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

                                                     Form 10-Q


(Mark One)
                                                         X

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

For the quarterly period ended       September 30, 1998                   
                                     --------- --- ---------------------------

                                       OR

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


For the transition period from                                           to

Commission File Number 1-8865


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

                          NEVADA                                  88-0200415
              (State or other jurisdiction of                 (I.R.S. Employer
              incorporation or organization)                Identification No.)


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

                                 (702) 242-7000
              (Registrant's telephone number, including area code)

                                       N/A
 (Former name, former address and former fiscal year,
   if changed since last report)

     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

     As of  October  30,  1998  there  were  27,130,000  shares of common  stock
outstanding.


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<PAGE>




                  SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
                                    FORM 10-Q
                  FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998

                                      INDEX
                                                                     Page No.

Part I - FINANCIAL INFORMATION

      Item l.     Financial Statements

                  Condensed Consolidated Balance Sheets -
                    September 30, 1998 and December 31, 1997.....        3

                  Condensed Consolidated Statements of Operations -
                    three and nine months ended September 30, 1998
                    and September 30, 1997..................... ..       4

                  Condensed Consolidated Statements of Cash Flows -
                    nine months ended September 30, 1998
                    and September 30, 1997.......................        5

                  Notes to Condensed Consolidated Financial Statements   6

      Item 2.     Management's Discussion and Analysis of
                    Financial Condition and Results of Operations...     9

      Item 3.     Quantitative and Qualitative Disclosures
                    about Market Risk.................................   17



Part II - OTHER INFORMATION

      Item l.     Legal Proceedings...............................       18

      Item 2.     Changes in Securities...........................       18

      Item 3.     Defaults Upon Senior Securities.................       18

      Item 4.     Submission of Matters to a Vote of Security Holders....18

      Item 5.     Other Information......................................18

      Item 6.     Exhibits and Reports on Form 8-K.......................18

Signature................................................................19



                                                     Page 2

<PAGE>



                         PART I - FINANCIAL INFORMATION

Item 1.  FINANCIAL STATEMENTS

                  SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
                      CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>

<CAPTION>
                                                                                        September 30           December 31
                                                                                            1998                  1997
                                                                                      -----------------     ----------
CURRENT ASSETS:

<S>                                                                                     <C>                   <C>
  Cash and Cash Equivalents...................................................          $  84,179,000         $  96,841,000
  Short-term Investments......................................................            134,022,000           115,498,000
  Accounts Receivable (Less: Allowance for Doubtful
     Accounts:  1998 - $7,767,000; 1997 - $7,916,000).........................             80,736,000            42,041,000
 Prepaid Expenses and Other Assets............................................             47,310,000            46,226,000
                                                                                        -------------         -------------
     Total Current Assets.....................................................            346,247,000           300,606,000
                                                                                         ------------          ------------

LAND, BUILDINGS AND EQUIPMENT.................................................            226,914,000           197,917,000
  Less-Accumulated Depreciation...............................................            (61,067,000)          (49,086,000)
                                                                                        -------------         -------------
     Land, Buildings and Equipment - Net......................................            165,847,000           148,831,000

  LONG-TERM INVESTMENTS.......................................................            155,984,000           155,153,000
  RESTRICTED CASH AND INVESTMENTS.............................................             17,895,000            16,540,000
  REINSURANCE RECOVERABLE (Less Current Portion)                                           20,965,000            20,245,000
  GOODWILL ...................................................................             41,403,000            42,803,000
  OTHER ASSETS................................................................             45,663,000            39,758,000
                                                                                        -------------         -------------
TOTAL ASSETS..................................................................           $794,004,000          $723,936,000
                                                                                         ============          ============

CURRENT LIABILITIES:
  Accounts Payable and Other Accrued Liabilities..............................          $  58,653,000         $  58,439,000
  Medical Claims Payable......................................................             99,192,000            55,943,000
  Current Portion of Reserves for Losses and
     Loss Adjustment Expense .................................................             74,085,000            63,358,000
  Unearned Premium Revenue....................................................             18,524,000            29,763,000
  Current Portion of Long-term Debt...........................................              7,995,000             4,726,000
                                                                                       --------------          ------------
     Total Current Liabilities................................................            258,449,000           212,229,000

RESERVES FOR LOSSES AND LOSS ADJUSTMENT
  EXPENSE (Less Current Portion)..............................................            132,394,000           139,341,000
LONG-TERM DEBT (Less Current Portion).........................................             81,485,000            90,841,000
OTHER LIABILITIES.............................................................             19,866,000            15,843,000
                                                                                         ------------         -------------
TOTAL LIABILITIES.............................................................            492,194,000           458,254,000
                                                                                         ------------          ------------

STOCKHOLDERS' EQUITY:
  Preferred Stock, $.01 Par Value,
    1,000,000 Shares Authorized; None Issued
  Common Stock, $.005 Par Value
    60,000,000 Shares Authorized;
    Shares Issued:  1998 - 28,096,000; 1997 - 27,709,000......................                140,000              139,000
  Additional Paid-in Capital..................................................            171,215,000          164,247,000
  Treasury Stock: 1998 - 955,550; 1997 - 426,800 Common Shares................            (14,617,000)          (5,601,000)
  Unrealized Holding Gain on
      Available-for-Sale Securities...........................................              1,508,000              655,000
  Retained Earnings...........................................................            143,564,000          106,242,000
                                                                                        -------------        -------------
TOTAL STOCKHOLDERS' EQUITY....................................................            301,810,000          265,682,000
                                                                                         ------------        -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                               $794,004,000         $723,936,000
                                                                                         ============         ============
</TABLE>

            See notes to condensed consolidated financial statements.

                                                     Page 3

<PAGE>



                  SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES

                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>

<CAPTION>
                                                                   Three Months Ended                  Nine Months Ended
                                                                       September 30                       September 30
                                                               ---------------------------       ---------------------
                                                                1998               1997             1998              1997
                                                            ------------       ------------     ------------      --------
OPERATING REVENUES:

<S>                                                          <C>              <C>               <C>             <C>
  Medical Premium Revenues  ..........................       $145,990,000     $131,528,000      $427,029,000    $379,117,000
  Specialty Product Revenues  ........................         44,016,000       37,596,000       120,898,000     109,388,000
  Military Contract Revenues  ........................         72,418,000                        132,806,000
  Professional Fees...................................         10,939,000        8,004,000        33,033,000      23,063,000
  Investment and Other Revenues ......................          7,719,000        6,731,000        22,270,000      19,190,000
                                                                ---------    --------------
    Total ............................................        281,082,000      183,859,000       736,036,000     530,758,000
                                                             ------------     ------------      ------------    ------------

OPERATING EXPENSES:
  Medical Expenses....................................        122,261,000      107,258,000       356,059,000     308,747,000
  Specialty Product Expenses..........................         42,390,000       36,361,000       118,149,000     107,360,000
  Military Contract Expenses..........................         71,082,000                        128,101,000
  General, Administrative and Marketing...............         27,136,000       24,655,000        79,301,000      69,721,000
  Merger and Start-up Expenses........................                          18,350,000                        29,350,000
                                                                                ---------- --------------------- -----------
     Total ...........................................        262,869,000      186,624,000       681,610,000     515,178,000
                                                             ------------     ------------       -----------    ------------

OPERATING (LOSS) INCOME...............................         18,213,000       (2,765,000)       54,426,000      15,580,000

INTEREST EXPENSE AND OTHER, NET...............                 (1,207,000)        (940,000)       (4,107,000)     (3,549,000)
                                                               ----------      -----------     -------------   -------------

INCOME (LOSS) BEFORE INCOME TAXES...............               17,006,000       (3,705,000)       50,319,000      12,031,000

(PROVISION) BENEFIT FOR INCOME TAXES...............            (4,422,000)       4,200,000       (12,997,000)        423,000
                                                               ----------    -------------     -----------------------------

NET INCOME ...........................................       $ 12,584,000    $     495,000      $ 37,322,000    $ 12,454,000
                                                             ============    =============      ============    ============

NET INCOME PER COMMON SHARE...............                           $.46             $.02             $1.36            $.46
                                                                     ====             ====
NET INCOME PER COMMON SHARE
 ASSUMING DILUTION...............                                    $.46             $.02             $1.34            $.46
                                                                     ====             ====

WEIGHTED AVERAGE COMMON SHARES
 OUTSTANDING........................                           27,433,000       27,114,000        27,462,000      26,948,000
                                                               ==========    =============     =============   =============

WEIGHTED AVERAGE COMMON SHARES
  OUTSTANDING ASSUMING DILUTION...............                 27,633,000       27,567,000        27,836,000      27,326,000
                                                               ==========    ================= =============   =============

</TABLE>

     See accompanying notes to condensed consolidated financial statements.

                                                     Page 4

<PAGE>



                  SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES

                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>

<CAPTION>
                                                                                   Nine Months Ended September 30

                                                                                         1998                 1997
                                                                                     ------------         --------

CASH FLOWS FROM OPERATING ACTIVITIES:
<S>                                                                                   <C>                 <C>
   Net Income..............................................................           $37,322,000         $ 12,454,000
   Adjustments to Reconcile Net Income to Net Cash
       Provided by Operating Activities:
          Depreciation and Amortization..................................             13,274,000             9,921,000
          Provision for Doubtful Accounts...............................               4,314,000             3,161,000
   Changes in Assets and Liabilities....................................             (11,725,000)            4,753,000
                                                                                   -------------          ------------
       Net Cash Provided by Operating Activities.......................               43,185,000            30,289,000
                                                                                  ------------------------------------

CASH FLOWS FROM INVESTING ACTIVITIES:
   Capital Expenditures, Net of Equipment Dispositions.....................          (25,597,000)          (34,102,000)
   Changes in Short-term Investments.......................................          (18,345,000)           18,708,000
   Changes in Long-term Investments........................................              (38,000)          (37,292,000)
   Changes in Restricted Cash and Investments...............................          (1,228,000)           (2,106,000)
   Corporate Acquisition, Net of Cash Acquired.............................                                 (3,200,000)
   Corporate Disposition, net of cash disposed............................             1,373,000
                                                                                   -------------
       Net Cash Used for Investing Activities.............................           (43,835,000)          (57,992,000)
                                                                                    ------------          ------------

CASH FLOWS FROM FINANCING ACTIVITIES:
   Proceeds from Borrowings...............................................            30,200,000            17,000,000
   Payments on Debt and Capital Leases...................................            (39,357,000)           (1,812,000)
   Exercise of Stock in Connection with Stock Plans........................            6,161,000             8,464,000
   Purchase of Treasury Stock..............................................           (9,016,000)           (5,471,000)
                                                                                  --------------         -------------
        Net Cash (used for) Provided by Financing Activities.............            (12,012,000)           18,181,000
                                                                                  --------------          ------------

NET DECREASE IN CASH AND CASH EQUIVALENTS.................................           (12,662,000)           (9,522,000)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR............................            96,841,000           103,587,000
                                                                                   -------------          ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD................................          $ 84,179,000          $ 94,065,000
                                                                                    ============          ============

                                                                                       Nine Months Ended September 30

Supplemental Condensed Consolidated
    Statements of Cash Flows Information:                                                 1998                   1997
    ---------- -- ---- ----- ------------                                                 ----------       ----------
Cash Paid During the Period for Interest
   (Net of Amount Capitalized)..............................................          $7,744,000           $4,267,000
Cash Paid During the Period for Income Taxes.............................             13,285,000            7,651,000

Non-cash Investing and Financing Activities:
   Tax Benefits of Stock Issued for Exercise of Options .................                808,000            1,405,000
   Additions to Capital Leases                                                         3,070,000
</TABLE>

     See accompanying notes to condensed consolidated financial statements.

                                                     Page 5

<PAGE>



                  SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


     1. The accompanying unaudited financial statements include the consolidated
accounts of Sierra Health Services, Inc. ("Sierra", a holding company,  together
with its subsidiaries,  collectively  referred to herein as the "Company").  All
material  intercompany  balances and transactions  have been  eliminated.  These
statements  have  been  prepared  in  conformity  with  the  generally  accepted
accounting   principles   used  in  preparing  the  Company's   annual   audited
consolidated  financial statements but do not contain all of the information and
disclosures  that  would be  required  in a complete  set of  audited  financial
statements.  They should,  therefore,  be read in conjunction with the Company's
annual audited  consolidated  financial statements and related notes thereto for
the years ended  December 31, 1997 and 1996. In the opinion of  management,  the
accompanying  unaudited condensed  consolidated financial statements reflect all
adjustments,  consisting only of normal and recurring adjustments, necessary for
a fair presentation of the financial results for the interim periods presented.

     2. On October 31, 1998, a subsidiary of Sierra,  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-Forth  Worth with  approximately  109,000 members and Permanente  Medical
Association of Texas  ("Permanente"),  an  approximately  150 physician  medical
group  operating  in that area.  The  acquisition  was  effected  pursuant  to a
definitive  agreement  dated as of June 5,  1998.  The  purchase  price was $124
million, which is net $20 million in operating cost support to be paid to Sierra
by Kaiser  Foundation  Hospitals in five  quarterly  installments  following the
closing of the transaction.  The purchase price includes amounts for real estate
and eight medical and office  facilities  encompassing  more than 500,000 square
feet. The purchase price may increase by $30 million over three years if certain
growth, member retention and accreditation goals are met by the health plan.

     Sierra  is  assuming  no  prior   liabilities   for  malpractice  or  other
litigation,  or for any unanticipated  future adjustments to claims expenses for
periods  prior to closing.  The  transaction  will be financed  with a five-year
revolving  credit  facility.  Approximately  $100  million  of the $200  million
revolving credit facility was used to fund the transaction. Bank of America NT &
SA is the administrative  agent,  NationsBanc  Montgomery  Securities LLC is the
lead  arranger and First Union  National Bank is the  syndication  agent for the
credit facility.  The transaction had been previously  approved by the Boards of
Directors of Kaiser and the Company.

     3. 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.

     4. On October 27, 1998,  Sierra  signed an agreement to purchase the Nevada
health  care  business  of  Exclusive  Healthcare,  Inc.,  United of Omaha  Life
Insurance  Company and United  World Life  Insurance  Company,  all of which are
subsidiaries of Mutual of Omaha Insurance Company. The transaction,  expected to
be completed by December 31, is subject to  regulatory  approvals.  The purchase
price is  contingent  based on how many  members are  retained  through 2000 and
2001. No cash will be paid until group renewals begin in 2000.

     Exclusive Healthcare is an HMO serving  approximately 26,000 members in six
Nevada counties,  including the Las Vegas and Reno metropolitan areas. United of
Omaha  provides PPO and  indemnity  coverage to an  additional  10,000  members.
United World provides health  benefits to  approximately  100 customers  through
small group coverage.


                                                     Page 6

<PAGE>



                  SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES

        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)


     5. The  following  tables  provide a  reconciliation  of basic and  diluted
earnings per share:
<TABLE>
<CAPTION>
                                                                                             Dilutive
                                                                              Basic        Stock Options        Diluted

For the Three Months ended September 30, 1998:
<S>                                                                       <C>                <C>               <C>
           Income from Continuing Operations..........                    $12,584,000        0                 $12,584,000
           Weighted Average Common Shares ..........                       27,433,000        200,000            27,633,000
           Per Share Amount...................................                   $.46                                 $.46

         For the Three Months ended September 30, 1997:
           Income from Continuing Operations...............              $    495,000                          $   495,000
           Weighted Average Common Shares...............                   27,114,000        453,000            27,567,000
           Per Share Amount...................................                   $.02                                 $.02

</TABLE>


<TABLE>

<CAPTION>

                                                                                             Dilutive
                                                                              Basic        Stock Options        Diluted

For the Nine Months ended September 30, 1998:
<S>                                                                       <C>                <C>              <C>
           Income from Continuing Operations................              $37,322,000        0                $37,322,000
           Weighted Average Common Shares..................                27,462,000        374,000           27,836,000
           Per Share Amount....................................                 $1.36                               $1.34

         For the Nine Months ended September 30, 1997:
           Income from Continuing Operations...................           $12,454,000                         $12,454,000
           Weighted Average Common Shares.....................             26,948,000        378,000           27,326,000
           Per Share Amount....................................                  $.46                                $.46
</TABLE>

     6. The Company has adopted Statement of Financial  Accounting  Standard No.
130, "Reporting Comprehensive Income" which requires companies to classify items
of other comprehensive  income by their nature in a financial  statement.  Other
comprehensive  income is  comprised  entirely of  unrealized  holding  gains and
losses on  available  for-sale  investments,  net of taxes,  arising  during the
period, adjusted for gains and losses included in net income.

     The following table presents  comprehensive  income for the three month and
nine month periods ended  September 30,  1998 and 1997:  Three Months Ended Nine
Months Ended September 30 September 30
<TABLE>

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

<S>                                                        <C>               <C>               <C>             <C>
           NET INCOME:...........................          $12,584,000       $  495,000        $37,322,000     $12,454,000
           Change in net unrealized Holding
             Gains (losses) on Investments,
             net of income taxes.................              662,000        1,461,000            853,000         244,000
                                                               -------       ----------      -----------------------------

          COMPREHENSIVE INCOME...................          $13,246,000       $1,956,000            $38,175,000 $12,698,000
                                                           ===========       =============================================
</TABLE>


                                                     Page 7

<PAGE>



                  SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES

        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)


     7. During 1997 the Financial Accounting Standards Board issued "Disclosures
about Segments of an Enterprise and Related Information" ("FAS 131"). FAS 131 is
effective  for fiscal years  beginning  after  December 31, 1997;  however,  the
statement  need not be applied  to interim  statements  in the  initial  year of
application. FAS 131 establishes additional standards for segment disclosures in
the financial statements. Management is in the process of determining the effect
of this statement on its financial statement disclosure.

     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 will adopt SOP 98-1 and SOP 98-5 for the fiscal year ending December 31,
1999 and does not believe these  statements  will 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, 1999. 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.

     8. Certain amounts in the Condensed  Consolidated  Financial Statements for
the three and nine months ended  September  30, 1997 have been  reclassified  to
conform with the current year presentation.

                                                     Page 8

<PAGE>



                  SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES


ITEM 2. 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  Condensed  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  Quarterly  Report on Form 10-Q
should be considered in connection with certain cautionary  statements contained
in the Company's  Current  Report on Form 8-K dated March 19, 1998  incorporated
herein by  reference,  as well as  cautionary  statements  included  within this
Quarterly  Report on Form 10-Q. 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  from  those  expressed  in  any  projected,   estimated  or
forward-looking statements relating to the Company.

Results of Operations,  three months ended September 30, 1998, compared to three
months ended September 30, 1997.

     The Company's total operating revenues for the three months ended September
30, 1998  increased  approximately  52.9% to $281.1 from $183.9  million for the
three  months ended  September  30, 1997.  The  increase  was  primarily  due to
military  contract  revenue of $72.4 million and an increase in medical  premium
revenue of $14.5  million.  During the fourth  quarter of 1997  Sierra  Military
Health Services,  Inc. ("SMHS"), a wholly-owned subsidiary of the Company, began
the implementation phase of its TRICARE contract.  The military contract revenue
is a result of health care delivery which began on June 1, 1998.

     Medical  premium  revenue  from the  Company's  HMO and  managed  indemnity
insurance  subsidiaries  increased  $14.5  million,  or 11.0%.  The  increase in
premium  revenue  reflects a 5.9% increase in commercial  HMO member months (the
number of months of each  period  that an  individual  is  enrolled  in a plan).
Medicare  member months  increased  19.5% 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.  Managed  indemnity member months decreased 21.3% as certain  unprofitable
blocks of business were not renewed in fiscal year 1998.  The Company's  premium
rates  increased  an  average of 3% to 5% for its HMO  commercial  groups and in
excess of 10% for its managed  indemnity  commercial  groups.  The Company  also
realized a slight increase in its capitation rate established by the Health Care
Financing  Administration  ("HCFA").  Approximately  75% of the Company's Nevada
Medicare  members  are  enrolled  in the Social HMO  Medicare  program.  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.

     Specialty product revenue  increased $6.4 million,  or 17.1%, for the three
months ended September 30, 1998 compared to the same  three-month  period in the
prior year. The increase was due to revenue growth in the workers'  compensation
insurance operation offset in part by a decrease in administrative  services and
other  revenue of $500,000 due  primarily to the  termination  of the  Company's
workers' compensation administrative services contract with the State of Nevada.
Professional fee revenue increased  approximately  $2.9 million primarily due to
the acquisition of the operations of two medical clinics in southern Nevada.  In
addition  approximately  $800,000 of the increase in professional fees is due to
the operations of Total Home Care, Inc.  ("THC").  THC was acquired in the third
quarter of 1997 and provides home infusion, oxygen and durable medical equipment
services. Investment and other revenue increased approximately $1.0 million over
the comparable period in the prior year primarily due to an increase in invested
balances.

                                                     Page 9

<PAGE>


                  SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS (continued)

Results of Operations,  three months ended September 30, 1998, compared to three
months ended September 30, 1997 (continued).

     Medical expenses as a percentage of medical premiums and professional  fees
("Medical  Cost  Ratio")  increased  from 76.9% to 77.9%.  The  increase  in the
medical cost 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  cost  ratios 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.   Specialty  product  expenses
increased  $6.0  million,  or 16.6%,  due  primarily  to the 17.1%  increase  in
specialty  product revenue discussed  previously.  Specialty product revenue and
expense is primarily related to the workers' compensation insurance business.

     The combined  ratio for the workers'  compensation  insurance  business was
99.6% compared to 100.9% for the comparable prior year period. The reduction was
due to a 61 basis  point  decrease  in the  expense  ratio and a 65 basis  point
decrease in the loss ratio.  The decrease in the expense ratio was primarily due
to a lower percentage  increase in salaries and related benefit expenses and the
higher net earned  premiums  denominator  base.  Incurred losses for the current
accident year were reduced as a result of the  Company's  ability to overlay and
implement managed care techniques to the workers' compensation claims as well as
net favorable  loss  development  on prior accident years totaling $2.6 million,
which is up from $2.3 million for the comparable prior-year period. There can be
no assurance that favorable development, or the magnitude thereof, will continue
in the future.  The loss and loss adjustment  expense ratio for the three months
ended  September  30,  1998  reflect the  Company's  current  projection  of the
ultimate  costs of claims  occurring  in the  current as well as prior  accident
years.  Such projections are subject to change and any change would be reflected
in the income  statement.  Workers'  compensation  claims are paid over  several
years. Until payment is made, the Company invests the monies, earning a yield on
the invested balance.

     General, administrative and marketing ("G&A") costs increased $2.5 million,
or 10.1%,  compared to the third  quarter of 1997.  As a percentage of revenues,
G&A costs for the third quarter of 1998  decreased to 9.7% from 13.4% during the
comparable period in 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. The G&A increase is due
to increased  expenses in several areas including an increase in depreciation of
$600,000.  The Company markets its products primarily to employer groups,  labor
unions and individuals enrolled in Medicare through its internal sales personnel
and independent insurance brokers. Such brokers receive commissions based on the
premiums  received  from each group.  The Company's  agreements  with its member
groups are usually for twelve months and are subject to annual renewal.  For the
quarter ended  September 30, 1998,  the  Company's  ten largest  commercial  HMO
employer  groups were, in the  aggregate,  responsible  for less than 10% of its
total revenues. Although none of such employer groups accounted for more than 2%
of  total  revenues  for  that  period,  the  loss of one or more of the  larger
employer groups could, if not replaced with similar membership,  have a material
adverse effect on the Company's business.

     Interest expense and other increased approximately $300,000 compared to the
same period in the prior year primarily due to the addition of a new mortgage as
well as capital leases for equipment at SMHS.

     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 net of taxes, were recorded in that quarter primarily for
expenses  associated with the Company's proposal to serve TRICARE Region 1. Such
expenses had been deferred until award notification.

                                                     Page 10

<PAGE>


                  SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS (continued)

     Results of Operations,  three months ended September 30, 1998,  compared to
three months ended September 30, 1997 (continued).

     The  Company  recorded  approximately  $4.4  million of tax  expense for an
effective  tax rate of 26.0%,  compared  to tax  expense of $3.5  million for an
effective  tax rate of 24.0% on  recurring  operations  in the prior  year.  The
Company's  current 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.  The
effective tax rate will increase in future periods after the remaining valuation
allowances  for net operating  loss  carryforwards  are  utilized.  In the third
quarter  of 1997,  the  operating  tax  expense  for the  period  was  offset by
approximately  $7.8 million in federal and state tax benefit  resulting from the
write-off of the TRICARE  start-up costs of $18.4 million.  Such offset resulted
in an overall net tax benefit of $4.2 million.

     Excluding  the effect of the  start-up  expenses,  net income for the three
months ended September 30, 1998, increased $1.4 million, or 13.0%.

     Results of Operations,  nine months ended  September 30, 1998,  compared to
nine months ended September 30, 1997.

     The Company's total operating  revenues for the nine months ended September
30, 1998  increased  approximately  38.7% to $736.0 from $530.8  million for the
nine months ended September 30, 1997. The increase was primarily due to military
contract  revenue of $132.8 million and an increase in premium  revenue of $47.9
million.   The  military   contract   revenue  is  a  result  of  the  continued
implementation  of the  TRICARE  contract  as well as four months of health care
delivery.

     Medical  premium  revenue  from the  Company's  HMO and  managed  indemnity
insurance  subsidiaries  increased  $47.9  million,  or 12.6%.  The  increase in
premium  revenue  reflects a 4.1%  increase in member  months.  Medicare  member
months  increased  19.4% 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 5% 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.
Approximately  75% of the Company's  Nevada Medicare members are enrolled in the
social HMO Medicare  program.  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.

     Specialty product revenue  increased $11.5 million,  or 10.5%, for the nine
months ended  September 30, 1998 compared to the same  nine-month  period in the
prior year. The increase was due to revenue growth in the workers'  compensation
insurance operation offset in part by a decrease in administrative  services and
other revenue of $2.8 million due primarily to the  termination of the Company's
workers' compensation administrative services contract with the State of Nevada.
Professional fee revenue increased  approximately $10.0 million primarily due to
the acquisition of the operations of two medical clinics in southern Nevada.  In
addition  approximately $2.7 million of the increase in professional fees is due
to the operations of THC.  Investment and other revenue increased  approximately
$3.1 million over the  comparable  period in the prior year  primarily due to an
increase  in  invested  balances  and  capital  gains  realized  on the  sale of
investments.



                                                     Page 11

<PAGE>


                  SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS (continued)

     Results of Operations,  nine months ended  September 30, 1998,  compared to
nine months ended September 30, 1997 (continued).


     The medical  cost ratio  increased  from 76.8% to 77.4% for the nine months
ended  September  30, 1998  compared to the prior  period.  The  increase in the
medical cost 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  cost  ratios 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.   Specialty  product  expenses
increased  $10.8  million,  or 10.0%,  due  primarily  to the 10.5%  increase in
specialty  product revenue discussed  previously.  Specialty product revenue and
expense is primarily related to the workers' compensation insurance business.

     The combined  ratio for the workers'  compensation  insurance  business was
100.5%  compared to 102.3% for the comparable  prior year period.  The reduction
was due to a 127 basis point  decrease in the expense ratio and a 53 basis point
decrease in the loss ratio.  The decrease in the expense ratio was primarily due
to lower  salaries  and  related  benefit  expenses  and the  higher  net earned
premiums  denominator  base.  Incurred losses for the current accident year were
reduced as a result of the Company's  ability to overlay and  implement  managed
care  techniques  to the workers'  compensation  claims as well as net favorable
loss  development on prior accident years totaling $7.2 million  compared to net
favorable loss development of $6.7 million for the comparable prior year period.
There can be no assurance that favorable development,  or the magnitude thereof,
will continue in the future.  The losses and loss  adjustment  expense ratio for
the  nine  months  ended  September  30,  1998  reflect  the  Company's  current
projection of the ultimate  costs of claims  occurring in the current as well as
prior  accident  years.  Such  projections  are subject to change and any change
would be reflected in the income  statement.  Workers'  compensation  claims are
paid over several years.  Until payment is made, the Company invests the monies,
earning a yield on the invested balance.

     G&A costs  increased  $9.6  million,  or 13.7%,  compared to the first nine
months of 1997. As a percentage of revenues, G&A costs for the first nine months
of 1998 decreased to 10.8% from 13.1% during the comparable  period in 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.  Of the $9.6  million  increase in G&A,  $2.4  million
consisted of 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  $1.2  million due to  increased  membership.  The  remaining  G&A
increase is due to additional expenses in several areas including an increase in
depreciation  of $1.2  million.  The Company  markets its products  primarily to
employer groups, labor unions and individuals enrolled in Medicare,  through its
internal sales personnel and independent insurance brokers. Such brokers receive
commissions  based on the  premiums  received  from each  group.  The  Company's
agreements  with its member groups are usually for twelve months and are subject
to annual  renewal.  For the nine months ended September 30, 1998, the Company's
ten largest  commercial HMO employer groups were, in the aggregate,  responsible
for less than 10% of its total  revenues.  Although none of such employer groups
accounted for more than 2% of total revenues for that period, the loss of one or
more  of the  larger  employer  groups  could,  if  not  replaced  with  similar
membership, have a material adverse effect on the Company's business.

     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
net of taxes, were recorded

                                                     Page 12

<PAGE>


                  SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS (continued)


     Results of Operations,  nine months ended  September 30, 1998,  compared to
nine months ended September 30, 1997 (continued).


     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 increased approximately $600,000 compared to the
same period in the prior year primarily due to the acquisition of new debt.

     For the period,  the Company  recorded  approximately  $13.0 million of tax
expense for an effective tax rate of 25.8% compared to 24.0% in 1997,  excluding
non-recurring items. The Company's current 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.  The  effective  tax rate will  increase  in future
periods  after  the  remaining  valuation  allowances  for  net  operating  loss
carryforwards are utilized. The tax expense for the prior-year period was offset
by  approximately  $7.8 million in federal and state tax benefit  resulting from
the  write-off  of TRICARE  start-up  costs of $18.4  million  and $2.6  million
federal tax benefit  resulting  from the  merger-related  expenses.  Such offset
resulted in an overall net tax benefit of $400,000.

     Net income for the nine months ended  September 30, 1998,  increased  $24.9
million  compared to the nine months ended  September  30, 1997.  Excluding  the
effect of the merger and start-up  expenses,  net income increased $5.9 million,
or 18.6% compared to the same period in the prior year.

Liquidity and Capital Resources

     The Company's  cash flow from operating  activities  during the nine months
ended  September 30, 1998 resulted  primarily  from $37.3 million of net income,
$13.3 million in depreciation and amortization and $4.3 million in provision for
doubtful  accounts  offset  by  an  $11.7  million  net  change  in  assets  and
liabilities.  The decrease in cash flow  resulting from the change in assets and
liabilities  was  primarily  due to an  increase in  accounts  receivable  and a
decrease in  unearned  premium  revenue.  The  increase  in accounts  receivable
resulted  primarily from revenues  related to the Region 1 TRICARE  contract for
which the Company had not been paid as of September  30,  1998.  The decrease in
unearned  premium  revenue  resulted  primarily  from the early  receipt  of the
subsequent  month's HCFA  Medicare  capitation  payment as of December 31, 1997.
These  cash  outflows  were  offset in part by an  increase  in  medical  claims
payable.  This increase resulted primarily from payables incurred in conjunction
with the Region 1 TRICARE contract.

     The  $55.8  million  used for  investing  and  financing  activities  since
December  31,  1997  consisted  of $25.6  million  in capital  expenditures  for
construction  costs associated with office  facilities,  furniture and equipment
for  the  newly   constructed   six-story   headquarters   building,   continued
implementation  of three new computer systems,  computer and medical  equipment,
other  capital needs to support the  Company's  growth,  and a $19.6 million net
increase in  investments.  The Company used $39.4  million for the  reduction of
debt,  offset in part by $30.2 million  received from new debt. The net decrease
of $9.2 million is primarily  related to net payments on the  Company's  line of
credit of $13 million,  as well as scheduled debt  payments,  offset by new debt
primarily related to financing for the newly constructed  headquarters building.
Additionally,  the Company used $9.0 million to purchase  treasury  stock on the
open market. These outflows in cash were offset in part by $6.2 million received
in connection  with the sale of stock through the Company's stock plans and $1.4
million received in connection with the sale of THC's Arizona operations.


                                                     Page 13

<PAGE>


                  SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS (continued)

Liquidity and Capital Resources (continued).

     On October 31, 1998, Texas Health Choice, L.C. completed the acquisition of
certain assets of  Kaiser-Texas,  a health plan operating in Dallas-Forth  Worth
with  approximately  109,000 members and a 150 physician medical group operating
in that area. The  acquisition was effected  pursuant to a definitive  agreement
dated as of June 5, 1998. The purchase price was $124 million,  which is net $20
million in  operating  cost  support  to be paid to Sierra by Kaiser  Foundation
Hospitals  in  five  quarterly   installments   following  the  closing  of  the
transaction.  The  purchase  price  includes  amounts  for real estate and eight
medical and office  facilities  encompassing  more than 500,000 square feet. The
purchase  price may increase by $30 million over three years if certain  growth,
member retention and accreditation goals are met by the health plan.

     Sierra  is  assuming  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.  Approximately  $100  million  of the $200  million
revolving credit facility was used to fund the transaction. Bank of America NT &
SA is the administrative  agent,  NationsBanc  Montgomery  Securities LLC is the
lead  arranger and First Union  National Bank is the  syndication  agent for the
credit facility.  The transaction had been previously  approved by the Boards of
Directors of Kaiser and the Company.

     The  holding  company  may  receive  dividends  from its HMO and  insurance
subsidiaries  which  generally  must be  approved  by  certain  state  insurance
departments.  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  $17.9 million as of September  30, 1998.  The HMO and
insurance   subsidiaries   must  also  meet  requirements  to  maintain  minimum
stockholder's  equity,  on a  statutory  basis,  ranging  from  $500,000 to $5.2
million.  Of the cash and cash  equivalents  held at September  30, 1998,  $74.6
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
available  on an  unrestricted  basis.  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.

     On  September  30,  1997,  the Company  was  awarded a TRICARE  contract to
provide managed health care coverage to eligible beneficiaries in Region 1. This
region includes more than 600,000 individuals in Connecticut,  Delaware,  Maine,
Maryland,  Massachusetts,  New Hampshire,  New Jersey,  New York,  Pennsylvania,
Rhode Island, Vermont, Virginia, West Virginia and Washington, D.C. In 1998, the
award will result in a total of approximately  $200.0 million of revenue for the
five-month  implementation phase and seven months of health care delivery.  SMHS
was  notified on February  13, 1998 that the United  States  General  Accounting
Office  ("GAO")  sustained  a  competitor's  protest of the  contract  award for
TRICARE  Managed  Care  Support  Region 1 and  recommended  that the contract be
re-bid.  The TRICARE  Management  Activity  ("TMA") along with the Company,  has
filed a motion requesting the GAO reconsider its recommendation. If the GAO does
not change its recommendation and the TMA follows the recommendation,  there are
several possible  outcomes,  including  litigation.  While it is not possible to
predict the outcome,  the Company  anticipates  that it will continue to provide
health care under the  contract for a currently  undetermined  amount of time if
the TMA and the Company are unsuccessful in their reconsideration request.

     The Company  has a 1998  capital  budget of  approximately  $50.0  million,
primarily for computer  hardware and  software,  furniture and equipment for the
newly  constructed  180,000  square  foot,   six-story  corporate   headquarters
building,  and other  requirements  due to the  Company's  projected  growth and
expansion.  The Company's liquidity needs over the next 12 months will primarily
be for the capital items noted above,  the Company's stock  repurchase  program,
debt service and expansion of the Company's operations, including

                                                     Page 14

<PAGE>


                  SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS (continued)

     potential acquisitions. The Company believes that existing working capital,
operating cash flow and, if necessary,  mortgage  financing,  equipment leasing,
and amounts  available  under its credit facility will 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, will
enable it to meet its liquidity needs on a longer term basis.

Year 2000

     The  Company is in the  process of  modifying  or  replacing  its  computer
systems and  applications  to accommodate  the "Year 2000".  The Year 2000 issue
exists because many computer  systems and  applications  currently use two-digit
date  fields  to  designate  a  year.   As  the  century  date  change   occurs,
date-sensitive systems will recognize the year 2000 as 1900, or not at all. This
inability  to  recognize  or properly  treat the Year 2000 may cause  systems to
process critical financial and operational information incorrectly.

     The Company is  currently  in the process of  modifying  or  replacing  its
mission critical financial and operational computer systems. The Company is also
in the process of testing its  non-information  system  technology for Year 2000
compliance.  The Year 2000  project has been broken down into five  phases:  (1)
inventorying  Year  2000  items;  (2)  assessing  the Year 2000  items  that are
determined to be material to the Company;  (3) renovating or replacing  material
items  that are  determined  not to be Year  2000  compliant;  (4)  testing  and
validating material items; and (5) implementing renovated and validated systems.

     At  September  30,  1998,   the  inventory   and   assessment   phases  are
substantially  complete  as it  relates to all  material  computer  systems  and
approximately 50% complete as it relates to  non-information  system technology.
The  Company   estimates   that  the   replacement/renovation   phases  and  the
testing/validation  phases will be  approximately  50%  complete by December 31,
1998 and 100% complete by September 30, 1999.  The Company  estimates that it is
approximately  45% complete  with the total  project as of  September  30, 1998.
Contingency  planning for the mission critical business  operations is scheduled
to be  completed  by  March  1999.  These  plans  focus on  business  operations
involving information systems and non-information systems technologies.

     The Company has initiated formal  communications with entities with whom it
does business to assess their Year 2000 issues. Evaluations of the most critical
third  parties  have been  initiated  and  follow-up  reviews  will be conducted
through 1999.  Contingency  plans are being developed based on these evaluations
and will be completed by the middle of 1999. There can be no assurances that the
systems  of  other  companies  or  governmental  agencies,  such as HCFA and the
Department  of  Defense  ("DOD"),  on which the  Company  relies  will be timely
modified for Year 2000,  or that the failure to modify by another  company would
not have a material  adverse  effect on the  Company.  Based  upon two  separate
reports  issued by the United States  General  Accounting  Office it is doubtful
that the  computer  systems  at both  HCFA and the DOD will be fully  Year  2000
compliant by the end of 1999. The Company does not currently have available data
to predict the impact of such non compliance on its business operations.  Should
there be any material delays caused by Year 2000 issues, the Company anticipates
that the governmental entities will make estimated payments.

     The Company is in the  process of  implementing  three major  systems at an
estimated  cost of $30 million for its current  operations.  To date the Company
has spent approximately $12.5 million on the new computer systems and other Year
2000 items. The Company is expensing the costs to make modifications to existing
computer systems and non-computer equipment.  Management currently estimates the
remaining new computer  system costs and other Year 2000 costs to be $18 million
to $21  million  for  current  operations  and $8 million to $10 million for the
Kaiser-Texas  operations that were acquired on October 31, 1998. While this is a
substantial  effort, it will give the Company the benefits of new technology and
functionality  for many of its financial and  operational  computer  systems and
applications.

                                                     Page 15

<PAGE>


                  SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS (continued)


Year 2000 (continued)


     The  failure to correct a material  Year 2000  problem  could  result in an
interruption  of, or a failure of,  certain  business  activities or operations.
Such  failures  could  materially  adversely  affect the  Company's  operations,
liquidity and financial  condition.  Due to the general uncertainty  inherent in
the Year  2000  problem,  resulting  in part from  uncertainty  of the Year 2000
readiness of third parties with which the Company does business,  the Company is
unable to determine at this time whether the consequences of potential Year 2000
failures  will have a  material  adverse  impact  on the  Company's  results  of
operations, liquidity or financial condition. The Company's Year 2000 project is
expected to  significantly  reduce the Company's level of uncertainty  about the
Year 2000 problem. The Company believes that, with the implementation of the new
computer  systems  and  completion  of the  entire  project  as  scheduled,  the
possibility of significant interruptions of operations should be reduced.

     The  above   contains   forward-looking   statements   including,   without
limitation, statements relating to the Company's plans, strategies,  objectives,
expectations,  intentions, and adequate resources, that are made pursuant to the
"safe harbor"  provisions  of the Private  Securities  Litigation  Reform Act of
1995.  Readers are cautioned that  forward-looking  statements  contained in the
Year 2000 disclosure should be read in conjunction with the following disclosure
of the company:

     The  costs of the  project  and the  dates on which  the  Company  plans to
complete the necessary Year 2000  modifications  are based on management's  best
estimates,  which were derived utilizing  numerous  assumptions of future events
including the continued  availability  of certain  resources and other  factors.
However,  there can be no guarantee  that these  estimates  will be achieved and
actual results could differ  materially from those plans.  Specific factors that
might  cause such  material  differences  include,  but are not  limited to, the
availability  and cost of personnel  trained in this area, the ability to locate
and  correct  all  relevant   computer  codes,  the  ability  of  the  Company's
significant  suppliers,  customers  and others with which it conducts  business,
including federal and state governmental agencies, to identify and resolve their
own Year 2000 issues and similar uncertainties.


                                                     Page 16

<PAGE>


                  SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS (continued)

Membership

  The Company's membership at September 30, 1998  and 1997 was as follows:
<TABLE>

<CAPTION>
                        Number of Members at Period Ended
                                                                          September 30             September 30
                                                                              1998                     1997
                                                                        ----------------         ----------

HMO
<S>                                                                           <C>                     <C>
  Commercial....................................................              162,600                 151,500
  Medicare......................................................               40,800                  34,400
Managed Indemnity...............................................               45,600                  68,400
Medicare Supplement.............................................               25,500                  25,200
Administrative Services  (1)....................................              316,000                 329,300
TRICARE Eligibles...............................................              606,400
                                                                           ----------
Total Members...................................................            1,196,900                 608,800
                                                                            =========                 =======
</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 approximately 175,000 members at September
30, 1997.


ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     Pursuant to the General  Instructions  to Rule 305 of  Regulation  S-K, the
quantitative and qualitative  disclosures  called for by this Item 3 and by Rule
305 of Regulation S-K are inapplicable to the Company at this time.

                                                     Page 17

<PAGE>



                           PART II - OTHER INFORMATION

ITEM 1.   LEGAL PROCEEDINGS


     On March 18,  1997,  the Company  announced  it had  terminated  its merger
agreement with Physician  Corporation of America ("PCA"). The original agreement
had been entered into in November 1996. On March 18, 1997,  prior to termination
of the merger  agreement,  PCA filed a lawsuit against the Company in the United
States  District  Court for the  Southern  District  of Florida  (the  "District
Court"),  seeking,  among  other  things,  specific  performance  of the  merger
agreement  and monetary  damages in excess of $20 million.  The lawsuit has been
dismissed   (without   prejudice  to  PCA's  claims)  for  failure  to  join  an
indispensable  party. On March 27, 1997, the Company commenced a lawsuit against
PCA in the Court of Chancery of the State of  Delaware.  On July 31,  1998,  the
Company filed a Second Amended Complaint alleging, among other things, breach of
the  merger  agreement,  negligent  misrepresentation,   common  law  fraud  and
equitable fraud, and seeking monetary damages and other remedies.  On August 31,
1998,  PCA filed an answer and  counterclaim  to the  Company's  second  amended
complaint  denying  that the  Company  was  entitled  to any relief and  seeking
monetary  damages.  The Company  intends to  vigorously  pursue all remedies and
assert all defenses available to it, however, there can be no assurance that the
Company will prevail in such litigation.

     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,  claims by providers for payment for medical  services  rendered to HMO
members.  Also included in such  litigation  are claims for dividends and claims
denials  in the  workers'  compensation  division  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 2.   CHANGES IN SECURITIES

           None

ITEM 3.   DEFAULTS UPON SENIOR SECURITIES

          None

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

          None

ITEM 5.  OTHER INFORMATION

          None

ITEM 6.  EHIBITS AND REPORTS ON FORM 8-K

               (a)      Exhibits

                        (27)   Financial Data Schedule

                        (99)  Registrant's  current  report  on Form  8-K  dated
                              March 19, 1998, incorporated herein by reference.

               (b)             Reports on Form 8-K

                               The Company  filed a Current  Report on Form 8-K,
                               dated November 11, 1998,  with the Securities and
                               Exchange   Commission   to   present   pro  forma
                               financial  information related to the acquisition
                               of  Kaiser-Texas   and  the  required   financial
                               statements.


                                                     Page 18

<PAGE>


                                   SIGNATURES

     Pursuant to the  requirements  of the Securities  Exchange Act of 1934, the
registrant  has duly  caused  this  report  to be  signed  on its  behalf by the
undersigned thereunto duly authorized.



                                                SIERRA HEALTH SERVICES, INC.
                                                          (Registrant)



Date  November 13, 1998                             /S/ PAUL H. PALMER
                                                 ---------------------
                                                 Paul H. Palmer
                                                 Acting Chief Financial Officer
                                                 (Principal Financial and
                                                 Accounting Officer)

                                                     Page 19

<PAGE>