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

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FORM 10-Q

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(Mark One)


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

For the quarterly period ended June 30, 2003

OR



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 Incorporation or Organization) | (I.R.S. Employer Identification Number)

2724 North Tenaya Way
Las Vegas, Nevada     89128

(702) 242-7000

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 reports), and (2) has been subject to such filing
requirements for the past 90 days.    Yes

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
    Yes  
x    No

As of August 1, 2003,  there were  28,707,000  shares of common  stock
outstanding.









SIERRA HEALTH SERVICES, INC.

          Quarterly Report on Form 10-Q

For the period ended June 30, 2003



|PART I.   FINANCIAL INFORMATION                                                                                         | Page No.
|----------------------------------------------------------------------------------------------------------------------- | --------
|                                                                                                                        |         
|Item 1. Financial Statements (Unaudited):                                                                               |         
|                                                                                                                        |         
|Condensed Consolidated Balance Sheets -
          
                   June 30, 2003 and December 31, 2002               | 3       
|                                                                                                                        |         
|Condensed Consolidated Statement of Operations -
          
          three and six months ended June 30, 2003 and 2002 | 4       
|                                                                                                                        |         
|Condensed Consolidated Statement of Cash Flows -
          
          six months ended June 30, 2003 and 2002           | 5       
|                                                                                                                        |         
|Notes to Condensed Consolidated Financial Statements                                                                    | 6 - 18  
|                                                                                                                        |         
|Item 2.   Management's Discussion and Analysis of Financial
                      Condition and Results of Operations   | 19 - 35 
|                                                                                                                        |         
|Item 3.   Quantitative and Qualitative Disclosures About Market Risk                                                    | 36      
|                                                                                                                        |         
|Item 4.  Controls and Procedures                                                                                        | 36      
|                                                                                                                        |         
|PART II.  OTHER INFORMATION                                                                                             |         
|                                                                                                                        |         
|Item 1.   Legal Proceedings                                                                                             | 37      
|                                                                                                                        |         
|Item 2.   Changes in Securities and Use of Proceeds                                                                     | 37      
|                                                                                                                        |         
|Item 3. Default upon Senior Securities                                                                                  | 37      
|                                                                                                                        |         
|Item 4. Submission of Matters to a Vote of Security Holders                                                             | 37 - 38 
|                                                                                                                        |         
|Item 5. Other Information                                                                                               | 38      
|                                                                                                                        |         
|Item 6.   Exhibits and Reports on Form 8-K                                                                              | 38      
|                                                                                                                        |         
|Signatures                                                                                                              | 39      
|                                                                                                                        |         

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PART I. FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES

                      CONDENSED CONSOLIDATED BALANCE SHEETS

                      (In thousands, except per share data)

                                   (Unaudited)

`June 30,   December 31,
                                                                        2003        2002
                                                                     ----------  ----------
                              ASSETS                                                                
CURRENT ASSETS:
     Cash and Cash Equivalents..................................... $   78,805  $   45,778
     Investments...................................................    146,616     182,452
     Accounts Receivable (Less Allowance for Doubtful
         Accounts; 2003 - $8,152; 2002 - $10,626)..................     10,529      11,232
     Military Accounts Receivable (Less Allowance for Doubtful
         Accounts; 2003 and 2002 - $100)...........................     75,765      47,126
     Current Portion of Deferred Tax Asset.........................     36,868      50,402
     Prepaid Expenses and Other Current Assets.....................     28,755      18,380
     Assets of Discontinued Operations.............................    562,264     565,058
                                                                     ----------  ----------
         Total Current Assets......................................    939,602     920,428

PROPERTY AND EQUIPMENT, NET........................................     62,275      64,868
RESTRICTED CASH AND INVESTMENTS....................................     17,635      17,557
GOODWILL...........................................................     14,782      14,782
DEFERRED TAX ASSET (Less Current Portion)..........................     20,236      14,947
OTHER ASSETS.......................................................     43,853      33,384
                                                                     ----------  ----------
TOTAL ASSETS....................................................... $1,098,383  $1,065,966
                                                                     ==========  ==========
                                                                                                    
               LIABILITIES AND STOCKHOLDERS' EQUITY                                                 
CURRENT LIABILITIES:
     Accrued Liabilities........................................... $   56,859  $   50,349
     Trade Accounts Payable........................................     24,913      29,249
     Accrued Payroll and Taxes.....................................     23,704      13,660
     Medical Claims Payable........................................    103,943      98,031
     Unearned Premium Revenue......................................     12,882      40,758
     Military Health Care Payable..................................     74,276      65,223
     Current Portion of Long-Term Debt.............................        140         186
     Liabilities of Discontinued Operations........................    468,772     500,720
                                                                     ----------  ----------
         Total Current Liabilities.................................    765,489     798,176

LONG-TERM DEBT (Less Current Portion)..............................    115,296      60,710
OTHER LIABILITIES..................................................     51,266      50,515
                                                                     ----------  ----------
TOTAL LIABILITIES..................................................    932,051     909,401
                                                                     ----------  ----------
COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY:
  Preferred Stock, $.01 Par Value, 1,000
       Shares Authorized; None Issued or Outstanding
  Common Stock, $.005 Par Value, 60,000 Shares Authorized;
       2003 - 31,557; 2002 - 30,953 Shares Issued..................        158         155
  Treasury Stock: 2003 - 3,598; 2002 - 1,163 Common Stock Shares...    (49,120)    (17,148)
  Additional Paid-in Capital.......................................    203,447     196,711
  Deferred Compensation............................................       (180)       (473)
  Accumulated Other Comprehensive Gain.............................        552         381
  Retained Earnings (Accumulated Deficit)..........................     11,475     (23,061)
                                                                     ----------  ----------
TOTAL STOCKHOLDERS' EQUITY.........................................    166,332     156,565
                                                                     ----------  ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY......................... $1,098,383  $1,065,966
                                                                     ==========  ==========`

See accompanying notes to condensed consolidated financial statements.

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SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES

                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

                      (In thousands, except per share data)

                                   (Unaudited)

`Three Months Ended June 30,      Six Months Ended June 30,
                                                ---------------------------     ---------------------------
                                                    2003          2002              2003          2002
OPERATING REVENUES:                             ------------  -------------     ------------  ------------- 
   Medical Premiums.......................... $     239,142  $     211,408     $    474,222  $     418,052
   Military Contract Revenues................       115,431         93,740          219,844        179,194
   Professional Fees.........................         9,715          7,704           18,419         15,226
   Investment and Other Revenues.............         5,917          4,116            9,990          8,244
                                                ------------  -------------     ------------  -------------
         Total...............................       370,205        316,968          722,475        620,716
                                                ------------  -------------     ------------  -------------
OPERATING EXPENSES:
   Medical Expenses..........................       189,775        176,112          380,761        351,444
   Military Contract Expenses................       113,347         89,862          215,143        172,216
   General and Administrative Expenses.......        33,787         33,186           68,000         65,735
                                                ------------  -------------     ------------  -------------
         Total...............................       336,909        299,160          663,904        589,395
                                                ------------  -------------     ------------  -------------

OPERATING INCOME FROM CONTINUING OPERATIONS..        33,296         17,808           58,571         31,321
Interest Expense.............................        (1,530)        (1,902)          (3,150)        (4,834)
Other Income (Expense), Net..................          (332)          (126)            (343)          (106)
                                                ------------  -------------     ------------  -------------
INCOME FROM CONTINUING OPERATIONS
   BEFORE INCOME TAXES.......................        31,434         15,780           55,078         26,381
PROVISION FOR INCOME TAXES...................       (10,924)        (5,237)         (19,140)        (8,696)
                                                ------------  -------------     ------------  -------------
INCOME FROM CONTINUING OPERATIONS............        20,510         10,543           35,938         17,685
(LOSS) INCOME FROM DISCONTINUED
   OPERATIONS (net of income tax
   benefit (provision) of $987,
   ($64), $1,322 and ($323)), respectively...          (245)           (20)            (651)           219
                                                ------------  -------------     ------------  -------------
NET INCOME .................................. $      20,265  $      10,523     $     35,287  $      17,904
                                                ============  =============     ============  =============
EARNINGS PER COMMON SHARE:
Income from Continuing Operations............ $        0.75  $        0.37     $       1.27  $        0.63
(Loss) Income from Discontinued Operations...         (0.01)            --            (0.02)          0.01
                                                ------------  -------------     ------------  -------------
   Net Income ............................... $        0.74  $        0.37     $       1.25  $        0.64
                                                ============  =============     ============  =============
EARNINGS PER COMMON SHARE ASSUMING DILUTION:
Income from Continuing Operations............ $        0.68  $        0.34     $       1.18  $        0.58
(Loss) Income from Discontinued Operations...         (0.01)            --            (0.02)          0.01
                                                ------------  -------------     ------------  -------------
   Net Income ............................... $        0.67  $        0.34     $       1.16  $        0.59
                                                ============  =============     ============  =============`

See accompanying notes to condensed consolidated financial statements.

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SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES

                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

                                 (In thousands)

                                   (Unaudited)

`Six Months Ended June 30,
                                                                      ----------------------------
                                                                          2003           2002
                                                                      -------------  -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net Income ...................................................... $      35,287  $      17,904
   Adjustments to Reconcile Net Income to Net Cash
       Provided by Operating Activities:
          Loss (Income) from Discontinued Operations................           651           (219)
          Depreciation and Amortization.............................         7,715          9,662
          Deferred Compensation Expense.............................           293            292
          Provision for Doubtful Accounts...........................         1,201          1,192
          Loss on Disposal of Assets................................           789            130
   Changes in Assets and Liabilities:
          Other Assets .............................................        (5,335)        (4,086)
          Deferred Tax Asset........................................        12,156         24,499
          Other Liabilities.........................................         7,902         (4,449)
          Other Current Assets......................................       (10,872)         2,841
          Military Accounts Receivable..............................       (28,639)        (3,209)
          Military Health Care Payable..............................         9,053          3,746
          Medical Claims Payable....................................         5,912         13,797
          Accrued Payroll and Taxes.................................        10,044         10,326
          Unearned Premium Revenue..................................       (27,876)       (26,678)
                                                                      -------------  -------------
       Net Cash Provided by Operating Activities
          of Continuing Operations..................................        18,281         45,748
                                                                      -------------  -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
   Capital Expenditures, Net of Dispositions........................        (9,586)        (3,797)
   Change in Investments............................................        34,687        (29,483)
                                                                      -------------  -------------
       Net Cash Provided by (Used for) Investing Activities of
          Continuing Operations.....................................        25,101        (33,280)
                                                                      -------------  -------------

CASH FLOWS FROM FINANCING ACTIVITIES:
   Proceeds from Senior Convertible Debentures......................       115,000             --
   Proceeds from  Sale-Leaseback....................................            --          1,769
   Debt Issue Costs.................................................        (5,137)            --
   Payments on Debt and Capital Leases..............................       (60,460)       (29,988)
   Purchase of Treasury Stock.......................................       (34,267)            --
   Issuance of Stock in Connection with Stock Plans.................         4,294          3,384
                                                                      -------------  -------------
       Net Cash Provided by (Used for) Financing Activities of
          Continuing Operations.....................................        19,430        (24,835)
                                                                      -------------  -------------

NET CASH USED FOR DISCONTINUED OPERATIONS...........................       (29,785)       (26,595)
                                                                      -------------  -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS................        33,027        (38,962)

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD....................        45,778        107,114
                                                                      -------------  -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.......................... $      78,805  $      68,152
                                                                      =============  =============

Supplemental Condensed Consolidated Continuing Operations
  Statements of Cash Flows Information:
---------------------------------------
Cash Paid During the Period for Interest
   (Net of Amount Capitalized)...................................... $      (1,125) $      (3,800)
Net Cash (Paid) Received During the Period for Income Taxes.........       (10,378)        13,104
Non-cash Investing and Financing Activities:
   Retired Sale-Leaseback Assets, Liabilities
       and Financing Obligations ...................................            --         58,053`

See accompanying notes to condensed consolidated financial statements.

---



1. 	BASIS OF PRESENTATION

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 and the Company's annual audited consolidated
financial statements have been prepared in conformity with accounting principles
generally accepted in the United States of America; however, these statements 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 year ended December 31, 2002. In the opinion
of management, the accompanying unaudited condensed consolidated financial
statements reflect all material adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the financial results for the
interim periods presented.

The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Such estimates and
assumptions could change in the future as more information becomes available,
which could impact the amounts reported and disclosed herein. Actual results may
differ materially from estimates.

Certain amounts in the condensed consolidated financial
statements for the three and six months ended June 30, 2002 have been
reclassified to conform with the current year presentation.

2.	EMPLOYEE STOCK PLANS

In December 2002, the Financial Accounting Standards
Board ("FASB"), issued Statement of Financial Accounting Standards No.
148, "Accounting for Stock-Based Compensation - Transition and
Disclosure" ("SFAS No. 148").  SFAS No. 148 is an amendment of
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation" ("SFAS No. 123").  SFAS No. 148 requires
prominent disclosures in interim as well as annual financial statements about
the method of accounting for stock-based employee compensation and the effect of
the method used on reported net income.  The Company has continued to account
for its stock-based compensation using the intrinsic value method prescribed by
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," as amended.  Accordingly, no compensation cost has been
recognized for the Company's employee stock plans.

The following schedule reflects the pro forma impact on net
income and earnings per common share for the accounting of stock option grants
and the Company's employee stock purchase plan using SFAS No. 123, which would
result in the recognition of compensation expense for the fair value of stock
option grants and the employee stock purchase plan as computed using the Black-
Scholes option-pricing model.

`Three Months Ended June 30,     Six Months Ended June 30,
                                                     --------------------------     --------------------------
                                                         2003          2002             2003          2002
                                                     ------------  ------------     ------------  ------------
  (In thousands, except per share data)

Net income, as reported............................ $     20,265  $     10,523     $     35,287  $     17,904
Less: total stock-based employee compensation
   expense determined under fair value based
   methods for all  awards, net of tax.............       (2,319)       (1,359)          (3,417)       (2,508)
                                                     ------------  ------------     ------------  ------------
Pro forma net income .............................. $     17,946  $      9,164     $     31,870  $     15,396
                                                     ============  ============     ============  ============

Net income per share, as reported.................. $       0.74  $       0.37     $       1.25  $       0.64
Pro forma net income, per share ...................         0.65          0.32             1.13          0.55

Net income per share
   assuming dilution, as reported.................. $       0.67  $       0.34     $       1.16  $       0.59
Pro forma net income, per share ...................         0.60          0.30             1.05          0.50`

3. 	ASSET IMPAIRMENT, RESTRUCTURING, REORGANIZATION AND
OTHER COSTS

The table below presents a summary of asset impairment,
restructuring, reorganization and other cost activity for the periods indicated
that were included in general and administrative expenses. Discontinued
operations are excluded from this presentation.

`Other
                                           ------------ 
  (In thousands)
Balance, January 1, 2002................. $      4,447
Charges recorded.........................           --
Cash used................................           --
Non-cash activity........................         (500)
Changes in estimate......................           --
                                           ------------
Balance, December 31, 2002...............        3,947
Charges recorded.........................           --
Cash used................................           --
Non-cash activity........................           --
Changes in estimate......................           --
                                           ------------
Balance, June 30, 2003................... $      3,947
                                           ============`



The remaining other costs of $3.9 million are related to
legal claims. Management believes that the remaining reserves, as of June 30,
2003, are appropriate and that no revisions to the estimates are necessary at
this time.

#### 

4.	LONG-TERM DEBT

Sierra Debentures - In March 2003, the Company
issued $115.0 million aggregate principal amount of its 21⁄4% senior convertible
debentures due March 15, 2023.  The debentures pay interest, which is due semi-
annually on March 15 and September 15 of each year, commencing September 15,
2003.  Each $1,000 principal amount of debentures is convertible, at the option
of the holders, into 54.6747 shares of Sierra Health Services, Inc. common stock
prior to March 15, 2023 if (1) the sale price of the Company's common stock for
at least 20 trading days in a period of 30 consecutive trading days ending on
the last trading day of the preceding fiscal quarter exceeds 120% of the
conversion price per share of the Company's common stock on such last trading
day; (2) the debentures are called for redemption; (3) there is an event of
default with respect to the debentures; or (4) specified corporate transactions
have occurred.  The conversion rate is subject to certain adjustments.  This
conversion rate initially represents a conversion price of $18.29 per share.
Holders of the debentures may require the Company to repurchase all or a portion
of their debentures on March 15 in 2008, 2013 and 2018 or upon certain corporate
events including a change in control.  In either case, the Company may choose to
pay the purchase price of such debentures in cash or common stock or a
combination of cash and common stock.  The debentures can be redeemed by the
Company for cash beginning on or after March 20, 2008.

The Company used the net proceeds of the offering to repay
the $39.0 million outstanding under the then existing credit facility and to
contribute $35.0 million to Sierra Military Health Services, Inc.
("SMHS"), in furtherance of its bid for the TRICARE Next Generation
contract.  The Company also used $19.9 million of the proceeds to purchase 1.6
million shares of the Company's common stock under its repurchase program. The
remainder of the net proceeds were used for working capital and general
corporate purposes including additional share repurchases.

New Credit Facility - On March 3, 2003, the Company
entered into a new $65.0 million revolving credit facility which replaced the
amended and restated credit facility.  The new facility may be increased up to
an aggregate amount of $125.0 million upon receipt of new commitments from
existing or additional lenders.  Interest on the facility is initially LIBOR
plus 2.25%.  The facility will expire on April 30, 2006 but can be extended, at
the sole discretion of each of the lenders, until March 3, 2008.  The new
facility is available for general corporate purposes.  The Company has not yet
utilized this facility.

The new credit facility is secured by guarantees by certain
of the Company's subsidiaries and a first priority perfected security interest
in (i) all the capital stock of each of the Company's unregulated, material
domestic subsidiaries (direct or indirect) as well as all of the capital stock
of certain regulated, material domestic subsidiaries and (ii) all other present
and future assets and properties of the Company and those of its subsidiaries
that guarantee the credit agreement obligations (including, without limitation,
accounts receivable, inventory, real property, equipment, contracts, trademarks,
copyrights, patents, license rights and general intangibles) subject, in each
case, to the exclusion of the capital stock of CII Financial, Inc. or any of its
subsidiaries and certain other exclusions.

The new revolving credit facility
has covenants that limit the Company's ability and the ability of the Company's
subsidiaries to dispose of assets, incur indebtedness, incur other liens, make
investments, loans or advances, make acquisitions, engage in mergers or
consolidations, or make capital expenditures and otherwise restricts certain
corporate activities.  In addition, the Company is required to comply with
specified financial ratios as set forth in the new credit agreement.  The
Company believes it is in compliance with all covenants of the new credit
agreement.

#### 

5.	SHARE REPURCHASE PROGRAM

The Company's Board of Directors authorized a program for
the repurchase of up to 4.6 million shares of the Company's common stock.
Through June 30, 2003, the Company has repurchased a total of 2.6 million shares
for $34.3 million.

6. 	TEXAS DISCONTINUED OPERATIONS

During the third quarter of 2001, the Company announced
its plan to exit the Texas HMO health care market and received formal approval
from the Texas Department of Insurance to withdraw its HMO operations in mid-
October.  The Company ceased providing HMO health care coverage in Texas on
April 17, 2002.

The Company elected to early adopt SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets,"
("SFAS No. 144"), effective January 1, 2001. In accordance with SFAS
No. 144, the Company's Texas HMO health care operations were reclassified as
discontinued operations.



The following are the unaudited condensed assets and
liabilities of the discontinued Texas HMO health care operations:

`June 30,        December 31,
                                                                2003              2002
                                                          ----------------  ----------------
  (In thousands)                                                                            
ASSETS                                                                                      
 Cash and Cash Equivalents............................ $              199  $             --
 Investments..........................................              4,167             4,263
 Other Assets.........................................                115               916
 Property and Equipment, Net..........................             12,022            11,967
                                                          ----------------  ----------------
ASSETS OF DISCONTINUED OPERATIONS.....................             16,503            17,146
                                                          ----------------  ----------------
LIABILITIES                                                                                 
 Accounts Payable and Other Liabilities...............              4,600             9,059
 Medical Claims Payable...............................                395             1,754
 Mortgage Loan........................................                 --            14,961
                                                          ----------------  ----------------
LIABILITIES OF DISCONTINUED OPERATIONS................              4,995            25,774
                                                          ----------------  ----------------
NET ASSETS (LIABILITIES) OF DISCONTINUED OPERATIONS... $           11,508  $         (8,628)
                                                          ================  ================`

The assets and liabilities above do not include an
intercompany liability of $55.6 million from Texas Health Choice, L.C.,
("TXHC") to Sierra at June 30, 2003.  The liability is partially
secured by certain of the TXHC land and buildings and has been eliminated upon
consolidation.

Property and equipment consists mainly of real estate
properties located in the Dallas/Fort Worth metroplex areas.  TXHC acquired
these properties from Kaiser Foundation Health Plan of Texas ("Kaiser-
Texas"), for $44.0 million as part of the acquisition of certain assets of
Kaiser-Texas in October 1998.  In June 2000, as part of its restructuring and
reorganization of the Texas HMO health care operations, the Company announced
its intention to sell these properties.  The real estate was written down to its
estimated fair value and the Company took an asset impairment charge of $27.0
million.  The real estate was encumbered by a mortgage loan payable to Kaiser-
Texas, which was guaranteed by Sierra.  In December 2001, the mortgage loan was
restructured and Kaiser-Texas forgave $8.5 million of the outstanding principal
balance of the mortgage loan and extended the maturity from November 1, 2003 to
November 1, 2006.  In accordance with accounting principles generally accepted
in the United States of America, the carrying amount of the mortgage loan was
equal to the total future cash payments (interest and principal).

During the third and fourth quarters of 2002, TXHC sold four
of the eight real estate properties and a parcel of land.  As required under the
terms of the mortgage loan agreement, pre-determined minimum amounts of the
mortgage note are required to be paid as each piece of real estate is sold.
Accordingly, total payments of $11.3 million were made to Kaiser-Texas on the
mortgage loan.  Since the principal payments resulted in a reduction of future
interest, future accrued interest was reduced and a gain, net of tax, of $1.9
million was recorded.  During the second quarter of 2003, the remaining mortgage
loan was paid off, resulting in a gain, net of tax, of  $1.3 million.

The following are unaudited condensed statements of
operations of the discontinued Texas HMO health care operations:

`Three Months Ended June 30,    Six Months Ended June 30,
                                                      ---------------------------    -------------------------
                                                          2003          2002             2003         2002
                                                      ------------  -------------    ------------  -----------  
  (In thousands)
Operating Revenues.................................. $         35  $         265    $         71  $     3,753
                                                      ------------  -------------    ------------  -----------

 Medical Expenses...................................          (72)        (5,845)         (1,451)      (3,810)
 General and Administrative Expenses, Net...........        1,234          6,592            (400)       8,647
 Interest Expense and Other, Net
   (including rental income)........................       (2,418)          (482)         (2,657)      (1,084)
                                                      ------------  -------------    ------------  -----------
 Total Expenses, Net................................       (1,256)           265          (4,508)       3,753
                                                      ------------  -------------    ------------  -----------
 Income from Discontinued Operations Before Taxes...        1,291             --           4,579           --
 Income Tax Provision...............................         (450)            --          (1,600)          --
                                                      ------------  -------------    ------------  -----------
 Net Income from Discontinued Operations............ $        841  $          --    $      2,979  $        --
                                                      ============  =============    ============  ===========`

The operating revenues of $35,000 and $71,000 for the three
and six months ended June 30, 2003, respectively, are all related to investment
income compared to investment income of $38,000 and $79,000 for the three and
six months ended June 30, 2002, respectively.  All of the discontinued Texas HMO
health care operations had previously been a component of the "managed care
and corporate operations" segment.

In conjunction with the Company's plan to exit the Texas HMO
health care market, during the third quarter of 2001, the Company recorded
charges of $10.6 million for premium deficiency medical costs, $1.6 million to
write down certain Texas furniture and equipment, $2.0 million in lease and
other termination costs, $1.8 million in legal and restitution costs, $500,000
in various other exit related costs and $570,000 in premium deficiency
maintenance.

The Company has continually evaluated its remaining
liabilities and made adjustments as appropriate.  During the second quarter of
2002, the medical claims run out had been favorable compared with the Company's
original projection and the legal and other costs were estimated to be higher
than originally anticipated.  As a result, during the second quarter, the
Company reduced its medical claims payable and medical expenses by $5.0 million
and increased its estimate of legal, restitution and other exit related costs by
$5.0 million.

During the third and fourth quarters of 2002, the Company had
favorable development in both medical claims and legal, restitution and other
exit related costs.  As a result, the Company reduced its estimate for medical
claims payable by $4.8 million and for legal, restitution and other exit related
costs by $4.2 million.

In the first quarter of 2003, the Company made a further
adjustment due to continued favorable development.  The Company's estimate for
medical claims payable was reduced by $1.4 million and legal, restitution and
other exit related costs and related accruals were reduced by $1.9 million.
Included in the $1.9 million reduction is $1.2 million that had been originally
recorded as a charge in the third quarter of 2001 and is presented in the table
below.  In the second quarter of 2003, the Company determined that it needed to
increase its legal and restitution accruals by approximately $500,000.

The table below presents a summary of current activity of the
discontinued Texas HMO health care operations' charge recorded in the third
quarter of 2001.



`Restructuring     Premium
                                      and        Deficiency
                                 Reorganization  Maintenance    Total
                                 --------------  -----------  ---------
  (In thousands)
Balance, January 1, 2002....... $        4,294  $       570  $   4,864
Charges recorded...............             --           --         --
Cash used......................         (2,490)        (570)    (3,060)
Non-cash activity..............         (4,222)          --     (4,222)
Changes in estimate............          5,000           --      5,000
                                 --------------  -----------  ---------
Balance, December 31, 2002.....          2,582           --      2,582
Charges recorded...............             --           --         --
Cash used......................             --           --         --
Non-cash activity..............           (523)          --       (523)
Changes in estimate............         (1,150)          --     (1,150)
                                 --------------  -----------  ---------
Balance, June 30, 2003......... $          909  $        --  $     909
                                 ==============  ===========  =========`

The remaining restructuring and reorganization costs of
$909,000 are primarily due to legal and related costs and various lease and
other exit related costs. Management believes that the remaining reserves, as of
June 30, 2003, are appropriate and that no further revisions to the estimates
are necessary at this time.  Based on the current estimated Texas HMO health
care run-out costs and recorded reserves, the Company believes it has adequate
funds available and the ability to fund the anticipated obligations.



7.	CII FINANCIAL, INC. DISCONTINUED OPERATIONS



On January 15, 2003, the Company announced that it was
exploring strategic alternatives to sell its workers' compensation company, CII
Financial, Inc., ("CII").  Sierra's Board of Directors approved the
plan to sell the operations on December 31, 2002.  Accordingly, beginning in the
fourth quarter of 2002, the Company reclassified its workers' compensation
insurance business as discontinued operations.  CII represented the majority of
the Company's previous workers' compensation operations segment and specialty
product income and expenses.  See Note 10 for a discussion of the recast segment
presentation.



The following are the unaudited assets and liabilities of the
discontinued operations of CII:



`June 30,        December 31,
                                                           2003              2002
                                                     ----------------  ----------------  
  (In thousands)                                                                         
ASSETS                                                                                   
Cash and Cash Equivalents.......................... $         49,166  $         23,060
Investments........................................          271,743           287,242
Reinsurance Recoverable............................          181,467           189,409
Property and Equipment, Net........................            1,578             2,167
Other Assets.......................................           41,807            46,034
                                                     ----------------  ----------------
TOTAL ASSETS.......................................          545,761           547,912
                                                     ----------------  ----------------
                                                                                        
LIABILITIES                                                                             
Accounts Payable and Other Accrued Expenses........           32,691            30,989
Senior Debentures..................................               --            16,765
Reserve for Loss and Loss Adjustment Expenses......          431,086           427,192
                                                     ----------------  ----------------
TOTAL LIABILITIES..................................          463,777           474,946
                                                     ----------------  ----------------
NET ASSETS OF DISCONTINUED OPERATIONS.............. $         81,984  $         72,966
                                                     ================  ================`

All intercompany notes receivable/payable have been
eliminated upon consolidation.



The following are the unaudited condensed statements of
operations of the discontinued operations of CII:



`Three Months Ended June 30,        Six Months Ended June 30,
                                              ------------------------------    ------------------------------
                                                   2003            2002              2003            2002
                                              --------------  --------------    --------------  -------------- 
  (In thousands)
OPERATING REVENUES:
Specialty Product Revenues.................. $       35,233  $       43,732    $       72,044  $       85,311
Investment and Other Revenues...............          2,820           3,263             7,300           6,511
                                              --------------  --------------    --------------  --------------
    Total Revenues..........................         38,053          46,995            79,344          91,822
                                              --------------  --------------    --------------  --------------

OPERATING EXPENSES:
Specialty Product Expenses..................         41,362          47,026            86,747          91,390
Interest Expense and Other
  (Income) Expense, Net.....................           (786)            (75)             (851)           (110)
                                              --------------  --------------    --------------  --------------
    Total Operating Expenses................         40,576          46,951            85,896          91,280
                                              --------------  --------------    --------------  --------------

(Loss) Income from Discontinued
   Operations Before Income Tax ............         (2,523)             44            (6,552)            542

Income Tax Benefit (Provision)..............          1,437             (64)            2,922            (323)
                                              --------------  --------------    --------------  --------------
Net (Loss) Income from Discontinued
   Operations............................... $       (1,086) $          (20)   $       (3,630) $          219
                                              ==============  ==============    ==============  ==============`

In the fourth quarter of 2002, in conjunction with the
decision to dispose of the workers' compensation operations, CII recorded
valuation adjustments of $17.3 million, $11.3 million after tax, to reduce the
operations to its estimated net realizable value upon disposition.  The
valuation adjustments included the write down of accounts receivable, fixed
assets and certain other assets of $3.5 million, an investment valuation
adjustment of $500,000 and additional loss reserves of $8.3 million for the 2002
accident year and $5.0 million for prior accident years.



In the second quarter of 2003, CII recorded an additional
valuation adjustment of $4.0 million, $2.6 million after tax, to further reduce
the operations to its estimated net realizable value upon disposition based on
the most recent information available.  The valuation adjustments included the
write down of accounts receivable, fixed assets and certain other
adjustments.



During the six months ended June 30, 2003 and 2002, the
Company experienced net adverse loss development on prior years of $9.4 million
and $5.3 million, respectively.  The net adverse loss development recorded was
largely attributable to higher costs per claim, or claim severity, in
California.  Many workers' compensation insurance carriers in California are
also experiencing high claim severity.  Factors influencing the higher claim
severity include rising average temporary disability costs, the increase in the
number of major permanent disability claims, medical inflation and adverse court
decisions related to medical control of a claimant's treatment.



Long-Term Debt - Senior Debentures.  At September 30,
2000, CII had approximately $47.1 million of subordinated debentures outstanding
that were due on September 15, 2001.  These subordinated debentures were neither
assumed nor guaranteed by Sierra and were subordinated to Sierra's credit
facility debt.  In December 2000, CII commenced an offer to exchange the
subordinated debentures for cash and/or new debentures.  On May 7, 2001, CII
closed its exchange offer on $42.1 million of its outstanding subordinated
debentures.  CII purchased $27.1 million in principal amount of subordinated
debentures for $20.0 million in cash and issued $15.0 million in new 91⁄2% senior
debentures, due September 15, 2004, in exchange for $15.0 million in
subordinated debentures. The remaining $5.0 million in subordinated debentures
were paid at maturity.



The transaction was accounted for as a restructuring of debt;
therefore, all subsequent cash payments, including interest, related to the
debentures were reductions of the carrying amount of the debentures and no
additional interest expense was recognized.



On June 3, 2003, CII called the outstanding 91⁄2% senior
debentures and redeemed them at the applicable premium of 102.5% along with all
outstanding accrued interest.  The transaction resulted in a pre-tax gain of
$1.4 million.



Intercompany Notes Receivable/Payable.  In connection
with the exchange offer for the subordinated debentures, CII has promissory
notes payable to Sierra aggregating $17.0 million and bearing interest at 9.5%
under which principal and interest are due on demand.



Also in connection with the exchange offer for the
subordinated debentures, California Indemnity Insurance Company, a wholly owned
subsidiary of CII Financial, Inc., loaned Sierra $7.5 million.  The loan bears
interest at 8.5%, which is due semi-annually on March 31 and September 30 of
each year, commencing September 30, 2001.  All outstanding principal and accrued
interest is due on September 30, 2004.  The loan is secured by the common stock
of Sierra Health and Life Insurance Company, Inc., a wholly owned subsidiary of
Sierra, equal to 120% of the principal amount outstanding.



In connection with the redemption of the outstanding 91⁄2%
senior debentures on June 3, 2003, CII entered into a promissory note payable to
another unregulated subsidiary of Sierra aggregating $15.6 million.  The loan
bears interest at 7.5%, which is due semi-annually on March 15 and September 15
of each year, commencing September 15, 2003.  The note is payable on demand
after September 15, 2004.  All intercompany notes receivable/payable have been
eliminated upon consolidation.



8.	EARNINGS PER SHARE:



The following table provides a reconciliation of basic
and diluted earnings per share:

`Three Months Ended June 30,      Six Months Ended June 30,
                                               ----------------------------    ----------------------------
                                                   2003           2002             2003           2002
                                               -------------  -------------    -------------  -------------
  (In thousands, except per share data)


Income from continuing operations............ $      20,510  $      10,543    $      35,938  $      17,685
(Loss) income from discontinued operations...          (245)           (20)            (651)           219
                                               -------------  -------------    -------------  -------------
Net income................................... $      20,265  $      10,523    $      35,287  $      17,904
                                               =============  =============    =============  =============
Earnings per common share:
Income from continuing operations............ $        0.75  $        0.37    $        1.27  $        0.63
(Loss) income from discontinued operations...         (0.01)            --            (0.02)          0.01
                                               -------------  -------------    -------------  -------------
Net income................................... $        0.74  $        0.37    $        1.25  $        0.64
                                               =============  =============    =============  =============
Earnings per common share assuming dilution:
Income from continuing operations............ $        0.68  $        0.34    $        1.18  $        0.58
(Loss) income from discontinued operations...         (0.01)            --            (0.02)          0.01
                                               -------------  -------------    -------------  -------------
Net income................................... $        0.67  $        0.34    $        1.16  $        0.59
                                               =============  =============    =============  =============

Weighted average common shares outstanding...        27,451         28,207           28,185         28,146
Dilutive options outstanding.................         2,299          2,460            2,018          2,150
Restricted Shares outstanding................           244            232              244            233
Weighted average common shares outstanding     -------------  -------------    -------------  -------------
   assuming dilution.........................        29,994         30,899           30,447         30,529
                                               =============  =============    =============  =============`

Stock options to purchase 259,000 and 305,000 shares for the
three months ended June 30, 2003 and 2002, respectively, and 281,000 and 335,000
shares for the six months ended June 30, 2003 and 2002, respectively, were not
dilutive and, therefore, were not included in the computation of diluted
earnings per share.  Also excluded was the effect of the Company's senior
convertible debentures as they were not dilutive.  Each $1,000 principal amount
of debentures is convertible, at the option of the holders, into 54.6747 shares
of Sierra Health Services, Inc., common stock, upon certain conditions including
the sale price of Sierra's common stock exceeding 120% of the conversion price
at specified times.  This conversion rate, which is adjustable, initially
represents a conversion price of $18.29 per share.

9.	COMPREHENSIVE INCOME

The following table presents comprehensive income for the periods
indicated:

`Three Months Ended June 30,      Six Months Ended June 30,
                                                   ----------------------------    ----------------------------
                                                       2003           2002             2003           2002
                                                   -------------  -------------    -------------  -------------  
  (In thousands)
Net Income ...................................... $      20,265  $      10,523    $      35,287  $      17,904
Change in Unrealized Holding Gain
  on Available-for-Sale Investments, net of tax..          (708)         4,195              (35)         1,112
Change in Minimum Pension Liability, net of tax..           368             --              206             --
                                                   -------------  -------------    -------------  -------------
Comprehensive Income ............................ $      19,925  $      14,718    $      35,458  $      19,016
                                                   =============  =============    =============  =============`



10. 	SEGMENT REPORTING

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

Due to the classification of the workers' compensation
insurance operations as discontinued operations in 2002, all amounts presented
have been recast to conform with the two segment presentation at June 30,
2003.

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.

`Managed      Military
                                                Care and      Health
                                               Corporate     Services
                                               Operations   Operations     Total
                                              ------------  -----------  ----------
  (In thousands)                                                                   
Three Months Ended June 30, 2003                                                   
Medical Premiums............................ $    239,142  $        --  $  239,142
Military Contract Revenues..................           --      115,431     115,431
Professional Fees...........................        9,715           --       9,715
Investment and Other Revenues...............        5,323          594       5,917
                                              ------------  -----------  ----------
   Total Revenue............................ $    254,180  $   116,025  $  370,205
                                              ============  ===========  ==========

Segment Operating Profit.................... $     30,618  $     2,678  $   33,296
Interest Expense............................       (1,446)         (84)     (1,530)
Other Income (Expense), Net.................         (712)         380        (332)
                                              ------------  -----------  ----------
Income from Continuing Operations
   Before Income Taxes...................... $     28,460  $     2,974  $   31,434
                                              ============  ===========  ==========
                                                                                   
Three Months Ended June 30, 2002                                                   
Medical Premiums............................ $    211,408  $        --  $  211,408
Military Contract Revenues..................           --       93,740      93,740
Professional Fees...........................        7,704           --       7,704
Investment and Other Revenues...............        3,490          626       4,116
                                              ------------  -----------  ----------
   Total Revenue............................ $    222,602  $    94,366  $  316,968
                                              ============  ===========  ==========

Segment Operating Profit.................... $     13,304  $     4,504  $   17,808
Interest Expense............................       (1,850)         (52)     (1,902)
Other Income (Expense), Net.................         (165)          39        (126)
                                              ------------  -----------  ----------
Income from Continuing Operations
   Before Income Taxes...................... $     11,289  $     4,491  $   15,780
                                              ============  ===========  ==========
                                                                                   
Six Months Ended June 30, 2003                                                     
Medical Premiums............................ $    474,222  $        --  $  474,222
Military Contract Revenues..................           --      219,844     219,844
Professional Fees...........................       18,419           --      18,419
Investment and Other Revenues...............        9,159          831       9,990
                                              ------------  -----------  ----------
   Total Revenue............................ $    501,800  $   220,675  $  722,475
                                              ============  ===========  ==========

Segment Operating Profit.................... $     53,039  $     5,532  $   58,571
Interest Expense............................       (3,020)        (130)     (3,150)
Other Income (Expense), Net.................         (705)         362        (343)
                                              ------------  -----------  ----------
Income from Continuing Operations
   Before Income Taxes...................... $     49,314  $     5,764  $   55,078
                                              ============  ===========  ==========
                                                                                   
Six Months Ended June 30, 2002                                                     
Medical Premiums............................ $    418,052  $        --  $  418,052
Military Contract Revenues..................           --      179,194     179,194
Professional Fees...........................       15,226           --      15,226
Investment and Other Revenues...............        7,159        1,085       8,244
                                              ------------  -----------  ----------
   Total Revenue............................ $    440,437  $   180,279  $  620,716
                                              ============  ===========  ==========

Segment Operating Profit.................... $     23,258  $     8,063  $   31,321
Interest Expense............................       (4,737)         (97)     (4,834)
Other Income (Expense), Net.................         (188)          82        (106)
                                              ------------  -----------  ----------
Income from Continuing Operations
   Before Income Taxes...................... $     18,333  $     8,048  $   26,381
                                              ============  ===========  ==========`



11. 	INVESTMENTS

Investments consist principally of U.S. Government and
its agencies' securities and municipal bonds, as well as corporate and mortgage-
backed securities.  At June 30, 2003, over 90% of the Company's portfolio is
invested in U.S. Government and its agencies' securities and municipal bonds.
All non-restricted investments that are designated as available-for-sale are
classified as current assets.  These investments are available for use in the
current operations regardless of contractual maturity dates.  Non-restricted
investments designated as held-to-maturity are classified as current assets if
expected maturity is within one year of the balance sheet date.  Otherwise, they
are classified as long-term investments. Realized gains and losses are
calculated using the specific identification method and are included in
investment and other revenues.  Unrealized holding gains and losses on
available-for-sale securities are included as a separate component of
stockholders' equity, net of income tax effects, until realized.

Investments that the Company has the intention and ability to
hold to maturity are stated at amortized cost and categorized as held-to-
maturity.  All of the held-to-maturity investments are part of the discontinued
workers' compensation operations.  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. The Company does not have any other than temporary investment
impairments.

12. 	RECENT ACCOUNTING PRONOUNCEMENTS

In November 2002, the FASB issued Interpretation No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees" ("FIN
45").  FIN 45 requires a guarantor to recognize, at the inception of a
guarantee, a liability for the fair value of the obligation it has undertaken in
issuing the guarantee. The adoption of FIN 45 did not have a material effect on
the Company's consolidated financial position or results of operations.

In January 2003, the FASB issued Interpretation No. 46,
"Consolidation of Variable Interest Entities" ("FIN 46").  FIN 46
requires an investor with a majority of the variable interests in a variable
interest entity to consolidate the entity and also requires majority and
significant variable interest investors to provide certain disclosures.  The
adoption of FIN 46 did not have a material effect on the Company's consolidated
financial position or results of operations.

In April 2002, the FASB issued Statement of Financial
Accounting Standards No. 145, "Rescission of FASB Statements No. 4, 44, and
64, Amendment of FASB Statement No. 13, and Technical Corrections"
("SFAS No. 145"). SFAS No. 145 requires that gains and losses from
extinguishment of debt be classified as extraordinary items only if they meet
the criteria in Accounting Principles Board Opinion No. 30 ("Opinion No.
30"). Applying the provisions of Opinion No. 30 will distinguish
transactions that are part of an entity's recurring operations from those that
are unusual and infrequent that meet the criteria for classification as an
extraordinary item. SFAS No. 145 is effective for the Company beginning January
1, 2003. The adoption of SFAS No. 145 did not have a material effect on the
Company's consolidated financial position or results of operations.

In June 2002, the FASB issued Statement of Financial
Accounting Standards No. 146, "Accounting for Costs Associated with Exit or
Disposal Activities" ("SFAS No. 146"). SFAS No. 146 addresses
financial accounting and reporting for costs associated with exit or disposal
activities and nullifies Emerging Issues Task Force Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)".  SFAS No. 146 requires that a liability for a cost
associated with an exit or disposal activity be recognized when the liability is
incurred.  A fundamental conclusion reached by the FASB in this statement is
that an entity's commitment to a plan, by itself, does not create a present
obligation to others that meets the definition of a liability.  SFAS No. 146
also establishes that fair value is the objective for initial measurement of the
liability.  The provisions of this statement are effective for exit or disposal
activities that are initiated after December 31, 2002, with early adoption
encouraged.  The adoption of SFAS No. 146 did not have a material effect on the
Company's consolidated financial position or results of operations.

In April 2003, the FASB issued Statement of Financial
Accounting Standards No. 149, "Amendment of Statement 133 on Derivative
Instruments and Hedging Activities" ("SFAS No. 149"), which amends and clarifies
financial accounting and reporting for derivative instruments, including certain
derivative instruments embedded in other contracts and for hedging activities
under SFAS No. 133.  SFAS No. 149 is effective for contracts entered into or
modified after June 30, 2003 except for the provisions that were cleared by the
FASB in prior pronouncements. The Company does not expect the adoption of SFAS
No. 149 to have a material effect on the Company's consolidated financial
position or results of operations.

In May 2003, the FASB issued Statement of Financial
Accounting Standards No. 150, "Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity" ("SFAS No. 150"). This statement
establishes standards for how an issuer classifies and measures in its statement
of financial position certain financial instruments with characteristics of both
liabilities and equity. In accordance with the standard, financial instruments
that embody obligations for the issuer are required to be classified as
liabilities. This Statement is effective for financial instruments entered into
or modified after May 31, 2003. The adoption of SFAS No. 150 did not have a
material effect on the Company's consolidated financial position or results of
operations.

ITEM 2.

The following discussion and
analysis provides information which management believes is relevant for an
assessment and understanding of our consolidated financial condition and results
of operations. The discussion should be read in conjunction with our audited
consolidated financial statements and accompanying notes for the year ended
December 31, 2002, and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included in our 2002 annual report on Form
10-K filed with the Securities and Exchange Commission on March 24, 2003, and in
conjunction with our unaudited condensed consolidated financial statements and
accompanying notes for the three and six month periods ended June 30, 2003 and
2002, included in this Form 10-Q. The information contained below is subject to
risk factors. We urge the reader to review carefully the section "Risk Factors"
in our 2002 annual report on Form 10-K for a more complete discussion of the
risks associated with an investment in our securities. See "Forward-Looking
Statements" and "Risk Factors" under Item 1 of our 2002 annual report
on Form 10-K.

This report on Form 10-Q contains "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933
and Section 21E of the Securities Exchange Act of 1934, both as amended.  The
forward-looking statements regarding our business and results of operations
should be considered by our stockholders or any reader of our business or
financial information along with the risk factors discussed in our 2002 annual
report on Form 10-K.  All statements other than statements of historical fact
are forward-looking statements for purposes of federal and state securities
laws. The cautionary statements are made pursuant to the "safe harbor"
provisions of the Private Securities Litigation Reform Act of 1995, as amended,
and identify important factors that could cause our actual results to differ
materially from those expressed in any projected, estimated or forward-looking
statements relating to us.  These forward-looking statements are generally
identified by their use of terms and phrases such as "anticipate,"
"believe," "could,"  "estimate,"
"expect,"  "hope,"  "intend,"  "may,"
"plan,"  "predict,"  "project,"
"seeks," "will," "continue," and other similar
terms and phrases, including references to assumptions.

Although we believe that the expectations reflected in any of
our forward-looking statements are reasonable, actual results could differ
materially from those projected or assumed in any of our forward-looking
statements. Readers are cautioned not to place undue reliance on these forward-
looking statements that speak only as of the date hereof. We undertake no
obligation to republish revised forward-looking statements to reflect events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events.

Critical Accounting Policies and Estimates

Our consolidated financial statements have been prepared
in conformity with accounting principles generally accepted in the United States
of America.  In preparing these financial statements, we are required to make
judgments, assumptions and estimates, which we believe are reasonable and
prudent based on the available facts and circumstances.  These judgments,
assumptions and estimates affect certain of our revenues and expenses and their
related balance sheet accounts and in disclosing our contingent assets and
liabilities.  Our most significant accounting estimates are for our premium
allowance, the liability for medical claims payable, military contract revenues
and expenses, investment impairment, litigation and legal accruals, reserve for
losses and loss adjustment expense, or LAE, reinsurance recoverables and
deferred tax assets and liabilities. We base our assumptions and estimates
primarily on historical experience and trends and factor in known and projected
trends.  On an on-going basis, we re-evaluate our selection of assumptions and
the method of calculating our estimates.  Actual results, however, may
materially differ from our calculated estimates and this difference would be
reported in our current operations.

For a more detailed description of our critical accounting
policies and estimates, see Item 7 of our 2002 annual report on Form 10-K and
for a more extensive discussion of our accounting policies, see Note 2, Summary
of Significant Accounting Policies, in the Notes to the Consolidated Financial
Statements in our 2002 annual report on Form 10-K filed on March 24, 2003.

RESULTS OF OPERATIONS, THREE MONTHS ENDED JUNE 30, 2003,
COMPARED TO THREE MONTHS ENDED JUNE 30, 2002.

Total Operating Revenues increased approximately
16.8% to $370.2 million from $317.0 million for 2002.



The change in operating revenues was comprised of the
following:



- An increase in medical premiums of $27.7 million
- An increase in military contract revenues of $21.7
million
- An increase in professional fees of $2.0 million
- An increase in investment and other revenues of $1.8
million



Medical Premiums from our HMO and managed indemnity
insurance subsidiaries increased from $211.4 million to $239.1 million, an
increase of $27.7 million or 13.1%. The $27.7 million increase in premium
revenue reflects a 7.6% increase in Medicare member months (the number of months
individuals are enrolled in a plan), a 28.9% increase in Medicaid member months
and a 3.6% increase in commercial member months.  The growth in Medicare member
months contributes significantly to the increase in premium revenues as the
Medicare per member premium rates are more than three times higher than the
average commercial premium rate.

HMO and POS premium rates for renewing
commercial groups increased on average 10% to 12% while the overall recorded per
member per month revenue increase, including new and continuing business, was
approximately 14%.  Managed indemnity rates on renewing groups increased
approximately 10%.  We did not receive a Medicaid rate increase in 2002 or 2003.
The basic Medicare rate increase received in 2003 was approximately 2.0%.  Our
overall Medicare rate increase was approximately 2.2% due primarily to an
increase in the Social HMO membership as a percentage of our total Medicare
membership.

The Centers for Medicare and Medicaid Services, or CMS,
has adopted a new risk adjustment payment methodology for Medicare beneficiaries
who are enrolled in managed care programs, including the Social HMO.  Beginning
January 2004, 90% of the per member per month prospective payment for the Social
HMO members will be based on the member demographics of the current Social HMO
payment methodology and 10% will be based on the risk-adjusted payment
methodology used for other Medicare+Choice plans.  As a result, we are
projecting an increase in our CMS rate of approximately 2.2% for 2004.  There is
ongoing activity in Congress to extend the Social HMO program beyond 2004;
however, there is no guarantee at this time that the Social HMO contract will be
renewed beyond 2004.  If the reimbursement for these members decreases
significantly and related benefit changes are not made timely, there could be a
materially adverse effect on our business.  Continued medical premium revenue
growth is principally dependent upon continued enrollment in our products and
upon competitive and regulatory factors.

Military Contract Revenues increased from $93.7
million to $115.4 million, an increase of $21.7 million or 23.1%. The increase
in revenue is primarily the result of increased eligible beneficiaries resulting
from the call up of reservists in Region 1, additional TRICARE change orders and
the positive impact of the first year of our contract extension which began June
2003.  The base monthly revenue under the contract extension is higher than it
was under the previous contract.  Family members of reservists are eligible for
the TRICARE program after 30 days.

Sierra Military Health Services, Inc., or SMHS, completed the
last year of a five-year contract in May 2003, and has begun the first year of
the contract extension which can be up to four additional years at the
government's sole option on a year-to-year basis.  The Department of Defense, or
DoD, is also currently procuring bids for managed care services under the
TRICARE Next Generation contract, or the T-Nex contract, in a combined and
larger North Region (covering Michigan, Ohio, Kentucky, Indiana, Illinois,
Wisconsin, West Virginia and North Carolina in addition to the areas that make
up Region 1 which we currently serve).  SMHS submitted its bid to the DoD for
the T-Nex contract for the North Region on January 29, 2003, with Sierra as a
proposed guarantor.  The award decision for this contract is expected to be made
in the third quarter of 2003.  Once awarded, the new contractor is scheduled to
be fully operational in Region 1 by the third quarter of 2004 based on the
current timetable set by the DoD, and the new contract would supersede the
remainder of the contract extension we have negotiated with the DoD under our
current TRICARE Region 1 contract.  In March 2003, we contributed $35.0 million
of the proceeds from the sale of the Sierra senior convertible debentures to
SMHS in furtherance of its bid for the T-Nex contract.

Professional Fees increased from $7.7 million
to $9.7 million, an increase of $2.0 million, or 26.1% as a result of increased
visits due to membership growth, a higher percentage of members selecting our
owned medical group and an increase in related services performed by our other
provider subsidiaries.

Investment and Other Revenues increased from
$4.1 million to $5.9 million, an increase of $1.8 million or 43.8%.  Investment
revenues increased due to higher average invested balances, an increase in net
gains on the sale of investments, higher than usual gains on our deferred
compensation plan assets and an increase in revenues associated with
administrative services.  Investment and other revenues now include the revenue
associated with administrative services, which were previously reported as part
of specialty product revenues.

Medical Expenses increased from $176.1 million
to $189.8 million, an increase of $13.7 million or 7.8%.  The increase is due
primarily to our increased membership which is in part offset by a lower medical
care ratio.  Medical expenses as a percentage of medical premiums and
professional fees decreased to 76.3% from 80.4%.  The favorable decrease is
primarily due to premium yields in excess of cost and utilization increases and
was partially offset by malpractice cost increases at our medical provider
subsidiary.  Our medical claims payable liability requires us to make
significant estimates.

We contract with hospitals, physicians and other
independently contracted providers of health care under capitated or discounted
fee-for-service arrangements including hospital per diems to provide medical
care services to members.  Capitated providers are at risk for a portion of the
cost of medical care services provided to our members in the relevant geographic
areas; however, we are ultimately responsible for the provision of services to
our members should the capitated provider be unable to provide the contracted
services.  We incurred capitation expenses of $26.6 million and $23.0 million or
14.0% and 13.0% of our total medical expenses for the three months ended June
30, 2003 and 2002, respectively.

During the third quarter of 2002, we entered into a new
hospital contract.  With this new contract, which began October 1, 2002, we hold
some form of contracted provider relationship with every hospital in the Las
Vegas area.

Military Contract Expenses increased from $89.9
million to $113.3 million, an increase of $23.4 million or 26.1%. The increase
is consistent with the increase in revenues discussed previously and includes
$1.8 million in bid proposal costs. Health care delivery expense consists
primarily of costs to provide managed health care services to eligible
beneficiaries in accordance with Sierra's TRICARE contract.  Under the contract,
SMHS provides health care services to approximately 672,000 eligible individuals
of active duty military personnel, military retirees under the age of 65 and
dependents of military retirees through a network of approximately 55,000 health
care providers and certain other subcontractor partnerships.  Also included in
military contract expenses are costs incurred to perform specific administrative
services, such as health care appointment scheduling, enrollment, medical and
network management services as well as health care advice line services, and
other administrative functions of the military health care subsidiary. These
administrative services are performed for active duty personnel and family
members as well as retired military families.

General and Administrative Expenses, or
G&A, increased from $33.2 million to $33.8 million, an increase of
approximately $600,000 or 1.8%. G&A expenses increased due to increases in
payroll and benefits, and facility lease expense offset by a decrease in legal
expenses.  The increase in facility lease expense is due to the rent payments
associated with the sale-leaseback transaction for our administrative buildings
now being recorded as an operating expense.  Previously, the rent payments were
recorded as interest and a reduction of principal and the assets were being
depreciated.  As a percentage of revenues, G&A expenses were 9.1% for 2003,
compared to 10.5% in 2002.  As a percentage of medical premium revenue, G&A
expenses were 14.1% for 2003, compared to 15.7% for 2002.  G&A expenses now
include the expenses associated with certain administrative services which were
previously reported as part of specialty product expenses.

Interest Expense decreased from $1.9 million to
$1.5 million, a decrease of approximately $400,000 or 19.6%.  Interest expense
related to the sale-leaseback transaction decreased by approximately $500,000 as
the remaining buildings qualified as a sale during 2002.  The decrease in the
interest expense related to our revolving credit facility was primarily offset
by an increase in interest related to the new senior convertible debentures.  We
incur a fee of 0.5% on the unused portion of our new revolving credit facility.

Other Income (Expense), Net resulted in expense
of approximately $300,000 for 2003 compared to approximately $100,000 for 2002.

Provision for Income Taxes was recorded at
$10.9 million for 2003 compared to $5.2 million for 2002. The effective tax rate
for 2003 was 34.8% compared to 33.2% for 2002. Our ongoing effective tax rate is
less than the statutory rate due primarily to tax preferred investments.  Due to
the increase in income from continuing operations in 2003, tax preferred
investments have less of an impact on our effective tax rate when compared to
2002.

Discontinued Operations consist of our Texas
HMO health care operations and the CII workers' compensation operations. The net
loss from discontinued operations for 2003 was approximately $300,000 compared
to $20,000 for 2002.  The Texas HMO health care operations had net income of
approximately $800,000 for 2003, which was offset by a net loss on the CII
workers' compensation operations of $1.1 million.

Discontinued Texas HMO health care operations.  The
income from the Texas HMO health care operations for 2003 included a pre-tax
gain on the early payoff of the remaining Kaiser-Texas mortgage loan of $2.1
million offset by an increase in litigation accruals of approximately $500,000
and a write down of the remaining real estate of approximately $300,000. The
combined adjustments resulted in income from the discontinued Texas HMO health
care operations of $1.3 million pre-tax or net income of approximately
$800,000.

Discontinued CII workers' compensation operations.
The discontinued workers' compensation operations for 2003 had a net loss of
$1.1 million.  We are continuing to operate the business until a disposal
occurs.

Net earned premiums decreased by $8.5 million or 19.4% due
primarily to a decrease in direct earned premiums of $7.8 million and an
increase in ceded reinsurance premiums of $1.5 million offset by an increase in
assumed premiums of approximately $800,000. Direct written premiums decreased by
$8.8 million due primarily to reduced California premium writings.  We have been
increasing our premium rates, especially in California, where we have
experienced significant adverse loss development.  In addition, we are becoming
more selective in the types of accounts we insure.  In the second quarter of
2003, our average premium rate increase on renewing California policies was
approximately 58%, which is in addition to a 35% average premium rate increase
in the second quarter of 2002.  In other states, our average premium rate
increase on renewing policies was approximately 6% in 2003 compared to
approximately 8% in 2002.

We continue to implement stricter underwriting guidelines and
we believe that our announcement that the workers' compensation insurance
business was reclassified to discontinued operations has negatively impacted our
premium production.  These factors have limited our ability to retain current
business and obtain new business.  Direct written premiums for the three months
ended June 30, 2003 in California are down $8.2 million or 29% over the
comparable 2002 period.  Direct written premiums in our other states are down by
approximately $600,000 or 5%, primarily in Texas and Colorado.  Premium
production results for the quarter may not be indicative of the full year's
premium production.

Premiums in force are an indicator of future written premium
trends and represent the total estimated annual premiums of all policies in
force at a point in time.  Total inforce premiums decreased by 21% from $160.3
million at June 30, 2002 to $126.9 million at June 30, 2003.

Investment and other revenue decreased by $400,000 or 13.6%
due to a decrease in the average investment yields during the period.

Expenses decreased in the CII workers' compensation
operations by approximately $6.4 million or 13.6%. The decrease is primarily due
to the following:

- In 2002 and 2003, we recorded $3.2 million of net adverse
loss development for prior accident years. The net adverse loss development
recorded in 2003, was largely attributable to higher costs per claim, or claim
severity, in California, primarily on accident years 1997, 1998 and 2001.
Higher claim severity has had a negative impact on the entire California
workers' compensation industry in the past few periods and this trend may
continue.
- The loss and LAE ratio for the 2003 accident year
compared to the 2002 accident year was lower by 3.0%, which resulted in a
decrease of approximately $1.1 million.
- A $6.2 million reduction in loss and LAE is related to
the decrease in net earned premiums in 2003 compared to 2002.

- In order to write down the workers' compensation
operations to its current estimated realizable value, CII recorded valuation
adjustments, which included the write down of accounts receivable, fixed assets
and certain other adjustments totaling $4.0 million.

- The net decrease in underwriting expenses, policyholders'
dividends and other operating expenses was approximately $1.7 million.
- A gain on the redemption of the 91⁄2% senior debentures of
$1.4 million.

The net adverse loss development on prior accident years
included those years that were covered by our low level reinsurance agreement.
This resulted in an increase in the reinsurance recoverable balance which was
then reduced by amounts collected from reinsurers.  During the three months
ended June 30, 2003, we increased our ceded reserves by $8.1 million and
received payments from our reinsurers totaling $9.5 million.

The loss and LAE reserves recorded as of June 30, 2003
reflect our best estimate of the ultimate loss costs for reported and unreported
claims occurring in accident year 2003 as well as those occurring in accident
years prior to 2003.  Workers' compensation claim payments are made over several
years from the date of the claim.  Until the final payments for reported claims
are made, reserves are invested to generate investment income.

The combined ratio is a measurement of the workers'
compensation underwriting profit or loss and is the sum of the loss and LAE
ratio, underwriting expense ratio and policyholders' dividend ratio.  A combined
ratio of less than 100% indicates an underwriting profit.  Our combined ratio
was 119.0% compared to 107.4% for 2002.  The increase was primarily due to the
$4.0 million write down, an increase in the policyholders' dividend ratio and
the decrease in net earned premiums. Excluding the $4.0 million write down, as
well as prior accident years' adverse loss development, the combined ratio would
have been 98.6% for 2003 and 100.0% for 2002.

In February 2002, California enacted Assembly Bill 749.  This
new legislation increased benefits paid to injured workers starting January 1,
2003.  Increased loss costs, such as benefit increases, are normally built into
the rate making process so that premiums are increased to cover the increase in
costs.  On October 18, 2002, the California Insurance Commissioner approved an
increase of 10.5% in pure premium rates for new and renewal policies effective
in 2003.  In addition, the Commissioner approved a 4.9% increase in pure premium
rates for the unexpired terms of policies in force at January 1, 2003.
The Commissioner also approved an additional mid year rate increase of 7.2% effective July 1, 2003.
Although we have increased our premiums, there is no assurance that our increase
will be sufficient enough to cover the ultimate cost increases or that the
estimate of cost increases provided by the Workers' Compensation Insurance
Rating Bureau (the organization that accumulates premium and loss data for the
State of California for rate making purposes) is accurate.  Assembly Bill 749 is
effective for claims occurring on and after January 1, 2003.  However, due to
other statutes, certain temporary total disability claims with dates of injury
prior to 2003 automatically increased to the new benefit levels effective
January 1, 2003.

In the wake of the events of September 11, 2001 and the
ensuing hardening of the reinsurance market, our new reinsurance agreements,
which cover new and renewal policies effective on and after January 1, 2003,
cost more and have reduced coverage limits, including exclusions for terrorist
acts.  We continue to retain the first $500,000 per occurrence but the maximum
coverage has been reduced from statutory (i.e., unlimited) limits to $20.0
million per occurrence.  We also must meet certain annual aggregate deductibles
before we can begin to recover from some of our reinsurers.  This new coverage
will result in our retaining more of the losses and LAE.   We have factored
these higher costs into our premium rates but there is no assurance that our
rates will be adequate to cover the ultimate costs.

Reinsurance contracts do not relieve us from our obligations
to injured workers or policyholders.  At June 30, 2003, we had $181.5 million in
reinsurance recoverable.  We evaluate the financial condition of our reinsurers
to minimize our exposure to significant losses from reinsurer insolvencies.  We
also periodically review the financial strength ratings of our reinsurers to
determine if an allowance for uncollectible reinsurance is warranted.  As of
June 30, 2003, no allowance was established.  At June 30, 2003, all of our
reinsurers were rated A- or better by Fitch Inc. (7th of 23) and the
A.M. Best Company (4th of 16).  Should these companies be unable to
perform their obligations to reimburse us for ceded losses, we would experience
significant losses.

RESULTS OF OPERATIONS, SIX MONTHS ENDED JUNE 30, 2003,
COMPARED TO SIX MONTHS ENDED JUNE 30, 2002.

Total Operating Revenues increased approximately
16.4% to $722.5 million from $620.7 million for 2002.



The change in operating revenues was comprised of the
following:



- An increase in medical premiums of $56.1 million
- An increase in military contract revenues of $40.6
million
- An increase in professional fees of $3.2 million
- An increase in investment and other revenues of $1.8
million



Medical Premiums increased from $418.1 million
to $474.2 million from our HMO and managed indemnity insurance subsidiaries, an
increase of $56.1 million or 13.4%. The $56.1 million increase in premium
revenue reflects a 7.4% increase in Medicare member months (the number of months
individuals are enrolled in a plan), a 31.8% increase in Medicaid member months
and a 2.6% increase in commercial member months.  The growth in Medicare member
months contributes significantly to the increase in premium revenues as the
Medicare per member premium rates are more than three times higher than the
average commercial premium rate.

HMO and POS premium rates for renewing commercial groups
increased on average 10% to 12% while the overall recorded per member per month
revenue increase, including new and continuing business, was approximately 13%.
Managed indemnity rates on renewing groups increased over 10%.  We did not
receive a Medicaid rate increase in 2002 or 2003.  The basic Medicare rate
increase received in 2003 was approximately 2.0%.  Our overall Medicare rate
increase was approximately 3.6% due primarily to the following:

- An increase in the Social HMO membership as a percentage
of our total Medicare membership.  The Social HMO members have a higher average
rate than our other Medicare members.  Approximately 96% of our Nevada Medicare
members are enrolled in the Social HMO Medicare program which includes our Reno
membership which was not part of the Social HMO program prior to 2003.
- Our Social HMO Medicare membership experienced an
increase in risk factors which contributes to higher rates and corresponding
increases in medical expenses.

Military Contract Revenues increased from
$179.2 million to $219.8 million, an increase of $40.6 million or 22.7%. The
increase in revenue is primarily the result of increased eligible beneficiaries
resulting from the call up of reservists in Region 1, additional TRICARE change
orders and the positive impact of the first year of our contract extension which
began in June 2003.  The base monthly revenue under the contract extension is
higher than it was under the previous contract.  Family members of reservists
are eligible for the TRICARE program after 30 days.

Professional Fees increased from $15.2 million
to $18.4 million, an increase of $3.2 million or 21.0% as a result of increased
visits due to membership growth, a higher percentage of members selecting our
owned medical group and an increase in other related services performed by our
other provider subsidiaries.

Investment and Other Revenues increased from
$8.2 million to $10.0 million, an increase of approximately $1.8 million or
21.2%.  Investment revenues increased due to higher average invested balances,
an increase in net gains on the sale of investments, higher than usual gains on
our deferred compensation plan assets and an increase in revenues associated
with administrative services.  Investment and other revenues now include the
revenue associated with administrative services, which were previously reported
as part of specialty product revenues.

Medical Expenses increased from $351.4 million
to $380.8 million, an increase of $29.4 million or 8.3%.  The increase is due
primarily to our increased revenues and associated membership which is in part
offset by a lower medical care ratio.  Medical expenses as a percentage of
medical premiums and professional fees decreased to 77.3% from 81.1%.  The
favorable decrease is primarily due to premium yields in excess of cost and
utilization increases and was partially offset by malpractice cost increases at
our medical provider subsidiary.  Our medical claims payable liability requires
us to make significant estimates.

We contract with hospitals, physicians and other
independently contracted providers of health care under capitated or discounted
fee-for-service arrangements including hospital per diems to provide medical
care services to members.  Capitated providers are at risk for a portion of the
cost of medical care services provided to our members in the relevant geographic
areas; however, we are ultimately responsible for the provision of services to
our members should the capitated provider be unable to provide the contracted
services.  We incurred capitation expenses of $52.0 million and $45.3 million or
13.7% and 12.9% of our total medical expenses for the six months ended June 30,
2003 and 2002, respectively.

Military Contract Expenses increased from
$172.2 million to $215.1 million, an increase of $42.9 million or 24.9%. The
increase is consistent with the increase in revenues discussed previously and
includes $4.1 million in bid proposal costs. Health care delivery expense
consists primarily of costs to provide managed health care services to eligible
beneficiaries in accordance with Sierra's TRICARE contract.  Under the contract,
SMHS provides health care services to approximately 672,000 eligible individuals
of active duty military personnel, military retirees under the age of 65 and
dependents of military retirees through a network of approximately 55,000 health
care providers and certain other subcontractor partnerships.  Also included in
military contract expenses are costs incurred to perform specific administrative
services, such as health care appointment scheduling, enrollment, medical and
network management services as well as health care advice line services, and
other administrative functions of the military health care subsidiary. These
administrative services are performed for active duty personnel and family
members as well as retired military families.

General and Administrative Expenses, or
G&A, increased from $65.7 million to $68.0 million, an increase of $2.3
million or 3.4%.  G&A expenses increased due to increases in payroll and
benefits, and facility lease expense offset by a decrease in legal expenses.
The increase in facility lease expense is due to the rent payments associated
with the sale-leaseback transaction for our administrative buildings now being
recorded as an operating expense.  Previously, the rent payments were recorded
as interest and a reduction of principal and the assets were being depreciated.
As a percentage of revenues, G&A expenses were 9.4% for 2003, compared to
10.6% in 2002.  As a percentage of medical premium revenue, G&A expenses
were 14.3% for 2003, compared to 15.7% for 2002.  G&A expenses now include
the expenses associated with certain administrative services which were
previously reported as part of specialty product expenses.

Interest Expense decreased from $4.8 million to
$3.2 million, a decrease of $1.6 million or 34.8%.  Interest expense related to
the sale-leaseback transaction decreased by $2.2 million as the remaining
buildings qualified as a sale during 2002.  The decrease in the interest expense
related to our revolving credit facility was primarily offset by an increase in
interest related to the new senior convertible debentures.  We incur a fee of
0.5% on the unused portion of our new revolving credit facility.

Other Income (Expense), Net resulted in expense
of approximately $300,000 compared to approximately $100,000 for 2002.

Provision for Income Taxes was recorded at
$19.1 million for 2003 compared to $8.7 million for 2002. The effective tax rate
for 2003 was 34.8% compared to 33.0% for 2002. Our ongoing effective tax rate is
less than the statutory rate due primarily to tax preferred investments.  Due to
the increase in income from continuing operations in 2003, tax preferred
investments have less of an impact on our effective tax rate when compared to
2002.

Discontinued Operations consist of our Texas
HMO health care operations and the CII workers' compensation operations. The net
loss from discontinued operations for 2003 was approximately $700,000 compared
to income of approximately $200,000 for 2002.  The Texas HMO health care
operations had net income of $2.9 million for 2003, which was offset by a net
loss on the CII workers' compensation operations of $3.6 million.

Discontinued Texas HMO health care operations.  The
income from the Texas HMO health care operations for 2003 included a pre-tax
gain on the early payoff of the remaining Kaiser-Texas mortgage loan of $2.1
million, a net decrease in litigation accruals of $1.4 million, favorable
development in medical claim liabilities of $1.4 million partially offset by a
write down of the remaining real estate of approximately $300,000. The combined
adjustments resulted in income from the discontinued Texas HMO health care
operations of $4.6 million pre-tax or net income of $2.9 million.

Discontinued CII workers' compensation operations.
The discontinued workers' compensation operations for 2003 had a net loss of
$3.6 million.  We are continuing to operate the business until a disposal
occurs.

Net earned premiums decreased by $13.3 million or 15.6% due
primarily to a decrease in direct earned premiums of $11.5 million and an
increase in ceded reinsurance premiums of $2.9 million offset by an increase in
assumed premiums of $1.1 million. Direct written premiums decreased by $17.3
million due primarily to reduced California premium writings.  We have been
increasing our premium rates, especially in California, where we have
experienced significant adverse loss development.  In addition, we are becoming
more selective in the types of accounts we insure.  For the first six months of
2003, our average premium rate increase on renewing California policies was
approximately 62%, which is in addition to a 33% average rate increase in the
first six months of 2002.  In other states, our average premium rate increase on
renewing policies was approximately 8% in 2003 compared to approximately 7% in
2002.

We continue to implement stricter underwriting guidelines and
we believe that our announcement that the workers' compensation insurance
business was reclassified to discontinued operations has negatively impacted our
premium production.  These factors have limited our ability to retain current
business and obtain new business.  Direct written premiums for the first six
months of 2003 in California are down $15.3 million or 26% over the comparable
2002 period.  Direct written premiums in our other states are also down by $2.0
million or 7%, primarily in Texas and Colorado.  Premium production results for
the first six months of 2003 may not be indicative of the full year's premium
production.

Investment and other revenue increased by $800,000 or 12.1%
due to an increase in realized gains of $2.6 million offset by a decrease in the
average investment yields during the period.

Expenses decreased in the CII workers' compensation
operations by approximately $5.4 million or 5.9%. The decrease is primarily due
to the following:

- In 2003, we recorded $9.4 million of net adverse loss
development for prior accident years compared to net adverse loss development of
$5.3 million recorded in 2002. The net adverse loss development recorded in
2003, was largely attributable to higher costs per claim, or claim severity, in
California, primarily on accident years 1997, 1998, 2001 and 2002.  Higher claim
severity has had a negative impact on the entire California workers'
compensation industry in the past few periods and this trend may
continue.
- The loss and LAE ratio for the 2003 accident year
compared to the 2002 accident year was lower by .2% which resulted in a decrease
of approximately $100,000.
- A $9.9 million reduction in loss and LAE is related to
the decrease in net earned premiums in 2003 compared to 2002.

- In order to write down the workers' compensation
operations to its current estimated realizable value, CII recorded valuation
adjustments, which included the write down of accounts receivable, fixed assets
and certain other adjustments totaling $4.0 million.

- The net decrease in underwriting expenses, policyholders'
dividends and other operating expenses was approximately $2.1 million.
- A gain on the redemption of the 91⁄2% senior debentures of
$1.4 million.

The net adverse loss development on prior accident years
included those years that were covered by our low level reinsurance agreement.
This resulted in an increase in the reinsurance recoverable balance which was
then reduced by amounts collected from reinsurers.  During the six months ended
June 30, 2003, we increased our ceded reserves by $19.4 million and received
payments from our reinsurers totaling $27.3 million.

The combined ratio is a measurement of the workers'
compensation underwriting profit or loss and is the sum of the loss and LAE
ratio, underwriting expense ratio and policyholders' dividend ratio.  A combined
ratio of less than 100% indicates an underwriting profit.  Our combined ratio
was 121.1% compared to 107.0% for 2002.  The increase was primarily due to the
$4.0 million write down, increased net adverse loss development for prior
accident years and the decrease in net earned premiums. Excluding the $4.0
million write down, as well as prior accident years' adverse loss development,
the combined ratio would have been 102.5% for 2003 and 100.8% for 2002.

LIQUIDITY AND CAPITAL RESOURCES

For continuing operations, we had cash provided by operating
activities of $18.3 million in 2003, compared to $45.8 million in 2002.  We
received only five monthly CMS payments during the first six months of 2003 and
2002.  We received the January payments of $29.9 million and $26.8 million in
December 2002 and 2001, respectively.  When the periods are adjusted to reflect
the January monthly payments from CMS, the cash flow from continuing operations
is $48.2 million in 2003 compared to  $72.6 million in 2002.  We believe
presenting this adjustment for the timing of the CMS payments is useful for
making a period to period comparison of our cash flow from continuing
operations.  The decrease in cash provided by operating activities in 2003 when
compared to 2002 is primarily related to the increase in the military accounts
receivable balance of $28.6 million from December 31, 2002 to June 30, 2003 and
tax payments of $10.4 million in 2003 compared to tax receipts of $13.1 million
in 2002.

Our business and cash flows could be adversely affected if
the timing or amount of the payments we receive from the DoD vary significantly
from our expectations.

On November 16, 2001, SMHS entered into a securitization
arrangement with General Electric Capital Corporation.  The arrangement provides
for the assignment of SMHS' Federal Government accounts receivable to SMHS
Funding.  SMHS Funding is a special purpose limited liability company owned by
SMHS and was formed for the purpose of purchasing all receivables of SMHS.  This
entity is fully consolidated into SMHS. SMHS Funding may assign an undivided
interest in certain of the receivables to a subsidiary of General Electric
Capital Corporation in the event that additional financing by SMHS is warranted.
This securitization arrangement has not been utilized and we do not anticipate
utilizing it in 2003.

In the event SMHS wins the competitive bid procurement for
the North Region T-Nex contract, SMHS has received a commitment from General
Electric Capital Corporation to provide a $200.0 million senior secured
revolving credit facility to support SMHS' additional working capital needs and
to refinance its existing securitization agreement.

For continuing operations, cash provided by investing
activities during 2003 was $25.1 million, compared to a use of cash of $33.3
million in 2002. The 2003 amount included $9.6 million in net capital
expenditures compared to $3.8 million in 2002. The net change in investments for
the period was a decrease in investments of $34.7 million for 2003, as
investments matured or were sold and were converted to cash.  For 2002, we used
cash from operations to purchase investments for a net increase in investments
of $29.5 million.

For continuing operations, cash provided by financing
activities during 2003 was $19.4 million, compared to cash used of $24.8 million
in 2002. The 2003 amount included net payments of $60.0 million on the revolving
credit facility compared to $29.0 million in 2002.  In addition, in 2003 we
received $115.0 million in proceeds from the sale of our senior convertible
debentures.  These proceeds were offset by debt issue costs of $5.1 million.
Proceeds from the issuance of stock in connection with stock plans were $4.3
million in 2003, compared to $3.4 million in 2002.  We used cash of $34.3
million to purchase treasury stock during the first six months of 2003.

Discontinued operations used cash of $29.8 million in 2003,
compared to $26.6 million in 2002. Cash used in 2003 was primarily for the payoff
of the remaining Kaiser-Texas mortgage loan for $11.3 million and the
redemption of the outstanding 91⁄2% senior debentures for $15.3 million.  Cash
used in 2002 was primarily for the run out of claims and other legal and
restitution related items. Based on the current estimated Texas HMO health care
run-out costs and recorded reserves, we believe we have adequate funds available
and the ability to invest, should we be required to do so, adequate funds in
Texas to meet the anticipated obligations for our members' health care claims.

Sierra Debentures

In March 2003, the Company issued $115.0 million
aggregate principal amount of its 21⁄4% senior convertible debentures due March
15, 2023.  The debentures pay interest, which is due semi-annually on March 15
and September 15 of each year, commencing September 15, 2003.  Each $1,000
principal amount of debentures is convertible, at the option of the holders,
into 54.6747 shares of Sierra Health Services, Inc., common stock prior to March
15, 2023 if (1) the sale price of our common stock for at least 20 trading days
in a period of 30 consecutive trading days ending on the last trading day of the
preceding fiscal quarter exceeds 120% of the conversion price per share of our
common stock on such last trading day; (2) the debentures are called for
redemption; (3) there is an event of default with respect to the debentures; or
(4) specified corporate transactions have occurred.  The conversion rate is
subject to certain adjustments.  This conversion rate initially represents a
conversion price of $18.29 per share.  Holders of the debentures may require the
Company to repurchase all or a portion of their debentures on March 15 in 2008,
2013 and 2018 or upon certain corporate events including a change in control.
In either case, the Company may choose to pay the purchase price of such
debentures in cash or common stock or a combination of cash and common stock.
The debentures can be redeemed by the Company for cash beginning on or after
March 20, 2008.

The debentures were sold to Banc of America Securities LLC,
Credit Lyonnais Securities (USA), Inc., and U.S. Bancorp Piper Jaffray, as
"accredited investors" within the meaning of Rule 501 under the Securities Act
of 1933, in reliance upon the private placement exemption afforded by Section
4(2) of the Securities Act, and were offered and resold to "qualified
institutional buyers" under Rule 144A of the Securities Act. The Company has
filed a registration statement under the Securities Act to permit registered
resales of the debentures and the common stock into which the debentures are
convertible.  This registration statement has not yet been declared effective by
the Securities and Exchange Commission.

The aggregate offering price of the debentures was $115.0
million, 100% of the principal amount thereof.  The purchase price paid to the
Company by the initial purchasers was the initial offering price less a discount
of $3.5 million, 3.0% of the principal amount of the debentures.  The Company
used the net proceeds of the offering to repay the $39.0 million outstanding
under the existing credit facility and to contribute $35.0 million to SMHS in
furtherance of its bid for the TRICARE Next Generation contract.  The Company
also used $19.9 million of the proceeds to purchase 1.6 million shares of the
Company's common stock under its repurchase program. The remainder of the net
proceeds were used for working capital and general corporate purposes including
additional share repurchases.

New Credit Facility

On March 3, 2003, we entered into a new $65.0 million
revolving credit facility which replaced the amended and restated credit
facility.  The new facility may be increased up to an aggregate amount of $125.0
million upon receipt of new commitments from existing or additional lenders.
Interest on the facility is initially LIBOR plus 2.25%.  The facility will
expire on April 30, 2006 but can be extended, at the sole discretion of each of
the lenders, until March 3, 2008.  The new facility is available for general
corporate purposes.  We have not yet utilized this facility.

The new credit facility is secured by guarantees by certain
of our subsidiaries and a first priority perfected security interest in (i) all
the capital stock of each of our unregulated, material domestic subsidiaries
(direct or indirect) as well as all of the capital stock of certain regulated,
material domestic subsidiaries and (ii) all other present and future assets and
properties of ours and those of our subsidiaries that guarantee our credit
agreement obligations (including, without limitation, accounts receivable,
inventory, real property, equipment, contracts, trademarks, copyrights, patents,
license rights and general intangibles) subject, in each case, to the exclusion
of the capital stock of CII Financial, Inc., or any of its subsidiaries and
certain other exclusions.

The new revolving credit facility has covenants that limit or
restrict our ability and the ability of our subsidiaries to dispose of assets,
incur indebtedness, incur other liens, make investments, loans or advances, make
acquisitions, engage in mergers or consolidations, or make capital expenditures
and otherwise restricts certain corporate activities.  In addition, we are
required to comply with specified financial ratios as set forth in the new
credit agreement.  The Company believes it is in compliance with all covenants
of the new credit agreement.

Sierra Share Repurchase Program

The Company's Board of Directors has authorized a program
for the repurchase of up to 4.6 million shares of the Company's common stock.
During 2003, the Company repurchased a total of 2.6 million shares for $34.3
million.

Statutory Capital and Deposit Requirements

Our HMO and insurance subsidiaries are required by state
regulatory agencies to maintain certain deposits and must also meet certain net
worth and reserve requirements.  The HMO and insurance subsidiaries, including
the discontinued operations, had restricted assets on deposit in various states
totaling $32.8 million at June 30, 2003. The HMO and insurance subsidiaries must
also meet requirements to maintain minimum stockholders' equity, on a statutory
basis, as well as minimum risk-based capital requirements, which are determined
annually.  In conjunction with the exit from the Texas HMO health care market,
the Texas Department of Insurance approved a plan of withdrawal and TXHC is now
required to maintain deposits and net worth of at least $1.5 million.  We
believe we are in material compliance with our regulatory requirements.

Of the $128.2 million in cash and cash equivalents held at
June 30, 2003, including discontinued operations, $49.4 million was held by
discontinued operations, and of the remainder, $28.6 million was designated for
use only by the regulated subsidiaries.  Amounts are available for transfer to
the holding company from the HMO and insurance subsidiaries only to the extent
that they can be remitted in accordance with the terms of existing management
agreements and by dividends. The holding company will not receive dividends from
its regulated subsidiaries if such dividend payment would cause violation of
statutory net worth and reserve requirements.

Obligations and Commitments

The following schedule represents our obligations and
commitments for long-term debt, capital leases and operating leases at June 30,
2003.  The amounts below represent the entire payment, principal and interest,
on our outstanding obligations.



`Long-Term   Capital   Operating
                                              Debt      Leases     Leases      Total
                                            ---------  ---------  ---------  ---------
  (In thousands)
Continuing Operations
------------------------
Payments due within 12 months............. $   2,644  $     121  $  17,500  $  20,265
Payments due in 13 to 36 months...........     5,246         68     34,301     39,615
Payments due in 37 to 60 months...........     5,240         62     32,078     37,380
Payments due in more than 60 months.......   153,812        138    113,949    267,899
                                            ---------  ---------  ---------  ---------
     Total Continuing Operations.......... $ 166,942  $     389  $ 197,828  $ 365,159
                                            =========  =========  =========  =========
Discontinued Operations
------------------------
Payments due within 12 months............. $      --  $     235  $     725  $     960
Payments due in 13 to 36 months...........        --         --      1,027      1,027
Payments due in 37 to 60 months...........        --         --        833        833
Payments due in more than 60 months.......        --         --        417        417
                                            ---------  ---------  ---------  ---------
     Total Discontinued Operations........ $      --  $     235  $   3,002  $   3,237
                                            =========  =========  =========  =========`

Included in long-term debt
payments for continuing operations are the senior convertible debentures of
$115.0 million along with the associated interest payments.  The debentures are
due March 2023.

Recent Accounting Pronouncements

In November 2002, the FASB issued Interpretation No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees," or FIN 45.
FIN 45 requires a guarantor to recognize, at the inception of a guarantee, a
liability for the fair value of the obligation it has undertaken in issuing the
guarantee. The adoption of FIN 45 did not have a material effect on our
consolidated financial position or results of operations.

In January 2003, the FASB issued Interpretation No. 46,
"Consolidation of Variable Interest Entities," or FIN 46.  FIN 46 requires an
investor with a majority of the variable interests in a variable interest entity
to consolidate the entity and also requires majority and significant variable
interest investors to provide certain disclosures. A variable interest entity is
an entity in which the equity investors do not have a controlling interest or
the equity investment at risk is insufficient to finance the entity's activities
without receiving additional subordinated financial support from the other
parties. The adoption of FIN 46 did not have a material effect on our
consolidated financial position or results of operations.

In April 2002, the FASB issued Statement of Financial
Accounting Standards No. 145, "Rescission of FASB Statements No. 4, 44, and
64, Amendment of FASB Statement No. 13, and Technical Corrections," of SFAS
No. 145. SFAS No. 145 requires that gains and losses from extinguishment of debt
be classified as extraordinary items only if they meet the criteria in
Accounting Principles Board Opinion No. 30 ("Opinion No. 30").
Applying the provisions of Opinion No. 30 will distinguish transactions that are
part of an entity's recurring operations from those that are unusual and
infrequent that meet the criteria for classification as an extraordinary item.
SFAS No. 145 is effective for us beginning January 1, 2003. The adoption of SFAS
No. 145 did not have a material effect on our consolidated financial position or
results of operations.

In June 2002, the FASB issued Statement of Financial
Accounting Standards No. 146, "Accounting for Costs Associated with Exit or
Disposal Activities," or SFAS No. 146. SFAS No. 146 addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies Emerging Issues Task Force Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)".  SFAS No.
146 requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred.  A fundamental conclusion
reached by the FASB in this statement is that an entity's commitment to a plan,
by itself, does not create a present obligation to others that meets the
definition of a liability.  SFAS No. 146 also establishes that fair value is the
objective for initial measurement of the liability.  The provisions of this
statement are effective for exit or disposal activities that are initiated after
December 31, 2002, with early adoption encouraged.  The adoption of SFAS No. 146
did not have a material effect on our consolidated financial position or results
of operations.

In December 2002, the FASB issued Statement of Financial
Accounting Standards No. 148, "Accounting for Stock-Based Compensation -
Transition and Disclosure" or SFAS No. 148.  SFAS No. 148 is an amendment
of Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS No. 123").  SFAS No. 148
requires prominent disclosures in interim as well as annual financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported net income.  We have continued to account
for our stock-based compensation using the intrinsic value method prescribed by
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," as amended.  Accordingly, no compensation cost has been
recognized for our employee stock option plans.

In April 2003, the FASB issued Statement of Financial
Accounting Standards No. 149, "Amendment of Statement 133 on Derivative
Instruments and Hedging Activities" or SFAS No. 149, which amends and clarifies
financial accounting and reporting for derivative instruments, including certain
derivative instruments embedded in other contracts and for hedging activities
under SFAS No. 133.  SFAS No. 149 is effective for contracts entered into or
modified after June 30, 2003 except for the provisions that were cleared by the
FASB in prior pronouncements. We do not expect the adoption of SFAS No. 149 to
have a material effect on our consolidated financial position or results of
operations.

In May 2003, the FASB issued Statement of Financial
Accounting Standards No. 150, "Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity" or SFAS No. 150. This
statement establishes standards for how an issuer classifies and measures in its
statement of financial position certain financial instruments with
characteristics of both liabilities and equity. In accordance with the standard,
financial instruments that embody obligations for the issuer are required to be
classified as liabilities. This Statement is effective for financial instruments
entered into or modified after May 31, 2003. The adoption of SFAS No. 150 did
not have a material effect on our consolidated financial position or results of
operations.

Ratings

Financial strength ratings are the opinion of the rating
agencies and the significance of individual ratings varies from agency to
agency.  Companies with higher ratings generally, in the opinion of the rating
agency, have the strongest capacity for repayment of debt or payment of claims,
while companies at the bottom end of the range have the weakest capacity.
Rating agencies continually review the financial performance and condition of
insurers. The current financial strength ratings of Sierra's HMO and insurance
subsidiaries are as follows:

A.M. Best Company, Inc., "B+" (Very Good,
6th of 16); and

Fitch, Inc., "BBB" (Good, 9th of
23).

Debt ratings are assessments of the likelihood that a company
will make timely payments of principal and interest. The principal agencies that
rate Sierra's senior convertible debentures are as follows:

Standard and Poors Corp., "B+" (Speculative,
12th of 23); and

Fitch, Inc., "BB" (Speculative, 14th of 22).

The ratings reflect the opinion of each rating agency, on our
operating performance and ability to meet obligations to policyholders and
debenture holders, and are not evaluations directed toward the protection of
investors in our common stock or senior convertible debentures.  Neither of the
ratings on our debentures are investment grade.  A rating is not a
recommendation to buy, sell or hold securities, and may be subject to revision
or withdrawal at any time by the rating agency.  Each individual rating should
be evaluated independently of any other rating.

Other

We have a 2003 capital budget of $30.9 million and are also
limited in the amount of capital expenditures we can make by our new revolving
credit facility.  The 2003 planned expenditures are primarily for a new medical
clinic, the purchase of computer hardware and software, furniture and equipment
and other normal capital requirements.  Our liquidity needs over the next 12
months will primarily be for the capital items noted above, T-Nex bid
implementation costs in the event SMHS wins the competitive bid for the North
Region T-Nex contract, debt service and funds required to exit the Texas HMO
health care market.  We believe that our existing working capital, operating
cash flow and, if necessary, equipment leasing, divestitures of certain non-core
assets and amounts available under our credit facility should be sufficient to
fund our capital expenditures and debt service.  Additionally, subject to
unanticipated cash requirements, we believe that our existing working capital
and operating cash flow should enable us to meet our liquidity needs on a long-
term basis.



We have a $25.0 million interest-rate swap agreement, which
expires on September 30, 2003, that allows us to mitigate the risk of interest
rate fluctuation on our credit facility.  The original intent of the agreement
was to keep our interest rate on $25.0 million of the credit facility relatively
fixed.  In accordance with Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities," we
reported the interest-rate swap agreement at its fair value as of June 30, 2003.
The fair value indicated that we would need to pay approximately $200,000 to
terminate the swap agreement.  If the LIBOR rate were to decrease by 1%, we
estimate our maximum increase in additional expense associated with the swap for
2003 to be less than $20,000.



In the second quarter of 1997, our Board of Directors
authorized a $3.0 million loan from us to our Chief Executive Officer, or CEO.
In April 2000, our Board of Directors authorized an additional $2.5 million loan
from us to our CEO.  In the second quarter of 2001, our Board of Directors
approved a loan amendment which extended the maturity of the principal balance
along with accrued interest to December 31, 2003.  During 2002 and 2001, our CEO
made payments of $1.0 million and $898,000, respectively.  As of June 30, 2003,
the aggregate principal balance outstanding and accrued interest for both
instruments was $4.3 million.  All amounts borrowed bear interest at a rate
equal to the Company's current borrowing rate under its revolving credit
facility plus 10 basis points.  The amounts outstanding are collateralized with
certain of the CEO's assets and rights to compensation from us.



Inflation



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



Government Regulation



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



Government regulation of health care coverage products and
services is a dynamic area of law that varies from jurisdiction to jurisdiction.
Amendments to existing laws and regulations are continually being considered and
interpretation of the existing laws and rules changes from time to time.
Regulatory agencies generally exercise broad discretion in interpreting laws and
promulgating regulations to enforce their interpretations.



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



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



In addition to the items described above, we urge you to
review carefully the section "Risk Factors" in our 2002 annual report
on Form 10-K for a more complete discussion of the risks associated with an
investment in our securities.  See "Note on Forward-Looking Statements" and
"Risk Factors" under Item 1.



The following table presents our membership as of June 30, 2003 and 2002:



`Number of Members at June 30,
                                              ------------------------------
                                                   2003            2002
                                              --------------  --------------
Continuing Operations:
-------------------------
HMO
  Commercial................................        194,100         186,000
  Medicare..................................         49,600          46,100
  Medicaid..................................         37,900          29,900
Managed Indemnity...........................         25,000          28,400
Medicare Supplement.........................         18,400          21,000
Administrative Services (1).................        186,500         216,400
TRICARE Eligibles...........................        672,200         639,200
                                              --------------  --------------
Total Members...............................      1,183,700       1,167,000
                                              ==============  ==============`

(1)   Restated to exclude the
workers' compensation ASO membership which was 93,000 at June 30,
2002.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK

As of June 30, 2003 and December 31, 2002, we had unrealized
holding gains on available for sale investments of $1.4 million.  We believe
that changes in market interest rates, resulting in unrealized holding gains or
losses, should not have a material impact on future earnings or cash flows, as
it is unlikely that we would need or choose to substantially liquidate our
investment portfolio.

As of June 30, 2003, we had outstanding $115.0 million in
aggregate principal amount of 21⁄4% senior convertible debentures due March 15,
2023.  The debentures are fixed rate, and therefore, the interest expense on the
debentures will not be impacted by future interest rate fluctuations.  The
interest rate on our new revolving credit facility is initially LIBOR plus
2.25%; we have not yet utilized this facility.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

The Company's management, with the participation of the
Company's Chief Executive Officer and Chief Financial Officer, evaluated the
effectiveness of the Company's disclosure controls and procedures as of the end
of the period covered by this report.  Based on that evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that the Company's
disclosure controls and procedures as of the end of the period covered by this
report were designed and were functioning effectively to provide reasonable
assurance that the information required to be disclosed by the Company in
reports filed under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in the SEC's rules and
forms.  The Company believes that a system of controls, no matter how well
designed and operated, cannot provide absolute assurance that the objectives of
the controls are met, and no evaluation of controls can provide absolute
assurance that all control issues and instances of fraud, if any, within a
company have been detected.

Change in Internal Control over Financial Reporting

No change in the Company's internal control over
financial reporting occurred during the Company's most recent fiscal quarter
that has materially affected, or is reasonably likely to materially affect, the
Company's internal control over financial reporting.

SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
PART II.  OTHER INFORMATION

ITEM 1.	LEGAL PROCEEDINGS

We are subject to various claims and other litigation in
the ordinary course of business.  Such litigation includes, but is not limited
to, 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 and other members.  Some litigation may also include
claims for punitive damages that are not covered by insurance.  Also included in
such litigation are claims for workers' compensation and claims by providers for
payment for medical services rendered to injured workers.  These actions are in
various stages of litigation and some may ultimately be brought to trial.  With
respect to certain pending actions, we maintain commercial insurance coverage
with varying deductibles for which we maintain estimated reserves for our self-
insured portion based upon our current assessment of such litigation.  Due to
recent unfavorable changes in the commercial insurance market, we have, for
certain risks, purchased coverage with higher deductibles and lower limits of
coverage.  In the opinion of management, based on information presently
available, the amount or range of any potential loss cannot be reasonably
estimated but the ultimate resolution of these pending legal proceedings should
not have a material adverse effect on our financial condition.

ITEM 2.	CHANGES IN SECURITIES AND
USE OF PROCEEDS

None

ITEM 3.	DEFAULTS UPON SENIOR
SECURITIES

None

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

Sierra held its annual meeting of stockholders on May 22,
2003 in Las Vegas, Nevada.

The following persons were elected directors for two-year
terms ending in 2005 based on the voting results below:





|Name                    | For        | Withheld 
|----------------------- | ---------- | ---------
|Thomas Y. Hartley       | 24,390,451 | 1,611,523
|Michael E. Luce         | 24,389,151 | 1,612,823
|Anthony M. Marlon, M.D. | 25,627,458 | 374,516  
|Anthony L. Watson       | 24,386,700 | 1,615,274



The following persons' terms as directors continued after the
meeting and end in 2004.



Erin E. MacDonald

William J. Raggio

Charles L. Ruthe

Albert L. Greene







The stockholders also re-approved the business criteria for
setting performance goals under the Company's 1995 Long-Term Incentive Plan
Employee Stock Option Plan in order to qualify certain awards for tax
deductibility.





|           |           |         | Broker   
|---------- | --------- | ------- | ---------
|For        | Against   | Abstain | Non-votes
|24,817,680 | 1,122,227 | 62,067  | 0        



The stockholders also ratified the appointment of Deloitte
& Touche LLP as the Company's independent auditors for the year ending
December 31, 2003.  The voting results were as follows:



|           |         |         | Broker   
|---------- | ------- | ------- | ---------
|For        | Against | Abstain | Non-votes
|25,452,398 | 542,910 | 6,666   | 0        



ITEM 5.	OTHER INFORMATION

None

ITEM 6.	EXHIBITS AND REPORTS ON
FORM 8-K

(a)	Exhibits



|(31.1) | Rule 13a - 14(a) Certification of Chief Executive
Officer.                                                                                                    
|------ | --------------------------------------------------------------------------------------------------------------------------------------------------------------
|(31.2) | Rule 13a - 14(a) Certification of Chief Financial
Officer.                                                                                                    
|(32.1) | Certification pursuant to 18 U.S.C. as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of Principal Executive
Officer dated August 13, 2003.
|(32.2) | Certification pursuant to 18 U.S.C. as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of Principal Financial
Officer dated August 13, 2003.

(b)	Reports on Form 8-K

Current Report on Form 8-K, dated April 22, 2003, with the
Securities and Exchange Commission reporting operating results for the quarter
ended March 31, 2003.

Current Report on Form 8-K, dated May 6, 2003, with the Securities and
Exchange Commission announcing that CII Financial, Inc., mailed a Notice of
Redemption for all of its outstanding 91⁄2%

Current Report on Form 8-K, dated May 27, 2003, with the
Securities and Exchange Commission announcing an increase in the Company's share repurchase
program.



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. 
Registrant 
By:/s/ Paul H. Palmer 
Paul H. Palmer
Senior Vice President of Finance,
Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------