**United
      States**


**Securities
      And Exchange Commission**


**Washington,
      DC 20549**











**FORM
      10-Q**







**(Mark
      One)**


R
            **Quarterly
                Report Pursuant To Section 13 Or 15(d) Of The Securities Exchange
                Act Of
                1934**




**For
      the quarterly period ended June 30, 2007**


**or**




 ̈
            **Transition
                Report Pursuant To Section 13 Or 15(d) Of The Securities Exchange
                Act Of
                1934**




**For
      the transition period
      from
      to**




**Commission
      File Number: 1-8865**








**SIERRA
      HEALTH SERVICES, INC.**


**(Exact
      Name of Registrant as Specified in Its Charter)**





**Nevada**
            
            **88-0200415****(State
                or Other Jurisdiction**
              **of
                Incorporation or Organization)**
            
            **(I.R.S.
                Employer Identification No.)****2724
                North Tenaya Way, Las Vegas, NV**
            
            **89128****(Address
                of Principal Executive Offices)**
            
            **(Zip
                Code)**




**Registrant's
      Telephone Number, Including Area Code: (702) 242-7000**




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




Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, or a non-accelerated filer. See definition of "accelerated
      filer" and "large accelerated filer" in Rule 12b-2 of the Exchange Act
      (check one).





Large
                accelerated filer R
            Accelerated
                filer o
            Non-accelerated
                filer o





Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act). Yeso No****R




The
      number of shares outstanding of the registrant's Common Stock as of
      July 26, 2007 was 56,152,000.











**Sierra
      Health Services, Inc.**


**Quarterly
      Report on Form 10-Q**


**For
      The Period Ended June 30, 2007**





**Part
                I.                      
                Financial Information**
            
            **Page
                No.**Item
                1.                      Financial
                Statements (Unaudited):Condensed
                Consolidated Balance Sheets – June 30, 2007 and
                December 31, 2006
            
            
            1Condensed
                Consolidated Statements of Income – three and six
                months ended June 30, 2007 and 2006
            
            
            2Condensed
                Consolidated Statements of Stockholders' Equity –
                six months ended June 30, 2007 and 2006
            
            
            3Condensed
                Consolidated Statements of Cash Flows – six months
                ended June 30, 2007 and 2006
            
            
            4Notes
                to Condensed Consolidated Financial
                Statements
            
            
            5-16Item
                2.                      Management's Discussion and Analysis of Financial
                Condition
                and Results of Operations
            
            
            17-30Item
                3.                      Quantitative and Qualitative Disclosures About
                Market
                Risk
            
            
            31Item
                4.                      Controls and Procedures
            
            
            31**Part
                II. Other Information**Item
                1.                      Legal Proceedings
            
            
            32-33Item
                1A.                   Risk Factors
            
            
            33-34Item
                2.                      Unregistered Sales of Equity Securities and Use
                of
                Proceeds
            
            
            34-35Item
                3.                      Defaults upon Senior Securities
            
            
            35Item
                4.                      Submission of Matters to a Vote of Security
                Holders
            
            
            35Item
                5.                      Other Information
            
            
            35Item
                6.                      Exhibits
            
            
            35Signatures
            
            
            36












Table
          of Contents







**Part
      I.  Financial Information**


**Item
      1.                      Financial
      Statements**


**Sierra
      Health Services, Inc. And Subsidiaries**


**Condensed
      Consolidated Balance Sheets**


*(in
      thousands, except per share data)*


*(Unaudited)*


June
                  30, 2007
              
              
              December
                  31, 2006**Assets**Current
                  assets:Cash
                  and cash equivalents
              
              $
              143,478
              
              
              $
              58,918Investments
              
              
              288,398
              
              
              
              323,846Accounts
                  receivable (less allowance for doubtful accounts: 2007 - $9,184;
                  2006 -
                  $5,518)
              
              
              31,510
              
              
              
              21,308Current
                  portion of deferred tax asset
              
              
              45,968
              
              
              
              29,861Prepaid
                  expenses and other current assets
              
              
              101,291
              
              
              
              110,020Total
                  current assets
              
              
              610,645
              
              
              
              543,953Property
                  and equipment, net
              
              
              64,947
              
              
              
              71,893Restricted
                  cash and investments
              
              
              17,403
              
              
              
              19,428Goodwill
              
              
              14,782
              
              
              
              14,782Deferred
                  tax asset (less current portion)
              
              
              26,590
              
              
              
              18,656Note
                  receivable (less valuation allowance: 2007 and 2006 -
                  $15,000)
              
              
              47,000
              
              
              
              47,000Other
                  assets
              
              
              92,258
              
              
              
              93,700Total
                  assets
              
              
              873,625
              
              
              
              809,412**Liabilities
                  and stockholders' equity**Current
                  liabilities:Accrued
                  and other current liabilities
              
              
              78,450
              
              
              
              99,314Trade
                  accounts payable
              
              
              1,670
              
              
              
              1,552Accrued
                  payroll and taxes
              
              
              28,580
              
              
              
              25,925Medical
                  claims payable
              
              
              191,788
              
              
              
              222,895Premium
                  deficiency reserve
              
              
              39,294
              
              
              
              1,076Unearned
                  premium revenue
              
              
              121,934
              
              
              
              52,075Current
                  portion of long-term debt
              
              
              3,558
              
              
              
              116Total
                  current liabilities
              
              
              465,274
              
              
              
              402,953Long-term
                  debt (less current portion)
              
              
              55,505
              
              
              
              118,734Other
                  liabilities
              
              
              91,703
              
              
              
              71,007Total
                  liabilities
              
              
              612,482
              
              
              
              592,694Commitments
                  and contingenciesStockholders'
                  equity:Preferred
                  stock, $.01 par value, 1,000 shares authorized; none issued or
                  outstanding
              
              
              3⁄4
              
              
              
              3⁄4Common
                  stock, $.005 par value, 120,000 shares authorized;  2007 –
                  73,513;2006
–
                70,835 shares issued; 2007 – 56,008; 2006 – 53,824 shares
                outstanding
              
              
              368
              
              
              
              354Treasury
                  stock
                  at cost: 2007 – 17,425; 2006 – 17,011 common stock shares
              
              
              (615,755
              )
              
              
              (600,539
              )Additional
                  paid-in capital
              
              
              466,771
              
              
              
              436,643Accumulated
                  other comprehensive loss
              
              
              (9,530
              )
              
              
              (8,635
              )Retained
                  earnings
              
              
              419,289
              
              
              
              388,895Total
                  stockholders' equity
              
              
              261,143
              
              
              
              216,718Total
                  liabilities and stockholders' equity
              
              $
              873,625
              
              
              $
              809,412
   See
      accompanying Notes to Condensed Consolidated Financial
      Statements


1
 Table
          of Contents








**Sierra
      Health Services, Inc. And Subsidiaries**


**Condensed
      Consolidated Statements Of Income**


*(In
      thousands, except per share data)*


*(Unaudited)*





Three
                  Months Ended
                June
                  30,
              
              
              Six
                  Months Ended
                June
                  30,2007
              
              
              2006
              
              
              2007
              
              
              2006Operating
                  revenues:Medical
                  premiums
              
              $
              457,246
              
              
              $
              400,664
              
              
              $
              925,320
              
              
              $
              815,108Professional
                  fees
              
              
              14,394
              
              
              
              12,882
              
              
              
              29,036
              
              
              
              25,797Investment
                  and other revenues
              
              
              10,407
              
              
              
              10,892
              
              
              
              22,328
              
              
              
              21,781Total
              
              
              482,047
              
              
              
              424,438
              
              
              
              976,684
              
              
              
              862,686Operating
                  expenses:Medical
                  expenses
              
              
              362,211
              
              
              
              321,545
              
              
              
              797,522
              
              
              
              658,064General
                  and administrative expenses
              
              
              59,528
              
              
              
              50,422
              
              
              
              118,720
              
              
              
              101,761Total
              
              
              421,739
              
              
              
              371,967
              
              
              
              916,242
              
              
              
              759,825Operating
                  income
              
              
              60,308
              
              
              
              52,471
              
              
              
              60,442
              
              
              
              102,861Interest
                  expense
              
              
              (1,037
              )
              
              
              (1,002
              )
              
              
              (2,992
              )
              
              
              (1,778
              )Other
                  income (expense), net
              
              
              844
              
              
              
              9
              
              
              
              1,494
              
              
              
              (24
              )Income
                  before income taxes
              
              
              60,115
              
              
              
              51,478
              
              
              
              58,944
              
              
              
              101,059Provision
                  for income taxes
              
              
              (20,755
              )
              
              
              (17,944
              )
              
              
              (20,823
              )
              
              
              (34,854
              )Net
                  income
              
              $
              39,360
              
              
              $
              33,534
              
              
              $
              38,121
              
              
              $
              66,205Net
                  income per common share
              
              $
              0.70
              
              
              $
              0.60
              
              
              $
              0.68
              
              
              $
              1.16Net
                  income per common share assuming dilution
              
              $
              0.67
              
              
              $
              0.54
              
              
              $
              0.65
              
              
              $
              1.05





See
      accompanying Notes to Condensed Consolidated Financial
      Statements


2
 Table
          of Contents





**Sierra
      Health Services, Inc. And Subsidiaries**


**Condensed
      Consolidated Statements Of Stockholders'
      Equity**


*(In
      thousands)*


*(Unaudited)*





Common
                Stock
            
            In
                Treasury
            
            Additional
              Paid-in
            
            Accumulated
              Other
              Comprehensive
            
            Retained
            
            Total
              Stock-
              holders'Shares
            
            Amount
            
            Shares
            
            Amount
            
            Capital
            
            Loss
            
            Earnings
            
            EquityBalance,
                January 1, 2006
            69,136
            $
            346
            
            11,006
            $
            (377,190)
            $
            400,287
            $
            (1,750)
            $
            262,559
            $
            284,252Common
                stock issued in connection with stock plans
            557
            
            3
            
            (461)
            
            15,589
            
            6,697
            
            3⁄4
            
            (11,570)
            
            10,719Share-based
                compensation expense
            3⁄4
            
            3⁄4
            
            3⁄4
            
            15
            
            3,024
            
            3⁄4
            
            3
            
            3,042Common
                stock issued in connection with conversion of debentures
            54
            
            3⁄4
            
            3⁄4
            
            3⁄4
            
            500
            
            3⁄4
            
            3⁄4
            
            500Excess
                tax benefits from share-based payment arrangements
            3⁄4
            
            3⁄4
            
            3⁄4
            
            3⁄4
            
            10,260
            
            3⁄4
            
            3⁄4
            
            10,260Repurchase
                of common stock shares
            3⁄4
            
            3⁄4
            
            3,136
            
            (127,780)
            
            3⁄4
            
            3⁄4
            
            3⁄4
            
            (127,780)Comprehensive
                income:Net
                income
            3⁄4
            
            3⁄4
            
            3⁄4
            
            3⁄4
            
            3⁄4
            
            3⁄4
            
            66,205
            
            66,205Other
                comprehensive income:Net
                unrealized holding loss on
              available-for-sale
                investments ($3,269 pretax)
            3⁄4
            
            3⁄4
            
            3⁄4
            
            3⁄4
            
            3⁄4
            
            (2,125)
            
            3⁄4
            
            (2,125)Total
                comprehensive income
            3⁄4
            
            3⁄4
            
            3⁄4
            
            3⁄4
            
            3⁄4
            
            (2,125)
            
            66,205
            
            64,080Balance,
                June 30, 2006
            69,747
            $
            349
            
            13,681
            $
            (489,366)
            $
            420,768
            $
            (3,875)
            $
            317,197
            $
            245,073Balance,
                January 1, 2007
            70,835
            $
            354
            
            17,011
            $
            (600,539)
            $
            436,643
            $
            (8,635)
            $
            388,895
            $
            216,718Common
                stock activity in connection with stock plans
            135
            
            1
            
            (171)
            
            4,665
            
            1,056
            
            3⁄4
            
            (3,658)
            
            2,064Share-based
                compensation expense
            3⁄4
            
            3⁄4
            
            3⁄4
            
            1,200
            
            1,596
            
            3⁄4
            
            198
            
            2,994Common
                stock issued in connection with conversion of debentures
            2,543
            
            13
            
            3⁄4
            
            3⁄4
            
            23,243
            
            3⁄4
            
            3⁄4
            
            23,256Excess
                tax benefits from share-based payment arrangements
            3⁄4
            
            3⁄4
            
            3⁄4
            
            3⁄4
            
            4,233
            
            3⁄4
            
            3⁄4
            
            4,233Repurchase
                of common stock shares
            3⁄4
            
            3⁄4
            
            585
            
            (21,081)
            
            3⁄4
            
            3⁄4
            
            3⁄4
            
            (21,081)Cumulative
                effect from adoption of
              FIN
                48
            3⁄4
            
            3⁄4
            
            3⁄4
            
            3⁄4
            
            3⁄4
            
            3⁄4
            
            (4,267)
            
            (4,267)Comprehensive
                income:Net
                income
            3⁄4
            
            3⁄4
            
            3⁄4
            
            3⁄4
            
            3⁄4
            
            3⁄4
            
            38,121
            
            38,121Other
                comprehensive income:Net
                unrealized holding loss on available-for-sale investments
                ($2,088  pretax)
            3⁄4
            
            3⁄4
            
            3⁄4
            
            3⁄4
            
            3⁄4
            
            (1,357)
            
            3⁄4
            
            (1,357)Unfunded
                portion of defined benefit pension plan ($711 pretax)
            3⁄4
            
            3⁄4
            
            3⁄4
            
            3⁄4
            
            3⁄4
            
            462
            
            3⁄4
            
            462Total
                comprehensive income
            3⁄4
            
            3⁄4
            
            3⁄4
            
            3⁄4
            
            3⁄4
            
            (895)
            
            38,121
            
            37,226Balance,
                June 30, 2007
            73,513
            $
            368
            
            17,425
            $
            (615,755)
            $
            466,771
            $
            (9,530)
            $
            419,289
            $
            261,143








See
      accompanying Notes to Condensed Consolidated Financial
      Statements


3
 Table
          of Contents





**Sierra
      Health Services, Inc. And Subsidiaries**


**Condensed
      Consolidated Statements Of Cash
      Flows**


*(In
      thousands)*


*(Unaudited)*





Six
                Months Ended June 30,2007
            
            
            2006Cash
                flows from operating activities:Net
                income
            
            $
            38,121
            
            
            $
            66,205Adjustments
                to reconcile net income to net cashprovided
                by operating activities:Depreciation
            
            
            7,976
            
            
            
            8,239Share-based
                compensation expense
            
            
            2,994
            
            
            
            3,042Excess
                tax benefits from share-based payment arrangements
            
            
            (4,233
            )
            
            
            (10,260
            )Provision
                for doubtful accounts
            
            
            3,424
            
            
            
            1,202Other
                adjustments
            
            
            (1,082
            )
            
            
            149Change
                in operating assets and liabilities:Deferred
                tax asset
            
            
            (23,299
            )
            
            
            (3,217
            )Other
                current assets
            
            
            1,838
            
            
            
            (34,485
            )Other
                assets
            
            
            (2,271
            )
            
            
            (3,500
            )Accrued
                payroll and taxes
            
            
            2,655
            
            
            
            5,093Medical
                claims payable
            
            
            (31,107
            )
            
            
            12,097Other
                current liabilities
            
            
            (10,464
            )
            
            
            30,515Unearned
                premium revenue
            
            
            69,859
            
            
            
            65,090Premium
                deficiency reserve
            
            
            38,217
            
            
            
            3⁄4Other
                liabilities
            
            
            16,888
            
            
            
            (73
            )Net
                cash provided by operating activities
            
            
            109,516
            
            
            
            140,097Cash
                flows from investing activities:Capital
                expenditures, net of dispositions
            
            
            (120
            )
            
            
            (8,179
            )Purchase
                of investments, net of proceeds
            
            
            27,789
            
            
            
            (36,268
            )Net
                cash provided by (used for) investing activities
            
            
            27,669
            
            
            
            (44,447
            )Cash
                flows from financing activities:Payments
                on debt and capital leases
            
            
            (40,078
            )
            
            
            (53
            )Proceeds
                from other long-term debt
            
            
            3⁄4
            
            
            
            20,000Purchase
                of treasury stock
            
            
            (21,081
            )
            
            
            (127,780
            )Excess
                tax benefits from share-based payment arrangements
            
            
            4,233
            
            
            
            10,260Proceeds
                from exercise of stock in connection with stock plans
            
            
            4,301
            
            
            
            10,719Net
                cash used for financing activities
            
            
            (52,625
            )
            
            
            (86,854
            )Net
                increase in cash and cash equivalents
            
            
            84,560
            
            
            
            8,796Cash
                and cash equivalents at beginning of period
            
            
            58,918
            
            
            
            88,059Cash
                and cash equivalents at end of period
            
            $
            143,478
            
            
            $
            96,855Supplemental
                condensed consolidated statement of cash flows
                information:Cash
                paid during the period for interest
            
            $
            2,966
            
            
            $
            1,339Net
                cash paid during the period for income taxes
            
            
            45,015
            
            
            
            21,248Non-cash
                investing and financing activities:Senior
                convertible debentures converted into Sierra common stock
            
            
            23,256
            
            
            
            500Asset
                received in consideration for payment of a loan
            
            
            6,815
            
            
            
            3⁄4Additions
                to capital leases
            
            
            171
            
            
            
            3⁄4Cashless
                exercise of restricted stock units
            
            
            2,237
            
            
            
            3⁄4Investments
                purchased but not settled
            
            
            8,285
            
            
            
            2,531








See
      accompanying Notes to Condensed Consolidated Financial
      Statements


4
 Table
          of Contents


**Sierra
      Health Services, Inc.** Notes
        to
        Condensed Consolidated Financial
        Statements
 *(Unaudited)*




**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, 2006. In the opinion
      of management, the accompanying unaudited condensed consolidated financial
      statements reflect all material adjustments, consisting only of normal recurring
      adjustments, necessary for a fair presentation of the financial results for
      the
      interim periods presented.





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





Certain
      amounts in the condensed consolidated financial statements for the three and
      six
      months ended June 30, 2006 have been reclassified to conform to the current
      year
      presentation. Such reclassifications have no effect on net income as previously
      reported.





**2.           Pending
      Business Combination**





On
      March
      11, 2007, the Company entered into an Agreement and Plan of Merger (the "Merger
      Agreement"), with UnitedHealth Group Incorporated, a Minnesota corporation
      ("UnitedHealth Group"), and Sapphire Acquisition, Inc., a Nevada corporation
      and
      an indirect wholly-owned subsidiary of UnitedHealth Group ("Merger
      Sub").  The Merger Agreement provides that, upon the terms and subject
      to the conditions set forth in the Merger Agreement, Merger Sub will merge
      with
      and into the Company (the "Merger"), with Sierra continuing as the surviving
      company.  At the effective time of the Merger, each issued and
      outstanding share of the Company's common stock (other than shares owned by
      UnitedHealth Group or Merger Sub, whose shares will be cancelled), will be
      converted into the right to receive $43.50 in cash, on the terms specified
      in
      the Merger Agreement. Completion of the Merger is subject to various conditions,
      including, among others, (i) approval of the holders of a majority of the
      outstanding shares of the Company's common stock, (ii) expiration or termination
      of the applicable Hart-Scott-Rodino Act (“HSR”) waiting period, (iii) absence of
      any order, injunction or other judgment or decree prohibiting the consummation
      of the Merger, (iv) receipt of required governmental consents and approvals
      without negative regulatory action, and (v) subject to certain exceptions,
      the
      accuracy of the representations and warranties of the Company and UnitedHealth
      Group, as applicable, and compliance by the Company and UnitedHealth Group
      with
      their respective obligations under the Merger Agreement.  The Merger
      Agreement contains certain termination rights for both the Company and
      UnitedHealth Group, and further provides that, upon termination of the Merger
      Agreement under specified circumstances, the Company may be required to pay
      UnitedHealth Group a termination fee of $85.0 million and in other
      circumstances, UnitedHealth Group may be required to pay Sierra a termination
      fee of $25.0 million.





On
      May
      16, 2007, the Company and UnitedHealth Group received a request for additional
      information from the Antitrust Division of the U.S. Department of Justice
      (“DOJ”) regarding the proposed merger between the two companies.  The
      information request, also known as a “second request,” was issued under
      notification requirements of the HSR.   The effect of the second
      request is to extend the waiting period imposed by the HSR until 30 days
      after


5
 Table
          of Contents


the
      Company and UnitedHealth Group have substantially complied with the request
      for
      additional information, unless the period is extended voluntarily by the parties
      or terminated sooner by the DOJ.





On
      June
      27, 2007, the Company’s stockholders approved the Merger Agreement.





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





The
      Company contracted with the Centers for Medicare and Medicaid Services ("CMS")
      to offer a basic stand-alone PDP (“Basic Plan”) to eligible Medicare
      beneficiaries effective January 1, 2006.  The Company offered the
      Basic Plan in eight regions covering Arizona, California, Colorado, Idaho,
      Nevada, New Mexico, Oregon, Texas, Utah and Washington. The Company was also
      selected as a PDP sponsor in the same states for auto-enrolled CMS subsidized
      beneficiaries.





In
      2007,
      the Company continues to offer a Basic Plan in 30 states and the District of
      Columbia. The Company remains eligible as a PDP sponsor for its current
      auto-enrolled CMS subsidized beneficiaries in California and Nevada, and for
      its
      current and 2007 auto-enrolled beneficiaries in Arizona, Colorado, Idaho,
      Oregon, Utah and Washington. The Company is no longer a PDP sponsor for
      auto-enrolled beneficiaries in New Mexico and Texas.  For 2007, the
      Company, for the first time, offers an enhanced benefit plan (“Enhanced Plan”)
      in the same 30 states and the District of Columbia.  The Enhanced Plan
      provides brand name and generic prescription drug benefits through the coverage
      gap.  See Note 4 for further discussion of the premium deficiency
      reserve associated with the Enhanced Plan.





The
      Company recognizes premium revenue as earned over the contract period; however,
      pharmacy and administrative costs are required to be recognized as incurred
      with
      no allocation or annualized estimation of the impact of deductibles, the
      coverage gap or “donut hole,” prior to it being reached by the member, or
      reinsurance.  This method of recognizing revenues and expenses results
      in a disproportionate amount of expense in the first part of each contract
      year
      when the plan is responsible for a larger portion of the drug cost.





CMS
      shares in the risk of certain pharmacy costs related to the basic benefits
      covered in both stand-alone plans.  The Company recognizes a risk
      sharing receivable or payable based on the year-to-date activity.  The
      risk sharing receivable or payable is accumulated for each contract and recorded
      in the Condensed Consolidated Balance Sheet in prepaid expenses and other
      current assets or accrued and other current liabilities depending on the net
      contract balance at the end of the reporting period.





Payments
      from CMS for reinsurance and for cost sharing related to low income individuals
      (“Subsidies”) are recorded as a payable when received. This payable is reduced
      when reinsurance is utilized and Subsidies are provided by the
      Company.  This activity is accumulated and when the net balance for
      each contract is negative, it is reclassed to a receivable.   The
      payable or receivable is recorded in the Condensed Consolidated Balance Sheet
      in
      prepaid expenses and other current assets or accrued and other current
      liabilities depending on the net contract balance at the end of the reporting
      period. A reconciliation of the final risk sharing, Subsidies, and reinsurance
      amounts is performed following the end of the 2006 contract year and is expected
      to be finalized by the fourth quarter of 2007.





During
      2006 and 2007, the PDP membership data submitted by CMS to plan sponsors
      contained many inaccuracies, which resulted in plan sponsors providing pharmacy
      benefits to members that were ultimately not theirs.  CMS created a
      formal program-wide reconciliation process to reconcile the amounts owed from
      one plan sponsor to another.  The Company has recorded its best
      estimate of amounts due from and due to other plan sponsors under this process
      based on data currently available to the Company.  These amounts are
      recorded in the Condensed Consolidated Balance Sheet in prepaid expenses and
      other current assets and accrued and other current liabilities,
      respectively.


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**4.           Premium
      Deficiency Reserves**





In
      2007,
      the Company offered its Basic Plan and, for the first time, it offered an
      Enhanced Plan.  The Company engaged independent actuarial consultants
      in developing the Enhanced Plan.  The premium structure for the
      Enhanced Plan was based on a projected level of utilization per
      member.  The Company's experience so far in 2007 indicates it will
      experience significantly increased costs from what the actuarial projections
      anticipated.  Based on the data available to date, the Company
      believes that estimated 2007 pharmacy and administrative maintenance costs
      will
      exceed the estimated 2007 premiums.





For
      purposes of analyzing premium deficiencies, the Company follows the guidance
      provided by the Financial Accounting Standards Board ("FASB") in Statement
      of
      Financial Accounting Standards No. 60 "Accounting and Recording by Insurance
      Enterprises" ("SFAS 60"), which requires contracts to be grouped in a manner
      consistent with its method of acquiring, servicing, and measuring the
      profitability of such contracts.  Based on the guidance provided in
      SFAS 60, the Company concluded that it should evaluate the Enhanced Plan and
      the
      Basic Plan separately when determining if a premium deficiency
      exists.  SFAS 60 also requires a premium deficiency be recognized if
      the sum of expected claim costs and claim adjustment expenses, expected
      dividends to policyholders, unamortized acquisition costs, and administrative
      maintenance costs exceeds related unearned premiums.  The Company does
      not consider anticipated investment income in determining if a premium
      deficiency exists. The Company recorded $48.8 million in estimated pre-tax
      losses related to its Enhanced Plan during the first quarter of
      2007.  This estimate represented expected pre-tax losses for the
      entire year 2007 and resulted in a premium deficiency reserve of $44.5 million
      at March 31, 2007.  Based on the most current available data, the
      Company now estimates that the pre-tax losses for the entire year 2007 related
      to the Enhanced Plan will be $55.3 million.  The $6.5 million increase
      in the Company’s estimate was recorded in general and administrative expenses,
      as the entire increase in the projected premium deficiency is related to higher
      bad debt expense for the members' portion of the premiums. As a result, the
      premium deficiency reserve related to the Enhanced Plan was adjusted to $39.3
      million at June 30, 2007, after utilizing $11.7 million of the premium
      deficiency reserve during the quarter.  The Company did not submit a
      bid to CMS for an Enhanced Plan offering for 2008 and therefore will not be
      offering this plan in 2008.





**5.           Investments**





Of
      the
      cash and cash equivalents and current investments that total $431.9 million
      in
      the accompanying Condensed Consolidated Balance Sheet at June 30, 2007, $396.7
      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, municipal
      bonds, corporate bonds, securities, trust deed mortgage notes, limited
      partnerships, and real estate joint ventures.  At June 30, 2007,
      approximately 74% 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 and stated at fair value.  Fair value is
      estimated primarily from published market values at the balance sheet
      date.  These investments are available for use in the current
      operations regardless of contractual maturity dates.  Restricted
      investments are classified as non-current assets. The Company calculates
      realized gains and losses using the specific identification method and includes
      them in investment and other revenues.  Unrealized holding gains and
      losses on available-for-sale investments are included as a separate component
      of
      stockholders' equity, net of income tax effects, until realized.  The
      Company does not have any held-to-maturity investments. The Company does not
      believe any of its available-for-sale or restricted investments are other than
      temporarily impaired at June 30, 2007.


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The
      Company classifies investments in trust deed mortgage notes, limited
      partnerships, and real estate joint ventures as other
      investments.  These investments are classified as current assets if
      expected maturity is within one year of the balance sheet
      date.  Otherwise, they are classified as long-term
      investments.  The Company believes that no adjustments are required to
      its recorded amounts of investments in trust deed mortgage notes, limited
      partnerships or real estate joint ventures at June 30, 2007.





**6.           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 are not guaranteed by any of Sierra's
      subsidiaries.  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 109.3494
      shares of the Company's common stock before 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.  Beginning December 2003, and for each
      subsequent period, the market price of the Company's common stock exceeded
      120%
      of the conversion price for at least 20 trading days in a period of 30
      consecutive trading days.  The conversion rate is subject to certain
      adjustments. This conversion rate represents a conversion price of $9.145 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 Company can redeem the debentures for cash
      beginning on or after March 20, 2008.





During
      the first quarter of 2006, a debenture holder ("holder") converted $500,000
      in
      debentures for approximately 54,000 shares of common stock.  During
      the third quarter of 2006, the Company entered into a privately negotiated
      transaction with a holder pursuant to which the holder converted $8.0 million
      in
      debentures for approximately 875,000 shares of common stock in accordance with
      the indenture governing the debentures. During the first quarter of 2007, the
      Company entered into one privately negotiated transaction with a holder pursuant
      to which the holder converted an aggregate of $21.7 million in debentures for
      approximately 2.4 million shares of common stock in accordance with the
      indenture governing the debentures. In addition, two holders also converted
      $1.5
      million in debentures for approximately 168,000 shares of common
      stock.  As a result of these transactions, the Company expensed
      accrued and prepaid interest of $434,000 and $176,000 in the first six months
      of
      2007 and the year ended 2006, respectively, and deferred financing costs of
      $187,000 and $91,000 in the first six months of 2007 and the year ended 2006,
      respectively.  At June 30, 2007, the Company had outstanding $20.2
      million in aggregate principal amount of its 21⁄4% senior convertible debentures
      due March 15, 2023.





*Revolving
      Credit Facility -*On March 3, 2003, the Company entered into a revolving
      credit facility.  Effective June 26, 2006, the current facility was
      amended to extend the maturity from December 31, 2009 to June 26, 2011, increase
      the availability from $140.0 million to $250.0 million and reduce
      the drawn and undrawn fees. The current incremental borrowing rate is
      LIBOR plus 0.60%.  The facility is available for general corporate
      purposes and at June 30, 2007, the Company had $35.0 million drawn on this
      facility.





The
      credit facility remains secured by guarantees by certain of the Company's
      subsidiaries and a first priority perfected security interest in (i) all of
      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, certain real property,


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equipment,
      contracts, trademarks, copyrights, patents, license rights and general
      intangibles) subject, in each case, to the exclusion of the capital stock of
      CII
      Financial, Inc. ("CII") and certain other exclusions.





The
      revolving credit facility's covenants limit the Company's ability to dispose
      of
      assets, incur indebtedness, incur other liens, make investments, loans or
      advances, make acquisitions, engage in mergers or consolidations, make capital
      expenditures and otherwise restrict certain corporate activities.  The
      Company's ability to pay dividends, repurchase its common stock and prepay
      other
      debt is unlimited provided that the Company can still exceed a certain required
      leverage ratio after such transaction or any borrowing incurred as a result
      of
      such transaction.  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
      at June 30, 2007 and 2006.





**7.           Employee
      and Director Benefit Plans**





*Share-based
      Compensation*- The Company's employee stock plan and non-employee director
      stock plan provide common share-based awards to employees and to non-employee
      directors. The plans provide for the granting of restricted stock units,
      options, and other share-based awards.  At June 30, 2007, the employee
      plan and the non-employee director plan permit the granting of share options
      and
      shares of up to 4.0 million and 221,000 shares, respectively, of common stock.
      A
      committee appointed by the Board of Directors grants awards. Awards become
      exercisable at such times and in such installments as set by the
      committee.





The
      following table summarizes the share-based compensation expense included in
      the
      Condensed Consolidated Statements of Income for all share-based compensation
      plans that were recorded in accordance with Statement of Financial Accounting
      Standards No. 123 (revised 2004), "Share-Based Payment":





Three
                Months Ended June 30,
            
            
            Six
                Months Ended June 30,2007
            
            
            2006
            
            
            2007
            
            
            2006*(In
                thousands)*Medical
                expenses
            
            $
            387
            
            
            $
            234
            
            
            $
            577
            
            
            $
            421General
                and administrative
                expenses
            
            
            863
            
            
            
            1,148
            
            
            
            2,417
            
            
            
            2,621Share-based
                compensation expense before income taxes
            
            
            1,250
            
            
            
            1,382
            
            
            
            2,994
            
            
            
            3,042Income
                tax benefit
            
            
            (438
            )
            
            
            (484
            )
            
            
            (1,048
            )
            
            
            (1,065
            )Net
                share-based compensation expense
            
            $
            812
            
            
            
            898
            
            
            $
            1,946
            
            
            $
            1,977





For
      the
      six months ended June 30, 2007 and 2006, net cash proceeds realized from stock
      option exercises and purchases under the Company's Employee Stock Purchase
      Plan
      ("Purchase Plan") were $4.3 million and $10.7 million, respectively, and the
      actual tax benefit realized from stock option exercises and purchases under
      the
      Purchase Plan was $4.6 million and $10.3 million, respectively.





*Employee
      Stock Purchase Plan and Stock Options*





The
      Company's Purchase Plan allows employees to purchase newly issued shares of
      common stock through payroll deductions at 85% of the fair market value of
      such
      shares on the lower of the first trading day of the plan period or the last
      trading day of the plan period as defined in the Purchase Plan.  For
      the six months ended June 30, 2007 and 2006, 49,000 and 158,000 shares were
      purchased at prices of $30.63 and $30.67 per share, respectively.  At
      June 30, 2007, the Company had 721,000 shares reserved for purchase under the
      Purchase Plan of which 56,000 shares were purchased by employees at $30.46
      in
      July 2007.  There were no stock option grants during the periods ended
      June 30, 2007 or 2006.


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The
        following table reflects the activity of the stock option plans for the six
        months ended June 30, 2007:


WeightedNumber
            
            
            Weighted
            
            
            Average
            
            
            AggregateOf
            
            
            Average
            
            
            Contractual
                Life
            
            
            IntrinsicShares
            
            
            Exercise
                Price
            
            
            Remaining
            
            
            Value*(In
                thousands)*
            
            
            *(per
                share)*
            
            
            *(In
                years)*
            
            
            *(In
                thousands)*Outstanding,
                January 1, 2007
            
            
            1,775
            
            
            $
            12.94Granted
            
            
            3⁄4
            
            
            
            3⁄4Exercised
            
            
            (288
            )
            
            
            9.72Canceled
            
            
            (17
            )
            
            
            15.42Outstanding,
                June 30, 2007
            
            
            1,470
            
            
            $
            13.54
            
            
            
            5.09
            
            
            $
            41,214Exercisable
                at June 30, 2007
            
            
            882
            
            
            $
            10.45
            
            
            
            4.94
            
            
            $
            27,464








The
      aggregate intrinsic value in the table above represents the total pretax
      intrinsic value (the difference between the market price of the Company's stock
      on June 30, 2007 and the exercise price, times the number of shares) that would
      have been received by the option holders had all option holders exercised their
      options on June 30, 2007. This amount changes based on the market value of
      the
      Company's stock. The total intrinsic value of options exercised during the
      three
      months ended June 30, 2007 and 2006 was $5.4 million and $14.8 million,
      respectively. The total intrinsic value of options exercised during the six
      months ended June 30, 2007 and 2006 was $8.8 million and $28.7 million,
      respectively.





The
      following table reflects the activity of the nonvested stock options for the
      six
      months ended June 30, 2007:





Number
            
            
            Weighted-AverageOf
            
            
            Grant
                DateShares
            
            
            Fair
                Value*(In
                thousands)*
            
            
            *(per
                share)*Nonvested
                shares, January 1, 2007 (1)
            
            
            803
            
            
            $
            7.34Granted
            
            
            3⁄4
            
            
            
            3⁄4Vested
            
            
            (358
            )
            
            
            6.04Canceled
            
            
            (11
            )
            
            
            6.72Nonvested
                shares, June 30, 2007 (1)
            
            
            434
            
            
            $
            8.43




(1)
            Excludes
                164,000 and 154,000 shares at January 1, 2007 and June 30, 2007,
                respectively, which vested in 2005, but are not exercisable until
                2008.







As
      of
      June 30, 2007, the Company expects to recognize future total compensation cost
      of $2.2 million related to nonvested stock options over a weighted-average
      period of 10 months.







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*Restricted
      Stock Units*




In
      January 2007, the Company issued 2,000 units of restricted stock ("Units")
      to
      each of the five non-employee Directors.  In January 2006, the Company
      issued 4,000 Units to each of the six non-employee Directors.  Each
      Unit represents a nontransferable right to receive one share of the Company's
      common stock and there is no cost to the recipient to exercise the Units. The
      Units vest according to a variety of vesting schedules or earlier based on
      the
      occurrence of certain events. The fair value of the transactions was based
      on
      the number of Units issued and the Company's stock price on the date of
      issuance, which was $35.35 and $38.49 in 2007 and 2006,
      respectively.   Total expense associated with the Units was
      $99,000 and $114,000 for the three months ended June 30, 2007 and 2006,
      respectively. Total expense associated with the Units was $185,000 and $239,000
      for the six months ended June 30, 2007 and 2006, respectively.





In
      August
      2006, the Company issued 210,000 Units to certain members of its
      management.  The Units vest according to a variety of vesting
      schedules, or earlier based on the occurrence of certain events.  The
      majority of Units have a three year holding period from the date of grant.
      The
      fair value of the transaction was based on the number of Units issued, the
      Company's stock price on the date of issuance, which was $43.60, and an
      estimated forfeiture rate.   A discount was applied to the Units
      with a holding period as a result of the lack of marketability between the
      vesting dates and settlement dates.  The discount was estimated at the
      date of grant using the Black-Scholes option-pricing model with the following
      weighted average assumptions: expected volatility of 32.3%, risk-free interest
      rate of 4.8% and dividend rate of 0%. Total expense associated with the Units
      was $274,000 and $537,000 for the three and six months ended June 30, 2007,
      which approximates the fair value of vested Units during the year. There was
      no
      expense associated with these Units for the three and six months ended June
      30,
      2006.





The
      Company allows employees to surrender vested Units (“Cashless Exercise”) to pay
      for payroll withholdings.  During 2007, the Company had employees
      Cashless Exercise 11,000 Units to pay for $2.2 million in payroll
      withholdings.





The
      following table reflects the activity of the restricted stock unit plans for
      the
      six months ended June 30, 2007:





Number
            
            AggregateOf
            
            IntrinsicShares
            
            Value*(In
                thousands)*Outstanding,
                January 1, 2007(1)(2)
            
            
            104Granted
            
            
            10Vested
            
            
            (23
            )Canceled
            
            
            (1
            )Outstanding,
                June 30, 2007(1)(3)
            
            
            90
            
            $3,743




(1)
            The
                Units have no exercise price.




(2)
            Does
                not include 540,000 Units that have vested but have not
                settled.  These Units are included in outstanding
                shares.




(3)
            Does
                not include 296,000 Units that have vested but have not settled.
                These
                Units are included in outstanding
                shares.





As
      of
      June 30, 2007, the Company expects to recognize future total compensation cost
      of $3.0 million related to nonvested Units over a weighted-average period of
      1.5
      years.


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*Supplemental
      Executive Retirement Plan ("SERP")*




The
      Company has a non-qualified defined benefit retirement plan covering certain
      key
      employees.  The Company is informally funding the benefits through the
      purchase of life insurance policies. Certain participant benefits are based
      on,
      among other things, the employee's average earnings of the three highest years
      over the five-year period prior to retirement or termination, and length of
      service.  Other participant benefits are defined by the plan and based
      on length of service.  Any benefits attributable to service prior to
      the adoption of the plan are amortized over the estimated remaining service
      period for those employees participating in the plan.





For
      the
      six months ended June 30, 2007, the Company contributed $365,000 to fund benefit
      payments and anticipates making $582,000 in additional contributions during
      the
      remainder of the year.








Three
                Months Ended June 30,
            
            
            Six
                Months Ended June 30,2007
            
            
            2006
            
            
            2007
            
            
            2006*(In
                thousands)*Components
                of net periodic benefit cost:Service
                cost
            
            $
            139
            
            
            $
            126
            
            
            $
            278
            
            
            $
            252Interest
                cost
            
            
            426
            
            
            
            399
            
            
            
            852
            
            
            
            798Amortization
                of prior service credits
            
            
            302
            
            
            
            303
            
            
            
            605
            
            
            
            606Recognized
                actuarial loss
            
            
            53
            
            
            
            32
            
            
            
            105
            
            
            
            64Net
                periodic benefit cost
            
            $
            920
            
            
            $
            860
            
            
            $
            1,840
            
            
            $
            1,720





**8.           Share
      Repurchases**





From
      January 1, 2007 through June 30, 2007, the Company purchased 585,000 shares
      of
      its common stock in the open market for $21.1 million at an average cost per
      share of $36.04. Since the repurchase program began in early 2003 and through
      June 30, 2007, the Company purchased, in the open market or through negotiated
      transactions, 29.2 million shares, adjusted for the two for one stock split
      effective December 30, 2005, for $651.9 million at an average cost per share
      of
      $22.29.  On January 25, 2007, the Company's Board of Directors
      authorized an additional $50.0 million in share repurchases.  At June
      30, 2007, $53.1 million was still available under the Board of Directors'
      authorized plan.  The repurchase program has no stated expiration
      date.  The Company's revolving credit facility, as amended, currently
      allows for unlimited stock repurchases based on meeting a certain covenant
      ratio; however, the Company has halted its repurchase program pending the
      UnitedHealth Group merger.


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**9.           Earnings
      Per Share**





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





Three
                Months Ended June 30,
            
            
            Six Months
                Ended June 30,2007
            
            
            2006
            
            
            2007
            
            
            2006*(In
                thousands, except per share data)*Basic
                income per share:Net
                income
            
            $
            39,360
            
            
            $
            33,534
            
            
            $
            38,121
            
            
            $
            66,205Weighted
                average common shares outstanding
            
            
            56,009
            
            
            
            56,074
            
            
            
            55,713
            
            
            
            56,896Net
                income per common share
            
            $
            0.70
            
            
            $
            0.60
            
            
            $
            0.68
            
            
            $
            1.16Diluted
                income per share:Net
                income
            
            $
            39,360
            
            
            $
            33,534
            
            
            $
            38,121
            
            
            $
            66,205Interest
                expense on Sierra debentures, net of tax
            
            
            73
            
            
            
            188
            
            
            
            168
            
            
            
            377Income
                for purposes of computing diluted net income per share
            
            $
            39,433
            
            
            $
            33,722
            
            
            $
            38,289
            
            
            $
            66,582Weighted
                average common shares outstanding
            
            
            56,009
            
            
            
            56,074
            
            
            
            55,713
            
            
            
            56,896Dilutive
                options and restricted shares outstanding
            
            
            714
            
            
            
            892
            
            
            
            725
            
            
            
            990Dilutive
                impact of conversion of Sierra debentures
            
            
            2,214
            
            
            
            5,631
            
            
            
            2,516
            
            
            
            5,639Weighted
                average common shares outstanding assuming dilution
            
            
            58,937
            
            
            
            62,597
            
            
            
            58,954
            
            
            
            63,525Net
                income per common share assuming dilution
            
            $
            0.67
            
            
            $
            0.54
            
            
            $
            0.65
            
            
            $
            1.05





**10.           Comprehensive
      Income**





The
      following table presents comprehensive income for the periods
      indicated:





Three
                Months Ended June 30,
            
            
            Six
                Months Ended June 30,2007
            
            
            2006
            
            
            2007
            
            
            2006*(In
                thousands)*Net
                income
            
            $
            39,360
            
            
            $
            33,534
            
            
            $
            38,121
            
            
            $
            66,205Change
                in net unrealized holding loss on available-for-sale
                investments
            
            
            (1,203
            )
            
            
            (1,077
            )
            
            
            (1,357
            )
            
            
            (2,125
            )Unfunded
                portion of defined benefit pension plan
            
            
            232
            
            
            
            3⁄4
            
            
            
            462
            
            
            
            3⁄4Comprehensive
                income
            
            $
            38,389
            
            
            $
            32,457
            
            
            $
            37,226
            
            
            $
            64,080





**11.**
            **Income
                Taxes**





In
      June
      2006, the FASB issued FASB Interpretation No. 48, "Accounting for Uncertainty
      in
      Income Taxes - an Interpretation of FASB Statement No. 109" ("FIN 48"). FIN
      48
      clarifies the accounting for uncertainty in income taxes recognized in an
      enterprise's financial statements in accordance with Statement of Financial
      Accounting Standards No. 109, "Accounting for Income Taxes". FIN 48 prescribes
      a
      recognition threshold and measurement attribute for the financial statement
      recognition and measurement of a tax position taken or expected to be taken
      in a
      tax return. FIN 48 also provides guidance on derecognition, classification,
      interest and penalties, accounting in interim periods, disclosure, and
      transition.




The
      Company adopted FIN 48 as of January 1, 2007.  The cumulative effect
      of adopting FIN 48 has resulted in an increase to our liability for uncertain
      tax positions of $4.3 million.  This increase was accounted for as an
      adjustment


13
 Table
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to
      the
      beginning balance of retained earnings on the balance
      sheet.  Including the cumulative effect increase, at the beginning of
      2007, the Company had approximately $19.2 million of total gross unrecognized
      tax benefits.




The
      total
      amount of unrecognized tax benefits that, if recognized, would favorably affect
      the effective income tax rate in future periods was $12.6 million as of
      adoption.   Interest and penalties related to income tax matters
      are classified as a component of income tax expense and totaled $200,000
      and $500,000 for the three and six months ended June 30, 2007,
      respectively.  Accrued interest and penalties were $2.7 million
      and $3.3 million as of January 1, 2007 and June 30, 2007,
      respectively.





The
      Company and its subsidiaries are subject to U.S. federal income tax as well
      as
      income tax of multiple state jurisdictions.  Tax years 1996 to 2007
      remain subject to examination for U.S. federal income tax and tax years 2002
      to
      2004 remain subject to examination by major state tax
      jurisdictions.





During the
      next 12 months, the Company expects a decrease of $4.2
      million in grossunrecognized
      tax benefits associated with multiple requests for changes in
      accounting method filings with the Internal Revenue Service. On July
      13, 2007, the Company was notified that one of these requests has been
      approved and the Company does not expect this change to have a material
      impact on our operating results, financial position, or cash flows.





**12.**
            **Recently
                Issued Accounting
                Standards**





In
      September 2006, the FASB issued Statement of Financial Accounting Standards
      No.
      157, "Fair Value Measurements" ("SFAS 157"). SFAS 157 defines fair value,
      establishes a framework for measuring fair value in generally accepted
      accounting principles, and expands disclosures about fair value measurements.
      SFAS 157 applies only to other accounting pronouncements that require or permit
      fair value measurements.   SFAS 157 is effective for fiscal years
      beginning after November 15, 2007. The
      Company does not believe theadoption
      ofSFAS
      157willhavea
      material impactonitsconsolidated financial position,results
      of operations,
      or cash flows.





In February
      2007, the FASB issued Statement of Financial Accounting Standards No. 159,
      "The Fair Value Option for Financial Assets and Financial Liabilities -
      Including an Amendment of FASB Statement No. 115" ("SFAS 159"). SFAS 159
      would create a fair value option of accounting for qualifying financial assets
      and liabilities under which an irrevocable election could be made at inception
      to measure such assets and liabilities initially and subsequently at fair value,
      with all changes in fair value reported in earnings.  SFAS 159 is
      effective as of the beginning of the first fiscal year beginning after November
      15, 2007. The Company is currently evaluating the impact that the adoption
      of SFAS 159 will have on its consolidated financial position, results of
      operations and cash flows.





**13.**
            **Segment
                Reporting**





In
      previous years, the Company had two reportable segments based on the products
      and services offered: managed care and corporate operations, and military health
      services operations. The managed care and corporate operations segment includes
      managed health care services provided through our HMO, managed indemnity plans,
      third-party administrative services programs for employer-funded health benefit
      plans, self-insured workers' compensation plans, multi-specialty medical groups,
      other ancillary services and corporate operations.  The military
      health services operations ("SMHS") segment administered a managed care federal
      contract for the Department of Defense's TRICARE program in Region
      1.  Prior to 2006, SMHS commenced a phase-out of operations and has
      had minimal activity during 2006 and 2007.  The Company believes that
      SMHS no longer meets the definition of an operating segment as described in
      Statement of Financial Accounting Standards No. 131, "Disclosures about
      Segments of an Enterprise and Related Information".  The Company
      believes the only remaining reportable segment is the managed care and corporate
      operations segment.  This segment's required financial information is
      represented in the accompanying unaudited condensed consolidated financial
      statements.


14
 Table
          of Contents




The
          Company generated approximately 45% of its total consolidated revenues
          from
          agencies of the U.S. government for both of the three month periods ended
          June
          30, 2007 and 2006, through participation in Medicare and the Federal Employees
          Health Benefit Plan programs.  The Company generated approximately 46%
          of its total consolidated revenues from agencies of the U.S. government
          for both
          of the six month periods ended June 30, 2007 and
          2006.


**14.**
            **Commitments
                and Contingencies**





*Litigation
      and Legal Matters.*Although the Company
      has
      not been sued, Sierra was identified in discovery submissions in pending class
      action litigation against major managed care companies as having allegedly
      participated in an unlawful conspiracy to improperly deny, diminish or delay
      payments to physicians. In Re: Managed Care Litigation, MDL No. 1334
      (S.D.Fl.).





Beginning
      in 1999, a series of class action lawsuits were filed against many major firms
      in the health benefits business alleging an unlawful conspiracy to deny,
      diminish or delay payments to physicians. The Company has not been named as
      a
      defendant in these lawsuits. A multi-district litigation panel has consolidated
      some of these cases in the United States District Court for the Southern
      District of Florida, Miami Division. In the lead case, known as *Shane*,
      the amended complaint alleges multiple violations under the Racketeer Influenced
      and Corrupt Organizations Act ("RICO"). The suit seeks injunctive, compensatory
      and equitable relief as well as restitution, costs, fees and interest payments.
      On April 7, 2003, the United States Supreme Court determined that certain claims
      against certain defendants should be arbitrated.





Subsequent
      lower court rulings have further resolved which of the plaintiffs' claims are
      subject to arbitration. In 2004, the Court of Appeals for the Eleventh Circuit
      upheld a district court ruling certifying a plaintiff class in the
*Shane* case. In February 2005, the district court determined to
      bifurcate the case, holding a trial phase limited to liability issues, and
      a
      second, if necessary, regarding damages.





Aetna,
      Inc., CIGNA Corporation, the Prudential Insurance Company of America, Wellpoint
      Inc., Health Net Inc. and Humana Inc. have entered into settlement agreements
      which have been approved by the district court.  On January 31, 2006,
      the trial court granted summary judgment on all claims to defendant PacifiCare
      Health Systems, Inc. ("PacifiCare"), finding that plaintiffs had failed to
      provide documents or other evidence showing that PacifiCare agreed to
      participate in the alleged conspiracy.   On June 19, 2006, the
      trial court granted summary judgment on all remaining claims against the two
      remaining defendants, UnitedHealth Group, Inc. and Coventry Health Care, Inc.,
      because the plaintiffs had not submitted evidence that would allow a jury to
      reasonably find that either had been part of a conspiracy to underpay doctors
      or
      that either had aided or abetted alleged RICO
      violations.    Plaintiffs appealed this decision; however,
      on June 13, 2007 the Eleventh Circuit Court of Appeals issued an opinion
      affirming the trial court’s decision.  Plaintiffs in the
*Shane* proceeding had stated their intention to introduce evidence at
      trial concerning Sierra and other parties not named as defendants in the
      litigation.





The
      Company is 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 or other damages that are not covered
      by
      insurance.  These actions are in various stages of litigation and some
      may ultimately be brought to trial.





For
      all
      claims that are considered probable and for which the amount of loss can be
      reasonably estimated, the Company accrued amounts it believes to be appropriate,
      based on information presently available.  With respect to certain
      pending actions, the Company maintains commercial insurance coverage with
      varying deductibles for which the Company maintains estimated reserves for
      its
      self-insured portion based upon its current assessment of such
      litigation.  Due to recent unfavorable changes in the commercial
      insurance market, the Company has for certain risks, purchased coverage with
      higher deductibles and lower limits of coverage.  In the opinion of
      management,


15
 Table
          of Contents


based
      on
      information presently available, the amount or range of any potential loss
      for
      certain claims and litigation cannot be reasonably estimated or is not
      considered probable.  However, the ultimate resolutions of these
      pending legal proceedings are not expected to have a material adverse effect
      on
      the Company's financial condition, operating results and cash
      flows.





On
      March
      19, 2007, a purported class action complaint, styled Edward Sara, on behalf
      of
      himself and all others similarly situated v. Sierra Health Services, Inc.,
      Anthony M. Marlon, Charles L. Ruthe, Thomas Y. Hartley, Anthony L. Watson,
      Michael E. Luce and Albert L. Greene, was filed in the Eighth Judicial District
      Court for the State of Nevada in and for the County of Clark.  The
      complaint names the Company and each of its directors as defendants
      (collectively, the “defendants”), and was filed by a purported stockholder of
      the Company.  The complaint alleges, among other things, that the
      defendants breached and/or aided the other defendants’ breaches of their
      fiduciary duties of loyalty, due care, independence, good faith and fair dealing
      in connection with the merger contemplated with UnitedHealth Group, the
      defendants breached their fiduciary duty to secure and obtain the best price
      reasonably available for the Company and its shareholders, and the defendants
      are engaging in self-dealing and unjust enrichment.  The complaint
      seeks, among other relief, (i) an injunction prohibiting the defendants from
      consummating the merger unless and until the Company adopts and implements
      a
      procedure or process to obtain the highest possible price for shareholders
      and
      (ii) the imposition of a constructive trust upon any benefits improperly
      received by the defendants as a result of the alleged wrongful
      conduct.







On
      June 4, 2007, the Company and the defendants reached an agreement in
      principle to settle the lawsuit.  As part of the settlement, the
      defendants deny all allegations of wrongdoing, and the Company agreed to make
      certain additional disclosures in connection with the merger.  The
      settlement will be subject to certain conditions, including court approval
      following notice to members of the proposed settlement class and consummation
      of
      the merger. If finally approved by the court, the settlement will resolve all
      of
      the claims that were or could have been brought on behalf of the proposed
      settlement class in the action being settled, including all claims relating
      to
      the merger, fiduciary obligations in connection with the merger, negotiations
      in
      connection with the merger and any disclosure made in connection with the
      merger. In addition, in connection with the settlement, the parties have agreed
      that, subject to approval of the court, the Company will pay plaintiffs’ counsel
      attorneys’ fees and expenses in the amount of $485,000. The merger may be
      consummated prior to final court approval of the settlement. The settlement
      will
      not affect the amount of merger consideration to be paid in the merger or any
      other provision of the merger agreement.




16


**Management's
        Discussion And Analysis Of
        Financial**


**Condition
      And Results Of
      Operations**


**Item
      2.**





The
      following discussion and analysis provides information that 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, 2006, and "Management's Discussion and
      Analysis of Financial Condition and Results of Operations," included in our
      2006
      Annual Report on Form 10-K filed with the Securities and Exchange Commission
      on
      February 27, 2007 and accompanying notes for the three and six month periods
      ended June 30, 2007 and 2006, included in this Form 10-Q. The information
      contained below is subject to risk factors. We urge the reader to review
      carefully the sections "Forward-Looking Statements" in Part I, Item 1 and "Risk
      Factors" in Part I, Item 1A of our 2006 Annual Report on Form 10-K as well
      as
      "Risk Factors" in Part II, Item 1A of this Form 10-Q for a more complete
      discussion of the risks associated with an investment in our
      securities.





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 2006 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,"
        "continue," "could,"  "estimate,"
        "expect,"  "hope,"  "intend,"  "may,"  "plan,"  "predict,"  "project,"  "seeks,"
        "will," 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 publish revised
      forward-looking statements to reflect events or circumstances after the date
      hereof or to reflect the occurrence of unanticipated events.





17
 Table
          of Contents


**Summary
      of Consolidated Results – Three Months Ended June 30, 2007 and
      2006**





Three
                Months Ended
              June
                30,
            
            
            Percent
                Of Revenue
              Three
                Months Ended
              June
                30,
            
            
            Increase
                (Decrease)2007
            
            
            2006
            
            
            2007
            
            
            2006
            
            
            2007
                vs. 2006*(In
                thousands, except percentages, per share and
                membership)*Operating
                revenues:Medical
                premiums
            
            $
            457,246
            
            
            $
            400,664
            
            
            
            94.9
            %
            
            
            94.4
            %
            
            $
            56,582
            
            
            
            14.1
            %Professional
                fees
            
            
            14,394
            
            
            
            12,882
            
            
            
            3.0
            
            
            
            3.0
            
            
            
            1,512
            
            
            
            11.7Investment
                and other revenues
            
            
            10,407
            
            
            
            10,892
            
            
            
            2.1
            
            
            
            2.6
            
            
            
            (485
            )
            
            
            (4.5
            )Total
            
            
            482,047
            
            
            
            424,438
            
            
            
            100.0
            
            
            
            100.0
            
            
            
            57,609
            
            
            
            13.6Operating
                expenses:Medical
                expenses
            
            
            362,211
            
            
            
            321,545
            
            
            
            75.1
            
            
            
            75.7
            
            
            
            40,666
            
            
            
            12.7Medical
                care ratio
            
            
            76.8
            %
            
            
            77.8
            %
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (1.0
            )General
                and administrative expenses
            
            
            59,528
            
            
            
            50,422
            
            
            
            12.4
            
            
            
            11.9
            
            
            
            9,106
            
            
            
            18.1Total
            
            
            421,739
            
            
            
            371,967
            
            
            
            87.5
            
            
            
            87.6
            
            
            
            49,772
            
            
            
            13.4Operating
                income
            
            
            60,308
            
            
            
            52,471
            
            
            
            12.5
            
            
            
            12.4
            
            
            
            7,837
            
            
            
            14.9Interest
                expense
            
            
            (1,037
            )
            
            
            (1,002
            )
            
            
            (0.2
            )
            
            
            (0.3
            )
            
            
            (35
            )
            
            
            3.5Other
                income (expense), net
            
            
            844
            
            
            
            9
            
            
            
            0.2
            
            
            
            
            
            
            
            835
            
            
            
            9277.8Income
                before income taxes
            
            
            60,115
            
            
            
            51,478
            
            
            
            12.5
            
            
            
            12.1
            
            
            
            8,637
            
            
            
            16.8Provision
                for income taxes
            
            
            (20,755
            )
            
            
            (17,944
            )
            
            
            (4.3
            )
            
            
            (4.2
            )
            
            
            (2,811
            )
            
            
            15.7Tax
                rate
            
            
            34.5
            %
            
            
            34.9
            %
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (0.4
            )Net
                income
            
            $
            39,360
            
            
            $
            33,534
            
            
            
            8.2
            %
            
            
            7.9
            %
            
            $
            5,826
            
            
            
            17.4
            %Net
                income per common share assuming dilution
            
            $
            0.67
            
            
            $
            0.54
            
            
            
            
            
            
            
            
            
            
            $
            0.13
            
            
            
            24.1
            %MembershipHMO:Commercial
            
            
            278,200
            
            
            
            265,600
            
            
            
            
            
            
            
            
            
            
            
            12,600
            
            
            
            4.7
            %Medicare
            
            
            56,500
            
            
            
            56,900
            
            
            
            
            
            
            
            
            
            
            
            (400
            )
            
            
            (0.7
            )Medicaid
            
            
            58,200
            
            
            
            56,700
            
            
            
            
            
            
            
            
            
            
            
            1,500
            
            
            
            2.6Subtotal
                HMO
            
            
            392,900
            
            
            
            379,200
            
            
            
            
            
            
            
            
            
            
            
            13,700
            
            
            
            3.6Commercial
                PPO and HSA
            
            
            36,100
            
            
            
            29,800
            
            
            
            
            
            
            
            
            
            
            
            6,300
            
            
            
            21.1Medicare
                PPO and PFFS
            
            
            3,300
            
            
            
            1,300
            
            
            
            
            
            
            
            
            
            
            
            2,000
            
            
            
            153.8Medicare
                Part D-Basic
            
            
            155,300
            
            
            
            180,300
            
            
            
            
            
            
            
            
            
            
            
            (25,000
            )
            
            
            (13.9
            )Medicare
                Part D-Enhanced
            
            
            44,300
            
            
            
            3⁄4
            
            
            
            
            
            
            
            
            
            
            
            44,300
            
            
            
            3⁄4Medicare
                supplement
            
            
            12,700
            
            
            
            14,000
            
            
            
            
            
            
            
            
            
            
            
            (1,300
            )
            
            
            (9.3
            )Administrative
                services
            
            
            221,200
            
            
            
            219,700
            
            
            
            
            
            
            
            
            
            
            
            1,500
            
            
            
            0.7Total
                membership
            
            
            865,800
            
            
            
            824,300
            
            
            
            
            
            
            
            
            
            
            
            41,500
            
            
            
            5.0
            %Member
                monthsCommercial
            
            
            936,100
            
            
            
            878,200
            
            
            
            
            
            
            
            
            
            
            
            57,900
            
            
            
            6.6
            %Medicare
                HMO
            
            
            169,700
            
            
            
            169,800
            
            
            
            
            
            
            
            
            
            
            
            (100
            )
            
            
            (0.1
            )Medicaid
            
            
            175,300
            
            
            
            169,000
            
            
            
            
            
            
            
            
            
            
            
            6,300
            
            
            
            3.7





The
      table
      above should be reviewed in association with the discussion that
      follows.


18
 Table
          of Contents


**Summary
      of Consolidated Results – Six Months Ended June 30, 2007 and
      2006**





Six
                Months Ended
              June
                30,
            
            
            Percent
                Of Revenue
              Six
                Months Ended
              June
                30,
            
            
            Increase
                (Decrease)2007
            
            
            2006
            
            
            2007
            
            
            2006
            
            
            2007
                vs. 2006*(In
                thousands, except percentages, per share and
                membership)*Operating
                revenues:Medical
                premiums
            
            $
            925,320
            
            
            $
            815,108
            
            
            
            94.7
            %
            
            
            94.5
            %
            
            $
            110,212
            
            
            
            13.5
            %Professional
                fees
            
            
            29,036
            
            
            
            25,797
            
            
            
            3.0
            
            
            
            3.0
            
            
            
            3,239
            
            
            
            12.6Investment
                and other revenues
            
            
            22,328
            
            
            
            21,781
            
            
            
            2.3
            
            
            
            2.5
            
            
            
            547
            
            
            
            2.5Total
            
            
            976,684
            
            
            
            862,686
            
            
            
            100.0
            
            
            
            100.0
            
            
            
            113,998
            
            
            
            13.2Operating
                expenses:Medical
                expenses
            
            
            797,522
            
            
            
            658,064
            
            
            
            81.7
            
            
            
            76.3
            
            
            
            139,458
            
            
            
            21.2Medical
                care ratio
            
            
            83.6
            %
            
            
            78.3
            %
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            5.3General
                and administrative expenses
            
            
            118,720
            
            
            
            101,761
            
            
            
            12.1
            
            
            
            11.8
            
            
            
            16,959
            
            
            
            16.7Total
            
            
            916,242
            
            
            
            759,825
            
            
            
            93.8
            
            
            
            88.1
            
            
            
            156,417
            
            
            
            20.6Operating
                income
            
            
            60,442
            
            
            
            102,861
            
            
            
            6.2
            
            
            
            11.9
            
            
            
            (42,419
            )
            
            
            (41.2
            )Interest
                expense
            
            
            (2,992
            )
            
            
            (1,778
            )
            
            
            (0.3
            )
            
            
            (0.2
            )
            
            
            (1,214
            )
            
            
            68.3Other
                income (expense), net
            
            
            1,494
            
            
            
            (24
            )
            
            
            0.1
            
            
            
            3⁄4
            
            
            
            1,518
            
            
            
            (6,325.0
            )Income
                before income taxes
            
            
            58,944
            
            
            
            101,059
            
            
            
            6.0
            
            
            
            11.7
            
            
            
            (42,115
            )
            
            
            (41.7
            )Provision
                for income taxes
            
            
            (20,823
            )
            
            
            (34,854
            )
            
            
            (2.1
            )
            
            
            (4.0
            )
            
            
            14,031
            
            
            
            (40.3
            )Tax
                rate
            
            
            35.3
            %
            
            
            34.5
            %
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            0.8Net
                income
            
            $
            38,121
            
            
            $
            66,205
            
            
            
            3.9
            %
            
            
            7.7
            %
            
            $
            (28,084
            )
            
            
            (42.4
            )%Net
                income per common share assuming dilution
            
            $
            0.65
            
            
            $
            1.05
            
            
            
            
            
            
            
            
            
            
            $
            (0.40
            )
            
            
            (38.1
            )%Member
                monthsCommercial
            
            
            1,858,700
            
            
            
            1,740,400
            
            
            
            
            
            
            
            
            
            
            
            118,300
            
            
            
            6.8
            %Medicare
              HMO
            
            
            340,200
            
            
            
            338,700
            
            
            
            
            
            
            
            
            
            
            
            1,500
            
            
            
            0.4Medicaid
            
            
            355,500
            
            
            
            336,000
            
            
            
            
            
            
            
            
            
            
            
            19,500
            
            
            
            5.8





The
      table
      above should be reviewed in association with the discussion that
      follows.





**Overview**





We
      are a
      managed health care organization that provides and administers the delivery
      of
      comprehensive health care programs with an emphasis on quality care and cost
      management.  Our strategy has been to develop and offer a portfolio of
      managed health care products to government agencies, employer groups, and
      individuals.  We derive revenues primarily from our health maintenance
      organization (HMO) and managed indemnity plans. 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 (including
      fees for workers' compensation third party administration, utilization
      management services and ancillary products).





Our
      principal expenses consist of medical expenses and general and administrative
      expenses.  Medical expenses represent capitation fees and other
      fee-for-service payments, including hospital per diems, paid to independently
      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 coordinating
      utilization of physician and hospital services and providing incentives to
      use
      cost-effective providers. General and administrative expenses generally
      represent operational costs other than those directly associated with the
      delivery of health care services.


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**Pending
      Business Combination**





On
      March
      11, 2007, we entered into an Agreement and Plan of Merger (the Merger
      Agreement), with UnitedHealth Group Incorporated, a Minnesota corporation
      (UnitedHealth Group), and Sapphire Acquisition, Inc., a Nevada corporation
      and
      an indirect wholly-owned subsidiary of UnitedHealth Group (Merger
      Sub).  The Merger Agreement provides that, upon the terms and subject
      to the conditions set forth in the Merger Agreement, we will merge with the
      Merger Sub (the Merger), and we will continue as the surviving
      company.  At the effective time of the Merger, each issued and
      outstanding share of our common stock (other than shares owned by UnitedHealth
      Group or Merger Sub, whose shares will be cancelled), will be converted into
      the
      right to receive $43.50 in cash, on the terms specified in the Merger Agreement.
      Completion of the Merger is subject to various conditions, including, among
      others, (i) approval of the holders of a majority of the outstanding shares
      of  our common stock, (ii) expiration or termination of the applicable
      Hart-Scott-Rodino Act (HSR) waiting period, (iii) absence of any order,
      injunction or other judgment or decree prohibiting the consummation of the
      Merger, (iv) receipt of required governmental consents and approvals without
      negative regulatory action, and (v) subject to certain exceptions, the accuracy
      of the representations and warranties of us and UnitedHealth Group, as
      applicable, and compliance by us and UnitedHealth Group with their respective
      obligations under the Merger Agreement.  The Merger Agreement contains
      certain termination rights for both us and UnitedHealth Group, and further
      provides that, upon termination of the Merger Agreement under specified
      circumstances, we may be required to pay UnitedHealth Group a termination fee
      of
      $85.0 million and in other circumstances, UnitedHealth Group may be required
      to
      pay us a termination fee of $25.0 million.





On
      May
      16, 2007, we and UnitedHealth Group received a request for additional
      information from the Antitrust Division of the U.S. Department of Justice (DOJ)
      regarding the proposed merger between the two companies.  The
      information request, also known as a “second request,” was issued under
      notification requirements of the HSR.   The effect of the second
      request is to extend the waiting period imposed by the HSR until 30 days after
      we and UnitedHealth Group have substantially complied with the request for
      additional information, unless the period is extended voluntarily by the parties
      or terminated sooner by the DOJ.





On
      June
      27, 2007, our stockholders approved the Merger Agreement.





**Executive
      Summary**





Our
      highlights for the six months ended June 30, 2007 compared to the six months
      ended June 30, 2006 include:





·
            Total
                operating revenues increased by 13.2%.  This improvement was
                primarily driven by a 13.5% increase in medical premiums due to a
                41.3%
                increase in premiums for our stand alone Medicare Part D prescription
                drug
                (PDP) programs, an increase in our commercial membership and premium
                rate
                increases.  Also contributing to the improvement in operating
                revenues was a 12.6% increase in professional fees due to an increase
                in
                visits to our clinical
                subsidiaries.





·
            HMO
                membership increased 3.6% as a result of new accounts and in-case
                growth
                on commercial membership and growth in Medicaid
                membership.  This increase is net of the 11,000 commercial
                member terminations effective January 1, 2007, from three large employer
                groups that had been anticipated.





·
            Medical
                expenses, as a percentage of medical premiums and professional fees,
                or
                medical care ratio, increased to 83.6% in 2007 from 78.3% in
                2006.  The increase in our medical care ratio is primarily
                related to the estimated full year 2007 pre-tax loss of $55.3 million
                related to our new enhanced PDP product that was recorded during
                the
                period, which significantly increased medical expenses.  See
                Medical Expenses below for more
                details.


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·
            General and administrative (G&A) expenses as a
              percentage of medical premiums increased to 12.8% in 2007 from 12.5%
              in
              2006.  G&A expenses increased 16.7% primarily due to costs
              associated with our pending merger with UnitedHealth Group, increases
              in
              premium taxes and brokers' fees, and an $8.8 million premium
              deficiency reserve recorded in G&A related to our new enhanced PDP
              product. This increase was entirely related to higher bad debt expense
              for
              the members’ portion of premiums.


·
            We
                had operating income of $60.4 million in 2007 compared to $102.9
                million
                in 2006.  This decrease is related to the $55.3 million
                operating loss recorded during 2007 related to our new enhanced PDP
                product.  See Medical Expenses below for more details. This
                decrease was partially offset by an increase in operating income
                primarily
                driven by medical premium revenue growth from new members and premium
                rate
                increases.





·
            Cash
                flows from operating activities decreased to $109.5 million from
                $140.1
                million during 2006.  This decrease is mostly due to the timing
                of tax payments and a $14.9 million decrease in operating cash flows
                from
                our PDP plans during 2007 compared to 2006, which was primarily related
                to
                the timing of PDP activity during the
                year.





**Results
      Of Operations For The Three Months Ended June 30, 2007 Compared To The Three
      Months Ended June 30, 2006**





***Medical
      Premiums.*** The increase in medical premiums for 2007 reflects a
      6.6% increase in commercial  member months (the number of months
      individuals are enrolled in a plan).  This increase is attributed to
      in-case growth, movement from self-insured plans to our commercial products
      and
      other new accounts, which was partially offset by 11,000 commercial member
      terminations effective January 1, 2007 from three large employer
      groups.  Commercial premium rates for renewing commercial groups
      increased approximately 4.0% while the overall recorded per member per month
      revenue increase, including new and continuing business, was approximately
      3.8%,
      net of changes in benefits.





The
      increase in medical premiums for 2007 includes $31.0 million from our new
      stand-alone enhanced PDP product (Enhanced Plan) that was effective January
      1,
      2007.  This was partially offset by a $8.2 million decrease in our
      stand-alone basic PDP plan (Basic Plan).   We recognize medical
      premiums from our PDP plans as earned over the contract
      period.  Medical premiums also included $5.0 million in medical
      premiums related to the first quarter of 2007 due to a higher than expected
      mid-year rate adjustment from the Centers for Medicare and Medicaid Services
      (CMS) relative to the risk factor portion of our payment that was retroactive
      to
      January 1, 2007.





In
      2007,
      we expanded our offering of our Basic Plan to 30 states and the District of
      Columbia.  We engaged a national marketing partner for our Basic Plan
      and we are using our established broker network in Nevada and
      Utah.  Additionally, our Basic Plan remained eligible as a PDP sponsor
      for our 2006 auto-enrolled Medicare and Medicaid beneficiaries in California
      and
      Nevada, and for our 2006 and new 2007 auto-enrolled beneficiaries in Arizona,
      Colorado, Idaho, Oregon, Utah and Washington. Our Basic Plan is no longer a
      PDP
      sponsor for auto-enrolled beneficiaries in New Mexico and Texas.  At
      June 30, 2007, we had 155,300 beneficiaries enrolled in our Basic Plan, the
      majority of which were auto-enrolled beneficiaries.   In 2007,
      for the first time, we offered an Enhanced Plan, which provides brand name
      and
      generic prescription drug benefits through the coverage gap or "donut hole",
      in
      30 states and the District of Columbia.  Based on the data available
      to date, we now anticipate that estimated 2007 pharmacy and administrative
      maintenance costs will exceed estimated 2007 premiums by $55.3
      million.  See Medical Expenses below for more details.  At
      June 30, 2007, we had 44,300 members enrolled in our Enhanced
      Plan.  We do expect some new members to enroll in the Enhanced Plan
      during the remainder of the year as newly eligible Medicare beneficiaries can
      still enroll; however, existing Medicare beneficiaries cannot change stand-alone
      PDP plans during the year unless unusual circumstances exist.





CMS
      shares in a portion of the risk of pharmacy costs related to the basic coverage
      in our Basic Plan and our Enhanced Plan as well as our Medicare Advantage
      PDP.  We recognize a risk sharing receivable or payable
      based


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on
      the
      year-to-date activity and a corresponding increase or decrease to medical
      premiums.  The risk sharing  receivable or payable is
      accumulated for each contract and recorded in prepaid expenses and other current
      assets or accrued and other current liabilities depending on the net contract
      balance at the end of the reporting period.





In
      2007,
      we continue to offer local and regional Medicare Advantage PPO (MAPPO) plans
      and
      for the first time, we are offering a Medicare Advantage Private Fee-For-Service
      (MAPFFS) plan. This plan is available in 28 states and the District of Columbia.
      The MAPFFS plan does not include Medicare Part D prescription drug coverage
      but
      does provide hospital and physician coverage. Members pay a monthly premium,
      co-payments and coinsurance, with reasonable out-of-pocket maximum amounts.
      Members also have unlimited network access. At June 30, 2007, we had 2,000
      and
      500 members enrolled in our regional and local MAPPO plans, respectively. At
      June 30, 2007, we had 900 members enrolled in our MAPFFS plan.





Effective
      January 2004, CMS adopted a new risk adjustment payment methodology for Medicare
      beneficiaries enrolled in managed care programs, including the Social HMO,
      which
      has been administratively extended by CMS through 2007.  For Social
      HMO members, the new methodology includes a frailty adjuster that uses measures
      of functional impairment to predict expenditures.  CMS has
      transitioned to the new payment methodology on a graduated basis from 2004
      through 2007 and we will be completely transitioned to the new methodology
      effective


January
      1, 2008.  In 2006, we were paid 50% based on the previous payment
      methodology and 50% based on the new methodology.  For 2007, we are
      paid 25% based on the previous payment methodology and 75% based on the new
      methodology.  We received a higher than expected mid-year adjustment
      from CMS to the risk factor used to calculate a portion of our
      payment.  This adjustment was retroactive to January 1,
      2007.  We expect our 2007 net Medicare per-member-per-month yield to
      be slightly higher than 2006.





For
      2008,
      we will be fully transitioned to a risk payment methodology; however, we have
      been notified by CMS that there will continue to be a frailty factor component
      to our payment through 2010.  The frailty factor will be a component
      of the risk score calculation for former Social HMO plans by using 75%, 50%
      and
      25% of the current frailty factor for  plan years 2008, 2009 and 2010,
      respectively.  Even with the additional frailty factor component, we
      believe that a full transition to a risk payment methodology may cause our
      per
      member payment in 2008 to be less than our per member payment in
      2007.





Early
      in
      2005, CMS replaced its legacy Group Health Plan system.  The
      transition to the new system had led to some incorrect transactions and
      inconsistencies in the payments and data we received from CMS.  We
      received overpayments, of over $30 million, from CMS in excess of our current
      best estimate of Medicare premiums in 2005. We have made CMS aware of the
      overpayments and they are in the process of researching the various
      issues.  We expect a portion of these funds to be settled with CMS
      over the course of the next several quarters. Additionally, while we continue
      to
      have some membership discrepancies with CMS in 2007, the 2006 membership
      discrepancies previously disclosed have largely been resolved with CMS and
      we
      believe that the appropriate revenue and expenses for these members have been
      recognized.





We
      contract with the Division of Healthcare Financing and Policy of the state
      of
      Nevada (DHCFP) to provide health care coverage to certain Medicaid eligible
      individuals.  To enroll in our Medicaid program, an individual must be
      eligible for the Temporary Assistance for Needy Families or the Children's
      Health Assurance Program categories of the state's Medicaid program. At June
      30,
      2007, we had approximately 41,900 members enrolled in this
      program.  We also contract with the DHCFP to provide health care
      coverage to the Nevada Check Up program, which covers certain uninsured children
      who do not qualify for Medicaid.  At June 30, 2007, we had
      approximately 16,300 members enrolled in this program. We receive a monthly
      fee
      for each Medicaid and Nevada Check Up member enrolled by the state's Managed
      Care Division and we also receive a per case fee for each Medicaid and Nevada
      Check Up eligible newborn delivery. In the first quarter we received a 1.0%
      rate
      increase retroactive to January 1, 2007 and do not expect to receive any further
      rate increases for 2007.


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The
      DHCFP
      awarded a contract to Health Plan of Nevada, Inc. (HPN) as one of two Medicaid
      managed care contractors in the state of Nevada.  The new contract is
      effective November 1, 2006 through June 30, 2009.  The new contract allows
      the DHCFP, at its sole option, to extend the term of the contract for up to
      two
      additional years.  When the new contract became effective on November 1,
      2006, existing Medicaid members were given the option to select either of the
      two Medicaid managed care contractors.  It appears that the majority of
      members that made an active selection selected our plan and our share of the
      plan membership was initially close to 60%.  The DHCFP tries to maintain a
      55/45 band between the two contractors.  Since our current membership is
      now estimated to be approximately 56% of the plan membership, the other
      contractor will continue to receive the majority of new members that do not
      make
      an active selection.  Over time, this is designed to keep the membership
      within a 55/45 band between the two contractors.





Continued
      medical premium revenue growth is principally dependent upon continued
      enrollment in our products and upon competitive and regulatory
      factors.





***Professional
      Fees.*** The increase in professional fees primarily resulted from
      increased visits to our clinical subsidiaries.





***Investment
      and Other Revenue.*****Investment and other revenue
      remained relatively flat.  See Note 5, "Investments", in the Notes to
      Condensed Consolidated Financial Statements.





***Medical
      Expenses.*****Our medical care ratio decreased 100 basis
      points to 76.8%.  The decrease in our medical care ratio is due
      primarily to lower average bed days during 2007, $5.4 million in positive
      reserve development, and the retroactive medical premium rate adjustment
      received from CMS mentioned above.  This was partially offset by an
      increase in medical expenses due to the termination of our HCA Inc. (HCA)
      contract on December 31, 2006.  The positive reserve development
      primarily relates to the benefit of a prompt pay discount we entered into during
      the quarter with HCA that was effective retroactive to January 1, 2007 as well
      as other accruals that came in below our reserved amounts.  The
      majority of this positive reserve development was related to our commercial
      business.





In
      2007,
      we began to offer the Enhanced Plan, which provides brand name and generic
      prescription drug benefits through the coverage gap or "donut
      hole".  We engaged independent actuarial consultants in developing the
      Enhanced Plan.  The premium structure for the Enhanced Plan was based
      on a projected level of utilization per member.  Our experience so far
      in 2007 indicates that we will experience significantly increased costs from
      what the actuarial projections anticipated.  During the first quarter
      of 2007, we recorded a $48.8 million pre-tax loss related to our Enhanced Plan,
      which resulted in a premium deficiency reserve of $44.5 million at March 31,
      2007.  This represented our estimate of the full year 2007 losses for
      the Enhanced Plan based on the data available at that time.  Based on
      the most current data available to date, we now believe that the entire year
      2007 losses for the Enhanced Plan will be $55.3 million and we recorded an
      additional $6.5 million in premium deficiency reserves during the quarter in
      general and administrative expenses.   The change in estimate is
      entirely related to higher bad debt expense related to the members’ portion of
      the premiums.  At June 30, 2007 our premium deficiency reserve balance
      for our Enhanced Plan was adjusted to $39.3 million. We did not submit a bid
      to
      CMS for an Enhanced Plan in 2008 and therefore will not be offering this plan
      for 2008.  See Note 4, "Premium Deficiency Reserves", in the Notes to
      Condensed Consolidated Financial Statements for further discussion of our
      Enhanced Plan.





The
      number of days in claims payable, which is the medical claims payable balance
      divided by the average medical expense per day, for 2007 was 48 compared to
      42
      for 2006.  The increase was related to an increase in claims payable
      for provider disputes and the timing of claims payments.





We
      contract with hospitals, physicians and other independent providers of health
      care under capitated or discounted fee-for-service arrangements, including
      hospital per diems, to provide medical care services to members.  We
      also have an extensive pharmacy network to provide pharmaceuticals to our
      members. Capitated providers are at risk for


23
 Table
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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 with
      non-affiliated providers of $33.3 million and $33.0 million, or 9.2% and 10.3%,
      of our total medical expenses for 2007 and 2006, respectively. Also included
      in
      medical expenses are the operating expenses of our medical provider subsidiaries
      and certain claims-related administrative expenses, which accounted for 27.2%
      and 28.3% of our total medical expenses for 2007 and 2006,
      respectively.





The
      Las
      Vegas area has thirteen hospitals.  Our contract with our 2006 primary
      Las Vegas area contracted hospital organization, which includes three hospitals
      − Sunrise Hospital and Medical Center, Mountain View Hospital and Southern Hills
      Hospital and Medical Center − owned by HCA, expired on December 31,
      2006.  We have contracts in place through at least the middle of 2008
      with all of the other hospitals in southern Nevada.  These contracts
      are based on a fixed per diem rate structure and in some circumstances are
      higher than the previous HCA contract rates. While our efforts to move the
      majority of our HCA hospital days to other contracted hospitals have been
      successful, there are emergency and other situations that have required us
      to
      use the HCA hospitals in 2007.  In 2007, we have negotiated a discount
      to billed charges with HCA for our commercial members based on certain prompt
      pay terms; however, these charges are still substantially higher than our
      current commercial rates with our contracted hospitals. We receive a significant
      discount to billed charges for services rendered to Medicare and Medicaid
      members at an HCA hospital because we pay charges at the established Medicare
      and Medicaid rates.





***General
      and Administrative Expenses.*****G&A expenses
      increased primarily due to costs associated with our pending merger with
      UnitedHealth Group, premium taxes, brokers' fees and a $6.5 million increase
      in
      our premium deficiency reserve recorded in G&A related to our new enhanced
      PDP product. This increase was entirely related to higher bad debt expense
      for
      the members’ portion of premiums.  As a percentage of medical
      premiums, G&A expenses were 13.0% and 12.6% for 2007 and 2006,
      respectively.





***Interest
      Expense.*** Interest expense remained relatively flat.  At
      June 30, 2007, we had $35.0 million outstanding on our credit
      facility.





***Provision
      for Income Taxes.*** Our effective tax rate is lower than the
      statutory tax rate primarily due to tax-preferred investment income and other
      items.  See Note 11, "Income Taxes", in the Notes to Condensed
      Consolidated Financial Statements for further discussion of our income
      taxes.





Our
      effective tax rate is based on actual or expected income, statutory tax rates
      and tax planning opportunities available to us.  We use significant
      estimates and judgments in determining our effective tax rate.  We are
      occasionally audited by federal, state or local jurisdictions regarding
      compliance with federal, state and local tax laws and the recognition of income
      and deductibility of expenses.  Tax assessments may not arise until
      several years after tax returns are filed.  While there is an element
      of uncertainty in predicting the outcome of tax audits, we believe that the
      recorded tax assets and liabilities are appropriately stated based on our
      analyses of probable outcomes, including interest and other potential
      adjustments.  Our tax assets and liabilities are adjusted based on the
      most current facts and circumstances, including the progress of audits, case
      law, emerging legislation and interpretations; any adjustments are included
      in
      the effective tax rate in the current period.  On July 13,
      2007, the Company was notified by the Internal Revenue Service that
      they have approved a request for a change in accounting method for a
      subsidiary, Health Plan of Nevada, Inc. .  The Company does
      not expect this to have a material impact on our operating results, financial
      position, or cash flows.







24
 Table
          of Contents


**Results
      Of Operations For The Six Months Ended June 30, 2007 Compared To The Six Months
      Ended June 30, 2006**




***Medical
      Premiums.*** The increase in medical premiums for 2007 reflects a
      6.8% increase in commercial  member months.  This increase
      is attributed to in-case growth, movement from self-insured plans to our
      commercial products and other new accounts, which was partially offset by 11,000
      commercial member terminations effective January 1, 2007 from three large
      employer groups.  The increase in medical premiums for 2007 also
      includes a 5.8% increase in Medicaid member months and a 0.4% increase in
      Medicare HMO member months as well as $64.3 million in medical premiums related
      to our Enhanced Plan that was effective January 1, 2007.  This was
      partially offset by a $18.2 million decrease in medical premiums related to
      our
      Basic Plan.





Commerical
      premium rates for renewing commercial groups increased approximately 6.9% while
      the overall recorded per member per month revenue increase, including new and
      continuing business, was approximately 3.6%, net of changes in
      benefits.





***Professional
      Fees.*** The increase in professional fees primarily resulted from
      increased visits to our clinical subsidiaries.





***Investment
      and Other Revenue.*****Investment and other revenue
      remained relatively flat.  See Note 5, "Investments", in the Notes to
      Condensed Consolidated Financial Statements.





***Medical
      Expenses.*****Our medical care ratio increased to 83.6%
      from 78.3%.  The increase is mainly due to estimated losses for the
      full year of 2007 from our Enhanced Plan recorded in the year. We incurred
      capitation expenses with non-affiliated providers of $67.1 million and $65.7
      million, or 8.4% and 10.0% of our total medical expenses for 2007 and 2006,
      respectively. Also included in medical expenses are the operating expenses
      of
      our medical provider subsidiaries and certain claims-related administrative
      expenses, which accounted for 24.7% and 27.6% of our total medical expenses
      for
      2007 and 2006, respectively.





***General
      and Administrative Expenses.*****G&A expenses
      increased primarily due to costs associated with our pending merger with
      UnitedHealth Group, premium taxes, brokers' fees and a $8.8 million premium
      deficiency reserve on our Enhanced Plan recorded in G&A.  As a
      percentage of medical premiums, G&A expenses were 12.8% for 2007, compared
      to 12.5% for 2006.





***Interest
      Expense.*** Interest Expense increased due to the increased balance
      of our credit facility that was used primarily to repurchase shares in the
      fourth quarter of 2006 and prepaid interest and other costs associated with
      debenture holders converting $23.3 million of our senior convertible debentures
      during 2007.  At June 30, 2007, we had $35.0 million outstanding on
      our credit facility.





***Provision
      for Income Taxes.*** Our effective tax rate is higher than the
      statutory tax rate primarily due to an increase in uncertain tax liabilities
      during the year, which were partially offset by tax-preferred investment
      income.


25
 Table
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**Liquidity
      And Capital Resources**





A
      summary
      of our major sources and uses of cash is reflected in the table
      below.





**Six
                Months Ended June 31,****2007**
            
            
            **2006**(In
                thousands)Sources
                of cash:Cash
                provided by operating activities
            
            $
            109,516
            
            
            $
            140,097Purchase
                of investments, net of proceeds
            
            
            27,789
            
            
            
            3⁄4Exercise
                of stock in connection with stock plans
            
            
            4,301
            
            
            
            10,719Proceeds
                from other long-term debt
            
            
            3⁄4
            
            
            
            20,000Other
            
            
            4,233
            
            
            
            10,260Total
                cash sources
            
            
            145,839
            
            
            
            181,076Uses
                of cash:Purchase
                of investments, net of proceeds
            
            
            3⁄4
            
            
            
            (36,268
            )Purchase
                of treasury stock
            
            
            (21,081
            )
            
            
            (127,780
            )Payment
                on debt and capital leases
            
            
            (40,078
            )
            
            
            (53
            )Other
            
            
            (120
            )
            
            
            (8,179
            )Total
                cash uses
            
            
            (61,279
            )
            
            
            (172,280
            )Net
                increase in cash
            
            $
            84,560
            
            
            $
            8,796





Our
      primary sources of cash are from premiums, professional fees, and income
      received on investments. Cash is used primarily for claim and benefit payments
      and operating expenses. We manage our cash, investments and capital structure
      so
      we are able to meet the short- and long-term obligations of our business while
      maintaining financial flexibility and liquidity. We forecast, analyze and
      monitor our cash flows to enable investment management and financing within
      the
      confines of our investment policies.





Cash
      flows from operating activities decreased to $109.5 million in 2007 from $140.1
      million during 2006.  This decrease is mostly due to the timing of tax
      payments and a $14.9 million decrease in operating cash flows from our PDP
      plans
      during 2007 compared to 2006, which was primarily related to the timing of
      PDP
      activity during the year.  We continue to have negative cash flow
      related to our Basic Plan due to the timing of reimbursement from CMS for our
      reimbursable low-income subsidy and reinsurance.  These costs should
      be fully reimbursed after CMS performs their year-end reconciliation of 2007,
      which is expected to be in the third quarter of 2008.  We received an
      interim payment from CMS of $36.5 million, which represented our projected
      cash
      shortfall through June 30, 2007; however, we expect a total funding deficit
      of
      approximately $50-$70 million for 2007.  While we are receiving our
      full payments from CMS related to our Enhanced Plan, we expect to incur losses
      of $55.3 million during the year on this product.  We believe that our
      operating cash flows and available cash reserves will be sufficient to cover
      any
      negative cash flows related to our Basic Plan and Enhanced Plan.  See
      Note 4, "Premium Deficiency Reserves", in the Notes to Condensed Consolidated
      Financial Statements for further discussion of our Enhanced Plan.





Net
      cash
      used for investing activities during 2007 included 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
      period was a decrease in investments due to the timing of purchasing and selling
      investments.








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**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 109.3494 shares of our common stock before
      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.  Beginning December 2003 and for
      each subsequent period, the market price of our common stock has exceeded 120%
      of the conversion price for at least 20 trading days in a period of 30
      consecutive trading days.  The conversion rate is subject to certain
      adjustments.  This conversion rate represents a conversion price of
      $9.145 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.  We can redeem the
      debentures for cash beginning on or after March 20, 2008.





During
      the first quarter of 2006, a debenture holder (holder) converted $500,000 in
      debentures for approximately 54,000 shares of common stock.  During
      the third quarter of 2006, we entered into a privately negotiated transaction
      with a holder pursuant to which the holder converted $8.0 million in debentures
      for approximately 875,000 shares of common stock in accordance with the
      indenture governing the debentures. During the first quarter of 2007, we entered
      into one privately negotiated transaction with a holder pursuant to which the
      holder converted an aggregate of $21.7 million in debentures for approximately
      2.4 million shares of common stock in accordance with the indenture governing
      the debentures. In addition, two other holders also converted $1.5 million
      in
      debentures for approximately 168,000 shares of common stock.   As
      a result of these transactions, we expensed accrued and prepaid interest of
      $434,000 and $176,000 in the first six months of 2007 and the year ended 2006,
      respectively, and deferred financing costs of $187,000 and $91,000 in the first
      six months of 2007 and the year ended 2006, respectively.  At June 30,
      2007, we had outstanding $20.2 million in aggregate principal amount of our
      21⁄4%
      senior convertible debentures due March 15, 2023.





**Revolving
      Credit Facility**





On
      March
      3, 2003, we entered into a revolving credit facility. Effective June 26, 2006,
      this facility was amended to extend the expiration from December 31, 2009 to
      June 26, 2011, increase the availability from $140.0 million to $250.0
      million and reduce the drawn and undrawn fees. The current incremental
      borrowing rate is LIBOR plus 0.60%.  The facility is available for
      general corporate purposes and at June 30, 2007, we had $35.0 million
      outstanding on this facility.





The
      credit facility is secured by guarantees by certain of our subsidiaries and
      a
      first priority security interest in: (i) all of 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, certain real property, equipment,
      contracts, trademarks, copyrights, patents, license rights and general
      intangibles) subject, in each case, to the exclusion of the capital stock of
      CII
      Financial, Inc. and certain other exclusions.





The
      revolving credit facility's covenants 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, make capital expenditures and otherwise restrict certain
      corporate activities.  Our ability to pay dividends, repurchase our
      common stock and prepay other debt is unlimited provided that we can still
      exceed a certain required leverage ratio after such transaction or any borrowing
      incurred as a result of such transaction.  In


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addition,
      we are required to comply with specified financial ratios as set forth in the
      credit agreement.  We believe that we were in compliance with all
      covenants of the credit agreement at June 30, 2007 and 2006.





**Sierra
      Share Repurchase Program**





From
      January 1, 2007 through June 30, 2007, we purchased 585,000 shares of our common
      stock in the open market for $21.1 million at an average cost per share of
      $36.04. Since the repurchase program began in early 2003 and through June 30,
      2007, we purchased, in the open market or through negotiated transactions,
      29.2
      million shares, adjusted for the two for one stock split effective December
      30,
      2005, for $651.9 million at an average cost per share of $22.29.  On
      January 25, 2007, our Board of Directors authorized an additional $50.0 million
      in share repurchases.  At June 30, 2007, $53.1 million was still
      available under the Board of Directors' authorized plan.  The
      repurchase programs have no stated expiration date.  Our revolving
      credit facility, as amended, currently allows for unlimited stock repurchases
      based on meeting a certain covenant ratio; however, we halted our repurchase
      program pending the UnitedHealth Group merger.





**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 had restricted
      assets on deposit in various states totaling $16.7 million at June 30, 2007.
      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.  We surrendered
      our HMO license in Texas during the quarter and are no longer required to
      maintain a deposit.  We believe we are in material compliance with our
      regulatory requirements.





Of
      the
      $143.5 million in cash and cash equivalents held at June 30, 2007, $136.4
      million was designated for use only by the regulated
      subsidiaries.  Amounts are available for transfer to the parent
      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 parent company will not receive dividends from its regulated
      subsidiaries if such dividend payment would cause a violation of statutory
      net
      worth and reserve requirements.





**Obligations
      and Commitments**





We
      believe that funds from future operating cash flows, cash and investments and
      funds available under our credit agreement will be sufficient for future
      operations and commitments and for capital acquisitions and other strategic
      transactions within the limits of the Merger Agreement.





For
      additional information regarding our estimated contractual obligations and
      commitments at December 31, 2006, see "Contractual Obligations, Commitments
      and
      Off-Balance Sheet Arrangements" included in the "Liquidity and Capital
      Resources" section of our 2006 Annual Report on Form 10-K filed with the
      Securities and Exchange Commission on February 27, 2007.





**Recently
      Issued Accounting Standards**





In
      June
      2006, the FASB issued FASB Interpretation No. 48, "Accounting for Uncertainty
      in
      Income Taxes - an Interpretation of FASB Statement No. 109" (FIN
      48).  FIN 48 clarifies the accounting for uncertainty in income taxes
      recognized in an enterprise's financial statements in accordance with Statement
      of Financial Accounting Standards No. 109, "Accounting for Income Taxes"*.*FIN 48 prescribes a recognition threshold and measurement attribute
      for the
      financial statement recognition and measurement of a tax position taken or
      expected to be taken in a tax return. FIN 48 also provides guidance on
      derecognition, classification, interest and penalties, accounting in interim
      periods, disclosure, and transition.  On January 1, 2007, we adopted
      FIN 48.  Applying
      the
      provisions of FIN


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48
      to all
      tax positions resulted in a cumulative effect adjustment to beginning retained
      earnings in the amount of $4.3 million.  For more information on the
      adoption of FIN 48, see Note 11, "Income Taxes", in the Notes to Condensed
      Consolidated Financial Statements.





In
      September 2006, the FASB issued Statement of Financial Accounting Standards
      No.
      157, "Fair Value Measurements" (SFAS 157). SFAS 157 defines fair value,
      establishes a framework for measuring fair value in generally accepted
      accounting principles, and expands disclosures about fair value measurements.
      SFAS 157 applies only to other accounting pronouncements that require or permit
      fair value measurements.   SFAS 157 is effective for fiscal years
      beginning after November 15, 2007. We
      do not believe theadoption
      ofSFAS
      157willhavea
      material impactonourconsolidated financial position,results of operations,
      or cash flows.





In February
      2007, the FASB issued Statement of Financial Accounting Standards No. 159,
      "The Fair Value Option for Financial Assets and Financial Liabilities -
      Including an Amendment of FASB Statement No. 115" (SFAS 159). SFAS 159
      would create a fair value option of accounting for qualifying financial assets
      and liabilities under which an irrevocable election could be made at inception
      to measure such assets and liabilities initially and subsequently at fair value,
      with all changes in fair value reported in earnings.  SFAS 159 is
      effective as of the beginning of the first fiscal year beginning after November
      15, 2007. We are currently evaluating the impact that the adoption of SFAS
      159 will have on our consolidated financial position, results of operations
      or
      cash flows.





**Ratings**





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





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





Standard
                & Poor's Corp. (3)Rating
            RankingCounterparty
                credit rating
            BB+
                Speculative
            11th
                of 22Senior
                convertible debentures
            BB+
                Speculative
            11th
                of 22







(1)
      Under
      review with positive implications. (2) Rating watch positive.  (3)
      Credit watch with positive implications.





The
      financial strength ratings reflect the opinion of each rating agency on our
      operating performance and ability to meet obligations to policyholders, and
      are
      not evaluations directed toward the protection of investors in our common stock
      or senior convertible debentures.


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**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,
      change in provider contracts, increases in pharmacy and other medical costs,
      utilization changes and catastrophic items, which could, in turn, result in
      medical cost increases equaling or exceeding premium increases.





**Critical
      Accounting Policies and Estimates**





We
      prepared our condensed consolidated financial statements in conformity with
      accounting principles generally accepted in the United States of
      America.  In preparing these condensed consolidated 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 disclosure of our contingent assets and liabilities.  We base our
      assumptions and estimates primarily on historical experience and trends and
      factor in known and projected trends.  On an on-going basis, we
      re-evaluate our selection of assumptions and the method of calculating our
      estimates.  Actual results, however, may materially differ from our
      calculated estimates and this difference would be reported in our current
      operations.  Our critical accounting policies and estimates have been
      reviewed by the Audit Committee of our Board of Directors.





For
      a
      more detailed description of all our critical accounting policies and estimates,
      see Part II, Item 7 of our 2006 Annual Report on Form 10-K.  As of
      June 30, 2007, our critical accounting policies have not changed from those
      described in our 2006 Annual Report on Form 10-K.  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 2006 Annual Report on Form 10-K.


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**Item
      3. Quantitative and Qualitative Disclosures About Market
      Risk**





At
      June
      30, 2007, we had unrealized holding losses on available for sale investments
      of
      $3.3 million, net of tax, compared to unrealized holding losses of $1.9 million,
      net of tax, at December 31, 2006.  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.





At
      June
      30, 2007, we had outstanding $20.2 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 borrowing rate
      on our revolving credit facility is currently LIBOR plus 0.60%.  At
      June 30, 2007, we had drawn $35.0 million on this facility.





At
      June
      30, 2007, we had approximately $78.5 million invested in trust deed mortgage
      notes and real estate joint ventures. Trust deed mortgage notes and real estate
      joint ventures are classified and accounted for as other
      investments.  Our investments in trust deed mortgage notes are with
      numerous independent borrowers and are secured by real estate in several states.
      All of our trust deed mortgage notes require interest only payments with a
      balloon payment of the principal at maturity. Loan to value ratios for these
      investments are typically based on appraisals or other market data obtained
      at
      the time of loan origination and may not reflect subsequent changes in value
      estimates.  As a result, there may be less security than anticipated
      at the time the loan was originally made. If the values of the underlying assets
      decrease and default occurs, we may not recover the full amount of the loan
      or
      any interest due.  Our investments in real estate joint ventures
      consist of three independent projects and are secured by real estate in
      California, Nevada, and Utah.  We have made assessments as to the
      value and recoverability of our investments in our trust deed mortgage notes
      and
      real estate joint ventures.  While there has been a national market
      decline in real estate values, we believe that the fair market values of the
      underlying assets of our investments in trust deed mortgage notes and real
      estate joint ventures remain higher than their stated book value at June 30,
      2007.





**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 at 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.  Management is required to apply its judgment in evaluating
      the cost-benefit relationship of such controls and procedures.





*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.


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**Part
      II.  Other Information**





**Item
      1. Legal Proceedings**





*Litigation
      and Legal Matters.* Although we have not been sued, we were identified in
      discovery submissions in pending class action litigation against major managed
      care companies, as having allegedly participated in an unlawful conspiracy
      to
      improperly deny, diminish or delay payments to physicians. In Re: Managed Care
      Litigation, MDL No. 1334 (S.D.Fl.).





Beginning
      in 1999, a series of class action lawsuits were filed against many major firms
      in the health benefits business alleging an unlawful conspiracy to deny,
      diminish or delay payments to physicians. We have not been named as a defendant
      in these lawsuits. A multi-district litigation panel has consolidated some
      of
      these cases in the United States District Court for the Southern District of
      Florida, Miami Division. In the lead case, known as *Shane*, the amended
      complaint alleges multiple violations under the Racketeer Influenced and Corrupt
      Organizations Act (RICO). The suit seeks injunctive, compensatory and equitable
      relief as well as restitution, costs, fees and interest payments. On April
      7,
      2003, the United States Supreme Court determined that certain claims against
      certain defendants should be arbitrated.





Subsequent
      lower court rulings have further resolved which of the plaintiffs' claims are
      subject to arbitration. In 2004, the Court of Appeals for the Eleventh Circuit
      upheld a district court ruling certifying a plaintiff class in the
*Shane* case. In February 2005, the district court determined to
      bifurcate the case, holding a trial phase limited to liability issues, and
      a
      second, if necessary, regarding damages.





Aetna,
      Inc., CIGNA, the Prudential Insurance Company of America, Wellpoint Inc., Health
      Net Inc. and Humana Inc. entered into settlement agreements, which have been
      approved by the district court.  On January 31, 2006, the trial court
      granted summary judgment on all claims to defendant PacifiCare Health Systems,
      Inc. (PacifiCare), finding that plaintiffs had failed to provide documents
      or
      other evidence showing that PacifiCare agreed to participate in the alleged
      conspiracy.   On June 19, 2006, the trial court granted summary
      judgment on all remaining claims against the two remaining defendants,
      UnitedHealth Group, Inc. and Coventry Health Care, Inc., because the plaintiffs
      had not submitted evidence that would allow a jury to find reasonably that
      either had been part of a conspiracy to underpay doctors or that either had
      aided or abetted alleged RICO violations.    Plaintiffs
      appealed this decision; however, on June 13, 2007 the Eleventh Circuit Court
      of
      Appeals issued an opinion affirming the trial court’s
      decision.    Plaintiffs in the *Shane* proceeding had
      stated their intention to introduce evidence at trial concerning Sierra and
      other parties not named as defendants in the litigation.




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 or other damages that are not covered
      by
      insurance.  These actions are in various stages of litigation and some
      may ultimately be brought to trial.






For
      all
      claims that are considered probable and for which the amount of loss can be
      reasonably estimated, we accrued amounts we believe to be appropriate, based
      on
      information presently available.  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 for certain
      claims and litigation cannot be reasonably estimated or is not considered
      probable.  However, the ultimate resolutions of these pending legal
      proceedings are not expected to have a material adverse effect on our financial
      condition.




On
      March
      19, 2007, a purported class action complaint, styled Edward Sara, on behalf
      of
      himself and all others similarly situated v. Sierra Health Services, Inc.,
      Anthony M. Marlon, Charles L. Ruthe, Thomas Y. Hartley, Anthony L. Watson,
      Michael E. Luce and Albert L. Greene, was filed in the Eighth Judicial District
      Court for the State of Nevada in and for the County of Clark.  The
      complaint names us and each of our directors as defendants (collectively, the
      “defendants”), and was filed by a purported stockholder of ours.  The
      complaint alleges, among other things, that the defendants breached and/or
      aided
      the other defendants’ breaches of their fiduciary duties of


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loyalty,
      due care, independence, good faith and fair dealing in connection with the
      merger contemplated with UnitedHealth Group, the defendants breached their
      fiduciary duty to secure and obtain the best price reasonably available for
      us
      and our shareholders, and the defendants are engaging in self-dealing and unjust
      enrichment.  The complaint seeks, among other relief, (i) an
      injunction prohibiting the defendants from consummating the merger unless and
      until we adopt and implement a procedure or process to obtain the highest
      possible price for shareholders and (ii) the imposition of a constructive trust
      upon any benefits improperly received by the defendants as a result of the
      alleged wrongful conduct.





On
      June 4, 2007, we and the defendants reached an agreement in principle to
      settle the lawsuit.  As part of the settlement, the defendants deny
      all allegations of wrongdoing, and we agreed to make certain additional
      disclosures in connection with the merger.  The settlement will be
      subject to certain conditions, including court approval following notice to
      members of the proposed settlement class and consummation of the merger. If
      finally approved by the court, the settlement will resolve all of the claims
      that were or could have been brought on behalf of the proposed settlement class
      in the action being settled, including all claims relating to the merger,
      fiduciary obligations in connection with the merger, negotiations in connection
      with the merger and any disclosure made in connection with the merger. In
      addition, in connection with the settlement, the parties have agreed that,
      subject to approval of the court, we will pay plaintiffs’ counsel attorneys’
fees and expenses in the amount of $485,000. The merger may be consummated
      prior
      to final court approval of the settlement. The settlement will not affect the
      amount of merger consideration to be paid in the merger or any other provision
      of the merger agreement.





**Item
      1A. Risk Factors**





As
      of
      June 30, 2007, we have additional risk factors that are not included in those
      described in our 2006 Annual Report on Form 10-K. For a detailed discussion
      of
      all other risks associated with an investment in our securities, see "Risk
      Factors" in Part 1, Item 1A of our 2006 Annual Report on Form 10-K.





**There
      can be no assurance that the pending merger with UnitedHealth Group will be
      completed.**





Our
      pending merger with UnitedHealth Group is subject to a number of conditions
      including receiving the approval of various state regulatory agencies and the
      expiration of the applicable waiting period under the Hart-Scott-Rodino
      Antitrust Improvements Act of 1976, as amended.  We understand that
      the American Medical Association, Consumers for Health Care Choices and the
      American Hospital Association have all contacted the Department of Justice
      and
      expressed their opposition to the merger on antitrust grounds.  While
      we and UnitedHealth Group expect to obtain all required regulatory approvals
      and
      to have the waiting period expire in the ordinary course, we cannot grant
      assurances that the Department of Justice or one or more of the state regulatory
      agencies will not impose conditions on the completion of the merger or require
      changes in the transaction, which could result in the conditions to the merger
      not being satisfied.




**Whether
      or not the proposed merger with UnitedHealth Group is completed, the
      announcement and pendency of the proposed merger could cause disruptions in
      our
      businesses, which could have a material adverse effect on our operating results,
      financial condition and cash flows.**




Whether
      or not the proposed merger with UnitedHealth Group is completed, the
      announcement and pendency of the proposed merger could cause disruptions in
      our
      businesses. Specifically:




•
            
            current
                and prospective employees may experience uncertainty about their
                future
                roles with the combined company, which might adversely affect our
                ability
                to retain key managers and other
                employees;




•
            
            the
                merger agreement with UnitedHealth Group imposes certain restrictions
                on
                the operations of our business until completion of the merger;
                and




•
            
            current
                or prospective customers may experience uncertainty about the consequences
                of the merger to them resulting in possible loss of their
                business.





**Our
      actual experience for our Enhanced Plan offered in January 2007 has varied
      materially from the actuarial assumptions used to develop the plan design for
      our 2007 bid.  As a result, we have a $39.3 million premium deficiency
      reserve at June 30, 2007 based on our best estimate of the most current
      available data.  If**


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**the
      assumptions used in our estimate are incorrect, it could materially adversely
      affect our operating results, financial position and cash
      flows.**





Our
      bid
      proposal for our Enhanced Plan was based upon actuarial assumptions developed
      by
      independent actuaries using their national database regarding membership
      characteristics, estimated drug utilization and other factors.  These
      actuarial assumptions were considered reasonable based upon the facts and
      circumstances known at the time we submitted our bid to CMS.  However,
      our claims experience to date has varied materially from the actuarial
      assumptions.  As a result, we have a $39.3 million premium deficiency
      reserve at June 30, 2007 based on our best estimate of the most current
      available data.  If the assumptions used in our estimate are
      incorrect, our operating results, financial position and cash flows for the
      remainder of 2007 could be further materially adversely affected.




**Item
        2. Unregistered Sales of Equity Securities and Use of
        Proceeds**
  (c)
              Below,
                  is a summary of stock repurchases for the six months ended June
                  30,
                  2007.  See Note 8, "Share Repurchases", of our Notes to
                  Condensed Consolidated Financial Statements for information regarding
                  our
                  stock repurchase plan.
  Period
              
              Total
                  Number
                Of
                  Shares
                Repurchased
                  (1)
              
              
              Average
                Price
                  Paid
                Per
                  Share
              
              
              Total
                  Number
                Of
                  Shares Purchased
                As
                  Part Of Publicly
                Announced
                  Plan
                Or
                  Program
              
              
              Approximate
                  Dollar
                Value
                  Of Shares
                That
                  May Yet Be
                Purchased
                  Under
                The
                  Plan (2)*(In
                  thousands, except per share data)*Beginning
                  approximate dollar value of shares that may yet be
                  purchased
              
              
              
              
              
              $
              24,142January
                  1, 2007 – January 31, 2007
              
              
              500
              
              
              $
              35.80
              
              
              
              500
              
              
              
              56,251February
                  1, 2007 – February 28, 2007
              
              
              85
              
              
              
              37.45
              
              
              
              85
              
              
              
              53,070March
                  1, 2007 – March 31, 2007
              
              
              3⁄4
              
              
              
              3⁄4
              
              
              
              3⁄4
              
              
              
              53,070April
                  1, 2007 – April 30, 2007
              
              
              3⁄4
              
              
              
              3⁄4
              
              
              
              3⁄4
              
              
              
              53,070May
                  1, 2007 – May 31, 2007
              
              
              3⁄4
              
              
              
              3⁄4
              
              
              
              3⁄4
              
              
              
              53,070June
                  1, 2007 – June 30, 2007
              
              
              3⁄4
              
              
              
              3⁄4
              
              
              
              3⁄4
              
              
              
              53,070
 
 (1)
              Repurchases
                  were made pursuant to a 10b5-1
                  plan.
 
 (2)
              At
                  January 1, 2007, $24.1 million remained available for purchase
                  under
                  previously approved plans. On January 25, 2007, our Board of Directors
                  authorized an additional $50.0 million in share
                  repurchases.  The repurchase program has no stated expiration
                  date; however we have halted our repurchase program pending the
                  UnitedHealth Group
                  merger.


34
 Table
          of Contents




(d)
            Below,
                is a summary of 21⁄4% senior convertible debenture conversions for the six
                months ended June 30, 2007.  See Note 6, "Long-Term Debt", of
                our Notes to Condensed Consolidated Financial Statements for information
                regarding our senior convertible
                debentures.




Period
            
            Total
                Dollar Value Of Debentures Converted
            
            
            Average
                Price
              Paid
                Per
              Debenture
            
            
            Total
                Dollar Value
              Of
                Debentures
              Purchased
              As
                Part Of Publicly
              Announced
                Plan
              Or
                Program
            
            
            Approximate
                Dollar
              Value
                Of Debentures
              That
                May Yet Be
              Purchased
                Under
              The
                PlanJanuary
                1, 2007 – January 31, 2007
            
            $
            21,720,000
            
            
            109.35
                shares of common stock for each $1,000 principal amount of
                debentures
            
            
            none
            
            
            noneFebruary
                1, 2007 – February 28, 2007
            
            
            3⁄4
            
            
            
            3⁄4
            
            
            
            3⁄4
            
            
            
            3⁄4March
                1, 2007 – March 31, 2007
            
            
            1,536,000
            
            
            109.35
                shares of common stock for each $1,000 principal amount of
                debentures
            
            
            none
            
            
            noneApril
                1, 2007 – April 30, 2007
            
            
            3⁄4
            
            
            
            3⁄4
            
            
            
            3⁄4
            
            
            
            3⁄4May
                1, 2007 – May 31, 2007
            
            
            3⁄4
            
            
            
            3⁄4
            
            
            
            3⁄4
            
            
            
            3⁄4June
                1, 2007 – June 30, 2007
            
            
            3⁄4
            
            
            
            3⁄4
            
            
            
            3⁄4
            
            
            
            3⁄4





**Item
      3.** **Defaults Upon Senior
      Securities**





None


**Item
      4.** **Submission Of Matters To A
      Vote Of Security Holders**





Sierra
      held a special meeting of stockholders to consider and vote upon the proposed
      merger with UnitedHealth Group Incorporated on June 27, 2007 in Las Vegas,
      Nevada.  The stockholders approved the merger based on the voting
      results below:





BrokerFor
            Against
            Abstain
            Non-votes40,959,541
            113,920
            22,022
            0





**Item
      5.** **Other
      Information**





None





**Item
      6. Exhibits**





(10.9)
            
            Sierra
                Health Services, Inc. Deferred Compensation Plan
                effective May 1, 1996, as Amended and Restated Effective January
                1,
                2006.(31.1)
            
            Rule
                13a – 14(a) or 15d – 14(a) Certification of Chief
                Executive Officer.(31.2)
            
            Rule
                13a – 14(a) or 15d – 14(a) Certification of Chief
                Financial Officer.(32.1)
            
            Certification
                pursuant to 18 U.S.C. Section 1350 as
                adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
                of
                Principal Executive Officer.(32.2)
            
            Certification
                pursuant to 18 U.S.C. Section 1350 as
                adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
                of
                Principal Financial Officer.





35
 Table
          of Contents


**Signatures**





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





SIERRA
                HEALTH SERVICES, INC.
              Registrant
              By:
                /s/ MARC R. BRIGGS
              Marc
                R. Briggs
              Senior
                Vice President of Finance,
              Chief
                Financial Officer and Treasurer
              (Principal
                Financial and Accounting Officer)




Date:
      July 31, 2007







36