---

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 March 31, 2004

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 April 23, 2004,   there were  26,898,000  shares of common  stock
outstanding.

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SIERRA HEALTH SERVICES, INC.

          Quarterly Report on Form 10-Q

For the period ended March 31, 2004



|PART I.   FINANCIAL INFORMATION                                                                                                                                                                                                                                                                                                                                                          | Page No.
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------
|                                                                                                                                                                                                                                                                                                                                                                                        
|Item 1. Financial Statements (Unaudited):                                                                                                                                                                                                                                                                                                                                                |         
|Condensed Consolidated Balance Sheets -
            
                   March 31, 2004 and December 31, 2003
          
        Condensed Consolidated Statement of Operations -
            
          three months ended March 31, 2004 and 2003
          
        Condensed Consolidated Statement of Cash Flows -
            
          three months ended March 31, 2004 and 2003 | 123     
|Notes to Condensed Consolidated Financial Statements                                                                                                                                                                                                                                                                                                                                     | 4 - 14  
|Item 2.   Management's Discussion and Analysis of Financial
                      Condition and Results of Operations                                                                                                                                                                                                                                                                    | 15 - 26 
|Item 3.   Quantitative and Qualitative Disclosures About Market Risk                                                                                                                                                                                                                                                                                                                     | 27      
|Item 4.  Controls and Procedures                                                                                                                                                                                                                                                                                                                                                         | 27      
|                                                                                                                                                                                                                                                                                                                                                                                        
|PART II.  OTHER INFORMATION                                                                                                                                                                                                                                                                                                                                                              |         
|                                                                                                                                                                                                                                                                                                                                                                                        
|Item 1.   Legal Proceedings                                                                                                                                                                                                                                                                                                                                                              | 28      
|Item 2.   Changes in Securities and Use of Proceeds                                                                                                                                                                                                                                                                                                                                      | 29      
|Item 3. Defaults upon Senior Securities                                                                                                                                                                                                                                                                                                                                                  | 29      
|Item 4. Submission of Matters to a Vote of Security Holders                                                                                                                                                                                                                                                                                                                              | 29      
|Item 5. Other Information                                                                                                                                                                                                                                                                                                                                                                | 29      
|Item 6.   Exhibits and Reports on Form 8-K                                                                                                                                                                                                                                                                                                                                               | 29 - 30 
|Signatures                                                                                                                                                                                                                                                                                                                                                                               | 31      

---

i

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)

`March 31,   December 31,
                                                                        2004         2003
                                                                     -----------  -----------
                              ASSETS                                                                  
CURRENT ASSETS:
     Cash and Cash Equivalents..................................... $   148,436  $   118,473
     Investments...................................................     179,808      197,573
     Accounts Receivable (Less Allowance for Doubtful
         Accounts; 2004 - $7,226; 2003 - $7,342)...................      11,786       12,080
     Military Accounts Receivable (Less Allowance for Doubtful
         Accounts; 2004 and 2003 - $100)...........................      44,688       47,389
     Current Portion of Deferred Tax Asset.........................      32,141       33,708
     Prepaid Expenses and Other Current Assets.....................      51,488       37,478
     Assets of Discontinued Operations.............................       2,593      533,756
                                                                     -----------  -----------
         Total Current Assets......................................     470,940      980,457

PROPERTY AND EQUIPMENT, NET........................................      62,160       63,109
RESTRICTED CASH AND INVESTMENTS....................................      18,913       17,646
GOODWILL...........................................................      14,782       14,782
DEFERRED TAX ASSET (Less Current Portion)..........................      11,510       11,501
NOTE RECEIVABLE......................................................    62,000           --
OTHER ASSETS.......................................................      58,810       46,626
                                                                     -----------  -----------
TOTAL ASSETS....................................................... $   699,115  $ 1,134,121
                                                                     ===========  ===========
                                                                                                      
               LIABILITIES AND STOCKHOLDERS' EQUITY                                                   
CURRENT LIABILITIES:
     Accrued Liabilities........................................... $    88,397  $    56,327
     Trade Accounts Payable........................................      35,972       37,787
     Accrued Payroll and Taxes.....................................      23,167       15,879
     Medical Claims Payable........................................     107,279      103,749
     Unearned Premium Revenue......................................      21,974       45,888
     Military Health Care Payable..................................      78,846       76,605
     Current Portion of Long-Term Debt.............................          62          163
     Liabilities of Discontinued Operations........................         740      472,407
                                                                     -----------  -----------
         Total Current Liabilities.................................     356,437      808,805

LONG-TERM DEBT (Less Current Portion)..............................     115,256      116,645
OTHER LIABILITIES..................................................      66,083       57,907
                                                                     -----------  -----------
TOTAL LIABILITIES..................................................     537,776      983,357
                                                                     -----------  -----------
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;
       2004 - 33,943; 2003 - 33,173 Shares Issued..................         170          166
  Treasury Stock: 2004 - 7,110; 2003 - 6,221 Common Stock Shares...    (143,000)    (112,737)
  Additional Paid-in Capital.......................................     242,874      227,417
  Deferred Compensation............................................          --          (22)
  Accumulated Other Comprehensive Gain  (Loss).....................         303         (479)
  Retained Earnings ...............................................      60,992       36,419
                                                                     -----------  -----------
TOTAL STOCKHOLDERS' EQUITY.........................................     161,339      150,764
                                                                     -----------  -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY......................... $   699,115  $ 1,134,121
                                                                     ===========  ===========`

See accompanying notes to condensed consolidated financial statements.

1

SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES

                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

                      (In thousands, except per share data)

                                   (Unaudited)

`Three Months Ended March 31,
                                                                  ----------------------------
                                                                      2004           2003
OPERATING REVENUES:                                               -------------  ------------- 
   Medical Premiums............................................ $      265,438  $     235,080
   Military Contract Revenues..................................        127,624        104,413
   Professional Fees...........................................          9,478          8,704
   Investment and Other Revenues...............................          5,650          4,073
                                                                  -------------  -------------
         Total.................................................        408,190        352,270
                                                                  -------------  -------------
OPERATING EXPENSES:
   Medical Expenses............................................        208,065        190,986
   Military Contract Expenses..................................        120,797        101,796
   General and Administrative Expenses.........................         37,168         34,213
                                                                  -------------  -------------
         Total ................................................        366,030        326,995
                                                                  -------------  -------------

OPERATING INCOME FROM CONTINUING OPERATIONS....................         42,160         25,275
Interest Expense...............................................         (1,165)        (1,620)
Other Income (Expense), Net....................................            122            (11)
                                                                  -------------  -------------
INCOME FROM CONTINUING OPERATIONS
   BEFORE INCOME TAXES.........................................         41,117         23,644
PROVISION FOR INCOME TAXES.....................................        (14,802)        (8,216)
                                                                  -------------  -------------
INCOME FROM CONTINUING OPERATIONS..............................         26,315         15,428
LOSS FROM DISCONTINUED OPERATIONS (net of income
    tax benefit of $761 and $335, respectively)................           (486)          (406)
                                                                  -------------  -------------
NET INCOME .................................................... $       25,829  $      15,022
                                                                  =============  =============
EARNINGS PER COMMON SHARE:
Income from Continuing Operations.............................. $         0.97  $        0.53
Loss from Discontinued Operations..............................          (0.01)         (0.01)
                                                                  -------------  -------------
   Net Income ................................................. $         0.96  $        0.52
                                                                  =============  =============
EARNINGS PER COMMON SHARE ASSUMING DILUTION:
Income from Continuing Operations.............................. $         0.75  $        0.50
Loss from Discontinued Operations..............................          (0.01)         (0.01)
                                                                  -------------  -------------
   Net Income ................................................. $         0.74  $        0.49
                                                                  =============  =============`

See accompanying notes to condensed consolidated financial statements.

2

SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES

                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

                                 (In thousands)

                                   (Unaudited)

`Three Months Ended March 31,
                                                                      ----------------------------
                                                                          2004           2003
                                                                      -------------  -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net Income ...................................................... $      25,829  $      15,022
   Adjustments to Reconcile Net Income to Net Cash
       Provided by (Used for) Operating Activities:
          Loss from Discontinued Operations.........................           486            406
          Depreciation..............................................         4,075          3,903
          Deferred Compensation Expense.............................            22            147
          Provision for Doubtful Accounts...........................           445            566
   Changes in Assets and Liabilities:
          Other Assets .............................................            60         (3,837)
          Deferred Tax Asset........................................         7,205          4,698
          Other Liabilities.........................................         1,684         11,591
          Other Current Assets......................................           575         (4,426)
          Military Accounts Receivable..............................         2,701        (13,044)
          Military Health Care Payable..............................         2,241          4,331
          Medical Claims Payable....................................         3,530          3,206
          Accrued Payroll and Taxes.................................         7,288          5,903
          Unearned Premium Revenue..................................       (23,914)       (29,183)
                                                                      -------------  -------------
       Net Cash Provided by (Used for) Operating Activities
          of Continuing Operations..................................        32,227           (717)
                                                                      -------------  -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
   Capital Expenditures, Net of Dispositions........................        (1,491)        (5,650)
   Change in Investments............................................        19,401         47,999
                                                                      -------------  -------------
       Net Cash Provided by Investing Activities of
          Continuing Operations.....................................        17,910         42,349
                                                                      -------------  -------------

CASH FLOWS FROM FINANCING ACTIVITIES:
   Payments on Debt and Capital Leases..............................        (1,490)       (60,059)
   Purchase of Treasury Stock.......................................       (31,944)       (27,558)
   Exercise of Stock in Connection with Stock Plans.................         9,846          1,581
   Proceeds from Senior Convertible Debentures......................            --        115,000
   Debt Issue Costs.................................................            --         (4,914)
                                                                      -------------  -------------
       Net Cash (Used for) Provided by Financing Activities of
          Continuing Operations.....................................       (23,588)        24,050
                                                                      -------------  -------------

NET CASH PROVIDED BY DISCONTINUED OPERATIONS........................         3,414          1,244
                                                                      -------------  -------------
NET INCREASE IN CASH AND CASH EQUIVALENTS...........................        29,963         66,926

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD....................       118,473         45,778
                                                                      -------------  -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.......................... $     148,436  $     112,704
                                                                      =============  =============

Supplemental Condensed Consolidated Continuing Operations
  Statements of Cash Flows Information:
--------------------------------------------------------------------
  Cash Paid During the Period for Interest
   (Net of Amount Capitalized)...................................... $       1,430  $         106
  Net Cash Paid During the Period for Income Taxes..................            22             42
Non-Cash Investing and Financing Activities:
  Assets and Liabilities Recorded in Conjunction with the Sale of
    the Workers' Compensation Operations..............................      54,060             --`

See accompanying notes to condensed consolidated financial statements.

3

1. 	BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated
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, 2003. 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.

4

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 except for those expenses
associated with the restricted stock units and certain stock options in which
vesting was accelerated in conjunction with the sale of California Indemnity
Insurance Co. Inc. ("Cal Indemnity").  (See Note 7 for more detail on
the sale of Cal Indemnity.)  Had compensation cost for the Company's stock-based
compensation plans been determined based on the fair value at the grant dates
for awards under those plans, the Company's net income and earnings per share,
would have been reduced to the pro forma amounts indicated below:

`Three Months Ended March 31,
                                                     ----------------------------
                                                         2004           2003
                                                     -------------  -------------   
  (In thousands, except per share data)

Net income, as reported............................ $      25,829  $      15,022
Less: total stock-based employee compensation
   expense determined under fair value based
   methods for all  awards, net of tax.............        (1,358)        (1,098)
                                                     -------------  -------------
Pro forma net income .............................. $      24,471  $      13,924
                                                     =============  =============

Net income per share, as reported.................. $        0.96  $        0.52
Pro forma net income, per share ...................          0.90           0.48

Net income per share
   assuming dilution, as reported.................. $        0.74  $        0.49
Pro forma net income, per share ...................          0.70           0.45`

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

3. 	ASSET IMPAIRMENT, RESTRUCTURING, REORGANIZATION AND
OTHER COSTS

The Company has $3.9 million in remaining asset
impairment, restructuring, reorganization and other costs at March 31, 2004.
The remaining costs are related to legal claims and management believes that
they are appropriate and that no revisions to the estimates are necessary at
this time.

5

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.  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
(i) the market 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; (ii) the debentures are called for redemption; (iii)
there is an event of default with respect to the debentures; or (iv) 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 evaluates the market price condition each quarter
to determine whether the debentures will be convertible, at the option of the
holder, during the subsequent quarter. For the quarters ended December 31, 2003
and March 31, 2004, the market price condition was satisfied. As a result, the
debentures were convertible, at the option of the holder, at any time during the
quarter ended March 31, 2004 and are convertible at any time during the quarter
ending June 30, 2004. Although no debentures were converted as of March 31,
2004, they are considered common stock equivalents and are included in the
calculation of weighted average common shares outstanding assuming dilution for
the quarter ended March 31, 2004.

Revolving 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 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 was
initially LIBOR plus 2.25% and is currently LIBOR plus 2.00%.  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 facility is available for general
corporate purposes.  The Company has not yet drawn on this facility.

The 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) other than cash and
cash equivalents, subject, in each case, to the exclusion of the capital stock
of CII Financial, Inc. ("CII") and certain other exclusions.

The 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, repurchase Company common stock 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 credit
agreement.  The Company believes it is in compliance with all covenants of the
credit agreement.

6

5. 	SHARE REPURCHASE PROGRAM

Pursuant to authorization from the Company's Board of Directors, through December 31, 2003,
the Company had purchased, at prevailing prices in the open market by block
purchase or private transactions, 5.3 million shares for $99.5 million.  As of
January 1, 2004, the Company had authorization from its Board of Directors to
repurchase an additional 2.3 million shares of the Company's common stock.  Currently, the Company's Board of Directors has authorized share repurchases at prices up to $42.50.  The
Company's revolving credit facility, as amended, allows for stock repurchases of
up to $60 million during 2004.  Through March 31, 2004, the Company had
purchased, at prevailing prices in the open market by block purchase or private
transactions an additional 980,000 shares for $31.9 million at an average cost
of $32.61 per share.  From April 1, 2004 to April 16, 2004, the Company
repurchased an additional 16,000 shares for $570,000 at an average cost of
$34.91 per share.  In total, the Company has purchased 6.3 million shares for $132.0 million at an average cost of $20.86 per share.

Included in the repurchases for the first quarter of 2004 are
500,000 shares the Company purchased from its CEO, at $32.00 per share, for a
total of $16.0 million.  The closing price of the Company's common stock on the
date of the transaction, February 11, 2004, was $32.35.  The Company's Board of
Directors approved the purchase.



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
2001.  The Company ceased providing HMO health care coverage in Texas on April
17, 2002.



The Company elected to early adopt 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:



`March 31,        December 31,
                                                                2004              2003
                                                          ----------------  ----------------
  (In thousands)                                                                            
ASSETS                                                                                      
 Cash and Cash Equivalents............................ $              569  $             47
 Investments..........................................              1,979             4,048
 Other Assets.........................................                 45               115
                                                          ----------------  ----------------
ASSETS OF DISCONTINUED OPERATIONS.....................              2,593             4,210
                                                          ----------------  ----------------
LIABILITIES                                                                                 
 Accounts Payable and Other Liabilities...............                640             2,658
 Medical Claims Payable...............................                100               202
                                                          ----------------  ----------------
LIABILITIES OF DISCONTINUED OPERATIONS................                740             2,860
                                                          ----------------  ----------------
NET ASSETS OF DISCONTINUED OPERATIONS................. $            1,853  $          1,350
                                                          ================  ================`

7

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

`Three Months Ended March 31,
                                                      ----------------------------
                                                          2004           2003
                                                      -------------  -------------
  (In thousands)
Operating Revenues.................................. $          36  $          36
                                                      -------------  -------------

 Medical Expenses...................................          (175)        (1,379)
 General and Administrative Expenses, Net...........          (136)        (1,634)
 Interest Expense and Other, Net
   (including rental income)........................            73           (239)
                                                      -------------  -------------
 Total Expenses, Net................................          (238)        (3,252)
                                                      -------------  -------------
 Income from Discontinued Operations Before Taxes...           274          3,288
 Income Tax Provision...............................           (78)        (1,150)
                                                      -------------  -------------
 Net Income from Discontinued Operations............ $         196  $       2,138
                                                      =============  =============`

The operating revenues of $36,000 for the three months ended
March 31, 2004 and 2003 are related to investment income.  All of the
discontinued Texas HMO health care operations had previously been a component of
the "managed care and corporate operations" segment.

In the first quarter of 2003, the Company made an 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 the 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.

In the first quarter of 2004, the Company made an adjustment
due to favorable development and reduced legal reserves and medical claims
payable by a total of $300,000.

Management believes that the remaining liabilities, as of
March 31, 2004, 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.
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 11 for the recast segment presentation.



On March 31, 2004, the Company completed the sale of CII's
subsidiary, Cal Indemnity which was CII's only significant asset.  Cal
Indemnity's subsidiaries, which were included in the sale, are Commercial
Casualty Insurance Co., Sierra Insurance Company of Texas, and CII Insurance
Co.



The Company received $14.2 million in cash at the closing,
subject to potential post closing adjustments with regard to the closing date
balance sheet. The transaction also includes a note receivable of $62.0

8

million, plus accrued interest, payable to the Company in January 2010. The note
receivable can be increased or decreased depending on favorable or adverse claim
and expense development from the date of closing through December 31, 2009, and
other offsets and additions based on certain agreements between the parties.
The note receivable can be increased on a dollar for dollar basis for the first
$15 million in positive loss reserve development and $.50 per dollar on any
positive development in excess of $15 million.  The note receivable can also be
decreased on a dollar for dollar basis for the first $58 million in adverse loss
development.  Certain other contractual assets and liabilities were recorded in
conjunction with the sale including a current asset of $15.8 million and a non-
current asset of $7.1 million that represent Cal Indemnity's unallocated loss
adjustment expense ("ULAE") reserves to be paid to Sierra.  Offsetting
these assets is a current liability of $15.8 million and a non-current
liability of $7.1 million, which represent the contractual services to be
performed by Sierra.  Including the cash proceeds, net assets of $68.3 million
were recorded in conjunction with the sale of Cal Indemnity.



As of the closing, a third-party claims administrator was
engaged to administer claims for a period of 15 years. Under the terms of this
agreement, the administrator will provide certain claims services for Cal
Indemnity and its subsidiaries. Sierra will be responsible for this
administrator's costs and for providing certain transition services for varying
terms to Cal Indemnity.  The purchaser of Cal Indemnity will reimburse Sierra
for these costs from an account consisting of the ULAE reserves and accrued
liabilities as of the closing, a percentage of premiums earned after the
closing, plus accrued interest on the ULAE reserves.



The Company's March 31, 2004 Condensed Consolidated Balance
Sheet does not include the assets and liabilities of Cal Indemnity due to the
disposal of those assets and liabilities as of March 31, 2004.  The Company's
Condensed Consolidated Statement of Income for the three months ended March 31,
2004 does reflect the activity of the discontinued operations through the
disposal date.  Any future activity related to this disposal will be reflected
in continuing operations.



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

`December 31,
                                                        2003
                                                     -----------  
  (In thousands)                                                  
ASSETS                                                            
Cash and Cash Equivalents.......................... $    58,634
Investments........................................     243,647
Reinsurance Recoverable............................     177,333
Property and Equipment, Net........................       1,612
Other Assets.......................................      48,320
                                                     -----------
TOTAL ASSETS.......................................     529,546
                                                     -----------
                                                                 
LIABILITIES                                                      
Accounts Payable and Other Accrued Expenses........      54,208
Reserve for Loss and Loss Adjustment Expenses......     415,339
                                                     -----------
TOTAL LIABILITIES....................................   469,547
                                                     -----------
NET ASSETS OF DISCONTINUED OPERATIONS...............$    59,999
                                                     ===========`

9

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

`Three Months Ended March 31,
                                              ------------------------------
                                                   2004            2003
                                              --------------  --------------
  (In thousands)
OPERATING REVENUES:
Specialty Product Revenues.................. $       19,015  $       36,811
Investment and Other Revenues...............          1,290           4,480
                                              --------------  --------------
    Total Revenues..........................         20,305          41,291
                                              --------------  --------------

OPERATING EXPENSES:
Specialty Product Expenses..................         21,917          45,385
Interest Expense and Other
  (Income) Expense, Net.....................            (91)            (65)
                                              --------------  --------------
    Total Operating Expenses................         21,826          45,320
                                              --------------  --------------

Loss from Discontinued
   Operations Before Income Tax ............         (1,521)         (4,029)

Income Tax Benefit..........................            839           1,485
                                              --------------  --------------
Net Loss from Discontinued
   Operations............................... $         (682) $       (2,544)
                                              ==============  ==============`

Specialty product revenues consist of workers' compensation
insurance net earned premiums.  Specialty product expenses consist of loss and
loss adjustment expenses incurred and general and administrative expenses.



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 gain of $1.4
million, or $1.3 million net of tax.



Intercompany Notes Receivable/Payable.  In connection
with the exchange offer for the subordinated debentures, Cal Indemnity loaned
Sierra $7.5 million.  Sierra paid the loan in full in conjunction with the sale
of Cal Indemnity.

10



8.	EARNINGS PER SHARE:



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

`Three Months Ended March 31,
                                                                     ----------------------------
                                                                         2004           2003
                                                                     -------------  -------------    
  (In thousands, except per share data)
BASIC INCOME (LOSS) PER SHARE
Income from continuing operations.................................. $      26,315  $      15,428
Loss from discontinued operations..................................          (486)          (406)
                                                                     -------------  -------------
Net income......................................................... $      25,829  $      15,022
                                                                     =============  =============
Weighted average common shares outstanding.........................        27,041         28,928
                                                                     =============  =============
Earnings per common share:
Income from continuing operations.................................. $        0.97  $        0.53
Loss from discontinued operations..................................         (0.01)         (0.01)
                                                                     -------------  -------------
Net income......................................................... $        0.96  $        0.52
                                                                     =============  =============
DILUTED INCOME (LOSS) PER SHARE
Income from continuing operations.................................. $      26,315  $      15,428
Loss from discontinued operations..................................          (486)          (406)
                                                                     -------------  -------------
Net income.........................................................        25,829         15,022
Interest expense on Sierra Debentures, net of tax..................           420             --
                                                                     -------------  -------------
Income for purposes of computing diluted net income per share...... $      26,249  $      15,022
                                                                     =============  =============
Weighted average common shares outstanding.........................        27,041         28,928
Dilutive options and restricted shares outstanding.................         2,213          1,957
Dilutive impact of conversion of Sierra Debentures.................         6,288             --
                                                                     -------------  -------------
Weighted average common shares outstanding assuming dilution.......        35,542         30,885
                                                                     =============  =============
Earnings per common share assuming dilution:
Income from continuing operations.................................. $        0.75  $        0.50
Loss from discontinued operations..................................         (0.01)         (0.01)
                                                                     -------------  -------------
Net income......................................................... $        0.74  $        0.49
                                                                     =============  =============`

The Company evaluates the market price condition of its
convertible debentures each quarter to determine whether they will be
convertible, at the option of the holder, during the subsequent quarter. For the
quarters ended December 31, 2003 and March 31, 2004, the market price condition
was satisfied. As a result, the debentures were convertible, at the option of
the holder, at any time during the quarter ended March 31, 2004 and are
convertible at any time during the quarter ending June 30, 2004. Although no
debentures were converted as of March 31, 2004, they are considered common
stock equivalents and are included in the calculation of weighted average common
shares outstanding assuming dilution for the quarter ended March 31, 2004.

For the three months ended March 31, 2003, stock options to
purchase 337,000 shares were not dilutive and, therefore, were not included in
the computation of diluted earnings per share.  In addition, the Company's
senior convertible debentures also were not dilutive for the three months ended
March 31, 2003.

11

9.	DEFINED BENEFIT PLAN

The Company previously disclosed that it expects to
contribute approximately $800,000 to its defined benefit plan in 2004 to fund
expected benefit payments.  As of March 31, 2004, the Company has contributed
$196,000 to the plan to fund benefit payments and anticipates making
approximately $600,000 in additional contributions during 2004.

`Three Months Ended March 31,
                                               ----------------------------
                                                   2004           2003
                                               -------------  -------------
  (In thousands)

Components of Net Periodic Benefit Cost:
Service Cost................................. $         106  $          77
Interest Cost................................           418            334
Amortization of Prior Service Credits........           303            231
Recognized Actuarial Loss....................           109            171
                                               -------------  -------------
Net Periodic Benefit Cost.................... $         936  $         813
                                               =============  =============`

10.	COMPREHENSIVE INCOME

The following table presents comprehensive
income for the periods indicated:

`Three Months Ended March 31,
                                                     ----------------------------
                                                         2004           2003
                                                     -------------  -------------   
  (In thousands)
Net Income ........................................ $      25,829  $      15,022
Change in Unrealized Holding Gain
  on Available-for-Sale Investments, net of tax....           782            673
Change in Minimum Pension Liability, net of tax....            --           (162)
                                                     -------------  -------------
Comprehensive Income .............................. $      26,611  $      15,533
                                                     =============  =============`

11.	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 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 ("DoD") TRICARE program in Region 1.

Sierra Military Health Services, Inc., ("SMHS") completed the fifth year of a five-year contract in May
2003 and is in the first year of a contract extension.  In August 2002, the DoD
requested proposals for managed care services under the TRICARE Next Generation
("T-Nex") contract.  The Company submitted its proposal in January
2003 for the T-Nex North Region contract, which includes Region 1, as well as
Michigan, Ohio, Kentucky, Indiana, Illinois, Wisconsin, Virginia and North
Carolina.  In August 2003, the DoD awarded the T-Nex North Region
contract to a competitor and the General Accounting Office denied the Company's
protest of the award in December 2003.  The new contractor is scheduled to be
operational in Region 1 on September 1, 2004 and the new contract will supersede
the remainder of

12

the Company's current TRICARE Region 1 contract.  After the new contractor is operational on September 1, 2004, SMHS will commence a six-month
phase-out of operations at prices previously negotiated with the DoD.  SMHS does
not meet the definition of discontinued operations since the Company does not
have plans to dispose of the operations before the phase-out is complete.

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 Care   Military Health
                                               and Corporate      Services
                                                Operations       Operations         Total
                                              ---------------  ---------------  --------------
  (In thousands)                                                                              
Three Months Ended March 31, 2004                                                             
Medical Premiums............................ $       265,438  $            --  $      265,438
Military Contract Revenues..................              --          127,624         127,624
Professional Fees...........................           9,478               --           9,478
Investment and Other Revenues...............           5,005              645           5,650
                                              ---------------  ---------------  --------------
   Total Revenue............................ $       279,921  $       128,269  $      408,190
                                              ===============  ===============  ==============

Segment Operating Profit.................... $        34,688  $         7,472  $       42,160
Interest Expense............................          (1,147)             (18)         (1,165)
Other Income (Expense), Net.................             127               (5)            122
                                              ---------------  ---------------  --------------
Income from Continuing Operations
   Before Income Taxes...................... $        33,668  $         7,449  $       41,117
                                              ===============  ===============  ==============
                                                                                              
Three Months Ended March 31, 2003                                                             
Medical Premiums............................ $       235,080  $            --  $      235,080
Military Contract Revenues..................              --          104,413         104,413
Professional Fees...........................           8,704               --           8,704
Investment and Other Revenues...............           3,836              237           4,073
                                              ---------------  ---------------  --------------
   Total Revenue............................ $       247,620  $       104,650  $      352,270
                                              ===============  ===============  ==============

Segment Operating Profit.................... $        22,421  $         2,854  $       25,275
Interest Expense............................          (1,574)             (46)         (1,620)
Other Income (Expense), Net.................               7              (18)            (11)
                                              ---------------  ---------------  --------------
Income from Continuing Operations
   Before Income Taxes...................... $        20,854  $         2,790  $       23,644
                                              ===============  ===============  ==============`

13

12. 	INVESTMENTS

Of the cash and cash equivalents and current investments
that total $328.2 million in the accompanying Consolidated Balance Sheet at
March 31, 2004, $199.0 million is limited for use only by the Company's
regulated subsidiaries.  Such amounts are available for transfer to Sierra from
the regulated subsidiaries only to the extent that they can be remitted in
accordance with terms of existing management agreements and by dividends, which
customarily must be approved by regulating state insurance departments.  The
remainder is available to Sierra on an unrestricted basis.

Investments consist primarily of U.S. Government and its
agencies' securities and municipal bonds, as well as corporate and mortgage-backed
securities.  At March 31, 2004, over 95% of the Company's investment
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.  Restricted investments are classified as non-current assets. 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 Companies held-to-maturity investments were part of the
discontinued workers' compensation operations.  As of March 31, 2004, all
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 believe it has any other than
temporary investment impairments.

13. 	COMMITMENTS AND CONTINGENCIES

On March 15, 2004, SMHS entered into a lease assignment agreement relative to one of
its administrative locations.  The agreement assigns the remainder of the lease term,
which expires September 30, 2012.  Under the
assignment SMHS remains contingently liable should the new tenant not perform under its
obligation.  The future lease payments due under the lease agreement total $5.8 million.
SMHS did not record a liability for its obligation under this agreement as the likelihood
of performance is considered remote at this time and SMHS would have the ability to
sublease or enter into another assignment arrangement if required to perform on this
obligation.

14



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,
2003, and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included in our 2003 annual report on Form 10-K filed
with the Securities and Exchange Commission on March 5, 2004, and in conjunction
with our unaudited condensed consolidated financial statements and accompanying
notes for the three month periods ended March 31, 2004 and 2003, 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 Part 1, Item 1
of our 2003 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 Part 1, Item 1 of our 2003 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 2003 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 all 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.

Overview

Our continuing operations derive revenues from our health
maintenance organization, or HMO, managed indemnity plans and military health
care services.  To a lesser extent, we also derive revenues from professional
fees (consisting primarily of fees for providing health care services to non-
members, co-payment fees received from members and ancillary products), and
investment and other revenue (consisting of fees for workers' compensation third
party administration, utilization management services and ancillary products).

Our principal expenses consist of medical expenses, military
contract expenses, and general and administrative expenses.  Medical expenses
represent capitation fees and other fee-for-service payments paid to independent
contracted physicians, hospitals and other health care providers to cover
members, pharmacy costs, as well as the aggregate expenses to operate and manage
our wholly-owned multi-specialty medical group and other provider subsidiaries.
As a provider of health care management services, we seek to positively affect
quality of care and expenses by contracting with physicians, hospitals and other
health care providers at negotiated price levels, by adopting quality assurance
programs, monitoring and managing utilization of physician and hospital services
and providing incentives

15

to use cost-effective providers.  Military contract expenses represent payments to providers for health care services rendered under
the TRICARE program, as well as administrative costs to pay claims and operate
the military health care subsidiary.  General and administrative expenses
generally represent operational costs other than those directly associated with
the delivery of health care services and military contract services.

Executive Summary

Continuing Operations.  Our March 31, 2004
operating results were significantly improved over 2003.  Our income from
continuing operations increased by 70.6% to $26.3 million.  The improvement in
the 2004 operating results was primarily driven by medical premium revenue
growth from new members, rate increases and an expansion of our operating
margin.  Our HMO membership increased by 13.4% from 275,200 at March 31, 2003 to
312,100 at March 31, 2004.  Our overall 2004 premium rates increased by
approximately 3.8% over 2003.  The combination of these factors resulted in a
12.9% increase in our medical premium revenues to $265.4 million, which was
partially offset by our medical expenses, which only increased by 8.9% to $208.1
million.  Medical expenses, as a percentage of medical premiums and professional
fees, decreased to 75.7% from 78.3%, or 260 basis points.  In addition, our
general and administrative expenses only increased by 8.6% to $37.2 million.  As
a percentage of total revenues, our general and administration expense ratio
decreased by 60 basis points to 9.1%.  Our operating margin, which is the
operating income from continuing operations divided by total revenues, improved
by 310 basis points to 10.3%.

Our Military Health Services Operations segment represented
31.4% of our March 31, 2004 operating revenues and 17.7% of our March 31, 2004
operating income from continuing operations.  This segment had income before
income taxes of $7.4 million for the first quarter of 2004 compared to $2.8
million for the same period in 2003.  For 2003, excluding the T-Nex related
expenses, the Military Health Services Operations segment would have had income
before income taxes of $5.1 million.   The improvement over 2003 was due to
greater administrative operating expense efficiencies and the positive impact of
the increased revenue under the contract extension, which began June 2003.  We
did not win the T-Nex North Region contract and our appeal to the United States
General Accounting Office was denied in December 2003.  Health care services
under our current TRICARE contract for Region 1 will end on August 31, 2004.  We
will then have a six-month phase-out at substantially reduced revenues and
earnings.

We had cash flows from operating activities of continuing
operations for 2004 of $32.2 million compared to a use of cash of $717,000 for
2003.  We received two monthly payments from the Centers for Medicare and
Medicaid Services, or CMS, during the first quarter of 2004 and 2003 as the
January payments were received at the end of December.  When the quarters are
adjusted to reflect three monthly payments from CMS the cash flow from
continuing operations would be $65.2 million in 2004 and $29.2 million in 2003.
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 increase in cash from operations was mainly attributable to the
increase in cash from earnings and the decrease in cash related to the increase
in the military accounts receivable balance that occurred from December 31, 2002
to March 31, 2003.

Discontinued Operations.  On January 15, 2003, we
announced that we were exploring strategic alternatives to dispose of CII
Financial, Inc., or CII.  Sierra's Board of Directors approved the sale of the
operations on December 31, 2002.  Accordingly, beginning in the fourth quarter
of 2002, we reclassified our workers' compensation insurance business as
discontinued operations.

On November 25, 2003, we announced that we had reached an
agreement to sell California Indemnity Insurance Company, or Cal Indemnity, and
its subsidiaries.  In the fourth quarter of 2003, we recorded a charge of $15.6
million, gross and net of tax, to write down the investment in Cal Indemnity to
its estimated net sales proceeds.

16

On March 31, 2004, we completed the sale of CII's subsidiary,
Cal Indemnity, which was CII's only significant asset.  Cal Indemnity's
subsidiaries, which were included in the sale, are Commercial Casualty Insurance
Company, Sierra Insurance Company of Texas, and CII Insurance Company.

We received $14.2 million in cash at the closing, subject to
potential post closing adjustments with regard to the closing date balance
sheet. The transaction also includes a note receivable of $62.0 million, plus
accrued interest, payable to us in January 2010. The note receivable can be
increased or decreased depending on favorable or adverse claim and expense
development from the date of closing through December 31, 2009, and other
offsets and additions based on certain agreements between the parties.  The note
receivable can be increased on a dollar for dollar basis for the first $15
million in positive loss reserve development and $.50 per dollar on any positive
development in excess of $15 million.  The note receivable can also be decreased
on a dollar for dollar basis for the first $58 million in adverse loss
development.  Certain other contractual assets and liabilities were recorded in
conjunction with the sale including a current asset of $15.8 million and a non-
current asset of $7.1 million that represent Cal Indemnity's unallocated loss
adjustment expense, or ULAE, reserves to be paid to Sierra.  Offsetting these
assets is a current liability of $15.8 million and a non-current liability of
$7.1 million, which represent the contractual services to be performed by
Sierra.  Including the cash proceeds, net assets of $68.3 million were recorded
in conjunction with the sale of Cal Indemnity.

As of the closing, a third-party claims administrator was
engaged to administer claims for a period of 15 years. Under the terms of this
agreement the administrator will provide certain claims services for Cal
Indemnity and its subsidiaries. Sierra will be responsible for this
administrator's costs and for providing certain transition services for varying
terms to Cal Indemnity.  The purchaser of Cal Indemnity will reimburse Sierra
for these costs from an account consisting of the ULAE reserves and accrued
liabilities as of the closing, a percentage of premiums earned after the
closing, plus accrued interest on the ULAE reserves.

RESULTS OF OPERATIONS, THREE MONTHS ENDED MARCH 31, 2004,
COMPARED TO THREE MONTHS ENDED MARCH 31, 2003

Total Operating Revenues increased approximately
15.9% to $408.2 million from $352.3 million for 2003.

The change in operating revenues was comprised of the
following:

- An increase in medical premiums of $30.3
million
- An increase in military contract revenues of $23.2
million
- An increase in professional fees of $774,000
- An increase in investment and other revenues of $1.6
million

Medical Premiums from our HMO and managed
indemnity insurance subsidiaries increased from $235.1 million to $265.4
million, an increase of $30.3 million or 12.9%. The increase in premium revenue
reflects a 6.2% increase in Medicare member months (the number of months
individuals are enrolled in a plan), a 21.9% increase in Medicaid member months
and a 12.0% 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 approximately 7% while the overall recorded per member per month
revenue increase, including new and continuing business, was approximately 5%,
net of changes in benefits.  We did not receive a Medicaid rate increase in 2004
or 2003.  The basic Medicare rate increase received in 2004 was approximately
2.2%.  Our overall Medicare rate increase was approximately 7.2% due primarily
to the impact of the Medicare Prescription Drug, Improvement, and Modernization
Act of 2003, or MMA, as described below.

17

In December 2003, President Bush signed MMA into law, which,
among other changes to Medicare, alters the Medicare+Choice program. Under the
MMA, Medicare+Choice plans are renamed Medicare Advantage plans and will receive
increased funding from CMS starting March 2004.  Because of the way in which the
increased funding is calculated, both our non-Social HMO Medicare Advantage
benefit plans and our Social HMO benefit plans received the increased funding.
MMA increased our Medicare premium rates by over 15% starting March 1, 2004.
The increased funding must be used in one or more of the following ways: to
reduce beneficiary premiums; reduce beneficiary cost sharing; enhance benefits;
place it into a benefit stabilization fund; use it to retain providers or expand
the provider network as long as the benefit stabilization fund or enhancement
does not result in increased premiums, increased cost sharing or reduced
benefits.  We are using the additional funding to enhance various plan benefits,
including a reduction in the amount of Medicare Part B premium that our members
pay to the federal government, and to stabilize our provider network.

Effective January 2004, CMS adopted a new risk adjustment
payment methodology for Medicare beneficiaries who are enrolled in managed care
programs, including the Social HMO. In addition, CMS has revised the payment
factors for the Social HMO members to include a frailty adjuster that uses
measures of functional impairment to predict expenditures.  Under the new
payment methodology, we are being paid 90% based on the previous payment
approach and 10% based on the new approach for 2004.  For 2004, excluding the
effects of MMA, the new payment methodology reduced our rate increase by 60
basis points.  We anticipate being paid 70% based on the previous payment
approach and 30% based on the new approach for 2005.  The Social HMO program was
due to expire at the end of 2003; however CMS administratively extended the
Social HMO program for one year, through 2004.  If the Social HMO contract were
not renewed beyond 2004, we would seek to transfer the members into one of our
traditional Medicare plans.  This transfer would allow for the continuity of
care of our members but without the additional Social HMO specific benefits that
are currently available to them and the associated higher premiums we receive.
There are activities taking place on a federal level to continue the program,
but there is no guarantee at this time that the Social HMO contract will be
renewed beyond 2004.  Continued medical premium revenue growth is principally
dependent upon continued enrollment in our products and upon competitive and
regulatory factors.

Our commercial membership increased from 189,000 at March 31,
2003 to 212,000 at March 31, 2004.  Our commercial member retention was
approximately 95% for our January 2004 renewals, which represent approximately
50% of our total commercial membership.  The increase in commercial membership
during the first quarter of 2004 is primarily attributed to in-case growth,
movement from self-insured plans to our commercial products and new
accounts.

Military Contract Revenues increased from
$104.4 million to $127.6 million, an increase of $23.2 million or 22.2%.
Included in the total military contract revenues are incremental change order
and bid price adjustments for 2003 and 2004 of $47.7 million and $31.8 million,
respectively.  The increase in revenue over 2003 is the result of higher base
contract revenue primarily due to increased eligible beneficiaries from the call
up of reservists in Region 1 and their family members who are eligible for the
TRICARE program after 30 days 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.  There
were no final settlements of bid price adjustments in 2003 or 2004.

Sierra Military Health Services, Inc., or SMHS, completed the fifth year of a five-year contract in May
2003 and is in the first year of a contract extension.  In August 2002, the DoD
requested proposals for managed care services under the TRICARE Next Generation,
or T-Nex, contract.  We submitted our proposal in January 2003 for the T-Nex
North Region contract, which includes Region 1, as well as Michigan, Ohio,
Kentucky, Indiana, Illinois, Wisconsin, Virginia and North Carolina.
In August 2003, the DoD awarded the T-Nex North Region contract to a competitor
and the General Accounting Office denied our protest of the award in December
2003.  The new contractor is scheduled to be operational in Region 1 on
September 1, 2004 and the new contract will supersede the remainder of our
current TRICARE

18

Region 1 contract.  After the new contractor is operational on September 1, 2004, SMHS will commence a six-month phase-out of operations at
prices previously negotiated with the DoD.  SMHS does not meet the definition of
discontinued operations since we do not have plans to dispose of the operations
before the phase-out is complete.

Subsequent to March 31, 2004, SMHS entered into a definitive
agreement with Health Net Federal Services to provide certain transition
services and to sell certain portions of its TRICARE business, including its
provider network and certain other assets.  The value of the transaction is up
to $4 million with the final value contingent on SMHS's operational performance
through August 2004.

Professional Fees increased from $8.7 million
to $9.5 million, an increase of $774,000, or 8.9% 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 $5.7 million, an increase of $1.6 million or 38.7%.  Investment
revenues increased due to higher average invested balances, an increase in net
gains on the sale of investments of $400,000 and an increase in revenues
associated with administrative services of $300,000.

Medical Expenses increased from $191.0 million
to $208.1 million, an increase of $17.1 million or 8.9%.  The increase is due
primarily to our increased membership, which is in part offset by a lower
medical care ratio.  This ratio, which is medical expenses as a percentage of
medical premiums and professional fees, decreased to 75.7% from 78.3%.  The
favorable decrease in our medical care ratio is due primarily to premium
increases in excess of cost increases.  The number of days in claims payable,
which is the medical claims payable balance divided by the average medical
expense per day for the period, at March 31, 2004, was 46.9 compared to 47.7 at
March 31, 2003.  In an effort to further improve service and customer relations
with our medical providers we have enhanced several claims processes,
including electronic data interchange and optical character recognition, to
reduce the time required to make claim payments.  The decrease in days in claims
payable is primarily a result of these enhancements.

We contract with hospitals, physicians and other independent
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 $26.9 million and $24.0 million,
or 12.9% and 12.6%, of our total medical expenses for 2004 and 2003,
respectively.

Military Contract Expenses increased from
$101.8 million to $120.8 million, an increase of $19.0 million or 18.7%. The
increase is consistent with the increase in revenues discussed previously and
includes T-Nex related costs of $2.3 million in 2003.  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 710,000 eligible individuals of
active duty military personnel, military retirees under the age of 65 and
dependents of military retirees through a network of approximately 49,700 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 $34.2 million to $37.2 million, an increase of
approximately $3.0 million or 8.6%. G&A expenses increased primarily due to
increases in payroll and benefits and premium taxes.  As a percentage of
revenues, G&A expenses were 9.1% for

19

2004, compared to 9.7% in 2003 due primarily to the overall increase in revenues.  As a percentage of medical
premium revenue, G&A expenses were 14.0% for 2004, compared to 14.6% for
2003.

Interest Expense decreased from $1.6 million to
$1.2 million, a decrease of $455,000 or 28.1%.  The decrease was primarily due
to the write off of the remaining deferred financing fees of approximately
$800,000 in 2003.  This was partially offset by the interest related to the new
senior convertible debentures.  We currently incur a fee of 0.375% on the unused
portion of our revolving credit facility.

Other Income (Expense), Net resulted in income
of $122,000 for 2004 compared to expense of $11,000 for 2003.

Provision for Income Taxes was recorded at
$14.8 million for 2004 compared to $8.2 million for 2003. The effective tax rate
for 2004 was 36.0% compared to 34.7% for 2003. Our effective tax rate is greater
than the statutory rate due primarily to state income taxes and other non-
deductible expenses.

Discontinued Operations consist of our Texas
HMO health care operations and the CII workers' compensation operations. The net
loss from discontinued operations for 2004 was $486,000 compared to $406,000 for
2003.  The Texas HMO health care operations had net income of $196,000 for 2004,
which was offset by a net loss on the CII workers' compensation operations of
$682,000.  We have stopped paying Texas claims as our evidence of coverage
requires that all claims or reconciliations must be settled within 18 months of
the time of service.

Discontinued Texas HMO health care operations. The
income from the Texas HMO health care operations for 2004 is the result of
favorable development in the medical claim liabilities and legal reserves.

Discontinued CII workers' compensation operations.  On
November 25, 2003, we announced that we had reached an agreement to sell Cal
Indemnity and its subsidiaries, which is CII's only significant asset.  In the
fourth quarter of 2003, we recorded a charge of $15.6 million, gross and net of
tax, to write down the investment in Cal Indemnity to its estimated net sales
proceeds.
On March 31, 2004, we completed
the sale of CII's subsidiary, Cal Indemnity, to Folksamerica Holding Company
Inc.

As of March 31, 2004 our Condensed Consolidated Balance Sheet
does not include the assets and liabilities of Cal Indemnity due to the disposal
of the assets and liabilities as of March 31, 2004.  Our Condensed Consolidated
Statement of Income for the three months ended March 31, 2004 does reflect the
activity of the discontinued operations through the disposal date.  Any future
activity related to this disposal will be reflected in continuing
operations.

The discontinued workers' compensation operations for 2004
had a net loss of $682,000.  Net earned premiums decreased by $17.8 million or
48.3% due to a decrease in direct earned premiums of $18.5 million partially
offset by a decrease in ceded reinsurance premiums of $300,000 and an increase
in assumed premiums of $400,000.  In conjunction with the Stock Purchase
Agreement for the sale of Cal Indemnity, we agreed to voluntarily stop writing
new and renewal policies except in Nevada.

Investment and other revenue decreased by $3.2 million or
71.2% due to realized losses of $400,000 in 2004 compared to realized gains of
$2.0 million in 2003 and a decrease in the average investment yields during the
period.

Expenses decreased in the CII workers' compensation
operations by $23.5 million or 51.8% compared to 2003 due primarily to the
overall decrease in premiums.

The loss and LAE reserves recorded for the three months ended
March 31, 2004 reflect our best estimate of the ultimate loss costs for reported
and unreported claims occurring in accident year 2004 as well as

20

those occurring in accident years prior to 2004.  Workers' compensation claim payments are made
over several years from the date of the claim.  The sale of Cal Indemnity
includes a note receivable of $62.0 million, plus accrued interest, payable in
January 2010. The note receivable can be increased or decreased depending on
favorable or adverse claim and expense development from the date of closing
through December 31, 2009, and other offsets and additions based on certain
agreements between the parties.

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
for 2004 was 114.8% compared to 123.1% for 2003.  Excluding prior accident
years' adverse loss development, the combined ratio would have been 117.2% for
2004 and 106.3% for 2003.  The increase is primarily due to a higher
underwriting expense ratio as a result of reduced net earned premiums.



LIQUIDITY AND CAPITAL RESOURCES

We had cash flows from operating activities for
continuing operations of $32.2 million for the three months ended March 31, 2004
compared to a use of cash of $717,000 in 2003.  We received two monthly CMS
payments during the first quarter of 2004 and 2003 as the January payments were
received at the end of December.  When the quarters are adjusted to reflect
three monthly payments from CMS, the cash flow from continuing operations would
be $65.2 million in 2004 and $29.2 million in 2003.  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.  We used the
majority of the cash flow for the repurchase of the Company's common stock.  The
improvement in cash flows from continuing operations over 2003 is primarily
attributable to cash from earnings and the decrease in cash related to the
increase in the military accounts receivable balance that occurred from December
31, 2002 to March 31, 2003.

SMHS receives monthly cash payments equivalent to one-twelfth
of its annual contractual price with the Department of Defense, or DoD.  SMHS
accrues health care revenue on a monthly basis for any monies owed above its
monthly cash receipt based on the number of at-risk eligible beneficiaries and
the level of military direct care system utilization.  The contractual bid price
adjustment, or BPA, process serves to adjust the DoD's monthly payments to SMHS
because the payments are based in part on 1996 DoD estimates for beneficiary
population and beneficiary population baseline health care cost, inflation and
military direct care system utilization.  As actual information becomes
available for the above items, quarterly adjustments are made to SMHS' monthly
health care payment in addition to lump sum adjustments for past months.  In
addition, SMHS accrues change order revenue for DoD directed contract changes.
Our business and cash flows could be adversely affected if the timing or amount
of the BPA and change order reimbursements vary significantly from our
expectations.

We expect that the loss of the T-Nex contract will adversely
affect our cash flow from operations starting in the fourth quarter of 2004
through the first half of 2005.  During the phase-out period, we expect that
SMHS will use $30.0 million to $35.0 million of their cash as the payout of the
remaining liabilities will exceed SMHS' accounts receivable and other non-cash
asset balances.

Net cash used for investing activities of continuing
operations during 2004 included $2.7 million in capital expenditures associated
with the continued implementation of new computer systems, leasehold
improvements on facilities, furniture and equipment and other capital purchases
to support our growth.  The net cash change in investments for the year was a
decrease in investments of $19.4 million as investments were converted to cash
equivalents.

Net cash used for financing activities of continuing
operations during the first quarter of 2004 included net payments of $1.5
million on debt related items.  Proceeds from the issuance of stock in
connection with stock plans were $9.8 million and cash of $31.9 million was used
to repurchase Sierra stock.

21

Discontinued operations provided cash of $3.4 million in
2004, compared to $1.2 million in 2003. Cash provided in 2004 was primarily the
result of the sale of Cal Indemnity.

Sierra Debentures

In March 2003, we issued $115.0 million aggregate
principal amount of 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.  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 (i) the market 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; (ii) the debentures are called
for redemption; (iii) there is an event of default with respect to the
debentures; or (iv) 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 us to repurchase all or a portion of their debentures on
March 15 in 2008, 2013 and 2018 or upon certain corporate events including a
change in control.  In either case, we may choose to pay the purchase price of
such debentures in cash or common stock or a combination of cash and common
stock.  The debentures can be redeemed by us for cash beginning on or after
March 20, 2008.

Sierra 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 SMHS.  The $35.0 million contribution to SMHS was
subsequently repaid to Sierra in February 2004.  Sierra also used $19.9 million
of the proceeds to purchase 1.6 million shares of Sierra's common stock under
our repurchase program. The remainder of the net proceeds were used for working
capital and general corporate purposes including additional share
repurchases.

Revolving 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 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 was initially LIBOR plus 2.25% and is currently LIBOR
plus 2.00%.  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 facility
is available for general corporate purposes.  We have not yet utilized this
facility.

The 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 and certain other exclusions.

The revolving credit facility has covenants that limit 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, repurchase our common stock
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 credit agreement.  We believe that we are in
compliance with all covenants of the credit agreement.

22

Sierra Share Repurchase Program

Pursuant to authorization from our Board of Directors, through December 31, 2003, we had purchased, at
prevailing prices in the open market by block purchase or private transactions,
5.3 million shares for $99.5 million at an average price of $18.66 per share.
As of January 1, 2004, we had authorization from our Board of Directors to
repurchase an additional 2.3 million shares of our common stock.  Currently, our Board of Directors has authorized share repurchases at prices up to $42.50.  Our revolving
credit facility, as amended, allows for stock repurchases of up to $60 million
during 2004.  Through March 31, 2004, we had purchased, at prevailing prices in
the open market by block purchase or private transactions an additional 980,000
shares for $31.9 million at an average of $32.61 per share.    From April 1,
2004 to April 16, 2004, we repurchased an additional 16,000 shares for $570,000
at an average of $34.91 per share.  In total, we have purchased 6.3 million shares for $132.0 million at an average cost of $20.86 per share.

Included in the repurchases for the first quarter of 2004 are
500,000 shares we purchased from our CEO, at $32.00 per share, for a total of
$16.0 million.  The closing price of our common stock on the date of the
transaction, February 11, 2004, was $32.35.  Our Board of Directors approved the
purchase.

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 $20.4 million at March 31, 2004. 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
Texas Health Choice, L.C., is now required to maintain deposits of $1.5 million and net worth of at
least $3.5 million. We believe we are in material compliance with our regulatory
requirements.

Of the $149.0 million in cash and cash equivalents held at
March 31, 2004, including discontinued operations, $600,000 was held by
discontinued operations and $62.5 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.

23



Obligations and Commitments

The following schedule represents our obligations and
commitments for long-term debt, capital leases and operating leases at March 31,
2004.  The amounts presented below include all future payments associated with
each obligation including interest expense.

`Long-Term   Capital   Operating
                                              Debt      Leases     Leases      Total
                                            ---------  ---------  ---------  ---------
  (In thousands)

Continuing Operations
------------------------
Payments due within 12 months............. $   2,587  $     101  $  20,518  $  23,206
Payments due in 13 to 36 months...........     5,175        145     38,492     43,812
Payments due in 37 to 60 months...........     5,175         91     33,454     38,720
Payments due in more than 60 months.......   151,225        107    108,438    259,770
                                            ---------  ---------  ---------  ---------
     Total Continuing Operations.......... $ 164,162  $     444  $ 200,902  $ 365,508
                                            =========  =========  =========  =========
Discontinued Operations
------------------------
Payments due within 12 months............. $      --  $     235  $      --  $     235
Payments due in 13 to 36 months...........        --         --         --         --
Payments due in 37 to 60 months...........        --         --         --         --
Payments due in more than 60 months.......        --         --         --         --
                                            ---------  ---------  ---------  ---------
     Total Discontinued Operations........ $      --  $     235  $      --  $     235
                                            =========  =========  =========  =========`

Other

We have a 2004 capital budget of $16.9 million and are also
limited in the amount of capital expenditures we can purchase by our revolving
credit facility.  The 2004 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 and the phase-out of
the Military operations.  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.

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 and, to a lesser extent, the delivery of medical services,
is heavily regulated at both the federal and state levels.

24

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, or FEHBP, 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 Part 1, Item 1 of our
2003 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" in Part 1, Item 1.

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 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
future results, however, may materially differ from our calculated estimates and
this difference would be reported in our then current operations.

25

For a more detailed description of our critical accounting
policies and estimates, see Part II, Item 7 of our 2003 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 2003 annual report on Form 10-K filed on March 5,
2004.

Membership

`Number of Members at March 31,
                                              ------------------------------
                                                   2004            2003
                                              --------------  --------------
HMO
  Commercial................................        212,000         189,000
  Medicare..................................         51,700          48,800
  Medicaid..................................         48,400          37,400
Managed Indemnity...........................         23,900          27,300
Medicare Supplement.........................         17,000          18,900
Administrative Services.....................        180,100         193,400
TRICARE Eligibles...........................        710,000         672,200
                                              --------------  --------------
Total Members...............................      1,243,100       1,187,000
                                              ==============  ==============`

26

ITEM 3.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK

As of March 31, 2004, we had unrealized holding gains on
available for sale investments of $303,000, net of tax, compared to unrealized
holding losses of $479,000, net of tax, at December 31, 2003.  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 March 31, 2004, we had outstanding $115.0 million in
aggregate principal amount of our 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 revolving credit facility was initially LIBOR plus 2.25%
and is currently LIBOR plus 2.00%; 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.

27

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

ITEM 1.	LEGAL PROCEEDINGS

Although Sierra is not a named defendant we have been
notified that we have been named as a co-conspirator in the class action lawsuit, In Re:  Managed Care Litigation:  MDL No. 1334.
The following summary is based upon information obtained from certain publicly filed
documents.  Beginning in 1999, a
series of class action lawsuits were filed against most other major entities in the
health benefits business. A multi-district litigation panel has consolidated
most of these cases in the Southern District Court of Florida, Miami division.
The plaintiffs assert that the defendants improperly paid providers' claims and
"downcoded" their claims by paying lesser amounts than they submitted.
The complaint alleges, among other things, multiple violations under the
Racketeer Influenced and Corrupt Organizations Act, or RICO, as well as various
breaches of contract and violations of regulations governing the timeliness of
claim payments. The consolidated suits seek injunctive, compensatory and
equitable relief as well as restitution, costs, fees and interest payments.
Discovery commenced on September 30, 2002.  In November 2002, the Eleventh
Circuit granted the industry defendants' petition to review the class
certification order. That appeal is pending. On April 7, 2003, the United States
Supreme Court determined that the RICO claims against certain defendants should
be arbitrated. On September 15, 2003, the district court granted in part and
denied in part the industry defendants' further motion to compel arbitration.
Significantly, the court denied the industry defendants' motion with respect to
plaintiffs' derivative RICO claims. On September 19, 2003, the industry
defendants appealed the district court's arbitration order to the Eleventh
Circuit. Discovery is ongoing and a trial date has been set for September 13,
2004. In the meantime, two of the defendants, Aetna Inc. and Cigna Corporation,
have entered into settlement agreements which have been approved by the Court.

We are subject to other various claims and 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 and other 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.
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.

28



ITEM 2.	CHANGES IN SECURITIES AND USE OF PROCEEDS

(e)  Below, is a summary of stock repurchases for the quarter
ended March 31, 2004.  See Note 5 of our Notes to Condensed Consolidated
Financial Statements for information regarding our stock repurchase plan.

`Total number      Maximum number
                                                                           of shares purchased   of shares that
(In thousands, except per share data)       Total number        Average    as part of publicly     may yet be
                                             of shares        price paid      announced plan    purchased under
                 Period                     repurchased (1)    per share        or program        the plan (2)
------------------------------------------  -------------    ------------- -------------------- ---------------- 
Beginning shares available to be purchased                                                                2,270
January 1, 2004 - January 31, 2004                    --               --                   --            2,270
February 1, 2004 - February 29, 2004 (3)             663           $31.86                  663            1,607
March 1, 2004 - March 31, 2004                       317            34.19                  317            1,290`

(1)  Certain repurchases were made pursuant to a 10b-5 plan.

(2)  On October 28, 2003, the
Company announced that its Board of Directors had authorized the Company to
purchase an additional 3.0 million shares of its common stock in addition to the
4.6 million shares that had previously been authorized. The repurchase program has no stated expiration date.  Through December 31,
2003, the Company had purchased 5.3 million shares leaving 2.3 million shares
authorized to be repurchased.

(3)  Includes 500,000 shares the Company purchased from its
CEO at $32.00 per share.



ITEM 3.	DEFAULTS UPON SENIOR
SECURITIES

None

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

None

ITEM 5.	OTHER INFORMATION

None

ITEM 6.	EXHIBITS AND REPORTS ON
FORM 8-K

(a)	Exhibits



|(10.1) | Employment Agreement with William R. Godfrey dated
April 3, 2004.
|------ | -----------------------------------------------------------------
|(10.2) | Employment Agreement with Laurence S. Howard dated
April 3, 2004.
|(10.3) | Employment Agreement with Paul H. Palmer dated
April 3, 2004.    
|(31.1) | Rule 13a - 14(a) Certification of Chief Executive
Officer.       

29



|(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 January 26, 2004, with the
Securities and Exchange Commission announcing the Company's participation in a
health care conference on February 3, 2004.

Current Report on Form 8-K, dated January 28, 2004, with the
Securities and Exchange Commission reporting operating results for the quarter
and year ended December 31, 2003.

Current Report on Form 8-K, dated March 3, 2004, with the
Securities and Exchange Commission announcing that its subsidiary, Sierra
Military Health Services, Inc., or SMHS, has entered into a binding commitment
with Health Net Federal Services, or Health Net. Under the commitment, Health
Net will, among other things, acquire assets of SMHS primarily related to its
provider network and regional TRICARE Service Center operations.

Current Report on Form 8-K, dated March 4, 2004, with the
Securities and Exchange Commission announcing the Company's participation in a
health care conference on March 9, 2004.

Current Report on Form 8-K, dated March 31, 2004, with the
Securities and Exchange Commission announcing the completion of the sale of the
Company's Workers' Compensation Operations.



30

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)
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

31