12(b) of the Act:

             Title of each class

                                             Name of each exchange on
                                                  which registered

         Common Stock, par value $.005

                                              New York Stock Exchange

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

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

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

     The aggregate  market value of the voting stock held by  non-affiliates  of
the registrant on February 28, 2000 was $145,661,000.

     The  number of shares  of the  registrant's  common  stock  outstanding  on
February 28, 2000 was 27,041,000.

                       DOCUMENTS INCORPORATED BY REFERENCE

                       DOCUMENT                             WHERE INCORPORATED

    Registrant's Current Report on Form 8-K dated                  Part I
                    March 15, 2000.                            Part II, Item 7
                                                                   Part III
Portions of the  registrant's  definitive  proxy  statement  for its 2000 annual
meeting to be filed with the SEC not later

    than 120 days after the end of the fiscal year.



<PAGE>



                          SIERRA HEALTH SERVICES, INC.

                          1999 FORM 10-K ANNUAL REPORT

                                TABLE OF CONTENTS

<TABLE>

<CAPTION>

                                                                                                               Page

                                     PART I

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

Item  2.      Properties................................................................................         15

Item  3.      Legal Proceedings.........................................................................         16

Item  4.      Submission of Matters to a Vote of Security Holders.......................................         16


                                                      PART II

Item  5.      Market for Registrant's Common Stock and

                 Related Stockholder Matters............................................................         17

Item  6.      Selected Financial Data...................................................................         18

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

                 and Results of Operations .............................................................         19

Item 7a.      Quantitative and Qualitative Disclosures about Market Risk ...............................         31

Item  8.      Financial Statements and Supplementary Data...............................................         32

Item  9.      Changes in and Disagreements with Accountants on
                 Accounting and Financial Disclosure....................................................         61


                                                     PART III

Item 10.      Directors and Executive Officers of the Registrant........................................         61

Item 11.      Executive Compensation....................................................................         61

Item 12.      Security Ownership of Certain Beneficial Owners and Management............................         61

Item 13.      Certain Relationships and Related Transactions............................................         61


                                                      PART IV

Item 14.      Exhibits, Financial Statement Schedules and Reports on Form 8-K...........................         62
</TABLE>

                                                         i


<PAGE>



                                                      PART I

ITEM 1.       BUSINESS

                                                      GENERAL

The Company  filed a Current  Report on Form 8-K dated March 15, 2000,  which is
incorporated by reference,  that set forth cautionary statements pursuant to the
"safe harbor" provisions of the Private Securities Litigation Reform Act of 1995
and  identified  important  risk factors that could cause the  Company's  actual
results to differ materially from those expressed in any projected, estimated or
forward-looking  statements  relating to Sierra  Health  Services,  Inc. and its
subsidiaries.

Sierra Health  Services,  Inc.  ("Sierra")  and its  subsidiaries  (collectively
referred  to as the  "Company"),  is a managed  health  care  organization  that
provides and administers the delivery of comprehensive  health care and workers'
compensation programs with an emphasis on quality care and cost management.  The
Company's  strategy has been to develop and offer a portfolio of managed  health
care and workers' compensation products to employer groups and individuals.  The
Company's  broad range of managed  health care services is provided  through its
federally qualified health maintenance organizations ("HMOs"), managed indemnity
plans, a third-party  administrative services program for employer-funded health
benefit  plans,   workers'   compensation  medical  management  programs  and  a
subsidiary that administers a managed care federal contact for the Department of
Defense's TRICARE program in Region 1. This contract is currently  structured as
five  one-year  option  periods.  If all option  periods  are  exercised  by the
Department of Defense  ("DoD") and no extensions of the  performance  period are
made,  health care  delivery  will end on May 31,  2003 for Region 1.  Ancillary
products and services  that  complement  the Company's  managed  health care and
workers' compensation product lines are also offered.

On October 31, 1998,  Sierra and one of its  subsidiaries,  Texas Health Choice,
L.C. ("TXHC"),  completed the acquisition of certain assets of Kaiser Foundation
Health Plan of Texas  ("Kaiser-Texas"),  a health plan  operating in  Dallas/Ft.
Worth and  Permanente  Medical  Association of Texas  ("Permanente"),  a medical
group with approximately 150 physicians.  The purchase price allocation included
a  premium  deficiency  reserve  of $25  million  for  estimated  losses  on the
contracts acquired from Kaiser-Texas. The purchase price was $124 million, which
is net $20 million in operating cost support paid to Sierra by Kaiser Foundation
Hospitals  in  four  quarterly   installments   following  the  closing  of  the
transaction.  The  purchase  price  included  amounts  for real estate and eight
medical  and office  facilities  with  approximately  500,000  square  feet.  In
December 1998, certain accreditation goals were met by the health plan resulting
in a purchase  price  increase of $3.0 million,  to $127  million.  The purchase
price may increase up to an  additional  $27 million over three years if certain
growth  and  member  retention  goals  are  met by  the  health  plan;  however,
preliminary results indicate these goals were not met for the first year. Sierra
assumed no prior  liabilities  for malpractice or other  litigation,  or for any
unanticipated  future  adjustments  to  claims  expenses  for  periods  prior to
closing. The transaction was financed with a five-year revolving credit facility
and a $35.2 million note payable to Kaiser  Foundation Health Plan of Texas. The
note is secured by the acquired real estate.  Approximately  $110 million of the
$200 million revolving credit facility was used to fund the transaction.

The original  liability  for the  estimated  premium  deficiency  was based upon
assumptions of membership and other operating information, some of which had not
been  received as of December 31, 1998.  During 1999,  the Company  continued to
gather such data, including data from the seller, and based upon the receipt and
analysis of this data, the Company  revised the initial  estimate of the premium
deficiency  accrual.  In total the  Company  recorded  a $72.0  million  premium
deficiency in conjunction with the acquisition. Of this amount, $6.8 million was
utilized in 1998 to offset  losses on the acquired  contracts  and the remainder
was  utilized  in  1999.  Total  goodwill   recorded  in  conjunction  with  the
acquisition  was  $126.8  million,  of  which  $24.8  million  was a  result  of
adjustments in 1999.

On December 31, 1998, Sierra completed the acquisition of the Nevada health care
business of Exclusive Healthcare,  Inc. ("EHI"),  United of Omaha Life Insurance
Company and United World Life Insurance  Company  ("United"),  all of which were
subsidiaries of Mutual of Omaha Insurance Company. Sierra initially retained

                                                         1


<PAGE>



approximately 9,000 members  (approximately 4,400 HMO members) subsequent to the
acquisition.  Effective June 1, 1999, the Company  completed the purchase of the
Texas operations of EHI  (approximately  1,000 HMO members) and United's related
preferred provider organization ("PPO") that was part of the dual option HMO/PPO
plan. The purchase price of both the Nevada and Texas transactions is contingent
based on how many  members are retained  through 2000 and 2001.  No cash will be
paid until group renewals begin in 2000.

The principal  executive offices of the Company are located at 2724 North Tenaya
Way, Las Vegas, Nevada 89128, and its telephone number is (702) 242-7000.

Managed Care Products and Services

The Company's  primary types of health care coverage are HMO plans, HMO Point of
Service ("POS") plans, and managed indemnity plans,  which include a PPO option.
As of December 31,  1999,  the Company  provided  HMO products to  approximately
198,900  members in Nevada,  92,200 in Dallas/Ft.  Worth,  33,300 in Houston and
3,100 in Arizona.  The POS products  allow  members to choose one of the various
coverage  options when medical services are required instead of one plan for the
entire  year.  The  Company  also  provides   managed   indemnity   products  to
approximately  36,700 members,  Medicare  supplement  products to  approximately
28,300 members,  and administrative  services to approximately  297,500 members.
Medical premiums account for approximately 64% of total revenues.  Approximately
72% and 28% of such medical  premiums were derived from Nevada HMO and insurance
subsidiaries, and the Texas HMO, respectively in 1999.

Health Maintenance Organizations. The Company operates mixed group network model
HMOs in Las Vegas, Nevada and Dallas/Ft. Worth, Texas and a network model HMO in
Reno,  Nevada  and  Houston,  Texas.  Contracted  primary  care  physicians  and
specialists   for  the  HMOs  are   compensated  on  a  capitation  or  modified
fee-for-service   basis.  Contracts  with  their  primary  hospitals  are  on  a
capitation  or  discounted  per diem  basis.  Members  receive  a wide  range of
coverage after paying a nominal  co-payment and are eligible for preventive care
coverage. The HMOs do not require deductibles or claim forms.

Most of the  Company's  managed  health  care  services  in Nevada are  provided
through its independently  contracted  network of approximately  2,000 providers
and 12 hospitals.  These Nevada networks  include the Company's  multi-specialty
medical  group,  which provides  medical  services to  approximately  73% of the
Company's  southern  Nevada HMO members and  employs  over 170 primary  care and
other providers in various medical  specialties.  The Company directly  provides
home health care,  hospice care and behavioral health care services and operates
a company that  provides home  infusion,  oxygen and durable  medical  equipment
services.  In addition,  the Company operates two 24-hour urgent care centers, a
radiology department,  a vision department,  an occupational medicine department
and two free-standing,  state-licensed and Medicare-approved  ambulatory surgery
centers.  The Company believes that this vertical integration of its health care
delivery system in Nevada  provides a competitive  advantage as it has helped it
to effectively manage health care costs while delivering quality care.

In Dallas/Ft.  Worth,  Texas,  the Company's  affiliated  medical group provides
professional services from seven health centers; all of which offer primary care
services while two offer specialty and urgent care services.  Approximately  95%
of the Company's 92,200  Dallas/Ft.  Worth HMO members are provided care by this
medical group.  In addition,  TXHC has contracts with 13 hospitals for inpatient
care in Dallas/Ft. Worth. Shortly after the acquisition, the Company changed the
provider  model in Dallas/Ft.  Worth from a group model to a mixed network model
by overlaying individual practice association ("IPA") delivery systems on top of
the existing  group model to provide  members with more choice.  Currently,  the
Dallas/Ft.  Worth  members  are  served  by  approximately  1,500  independently
contracted providers. The 33,300 Houston HMO members are served by approximately
1,600 independently contracted providers and 15 hospitals.

The Company's  commercial plans offer traditional HMO benefits and POS benefits.
At December 31, 1999, the Company had approximately  263,100  commercial members
of which 148,400 were located in Nevada, 114,400 in Texas and 300 in Arizona.

                                                         2


<PAGE>



The Company offers a Medicare risk product for  Medicare-eligible  beneficiaries
called Senior Dimensions in Nevada and Golden Choice in Texas. Senior Dimensions
is marketed directly to Medicare-eligible  beneficiaries in the Company's Nevada
service area. In the first quarter of 2000, the Company  eliminated active sales
and marketing for Golden Choice.  The Company will continue to offer the plan to
potential  customers  who contact  the  Company,  as well as provide  service to
existing  members.  The monthly payment  received from the Health Care Financing
Administration   ("HCFA")  for  Medicare   members  is   determined  by  formula
established by Federal law. The Balanced Budget Act of 1997 included legislative
changes which affected the way health plans are compensated for Medicare members
by eliminating over five years amounts paid for graduate  medical  education and
by increasing the blend of national cost factors  applied in  determining  local
reimbursement  rates over a six-year phase-in period. Both changes will have the
effect of reducing  reimbursement in high cost  metropolitan  areas with a large
number of teaching hospitals;  however, the legislation includes a provision for
a minimum increase of 2% annually in health plan Medicare  reimbursement through
2003.  Under  the  authority  provided  by the  1997  Balanced  Budget  Act (see
"Government  Regulation  and  Recent  Legislation"),  HCFA has begun to  collect
hospital encounter data from Medicare risk contractors. The data will be used to
implement  a new  risk  adjustment  mechanism  which  will be  phased  in over a
five-year period which began January 1, 2000. Given the relatively high Medicare
risk premium levels in certain of the Company's  market areas, the Company is in
jeopardy that the new risk adjustment  mechanism to be developed could adversely
affect the Company's  Medicare premium rates going forward.  The risk adjustment
factors have not been applied to the Social HMO capitation payments for the Year
2000 and the Company does not believe that the risk adjustment mechanism will be
applied to Social HMO capitation payments in the future.

As of December  31,  1999,  the Company had 52,900  Medicare  members,  of which
39,000  were  located  in  Nevada,   11,100  in  Texas  and  2,900  in  Arizona.
Approximately  35,000 of the Nevada  Medicare  members were enrolled in a Social
HMO (See "Social Health Maintenance Organization" following).

In  addition,  as of December  31, 1999,  the Company had  approximately  11,500
members enrolled in its HMO Medicaid risk products. To enroll in these products,
an individual must be eligible for Medicaid benefits in the state of Nevada. The
state's  managed care  division  pays the  Company's  HMO a monthly fee for each
Medicaid member enrolled.

Social Health Maintenance Organization.  Effective November 1, 1996, the Company
entered  into a Social  HMO II  contract  with  HCFA  pursuant  to which a large
portion of the Company's  Medicare risk enrollees will receive certain  expanded
benefits. Sierra was one of six HMOs nationally to be awarded this contract, and
is currently the only company to have implemented the program as of December 31,
1999.  The Company  receives  additional  revenues for providing  these expanded
benefits.   The  additional   revenues  are  determined  based  on  health  risk
assessments  that have been, and will continue to be, performed on the Company's
eligible Medicare risk members.  The additional  benefits  include,  among other
things,  assisting the eligible  Medicare risk members with typical daily living
functions such as bathing, dressing and walking. These members, as identified in
the health risk assessments,  are those who currently have difficulty performing
such daily living  functions  because of a health or physical  problem.  HCFA is
considering  adjusting the  reimbursement  factors for the Social HMO members in
the future.  At this time,  however,  there can be no  assurance  as to what the
final per member  reimbursement  will be or that the Social HMO contract will be
renewed.  If the  reimbursement  for these members  decreases  significantly and
related benefit changes are not made timely,  there could be a material  adverse
effect on the Company's business.

Preferred  Provider  Organizations.  The Company  also offers  health  insurance
through its PPO. The Company's  managed indemnity plans generally offer insureds
the  option  of  receiving   their  medical  care  from  either   contracted  or
non-contracted  providers.  Insureds pay higher  deductibles and co-insurance or
co- payments when they receive care from non-contracted providers. Out-of-pocket
costs  are  lowered  by  utilizing  contracted  providers  who  are  part of the
Company's PPO network.  As of December 31, 1999,  approximately  36,700  members
were enrolled in Sierra's managed indemnity plans.

The  Company  currently  provides  managed   indemnity,   accidental  death  and
disability,   and  Medicare  supplement  services  to  individuals  in  Arizona,
California, Colorado, Iowa, Louisiana, Maryland, Mississippi,

                                                         3


<PAGE>



Missouri,  Nevada,  South  Carolina  and Texas.  The  Company is also  exploring
further expansion in certain other states and currently provides other insurance
services in Missouri.  As of December 31, 1999 the managed indemnity  subsidiary
was licensed in a total of 43 states and the District of Columbia.

Ancillary Medical Services.  Among the ancillary medical services offered by the
Company are outpatient  surgical care,  diagnostic  tests,  medical and surgical
procedures,  inpatient  and  outpatient  laboratory  tests,  x- ray,  CAT scans,
nuclear medicine  services,  and mental health and substance abuse services.  In
Nevada,  the Company also provides home health care services,  a hospice program
and vision  services.  These  services are provided to members of the  Company's
HMOs, managed indemnity and administrative services plans. The mental health and
substance abuse services are also provided to approximately 145,000 participants
from non-affiliated  employer groups and insurance companies.  In addition,  the
Company offers home infusion, oxygen and durable medical equipment services.

Administrative Services. The Company's administrative services products provide,
among other things, utilization review and PPO services to large employer groups
that are usually  self-insured.  As of December 31, 1999,  approximately 298,000
members  were  enrolled in the  Company's  administrative  services  plans.  The
results of  operations  for these  services are  included in  specialty  product
revenues and expenses in the Consolidated Statements of Operations.

Military Contract Services

Sierra Military Health Services, Inc. On September 30, 1997, the DoD awarded the
Company a triple-option  health benefits ("TRICARE") contract to provide managed
health care coverage to eligible beneficiaries in Region 1. This region includes
approximately  610,000  eligible  individuals in Connecticut,  Delaware,  Maine,
Maryland,  Massachusetts,  New Hampshire,  New Jersey,  New York,  Pennsylvania,
Rhode  Island,  Vermont,  Virginia,  West  Virginia and  Washington,  D.C.  SMHS
completed an eight month  implementation  phase in May 1998 and began  providing
health care benefits on June 1, 1998 under the TRICARE contract.

Under the TRICARE  contract,  Sierra Military  Health  Services,  Inc.  ("SMHS")
provides  health care services to  dependents of active duty military  personnel
and military retirees and their dependents  through  subcontractor  partnerships
and individual providers. Through such partnerships, SMHS also performs specific
administrative services, such as health care appointment scheduling, enrollment,
network  management  and health care advice line  services.  SMHS  performs such
services using DoD information systems. If all five option periods are exercised
by the DoD and no extensions  of the  performance  period are made,  health care
delivery  will  end on May 31,  2003,  followed  by an  additional  eight  month
phaseout of the Region 1 managed care support contract.

In June 1996, the DoD awarded a TRICARE contract to TriWest Healthcare  Alliance
("TriWest"),  a  consortium  consisting  of  Sierra  and 13  other  health  care
companies,  to provide health services to Regions 7 and 8, which include a total
of 16 states.  The Company's  interest in this equity investee is  approximately
12%. In April 1997, TriWest began providing health care to approximately 700,000
individuals,  of  which  the  Company  is  responsible  for  providing  care  to
approximately 93,000 beneficiaries in Nevada and Missouri.

Workers' Compensation Operations

Workers' Compensation Subsidiary.  On October 31, 1995, the Company acquired CII
Financial,  Inc. ("CII"),  for approximately  $76.3 million of common stock in a
transaction  accounted  for as a  pooling  of  interests.  CII  writes  workers'
compensation insurance in the states of California,  Colorado, Kansas, Missouri,
Nebraska,  Nevada, New Mexico, Texas and Utah. CII has licenses in 32 states and
the  District of  Columbia.  California,  Colorado,  Texas and Nevada  represent
approximately 81%, 8%, 5% and 2%, respectively,  of CII's fully insured workers'
compensation   insurance  premiums  in  1999.  Workers'  compensation  insurance
premiums  account for  approximately  6% of the  Company's  total  revenue.  The
workers' compensation subsidiary applies the discipline of managed care concepts
to its operations.  These concepts  include,  but are not limited to, the use of
specialized  preferred  provider  networks,  utilization  reviews by an employed
board certified occupational

                                                         4


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medicine  physician as well as nurse case  managers,  medical bill reviewers and
job developers who facilitate early return to work.

Effective  September 30, 1997, the Company terminated its workers'  compensation
administrative  services contract with the state of Nevada.  The contract served
approximately  200,000  enrollees  and  provided  approximately  $3.2 million in
revenues for the year ended  December 31, 1997.  The contract was  terminated to
allow the Company to participate in the Nevada workers'  compensation  insurance
market which was opened to competition in July 1999.

Marketing

The Company's marketing efforts for its commercial managed care products usually
involve a two-step process.  The Company first makes  presentations to employers
and then  provides  information  directly to  employees  once the  employer  has
decided to offer the Company's  products.  Once a  relationship  with a group is
established  and a group  agreement  is  negotiated  and signed,  the  Company's
marketing  efforts  focus on  individual  employees.  During a designated  "open
enrollment"  period each year, usually the month preceding the annual renewal of
the agreement with the group,  employees  choose whether to remain with, join or
terminate their  membership with a specific health plan offered by the employer.
New employees  decide  whether to join one of the  employers'  health  insurance
options at the time of their employment.  Although  contracts with employers are
generally  terminable on 60 days notice,  changes in membership  occur primarily
during open enrollment periods. Medicare risk products are primarily marketed by
the HMOs' sales employees. Retention of employer groups and membership growth is
accomplished  through  print  advertising  directed  to  employers  and  through
consumer media campaigns.  Media communications convey the Company's emphasis on
preventive  care,  ready access to health care  providers  and quality  service.
Other  communications  to customers  include  employer  and member  newsletters,
member  education  brochures,  prenatal  information  packets,   employer/broker
seminars and direct mail  advertising  to clients.  Members'  satisfaction  with
Company  benefits and services is  monitored by customer  surveys.  Results from
these  surveys and other  primary  and  secondary  research  guide the sales and
advertising efforts throughout the year.

The  Company's  workers'  compensation   insurance  policies  are  sold  through
independent  insurance agents, who may also represent other insurance companies.
The Company  believes that  independent  insurance  agents and brokers choose to
market  the  Company's  insurance  policies  primarily  because of the price the
Company charges.  Additional  considerations include the quality of service that
the Company  provides and the  commissions the Company pays. The Company employs
full-time employees as marketing  representatives to make personal contacts with
agents,  to  maintain  regular  communication  with them,  to advise them of the
Company's services and products,  and to recruit additional agents. In addition,
the Company employs  full-time field  underwriters  who meet with agents and can
provide an immediate quote on a policy. As of December 31, 1999, the Company had
relationships  with  approximately  881 agents  and paid its agents  commissions
based on a percentage of the gross written  premium  produced by such agents and
brokers.  The Company also has various agency incentive  programs that enable an
agent to earn  additional  compensation  if certain  premium  production  and/or
agency  loss  ratio  goals  are met.  The  Company  also  utilizes  a number  of
promotional media,  including advertising in publications and at trade fairs, to
support the efforts of its independent agents.

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

                                                         5


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Membership

Period End Membership:
<TABLE>

<CAPTION>
                                                               At December 31,

                                                     1999          1998         1997          1996        1995
                                                   --------      --------     --------      -------     ------
HMO:

<S>                                                  <C>          <C>          <C>          <C>          <C>
    Commercial..............................         263,000      272,000      154,000      147,000      116,000
    Medicare................................          53,000       47,000       36,000       30,000       25,000
    Medicaid................................          11,000        5,000        2,000
Managed Indemnity...........................          37,000       41,000       64,000       46,000       31,000
Medicare Supplement.........................          28,000       26,000       25,000       23,000       15,000
Administrative Services (1) ................         298,000      318,000      328,000      338,000      117,000
TRICARE Eligibles...........................         610,000      606,000       ______       ______       ______
                                                  ----------   ----------
    Total Membership........................       1,300,000    1,315,000      609,000      584,000      304,000
                                                   =========    =========      =======      =======      =======
</TABLE>

(1)  For  comparability  purposes,  enrollment  information has been restated to
     reflect  the  September  30, 1997  termination  of the  Company's  workers'
     compensation  administrative  services  contract  with the state of Nevada.
     Enrollment  in the  terminated  plan was  163,000  and  94,000  members  at
     December 31, 1996 and 1995, respectively.

For the years ended  December  31,  1999,  1998 and 1997,  the Company  received
approximately 23.5%, 23.0% and 23.7%,  respectively,  of its total revenues from
its contract with HCFA to provide  health care  services to Medicare  enrollees.
The Company's contract with HCFA is subject to annual renewal at the election of
HCFA,  and requires the Company to comply with federal HMO and Medicare laws and
regulations  and may be  terminated  if the  Company  fails  to so  comply.  The
termination  of the Company's  contract with HCFA would have a material  adverse
effect on the Company's business. In addition,  there have been, and the Company
expects  that there will  continue to be, a number of  legislative  proposals to
limit Medicare reimbursements and to require additional benefits.  Future levels
of funding of the Medicare program by the federal government cannot be predicted
with certainty. (See "Government Regulation and Recent Regulation").

The Company's ability to obtain and maintain  favorable group benefit agreements
with employer  groups  affects the Company's  profitability.  The agreements are
generally renewable on an annual basis but are subject to termination on 60 days
prior  notice.  For the fiscal year ended  December 31, 1999,  the Company's ten
largest HMO employer  groups were, in the aggregate,  responsible  for less than
10% of the Company's  total  revenues.  Although  none of such  employer  groups
accounted for more than 2% of total revenues during that period, the loss of one
or more of the larger  employer  groups  would,  if not  replaced  with  similar
membership,  have a material  adverse  effect upon the Company's  business.  The
Company has  generally  been  successful  in retaining  these  employer  groups.
However,  there can be no  assurance  that the Company will be able to renew its
agreements  with  such  employer  groups  in the  future  or that  it  will  not
experience a decline in  enrollment  within its employer  groups.  Additionally,
revenues  received under certain  government  contracts are subject to audit and
retroactive adjustment.

Provider Arrangements and Cost Management

HMO and  Managed  Indemnity  Products.  A  significant  distinction  between the
Company's  health  care  delivery  system  and that of many other  managed  care
providers is the fact that  approximately  73% of the Company's  southern Nevada
HMO members and 95% of its Dallas/Ft.  Worth,  Texas HMO members receive primary
health care through the Company's affiliated multi-specialty medical groups. The
Company makes health care available through  independently  contracted providers
employed  by  the   multi-specialty   medical  groups  and  other  independently
contracted networks of physicians, hospitals and other providers.

Under the  Company's  HMOs,  the member  selects a primary  care  physician  who
provides or  authorizes  any  non-emergency  medical  care given to that member.
These primary care physicians and some  specialists are compensated to a limited
extent on the basis of how well they  coordinate  appropriate  medical care. The
Company has a system of limited  incentive  risk  arrangements  and  utilization
management with respect to its

                                                         6


<PAGE>



independently  contracted primary care physicians.  The Company  compensates its
independently  contracted  primary care physicians and specialists by using both
capitation and modified  fee-for-service  payment methods. In Nevada, under both
the  capitation  and  modified   fee-for-service   methods,  an  incentive  risk
arrangement is established for institutional services. Additional amounts may be
made available to certain  capitated  physicians if hospital costs are less than
anticipated  for the  Company's HMO members.  For those primary care  physicians
receiving payments on a modified fee-for-service basis, portions of the payments
otherwise due the  physicians are withheld.  The amounts  withheld are available
for  payment  to the  physicians  if, at  year-end,  the  expenditures  for both
institutional and  non-institutional  medical services are within predetermined,
contractually  agreed upon  ranges.  It is believed  that this method of limited
incentive risk payment is  advantageous  to the  physician,  the Company and the
members  because all share in the  benefits of managing  health care costs.  The
Company  has,  however,  negotiated  capitation  and  reduced  fee-for-  service
agreements  with  certain  specialists  and primary  care  providers  who do not
participate in the incentive risk arrangements. The Company monitors health care
utilization,  including evaluation of elective surgical  procedures,  quality of
care and financial  stability of its capitated providers to facilitate access to
service and to ensure member satisfaction.

The Company provides or negotiates  discounted  contracts with hospitals for the
provision of inpatient and outpatient  hospital care,  including room and board,
diagnostic tests and medical and surgical procedures.  The Company believes that
it  currently  has  a  favorable  contract  with  its  primary  southern  Nevada
contracted hospital,  Columbia Sunrise Hospital. Subject to certain limitations,
the contract provides,  among other things,  guaranteed contracted per diem rate
increases  on an  annual  basis  after  December  31,  1997.  The per diem  rate
increased 2% in 1999 and is  scheduled to increase 3% in 2000.  Since a majority
of the Company's southern Nevada hospital days are at Columbia Sunrise Hospital,
this  contract  assists  the Company in  managing a  significant  portion of its
medical costs. The contract expires in the year 2012.  Columbia Sunrise Hospital
has requested to renegotiate the contract.  While the Company intends to enforce
the existing  terms of the contract,  legal and other expenses will be incurred.
In Texas,  the Company  has  negotiated  a per diem  arrangement  with  Columbia
Hospital,  Inc., for hospital  services provided through 15 hospitals in Houston
and has contracts with 13 Columbia  hospitals and several tertiary hospitals for
inpatient care in Dallas/Ft. Worth.

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

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

The Company manages health care costs through its large case management program,
urgent  care  centers  and by  educating  its members on how and when to use the
services of its plans and how to manage chronic disease conditions.  The Company
also  audits  hospital  bills to identify  inappropriate  charges.  Further,  in
Nevada,  the Company  utilizes its home health care agency and its hospice which
helps to minimize hospital admissions and lengths of stay.

     Military Health Services. Under the TRICARE contract,  dependents of active
duty military personnel and military retirees and their dependents choose one of
three option plans available to them for health care

                                                         7


<PAGE>



services:  (1) TRICARE Prime (an HMO style option with a  self-selected  primary
care manager and no deductibles), (2) TRICARE Extra (a PPO style option), or (3)
TRICARE  Standard (an indemnity style option with  deductibles and cost shares).
Approximately 35% of eligible  beneficiaries  receive their primary care through
existing Military Treatment  Facilities.  SMHS negotiated  discounted  contracts
with  approximately  25,000 individual  providers,  1,500 institutions and 5,000
pharmacies to provide  supplemental  network  access for TRICARE Prime and Extra
beneficiaries.  SMHS'  contracts  with  providers  are primarily on a discounted
fee-for-service  basis with renewal and  termination  terms  similar to Sierra's
commercial  practice.  SMHS is at- risk for and manages the health care  service
cost  of all  TRICARE  Extra  and  Standard  beneficiaries  as  well  as a small
percentage of TRICARE Prime beneficiaries.

Risk Management

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

Effective July 1, 1997, the Company also maintains excess catastrophic  coverage
for one of the Company's wholly-owned HMOs, Health Plan of Nevada, Inc. ("HPN"),
that  reimburses  the Company for amounts by which the ultimate net loss exceeds
$400,000, but does not exceed the annual maximum of $19.6 million per occurrence
and $39.2 million per contract. In the ordinary course of its business, however,
the Company is subject to claims that are not  insured,  principally  claims for
punitive damages.

Effective January 1, 1998,  workers'  compensation  claims are reinsured between
$500,000 and $100 million per occurrence. For claims occurring on and after July
1, 1998, that are below $500,000, the Company obtained quota share and excess of
loss reinsurance.  Under this agreement,  the Company reinsures 30% of the first
$10,000 of each claim,  75% of the next  $40,000 and 100% of the next  $450,000.
The  Company  receives  a ceding  commission  from the  reinsurer  as a  partial
reimbursement of operating  expenses.  This agreement  expires June 30, 2000 and
there is a provision for optional  twelve-month  run-off coverage on policies in
force at June 30, 2000.

Effective  January 1, 2000,  the  reinsurance  on workers'  compensation  claims
between $500,000 and $100 million was replaced with a three-year agreement which
provides  coverage for claims  exceeding  $500,000 per occurrence  with no upper
limit.

The Company is unaware of any pending  disputes with any of its reinsurers  that
could  result  in  termination,  recision,  arbitration  or  litigation  of  its
reinsurance agreements.

Information System

The Company has in place certain data systems which assist the Company in, among
other  things,  pricing  its  services,  monitoring  utilization  and other cost
factors,  providing bills on a timely basis, identifying accounts for collection
and  handling  various  accounting  and  reporting  functions.  Its  imaging and
workflow  systems are used to process and track claims and  coordinate  customer
service. Where it is cost efficient,  the Company's system is connected to large
provider  groups,  doctors'  offices,  payors and  brokers  to enable  efficient
transfer  of  information  and  communication.  In 2000,  the  Company  plans to
implement an internet-based health access

                                                         8


<PAGE>



system to serve its members,  providers  and  employees.  The Company  views its
information  systems  capability  as  critical  to the  performance  of  ongoing
administrative   functions  and  integral  to  quality   assurance  and  to  the
coordination  of patient  care  across care  sites.  The Company is  continually
modifying or improving  its  information  systems  capabilities  in an effort to
improve operating efficiencies.

Year 2000

The Year 2000 issue existed because many computer systems and applications  used
two-digit date fields to designate a year. As the century date change  occurred,
date-sensitive  non-compliant systems may have recognized the year 2000 as 1900,
or not at all. This  inability to recognize or properly  treat the Year 2000 may
have caused systems to process  critical  financial and operational  information
incorrectly.

The Company  replaced or remediated its mission  critical  financial  systems as
well as its mission critical operational computer systems,  remediated databases
and validated the readiness of all  computing and non-  computing  systems.  The
Company  also  engaged in a thorough  evaluation  to validate  that all systems,
computing and  non-computing,  were  functioning.  The Company is unaware of any
Year 2000 related outages over the century date change.

The  Company  implemented  two major  systems  in 1999 and is in the  process of
implementing a third,  at an estimated cost of over $50 million,  which includes
the  implementation  costs related to the acquired Kaiser- Texas operations.  To
date the  Company  has spent  approximately  $48.9  million on the new  computer
systems  and other  Year 2000  items.  The  Company  expensed  the costs to make
modifications  to  existing   computer   systems  and  non-computer   equipment.
Management  currently  estimates the  remaining new computer  system costs to be
$4.0 million to $6.0  million.  While this has been a  substantial  effort,  the
results should give the Company the benefits of new technology and functionality
for many of its financial and operational computer systems and applications.

Quality Assurance and Improvement

The Company has developed  programs to help ensure that the health care services
provided by its HMO and managed indemnity plans meet the professional  standards
of care  established  by the medical  community.  The Company  believes that its
emphasis on quality  allows it to increase and retain its  members.  The Company
monitors and evaluates the availability and quality of the medical care rendered
by the providers in its HMO and insurance plans and periodically audits selected
diagnoses,   problems  and  referrals  to  determine  adherence  to  appropriate
standards of medical care. In addition,  the Company has medical  directors who,
supported   by  a   professional   medical   staff,   monitor  the  quality  and
appropriateness  of  health  care by  analyzing  a  physician's  utilization  of
diagnostic  tests,  laboratory and radiology  procedures,  specialty  referrals,
prescriptions  and  hospitals.  Physicians  and  hospitals  selected  to provide
services to the Company's members are subject to the Company's quality assurance
programs including a formal credentialing process of all physicians.

The  Company  also  has  internal  quality  assurance  and  improvement   review
committees that meet on a regular basis to review specialist referrals,  monitor
the performance of physicians and review practice patterns, complaints and other
patient  issues.  Staff  members  regularly  visit  hospitals to review  medical
records,  meet with patients and review  treatment  programs and discharge plans
with attending  physicians.  In addition,  the Company solicits information from
both  existing  and  former  members  as to  their  satisfaction  with  the care
delivered.

Several independent organizations have been formed for the purpose of responding
to external demands for accountability in the health care industry.  The Company
has  voluntarily  elected  to be  evaluated  by  these  external  organizations,
including the National  Committee for Quality  Assurance  ("NCQA") and the Joint
Commission on Accreditation of Healthcare Organizations ("JCAHO").

The NCQA is an independent,  not-for-profit  organization dedicated to measuring
the quality of America's health care. The NCQA survey includes  rigorous on-site
and off-site evaluations of over 60 standards.  A team of physicians and managed
care experts conducts  accreditation  surveys. A national oversight committee of
physicians analyzes the team's findings and assigns an accreditation level based
on the  performance  level of each plan  being  evaluated  to NCQA's  standards.
Health Plan of Nevada, Inc., has received a Commendable Accreditation from NCQA,
for the Commercial HMO and Medicare HMO product

                                                         9


<PAGE>



lines in the Las  Vegas  metropolitan  area and  Pahrump.  TXHC  has  earned  an
Accredited  status from NCQA for its  commercial  HMO product in the  Dallas/Ft.
Worth service area.

The TXHC  accreditation  will expire in April of 2000. At this time, the Company
has  voluntarily  postponed  its  accreditation  renewal  process for TXHC and a
scheduled  site  examination  visit of TXHC by the NCQA in the second quarter of
2000 was cancelled.  The Company expects to reschedule the site  examination for
the first quarter of 2001 depending on the NCQA's availability.  There can be no
assurance,  however,  that the Company will maintain or re-obtain  NCQA or other
accreditations  in the future and there is no basis to predict what  effect,  if
any,  the lack of NCQA or other  accreditations  could  have on HPN's or  TXHC's
competitive   positions  in  southern   Nevada  and  Dallas/Ft.   Worth,   Texas
respectively.

The JCAHO  reviews  rights,  responsibilities  and  ethics,  continuum  of care,
education and communication,  leadership,  management of information,  and human
resources and network  performance.  The Company's  home health care and hospice
subsidiaries are JCAHO accredited.

Underwriting

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

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

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

Workers' Compensation. Prior to insuring a particular risk, the Company reviews,
among  other  factors,   a  standard   industry   application,   a  supplemental
questionnaire  and the  employer's  prior  loss  experience.  Additionally,  the
Company determines whether the employer's  employment  classifications are among
the classifications that the Company has elected to insure and if the amounts of
the premiums for the  classifications are within the Company's  guidelines.  The
Company reviews these classifications  periodically to evaluate whether they are
profitable.  A member of the Company's  loss control  department  may conduct an
on-site safety inspection  before the Company insures the employer.  The Company
generally initiates this inspection for enterprises  classified as higher hazard
or ones  identified  as  needing  loss  control  attention  or  service  such as
manufacturing and construction. The Company may also initiate inspections if the
enterprise previously has had a high loss ratio, a high experience  modification
factor or frequency of losses.  If the on-site  inspection  reveals hazards that
can be  corrected,  and an agreement can be reached with the employer that these
hazards  will  be  corrected  in a  time  frame  established  by  the  Company's
underwriting department, the Company may issue a policy subject to correction of
those  hazards.  In the event the Company has issued a policy  where no previous
inspection has been conducted, and subsequently learns through an inspection the
employer has hazards that must be  corrected,  the Company will request that the
employer correct the hazards within a specified period of time. If these hazards
are not corrected,  the Company may cancel the policy for  non-compliance of the
hazard correction,  within legal requirements.  With regard to new business, the
agent or broker  will  usually  submit  the claims  history  on the  prospective
account.  In those  situations  where the claims  history is not supplied by the
agent or broker,  other  sources (such as the Industry  Experience  Modification
Worksheets) are used to obtain the appropriate claims history if possible.

                                                        10


<PAGE>



Competition

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

Workers'   Compensation.   The  Company's  workers'   compensation  business  is
concentrated in California,  a state where the workers'  compensation  insurance
industry is  extremely  competitive.  Since open  rating  became  effective  for
policyholders  in 1995,  there have been  substantial  reductions  in  premiums.
However,  for renewal  policies issued year to date in 2000,  Sierra's  workers'
compensation  business has obtained premium rate increases in excess of 15%. The
increase  seen so far in 2000 is a material  positive  change from the  previous
rate trend. Based on public information,  other California workers' compensation
companies  are issuing  year 2000  policies at rates 15% to 20% in excess of the
expiring premiums.

The Company  believes that there are more than 200 insurance  companies  writing
workers' compensation insurance in California. Many of the Company's competitors
have been in business  longer,  have a larger  volume of business,  offer a more
diversified line of insurance  coverage,  have greater  financial  resources and
have greater  distribution  capability  than the Company.  The largest writer of
workers'  compensation   insurance  in  California  is  the  State  Compensation
Insurance Fund.

Losses and Loss Adjustment Expenses

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

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

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

The  Company  reviews  the  adequacy  of its  reserves  on a periodic  basis and
considers  external  forces  such  as  changes  in the  rate of  inflation,  the
regulatory environment, the judicial administration of claims, medical costs and
other  factors  that could  cause  actual  losses and loss  adjustment  expenses
("LAE") to change.  Reserves are reviewed with the Company's independent actuary
at least  annually.  The  actuarial  projections  include  a range of  estimates
reflecting the uncertainty of projections. Management evaluates the reserves

                                                        11


<PAGE>



in the aggregate,  based upon the actuarial  indications,  and makes adjustments
where appropriate.  The consolidated financial statements of the Company provide
for reserves based on the anticipated ultimate cost of losses.

Government Regulation and Recent Legislation

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

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

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

In  addition  to changes in  applicable  laws and  regulations,  the  Company is
subject to various audits, investigations and enforcement actions. These include
possible  government actions relating to the federal Employee  Retirement Income
Security Act, which  regulates  insured and  self-insured  health coverage plans
offered by employers,  the Federal  Employees  Health Benefit Plan,  federal and
state fraud and abuse laws, and laws relating to utilization  management and the
delivery of health care and payment or reimbursement  therefor. In addition, the
Company is subject to Medicare regulations promulgated by HCFA. Any violation of
such  government  laws and  regulations  could result in  assessment of damages,
civil or criminal fines or penalties,  or other sanctions,  including  exclusion
from  participation  in  government  programs.  In addition,  disclosure  of any
adverse  investigation or audit results or sanctions could negatively affect the
Company's  reputation  in various  markets  and make it more  difficult  for the
Company to sell its products and services.

The Company has HMO licenses in Nevada,  Texas and Arizona.  The  Company's  HMO
operations  are subject to regulation by the Nevada  Division of Insurance,  the
Board of Health, the Texas Department of Insurance and the Arizona Department of
Insurance.   The  Company's  health   insurance   subsidiary  is  domiciled  and
incorporated  in  California  and is licensed  in 43 states and the  District of
Columbia.  It is subject to licensing and other  regulations  of the  California
Department of Insurance as well as the insurance  departments of other states in
which it operates or holds  licenses.  The Company's  HMO and insurance  premium
rate increases are subject to various state insurance department approvals.  The
Company's Nevada HMO and health insurance  subsidiaries  currently maintain home
offices and a regional home office, respectively, in Las Vegas and, accordingly,
are eligible for certain  premium tax credits in Nevada.  The Company intends to
take all necessary steps to continue to comply with eligibility requirements for
these credits. The elimination or reduction of the premium tax credit would have
a material adverse effect on the Company's results of operations.

                                                        12


<PAGE>



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

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

Medicare and Medicaid  antifraud and abuse  provisions are codified at 42 U.S.C.
Sections  1320a-7(b)  (the  "Anti-kickback  Statute")  and  1395nn  (the  "Stark
Amendments").  Many states have similar  anti-kickback and  anti-referral  laws.
These statutes prohibit certain business  practices and relationships  involving
the  referral of  patients  for the  provision  of health care items or services
under certain  circumstances.  Violations of the  Anti-kickback  Statute and the
Stark Amendments include criminal penalties and civil sanctions, including fines
and  possible  exclusion  from  the  Medicare  and  Medicaid  programs.  Similar
penalties are provided for violation of state  anti-kickback  and  anti-referral
laws. The Department of Health and Human Services ("HHS") has issued regulations
establishing  "safe  harbors"  with respect to the  Anti-kickback  Statute.  The
Company believes that its business arrangements and operations are in compliance
with the  Anti-kickback  Statute and the Stark Amendments and the exceptions set
forth  therein,  regardless  of  the  availability  of  regulatory  safe  harbor
protection with respect to those statutes.  There can, however,  be no assurance
that (i)  government  officials  charged with  responsibility  for enforcing the
prohibitions  of the  Anti-kickback  Statute and the Stark  Amendments  will not
assert that the Company or certain  transactions  in which it is involved are in
violation  of  those  statutes;  and  (ii)  such  statutes  will  ultimately  be
interpreted   by  the  courts  in  a  manner   consistent   with  the  Company's
interpretation.

In 1997,  Congress  passed the  Balanced  Budget Act ("Act")  which  revised the
structure  of and  reimbursement  for private  health plan  options for Medicare
enrollees.  The Act seeks to expand the options available to Medicare  enrollees
by  permitting  HCFA to contract  with a variety of types of managed care plans,
creating  a new  Medicare  fee-for-service  option and  establishing  a Medicare
Medical Savings Account  Demonstration  Program. The legislation also encourages
provider  sponsored  organizations  to  contract  directly  with HCFA to provide
coverage for Medicare enrollees.  Federal reimbursement was modified so that the
premiums  paid by HCFA will be adjusted to take into  account,  on an increasing
basis, a blend of national and local health care cost factors,  rather than only
local  costs--starting  with a 10%  national  factor in 1998 and moving to a 50%
national  factor by 2003.  Congress  also  provided  for  gradual  removal  of a
graduate  medical  education  factor in determining  reimbursement  and, for the
phase in of a risk adjustment  payment  methodology.  As a result,  it is likely
that  premiums  paid by HCFA  will not match the rate of  increase  for  medical
costs.

The  legislation  includes a provision for a minimum  increase of 2% annually in
health plan Medicare  reimbursement  through 2003. The legislation also provides
for expedited licensure of provider-sponsored Medicare plans and a repeal of the
rule requiring health plans to have one commercial enrollee for each Medicare or
Medicaid enrollee. These changes could have the effect of increasing competition
in the Medicare  market.  Further,  effective  January 1, 1999,  the Company was
required to implement new Medicare  regulations  including,  but not limited to,
discharge  notices,  additional  provider  contract  language and  extensive new
quality  improvement  programs.  In 1999,  Congress  changed a number of the Act
provisions  in the  Balanced  Budget  Refinement  Act  ("BBRA").  The BBRA  made
numerous changes in Medicare payment,

                                                        13


<PAGE>



contracting,   enrollment  rules,  and  altered  the  risk  adjustment  phase-in
schedule.   These  new   regulations  are  likely  to  increase  the  burden  of
administering  the  Company's  Medicare  plans  and  may  adversely  impact  the
Company's operations.

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

Workers'  Compensation.   The  Company  is  subject  to  extensive  governmental
regulation  and  supervision  in  each  state  in  which  it  conducts  workers'
compensation business. The primary purpose of such regulation and supervision is
to provide  safeguards for policyholders and injured workers rather than protect
the interests of  shareholders.  The extent and form of the regulation may vary,
but generally has its source in statutes that establish  regulatory agencies and
delegate  to  the  regulatory   agencies  broad   regulatory,   supervisory  and
administrative authority. Typically, state regulations extend to such matters as
licensing companies; restricting the types or quality of investments;  requiring
triennial  financial  examinations  and  market  conduct  surveys  of  insurance
companies; licensing agents; regulating aspects of a company's relationship with
its agents;  restricting use of some underwriting  criteria;  regulating premium
rates,  forms  and  advertising;   limiting  the  grounds  for  cancellation  or
nonrenewal of policies;  solicitation and replacement practices;  and specifying
what might constitute unfair practices.  Moreover,  the payment of dividends and
the making of other  distributions  to the Company by its workers'  compensation
insurance  company  subsidiaries  are  contingent  upon  the  earnings  of those
subsidiaries  and are  subject to various  business  considerations,  applicable
state corporate laws and regulations,  the terms of agreements to which they may
become  a  party  and   government   regulations,   which  restrict  in  certain
circumstances  the payment of dividends and  distributions,  and the transfer of
assets to the Company.

In the normal  course of business,  the Company and the various  state  agencies
that regulate the activities of the Company may disagree on  interpretations  of
laws and  regulations,  policy wording and  disclosures or other related issues.
These disagreements, if left unresolved, could result in administrative hearings
and/or  litigation.  The  Company  attempts  to  resolve  all  issues  with  the
regulatory agencies,  but is willing to litigate issues where it believes it has
a strong position.  The ultimate outcome of these  disagreements could result in
sanctions and/or  penalties and fines assessed  against the Company.  Currently,
there are no litigation matters pending with any department of insurance.

Typically,  states mandate  participation  in insurance  guaranty  associations,
which  assess   solvent   insurance   companies  in  order  to  fund  claims  of
policyholders of insolvent insurance companies. Under this arrangement, insurers
can be  assessed  up to 1% (or 2% in certain  states) of  premiums  written  for
workers' compensation insurance in that state each year to pay losses and LAE on
covered  claims of insolvent  insurers.  In California and certain other states,
insurance  companies are allowed to recoup such assessments  from  policyholders
while several states allow an offset against premium taxes. Potential assessment
expenses,  net of  recoupment,  if any, for  insolvencies  are not accrued until
after an  insolvency  has occurred  since the  likelihood  and the amount of the
assessment expense cannot be reasonably determined or estimated.  In California,
there have been no new assessments for insolvent workers' compensation insurance
companies since 1990.

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

                                                        14


<PAGE>



Deposits.  The Company's HMO and  insurance  subsidiaries  are required by state
regulatory  agencies to maintain certain deposits and must also meet certain net
worth and reserve requirements.  The Company has restricted assets on deposit in
various  states  ranging from $20,000 to $2.0 million and totaling $21.7 million
at  December  31,  1999.  The  Company's  HMO and  insurance  subsidiaries  meet
requirements to maintain minimum  stockholder's equity ranging from $1.1 million
to $5.2 million. In addition, in conjunction with the Kaiser-Texas  acquisition,
TXHC  entered into a letter  agreement  with the Texas  Department  of Insurance
whereby TXHC agreed to maintain a net worth of $20.0 million.

Dividends.  The Company's HMO and insurance  subsidiaries are also restricted by
state law as to the amount of dividends that can be declared and paid. Moreover,
insurance companies and HMOs domiciled in Texas, Nevada and California generally
may not pay  extraordinary  dividends  without  providing  the  state  insurance
commissioner with 30 days prior notice, during which period the commissioner may
disapprove the payment.  An  "extraordinary  dividend" is generally defined as a
dividend  whose fair  market  value  together  with that of other  dividends  or
distributions made within the preceding 12 months exceeds the greater of (i) ten
percent of the insurer's surplus as of the preceding December 31 or (ii) the net
gain from  operations  of such  insurer for the  12-month  period  ending on the
preceding December 31. The Company is not in a position to assess the likelihood
of obtaining  future  approval for the payment of  "extraordinary  dividends" or
dividends  other  than  those  specifically  allowed  by  law  in  each  of  its
subsidiaries'  states of domicile.  No prediction  can be made as to whether any
legislative  proposals  relating to dividend rules in the domiciliary  states of
the Company's  subsidiaries  will be made or adopted in the future,  whether the
insurance departments of such states will impose either additional  restrictions
in the  future  or a  prohibition  on the  ability  of the  Company's  regulated
subsidiaries  to  declare  and pay  dividends  or as to the  effect  of any such
proposals or restrictions on the Company's regulated subsidiaries.

Employees

The Company had  approximately  4,700 employees as of December 31, 1999. None of
these employees are covered by a collective  bargaining  agreement.  The Company
believes that its relations with its employees are good.

ITEM 2. PROPERTIES

The Company owns several  administrative  facilities in southern Nevada totaling
approximately  400,000  square  feet.  Such  facilities  include an  approximate
110,000  square foot six-story  home office  building and an approximate  43,000
square foot two-story corporate administrative headquarters. These buildings are
subject to liens  securing a $400,000 loan balance.  Also included in this total
is a 198,000 square foot six-story  administrative  headquarters  building which
became fully occupied in 1998.  This building is subject to a $11.6 million loan
balance.  The Company also owns clinical  facilities in the southern Nevada area
totaling  approximately  425,000  square feet and  consisting  primarily  of ten
medical clinics including one medical clinic that opened for business in January
2000 and two surgery centers.  The Company leases additional office and clinical
space  in  Nevada  totaling   approximately  129,000  and  90,000  square  feet,
respectively.

In conjunction with the Kaiser-Texas  acquisition,  the Company  purchased eight
medical and office facilities with approximately 323,000 square feet of clinical
facilities and approximately  175,000 square feet of administrative  facilities.
These  buildings  are subject to a deed of trust note  securing a $34.7  million
note balance.  In addition,  the Company leases  additional  office and clinical
space in Texas totaling approximately 24,000 square feet and 56,000 square feet,
respectively.  The above properties are utilized  primarily for the managed care
operations.  The workers' compensation subsidiary is headquartered in Nevada and
occupies approximately 25% of the 198,000 square foot administrative building as
well as leases  approximately  64,000 square feet of office space in California.
The Company  leases  approximately  150,000 square feet of office space in other
various   states  as  needed  for  the  military   subsidiary's   administrative
headquarters, for TRICARE service centers and for other regional operations.

                                                        15


<PAGE>



The Company  believes that current and planned  clinical  space will be adequate
for its present needs.  Additional  clinical space may be required,  however, if
membership continues to expand in southern Nevada.

The Company owns real estate and a building in Park City, Utah purchased in 1996
to provide  entertainment and a meeting  environment for significant current and
prospective  clients,  brokers and others who assist in the Company's  marketing
efforts.

ITEM 3.   LEGAL PROCEEDINGS

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

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

None

                                                        16


<PAGE>






                                                      PART II

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

Market Information

The Company's common stock, par value $.005 per share (the "Common Stock"),  has
been listed on the New York Stock  Exchange under the symbol SIE since April 26,
1994 and,  prior to that,  had been listed on the American  Stock Exchange since
the Company's  initial public  offering on April 11, 1985.  The following  table
sets forth the high and low sales  prices for the Common  Stock for each quarter
of 1999 and 1998.

<TABLE>

<CAPTION>

         Period                                                                     High               Low

         1999

<S>                                                                                <C> <C>             <C> <C>
             First Quarter........................................                 $22 1/8             $11 9/16
             Second Quarter.......................................                   16 1/4              10 7/16
             Third Quarter........................................                   14 9/16             10 1/16
             Fourth Quarter.......................................                   10                    4 5/8

         1998

             First Quarter........................................                 $26 7/8             $20 9/16
             Second Quarter.......................................                   27 37/64            23 1/4
             Third Quarter........................................                   26                  15 7/8
             Fourth Quarter.......................................                   24 15/16            17 15/16
</TABLE>

On February  28, 2000 the closing  sale price of the Common  Stock was $6.00 per
share.

Note:    The  above  stock  prices  have  been   adjusted  to  account  for  the
         three-for-two stock split of the Company's Common Stock to stockholders
         of record as of May 18, 1998.

Holders

The number of record holders of Common Stock at February 28, 2000 was 241. Based
upon  information  available  to it,  the  Company  believes  there are  several
thousand beneficial holders of the Common Stock.

Dividends

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

                                                        17


<PAGE>





ITEM 6.       SELECTED FINANCIAL DATA

The following  selected  consolidated  financial data of Sierra Health Services,
Inc.,  and  subsidiaries  (the  "Company"),  for each of the fiscal years in the
five-year  period ended December 31, 1999 should be read in conjunction with the
Consolidated  Financial Statements and the related Notes thereto,  "Management's
Discussion and Analysis of Financial  Condition and Results of  Operations"  and
other  information  which appears  elsewhere in this Annual Report on Form 10-K.
The selected consolidated financial data below has been derived from the audited
Consolidated Financial Statements of the Company.

<TABLE>



<CAPTION>
                                                                                           Years Ended December 31,
                                                                    -----------------------------------------------
                                                                      1999           1998           1997         1996         1995
                                                                   ----------     ----------     ----------   ----------   --------
                                                                                    (Amounts in thousands, except per share data)
Statement of Operations Data:
OPERATING REVENUES:
<S>                                                               <C>             <C>             <C>           <C>           <C>
   Medical Premiums.............................................  $   827,779     $  609,404      $513,857      $386,968   $319,475
   Military Contract Revenues ..................................      287,398        204,838         4,346
   Specialty Product Revenues ..................................       94,221        148,368       146,211       133,324    102,807
   Professional Fees............................................       51,842         45,363        31,238        28,836     19,417
   Investment and Other Revenues................................       22,571         29,230        26,072        26,283     25,310
                                                                -------------   ------------    ----------    ----------  ----------
     Total......................................................    1,283,811      1,037,203       721,724       575,411    467,009
                                                                  -----------     ----------     ---------     ---------   ---------

OPERATING EXPENSES:
   Medical Expenses.............................................      749,797        513,209       419,272       315,915    245,135
   Military Contract Expenses  .................................      276,493        196,625         4,193
   Specialty Product Expenses...................................       96,487        142,258       143,082       130,758    102,859
   General, Administrative and Marketing Expenses...............      137,812        110,687        93,919        72,237     63,562
   Impairment, Settlement and Other Costs (1) ..................       18,808         13,851        29,350        12,064     11,614
                                                                -------------   ------------    ----------    ---------- ----------
     Total......................................................    1,279,397        976,630       689,816       530,974    423,170
                                                                  -----------    -----------     ---------     ---------  ---------

OPERATING INCOME ...............................................        4,414         60,573        31,908        44,437     43,839

INTEREST EXPENSE AND OTHER, NET.................................      (14,980)        (7,181)       (4,433)       (2,823)    (3,737)
                                                                 ------------   ------------   -----------    ---------- ----------

(LOSS) INCOME FROM CONTINUING OPERATIONS
     BEFORE INCOME TAXES .......................................      (10,566)        53,392        27,475        41,614     40,102
BENEFIT (PROVISION) FOR INCOME TAXES............................         5,935       (13,796)      ( 3,234)      (10,471)   (12,198)
                                                                --------------   -----------   -----------     ---------  ---------
(LOSS) INCOME FROM CONTINUING OPERATIONS........................       (4,631)        39,596        24,241        31,143     27,904
LOSS FROM DISCONTINUED OPERATIONS ..............................                                                             (6,600)
                                                                -----------------  -----------------  --------------- -------------

NET (LOSS) INCOME .............................................. $     (4,631)   $    39,596     $  24,241     $  31,143  $  21,304
                                                                 ============    ===========     =========     =========  =========

EARNINGS PER COMMON SHARE (2):
   (Loss) Income from Continuing Operations Per Share ..........        $(.17)         $1.45          $.90         $1.17      $1.07
   Loss Per Share from Discontinued Operations .................                                                               (.25)
                                                                     --------      --------        ------      --------     -------
   Net (Loss) Income Per Share .................................        $(.17)         $1.45          $.90         $1.17     $  .82
                                                                        =====          =====          ====         =====     ======

   Weighted Average Number of Common

     Shares Outstanding ........................................       26,927         27,391        27,013        26,589     26,121
                                                                       ======         ======        ======        ======     ======

EARNINGS PER COMMON SHARE ASSUMING
     DILUTION (2):
       (Loss) Income from Continuing Operations Per Share ......        $(.17)         $1.43          $.88         $1.15      $1.05
       Loss Per Share from Discontinued Operations .............                                                               (.25)
                                                                     --------      ---------         -----     ---------     ------
       Net (Loss) Income Per Share .............................        $(.17)         $1.43          $.88         $1.15     $  .80
                                                                        =====          =====          ====         =====     ======

   Weighted Average Number of Common

     Shares Outstanding Assuming Dilution ......................        26,927        27,747        27,426        27,191     26,601
                                                                        ======        ======        ======        ======     ======
</TABLE>

                                                                   18


<PAGE>


<TABLE>

<CAPTION>

                                                                                      Years Ended December 31,

                                                                      1999           1998           1997         1996         1995
                                                                   ----------     ----------     ----------   ----------  --------

                                                                                                       (Amounts in thousands)

Balance Sheet Data:

<S>                                                                <C>            <C>             <C>           <C>           <C>
   Working Capital .............................................   $  114,740     $   198,092     $ 211,911     $189,943   $192,873
   Total Assets.................................................    1,130,112       1,045,120       723,936      629,462    575,146
   Long-term Debt (Net of Current Maturities)...................      258,854         242,398        90,841       66,189     71,257
   Cash Dividends Per Common Share..............................         none            none          none         none       none
   Stockholders' Equity.........................................      278,412         303,714       265,682      234,482    207,715
</TABLE>

     (1) The Company recorded certain  identifiable  impairment,  settlement and
other costs. See Note 15 of Notes to the Consolidated Financial Statements.

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



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

The following  discussion and analysis  provides  information  which  management
believes  is relevant  for an  assessment  and  understanding  of the  Company's
consolidated  financial  condition  and results of  operations.  The  discussion
should be read in conjunction  with the  Consolidated  Financial  Statements and
Related  Notes  thereto.  Any  forward-looking  information  contained  in  this
Management's  Discussion  and  Analysis of  Financial  Condition  and Results of
Operations and any other sections of this 1999 Annual Report on Form 10-K should
be considered in connection with certain cautionary  statements contained in the
Company's  Current Report on Form 8-K filing dated March 15, 2000,  incorporated
herein by reference.  Such cautionary  statements are made pursuant to the "safe
harbor" provisions of the Private  Securities  Litigation Reform Act of 1995 and
identify important risk factors that could cause the Company's actual results to
differ   materially  from  those  expressed  in  any  projected,   estimated  or
forward-looking statements relating to the Company.

Acquisitions

On October 31, 1998,  Sierra Health  Services,  Inc.  ("Sierra")  and one of its
subsidiaries,  Texas Health Choice, L.C. (formerly HMO Texas L.C.) completed the
acquisition  of  certain  assets  of  Kaiser  Foundation  Health  Plan of  Texas
("Kaiser-Texas"),  a health plan operating in Dallas/Ft.  Worth,  and Permanente
Medical Association of Texas ("Permanente"),  a medical group with approximately
150 physicians.  The purchase price was $124 million,  which was net $20 million
in operating cost support paid to Sierra by Kaiser Foundation  Hospitals in four
quarterly  installments  following the closing of the transaction.  The purchase
price  allocation  included  a premium  deficiency  reserve of $25  million  for
estimated losses on the contracts acquired from Kaiser-Texas. The purchase price
also included  amounts for real estate and eight  medical and office  facilities
with approximately  500,000 square feet. In December 1998, certain accreditation
goals were met by the health plan resulting in a purchase price increase of $3.0
million to $127 million. The purchase price may increase up to an additional $27
million over three years if certain growth and member retention goals are met by
the health plan; however,  preliminary results indicate these goals were not met
for the first year. Sierra assumed no prior liabilities for malpractice or other
litigation,  or for any unanticipated  future adjustments to claims expenses for
periods  prior  to  closing.  The  transaction  was  financed  with a  five-year
revolving credit facility and a $35.2 million note payable to Kaiser  Foundation
Health  Plan of  Texas.  The  note  is  secured  by the  acquired  real  estate.
Approximately  $110 million of the $200 million  revolving  credit  facility was
used to fund the transaction.

The original  liability  for the  estimated  premium  deficiency  was based upon
assumptions of membership and other operating information, some of which had not
been  received as of December 31, 1998.  During 1999,  the Company  continued to
gather such data, including data from the seller, and based upon the receipt and

                                                        19


<PAGE>



analysis of this data, the Company  revised the initial  estimate of the premium
deficiency  accrual.  In total the  Company  recorded  a $72.0  million  premium
deficiency in conjunction with the acquisition. Of this amount, $6.8 million was
utilized in 1998 to offset losses on the acquired  contracts,  and the remainder
was  utilized  in  1999.  Total  goodwill   recorded  in  conjunction  with  the
acquisition  was  $126.8  million  of  which  $24.8  million  was  a  result  of
adjustments in 1999.

On December 31, 1998, Sierra completed the acquisition of the Nevada health care
business of Exclusive Healthcare,  Inc. ("EHI"),  United of Omaha Life Insurance
Company and United World Life Insurance  Company  ("United"),  all of which were
subsidiaries of Mutual of Omaha Insurance  Company.  Sierra  initially  retained
approximately 9,000 members  (approximately 4,400 HMO members) subsequent to the
acquisition.  Effective June 1, 1999, the Company  completed the purchase of the
Texas operations of EHI  (approximately  1,000 HMO members) and United's related
preferred provider  organization ("PPO") that is part of the dual option HMO/PPO
plan. The purchase price of both the Nevada and Texas  transaction is contingent
based on how many  members are retained  through 2000 and 2001.  No cash will be
paid until group renewals begin in 2000.

In August 1997,  the Company  acquired the assets and  operations  of Total Home
Care, Inc. ("THC") for  approximately  $3.1 million,  net of cash acquired.  THC
provides home infusion, oxygen, and durable medical equipment services in Nevada
and Arizona.  The Company sold the Arizona  operations  in the first  quarter of
1998 for  approximately  $1.5 million.  Also, in the first quarter of 1998,  the
Company  purchased three medical  clinics in southern  Nevada for  approximately
$7.3 million.

Overview

The Company derives revenues from its health maintenance organizations,  managed
indemnity,  military  health care services and workers'  compensation  insurance
subsidiaries.  To a lesser extent, the Company also derives additional specialty
product  revenues from non-HMO and insurance  products  (consisting  of fees for
workers'  compensation  administration,   utilization  management  services  and
ancillary  products),  professional  fees  (consisting  primarily  of  fees  for
providing health care services to non-members and co- payment fees received from
members),  and investment and other revenue.  Medical premium revenues accounted
for  approximately  64.5%,  58.8% and 71.2% of the Company's  total revenues for
1999,  1998 and 1997,  respectively.  The  decrease  in  medical  premiums  as a
percentage  of  total  revenues  in 1998 is  primarily  due to the  addition  of
military contract  revenues.  The increase in the percentage of medical premiums
as a percentage of total revenues in 1999 is due to the  acquisitions  discussed
previously.  Continued  medical premium revenue growth is principally  dependent
upon continued  enrollment in the Company's  products and upon  competitive  and
regulatory factors.

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

     On September 30, 1997, Sierra Military Health Services,  Inc.  ("SMHS"),  a
wholly  owned  subsidiary  of the  Company,  was  awarded a TRICARE  contract to
provide managed health care coverage to eligible

                                                        20


<PAGE>



beneficiaries in Region 1. Under the contact, SMHS provides health care services
to  approximately  610,000  dependents  of active duty  military  personnel  and
military retirees and their dependents  through  subcontractor  partnerships and
individual  providers.  In June 1998,  the Company began  providing  health care
benefits   to   individuals   in   Connecticut,   Delaware,   Maine,   Maryland,
Massachusetts,  New Hampshire, New Jersey, New York, Pennsylvania, Rhode Island,
Vermont,  Virginia,  West  Virginia and  Washington,  D.C.  SMHS was notified on
February 13, 1998 that the United States General  Accounting  Office sustained a
competitor's  protest of the  contract  award for TRICARE  Managed  Care Support
Region 1 and  recommended  that the contract be re-bid.  In December  1998,  the
Company  reached an agreement to settle the protest.  As part of the settlement,
the  competitor  has foregone  any and all rights it may have to  challenge  the
contract  award  and seek a re-bid.  (See  Note 15 of Notes to the  Consolidated
Financial Statements).

Impairment,  settlement and other costs represent identifiable incremental costs
the  Company  has  incurred   primarily  in  connection  with  various  mergers,
acquisitions  and planned  dispositions as well as expenses  associated with the
Company's  proposal to serve TRICARE  beneficiaries in Region 1 and the ultimate
cost to settle the bid protest.  Start-up expenses  associated with the proposal
to serve TRICARE  beneficiaries  were charged to operations upon notification of
award. (See Note 15 of Notes to the Consolidated Financial Statements).

Results of Operations

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

<TABLE>

<CAPTION>

                                                                            Years Ended December 31,
                                                                    --------------------------------
                                                                     1999              1998             1997
                                                                  ----------        ----------       -------

OPERATING REVENUES:
<S>                                                                   <C>              <C>              <C>
     Medical Premiums........................................         64.5%            58.8%            71.2%
     Military Contract Revenues..............................         22.4             19.7               .6
     Specialty Product Revenues .............................          7.3             14.3             20.3
     Professional Fees.......................................          4.0              4.4              4.3
     Investment and Other Revenues ..........................          1.8              2.8              3.6
                                                                   -------           ------           ------
        Total................................................        100.0            100.0            100.0
                                                                     -----            -----            -----

OPERATING EXPENSES:
     Medical Expenses........................................         58.4             49.5             58.1
     Military Contract Expenses .............................         21.6             19.0               .6
     Specialty Product Expenses..............................          7.5             13.7             19.8
     General, Administrative and Marketing Expenses..........         10.7             10.7             13.0
     Impairment, Settlement and Other Costs..................          1.5              1.3              4.1
                                                                     -----            -----           ------

        Total................................................         99.7             94.2             95.6
                                                                      ----             ----             ----

OPERATING INCOME ............................................           .3              5.8              4.4

INTEREST EXPENSE AND OTHER, NET..............................       (1.1)             (.7)             (.6)
                                                                   -----             ----             ----

(LOSS) INCOME FROM CONTINUING OPERATIONS
     BEFORE INCOME TAXES ....................................        (.8)               5.1              3.8

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

NET (LOSS) INCOME ...........................................        (.4)%              3.8%             3.4%
                                                                  ======               ====             ====
</TABLE>

                                                              21


<PAGE>



1999 Compared to 1998

Revenues.   The  Company's   total   operating   revenues  for  1999   increased
approximately  23.8% to $1.28 billion from $1.04 billion for 1998.  The increase
was  primarily  due to an  increase  in premium  revenue of $218.4  million  and
increases in military contract revenue of $82.6 million, offset by a decrease in
specialty product revenue of $54.1 million.

Medical premium revenue from the Company's HMO and managed  indemnity  insurance
subsidiaries  increased  $218.4 million,  or 35.8%.  Excluding the effect of the
Kaiser-Texas acquisition, premium revenue increased $84.9 million, or 14.6%. The
$84.9  million  increase in premium  revenue  reflects a 7.9% increase in member
months  (the number of months of each year that an  individual  is enrolled in a
plan).  Additionally,  Medicare member months  increased  16.2%.  Such growth in
Medicare  member  months  contributes  significantly  to the increase in premium
revenues as the  Medicare per member  premium  rates are over three times higher
than the average  commercial premium rate. The Company's premium rates increased
approximately  4% for its Nevada HMO commercial  groups and 11% for its Houston,
Texas commercial groups.  Compared to the fourth quarter of 1998, the commercial
rates for the Company's  acquired  Dallas/ Ft. Worth  operations  have increased
approximately 8%. The Company's managed indemnity rates increased  approximately
8% and Medicare  rates  increased  approximately  2%. Over 90% of the  Company's
Nevada  Medicare  members are enrolled in the Social HMO Medicare  program.  The
Health Care  Financing  Administration  ("HCFA") is  considering  adjusting  the
reimbursement  factor  for  the  Social  HMO  members  in  the  future.  If  the
reimbursement  for these members  decreases  significantly  and related  benefit
changes are not made  timely,  there could be a material  adverse  effect on the
Company's business.

Military contract revenues increased $82.6 million,  or 40.3%.  Military contact
revenue is  recorded  based on the  contract  price as agreed to by the  federal
government,  adjusted  for certain  provisions  based on actual  experience.  In
addition,  the Company  records revenue based on estimates of the earned portion
of any contract  change orders not  originally  specified in the  contract.  The
revenue  recorded in 1999 is a result of the  provision of health care  services
for twelve months.  Revenue recorded in 1998 was comprised of revenue earned for
five months of contract implementation and seven months of health care delivery.

Specialty product revenue decreased $54.1 million,  or 36.5%, for the year ended
December 31, 1999 compared to the prior year. Of the decrease, $51.1 million was
due to a decrease in revenue in the workers' compensation operations segment and
$3.0  million  was due to a decrease in  administrative  services  revenue.  The
decrease in specialty  product  revenues  related to the  workers'  compensation
insurance  segment  was  primarily  due  to a  full  year  of  additional  ceded
reinsurance  premiums on the low level reinsurance  agreement  effective July 1,
1998,  totaling  $60.7  million.  This  agreement was entered into in the fourth
quarter  of  1998.  In  addition,  ongoing  price  competition,   especially  in
California,  is  contributing  to the  reduction  in  revenue.  The  decrease in
administrative  services  revenue was  primarily  attributable  to a decrease in
membership.

Professional fee revenue  increased $6.5 million  primarily due to the Company's
medical  group  operations  in  Dallas/Ft.  Worth  related  to the  Kaiser-Texas
acquisition.  Investment and other revenue decreased  approximately $6.7 million
over the comparable  prior year period.  Of this decrease,  $2.7 million was due
primarily to capital gains realized on the sale of investments in the prior year
period.  The  remaining  decrease  was  primarily  due to a decrease in invested
balances.

Medical  Expenses.  Total medical  expenses for the year ended December 31, 1999
increased  $236.6 million  compared to the prior year. The following  costs were
included in 1999 medical expenses:

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

                                                        22


<PAGE>



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

Excluding  the  effect  of the  Dallas/Ft.  Worth  operations,  as  well  as the
non-recurring charges, medical expenses increased approximately $83.4 million or
17.0%  compared to the prior year.  Medical  expenses as a percentage of medical
premiums and  professional  fees ("Medical Care Ratio")  increased from 78.4% to
85.2%, or 81.1% excluding the non-recurring charges, for the year ended December
31,  1999  compared to the prior year.  The  increase in the medical  care ratio
reflects the Kaiser-Texas  membership which has a higher medical care ratio, and
the charges discussed previously,  as well as an increase in Medicare members as
a percentage of  fully-insured  members,  and higher pharmacy costs. The cost of
providing  medical  care  to  Medicare  members  generally  requires  a  greater
percentage of the premiums received.  Pharmacy costs increased as the management
of the pharmacy  benefit was  transitioned  from a capitated  pharmacy  benefits
contract to in-house  management in the third  quarter of 1998.  The costs under
such  capitation  contract were  substantially  below actual claims  experience.
Included in medical  expenses  is the  utilization  of $43.9  million of premium
deficiency   reserve  to  offset  losses  on  contracts  from  the  Kaiser-Texas
acquisition.  Although not  reflected  in earnings,  $20 million of these losses
were funded by Kaiser as agreed to in the purchase agreement.

Military  Contract  Expenses.  Military  contract expenses for the twelve months
ended  December  31,  1999,  increased  approximately  $79.9  million  or 40.6%,
compared to the prior year. The military  contract expenses in 1999 are a result
of twelve months of health care delivery. Expense in 1998 was for five months of
contract  implementation  and seven months of health care delivery.  Health care
delivery  expense  consists  primarily of costs to provide  managed  health care
services to eligible  beneficiaries  in accordance  with the  Company's  TRICARE
contract.   Under  the  contract,   SMHS   provides   health  care  services  to
approximately  610,000 dependents of active duty military personnel and military
retirees and their dependents through subcontractor  partnerships and individual
providers.  Health  care costs are  recorded  in the period  when  services  are
provided to eligible beneficiaries, including estimates for provider costs which
have been incurred but not reported to the Company.  Also,  included in military
contract  expenses  are  costs  incurred  to  perform  specific   administrative
services,  such as  health  care  appointment  scheduling,  enrollment,  network
management  and health  care  advice  line  services,  and other  administrative
functions of the military health care subsidiary.

Specialty Product Expenses.  Specialty product expenses decreased  approximately
$45.8 million,  or 32.2%, due primarily to the  implementation  of the low level
reinsurance agreement as discussed previously,  offset by adverse development of
$9.9 million on prior  accident  years for the Company's  workers'  compensation
business.  Effective  January 1,  1998,  workers'  compensation  claims are 100%
reinsured between $500,000 and $100 million per occurrence. For claims occurring
on and after July 1, 1998,  that are below  $500,000,  the Company  obtained low
level quota share and excess of loss  reinsurance.  Under this agreement,  which
was not reflected in the financial  statements until the fourth quarter of 1998,
the Company  reinsures 30% of the first  $10,000 of each claim,  75% of the next
$40,000 and 100% of the next $450,000.  Claims occurring in the third quarter of
1998 are accounted for as retroactive  reinsurance.  (See Note 6 of Notes to the
Consolidated Financial Statements).

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

The  adverse  development  recorded  in 1999  for the  prior  accident  years is
primarily  attributable to increased  California  claim  severity.  Higher claim
severity  has  had  a  negative  impact  on  the  entire   California   workers'
compensation  industry. The historical claim frequency development patterns have
not significantly changed

                                                        23


<PAGE>



in 1999. In addition,  continuing price competition in California has negatively
affected operating ratios.  However, for renewal policies issued year to date in
2000,  Sierra's  workers'   compensation  business  has  obtained  premium  rate
increases  in  excess of 15%.  The  increase  seen so far in 2000 is a  material
positive change of the previous rate trend. Based on public  information,  other
California  workers'  compensation  companies  are issuing year 2000 policies at
rates 15% to 20% in excess of the expiring premiums.

The loss and loss  adjustment  expense  reserves  booked as of December 31, 1999
reflect the Company's  best estimate of the ultimate loss costs for reported and
unreported  claims occurring in accident year 1999 as well as those occurring in
accident  years  prior to 1999.  The loss  estimates  are  subject  to change in
subsequent  accounting  periods and any change to the current reserve  estimates
would be accounted for in future  results of  operations.  The Company may incur
future  adverse or  favorable  loss  development.  Workers'  compensation  claim
payments are made over several years from the date of the claim. Until the final
payments  for reported  claims are made,  reserves are invested and the interest
proceeds are included in investment income.

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

Impairment,  Settlement  and Other Costs.  In March 1999, the Company closed all
inpatient  operations at Mohave Valley Hospital, a 12-bed acute care facility in
Bullhead City, Arizona, and terminated  approximately 45 employees.  The Company
recorded a charge of $4.3 million related primarily to the write-off of goodwill
associated with the Mohave Valley operations. The Company also incurred $450,000
for certain legal and  contractual  settlements  and $400,000 to provide for the
Company's  portion of the write-off of start-up  costs at the  Company's  equity
investee,  TriWest HealthCare  Alliance in accordance with Statement of Position
98-5.

During the  fourth  quarter  of 1999,  the  Company  recorded  $13.7  million of
non-recurring  costs.  Of this amount $11.0 million was recorded in  conjunction
with a  premium  deficiency  accrual  for  contracts  in the  Texas  market  and
represents  general  and  administrative  costs,  in excess of those  covered by
premiums,  the Company  will incur to service  these  contracts.  The  remaining
expense is primarily related to contractual settlements.

Interest Expense and Other.  Interest expense and other increased  approximately
$7.8 million for the year ended  December  31, 1999,  compared to the prior year
due  to  an  increase  in  debt  primarily  as  a  result  of  the  Kaiser-Texas
acquisition,  offset  by a net  gain  of $1.8  million  on the  sale of  certain
pharmacy assets purchased in conjunction with the Kaiser-Texas acquisition.

Income Taxes. For 1999, the Company recorded  approximately  $5.9 million of tax
benefit  compared to a tax expense of $13.8 million in the prior year.  Due to a
change in tax law,  which took effect in 1999, the Company was able to utilize a
$1.6  million  net  operating  loss  carryover  that  had  previously  not  been
recognized in the financial statements due to uncertainty about its realization.
Excluding the effect of this change,  the effective tax rate was 41.3%  compared
to 25.8% in 1998.  Including  the effect of this change,  the effective tax rate
for 1999 was 56.2%. The difference between the effective tax rate, excluding the
change in the deferred tax valuation allowance, and the statutory rate is due to
income earned on tax preferred investments.  The effective tax rate for the year
2000  is  projected  to  range  from  33% to 35%.  The  difference  between  the
anticipated  tax rate and the statutory tax rate is due primarily to investments
in tax preferred investments offset by state income taxes.

                                                        24


<PAGE>



1998 Compared to 1997

Revenues.   The  Company's   total   operating   revenues  for  1998   increased
approximately  43.7% to $1.04 billion from $721.7 million for 1997. The increase
was primarily due to military contract revenue of $204.8 million and an increase
in premium revenue of $95.5 million.  The military  contract revenue is a result
of the  implementation of the TRICARE contract as well as the first seven months
of health care delivery. Revenue under the TRICARE contract is recorded based on
the contract  price as agreed to by the federal  government.  The contract  also
contains  provisions which adjust the contract price based on actual experience.
The estimated effects of these adjustments are recognized on a monthly basis.

Medical premium revenue from the Company's HMO and managed  indemnity  insurance
subsidiaries  increased  $95.5  million,  or 18.6%.  Excluding the effect of the
Kaiser-Texas  acquisition  in  the  fourth  quarter  of  1998,  premium  revenue
increased $66.9 million, or 13.0%. The $66.9 million increase in premium revenue
reflects a 3.4% increase in member  months.  Medicare  member  months  increased
20.1% which contributed to the increase in medical premium revenue.  Such growth
in Medicare member months  contributes  significantly to the increase in premium
revenues as the  Medicare per member  premium  rates are over three times higher
than the average  commercial premium rate. The Company's premium rates increased
an  average of 3% to 4% for its HMO  commercial  groups and in excess of 10% for
managed indemnity commercial groups. The Company also realized a slight increase
in its capitation rate established by HCFA.

Specialty  product revenue  increased $2.2 million,  or 1.5%, for the year ended
December  31, 1998  compared to the prior year.  The increase was due to revenue
growth of $5.1 million in the workers'  compensation  insurance operation offset
in part by a  decrease  in  administrative  services  and other  revenue of $2.9
million due primarily to the termination of the Company's workers'  compensation
administrative  services  contract  with the  State  of  Nevada.  The  Company's
workers'  compensation  subsidiary  signed a  reinsurance  agreement  whereby  a
greater portion of premium is ceded thus reducing revenue. The agreement results
in a reduction of specialty product expenses as discussed later in this section.
Excluding the effect of the new reinsurance agreement, the workers' compensation
subsidiaries'  revenue would have increased $21.2 million  compared to the prior
year.  Professional fee revenue increased  approximately $14.1 million primarily
due to the January 1998  acquisition of the operations of two medical clinics in
southern  Nevada and the clinics  acquired  in the  Dallas/Ft.  Worth  area.  In
addition approximately $3.5 million of the increase in professional fees was due
to the operations of Total Home Care, Inc.  ("THC") which was acquired in August
1997.

Investment and other revenue increased approximately $3.2 million over the prior
year  primarily  due to an  increase  in invested  balances  and  capital  gains
realized on the sale of investments.

Medical and Specialty  Product  Expenses.  The Medical Care Ratio increased from
76.9% to 78.4% for the year ended  December 31, 1998 compared to the prior year.
The  increase  in the  medical  care ratio was due to an  increase  in  Medicare
members as a percentage of fully-insured members,  continued expansion in Texas,
northern  Nevada and  Arizona  which have higher  medical  care  ratios,  higher
pharmacy  costs and the  acquisitions  of THC and two medical  clinics for which
costs of  operations  are  included in medical  expenses.  The cost of providing
medical care to Medicare members generally  requires a greater percentage of the
premiums  received.  Pharmacy costs  increased as the management of the pharmacy
benefit was transitioned from a capitated pharmacy benefits contract to in-house
management  in the third  quarter  of 1998.  The  costs  under  such  capitation
contract were substantially below actual claims experience.  Included in medical
expenses is the reversal of $4.4 million of premium  deficiency reserve that was
used to offset losses on contracts from the  Kaiser-Texas  operations  that were
acquired on October 31, 1998.

Specialty product expenses decreased  approximately $800,000, or less than 1.0%,
due primarily to the  implementation of the low level  reinsurance  agreement as
discussed previously. Specialty product revenue and expense is primarily related
to the workers'  compensation  insurance  business.  Effective  January 1, 1998,
workers' compensation claims are reinsured between $500,000 and $100 million per
occurrence.  For claims  occurring  on and after  July 1,  1998,  that are below
$500,000, the Company obtained quota share and excess of loss reinsurance. Under
this agreement, the Company reinsures 30% of the first $10,000 of each claim,

                                                        25


<PAGE>



75% of the next $40,000 and 100% of the next  $450,000.  The Company  receives a
ceding  commission  from the reinsurer as a partial  reimbursement  of operating
expenses.  Excluding the effect of the reinsurance agreement,  specialty product
expenses would have increased $19.5 million compared to the prior year.

The combined ratio for the workers'  compensation  insurance  business was 98.7%
compared  to 101.9% for the prior  year.  The  reduction  was due to a 198 basis
point  decrease  in  the  LAE  ratio  and a 122  basis  point  decrease  in  the
underwriting  expense  ratio.  The decrease in the loss ratio was largely due to
the new reinsurance agreement for losses occurring on and after July 1, 1998 and
as a result of the  Company's  ability to overlay  and  implement  managed  care
techniques to the workers' compensation claims. The combined ratio excluding the
effect of the new  reinsurance  agreement was 101.6% for the year ended December
31, 1998.  In addition,  favorable  loss  development  on prior  accident  years
totaled  $9.6  million for the year ended  December  31,  1998,  compared to net
favorable  loss  development  of $9.0 million for the prior year.  The favorable
loss  development  is largely due to actual paid  losses  being below  projected
losses. There can be no assurance that favorable  development,  or the magnitude
thereof,  will  continue in the future.  The  reduction in the expense ratio was
largely  due to a  reduction  in  agents'  commissions,  as a result of a ceding
commission related to the new reinsurance  agreement and from lower salaries and
related benefits expenses.

Military  Contract  Expenses.  The military  contract  expenses are comprised of
those expenses incurred in 1998 for five months of contract  implementation  and
seven months of health care delivery.  This expense consists  primarily of costs
to provide managed health care services to eligible  beneficiaries in accordance
with the Company's  TRICARE contract.  Under the contract,  SMHS provides health
care  services to  dependents  of active duty  military  personnel  and military
retirees and their dependents through subcontractor  partnerships and individual
providers.  Health  care costs are  recorded  in the period  when  services  are
provided to eligible beneficiaries, including estimates for provider costs which
have been incurred but not reported to the Company.  Also,  included in military
contract  expenses  are  costs  incurred  to  perform  specific   administrative
services,  such as  health  care  appointment  scheduling,  enrollment,  network
management  and health  care  advice  line  services,  and other  administrative
functions of the military health care subsidiary.

General,  Administrative  and  Marketing  Expenses.  G&A  cost  increased  $16.8
million, or 17.9%, compared to 1997. As a percentage of revenues,  G&A costs for
1998 decreased to 10.7% from 13.0% during 1997. The decrease in the G&A ratio is
primarily due to the addition of military  contract  revenues  offset in part by
costs for additional  infrastructure  needed to support  overall Company growth.
Excluding military revenues,  G&A as a percentage of revenues was 13.3% in 1998.
Of the $16.8 million  increase in G&A,  $3.2 million was due to  additional  G&A
related to the acquired HMO business in the Dallas/Ft. Worth area. The remaining
increase of $13.6  million  consisted  of $3.8  million  increased  compensation
expense,  resulting  primarily from  additional  employees  supporting  expanded
services  and  new  benefit  programs  for  management.   Broker,   third  party
administration and premium tax expense increased  approximately  $900,000 due to
increased membership. In addition, depreciation expense increased $1.7 million.

Impairment,  Settlement  and Other  Costs.  In the fourth  quarter of 1998,  the
Company expensed  approximately $13.9 million, $10.3 million after tax, of costs
primarily  associated  with the  settlement  of the  protest  pertaining  to its
military  services  contract as well as costs associated with the integration of
the  Kaiser-Texas  business  acquired October 31, 1998. (See Note 15 of Notes to
the Consolidated Financial Statements).

On March 18, 1997, the Company  announced it had terminated its merger agreement
with  Physician  Corporation  of America,  Inc. and  recorded  expenses of $11.0
million,  $8.4 million  after tax, for  merger-related  costs.  During the third
quarter  of  1997,  SMHS was  awarded  a  contract  to  serve  TRICARE  eligible
beneficiaries in Region 1. Development expenses of $18.4 million,  $10.6 million
after tax, were recorded in the third quarter primarily for expenses  associated
with the Company's  proposal to serve  TRICARE  Region 1. Such expenses had been
deferred until award notification.

Interest Expense and Other.  Interest expense and other increased  approximately
$2.7 million for the year ended  December  31, 1998,  compared to the prior year
due to an increase in debt as a result of the Kaiser- Texas acquisition.

                                                        26


<PAGE>



Income Taxes. For 1998, the Company recorded  approximately $13.8 million of tax
expense for an effective tax rate of 25.8% compared to 23.9% in 1997,  excluding
the tax effects of  identifiable  integration,  settlement and other costs.  The
Company's  low  operating  tax  rate is  primarily  a  result  of  tax-preferred
investments and the change in the deferred tax valuation allowance, which is due
primarily to the ability to use a portion of net operating loss carryovers.

LIQUIDITY AND CAPITAL RESOURCES

The Company had negative  cash flows from  operating  activities of $7.7 million
for the twelve months ended  December 31, 1999,  resulting  primarily from a net
change in assets and liabilities of $41.9 and a net loss of $4.6 million, offset
by $28.1 million in depreciation and amortization, $7.2 million in provision for
doubtful  accounts and a $3.5 million  provision  for goodwill  impairment.  The
decrease in cash flow  resulting from the change in assets and  liabilities  was
primarily due to increases in reinsurance  recoverable of $69.8 million, as well
as the utilization of premium deficiency  reserves.  The increase in reinsurance
recoverable is primarily due to the low level reinsurance  agreement implemented
by the Company's workers' compensation  insurance business in the fourth quarter
of 1998.  Offsetting  the  cash  outflows  related  to  changes  in  assets  and
liabilities is a $32.1 million increase in the reserve for workers' compensation
losses and loss adjustment  expense due to increased  business as well as a $9.9
million  adjustment  related to adverse  development  on prior  accident  years.
Additionally,  medical  claims  payable  increased  $13.6 million due to overall
growth of the Company and military  accounts  receivable  decreased $8.9 million
due to payments received from DoD.

SMHS receives  monthly cash payments  equivalent  to  one-twelfth  of its annual
contractual  price with the Department of Defense  ("DoD").  SMHS accrues health
care  revenue on a monthly  basis for any monies  owed  above its  monthly  cash
receipt based on the number of at-risk eligible  beneficiaries  and the level of
military direct care system  utilization.  The contractual Bid Price  Adjustment
("BPA")  process  serves to adjust the DoD's monthly  payments to SMHS,  because
such  payments  are  based  in  part  on  1996  DoD  estimates  for  beneficiary
population,  beneficiary  population  baseline  health care cost,  inflation and
military  direct care system  utilization.  As actual  information has been made
available for the above items,  quarterly  adjustments are made to SMHS' monthly
health care  payment in addition to lump sum  adjustments  for past  months.  In
addition,  SMHS accrues change order revenue for DoD directed  contract changes.
During the second and fourth  quarters of 1999,  SMHS received $46.3 million and
$34.6 million,  respectively,  as partial payments from the BPA process covering
the period June 1, 1998 through  December 31, 1999.  As a result of  preliminary
data accumulated from the BPA process, SMHS received a partial upward adjustment
of  approximately  $2.2  million to its monthly DoD  payments  for January  2000
through May 2000.  SMHS  received $2 million as an interim  payment in the first
quarter of 1999 as a result of contract  change order  related  activities.  The
Company's  business and cash flows could be adversely  affected if the timing or
amount of the BPA and change order reimbursements  varies significantly from the
Company's  expectations.  (See  Note 2 of  Notes to the  Consolidated  Financial
Statements).

Net cash used for investing  activities  during 1999  included  $58.5 million in
capital  expenditures  associated  with  continued  implementation  of three new
computer  systems,  as well as  construction,  furniture,  equipment  and  other
capital  needs to  support  the  Company's  growth.  Additionally,  in the first
quarter of 1999, $3.0 million was paid to Kaiser Foundation Health Plan of Texas
in accordance with the purchase  agreement as certain  accreditation  goals were
met by the health plan.  The purchase price may increase up to an additional $27
million over three years if certain  goals are met by the health plan;  however,
preliminary  results  indicate  these  goals  were not met for the  first  year.
Offsetting the above cash outflows was $29.9 million net change in investments.

Cash flows from  financing  activities  included  net  proceeds  from  long-term
borrowings  (proceeds  less  payments)  of $15.9  million.  In 1998 the  Company
utilized a five-year  revolving  credit  facility  to finance  the  Kaiser-Texas
acquisition. As of December 31, 1999, the Company had $160 million in borrowings
on the $200  million  line of  credit.  Interest  under the credit  facility  is
variable and based on the London Interbank Offering Rate ("LIBOR") plus a margin
determined  by reference  to the  Company's  leverage  ratio.  In addition,  $50
million of the outstanding  balance is covered by interest-rate swap agreements.
The average cost of

                                                        27


<PAGE>



borrowing  on this line of credit  for 1999,  including  the  impact of the swap
agreements,  was approximately  7.8%. The terms of the credit facility contain a
mandatory  payment  schedule  that begins on June 30, 2001 and ends on September
30, 2003 if the principal balance exceeds certain  thresholds.  The terms of the
credit  facility  contain  certain  covenants  including a minimum  fixed charge
coverage ratio and a maximum leverage ratio. For the quarter ended September 30,
1999, the Company exceeded the limits of certain covenants. The Company was able
to obtain a waiver and  re-negotiate  the covenant  limits.  These  negotiations
resulted in a borrowing rate of LIBOR plus 2.375%,  through  September 30, 2000.
The Company  believes it is in compliance with debt covenants as of December 31,
1999. Of the remaining $40 million available balance on the line of credit as of
December 31, 1999,  $4.2  million is reserved  for use by the  Company's  equity
investee,  TriWest Healthcare Alliance and the remainder may be used for general
corporate purposes, including working capital.

During 1999, the Company used $8.0 million to buy back Company stock on the open
market. Under the current terms of the Company's revolving credit facility,  the
Company  may not  continue  to buy back its stock  without  the  consent  of the
lenders or until after December 31, 2000 if certain covenant ratios are met.

In the second  quarter of 1997,  the Company's  Board of Directors  authorized a
$3.0 million line of credit from the Company to the  Company's  Chief  Executive
Officer ("CEO").  The CEO borrowed a total of $650,000 in 1998 and $2 million in
1997 at an  interest  rate  equal to the rate at which  the  Company  is able to
borrow  funds  under the credit  facility at the time of the  borrowing  plus 10
basis  points.  During the first quarter of 1999,  the CEO repaid  approximately
$360,000 of the line of credit.  The line of credit is collateralized by certain
of the CEO's rights to  compensation  from the Company and is due and payable no
later than August 15, 2001.

In  September  1991,  CII  issued  convertible   subordinated   debentures  (the
"Debentures")  due September 15, 2001.  The  Debentures  bear interest at 7 1/2%
which  is due  semi-annually  on March  15 and  September  15.  Each  $1,000  in
principal is convertible  into 25.382 shares of the Company's  common stock at a
conversion price of $39.40 per share. Unamortized issuance costs of $362,000 are
included in other assets on the balance sheet and are being  amortized  over the
life of the Debentures.  The Debentures are general unsecured obligations of CII
only and are not  guaranteed  by Sierra Health  Services,  Inc.  ("Sierra").  At
December 31, 1999, CII had total assets of $402.4 million,  consisting primarily
of investments  and  reinsurance  recoverable,  and total  liabilities of $336.3
million, consisting primarily of reserves for losses and loss adjustment expense
and the  debentures.  For the year ended December 31, 1999, CII had net premiums
earned of $82.9 million and investment  and other revenue of $15.4 million,  and
total  operating  expenses  of $91.0  million.  During the twelve  months  ended
December 31, 1999, the Company purchased  $753,000 of the Debentures on the open
market.

The  holding   company  may  receive   dividends  from  its  HMO  and  insurance
subsidiaries  which  generally  must be  approved  by  certain  state  insurance
departments. During 1999, the holding company received $9.7 million in dividends
from  its  HMO and  insurance  subsidiaries.  The  Company's  HMO and  insurance
subsidiaries  are  required by state  regulatory  agencies  to maintain  certain
deposits  and must also meet  certain  net worth and reserve  requirements.  The
Company  had  restricted  assets on  deposit in various  states  totaling  $21.7
million as of December 31, 1999.  The HMO and insurance  subsidiaries  must also
meet  requirements  to maintain  minimum  stockholder's  equity,  on a statutory
basis,  ranging from $1.1 million to $5.2 million.  In addition,  in conjunction
with the Kaiser-Texas  acquisition,  Texas Health Choice,  L.C. ("TXHC") entered
into a letter  agreement  with the Texas  Department  of Insurance  whereby TXHC
agreed to maintain a net worth of $20.0  million.  Of the $274.9 million of cash
and cash equivalents and current  investments held at December 31, 1999,  $267.5
million is designated for use only by the regulated  subsidiaries.  Such amounts
are  available  for transfer to the holding  company from the HMO and  insurance
subsidiaries only to the extent that they can be remitted in accordance with the
terms of existing management agreements and by dividends.  Remaining amounts are
generally available on an unrestricted basis.

The National Association of Insurance Commissioners ("NAIC") has adopted minimum
capitalization  requirements for HMOs, health care insurance  entities and other
risk-bearing  health care  entities.  The state of Nevada has not adopted  these
regulations as of December 31, 1999. If the regulations were adopted as

                                                        28


<PAGE>



recommended   by  the  NAIC,   the  Nevada  HMO  would  not   require   material
contributions.  The  state  of  Texas  did pass  legislation  in 1999  regarding
risk-based capitalization  requirements.  As of December 31, 1999, the Texas HMO
is in compliance with the requirements.  Additional  legislation could be passed
in either  state.  Depending on the nature and extent of any new  capitalization
requirements  ultimately  adopted,  there  could be an  increase  in the capital
required. The Company intends to fund any increase from available parent company
cash reserves;  however,  there can be no assurance that such cash reserves will
be sufficient to fund these requirements.

The workers'  compensation  insurance  subsidiaries  are also subject to minimum
capitalization  requirements for property-casualty  insurers. As of December 31,
1999, these entities were in compliance with the requirements.

The holding company will not receive  dividends from its regulated  subsidiaries
if such  dividend  payment  would cause  violation  of  statutory  net worth and
reserve requirements.

The Company has a 2000 capital budget of  approximately  $25 million,  primarily
for  computer   hardware  and  software,   furniture  and  equipment  and  other
requirements  due to the  Company's  computer  system  conversion  and projected
growth and expansion. The Company's liquidity needs over the next 12 months will
primarily be for the capital  items noted above,  debt service and  expansion of
the Company's operations, including potential acquisitions. The Company believes
that existing working capital,  operating cash flow and, if necessary,  mortgage
financing,  equipment  leasing,  divestitures of certain  non-core  assets,  and
amounts  available  under its credit  facility  should be sufficient to fund its
capital  expenditures and debt service.  Additionally,  subject to unanticipated
cash  requirements,  the Company  believes that its existing working capital and
operating  cash flow and,  if  necessary,  its access to new credit  facilities,
should enable it to meet its liquidity needs on a longer term basis.

                                                        29


<PAGE>



Year 2000

The Year 2000 issue existed because many computer systems and applications  used
two-digit date fields to designate a year. As the century date change  occurred,
date-sensitive  non-compliant systems may have recognized the year 2000 as 1900,
or not at all. This  inability to recognize or properly  treat the Year 2000 may
have caused systems to process  critical  financial and operational  information
incorrectly.

The Company  replaced or remediated its mission  critical  financial  systems as
well as its mission critical operational computer systems,  remediated databases
and validated the  readiness of all  computing  and non computing  systems.  The
Company  also  engaged in a thorough  evaluation  to validate  that all systems,
computing and  non-computing,  were  functioning.  The Company is unaware of any
Year 2000 related outages over the century date change.

The  Company  implemented  two major  systems  in 1999 and is in the  process of
implementing a third,  at an estimated cost of over $50 million,  which includes
the  implementation   costs  related  to  the  recently  acquired   Kaiser-Texas
operations. To date the Company has spent approximately $48.9 million on the new
computer  systems and other Year 2000 items.  The Company  expensed the costs to
make  modifications to existing  computer  systems and  non-computer  equipment.
Management  currently  estimates the  remaining new computer  system costs to be
$4.0 million to $6.0  million.  While this has been a  substantial  effort,  the
results should give the Company the benefits of new technology and functionality
for many of its financial and operational computer systems and applications.

Inflation

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

Government Regulation

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

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

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

                                                        30


<PAGE>



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

Recently Issued Accounting Standards

In March 1998,  the  Accounting  Standards  Executive  Committee of the American
Institute of Certified Public Accountants ("AcSEC") issued Statement of Position
98-1 ("SOP 98-1"),  "Accounting for the Costs of Computer Software Developed For
or Obtained For Internal Use". SOP 98-1 requires certain computer software costs
to be capitalized  and amortized over the software's  estimated  useful life. In
June 1998, the AcSEC issued Statement of Position 98-5 ("SOP 98-5"),  "Reporting
on the Costs of Start-Up Activities".  This standard requires organization costs
and costs associated with start-up  activities to be expensed as incurred.  Both
statements  are  effective  for years  beginning  after  December 15, 1998.  The
Company  adopted SOP 98- 1 and SOP 98-5 for the fiscal year ending  December 31,
1999.  These  statements  did  not  have a  material  impact  on  its  financial
statements.

In June 1998, The Financial  Accounting  Standards Board issued  "Accounting for
Derivative Instruments and Hedging Activities" ("FAS 133"). FAS 133 is effective
for fiscal years beginning after June 15, 2000. FAS 133 addresses the accounting
for derivative  instruments including certain derivative instruments embedded in
other  contracts,  and hedging  activities.  The Company  does not believe  this
statement will have a material impact on its financial statements.

ITEM 7a.          QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As of December 31, 1999, the Company has  approximately  $ 311.5 million in cash
and cash equivalents,  and current, long-term and restricted investments. Of the
investments,  approximately  $230.5 million is classified as  available-for-sale
investments  and $25.0 million is classified  as  held-to-maturity  investments.
These  investments are primarily in fixed income,  investment grade  securities.
The Company's  investment  policies  emphasize return of principal and liquidity
and are focused on fixed  returns that limit  volatility  and risk of principal.
Because of the Company's investment policies, the primary market risk associated
with the Company's portfolio is interest rate risk.

Assuming an immediate 10% increase in interest rates, the net hypothetical  loss
in fair value of  shareholders'  equity  related  to  financial  instruments  is
estimated  to  be   approximately   $9.3  million   after  tax  (3.3%  of  total
shareholders'  equity).  The Company  believes that such an increase in interest
rates would not have a material impact on future earnings or cash flows as it is
unlikely  that the Company would need or choose to  substantially  liquidate its
investment portfolio.

The effect of interest rate risk on potential  near-term  net income,  cash flow
and fair value was determined based on commonly used sensitivity  analyses.  The
models  project the impact of interest  rate changes on a wide range of factors,
including  duration and  prepayment.  Fair value was estimated  based on the net
present  value of cash flows or duration  estimates,  assuming an immediate  10%
increase in interest rates.

As of December 31, 1999, the Company had $160 million in borrowings  outstanding
under a  revolving  credit  facility  that was  entered  into in  October  1998.
Interest under the credit facility is variable and based on LIBOR plus a margin.
To mitigate the risk of interest rate  fluctuation on the credit  facility,  the
Company entered into a five-year $50 million interest-rate swap agreement during
the fourth quarter of 1998. The intent of the agreement is to keep the Company's
interest rate on $50 million of the  borrowings  relatively  fixed.  The average
cost of borrowing on this line of credit was  approximately  7.8% for 1999.  The
specified rate of borrowing  related to the last renewed  borrowing amount prior
to December 31, 1999 under the credit facility was 8.9%. The renewal occurred on
December 16, 1999. If the average cost of borrowing on the amount outstanding as
of December 31, 1999,  was to increase by 10%,  annual  income  before tax would
decrease by approximately $976,000.

                                                        31


<PAGE>




ITEM 8.           FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

<TABLE>

                                           INDEX TO FINANCIAL STATEMENTS

<CAPTION>

                                                                                                          Page

<S>                                                                                                          <C>
Management Report on Consolidated Financial Statements....................................................   33
Independent Auditors' Report..............................................................................   34
Consolidated Balance Sheets at December 31, 1999 and 1998.................................................   35
Consolidated Statements of Operations for the Years Ended
   December 31, 1999, 1998 and 1997.......................................................................   36
Consolidated Statements of Stockholders' Equity
   for the Years Ended December 31, 1999, 1998 and 1997...................................................   37
Consolidated Statements of Cash Flows for the Years Ended
   December 31, 1999, 1998 and 1997.......................................................................   38
Notes to Consolidated Financial Statements................................................................   39
</TABLE>

                                                      Page 32

<PAGE>



             MANAGEMENT REPORT ON CONSOLIDATED FINANCIAL STATEMENTS

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

The  accounting  systems and  controls  of the  Company are  designed to provide
reasonable   assurance  that   transactions  are  executed  in  accordance  with
management's  authorization,   that  the  financial  records  are  reliable  for
preparing  financial  statements and maintaining  accountability for assets, and
that assets are safeguarded against losses from unauthorized use or disposition.
Management  believes that for the year ended December 31, 1999, such systems and
controls were adequate to meet the objectives discussed herein.

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

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

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

Paul H. Palmer
Vice President, Finance

     Chief Financial Officer,
     and Treasurer

                                                      Page 33

<PAGE>





                                           INDEPENDENT AUDITORS' REPORT

Board of Directors
Sierra Health Services, Inc.:

We have audited the  accompanying  consolidated  balance sheets of Sierra Health
Services,  Inc., and its  subsidiaries as of December 31, 1999 and 1998, and the
related  consolidated  statements of operations,  stockholders'  equity and cash
flows for each of the three years in the period ended  December  31,  1999.  Our
audits also included the financial  statement  schedules  listed in the index at
Item 14 (a)(2). These financial statements and financial statement schedules are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and financial statement schedules based
on our audits.

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

In our opinion,  such consolidated  financial  statements present fairly, in all
material respects,  the financial  position of Sierra Health Services,  Inc. and
its  subsidiaries  at  December  31,  1999 and 1998,  and the  results  of their
operations  and their cash flows for each of the three years in the period ended
December 31, 1999 in conformity with generally accepted  accounting  principles.
Also, in our opinion,  such financial  statement  schedules  when  considered in
relation  to the  basic  consolidated  financial  statements  taken  as a whole,
present fairly in all material respects the information set forth therein.

DELOITTE & TOUCHE LLP
Las Vegas, Nevada
February 14, 2000

                                                      Page 34

<PAGE>



                  SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS

                           December 31, 1999 and 1998

                                     ASSETS

<TABLE>

<CAPTION>

                                                                                           1999                    1998
                                                                                     ----------------        ----------
CURRENT ASSETS:
<S>                                                                                <C>                   <C>
      Cash and Cash Equivalents...............................................     $     55,936,000      $     83,910,000
      Investments.............................................................          218,951,000           260,337,000
      Accounts Receivable (Less:  Allowance for Doubtful
           Accounts 1999 - $15,551,000; 1998 - $10,540,000)...................           43,036,000            44,100,000
      Military Accounts Receivable (Less: Allowance for Doubtful
           Accounts 1999 - $800,000; 1998 - $444,000).........................           60,340,000            69,552,000
      Current Portion of Deferred Tax Asset ..................................           40,199,000            14,311,000
      Reinsurance Recoverable.................................................           54,563,000            32,076,000
      Other Current Receivables...............................................           39,276,000            24,898,000
      Prepaid Expenses and Other Current Assets...............................           12,292,000            15,076,000
                                                                                  -----------------     -----------------
           Total Current Assets...............................................          524,593,000           544,260,000

PROPERTY AND EQUIPMENT, NET...................................................          264,549,000           229,164,000
LONG-TERM INVESTMENTS.........................................................           14,862,000            30,487,000
RESTRICTED CASH AND INVESTMENTS...............................................           21,705,000            17,758,000
REINSURANCE RECOVERABLE, Net of Current Portion...............................           82,300,000            34,946,000
GOODWILL (Less:  Accumulated Amortization
       1999 - $8,828,000; 1998 - $5,213,000)..................................          159,514,000           142,471,000
OTHER ASSETS..................................................................           62,589,000            46,034,000
                                                                                  -----------------     -----------------
TOTAL ASSETS..................................................................       $1,130,112,000        $1,045,120,000
                                                                                     ==============

                                             LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
    Accrued Liabilities.......................................................     $     59,556,000      $     25,196,000
    Trade Accounts Payable....................................................           21,052,000            25,904,000
    Premium Deficiency Reserve................................................           21,000,000            18,184,000
    Accrued Payroll and Taxes.................................................           21,965,000            19,942,000
    Medical Claims Payable....................................................           91,607,000            78,022,000
    Current Portion of Reserve for
         Losses and Loss Adjustment Expense ..................................           93,768,000            79,869,000
    Unearned Premium Revenue..................................................           45,333,000            39,968,000
    Military Health Care Payable..............................................           50,831,000            53,820,000
    Current Portion of Long-term Debt.........................................            4,741,000             5,263,000
                                                                                 -------------------   ------------------
         Total Current Liabilities............................................          409,853,000           346,168,000

RESERVE FOR LOSSES AND
    LOSS ADJUSTMENT EXPENSE (Less Current Portion) ...........................          150,626,000           132,394,000
LONG-TERM DEBT (Less Current Portion) ........................................          258,854,000           242,398,000
OTHER LIABILITIES ............................................................           32,367,000            20,446,000
                                                                                  -----------------     -----------------
TOTAL LIABILITIES.............................................................          851,700,000           741,406,000
                                                                                   -----------------     ----------------

STOCKHOLDERS' EQUITY:
    Preferred Stock, $.01 Par Value, 1,000,000
         Shares Authorized; None Issued or Outstanding
    Common Stock, $.005 Par Value, 40,000,000
         Shares Authorized; Shares Issued:  1999-- 28,400,000;
         1998-- 28,236,000....................................................              142,000               141,000
    Additional Paid-in Capital................................................          175,915,000           173,583,000
    Treasury Stock: 1999-- 1,523,000; 1998-- 967,000
         Common Shares........................................................          (22,789,000)          (14,821,000)
    Accumulated Other Comprehensive Loss:
         Unrealized Holding Loss on Available-for-Sale

              Investments.....................................................          (16,063,000)           (1,027,000)
    Retained Earnings.........................................................          141,207,000           145,838,000
                                                                                   ----------------      ----------------
TOTAL STOCKHOLDERS' EQUITY....................................................          278,412,000           303,714,000
                                                                                   ----------------      ----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY....................................       $1,130,112,000        $1,045,120,000
                                                                                     ==============        ==============
</TABLE>

        See the accompanying notes to consolidated financial statements.

                                                             Page 35

<PAGE>



                  SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS

              For the Years Ended December 31, 1999, 1998 and 1997

<TABLE>

<CAPTION>

                                                                             1999                1998                1997
                                                                      ------------------  -----------------   -----------

OPERATING REVENUES:
<S>                                                                      <C>                 <C>                   <C>
     Medical Premiums.............................................       $  827,779,000      $  609,404,000        $513,857,000
     Military Contract Revenues ..................................          287,398,000         204,838,000           4,346,000
     Specialty Product Revenues ..................................           94,221,000         148,368,000         146,211,000
     Professional Fees............................................           51,842,000          45,363,000          31,238,000
     Investment and Other Revenues ...............................           22,571,000          29,230,000          26,072,000
                                                                       ----------------    ----------------      --------------
        Total.....................................................        1,283,811,000       1,037,203,000         721,724,000
                                                                         --------------      --------------       -------------

OPERATING EXPENSES:
     Medical Expenses.............................................          749,797,000         513,209,000         419,272,000
     Military Contract Expenses ..................................          276,493,000         196,625,000           4,193,000
     Specialty Product Expenses...................................           96,487,000         142,258,000         143,082,000
     General, Administrative and Marketing Expenses...............          137,812,000         110,687,000          93,919,000
     Impairment, Settlement and Other Costs.......................           18,808,000          13,851,000          29,350,000
                                                                       ----------------    ----------------      --------------
        Total.....................................................        1,279,397,000         976,630,000         689,816,000
                                                                         --------------     ---------------       -------------

OPERATING INCOME..................................................            4,414,000          60,573,000          31,908,000

INTEREST EXPENSE AND OTHER, NET...................................          (14,980,000)         (7,181,000)         (4,433,000)
                                                                       ----------------    ----------------     ---------------

(LOSS) INCOME FROM OPERATIONS
     BEFORE INCOME TAXES .........................................          (10,566,000)         53,392,000          27,475,000

BENEFIT (PROVISION) FOR INCOME TAXES..............................            5,935,000         (13,796,000)         (3,234,000)
                                                                      -----------------     ---------------     ---------------

NET (LOSS) INCOME ................................................     $     (4,631,000)    $    39,596,000       $  24,241,000
                                                                       ================     ===============       =============

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

EARNINGS PER COMMON SHARE ASSUMING DILUTION:
         Net (Loss) Income Per Share .............................                $(.17)              $1.43                $.88
                                                                                   ====               =====                ====
</TABLE>

        See the accompanying notes to consolidated financial statements.

                                                      Page 36

<PAGE>






                  SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES

                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

              For the Years Ended December 31, 1999, 1998 and 1997
                             (Amounts in thousands)

<TABLE>

<CAPTION>

                                                                                            Accumu-
                                                                                             lated

                                                                                            Other

                                                                    Addi-                  Compre-       Compre-              Total
                                                                   tional                   hensive     hensive              Stock-
                                              Common Stock         Paid-In     Treasury    Income       Income   Retained   holders'
                                          Shares       Amount      Capital       Stock       (Loss)     (Loss)   Earnings    Equity




<S>              <C>                       <C>          <C>      <C>       <C>         <C>                       <C>       <C>
BALANCE, JANUARY 1, 1997 .............     26,865       $134     $151,990  $     (130) $      487          -     $  82,001 $234,482
 Comprehensive Income:
     Net Income.......................                                                               $ 24,241       24,241   24,241
     Other Comprehensive Income,
        Net of Tax

     Unrealized Gain on Available-for-sale-
              Investments ............                                                        168         168                   168
                                                                                                  -----------
 Comprehensive Income.................                                                               $ 24,409
                                                                                                     ========
 Common Stock Issued in Connection
     with Stock Plans.................        844          5       10,253                                                    10,258
  Purchase of Treasury Stock .........                                         (5,471)                                       (5,471)
  Income Tax Benefit Realized Upon
     Exercise of Stock Options........                              2,004                                                     2,004
                                      -----------   --------   ------------------------ --------------      ------------- ----------
BALANCE, DECEMBER 31, 1997 ...........     27,709        139      164,247      (5,601)        655                 106,242   265,682
 Comprehensive Income:
     Net Income.......................                                                               $ 39,596      39,596    39,596
     Other Comprehensive Income,
         Net of Tax

     Unrealized Holding Loss on Available-
                 for-sale Investments Arising
                        During Period.                                                       (201)       (201)                 (201)
            Reclassification Adjustment for
               Gains Included in Net Income                                                (1,481)     (1,481)               (1,481)
                                                                                                   ----------
 Comprehensive Income.................                                                               $ 37,914
                                                                                                     ========
 Common Stock Issued in Connection
     with Stock Plans.................        527          2        8,052                                                     8,054
  Purchase of Treasury Stock .........                                         (9,220)                                       (9,220)
  Income Tax Benefit Realized Upon
     Exercise of Stock Options........                              1,284                                                     1,284
                                      -----------   --------   -------------------------------------           ----------  --------
  BALANCE, DECEMBER 31, 1998 .........     28,236        141      173,583     (14,821)     (1,027)                145,838   303,714
 Comprehensive Income:
     Net Loss.........................                                                              $  (4,631)     (4,631)   (4,631)
     Other Comprehensive Loss,
         Net of Tax

     Unrealized Holding Loss on Available-
                 for-sale Investments Arising
                        During Period.                                                    (15,295)    (15,295)              (15,295)
            Reclassification Adjustment for
               Losses Included in Net Loss                                                    259         259                   259
                                                                                                  -----------
 Comprehensive Loss...................                                                               $(19,667)
                                                                                                     ========
 Common Stock Issued in Connection
     with Stock Plans.................        164          1        2,331                                                     2,332
  Purchase of Treasury Stock .........                                         (7,968)                                       (7,968)
  Income Tax Benefit Realized Upon
     Exercise of Stock Options........                                  1                                                         1
                                      -----------   -----------------------------------------------            ----------  ---------
  BALANCE, DECEMBER 31, 1999 .........     28,400       $142     $175,915    $(22,789)   $(16,063)               $141,207  $278,412
                                           ======       ====     ========    ========    ========                ========  ========
</TABLE>

        See the accompanying notes to consolidated financial statements.

                                     Page 37

<PAGE>



                  SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS

              For the Years Ended December 31, 1999, 1998 and 1997

<TABLE>

<CAPTION>

                                                                                    1999               1998              1997
                                                                               --------------     -------------     ---------


CASH FLOWS FROM OPERATING ACTIVITIES:
<S>                                                                            <C>               <C>               <C>
      Net (Loss) Income .................................................      $  (4,631,000)    $  39,596,000     $   24,241,000
      Adjustments to Reconcile Net Income to Net Cash
         Provided by Operating Activities:
          Depreciation and Amortization..................................         28,079,000        19,263,000         13,510,000
          Provision for Doubtful Accounts................................          7,201,000         6,379,000          4,283,000
          Provision for Goodwill Impairment..............................          3,509,000
      Change in Assets and Liabilities, Net of
         Effects from Acquisitions:
          Other Assets...................................................          7,991,000        (5,362,000)        (5,851,000)
          Reinsurance Recoverable .......................................        (69,841,000)      (41,618,000)        (5,635,000)
          Reserve for Losses and Loss Adjustment Expense ................         32,131,000         9,564,000         14,923,000
          Other Liabilities .............................................         11,921,000         4,603,000          6,826,000
          Accounts Receivable............................................        (11,810,000)       (2,870,000)        (7,944,000)
          Other Current Assets...........................................        (22,952,000)      (10,674,000)       (11,853,000)
          Military Accounts Receivable...................................          8,857,000       (69,552,000)        (4,346,000)
          Military Health Care Payable...................................         (2,989,000)       53,820,000
          Medical Claims Payable.........................................         13,585,000        12,333,000          8,974,000
          Other Current Liabilities......................................         (8,755,000)       34,606,000         15,692,000
                                                                              --------------    --------------    ---------------
                  Net Cash (Used For) Provided by

                     Operating Activities ...............................         (7,704,000)       50,088,000         52,820,000
                                                                              --------------    --------------    ---------------

CASH FLOWS FROM INVESTING ACTIVITIES:
      Capital Expenditures...............................................        (58,512,000)      (40,743,000)       (55,642,000)
      Property and Equipment Dispositions, Net...........................          1,018,000                              772,000
      Purchase of Available-for-Sale Investments.........................       (357,810,000)     (901,542,000)    (1,078,396,000)
      Proceeds from Sales/Maturities of
          Available-for-Sale Investments.................................        358,792,000       884,288,000      1,046,523,000
      Purchase of Held-to-Maturity Investments...........................         (7,133,000)      (51,887,000)        (7,523,000)
      Proceeds from Maturities of Held-to-Maturity Investments...........         36,077,000        44,964,000         10,449,000
      Corporate Acquisitions, Net of Cash Acquired.......................         (3,000,000)     (111,408,000)        (3,145,000)
      Corporate Disposition, Net of Cash Disposed........................                            1,373,000
                                                                         --------------------- ---------------
          Net Cash Used for Investing Activities.........................        (30,568,000)     (174,955,000)       (86,962,000)
                                                                               -------------     -------------     --------------

CASH FLOWS FROM FINANCING ACTIVITIES:
      Proceeds from Long-term Borrowing..................................         79,000,000       172,200,000         25,000,000
      Payments on Debt and Capital Leases................................        (63,066,000)      (59,098,000)        (2,391,000)
      Purchase of Treasury Stock ........................................         (7,968,000)       (9,220,000)        (5,471,000)
      Exercise of Stock in Connection with Stock Plans...................          2,332,000         8,054,000         10,258,000
                                                                             ---------------   ---------------    ---------------
          Net Cash Provided by Financing Activities......................         10,298,000       111,936,000         27,396,000
                                                                              --------------     -------------    ---------------

NET DECREASE IN CASH
      AND CASH EQUIVALENTS...............................................        (27,974,000)      (12,931,000)        (6,746,000)
CASH AND CASH EQUIVALENTS AT BEGINNING
       OF YEAR    .......................................................         83,910,000        96,841,000        103,587,000
                                                                              --------------    ---------------    --------------

CASH AND CASH EQUIVALENTS AT END OF YEAR.................................      $  55,936,000     $  83,910,000     $   96,841,000
                                                                               =============     =============     ==============
</TABLE>

        See the accompanying notes to consolidated financial statements.

                                     Page 38

<PAGE>


                  SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

              For the Years Ended December 31, 1999, 1998 and 1997

1.   BUSINESS

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

Acquisitions.  On October 31, 1998, Texas Health Choice, L.C. ("TXHC") (formerly
HMO Texas,  L.C.), a subsidiary of Sierra,  completed the acquisition of certain
assets of Kaiser Foundation Health Plan of Texas ("Kaiser-Texas"), a health plan
operating  in  Dallas/Ft.  Worth and  Permanente  Medical  Association  of Texas
("Permanente"),  a 150  physician  medical  group  operating  in that area.  The
purchase price was $124 million,  which was net of $20 million in operating cost
support  paid to  Sierra  by  Kaiser  Foundation  Hospitals  in  four  quarterly
installments  following  the  closing of the  transaction.  The  purchase  price
allocation  included a premium  deficiency  reserve of approximately $25 million
for estimated losses on the contracts acquired from  Kaiser-Texas.  The purchase
price  also  included  amounts  for real  estate  and eight  medical  and office
facilities  encompassing  approximately  500,000  square feet.  During the first
quarter  of  1999,  certain  accreditation  goals  were met by the  health  plan
resulting in a purchase  price  increase of $3.0 million,  to $127 million.  The
purchase  price may  increase  an  additional  $27  million  over three years if
certain growth and member  retention goals are met by the health plan;  however,
preliminary results indicate these goals were not met for the first year.

The original  liability  for the  estimated  premium  deficiency  was based upon
assumptions of membership and other operating information, some of which had yet
to be  received.  During  1999,  the  Company  continued  to gather  such  data,
including  obtaining  data from the  seller,  and  based  upon the  receipt  and
analysis of this data, the Company  revised the initial  estimate of the premium
deficiency accrual resulting in a total recorded amount of $72.0 million.

The  acquisition  has been recorded using purchase  accounting and the excess of
the  purchase  price over the fair value of the assets  acquired was recorded as
goodwill. Total goodwill, in the amount of $126.8 million, is being amortized on
a straight line basis over 40 years.

On December 31, 1998, Sierra completed the acquisition of the Nevada health care
business of Exclusive Healthcare,  Inc. ("EHI"),  United of Omaha Life Insurance
Company and United World Life  Insurance  Company  ("United"),  all of which are
subsidiaries of Mutual of Omaha Insurance  Company.  Sierra  initially  retained
approximately 9,000 members  (approximately 4,400 HMO members) subsequent to the
acquisition.  Effective June 1, 1999, the company  completed the purchase of the
Texas operations of EHI  (approximately  1,000 HMO members) and United's related
preferred provider  organization ("PPO") that is part of the dual option HMO/PPO
plan. The purchase price of both the Nevada and Texas transactions is contingent
based on how many  members are retained  through 2000 and 2001.  No cash will be
paid until group renewals begin in 2000.

In August 1997,  the Company  acquired the assets and  operations  of Total Home
Care, Inc. ("THC") for  approximately  $3.1 million,  net of cash acquired.  THC
provides home infusion, oxygen, and durable medical equipment services in Nevada
and Arizona.  The Company sold the Arizona  operations  in the first  quarter of
1998 for  approximately  $1.5 million.  Also, in the first quarter of 1998,  the
Company  purchased three medical  clinics in southern  Nevada for  approximately
$7.3 million.

2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     Principles of Consolidation.  All significant intercompany transactions and
balances  have been  eliminated.  Sierra's  consolidated  subsidiaries  include:
Health Plan of Nevada,  Inc. ("HPN") and TXHC,  licensed HMOs; Sierra Health and
Life Insurance  Company,  Inc.  ("SHL"),  a health and life  insurance  company;
Southwest

                                                      Page 39

<PAGE>


                  SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

              For the Years Ended December 31, 1999, 1998 and 1997

Medical  Associates,  Inc.  ("SMA")  and The  Medical  Group of Texas  ("TMGT"),
multi-specialty  medical provider groups; Sierra Military Health Services,  Inc.
("SMHS"),  a company that has been contracted to provide and administer  managed
care services to certain TRICARE eligible beneficiaries from June 1, 1998 to May
31, 2003; CII Financial,  Inc.  ("CII"),  a holding company primarily engaged in
writing workers'  compensation  insurance through its wholly owned subsidiaries;
administrative  services companies; a home health care agency; a hospice; a home
medical  products  subsidiary;  and a company that  provides and manages  mental
health and substance abuse services.

Medical Premiums.  Non-Medicare member enrollment is represented  principally by
employer  groups.  Medical  premiums  are  billed  to  each  employer  group  in
accordance  with  negotiated  contracts,  and such premium revenue is recognized
when earned.  Unearned premium revenue includes  payments under prepaid Medicare
contracts with the Health Care Financing Administration ("HCFA") and prepaid HPN
and TXHC  commercial  and SHL indemnity  premiums.  HPN and TXHC offer a prepaid
health care program to Medicare  recipients.  Revenues  associated with Medicare
recipients were  approximately  $301,141,000,  $238,913,000  and $186,105,000 in
1999, 1998 and 1997, respectively.

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

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

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

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

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

Military Contract Expenses.  This expense consists primarily of costs to provide
managed health care services to eligible  beneficiaries  in accordance  with the
Company's  TRICARE  contract.  Under the  contract,  SMHS  provides  health care
services to approximately  610,000  dependents of active duty military personnel
and military retirees and their dependents  through  subcontractor  partnerships
and  individual  providers.  Health  care costs are  recorded in the period when
services are provided to eligible beneficiaries including estimates for provider
costs which have been  incurred as of the balance sheet date but not reported to
the Company.  Also included in military  contract expenses are costs incurred to
perform  specific  administrative  services,  such as  health  care  appointment
scheduling, enrollment, network management and health care advice line services,
and other administrative functions of the military health care subsidiary.

                                                      Page 40

<PAGE>


                  SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

              For the Years Ended December 31, 1999, 1998 and 1997

Specialty Product Expenses.  This expense consists  primarily of losses and loss
adjustment  expense  ("LAE"),  policy  acquisition  costs and other  general and
administrative  expenses associated with issued workers' compensation  policies.
Losses and LAE are based upon the  accumulation  of cost  estimates for reported
claims  occurring  during the period as well as an estimate for losses that have
occurred but have not yet been  reported.  Policy  acquisition  costs consist of
commissions,  premium  taxes and other  underwriting  costs,  which are directly
related to the  production  and  retention  of new and renewal  business and are
deferred  and  amortized  as the  related  premiums  are  earned.  Should  it be
determined  that future policy  revenues and earnings on invested funds relating
to existing insurance  contracts will not be adequate to cover related costs and
expenses,  deferred  costs are  expensed.  Also  included in  specialty  product
expenses are costs associated with administrative services and certain ancillary
products. These costs are recorded when incurred.

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

Investments.  Investments consist principally of U.S. Government  securities and
municipal  bonds,  as well as corporate  and  mortgage  backed  securities.  All
non-restricted  investments  that  are  designated  as  available-for-  sale are
classified as current  assets.  These  investments  are available for use in the
current  operations  regardless of contractual  maturity  dates.  Non-restricted
investments  designated as held-to-maturity  are classified as current assets if
expected maturity is within one year of the balance sheet date. Otherwise,  they
are classified as long-term investments.

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

Military Accounts Receivable.  Amounts receivable under government contracts are
comprised  primarily  of one month's  contract  payment from the  government  in
arrears, estimates of adjustments under the contract based on actual experience,
and  estimates  of the  earned  portion  of any  change  orders  not  originally
specified in the contract.

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

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

Goodwill.  Goodwill has been recorded  primarily as a result of various business
acquisitions  by the Company.  Amortization is provided on a straight line basis
over periods not  exceeding 40 years.  The Company  periodically  evaluates  the
carrying value of its  intangible  assets.  The Company  utilizes the discounted
cash flow method for  evaluating  the  recoverability  of goodwill.  Future cash
flows are estimated based on Company projections and are discounted based on the
interest  rates  approximating  long-term  bond  yields.   Amortization  expense
associated with goodwill was $4,345,000, $2,321,000 and $1,850,000 for the years
ended December 31, 1999, 1998 and 1997, respectively.

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

     Reserve for Losses and Loss  Adjustment  Expense.  The reserve for workers'
compensation  losses and LAE  consists of  estimated  costs of each unpaid claim
reported to the Company prior to the close of the accounting

                                                      Page 41

<PAGE>


                  SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

              For the Years Ended December 31, 1999, 1998 and 1997

period,  as well  as  those  incurred  but not yet  reported.  The  methods  for
establishing  and  reviewing  such  liabilities  are  continually  reviewed  and
adjustments are reflected in current operations.

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

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

Credit risk with respect to accounts receivable is generally  diversified due to
the large number of entities  comprising  the Company's  customer base and their
dispersion  across many  different  industries.  These  customers  are primarily
located  in the  states in which  the  Company  operates.  Such  operations  are
principally in California,  Nevada and Texas.  However,  the Company is licensed
and does business in several other states as well. As of December 31, 1999,  the
Company has receivables  outstanding from the federal  government related to its
TRICARE  contract  in  the  amount  of  $60.3  million.  The  Company  also  has
receivables from certain  reinsurers.  Reinsurance  contracts do not relieve the
Company  from  its  obligations  to  enrollees  or  policyholders.   Failure  of
reinsurers to honor their obligations could result in losses to the Company. The
Company  evaluates  the  financial  condition of its  reinsurers to minimize its
exposure to significant losses from reinsurer insolvencies.  All reinsurers that
the Company has  reinsurance  contracts  with are rated A- or better by the A.M.
Best Company.

Recently Issued  Accounting  Standards.  In June 1998, The Financial  Accounting
Standards  Board  issued  "Accounting  for  Derivative  Instruments  and Hedging
Activities"  ("FAS 133").  FAS 133 is effective for fiscal years beginning after
June 15, 2000.  FAS 133  addresses the  accounting  for  derivative  instruments
including  certain  derivative  instruments  embedded  in other  contracts,  and
hedging  activities.  The Company  does not believe this  statement  will have a
material impact on its financial statements.

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

Reclassifications.  Certain amounts in the Consolidated Financial Statements for
the years ended  December  31, 1998 and 1997 have been  reclassified  to conform
with the current year presentation.

                                                      Page 42

<PAGE>


                  SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

              For the Years Ended December 31, 1999, 1998 and 1997

3.   EARNINGS PER SHARE

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

<TABLE>

<CAPTION>

                                                                                     Dilutive

                                                                Basic              Stock Options           Diluted

For the Year Ended December 31, 1999:
<S>                                                          <C>                                         <C>
Net Loss.......................................              $(4,631,000)                                $(4,631,000)
Shares.........................................               26,927,000                                  26,927,000
Per Share Amount...............................                    $(.17)                                      $(.17)

For the Year Ended December 31, 1998:
Net Income.....................................              $39,596,000                                 $39,596,000
Shares.........................................               27,391,000                356,000           27,747,000
Per Share Amount...............................                    $1.45                                       $1.43

For the Year Ended December 31, 1997:
Net Income.....................................               $24,241,000                                $24,241,000
Shares.........................................                27,013,000               413,000           27,426,000
Per Share Amount...............................                      $.90                                       $.88
</TABLE>

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

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

CII issued convertible  subordinated debentures (the "Debentures") due September
15,  2001.  Each $1,000 in principal is  convertible  into 25.382  shares of the
Company's common stock at a conversion price of $39.40 per share. The Debentures
were not  included in the  computation  of EPS  because  their  effect  would be
anti-dilutive.  At December 31, 1999, common stock shares reserved for potential
issuance in connection with the subordinated debentures were 1,442,000.

                                                       Page 43

<PAGE>


                  SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

              For the Years Ended December 31, 1999, 1998 and 1997

4.   PROPERTY AND EQUIPMENT

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

<TABLE>

<CAPTION>

                                                                            1999                       1998
                                                                      ----------------           ----------
<S>                                                                     <C>                       <C>
           Land...................................................      $  28,643,000             $  28,588,000
           Buildings and Improvements.............................        152,284,000               145,308,000
           Furniture, Fixtures and Equipment......................         61,793,000                57,261,000
           Data Processing Equipment and Software.................         97,204,000                43,643,000
           Software in Development and Construction
              in Progress.........................................         14,157,000                20,324,000
           Less: Accumulated Depreciation ........................        (89,532,000)              (65,960,000)
                                                                       --------------            --------------
               Net Property and Equipment.........................       $264,549,000              $229,164,000
                                                                         ============              ============
</TABLE>

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

<TABLE>

<CAPTION>

                                                                               1999                      1998
                                                                         ---------------           ----------
<S>                                                                        <C>                       <C>
           Data Processing Equipment and Software ................         $4,736,000                $4,736,000
           Furniture, Fixtures and Equipment......................          4,426,000                 4,426,000
           Building...............................................            245,000                   245,000
           Less: Accumulated Depreciation.........................         (4,376,000)               (2,255,000)
                                                                           ----------               -----------
              Net Property and Equipment..........................         $5,031,000                $7,152,000
                                                                           ==========                ==========
</TABLE>

The Company capitalizes  interest expense as part of the cost of construction of
facilities  and  the  implementation  of  computer  systems.   Interest  expense
capitalized in 1999,  1998 and 1997 was  $2,140,000,  $1,037,000 and $1,621,000,
respectively.  Depreciation  expense  in 1999,  1998  and 1997 was  $23,577,000,
$16,767,000 and $10,921,000, respectively.

5.   CASH AND INVESTMENTS

Investments  that the Company has the  intention and ability to hold to maturity
are stated at amortized cost and categorized as held-to-maturity.  The remaining
investments have been categorized as available-for-sale  and are stated at their
fair value. Fair value is estimated primarily from published market values as of
the   balance   sheet   date.   Unrealized   holding   gains   and   losses   on
available-for-sale   securities   are  included  as  a  separate   component  of
stockholders'  equity until  realized.  Gross  realized  gains on investments in
1999,  1998 and 1997 were  $334,000,  $4,789,000 and  $2,878,000,  respectively.
Gross  realized  losses on  investments  in 1999,  1998 and 1997 were  $733,000,
$2,511,000  and  $2,373,000,   respectively.   Realized  gains  and  losses  are
calculated  using the  specific  identification  method and are  included in net
income.

                                                       Page 44

<PAGE>


                  SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

              For the Years Ended December 31, 1999, 1998 and 1997

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

<TABLE>

<CAPTION>

                                                                                Gross               Gross
                                                            Amortized         Unrealized          Unrealized            Fair

                                                            Cost               Gains               Losses               Value

Available-for-Sale Investments:
Classified as Current:

    U.S. Government

<S>                                                      <C>                   <C>               <C>               <C>
       and its Agencies...........................       $112,211,000          $  37,000         $16,294,000       $  95,954,000
    Municipal Obligations.........................         60,245,000             97,000           2,316,000          58,026,000
    Corporate Bonds...............................         33,756,000             34,000           1,715,000          32,075,000
    Other . . . . . ..............................         28,683,000             21,000           3,796,000          24,908,000
                                                       --------------         ----------       -------------      --------------
       Total Current..............................        234,895,000            189,000          24,121,000         210,963,000
                                                        -------------          ---------        ------------       -------------

Classified as Restricted:
    U.S. Government
       and its Agencies...........................         12,021,000            104,000             670,000          11,455,000
    Municipal Obligations.........................          2,485,000             29,000             101,000           2,413,000
    Corporate Bonds...............................            989,000             11,000              33,000             967,000
    Other. . . . . . . . . .......................          4,815,000                                118,000           4,697,000
                                                      ---------------    ---------------      --------------     ---------------
       Total Restricted ..........................         20,310,000            144,000             922,000          19,532,000
                                                       --------------          ---------      --------------      --------------
          Total Available-for-Sale ...............       $255,205,000           $333,000         $25,043,000        $230,495,000
                                                         ============           ========         ===========        ============

Held-to-Maturity Investments:
Classified as Current:

    U.S. Government

       and its Agencies...........................     $    5,129,000           $341,000       $     317,000      $    5,153,000
    Municipal Obligations.........................          2,759,000             32,000              55,000           2,736,000
    Other        .................................            100,000                                                    100,000
                                                     ----------------    -----------------------------------    ----------------
       Total Current..............................          7,988,000            373,000             372,000           7,989,000
                                                      ---------------          ---------      --------------     ---------------

Classified as Long-term:
    U.S.  Government
       and its Agencies...........................          4,034,000                                390,000           3,644,000
    Municipal Obligations.........................          2,284,000             33,000                               2,317,000
    Corporate Bonds...............................          5,239,000            115,000                               5,354,000
    Other        .................................          3,305,000                                751,000           2,554,000
                                                      ---------------    ---------------      --------------     ---------------
       Total Long-term............................         14,862,000            148,000           1,141,000          13,869,000
                                                       --------------          ---------       -------------      --------------

Classified as Restricted:
   U.S. Government
       and its Agencies...........................            619,000                                                    619,000
   Municipal Obligations..........................            515,000                                                    515,000
    Corporate Bonds...............................            499,000                                                    499,000
    Other        .................................            540,000                                                    540,000
                                                     ----------------                                           ----------------
       Total Restricted ..........................          2,173,000                                                  2,173,000
                                                      ---------------                                            ---------------
          Total Held-to-Maturity .................      $  25,023,000           $521,000        $  1,513,000       $  24,031,000
                                                        =============           ========        ============       =============
</TABLE>

                                     Page 45

<PAGE>


                  SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

              For the Years Ended December 31, 1999, 1998 and 1997

     The  following  table  summarizes  the  Company's  current,  long-term  and
restricted investments as of December 31, 1998:

<TABLE>

<CAPTION>

                                                                                Gross               Gross
                                                            Amortized         Unrealized          Unrealized          Fair

                                                            Cost               Gains               Losses             Value

Available-for-Sale Investments:
Classified as Current:

    U.S.  Government

<S>                                                     <C>                  <C>                  <C>              <C>
       and its Agencies.....................            $  80,214,000        $   660,000          $1,576,000       $  79,298,000
    Mortgage Backed.........................                6,209,000              1,000             216,000           5,994,000
    Municipal Obligations...................               58,060,000            317,000             413,000          57,964,000
    Corporate Bonds.........................               82,617,000            759,000             829,000          82,547,000
    Other      .............................               13,795,000             41,000             548,000          13,288,000
                                                       --------------      -------------        ------------      --------------
       Total Current........................              240,895,000          1,778,000           3,582,000         239,091,000
                                                        -------------        -----------         -----------       -------------

Classified as Restricted:
    U.S. Government
       and its Agencies.....................                8,549,000             87,000                               8,636,000
    Municipal Obligations...................                2,594,000            124,000                               2,718,000
    Corporate Bonds.........................                2,071,000             19,000                               2,090,000
    Other      .............................                2,081,000                                                  2,081,000
                                                      --------------- ------------------                         ---------------
       Total Restricted ....................               15,295,000            230,000                              15,525,000
                                                       --------------       ------------                          --------------
          Total Available-for-Sale .........             $256,190,000         $2,008,000          $3,582,000        $254,616,000
                                                         ============         ==========          ==========        ============

Held-to-Maturity Investments:
Classified as Current:

    U.S.  Government

       and its Agencies.....................           $    8,468,000      $       9,000         $   432,000      $    8,045,000
    Mortgage Backed.........................                5,936,000                                266,000           5,670,000
    Municipal Obligations...................                1,570,000             44,000                               1,614,000
    Corporate Bonds.........................                5,272,000             66,000                               5,338,000
                                                      ---------------      -------------  ------------------     ---------------
       Total Current........................               21,246,000            119,000             698,000          20,667,000
                                                       --------------       ------------        ------------      --------------

Classified as Long-term:
    U.S.  Government
       and its Agencies.....................                6,529,000             29,000              51,000           6,507,000
   Mortgage Backed..........................               14,331,000                                672,000          13,659,000
   Municipal Obligations....................                4,154,000            259,000                               4,413,000
   Corporate Bonds..........................                5,473,000            441,000                               5,914,000
                                                      ---------------       ------------  ------------------     ---------------
       Total Long-term......................               30,487,000            729,000             723,000          30,493,000
                                                       --------------       ------------        ------------      --------------

Classified as Restricted:
    U.S.  Government
       and its Agencies.....................                  495,000              9,000                                 504,000
    Municipal Obligations...................                  574,000             17,000                                 591,000
    Corporate Bonds.........................                1,164,000             50,000                                1,214,000
                                                      ---------------      -------------                          ---------------
       Total Restricted ....................                2,233,000             76,000                               2,309,000
                                                      ---------------      -------------                         ---------------
          Total Held-to-Maturity ...........            $  53,966,000        $   924,000          $1,421,000       $  53,469,000
                                                        =============        ===========          ==========       =============
</TABLE>

                                                              Page 46

<PAGE>


                  SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

              For the Years Ended December 31, 1999, 1998 and 1997

     The contractual  maturities of  available-for-sale  investments at December
31, 1999 are shown below.

<TABLE>

<CAPTION>

                                                                            Amortized

                                                                                 Cost               Fair Value

<S>                                                                       <C>                      <C>
Due in one year or less......................................             $  25,114,000            $  25,094,000
Due after one year through five years........................                53,477,000               52,317,000
Due after five years through ten years.......................                18,052,000               17,369,000
Due after ten years..........................................               158,562,000              135,715,000
                                                                          -------------            -------------
     Total...................................................              $255,205,000             $230,495,000
                                                                           ============             ============
</TABLE>

     The contractual maturities of held-to-maturity  investments at December 31,
1999 are shown below. Expected maturities may differ from contractual maturities
because  borrowers may have the right to call or prepay  obligations.  Amortized
Cost Fair Value
<TABLE>
<CAPTION>

<S>                                                                        <C>                      <C>
Due in one year or less......................................              $  2,580,000             $  2,611,000
Due after one year through five years........................                 9,565,000                9,585,000
Due after five years through ten years.......................                   776,000                  775,000
Due after ten years..........................................                12,102,000               11,060,000
                                                                           ------------             ------------
     Total...................................................               $25,023,000              $24,031,000
                                                                            ===========              ===========
</TABLE>

     Of the cash and cash equivalents and current  investments that total $274.9
million in the  accompanying  Consolidated  Balance  Sheet at December 31, 1999,
$267.5 million is limited for use only by the Company's regulated  subsidiaries.
Such  amounts  are   available   for  transfer  to  Sierra  from  the  regulated
subsidiaries  only to the extent that they can be remitted  in  accordance  with
terms of existing management agreements and by dividends, which customarily must
be  approved  by  regulating  state  insurance  departments.  The  remainder  is
available to Sierra on an unrestricted basis.

6.   REINSURANCE

In the normal course of business,  the Company seeks to reduce  potential losses
that may arise from  catastrophic  events  that cause  unfavorable  underwriting
results by reinsuring certain levels of such risk with other reinsurers. Amounts
recoverable from reinsurers are estimated in a manner  consistent with the claim
liability associated with the reinsurance policy.

The  Company  is covered  under  medical  reinsurance  agreements  that  provide
coverage  for 50% - 90% of hospital  and other costs in excess of,  depending on
the contract,  $75,000 to $200,000 per case,  up to a maximum of $2,000,000  per
member per  lifetime for both the managed  indemnity  and HMO  subsidiaries.  In
addition,  certain  of the  Company's  HMO  members  are  covered  by an  excess
catastrophe reinsurance contract. Reinsurance premiums of $3,269,000, $2,860,000
and  $3,156,000,  net of reinsurance  recoveries of  $2,904,000,  $1,185,000 and
$1,729,000,   are  included  in  medical  expenses  for  1999,  1998  and  1997,
respectively.  In addition, SHL maintains reinsurance on certain other insurance
products.

CII also  has  reinsurance  treaties  in  effect.  In 1999  and  1998,  workers'
compensation  claims between  $500,000 and  $100,000,000 per occurrence are 100%
reinsured.   In  1997,   workers'   compensation  claims  between  $350,000  and
$60,000,000 per occurrence were 100% reinsured.  In addition,  effective July 1,
1998,  workers'  compensation claims below $500,000 per occurrence are reinsured
under quota share and excess reinsurance  agreements  (referred to as "low level
reinsurance") with an A+ rated carrier. Under this agreement,  CII reinsures 30%
of the first $10,000 of each loss,  75% of the next $40,000 and 100% of the next
$450,000.  CII  receives a ceding  commission  from the  reinsurer  as a partial
reimbursement of its operating expenses.

                                                      Page 47

<PAGE>


                  SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

              For the Years Ended December 31, 1999, 1998 and 1997

The low level  reinsurance  agreement  contains both retroactive and prospective
reinsurance coverage and CII has bifurcated the low level reinsurance  agreement
to account  for the  different  accounting  treatments.  The amount by which the
estimated ceded liabilities exceed the amount paid for the retroactive  coverage
is  reported  as a deferred  gain and  amortized  to income  over the  estimated
remaining settlement period using the interest method. Any subsequent changes in
estimated or actual cash flows related to the retroactive coverage are accounted
for by adjusting the previously recorded deferred gain to the balance that would
have existed had the revised  estimate  been  available at the  inception of the
reinsurance  transactions,  with a  corresponding  charge or  credit to  income.
During 1999, CII recorded an adjustment to increase its deferred gain related to
retroactive reinsurance coverage by $4,615,000. For the years ended December 31,
1999 and 1998,  CII  amortized  deferred  gains of  $3,850,000  and  $1,038,000,
respectively.  The balance of unamortized  deferred gains related to retroactive
reinsurance  was  $7,015,000  and  $6,250,000  at  December  31,  1999 and 1998,
respectively.

At  December  31, 1999 and 1998,  the amount of  reinsurance  recoverable  under
prospective reinsurance contracts for unpaid losses and loss adjustment expenses
for CII was $110,089,000 and $37,797,000, respectively. At December 31, 1999 and
1998, the amount of reinsurance  recoverable  under the retroactive  reinsurance
contract  was  $14,842,000  and   $18,710,000,   respectively.   The  amount  of
reinsurance  receivable  for  paid  losses  and  loss  adjustment  expenses  was
$6,931,000 and $1,917,000, at December 31, 1999 and 1998, respectively.

Reinsurance  contracts  do not  relieve  the  Company  from its  obligations  to
enrollees or  policyholders.  Failure of reinsurers  to honor their  obligations
could  result in losses to the  Company.  The Company  evaluates  the  financial
condition of its reinsurers to minimize its exposure to significant  losses from
reinsurer  insolvencies.   All  reinsurers  that  the  Company  has  reinsurance
contracts with are rated A- or better by the A.M. Best Company.

The following  table  provides  workers'  compensation  prospective  reinsurance
information for the three years ended December 31, 1999:



<TABLE>
<CAPTION>
                                                                                  Change in

                                                             Recoveries           Recoverable
                                                             on Paid              on Unpaid             Premiums

                                                              Losses/LAE           Losses/LAE          Ceded

1999:

     Travelers Indemnity Company

<S>                                                           <C>                  <C>                 <C>
         of Illinois...........................               $21,941,000          $69,104,000         $60,702,000
     General Reinsurance Corporation...........                 1,730,000            3,188,000          2,912,000
     Others....................................                                                           169,000
                                                     -------------------- --------------------     --------------
     Total ....................................               $23,671,000          $72,292,000        $63,783,000
                                                              ===========          ===========        ===========

1998:

     Travelers Indemnity Company

         of Illinois...........................              $ 1,379,000           $19,664,000         $16,095,000
     General Reinsurance Corporation...........                3,292,000            (2,923,000)         3,533,000
     Others ...................................                                                           202,000
                                                     -------------------  --------------------     --------------
     Total ....................................              $ 4,671,000           $16,741,000        $19,830,000
                                                             ===========           ===========        ===========

1997:

     General Reinsurance Corporation.............           $    841,000          $  5,380,000        $ 4,872,000
     Others .....................................                                                         187,000
                                                     -------------------  --------------------      -------------
     Total ......................................           $    841,000          $  5,380,000        $ 5,059,000
                                                            ============          ============        ===========
</TABLE>

                                                      Page 48

<PAGE>


                  SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

              For the Years Ended December 31, 1999, 1998 and 1997

7.   LOSSES AND LOSS ADJUSTMENT EXPENSES

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

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




<TABLE>
<CAPTION>
                                                                            Year ended December 31,
                                                                 ----------------------------------
                                                                      1999            1998                1997
                                                                -------------------------------     ----------

<S>                                                                 <C>             <C>               <C>
Net Beginning Losses and LAE Reserve .....................          $174,466,000    $181,643,000      $172,100,000
                                                                    ------------    ------------      ------------

Net Provision for Insured Events Incurred in:
   Current Year ..........................................            51,541,000     103,990,000       102,301,000
   Prior Years............................................             9,920,000      (9,643,000)       (8,970,000)
                                                                 ---------------  --------------    --------------
     Total Net Provision..................................            61,461,000      94,347,000        93,331,000
                                                                  --------------  --------------    --------------

Net Payments for Losses and LAE
   Attributable to Insured Events Incurred in:
   Current Year ..........................................            21,206,000      29,592,000        26,811,000
   Prior Years............................................            80,416,000      71,932,000        56,977,000
                                                                  --------------  --------------    --------------
     Total Net Payments ..................................           101,622,000     101,524,000        83,788,000
                                                                   -------------   -------------    --------------

Net Ending Losses and LAE Reserve ........................           134,305,000     174,466,000       181,643,000
Reinsurance Recoverable ..................................           110,089,000      37,797,000        21,056,000
                                                                   -------------  --------------    --------------

Gross Ending Losses and LAE Reserve ......................          $244,394,000    $212,263,000      $202,699,000
                                                                    ============    ============      ============
</TABLE>

8.   LONG-TERM DEBT

Long-term debt at December 31, consists of the following:




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


<S>                                                                          <C>                      <C>
Revolving Credit Facility............................................        $160,000,000             $139,000,000
7 1/2% Convertible Subordinated Debentures ..........................          50,498,000               51,251,000
6% Mortgage Note.....................................................          34,693,000               35,171,000
7 1/5% Mortgage Note.................................................          11,614,000               13,440,000
7 3/8% Mortgage Note  ...............................................             393,000                  821,000
Other................................................................           6,397,000                7,978,000
                                                                          ---------------          ---------------
  Total..............................................................         263,595,000              247,661,000
Less Current Portion.................................................          (4,741,000)              (5,263,000)
                                                                          ---------------           --------------
Long-term Debt.......................................................        $258,854,000             $242,398,000
                                                                             ============             ============
</TABLE>

Revolving Credit  Facility.  On October 31, 1998, the Company replaced its prior
line of credit  with a $200  million  credit  facility  under  which it has $160
million in borrowings  outstanding  as of December 31, 1999.  Interest under the
credit facility is variable and based on the London Interbank Offering Rate plus
a margin  determined  by  reference  to the  Company's  leverage  ratio.  Of the
outstanding balance, $50 million is covered by interest-rate swap agreements. To
mitigate  the risk of interest  rate  fluctuation  on the credit  facility,  the
Company entered into a five-year $50 million interest-rate swap agreement during
the fourth quarter of 1998. The intent of the agreement is to keep the Company's
interest rate on $50 million of the borrowing relatively fixed. The average cost
of borrowing on this line of credit for 1999,  including  the impact of the swap
agreements,  was approximately  7.8%. The terms of the credit facility contain a
mandatory payment schedule

                                                      Page 49

<PAGE>


                  SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

              For the Years Ended December 31, 1999, 1998 and 1997

that  begins  on June 30,  2001 and ends  September  30,  2003 if the  principal
balance exceeds  certain  thresholds.  The terms of the credit facility  contain
certain covenants  including a minimum fixed charge coverage ratio and a maximum
leverage ratio.  For the quarter ended September 30, 1999, the Company  exceeded
the limits of certain  covenants.  The  Company  was able to obtain a waiver and
re-negotiate the covenant  limits.  These  negotiations  resulted in a borrowing
rate of LIBOR plus 2.375% through September 30, 2000. The Company believes it is
in compliance with debt covenants as of December 31, 1999.

7 1/2%  Convertible  Subordinated  Debentures.  In  September  1991,  CII issued
convertible  subordinated  debentures (the "Debentures") due September 15, 2001.
The Debentures bear interest at 7 1/2%,  which is due  semi-annually on March 15
and September 15. Each $1,000 in principal is convertible  into 25.382 shares of
the  Company's  common  stock  at  a  conversion  price  of  $39.40  per  share.
Unamortized  issuance  costs of $362,000  are  included  in other  assets on the
balance sheet and are being amortized over the life of the  Debentures.  Accrued
interest on the  Debentures as of December 31, 1999 and 1998 was  $1,099,000 and
$1,117,000,  respectively.  The Debentures are redeemable by CII, in whole or in
part, at a redemption price of 100.75%,  plus accrued  interest.  The Debentures
are general unsecured obligations of CII only and were not assumed or guaranteed
by Sierra.  During the twelve  months  ended  December  31,  1999 and 1998,  the
Company purchased  $753,000 and $3,216,000,  respectively,  of the debentures on
the open market.

6.0% Mortgage Note. In conjunction  with the acquisition of  Kaiser-Texas,  TXHC
executed a deed of trust note for  $35,200,000.  The note is secured by deeds of
trust  covering the underlying  real estate and fixtures.  The terms of the note
include  fixed  monthly  payments of  $211,000  for five years at which time the
remaining principal is due.

7 1/5% Mortgage Note. In January 1998, the Company  obtained a $15,000,000  loan
from Bank of America, Nevada at an interest rate of 7 1/5%. This loan is secured
by a deed of trust, assignment of rents and leases, and a security agreement and
fixture filing covering a portion of the Company's  administrative  headquarters
complex and underlying real property.

7 3/8% Mortgage Note. In December 1993, the Company obtained a loan from Bank of
America,  Nevada.  This loan is secured by a deed of trust,  assignment of rents
and leases,  and a security  agreement and fixture filing  covering a portion of
the Company's administrative headquarters complex and underlying real property.

Other. The Company has obligations under capital leases with interest rates from
6.7% to  13.4%.  In  addition,  the  Company  has  term  loans  with the City of
Baltimore and the State of Maryland.

                                                      Page 50

<PAGE>


                  SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

              For the Years Ended December 31, 1999, 1998 and 1997

     Scheduled  maturities  of the Company's  notes  payable and future  minimum
payments  under  capital  leases,  together  with the  present  value of the net
minimum lease payments at December 31, 1999, are as follows:


<TABLE>

<CAPTION>
                                                                                                 Obligations

                                                                            Notes               Under Capital

     Year ending December 31,                                              Payable                  Leases
     -------------------------------------------------------             ---------------------------------
<S>      <C>                                                              <C>                    <C>
         2000.................................................            $    2,920,000         $   2,192,000
         2001.................................................                53,205,000             1,769,000
         2002.................................................                 2,897,000             1,523,000
         2003 ................................................               195,740,000               425,000
         2004.................................................                 2,644,000                31,000
         Thereafter...........................................                   854,000               245,000
                                                                        ----------------       ---------------
            Total.............................................              $258,260,000             6,185,000
                                                                            ============
         Less:  Amounts Representing Interest.................                                        (850,000)
                                                                                                --------------

         Present Value of Minimum Lease Payments..............                                   $   5,335,000
                                                                                                 =============
</TABLE>

     The fair value of the  Debentures  at December  31,  1999 was  $35,601,000,
which was determined  based on the estimated  market price on December 31, 1999.
Excluding  the  Debentures,  the fair value of  long-term  debt,  including  the
current  portion,  is estimated to be  approximately  $209,446,000  based on the
borrowing rates currently available to the Company .

9.   INCOME TAXES

A summary of the  provision  for income  taxes for the years ended  December 31,
1999, 1998 and 1997 is as follows:




<TABLE>

<CAPTION>
                                                             1999                 1998                  1997
                                                         ------------         ------------          --------
     (Benefit) Provision for Income Taxes:
<S>                                                      <C>                     <C>                   <C>
     Current.....................................        $(12,919,000)           $12,595,000           $5,528,000
     Deferred....................................           6,984,000              1,201,000           (2,294,000)
                                                       --------------            -----------           ----------
        Total                                           $  (5,935,000)           $13,796,000           $3,234,000
                                                        =============            ===========           ==========
</TABLE>

The following reconciles the difference between the 1999, 1998 and 1997 reported
and statutory provision for income taxes:
<TABLE>

<CAPTION>
                                                             1999                 1998                  1997
                                                         ------------         ------------          --------

<S>                                                           <C>                    <C>                   <C>
Statutory Rate ..................................             35%                    35%                   35%
     State Income Taxes .........................          (12)                     1                     1
     Tax Preferred Investments ..................           12                     (2)                   (5)
     Change in Valuation Allowance ..............           15                     (9)                  (17)
     Other ......................................            6                      1                    (2)
                                                            --                     --                    --
        Provision for Income Taxes ..............             56%                    26%                   12%
                                                             ===                     ==                    ==
</TABLE>

                                                      Page 51

<PAGE>


                  SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

              For the Years Ended December 31, 1999, 1998 and 1997

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

<TABLE>

<CAPTION>

                                                                                   1999                  1998
                                                                             ----------------      ----------

Deferred Tax Assets:
<S>                                                                               <C>                 <C>
    Medical and Losses and LAE Reserves ......................                    $11,699,000         $  4,398,000
    Accruals Not Currently Deductible.........................                     12,635,000            4,875,000
    Compensation Accruals ....................................                      6,218,000            4,569,000
    Bad Debt Allowances.......................................                      4,373,000            2,189,000
    Loss Carryforwards and Credits............................                     18,886,000            9,878,000
    Unearned Premiums.........................................                      1,029,000              850,000
    Deferred Reinsurance Gains................................                      2,455,000            2,188,000
    Unrealized Investment Losses..............................                      8,648,000              551,000
    Other ....................................................                         90,000
                                                                              ---------------
      Total...................................................                     66,033,000           29,498,000
                                                                                 ------------         ------------


Deferred Tax Liabilities:
    Deferred Policy Acquisition Costs ........................                        777,000              586,000
    Depreciation and Amortization ............................                     17,729,000            6,249,000
    Other ....................................................                        684,000              558,000
                                                                               --------------       --------------
      Total...................................................                     19,190,000            7,393,000
                                                                                 ------------        -------------

    Net Deferred Tax Asset Before

       Valuation Allowance....................................                     46,843,000           22,105,000

    Valuation Allowance ......................................                                          (1,575,000)
                                                                         --------------------         ------------
    Net Deferred Tax Asset ...................................                    $46,843,000          $20,530,000
                                                                                  ===========          ===========
</TABLE>

     At December 31, 1999, the Company had approximately  $29,530,000 of regular
tax net operating loss  carryforwards.  The net operating loss carryforwards can
be used to reduce future taxable income until they expire through the year 2019.
In addition to the net operating loss carryforwards, the Company has alternative
minimum  tax  credits of  approximately  $7,216,000  which can be used to reduce
regular tax  liabilities  in future years.  There is no expiration  date for the
alternative minimum tax credits.

A valuation  allowance was established to reflect the Company's inability to use
tax benefits from certain acquisitions currently or in the near future. Due to a
change in tax laws and the Company's ability to realize tax benefits for which a
valuation  allowance had been  previously  established,  the Company reduced its
valuation allowance by $1,575,000, $4,691,000 and $4,663,000 for the years ended
December  31,  1999,  1998 and 1997,  respectively.  Included  in other  current
receivables  in the  December  31, 1999  balance  sheet is a tax  receivable  of
$10,518,000.

                                                      Page 52

<PAGE>


                  SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

              For the Years Ended December 31, 1999, 1998 and 1997

10.  COMMITMENTS AND CONTINGENCIES

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

<TABLE>

<CAPTION>

     Year Ending December 31,

<S>       <C>                                                               <C>
          2000...................................................           $  7,955,000
          2001...................................................              7,165,000
          2002...................................................              6,554,000
          2003 ..................................................              4,679,000
          2004...................................................              3,634,000
          Thereafter.............................................              9,347,000
                                                                           -------------
               Total.............................................            $39,334,000
                                                                             ===========
</TABLE>

     Rent expense  totaled  $9,098,000,  $8,763,000 and $5,827,000 in 1999, 1998
and 1997, respectively.

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

11.  RELATED PARTY TRANSACTIONS

The  Company's  Board of  Directors  has  authorized  a line of credit  from the
Company to the Chief  Executive  Officer (the "CEO").  The CEO borrowed  amounts
under this line of credit during 1998 which resulted in aggregate  borrowings of
$2,650,000. The CEO repaid approximately $360,000 of the indebtedness during the
first quarter of 1999. The borrowed amounts bear interest at a rate equal to the
rate at which the Company could have borrowed funds under the credit facility at
the time of the borrowing plus 10 basis points.  Indebtedness  under the line of
credit is  secured  by  certain  of the CEO's  rights to  compensation  from the
Company.  At December  31,  1999,  the  aggregate  outstanding  principal of and
accrued interest on this indebtedness was $2,635,000.

The Company expensed  $289,000,  $78,000 and $27,000 in the years ended December
31,  1999,  1998 and 1997  respectively,  for legal fees to a Nevada law firm of
which a non-employee director of the Company is a shareholder.

12.  EMPLOYEE BENEFIT PLANS

Defined  Contribution Plan. The Company has a defined  contribution  pension and
401(k) plan (the "Plan") for its  employees.  The Plan covers all  employees who
meet  certain  age and  length of  service  requirements.  For the  years  ended
December  31,  1998 and 1997 and for the six  months  ended June 30,  1999,  the
Company  contributed  a maximum of 2% of eligible  employees'  compensation  and
matched 50% of a participant's  elective  deferral up to a maximum of either 10%
of an  employee's  compensation  or the  maximum  allowable  under  current  IRS
statute.  Effective  July 1, 1999,  the Plan was modified  such that the Company
matches  50%-100% of an  employee's  elective  deferral and the maximum  Company
match is 6% of a participant's annual compensation,  subject to Internal Revenue
Service  limits.  The Plan does not require  additional  Company  contributions.
Expense under the plan totaled  $6,736,000,  $4,522,000  and $3,929,000 in 1999,
1998 and 1997, respectively.

                                                      Page 53

<PAGE>


                  SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

              For the Years Ended December 31, 1999, 1998 and 1997

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

Executive  Life Insurance  Plan.  Effective July 1, 1997, the Company has funded
and entered into split dollar life insurance  agreements  with certain  officers
and key executives (selected and approved by the Sierra Board of Directors). The
premiums paid by the Company will be reimbursed  upon the  occurrence of certain
events as specified in the contract.

                                                      Page 54

<PAGE>


                  SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

              For the Years Ended December 31, 1999, 1998 and 1997

Supplemental  Executive  Retirement  Plan ("SERP").  Effective July 1, 1997, the
Company  adopted  a  defined  benefit   retirement  plan  covering  certain  key
employees.  The Company is funding the benefits  through the purchase of certain
life  insurance  policies.  Benefits  are  based on,  among  other  things,  the
employee's  average  earnings over the  five-year  period prior to retirement or
termination,  and length of service.  Benefits  attributable to service prior to
the adoption of the plan are  amortized  over the  estimated  remaining  service
period for those  employees  participating  in the plan.  In 1998,  the  Company
expanded  the SERP to include  more  participants.  The  effect of adding  these
participants is included in plan amendments in the reconciliation below.

A reconciliation of ending year balances is as follows:

<TABLE>

<CAPTION>

                                                                                       For the Year Ended December 31,
                                                                                       -------------------------------
                                                                                1999                  1998                 1997
                                                                              --------              --------             ------
     Change in Benefit Obligation:

       Projected Benefit Obligation at Beginning of Period

<S>                       <C>                                                <C>                  <C>                  <C>
           (Inception for 1997) .......................................      $14,198,000          $ 9,515,000          $ 9,008,000
       Service Cost ...................................................          365,000              408,000              132,000
       Interest Cost ..................................................          829,000              875,000              375,000
       Plan Amendments.................................................                             1,572,000
       Actuarial (Gains) Losses........................................       (2,391,000)           1,925,000
       Benefits Paid ..................................................         (193,000)             (97,000)
                                                                          --------------       ---------------
       Benefit Obligation at End of Period.............................       12,808,000           14,198,000            9,515,000
                                                                            ------------          -----------         ------------

     Change in Plan Assets:

       Fair Value of Plan Assets at Beginning of Period................       4,493,000             1,872,000
       Actual Return on Plan Assets ...................................         123,000               (58,000)            (308,000)
       Company Contributions ..........................................       2,679,000             2,679,000            2,180,000
                                                                          -------------          ------------         ------------
       Fair Value of Plan Assets at End of Period......................       7,295,000             4,493,000            1,872,000
                                                                          -------------          ------------         ------------

       Funded Status of the Plan ......................................      (5,513,000)           (9,705,000)          (7,643,000)
       Unrecognized Actuarial Change...................................        (532,000)            1,858,000
       Unrecognized Prior Service Credit ..............................       8,412,000             9,334,000            8,647,000
       Unrecognized Net Loss ..........................................       1,150,000               748,000              394,000
                                                                          --------------        -------------        -------------
       Total Recognized ...............................................    $  3,517,000           $ 2,235,000          $ 1,398,000
                                                                           ============           ===========          ===========

     Total Recognized Amounts in the Financial
        Statements Consist of:

       Accrued Benefit Liability ......................................     $(2,439,000)          $(3,325,000)         $(2,964,000)
       Intangible Asset ...............................................       5,956,000             5,560,000            4,362,000
                                                                          --------------         ------------         ------------
       Total ..........................................................    $  3,517,000           $ 2,235,000          $ 1,398,000
                                                                           ============           ===========          ===========

     Assumptions:

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

     Components of Net Periodic Benefit Cost:

       Service Cost....................................................   $     365,000          $    408,000         $    132,000
       Interest Cost ..................................................         829,000               875,000              375,000
       Expected Return on Plan Assets..................................        (525,000)             (295,000)             (87,000)
       Amortization of Prior Service Credits...........................         922,000               885,000              361,000
       Recognized Actuarial (Gain) Loss................................          (1,000)               68,000
                                                                        ---------------        --------------
       Net Periodic Benefit Cost.......................................    $  1,590,000           $ 1,941,000         $    781,000
                                                                           ============           ===========         ============
</TABLE>

                                                              Page 55

<PAGE>


                  SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

              For the Years Ended December 31, 1999, 1998 and 1997

13.           CAPITAL STOCK PLANS

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

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

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

<TABLE>

<CAPTION>

                                                       Number of                  Option              Weighted

                                                         Shares                    Price           Average Price

<S>                 <C>                                <C>                   <C>       <C>              <C>
Outstanding January 1, 1997 ................           2,998,000             $ 5.00  - $23.33           $15.34

   Granted..................................             459,000              16.25  -  24.50            23.15
   Exercised................................            (705,000)              5.00  -  21.17            11.81
   Canceled.................................             (97,000)              6.31  -  23.33            17.33
                                                     -----------
Outstanding December 31, 1997 ..............           2,655,000               6.31  -  24.50            17.53

   Granted..................................             468,000              16.94  -  24.83            22.49
   Exercised................................            (386,000)              6.31  -  23.33            14.25
   Canceled.................................              (7,000)              7.13  -  24.50            17.01
                                                    ------------
Outstanding December 31, 1998...............           2,730,000               6.31  -  24.83            18.89

   Granted..................................           1,436,000               6.69  -  21.00             9.44
   Exercised................................              (2,000)              6.31  -  12.08             9.41
   Canceled.................................            (260,000)             11.71  -  24.83            19.65
                                                      ----------
Outstanding December 31, 1999...............           3,904,000               6.31  -  24.69            15.37
                                                      ==========

Exercisable at December 31, 1999 ...........           1,737,000             $ 6.31  - $24.69           $17.70
                                                       =========

Available for Grant at

   December 31, 1999 .......................           2,047,000
                                                       =========
</TABLE>

                                                      Page 56

<PAGE>


                  SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

              For the Years Ended December 31, 1999, 1998 and 1997

     The following table summarizes  information about stock options outstanding
at December 31, 1999:

<TABLE>

<CAPTION>

                                Weighted Average                                                Weighted Average

        Range of Exercise       Contractual Life                 Options                         Exercise Price
                                                     --------------------------------   -----------------------
            Prices              Remaining in Days       Outstanding      Exercisable      Outstanding       Exercisable

<S>   <C>        <C>                   <C>              <C>                  <C>            <C>               <C>
      $ 6.31  -  $ 8.00                2,324            1,239,000            15,000         $ 7.78            $ 6.31
        9.91  -   12.88                2,515              187,000           133,000          11.19             11.07
       14.94  -   21.28                1,189            1,724,000         1,362,000          17.69             17.46
       22.17  -   24.69                1,615              754,000           227,000          23.53             23.80
</TABLE>

Employee  Stock  Purchase  Plans.  The Company has employee stock purchase plans
(the  "Purchase  Plans")  whereby  employees may purchase newly issued shares of
stock through payroll  deductions at 85% of the fair market value of such shares
on specified  dates as defined in the Purchase  Plans.  As of December 31, 1999,
the Company had 294,000 shares  reserved for purchase under the Purchase  Plans.
During  1999, a total of 163,000  shares were  purchased at prices of $17.85 and
$11.70  per share.  During  January  2000,  164,000  shares  were  purchased  by
employees at $5.68 per share in connection with the Purchase Plans.

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

<TABLE>

<CAPTION>

                                                                                 For the Years Ended

                                                                1999                  1998                1997
                                                                ----                  ----                ----

<S>                                                        <C>                    <C>                  <C>
Net (Loss) Income                   As reported            $(4,631,000)           $39,596,000          $24,241,000
                                    Pro forma               (9,204,000)            37,106,000           22,177,000

Net (Loss) Income Per Share         As reported                  $(.17)                 $1.45                 $.90
                                    Pro forma                     (.34)                  1.35                  .82

Net (Loss) Income Per Share

    Assuming Dilution               As reported                  $(.17)                 $1.43                 $.88
                                    Pro forma                     (.34)                  1.34                  .81
</TABLE>

The fair value of each option  grant is estimated on the date of grant using the
Black-Scholes   option  pricing  model  with  the  following   weighted  average
assumptions used for grants in 1999, 1998 and 1997, respectively: dividend yield
of 0% for all years; expected volatility of 43%, 37% and 35%; risk-free interest
rates of 5.87%,  4.46% and 5.89%;  and expected lives of four to five years. The
weighted average fair value of options granted in 1999, 1998 and 1997 was $3.77,
$9.92 and $8.27, respectively.

The fair value of the look-back option implicit in each offering of the Purchase
Plans is estimated on the date of grant using the  Black-Scholes  option pricing
model with the following  weighted average  assumptions used for grants in 1999,
1998  and  1997,  respectively:  dividend  yield of 0% for all  years;  expected
volatility of 45%, 32% and 35%;  risk-free  interest  rates of 4.66%,  5.30% and
5.32%; and expected lives of six months for all years.

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

                                                      Page 57

<PAGE>


                  SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

              For the Years Ended December 31, 1999, 1998 and 1997

     Due to the fact that the  Company's  stock option  programs  vest over many
years and additional  awards are made each year, the above pro forma numbers are
not indicative of the financial impact had the disclosure  provisions of FAS 123
been applicable to all years of previous option grants. The above numbers do not
include the effect of options granted prior to 1995.

14.  STATEMENTS OF CASH FLOWS SUPPLEMENTAL INFORMATION

     Supplemental  statements  of cash  flows  information  for the years  ended
December 31, is presented below:

<TABLE>

<CAPTION>

                                                                        1999                1998                  1997
                                                                    ------------        ------------          --------

Cash Paid During the Year for Interest

<S>                                                                 <C>                  <C>                    <C>
    (Net of Amount Capitalized)...............................      $17,721,000          $ 8,737,000            $4,463,000
Cash (Received) Paid During the Year

    for Income Taxes..........................................       (4,590,000)          15,003,000             7,943,000

Noncash Investing and Financing Activities:
    Liabilities Assumed in Connection with
       Corporate Acquisitions.................................                            53,461,000               195,000
    Reductions to Funds Withheld by Ceding
       Insurance Company and Future

       Policy Benefits........................................                                                   8,471,000
    Stock Issued for Exercise of Options
       and Related Tax Benefits...............................            1,000            1,284,000             2,004,000
    Additions to Capital Leases...............................                             3,070,000             4,574,000
</TABLE>

15.        PREMIUM DEFICIENCY, IMPAIRMENT, SETTLEMENT AND OTHER COSTS

1999

Medical  expenses  reported  in the first  quarter  of 1999  included  a premium
deficiency charge of $8.1 million related to losses in under-performing  markets
primarily  in  Arizona  and rural  Nevada.  In the fourth  quarter of 1999,  the
Company  recorded a premium  deficiency  charge of $21.0 million  related to HMO
contracts in the Texas  market.  Of this amount,  $10.0  million was recorded in
medical  expenses and $11.0 million was recorded in the  impairment,  settlement
and other  costs line item.  The $11.0  million is an  estimate  of general  and
administrative  costs, in excess of those covered by premiums,  the Company will
incur to service  the  Dallas/Ft.  Worth  contracts.  Also  recorded  in medical
expenses  during the fourth  quarter is $11.2  million  primarily  related to an
adjustment to the estimate for medical expenses  recorded in previous years, and
$6.8 million  primarily  related to  contractual  settlements  with providers of
medical services.

The remaining $7.8 million of impairment, settlement and other costs consists of
charges in the first  quarter of $5.1  million  and  additional  charges of $2.7
million  in the  fourth  quarter.  In the first  quarter  of 1999,  the  Company
recorded a charge of $4.3 million related primarily to the write-off of goodwill
associated with the Mohave Valley operations.  During the first quarter of 1999,
the Company closed all inpatient  operations at Mohave Valley Hospital, a 12-bed
acute care facility in Bullhead City, Arizona,  and terminated  approximately 45
employees.  The Company also incurred $450,000 for certain legal and contractual
settlements  and $400,000 to provide for the Company's  portion of the write-off
of start-up costs at the Company's equity investee, TriWest Healthcare Alliance.
The remaining  charges in the fourth quarter of 1999 consist  primarily of legal
and contractual settlements.

1998

During the fourth  quarter of 1998,  the Company  incurred  settlement  expenses
totaling $8 million,  $5.9 million  after tax,  related to the  settlement  of a
competitor's  protest for the Region 1 TRICARE contract.  All of this amount was
paid  during  fiscal  year 1998.  On  September  30,  1997,  SMHS was  awarded a
five-year,  $1.2 billion contract to administer  managed health care services to
military families and retirees in 13 northeastern states and Washington,  D.C. A
competing bidder

                                                           Page 58

<PAGE>


                  SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

              For the Years Ended December 31, 1999, 1998 and 1997

protested the contract  award and claimed,  among other issues,  that the United
States  Department of Defense  failed to adequately  disclose the weights of the
significant factors used to evaluate  proposals.  In December 1998, SMHS reached
an agreement to settle the protest.  As part of the  settlement,  the competitor
has foregone any and all rights it may have to challenge the contract  award and
seek re-bid.

During the fourth quarter of 1998, the Company incurred integration,  transition
and other  charges  totaling  $3.1  million,  $2.3  million  after tax,  related
primarily to its acquisition of the Texas operations of Kaiser Foundation Health
Plan. In addition,  the Company  incurred  certain legal expenses  totaling $2.7
million, $2.0 million after tax, resulting primarily from the TRICARE settlement
and acquisition and integration  activity. As of December 31, 1998, $2.8 million
was included in accrued  expenses for these  integration,  transition  and legal
costs incurred through December 31, 1998.

1997

During 1997,  the Company  recorded  and paid  expenses of  approximately  $11.0
million,  $8.4 million after tax, for merger-  related costs. On March 18, 1997,
the Company  announced it had  terminated  its merger  agreement  with Physician
Corporation of America. The original agreement had been entered into in November
1996.

During  the third  quarter  of 1997,  SMHS was  notified  it had been  awarded a
TRICARE  managed care contract by the  Department  of Defense to serve  eligible
beneficiaries in Region 1. This region includes more than 600,000  beneficiaries
in 13 northeastern states and the District of Columbia.  Development expenses of
$18.4 million,  $10.6 million net of taxes,  were recorded in the third quarter,
primarily for expenses  associated with the Company's  proposal to serve TRICARE
beneficiaries  in  Region  1.  Such  expenses  had  been  deferred  until  award
notification. SMHS began health care delivery on June 1, 1998.

16.     UNAUDITED QUARTERLY INFORMATION
           (Amounts in thousands, except per share data)
<TABLE>

<CAPTION>

                                                                 March             June              September         December
                                                                 31                30                30               31
                                                           ---------------   ---------------   ---------------  --------
Year Ended December 31, 1999:

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

Year Ended December 31, 1998:

  Operating Revenues....................................        $210,409          $244,545          $281,082        $301,167
  Operating Income .....................................          17,663            18,550            18,213           6,147
  Income Before Income Taxes ...........................          16,382            16,931            17,006           3,073
  Net Income............................................          12,187            12,551            12,584           2,274
  Earnings Per Share ...................................             .44               .46               .46             .08
  Earnings Per Share Assuming Dilution .................             .44               .45               .46             .08
</TABLE>

17.     SEGMENT REPORTING

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

                                                             Page 59

<PAGE>


                  SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

              For the Years Ended December 31, 1999, 1998 and 1997

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

Information concerning the operations of the reportable segments is as follows:
(Amounts in thousands)
<TABLE>

<CAPTION>

                                                          Managed Care           Military                Workers'
                                                         and Corporate         Health Services           Compensation
                                                         Operations             Operations              Operations          Total

1999

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

Segment Operating Profit..........................       $  23,332              $  11,612             $  21,091        $     56,035
Interest Expense and Other........................         (12,589)                  (910)               (3,256)            (16,755)
Impairment, Settlement and Other Costs............         (39,926)                                      (9,920)            (49,846)
                                                        ----------        ---------------           -----------       -------------
Net (Loss) Income Before Income Taxes.............       $ (29,183)             $  10,702            $    7,915        $    (10,566)
                                                         =========              =========            ==========        ============

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

1998

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

Segment Operating Profit..........................       $  43,314             $    8,620             $  22,490        $     74,424
Interest Expense and Other........................          (2,610)                  (573)               (3,998)             (7,181)
Impairment, Settlement and Other Costs............          (4,869)                (8,982)                                  (13,851)
                                                       ------------           -----------       ---------------       --------------
Net Income (Loss) Before Income Taxes.............       $  35,835            $     ( 935)            $  18,492        $     53,392
                                                         =========            ===========             =========        ============

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

1997

Medical Premiums..................................        $513,857                                                      $   513,857
Military Contract Revenues........................                             $    4,346                                     4,346
Specialty Product Revenues........................          16,297                                     $129,914             146,211
Professional Fees.................................          31,238                                                           31,238
Investment and Other Revenues.....................           8,711                                       17,361              26,072
                                                       -----------        ---------------            ----------       -------------
   Total Revenue..................................        $570,103             $    4,346              $147,275         $   721,724
                                                          ========             ==========              ========         ===========

Segment Operating Profit..........................       $  46,033            $       153             $  15,072        $     61,258
Interest Expense and Other........................            (371)                                      (4,062)             (4,433)
Impairment, Settlement and Other Costs............         (12,600)               (16,750)                                  (29,350)
                                                        ----------             ----------       ---------------       -------------
Net Income (Loss) Before Income Taxes.............       $  33,062              $ (16,597)            $  11,010        $     27,475
                                                         =========              ==========            =========        ============

Segment Assets....................................        $373,652             $    6,859              $343,425         $   723,936
Capital Expenditures..............................          43,825                    639                11,178              55,642
Depreciation and Amortization.....................          12,491                     69                   950              13,510
</TABLE>

                                                              Page 60

<PAGE>



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

      None.

                                                     PART III

ITEM 10.      DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information set forth under the caption  "Election of Directors" in Sierra's
Proxy  Statement for its 2000 Annual Meeting of  Stockholders,  is  incorporated
herein by reference.

ITEM 11.      EXECUTIVE COMPENSATION

The information set forth under the caption "Compensation of Executive Officers"
in Sierra's  Proxy  Statement for its 2000 Annual  Meeting of  Stockholders,  is
incorporated herein by reference.

ITEM 12.      SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The  information  set forth under the  caption  "Security  Ownership  of Certain
Beneficial  Owners and  Management"  in Sierra's  Proxy  Statement  for its 2000
Annual Meeting of Stockholders, is incorporated herein by reference.

ITEM 13.      CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information set forth under the caption "Certain  Relationships  and Related
Transactions"  in  Sierra's  Proxy  Statement  for its 2000  Annual  Meeting  of
Stockholders, is incorporated herein by reference.

                                                      Page 61

<PAGE>



                                                      PART IV

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

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

<TABLE>
<CAPTION>

                                                                                                     Page

<S>                                                                                                    <C>
        Independent Auditors' Report.............................................................      34
        Consolidated Balance Sheets at December 31, 1999 and 1998................................      35
        Consolidated Statements of Operations for the Years Ended
           December 31, 1999, 1998 and 1997......................................................      36
        Consolidated Statements of Stockholders' Equity
           for the Years Ended December 31, 1999, 1998 and 1997..................................      37
        Consolidated Statements of Cash Flows for the Years Ended
           December 31, 1999, 1998 and 1997......................................................      38
        Notes to Consolidated Financial Statements...............................................      39

(a)(2) Financial Statement Schedules:

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

        Schedule V           -   Supplemental Information Concerning

                                   Property-Casualty Insurance ..................................     S-4

        Section 403.04 b     -   Reconciliation of Beginning and Ending Loss
                                 and Loss Adjustment Expense Reserves

                                   and Exhibit of Redundancies (Deficiencies) ...................     S-5
</TABLE>

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

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

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

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

       (3.3)      Amended  and  Restated  Bylaws of the  Registrant,  as amended
                  through  December  12,  1997,  incorporated  by  reference  to
                  Exhibit 3.3 to the Registrant's Annual Report on Form 10-K for
                  the fiscal year ended December 31, 1997.

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

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


                                                      Page 62

<PAGE>



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

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

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

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

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

      (10.4)      Credit  Agreement  dated as of October 30, 1998,  among Sierra
                  Health  Services,  Inc. as Borrower,  Bank of America National
                  Trust and  Savings  Association  as  Administrative  Agent and
                  Issuing Bank, First Union National Bank as Syndication  Agent,
                  and the Other Financial  Institutions Party Thereto,  dated as
                  of October 30, 1998, incorporated by reference to Exhibit 10.4
                  to the  Registrant's  Annual Report on Form 10-K filed for the
                  fiscal year ended December 31, 1998.

      (10.5)      First  Amendment  to  Credit  Agreement  among  Sierra  Health
                  Services,  Inc., as Borrower,  Bank of America  National Trust
                  and Savings  Association as  Administrative  Agent and Issuing
                  Bank and the Other Financial Institutions Party Thereto, dated
                  as of November 23, 1998,  incorporated by reference to Exhibit
                  10.5 to the Registrant's  Annual Report on Form 10-K filed for
                  the fiscal year ended December 31, 1998.

      (10.6)      Second  Amendment  to Credit  Agreement  among  Sierra  Health
                  Services, Inc. as borrower, Bank of America National Trust and
                  Savings  Association  as  Administrative  Agent  and the Other
                  Financial  Institutions Party Thereto, dated as of January 15,
                  1999,  incorporated  by  reference  to  Exhibit  10.6  to  the
                  Registrant's  Annual  Report on Form 10-K filed for the fiscal
                  year ended December 31, 1998.

     (10.7) Third Amendment to Credit  Agreement  among Sierra Health  Services,
Inc. as borrower,  Bank of America  National  Trust and Savings  Association  as
Administrative Agent and the Other Financial  Institutions Party Thereto,  dated
as of September 30, 1999.

      (10.8)      Compensatory Plans, Contracts and Arrangements.

                  (1)   Employment  Agreement  with  Jonathon  W.  Bunker  dated
                        November 15, 1997,  incorporated by reference to Exhibit
                        10.6 to Registrant's  Annual Report on Form 10-K for the
                        fiscal year ended December 31, 1997.

                  (2)   Employment   Agreement   with  Frank  E.  Collins  dated
                        November 15, 1997,  incorporated by reference to Exhibit
                        10.6 to Registrant's  Annual Report on Form 10-K for the
                        fiscal year ended December 31, 1997.

                                                      Page 63

<PAGE>




     (3)   Employment Agreement with William R. Godfrey dated December 10, 1999.

     (4)   Employment Agreement with Laurence S. Howard dated December 10, 1999.

                  (5)   Employment  Agreement with Anthony M. Marlon, M.D. dated
                        November 15, 1997,  incorporated by reference to Exhibit
                        10.6 to Registrant's  Annual Report on Form 10-K for the
                        fiscal year ended December 31, 1997.

                  (6)   Employment   Agreement  with  Erin  E.  MacDonald  dated
                        November 15, 1997,  incorporated by reference to Exhibit
                        10.6 to Registrant's  Annual Report on Form 10-K for the
                        fiscal year ended December 31, 1997.

                  (7)   Employment  Agreement  with  Michael A.  Montalvo  dated
                        November 15, 1997,  incorporated by reference to Exhibit
                        10.6 to Registrant's  Annual Report on Form 10-K for the
                        fiscal year ended December 31, 1997.

                  (8)   Employment  Agreement with Marie H. Soldo dated November
                        15, 1997,  incorporated  by reference to Exhibit 10.6 to
                        Registrant's  Annual  Report on Form 10-K for the fiscal
                        year ended December 31, 1997.

                  (9)   Employment  Agreement with Paul H. Palmer dated November
                        20, 1998,  incorporated by reference to Exhibit 10.7(10)
                        to  Registrant's  Annual  Report  on Form  10-K  for the
                        fiscal year ended December 31, 1998.

     (10) Draft of Split Dollar Life Insurance Agreement effective as of July 1,
1997, by and between Sierra Health Services,  Inc., and Jonathon W. Bunker,  Ria
Marie Carlson, Frank E. Collins, William R. Godfrey, Laurence S. Howard, Erin E.
MacDonald,  Anthony M. Marlon,  M.D.,  Kathleen M. Marlon,  Michael A. Montalvo,
John A.  Nanson,  M.D.,  Marie H.  Soldo,  and James L. Starr,  incorporated  by
reference to Exhibit 10.2 to the Registrant's  Quarterly Report on Form 10-Q for
the fiscal quarter ended June 30, 1997.

     (11) Sierra Health Services,  Inc. Deferred Compensation Plan effective May
1, 1996 as Amended and Restated  Effective  January 1, 2000, dated as of January
1, 2000.

                  (12)  Sierra  Health  Services,  Inc.  Supplemental  Executive
                        Retirement  Plan effective as of July 1, 1997,  dated as
                        of July 7, 1997,  incorporated  by  reference to Exhibit
                        10.4 to the  Registrant's  Quarterly Report on Form 10-Q
                        for the fiscal quarter ended June 30, 1997.

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

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

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

     (16) Sierra Health Services, Inc. Management Incentive Compensation Plan.

                  (17)  Sierra Health  Services,  Inc. 1995 Long-Term  Incentive
                        Plan,  as amended and  restated  through  May 18,  1998,
                        incorporated   by  reference  to  Exhibit  10.4  to  the
                        Registrant's  Quarterly  Report  on  Form  10-Q  for the
                        fiscal quarter ended June 30, 1998.

                                                      Page 64

<PAGE>




                  (18)  Sierra   Health   Services,   Inc.   1995   Non-Employee
                        Directors'  Stock Plan, as amended and restated  through
                        May 18, 1998,  incorporated by reference to Exhibit 10.5
                        to the  Registrant's  Quarterly  Report on Form 10-Q for
                        the fiscal quarter ended June 30, 1998.

     (19) First  Amendment to Sierra Health  Services,  Inc.  1995  Non-Employee
Directors'  Stock Plan,  as amended and  restated  through May 18,  1998,  dated
November 6, 1999.

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

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

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

     (10.12)      Asset Sale and Purchase  Agreement  between Kaiser  Foundation
                  Health Plan of Texas, A Texas  Non-Profit  Corporation and HMO
                  Texas, L.C., a Texas Limited Liability Company,  dated June 5,
                  1998,  incorporated  by  reference  to  Exhibit  10.2  to  the
                  Registrant's  Quarterly  Report  on Form  10-Q for the  fiscal
                  quarter ended June 30, 1998.*

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

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


                                                      Page 65

<PAGE>



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

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

                                                           Jurisdiction of

                                                           Incorporation

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

      (23.1)      Consent of Deloitte & Touche LLP

      (27.1)      Financial Data Schedule --  1999

     (99)  Registrant's  current  report  on Form  8-K  dated  March  15,  2000,
incorporated herein.

            All other Exhibits are omitted because they are not applicable.

(b)         Reports on Form 8-K

(d)         Financial Statement Schedules

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

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

                                                      Page 66

<PAGE>



                                                    SIGNATURES

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

                                          SIERRA HEALTH SERVICES, INC.


                                          By:         /S/ ANTHONY M. MARLON
                                                   ------------------------
                                                     Anthony M. Marlon, M.D.
Date:  March 24, 2000

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


<CAPTION>
Signature                                          Title                                     Date

<S>                                                                                                    <C>
   /S/ ANTHONY M. MARLON, M.D.                     Chief Executive Officer                   March 24, 2000
------------------------------------------
   Anthony M. Marlon, M.D.                         and Chairman of the Board
                                                   (Chief Executive Officer)


   /S/ PAUL H. PALMER                              Vice President of Finance,                March 24, 2000
------------------------------------------
   Paul H. Palmer                                  Chief Financial Officer,
                                                   and Treasurer
                                                   (Chief Accounting Officer)


   /S/ ERIN E. MACDONALD                           President and                             March 24, 2000
------------------------------------------
   Erin E. MacDonald                               Chief Operating Officer
                                                   Director

   /S/ CHARLES L. RUTHE                            Director                                  March 24, 2000
------------------------------------------
        Charles L. Ruthe

   /S/ WILLIAM J. RAGGIO                           Director                                  March 24, 2000
------------------------------------------
        William J. Raggio

   /S/ THOMAS Y. HARTLEY                           Director                                  March 24, 2000
------------------------------------------
        Thomas Y. Hartley
</TABLE>

                                                      Page 67

<PAGE>



                  SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
           SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT

                 CONDENSED BALANCE SHEETS - Parent Company Only

<TABLE>

<CAPTION>

                                                                                            December 31,

                                                                                      1999               1998
                                                                                ----------------   ----------
CURRENT ASSETS:
<S>                                                                            <C>                   <C>
     Cash and Cash Equivalents ..........................................      $       194,000       $   7,945,000
     Short-term Investments..............................................            1,149,000           3,919,000
     Prepaid Expenses and Other Current Assets...........................           32,606,000           9,189,000
                                                                                 -------------      --------------
           Total Current Assets..........................................           33,949,000          21,053,000

PROPERTY AND EQUIPMENT - NET ............................................           71,121,000          45,699,000
EQUITY IN NET ASSETS OF SUBSIDIARIES ....................................          341,994,000         375,910,000
NOTES RECEIVABLE FROM SUBSIDIARIES ......................................            9,517,000           9,677,000
GOODWILL ................................................................            2,188,000           2,275,000
OTHER ...................................................................           50,271,000          30,817,000
                                                                                 -------------       -------------

TOTAL ASSETS ............................................................         $509,040,000        $485,431,000
                                                                                  ============        ============

CURRENT LIABILITIES:
     Accounts Payable and Other Accrued Liabilities .....................        $  41,212,000       $  24,422,000
     Current Portion of Long-term Debt ..................................              393,000             393,000
                                                                              ----------------     ---------------
           Total Current Liabilities ....................................           41,605,000          24,815,000

LONG-TERM DEBT (Less Current Portion)....................................          160,000,000         139,429,000
OTHER LIABILITIES .......................................................           29,023,000          17,473,000
                                                                                --------------      --------------
TOTAL LIABILITIES .......................................................          230,628,000         181,717,000
                                                                                 -------------       -------------

STOCKHOLDERS' EQUITY:
     Capital Stock ......................................................              142,000             141,000
     Additional Paid-in Capital .........................................          175,915,000         173,583,000
     Treasury Stock .....................................................          (22,789,000)        (14,821,000)
     Accumulated Other Comprehensive Income:
           Unrealized Holding (Loss) on Available-for-sale

                Investments .............................................          (16,063,000)         (1,027,000)
     Retained Earnings ..................................................          141,207,000         145,838,000
                                                                                 -------------       -------------
           Total Stockholders' Equity ...................................          278,412,000         303,714,000
                                                                                 -------------       -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY...............................         $509,040,000        $485,431,000
                                                                                  ============        ============


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

     Year Ending December 31,

          2001...........................................................      $       393,000
          2003...........................................................          160,000,000
                                                                                 -------------
              Total......................................................         $160,393,000
                                                                                  ============
</TABLE>

                                                        S-1

<PAGE>



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

<TABLE>

<CAPTION>

                                                                           Year Ended December 31,
                                                               -----------------------------------
                                                                    1999                1998           1997
                                                              ----------------    -------------------------
OPERATING REVENUES:
<S>                                                              <C>               <C>              <C>
    Management Fees........................................      $52,109,000       $52,773,000      $47,303,000
    Subsidiary Dividends...................................        9,700,000         4,085,000        1,700,000
    Investment and Other Income............................        4,600,000         5,564,000        6,688,000
                                                               -------------     -------------      -----------
       Total Operating Revenues............................       66,409,000        62,422,000       55,691,000
                                                                ------------      ------------      -----------

GENERAL AND ADMINISTRATIVE EXPENSES:
    Depreciation...........................................        6,311,000         5,329,000        3,707,000
    Other..................................................       43,789,000        34,715,000       26,799,000
    Impairment, Settlement and Other Costs.................       14,552,000         4,569,000       29,350,000
                                                                ------------     -------------      -----------
       Total General and Administrative....................       64,652,000        44,613,000       59,856,000

INTEREST EXPENSE AND OTHER, NET............................      (12,741,000)       (2,566,000)        (676,000)

EQUITY IN UNDISTRIBUTED
    (LOSS) EARNINGS OF SUBSIDIARIES........................      (10,461,000)       28,364,000       25,615,000
                                                                 -----------      ------------      -----------

(LOSS) INCOME BEFORE INCOME TAXES..........................      (21,445,000)       43,607,000       20,774,000

BENEFIT (PROVISION) FOR
     INCOME TAXES..........................................        16,814,000       (4,011,000)       3,467,000
                                                                -------------     ------------      -----------

NET (LOSS) INCOME..........................................      $(4,631,000)      $39,596,000      $24,241,000
                                                                 ===========       ===========      ===========
</TABLE>

                                                        S-2

<PAGE>



                  SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
     SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)
            CONDENSED STATEMENTS OF CASH FLOWS -- Parent Company Only

<TABLE>

<CAPTION>

                                                                                            Year Ended December 31,
                                                                                 ----------------------------------
                                                                                    1999              1998               1997
                                                                               --------------    --------------     ---------

CASH FLOWS FROM OPERATING ACTIVITIES:
<S>                                                                              <C>                <C>               <C>
      Net (Loss) Income....................................................      $ (4,631,000)      $39,596,000       $24,241,000
      Adjustments to Reconcile Net (Loss) Income to Net Cash
          Provided by Operating Activities:
             Depreciation and Amortization.................................         6,398,000         5,416,000         3,885,000
             Equity in Undistributed Earnings of Subsidiaries..............        10,461,000       (28,364,000)      (25,615,000)
             Change in Assets and Liabilities..............................       (14,505,000)        8,021,000         8,638,000
                                                                                 ------------     -------------     -------------
                 Net Cash (Used For) Provided by Operating Activities......        (2,277,000)       24,669,000        11,149,000
                                                                                -------------      ------------      ------------

CASH FLOWS FROM INVESTING ACTIVITIES:
      Capital Expenditures, Net ...........................................       (31,804,000)      (22,294,000)      (26,453,000)
      Decrease (Increase) in Investments...................................         2,655,000        (1,492,000)       15,552,000
      Dividends from Subsidiaries..........................................         9,700,000         4,085,000         1,700,000
      Acquisitions, Net of Cash Acquired ..................................        (3,000,000)       (7,500,000)       (3,145,000)
      Dispositions, Net of Cash Disposed ..................................                           1,373,000
      Decrease (Increase) in Net Assets in Subsidiaries....................        (7,080,000)     (125,488,000)      (30,816,000)
                                                                                -------------      ------------      ------------
          Net Cash Used for Investing Activities ..........................       (29,529,000)     (151,316,000)      (43,162,000)
                                                                                 ------------      ------------      ------------

CASH FLOWS FROM FINANCING ACTIVITIES:
      Proceeds from Long-term Borrowing ...................................        79,000,000       166,000,000        25,000,000
      Reductions in Long-term Obligations and
          Payments on Capital Leases.......................................       (49,469,000)      (45,424,000)         (480,000)
      Proceeds from Note Receivable to Subsidiaries........................           160,000            67,000            60,000
      Purchase of Treasury Stock ..........................................        (7,968,000)       (9,220,000)       (5,471,000)
      Exercise of Stock in Connection with Stock Plans.....................         2,332,000         8,054,000        10,258,000
                                                                               --------------      ------------      ------------
          Net Cash Provided by Financing Activities........................        24,055,000       119,477,000        29,367,000
                                                                                -------------       -----------      ------------

Net Decrease in Cash and Cash Equivalents..................................        (7,751,000)       (7,170,000)       (2,646,000)
Cash and Cash Equivalents at Beginning of Year.............................         7,945,000        15,115,000        17,761,000
                                                                               --------------      ------------      ------------
Cash and Cash Equivalents at End of Year...................................    $      194,000      $  7,945,000       $15,115,000
                                                                               ==============      ============       ===========



Supplemental condensed statements of cash flows information:

Cash Paid During the Year for Interest

      (Net of Amount Capitalized)..........................................      $ 11,210,000      $  2,030,000       $   632,000
Cash (Received) Paid During the Year for Income Taxes......................        (4,702,000)       14,788,000         7,916,000

Noncash Investing and Financing Activities:
      Stock Issued for Exercise of Options
          and Related Tax Benefits.........................................              1,000        1,284,000         2,004,000
      Liabilities Assumed in Connection
          with Corporate Acquisition.......................................                           1,233,000
</TABLE>

                                                                  S-3

<PAGE>



                          SIERRA HEALTH SERVICES, INC.
                            SUPPLEMENTAL INFORMATION

                    CONCERNING PROPERTY -- CASUALTY INSURANCE

                             (amounts in thousands)

<TABLE>

<CAPTION>

                                      Gross

                                               Reserves
                                  Deferred    for Unpaid

                                   Policy     Claims and Discount if any                Gross
                                 Acquisition  Adjustment   Deducted in   Unearned      Earned

Affiliation With                    Costs      Expenses     Column C     Premiums     Premiums
Registrant Column A               Column B     Column C     Column D     Column E     Column F
-------------------               --------     --------     --------     --------     --------

Consolidated Property and
  Casualty Entities of CII
  Financial, Inc. for
  Years Ended:

<S>           <C> <C>              <C>         <C>                        <C>          <C>
     December 31, 1999........     $2,378      $244,394            --     $13,300      $146,698
     December 31, 1998........      1,804       212,263            --      11,158       154,104
     December 31, 1997........      1,800       202,699            --      11,285       134,262
</TABLE>

<TABLE>

<CAPTION>

                                                   Claims & Claim
                                                     Adjustment        Amortization

                                                  Expenses Incurred     of Deferred  Paid Claims
                                     Net             Related to           Policy     and Claims      Direct
                                             --------------------------
                                 Investment       (1)          (2)      Acquisition  Adjustment     Premiums
Affiliation With                   Income       Current    Prior Year      Costs      Expenses       Written
Registrant Column A               Column G       Year       Column H     Column I     Column J      Column K
-------------------               --------    ----------    --------     --------     --------      --------

Consolidated Property and
  Casualty Entities of CII
  Financial, Inc. for
  Years Ended:

<S>           <C> <C>              <C>          <C>         <C>          <C>          <C>           <C>
     December 31, 1999........     $15,772      $51,541     $ 9,920      $11,260      $101,622      $148,856
     December 31, 1998........     18,241       103,990       (9,643)      24,783       101,524     153,914
     December 31, 1997........     16,780       102,301       (8,970)      26,211        83,788     135,580
</TABLE>

                                                                S-4

<PAGE>


                  SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES

                                 SECTION 403.04b

              RECONCILIATION OF BEGINNING AND ENDING LOSS AND LOSS
                           ADJUSTMENT EXPENSE RESERVES

                   AND EXHIBIT OF REDUNDANCIES (DEFICIENCIES)

                                 (in thousands)

<TABLE>

                                                                                                              Year ended December 31
                        ------------------------------------------------------------------------------------------------------------
<CAPTION>

                          1999      1998       1997       1996     1995       1994     1993       1992     1991      1990      1989
                       --------  --------    --------  --------  --------  --------  --------   -------- --------   --------  -----
Losses and LAE


<S>                     <C>       <C>        <C>       <C>       <C>       <C>       <C>       <C>       <C>      <C>       <C>
    Reserve...........  $244,394  $212,263   $202,699  $187,776  $182,318  $190,962  $200,356  $178,460  $112,749 $ 67,593  $37,466

Less Reinsurance

    Recoverables (1)..   110,089    37,797     21,056    15,676    25,871    29,342    25,841    20,207
                        --------  --------   -------- --------   --------   --------  --------  --------

Net Loss and LAE

    Reserves .........   134,305   174,466    181,643   172,100   156,447   161,620   174,515   158,253

Net Reserve
  Re-estimated as of:
    1 Year Later .....             184,386    172,000   163,130   141,163   139,741   160,562   154,388  140,815   83,841    37,463
    2 Years Later ....                        173,596   146,987   132,193   125,279   141,100   147,167  142,447   96,011    39,753
    3 Years Later ....                                  140,563   113,766   117,792   126,483   134,747  143,433   97,142    43,528
    4 Years Later ....                                            102,652   102,955   122,517   132,193  137,143   97,942    44,404
    5 Years Later ....                                                       95,997   114,443   131,112  135,249   94,852    45,027
    6 Years Later ....                                                                112,284   127,258  135,299    93,561   44,543
    7 Years Later ....                                                                          125,936  133,729    93,672   43,741
    8 Years Later ....                                                                                   132,696    92,851   43,682
    9 Years Later ....                                                                                              92,104   43,682
    10 Years Later....                                                                                                       43,219

Cumulative Redundancy

    (Deficiency) .....              (9,920)      8,047   31,537    53,795    65,623    62,231    32,317  (19,947)  (24,511)  (5,753)

Cumulative Net Paid
    as of:
    1 Year Later .....              80,416      71,933   56,977    45,731    44,519    50,210    50,360    57,611   39,118   14,820
    2 Years Later ....                         117,794   91,765    70,854    68,619    79,788    84,465    89,177   65,165   28,657
    3 Years Later ....                                  113,054    83,674    80,645    94,865   104,569   108,849   76,988   36,579
    4 Years Later ....                                             91,115    86,381   102,395   114,293   120,539   83,822   39,345
    5 Years Later ....                                                       89,601   106,012   119,462   126,100   87,618   41,043
    6 Years Later ....                                                                107,850   122,000   129,060   89,607   41,962
    7 Years Later ....                                                                          123,291   130,649   90,721   42,541
    8 Years Later ....                                                                                    131,346   91,354   42,818
    9 Years Later ....                                                                                              91,598   43,054
    10 Years Later....                                                                                                       43,116

Net Reserve...........   134,305    174,466    181,643  172,100    56,447   161,620   174,515
Reins. Recoverables...   110,089     37,797     21,056   15,676    25,871    29,342    25,841
                        -------- ----------   -------- --------   --------  --------  --------
Gross Reserve ........  $244,394    212,263    202,699  187,776   182,318   190,962   200,356
                        ========    -------    -------  -------   -------   -------   -------

Net Re-estimated

  Reserve ............              184,386    173,596  140,563   102,652    95,997   112,284
Re-estimated Reins.
    Recoverables .....               43,732     18,822   15,537    15,484    13,894    11,834
                                  ---------   --------  -------   -------   -------   -------
Gross Re-estimated

    Reserve ..........              228,118    192,418  156,100   118,136   109,891   124,118
                                  ---------   --------  -------   -------   -------  --------
Gross Cumulative
    Redundancy

      (Deficiency)....            $(15,855)   $ 10,281 $ 31,676   $64,182  $ 81,071  $ 76,238
                                  ========    ========   ========    =======   ========   ========
</TABLE>

     (1) Amounts reflect reinsurance  recoverable under prospective  reinsurance
contracts  only.  The  Company  adopted  Financial  Accounting  Standards  Board
Statement No. 113 ("FAS 113"),  "Accounting and Reporting for Short-Duration and
Long-Duration  Reinsurance  Contracts"  for the year ended December 31, 1992. As
permitted,  prior  financial  statements  have  not been  restated.  Reinsurance
recoverables  on  unpaid  losses  and LAE are  shown as an asset on the  balance
sheets  at  December   31,  1999  and  1998.   However,   for  purposes  of  the
reconciliation and development tables, loss and LAE information are shown net of
reinsurance.

                                                              S-5

<PAGE>