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

                                  Form 10-Q**
(Mark One)

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

For the quarterly period ended       September 30, 2002                         

                                       OR

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

For the transition period from  ______________________ to ______________________

Commission File Number 1-8865

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

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

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

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

                                       N/A

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

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

     As of November  11,  2002,  there were  29,546,000  shares of common  stock
outstanding.

                  **SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES

             FORM 10-Q FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002

                                      INDEX**Page No.**Part I - FINANCIAL INFORMATION**

      Item 1.     Financial Statements

                  Condensed Consolidated Balance Sheets -
                   September 30, 2002 and December 31, 2001..................................................    3

                  Condensed Consolidated Statements of Operations -
                   three and nine months ended September 30, 2002 and 2001...................................    4

                  Condensed Consolidated Statements of Cash Flows -
                   nine months ended September 30, 2002 and 2001.............................................    5

                  Notes to Condensed Consolidated Financial Statements.......................................    6

      Item 2.     Management's Discussion and Analysis of
                   Financial Condition and Results of Operations.............................................   16

      Item 3.     Quantitative and Qualitative Disclosures
                   about Market Risk.........................................................................   30

      Item 4.     Controls and Procedures....................................................................   30

**Part II - OTHER INFORMATION**

      Item 1.     Legal Proceedings..........................................................................   31

      Item 2.     Changes in Securities and Use Of Proceeds..................................................   31

      Item 3.     Defaults Upon Senior Securities............................................................   31

      Item 4.     Submission of Matters to a Vote of Security Holders........................................   31

      Item 5.     Other Information..........................................................................   31

      Item 6.     Exhibits and Reports on Form 8-K...........................................................   31

Signatures...................................................................................................   33

Certifications...............................................................................................   34

                         **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)

                                     ASSETS
                                                                                        September 30,         December 31,
                                                                                            20022001**

Current Assets:
     Cash and Cash Equivalents..............................................             $   93,779           $  115,754
     Investments............................................................                394,596              260,762
     Accounts Receivable(Less Allowance for Doubtful
         Accounts; 2002 - $10,912; 2001 - $12,655)..........................                 23,099               26,003
     Military Accounts Receivable ..........................................                 41,702               40,166
     Current Portion of Deferred Tax Asset..................................                 49,905               35,869
     Current Portion of Reinsurance Recoverable.............................                 81,603               96,762
     Prepaid Expenses and Other Current Assets..............................                 26,452               31,640
     Assets of Discontinued Operations......................................                 20,767               28,404
                                                                                          ---------            ---------
         Total Current Assets...............................................                731,903              635,360

Property and Equipment, Net.................................................                 62,857              141,451
Long-Term Investments.......................................................                  2,727                8,434
Restricted Cash and Investments.............................................                 34,846               26,011
Reinsurance Recoverable, Net of Current Portion.............................                103,967              123,383
Deferred Tax Asset, Net of Current Portion..................................                 36,076               77,036
Goodwill ...................................................................                 14,782               14,782
Other Assets................................................................                 42,419               43,505
                                                                                          ---------            ---------
TOTAL ASSETS................................................................             $1,029,577           $1,069,962
                                                                                          =========            =========

                      **LIABILITIES AND STOCKHOLDERS' EQUITY**

Current Liabilities:
     Accrued Liabilities....................................................             $   72,255           $   53,546
     Trade Accounts Payable.................................................                 19,178               21,578
     Accrued Payroll and Taxes..............................................                 27,653               14,390
     Medical Claims Payable.................................................                101,315               81,662
     Current Portion of Reserve for Losses and Loss Adjustment Expense......                167,281              142,342
     Unearned Premium Revenue...............................................                 30,138               52,919
     Military Health Care Payable...........................................                 76,104               77,261
     Current Portion of Long-Term Debt......................................                 51,617                1,612
     Liabilities of Discontinued Operations.................................                 43,895               83,931
                                                                                          ---------            ---------
         Total Current Liabilities..........................................                589,436              529,241
Reserve For Losses and
  Loss Adjustment Expense, Net of Current Portion...........................                231,495              243,363
Long-Term Debt, Net of Current Portion......................................                 16,235              181,759
Other Liabilities...........................................................                 38,900               19,080
                                                                                          ---------            ---------
TOTAL LIABILITIES...........................................................                876,066              973,443
                                                                                          ---------            ---------

Stockholders' Equity:
  Preferred Stock, $.01 Par Value, 1,000
       Shares Authorized; None Issued or Outstanding
  Common Stock, $.005 Par Value, 60,000 Shares Authorized;
       Shares Issued: 30,703 and 29,648 issued as of 2002
        and 2001, respectively..............................................                    155                 148
  Additional Paid-in Capital................................................                196,636              181,076
  Deferred Compensation for Restricted Stock................................                   (620)              (1,058)
  Treasury Stock: 2002 - 1,163; 2001 - 1,523 Common Stock Shares............                (17,148)             (22,789)
  Accumulated Other Comprehensive Gain (Loss)...............................                  2,031               (5,636)
  Accumulated Deficit.......................................................                (27,543)             (55,222)
                                                                                          ---------            ---------
         Total Stockholders' Equity.........................................                153,511               96,519
                                                                                          ---------            ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY..................................             $1,029,577           $1,069,962
                                                                                          =========            =========

     See accompanying notes to condensed consolidated financial statements.

                  **SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                      (In thousands, except per share data)
                                   (Unaudited)

                                                                Three Months Ended                        Nine Months Ended
                                                                   September 30,                            September 30,
                                                              2002200120022001**

Operating Revenues:
   Medical Premiums....................................      $217,995         $184,402            $  636,047            $522,806
   Military Contract Revenues..........................       100,366           85,499               279,560             255,497
   Specialty Product Revenues..........................        50,057           49,447               140,434             135,774
   Professional Fees...................................         7,819            6,981                23,045              22,056
   Investment and Other Revenues.......................         5,087            4,525                14,786              16,276
                                                              -------          -------             ---------             -------
         Total.........................................       381,324          330,854             1,093,872             952,409
                                                              -------          -------             ---------             -------

Operating Expenses:
   Medical Expenses....................................       178,958          156,307               530,402             443,595
   Military Contract Expenses..........................        96,629           83,561               268,845             250,332
   Specialty Product Expenses..........................        52,843           50,144               147,246             139,570
   General, Administrative and Marketing Expenses......        33,333           30,084                96,065              86,701
                                                              -------          -------             ---------             -------
         Total ........................................       361,763          320,096             1,042,558             920,198
                                                              -------          -------             ---------             -------

Operating Income from Continuing Operations............        19,561           10,758                51,314              32,211

Interest Expense and Other, Net........................        (1,312)          (3,888)               (6,142)            (14,450)
                                                              -------          -------             ---------             -------

Income from Continuing Operations Before Taxes.........        18,249            6,870                45,172              17,761

Income Tax Provision...................................        (6,114)          (2,298)              (15,133)             (5,946)
                                                              -------          -------             ---------             -------

Net Income from Continuing Operations..................        12,135            4,572                30,039              11,815

Income (Loss) from Discontinued Operations (Note 3)....         1,928          (12,126)                1,928             (13,369)
                                                              -------          -------             ---------             -------

Net Income (Loss)......................................      $ 14,063         $ (7,554)           $   31,967            $ (1,554)
                                                              =======          =======             =========             =======

Earnings per Common Share:
-------------------------
Net Income from Continuing Operations..................          $.42            $ .16                 $1.05               $ .43
Income (Loss) from Discontinued Operations.............           .06             (.43)                  .07                (.49)
                                                                  ---             ----                  ----                ----
   Net Income (Loss)...................................          $.48            $(.27)                $1.12               $(.06)
                                                                  ===             ====                  ====                ====

Earnings per Common Share Assuming Dilution:
-------------------------------------------
Net Income from Continuing Operations..................          $.38            $ .16                 $ .97               $ .42
Income (Loss) from Discontinued Operations.............           .06             (.42)                  .06                (.47)
                                                                  ---             ----                  ----                ----
   Net Income (Loss)...................................          $.44            $(.26)                $1.03               $(.05)
                                                                  ===             ====                  ====                ====

Weighted Average Common Shares Outstanding.............        29,166           27,851                28,489              27,619

Weighted Average Common Shares Outstanding
   Assuming Dilution...................................        31,756           29,270                30,994              28,316

     See accompanying notes to condensed consolidated financial statements.

                  **SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (In thousands)
                                   (Unaudited)

                                                                                        Nine Months Ended September 30,
                                                                                           20022001**

Cash Flows From Operating Activities:
   Net Income (Loss).......................................................             $  31,967            $ (1,554)
   Adjustments to Reconcile Net Income (Loss) to Net Cash
       Provided by Operating Activities:
          (Gain) Loss from Discontinued Operations.........................                (1,928)             13,369
          Depreciation and Amortization....................................                15,205              18,439
          Provision for Doubtful Accounts..................................                 2,321               1,899
          Deferred Compensation Expense....................................                   438
          (Gain) Loss on Property and Equipment Dispositions...............                   (80)              2,399
   Changes in Assets and Liabilities
          Deferred Tax Asset...............................................                29,653                 595
          Reinsurance Recoverable..........................................                34,575              (8,259)
          Accrued Payroll and Taxes........................................                12,095               3,001
          Medical Claims Payable...........................................                19,653               3,164
          Reserve for Losses and Loss Adjustment Expense...................                13,071              36,055
          Unearned Premium Revenue.........................................               (22,781)              9,648
          Other Assets and Liabilities.....................................                 5,752              10,291
                                                                                         --------           ---------
       Net Cash Provided by Operating Activities ..........................               139,941              89,047
                                                                                         --------           ---------

Cash Flows From Investing Activities:
   Capital Expenditures, Net of Dispositions...............................                (5,588)             (2,454)
   Changes in Investments..................................................              (110,281)               (839)
                                                                                         --------             -------
       Net Cash Used for Investing Activities..............................              (115,869)             (3,293)
                                                                                         --------             -------

Cash Flows From Financing Activities:
   Payments on Debt and Capital Leases.....................................               (42,630)            (74,255)
   Proceeds on Sale-Leaseback Deposit......................................                16,862               2,866
   Issuance of Stock in Connection with Stock Plans........................                10,193               2,180
                                                                                         --------             -------
       Net Cash Used for Financing Activities..............................               (15,575)            (69,209)
                                                                                         --------             -------

Net Cash Used for Discontinued Operations..................................               (30,472)            (26,414)
                                                                                         --------             -------

Net Decrease In Cash and Cash Equivalents..................................               (21,975)             (9,869)

Cash and Cash Equivalents at Beginning of Period...........................               115,754             157,564
                                                                                         --------             -------

Cash and Cash Equivalents at End Of Period.................................             $  93,779            $147,695
                                                                                         ========             =======

Supplemental Condensed Consolidated Continuing Operations                                **Nine Months Ended September 30,**
  Statements of Cash Flows Information:                                                     **20022001**
---------------------------------------------------------------------------
Cash Paid During the Period for Interest
   (Net of Amount Capitalized).............................................               $ 5,224             $14,423
Net Cash Received During the Period for Income Taxes.......................                13,019                 376

Non-cash Investing and Financing Activities:
   Retired Sale-Leaseback Assets, Liabilities
       and Financing Obligations (Note 6)..................................                89,751              10,626
   Debentures Exchanged....................................................                                    19,692

     See accompanying notes to condensed consolidated financial statements.

                  **SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

1.   Basis of Presentation

     The accompanying  unaudited  financial  statements include the consolidated
     accounts of Sierra Health  Services,  Inc.  ("Sierra",  a holding  company,
     together  with its  subsidiaries,  collectively  referred  to herein as the
     "Company").  All material  intercompany balances and transactions have been
     eliminated.   These  statements  have  been  prepared  in  conformity  with
     accounting  principles  generally  accepted in the United States of America
     and used in preparing the Company's annual audited  consolidated  financial
     statements but do not contain all of the information  and disclosures  that
     would be required in a complete set of audited financial  statements.  They
     should, therefore, be read in conjunction with the Company's annual audited
     consolidated  financial  statements and related notes thereto for the years
     ended  December  31,  2001 and 2000.  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 materially differ from estimates.

     Certain amounts in the Condensed  Consolidated Financial Statements for the
     three and nine months ended  September 30, 2001 have been  reclassified  to
     conform with the current year presentation.

2.   Asset Impairment, Restructuring, Reorganization and Other Costs

     The table  below  presents  a summary of asset  impairment,  restructuring,
     reorganization  and other cost activity for the periods  indicated that are
     included in general,  administrative and marketing  expenses.  Discontinued
     Texas HMO  health  care  operations  are  excluded  from this table and are
     discussed in Note 3.

                                                               **Restructuring
                                                                    and
                                                              ReorganizationOtherTotal**

      (In thousands)
      Balance, January 1, 2001.........................           $ 594                $4,447             $5,041

      Charges recorded.................................
      Cash used........................................            (594)                                    (594)
      Noncash activity.................................
      Changes in estimate..............................
                                                                   ----                 -----              -----
      Balance, December 31, 2001.......................               -                 4,447              4,447

      Charges recorded.................................
      Cash used........................................
      Noncash activity.................................                                  (500)              (500)
      Changes in estimate..............................
                                                                   ----                 -----              -----
      Balance, September 30, 2002......................           $   -                $3,947             $3,947
                                                                   ====                 =====              =====

     The  remaining  other costs of $3.9  million  are related to legal  claims.
     Management believes that the remaining reserves,  as of September 30, 2002,
     are  appropriate  and that no revisions to the  estimates  are necessary at
     this time.

3.   Discontinued Operations

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

     As part of the Company's continual evaluation of its remaining liabilities,
     it was  determined  during the second  quarter  of 2002,  that the  medical
     claims run out had been  favorable  compared  with the  Company's  original
     projection  and that legal and other costs were estimated to be higher than
     originally anticipated.  As a result, during the second quarter, we reduced
     our  medical  claims  payable  and  medical  expenses  by $5.0  million and
     increased  our  estimate of  accounts  payable  and other  liabilities  and
     related expenses by $5.0 million.  During the third quarter we continued to
     have favorable  medical claims  development  and reduced our medical claims
     payable estimate by $2.0 million. The adjustment resulted in income, net of
     tax, from discontinued operations of $1.3 million. See the discussion below
     for a  description  of the  $628,000  gain,  net  of  tax,  related  to the
     Kaiser-Texas mortgage loan.

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

                                                                       **Three  Months  Ended           Nine Months Ended
                                                                           September 30,                September 30,
                                                                        2002200120022001**
     (In thousands)
     Operating Revenues.........................................      $    84     $ 45,474          $ 3,837     $137,744
                                                                       ------      -------           ------      -------

      Medical Expenses..........................................       (2,165)      49,042           (5,975)     136,259
      General, Administrative and Marketing Expenses............          705        8,184            4,352       22,766
      Asset Impairment, Restructuring, Reorganization
         and Other Costs........................................                     6,550            5,000       (1,250)
      Interest Expense and Other, Net (including rental income).       (1,423)         (74)          (2,507)          66
                                                                       ------      -------           ------      -------

      Income (Loss) from Discontinued Operations Before Taxes...        2,967      (18,228)           2,967      (20,097)
      Income Tax (Expense) Benefit..............................       (1,039)       6,102           (1,039)       6,728
                                                                       ------      -------           ------      -------

      Net Income (Loss) from Discontinued Operations............      $ 1,928     $(12,126)         $ 1,928     $(13,369)
                                                                       ======      =======           ======      =======

     The table below  presents a summary of  discontinued  Texas HMO health care
     operations' asset impairment, restructuring,  reorganization and other cost
     activity for the periods indicated.

                                                          **Restructuring         Premium
                                             Asset             and            Deficiency
                                          ImpairmentReorganizationMaintenanceOtherTotal**

      (In thousands)
      Balance, January 1, 2001.......             -           $ 3,755          $ 9,278         $ 800         $13,833

      Charges recorded...............       $ 1,600             4,380              570                         6,550
      Cash used......................                          (3,716)          (1,478)         (800)         (5,994)
      Noncash activity...............        (1,600)             (125)                                        (1,725)
      Changes in estimate............                                           (7,800)                       (7,800)
                                             ------            ------           ------          ----          ------
      Balance, December 31, 2001.....             -             4,294              570             -           4,864

      Charges recorded...............
      Cash used......................                          (1,707)            (570)                       (2,277)
      Noncash activity...............
      Changes in estimate............                           5,000                                          5,000
                                             ------            ------           ------          ----          ------
      Balance, September 30, 2002....       $     -           $ 7,587          $     -         $   -         $ 7,587
                                             ======            ======           ======          ====          ======

     The remaining  restructuring and  reorganization  costs of $7.6 million are
     primarily  due to legal and  related  costs,  lease  and other  termination
     costs,  the  cost to  provide  malpractice  insurance  on our  discontinued
     affiliated medical groups and various other exit related costs.  Management
     believes  that the  remaining  reserves,  as of  September  30,  2002,  are
     appropriate and that no further revisions to the estimates are necessary at
     this time.  Based on the current  estimated  Texas HMO  healthcare  run-out
     costs and recorded  reserves,  we believe we have adequate funds  available
     and the ability to fund the anticipated obligations.

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

                                                                   **September 30,               December 31,
                                                                       20022001**

      (In thousands)
      **ASSETS**
       Cash and Cash Equivalents..............................       $      -                     $      -
       Accounts Receivable, Net...............................             31                        1,402
       Other Assets...........................................          4,593                        6,895
       Property and Equipment, Net............................         16,143                       20,107
                                                                      -------                      -------
      ASSETS OF DISCONTINUED OPERATIONS.......................         20,767                       28,404
                                                                      -------                      -------

      **LIABILITIES**
       Accounts Payable and Other Liabilities.................         13,846                       16,407
       Medical Claims Payable.................................          5,411                       36,567
       Unearned Premium Revenue...............................              -                           68
       Premium Deficiency Reserve.............................              -                        1,700
       Mortgage Loan Payable..................................         24,638                       29,189
                                                                      -------                      -------
      LIABILITIES OF DISCONTINUED OPERATIONS..................         43,895                       83,931
                                                                      -------                      -------

      NET LIABILITIES OF DISCONTINUED OPERATIONS..............       $(23,128)                    $(55,527)
                                                                      =======                      =======

     The assets and liabilities  above do not include an intercompany  liability
     of $30.5  million from Texas  Health  Choice,  L.C.,  ("TXHC") to Sierra at
     September  30, 2002.  The  liability is secured by certain of the TXHC land
     and buildings and has been eliminated upon consolidation.

     Property and equipment consists mainly of real estate properties located in
     the Dallas/Fort  Worth metroplex areas. TXHC acquired these properties from
     Kaiser Foundation Health Plan of Texas ("Kaiser-Texas"),  for $44.0 million
     as part of the  acquisition  of certain assets of  Kaiser-Texas  in October
     1998. In June 2000, as part of its restructuring and  reorganization of the
     Texas HMO health care  operations,  the Company  announced its intention to
     sell these  properties.  The real estate was written down to its  estimated
     fair  value  and the  Company  took an  asset  impairment  charge  of $27.0
     million.  The real estate is encumbered by a mortgage loan to Kaiser-Texas,
     which is guaranteed by Sierra.

     During 2001, Sierra participated in negotiations with Kaiser-Texas relating
     to the real estate properties and associated  mortgage loan to Kaiser-Texas
     along with other matters.  Sierra  reached an agreement with  Kaiser-Texas,
     effective December 31, 2001, whereby  Kaiser-Texas  forgave $8.5 million of
     the  outstanding  principal  balance of the mortgage  loan and extended the
     maturity  from  November 1, 2003 to November 1, 2006.  In exchange  for the
     consideration by Kaiser-Texas,  Sierra agreed to an unconditional  guaranty
     of the mortgage loan. In conjunction  with the agreement,  Sierra applied a
     $2.5 million  outstanding  receivable from  Kaiser-Texas to the outstanding
     balance of the mortgage loan on December 31, 2001.

     In accordance with accounting  principles  generally accepted in the United
     States of America,  the agreement was accounted for as a  restructuring  of
     debt.  In  the  transaction,  total  future  cash  payments  (interest  and
     principal)  were less than the balance of the mortgage  loan at the time of
     the agreement.  Accordingly, a gain on restructuring was recognized for the
     difference  and the carrying  amount of the  mortgage  loan is equal to the
     total future cash payments. Costs incurred in connection with the agreement
     were offset against the gain on  restructuring.  Effective January 1, 2002,
     all future cash payments,  including interest, related to the mortgage loan
     are  reductions  of the  carrying  amount;  therefore,  no future  interest
     expense will be recognized.

     During  the  third  quarter  of 2002,  TXHC  sold  two of the  real  estate
     properties for net proceeds of $3.6 million. As required under the terms of
     the mortgage  loan  agreement,  the  proceeds of the sale went  directly to
     Kaiser-Texas as payment on the mortgage loan.  Since the principal  payment
     resulted in a reduction of future  interest,  future  accrued  interest was
     reduced and a gain, net of tax, of $628,000 was recorded.  At September 30,
     2002,  the  mortgage  loan has a  carrying  value of $24.6  million,  which
     consists of a principal balance of $20.1 million and $4.5 million in future
     accrued interest.

4.   Earnings Per Share:

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

                                                                                           **Dilutive
                                                                           BasicStock OptionsDiluted**

     (In thousands, except per share data)
     **For the Three Months ended September 30, 2002:**
      Income from Continuing Operations                                    $12,135                            $12,135
      Weighted Average Common Shares Outstanding                            29,166           2,590             31,756
      Per Share Amount                                                        $.42                               $.38

     **For the Three Months ended September 30, 2001:**
     Income from Continuing Operations                                     $ 4,572                            $ 4,572
      Weighted Average Common Shares Outstanding                            27,851           1,419             29,270
      Per Share Amount                                                        $.16                               $.16

    **For the Nine Months ended September 30, 2002:**
      Income from Continuing Operations                                    $30,039                            $30,039
      Weighted Average Common Shares Outstanding                            28,489           2,505             30,994
      Per Share Amount                                                       $1.05                               $.97

     **For the Nine Months ended September 30, 2001:**
      Income from Continuing Operations                                    $11,815                            $11,815
      Weighted Average Common Shares Outstanding                            27,619             697             28,316
      Per Share Amount                                                        $.43                               $.42

5.   The  following  table  presents   comprehensive   income  for  the  periods
     indicated:

                                                             **Three Months Ended                    Nine Months Ended
                                                                September 30,                         September 30,
                                                           2002200120022001**

         (In thousands)
         Net Income (Loss)...........................    $14,063           $(7,554)           $31,967           $(1,554)
         Change in Accumulated Other
           Comprehensive Income, Net.................      6,555             4,779              7,667             3,190
                                                          ------            ------             ------            ------

         Comprehensive Income (Loss).................    $20,618           $(2,775)           $39,634           $ 1,636
                                                          ======            ======             ======            ======

     The  change  in  accumulated  other  comprehensive  income  is  all  due to
     unrealized gains in the available for sale investment portfolio.

6.   Sale-Leaseback

     On  December  28,  2000,  the Company  sold the  majority of its Las Vegas,
     Nevada,  administrative  and  medical  clinic  real  estate  holdings  in a
     sale-leaseback  transaction.  Due to continuing  involvement  as defined in
     Statement of Financial Accounting Standards No. 98, "Accounting for Leases"
     ("SFAS No. 98"),  the  transaction  did not qualify as a sale.  The Company
     recorded the transaction as a financing  obligation  offset by the mortgage
     notes receivable.

     During 2001, the Company received full payment on the outstanding  mortgage
     notes receivable  associated with three of the medical clinics.  During the
     first two  quarters of 2002,  the Company  received the deposit back on the
     three administrative buildings and full payment of the outstanding mortgage
     obligation on one of the remaining medical clinics.

     During the third quarter of 2002, the Company  received full payment on the
     remaining  outstanding  mortgage obligations on the four remaining clinics.
     The payment cured the continuing  involvement criteria from SFAS No. 98 and
     the  transaction  then qualified as a sale. To record the sale, the Company
     retired  the  assets  and their  associated  accumulated  depreciation  and
     financing obligation and recorded a deferred gain to be recognized over the
     remaining  13  year  term  of the  lease.  The  impact  of the  sale of the
     buildings  recorded  during 2002 was a net  reduction  of $68.8  million in
     property and equipment,  a net reduction of $89.8 million in the associated
     financing  obligation and a deferred gain of $21.0 million. As of September
     30,  2002,  the  entire  transaction  has  qualified  as a sale.  The total
     deferred  gain  recorded  on the  transaction  in 2001 and  2002 was  $25.7
     million;  $1.9 million will be recognized  annually over the remaining term
     of the lease.

7.   Segment Reporting

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

The Company  evaluates each  segment's  performance  based on segment  operating
profit.  Information concerning reportable segments for continuing operations is
as follows:

                                                 **Managed Care          Military            Workers'
                                                 and Corporate      Health Services      Compensation
                                                  OperationsOperationsOperationsTotal**

(In thousands)
**Three Months Ended September 30, 2002**
Medical Premiums..........................           $217,995                                              $  217,995
Military Contract Revenues................                               $100,366                             100,366
Specialty Product Revenues................              2,491                              $ 47,566            50,057
Professional Fees.........................              7,819                                                   7,819
Investment and Other Revenues.............                744                 624             3,719             5,087
                                                      -------             -------           -------         ---------
   Total Revenue..........................           $229,049            $100,990          $ 51,285        $  381,324
                                                      =======             =======           =======        ==========

Segment Operating Profit (Loss)...........           $ 15,824             $ 4,361          $   (624)       $   19,561
Interest Expense and Other, Net...........             (1,080)                 91              (323)           (1,312)
                                                      -------             -------           -------         ---------
Income (Loss) Before Income Taxes.........           $ 14,744            $  4,452          $   (947)       $   18,249
                                                     ========             =======           =======         =========

**Three Months Ended September 30, 2001**
Medical Premiums..........................           $184,402                                              $  184,402
Military Contract Revenues................                               $ 85,499                              85,499
Specialty Product Revenues................              1,908                              $ 47,539            49,447
Professional Fees.........................              6,981                                                   6,981
Investment and Other Revenues.............                296                 659             3,570             4,525
                                                      -------             -------           -------         ---------
   Total Revenue..........................           $193,587            $ 86,158          $ 51,109        $  330,854
                                                      =======             =======           =======         =========

Segment Operating Profit..................           $  6,888            $  2,597          $  1,273        $   10,758
Interest Expense and Other, Net...........             (3,412)                 31              (507)           (3,888)
                                                      -------             -------           -------         ---------
Income Before Income Taxes................           $  3,476            $  2,628          $    766        $    6,870
                                                      =======             =======           =======         =========

**Nine Months Ended September 30, 2002**
Medical Premiums..........................           $636,047                                              $  636,047
Military Contract Revenues................                               $279,560                             279,560
Specialty Product Revenues................              6,454                              $133,980           140,434
Professional Fees.........................             23,045                                                  23,045
Investment and Other Revenues.............              1,813               1,709            11,264            14,786
                                                      -------             -------           -------         ---------
   Total Revenue..........................           $667,359            $281,269          $145,244        $1,093,872
                                                      =======             =======           =======         =========

Segment Operating Profit..................           $ 37,758            $ 12,424          $  1,132        $   51,314
Interest Expense and Other, Net...........             (5,196)                 76            (1,022)           (6,142)
                                                      -------             -------           -------         ---------
Income Before Income Taxes................           $ 32,562            $ 12,500          $    110        $   45,172
                                                      =======             =======           =======         =========

**Nine Months Ended September 30, 2001**
Medical Premiums..........................           $522,806                                              $  522,806
Military Contract Revenues................                               $255,497                             255,497
Specialty Product Revenues................              5,813                              $129,961           135,774
Professional Fees.........................             22,056                                                  22,056
Investment and Other Revenues.............              2,508               1,821            11,947            16,276
                                                      -------            --------           -------         ---------
   Total Revenue..........................           $553,183            $257,318          $141,908        $  952,409
                                                      =======             =======           =======         =========

Segment Operating Profit..................           $ 20,249            $  6,986          $  4,976        $   32,211
Interest Expense and Other, Net...........            (13,194)                 14            (1,270)          (14,450)
                                                      -------             -------           -------         ---------
Income Before Income Taxes................           $  7,055            $  7,000          $  3,706        $   17,761
                                                      =======             =======           =======         =========

Goodwill  amortization  of  $201,000  and  $606,000  is  included as part of the
managed  care and  corporate  operations  segment  for the three and nine months
ended September 30, 2001, respectively.

8.   CII Financial Debentures

     In December 2000, CII Financial,  our  wholly-owned  workers'  compensation
     subsidiary,  commenced  an offer to exchange its  outstanding  subordinated
     debentures  for cash and/or new  debentures.  On May 7, 2001, CII Financial
     closed its exchange offer on $42.1 million of its outstanding  subordinated
     debentures.  CII Financial  purchased $27.1 million in principal  amount of
     subordinated  debentures for $20.0 million in cash and issued $15.0 million
     in new 9 1/2% senior  debentures,  due  September 15, 2004, in exchange for
     $15.0 million in  subordinated  debentures.  The remaining  $5.0 million in
     subordinated  debentures  were  paid at  maturity.  Since  the  time of the
     exchange,  Sierra has purchased  $1.0 million in  outstanding 9 1/2% senior
     debentures which are eliminated upon consolidation.

     The transaction was accounted for as a restructuring of debt, therefore all
     future cash payments, including interest, related to the debentures will be
     reductions of the carrying  amount of the debentures and no future interest
     expense will be recognized.  Accordingly, the 9 1/2% senior debentures have
     a carrying amount of $16.8 million,  which consists of principal  amount of
     $14.0 million and $2.8 million in future accrued interest.

     The 9 1/2% senior  debentures pay interest,  which is due  semi-annually on
     March 15 and  September 15,  commencing  on September 15, 2001.  The 9 1/2%
     senior  debentures  rank  senior  to  outstanding  notes  payable  from CII
     Financial to Sierra and CII  Financial's  guarantee  of Sierra's  revolving
     credit  facility.  The 9 1/2%  senior  debentures  may be  redeemed  by CII
     Financial at any time at premiums  currently at 105% and  declining to 100%
     for redemptions after April 1, 2004. In the event of a change in control of
     CII Financial (as defined), the holders of the 9 1/2% senior debentures may
     require  that  CII  Financial   repurchase  them  at  the  then  applicable
     redemption price, plus accrued and unpaid interest.

9.   Goodwill

     On January 1, 2002, the Company adopted  Statement of Financial  Accounting
     Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS No. 142").
     SFAS No. 142 requires,  among other things,  the discontinuance of goodwill
     amortization.  In addition,  the pronouncement  includes provisions for the
     reclassification  of certain existing  recognized  intangibles as goodwill,
     reassessment  of the  useful  lives  of  existing  recognized  intangibles,
     reclassification of certain intangibles out of previously reported goodwill
     and the  identification  of  reporting  units  for  purposes  of  assessing
     potential  future  impairments of goodwill.  SFAS No. 142 also required the
     Company to complete a transitional goodwill impairment test six months from
     the date of adoption and at least  annually  thereafter.  The net amortized
     goodwill  balance at December 31, 2001, was $14.8 million.  The Company has
     completed its  transitional  goodwill test and determined that the recorded
     goodwill was not impaired under the guidelines of the pronouncement.

                  **SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

The  following  table  presents  the  results  of our  operations  as though the
adoption of SFAS No. 142 occurred as of January 1, 2001:

                                                                       **Three Months Ended September 30, 2001
                                                                    As ReportedAdjustmentsAs Adjusted**

      (In thousands, except per share data)
      Net Income from Continuing Operations...................       $  4,572            $131         $  4,703
      Loss from Discontinued Operations.......................        (12,126)              -          (12,126)
                                                                      -------             ---          -------
              Net (Loss) Income...............................       $ (7,554)           $131         $ (7,423)
                                                                      =======             ===          =======

      Earnings per Common Share:
      -------------------------
      Net Income from Continuing Operations...................          $ .16            $.01            $ .17
      Loss from Discontinued Operations.......................           (.43)              -             (.43)
                                                                         ----            ----             ----
              Net (Loss) Income...............................          $(.27)           $.01            $(.26)
                                                                         ====            ====             ====

      Earnings per Common Share Assuming Dilution:
      -------------------------------------------
      Net Income from Continuing Operations...................          $ .16               -            $ .16
      Loss from Discontinued Operations.......................           (.42)              -             (.42)
                                                                         ----            ----             ----
              Net Loss........................................          $(.26)              -            $(.26)
                                                                         ====            ====             ====

                                                                       **Nine Months Ended September 30, 2001
                                                                    As ReportedAdjustmentsAs Adjusted**

      (In thousands, except per share data)
      Net Income from Continuing Operations...................       $ 11,815            $394         $ 12,209
      Loss from Discontinued Operations.......................        (13,369)              -          (13,369)
                                                                      -------             ---          -------
              Net (Loss) Income...............................       $ (1,554)           $394         $ (1,160)
                                                                      =======             ===          =======

      Earnings per Common Share:
      -------------------------
      Net Income from Continuing Operations...................          $ .43            $.01            $ .44
      Loss from Discontinued Operations.......................           (.49)              -             (.49)
                                                                         ----            ----             ----
              Net (Loss) Income...............................          $(.06)           $.01            $(.05)
                                                                         ====            ===              ====

      Earnings per Common Share Assuming Dilution:
      -------------------------------------------
      Net Income from Continuing Operations...................          $ .42            $.01            $ .43
      Loss from Discontinued Operations.......................           (.47)              -             (.47)
                                                                         ----            ----             ----
              Net (Loss) Income...............................          $(.05)           $.01            $(.04)
                                                                         ====             ===             ====

10.  Investments

Investments consist principally of U.S. Government and its agencies'  securities
and municipal  bonds, as well as corporate and  mortgage-backed  securities.  At
September 30, 2002, over 85% of our portfolio is invested in U.S. Government and
its agencies'  securities and municipal  bonds. All  non-restricted  investments
that are  designated as  available-for-sale  are  classified as current  assets.
These investments are available for use in the current operations  regardless of
contractual   maturity   dates.   Non-restricted   investments   designated   as
held-to-maturity are classified as current assets if expected maturity is within
one year of the balance sheet date. Otherwise,  they are classified as long-term
investments.  Realized  gains and  losses  are  calculated  using  the  specific
identification  method and are included in net income.  Unrealized holding gains
and losses on available-for-sale securities are included as a separate component
of stockholders' equity until realized.

Investments  that the Company has the  intention and ability to hold to maturity
are stated at amortized cost and categorized as held-to-maturity.  The remaining
investments have been categorized as available-for-sale  and are stated at their
fair value. Fair value is estimated primarily from published market values as of
the balance  sheet  date.  The  Company  does not have any other than  temporary
investment impairments.

11.  Recent Accounting Pronouncements

In April 2002, the FASB issued  Statement of Financial  Accounting  Standard No.
145,  "Recission  of FASB  Statements  No.  4,  44,  and 64,  Amendment  of FASB
Statement No. 13, and  Technical  Corrections"  ("SFAS No.  145").  SFAS No. 145
requires  that gains and losses from  extinguishment  of debt be  classified  as
extraordinary  items only if they meet the  criteria  in  Accounting  Principles
Board Opinion No. 30 ("Opinion No. 30").  Applying the provisions of Opinion No.
30  will  distinguish  transactions  that  are  part  of an  entity's  recurring
operations from those that are unusual and infrequent that meet the criteria for
classification  as an  extraordinary  item.  SFAS No. 145 is  effective  for the
Company  beginning  January 1, 2003, but the Company may adopt the provisions of
SFAS No. 145 prior to this date. The Company has not yet completed is evaluation
of the  impact  from SFAS No.  145 on its  financial  position  and  results  of
operations.

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

                **MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                       CONDITION AND RESULTS OF OPERATION****ITEM 2. MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS**

The following  discussion and analysis  provides  information  which  management
believes is relevant for an assessment  and  understanding  of 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, 2001,  and  "Management  Discussion  and
Analysis of Financial Condition and Results of Operations"  included in our 2001
annual report on Form 10-K filed with the Securities and Exchange  Commission on
March 29, 2002, and in  conjunction  with our unaudited  Condensed  Consolidated
Financial Statements and accompanying notes for the three and nine month periods
ended  September 30, 2002 and 2001,  included in this Form 10-Q. The information
contained below is subject to risk factors.  We urge you to review carefully the
section "Risk  Factors" in our 2001 Form 10-K for a more complete  discussion of
the  risks  associated  with an  investment  in our  securities.  See  "Note  on
Forward-Looking Statements and Risk Factors" under Item 1 of our 2001 Form 10-K.

This report 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.  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 identified by
their use of terms and  phrases  such as  "anticipate,"  "believe,"  "continue,"
"could,"  "estimate,"  "expect,"  "intend," "may," "plan," "project," "will" and
other similar terms and phrases, including references to assumptions.

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

**Critical Accounting Policies and Estimates**

In preparing  our  consolidated  financial  statements,  we are required to make
judgments,  assumptions  and estimates  which affect certain of our revenues and
expenses,  their  related  balance  sheet  accounts  and our  disclosure  of our
contingent assets and liabilities. Our most significant accounting estimates are
the liability for medical claims payable, reserve for losses and loss adjustment
expense, or LAE, and reinsurance  recoverables.  Due to the inherent uncertainty
in projecting these  estimates,  it is not only possible but probable that there
will be differences  between the projections  and the actual results.  Claims we
incur in excess of our  projections  generally are not recovered in the current
contract year. Any subsequent  change in an estimate for a prior period would be
reflected in the current period's  operating  results.  For a description of our
other critical  accounting  policies and estimates,  see Item 7 of our 2001 Form
10-K and for a more extensive discussion of our accounting policies, see Note 2,
Summary of Significant  Accounting  Policies,  in the Notes to the  Consolidated
Financial Statements in our 2001 Form 10-K filed on March 29, 2002.

Our medical claims payable liability includes an estimate for pending claims and
claims incurred but not reported to us. We use a variety of actuarial projection
methods to make this estimate  including  historical trends and projected future
trends. Our assumptions could be affected by unanticipated  legal and regulatory
changes or disputed  contract  provisions with either  providers or members.

                **MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                       CONDITION AND RESULTS OF OPERATION**

We review the  adequacy of our  workers'  compensation  insurance  reserves  for
losses and LAE with our independent actuary  periodically.  We consider external
forces such as changes in the rate of  inflation,  the  regulatory  environment,
state laws,  changes in legal decisions that affect the administration or amount
of payment on claims,  medical  costs and other  factors that could cause actual
losses and LAE to change. The actuarial projections include a range of estimates
reflecting  the  uncertainty  of  projections  over long periods of time and are
based on the  anticipated  ultimate cost of losses.  We evaluate the reserves in
the aggregate and make adjustments where appropriate.

Reinsurance  recoverable  primarily  represents  the estimated  amount of unpaid
workers'  compensation  loss and LAE reserves  that would be recovered  from our
reinsurers  and, to a lesser extent,  amounts billed to the reinsurers for their
portion of paid losses and LAE and health care  claims.  Reinsurance  receivable
for ceded paid claims is recorded in accordance with the terms of the agreements
and reinsurance recoverable for unpaid losses and LAE and medical claims payable
is estimated in a manner consistent with the claim liability associated with the
reinsurance  policy.  Any significant  changes in the underlying claim liability
could  directly  affect  the  amount  of  reinsurance  recoverable.  Reinsurance
recoverable,  including amounts related to paid and unpaid losses,  are reported
as assets  rather than as a reduction  of the related  liabilities.  Reinsurance
contracts do not relieve us from our  obligations to enrollees,  injured workers
or  policyholders.  If our  reinsurers  were to fail to honor their  obligations
because  of  insolvency  or  disputed  contract   provisions,   we  could  incur
significant losses. Prior to entering into reinsurance  agreements,  we evaluate
the  financial   condition  of  our  reinsurers  to  minimize  our  exposure  to
significant losses from reinsurer insolvencies.

**RESULTS OF OPERATIONS,  THREE MONTHS ENDED SEPTEMBER 30, 2002, COMPARED TO THREE
MONTHS ENDED SEPTEMBER 30, 2001.

*Total Operating  Revenues*** increased  approximately  15.3% to $381.3 million from
$330.9 million for 2001.

***Medical  Premiums***  from our HMO and  managed  indemnity  insurance  subsidiaries
increased $33.6 million or 18.2%.  The $33.6 million increase in premium revenue
reflects  a 4.2%  increase  in  Medicare  member  months  (the  number of months
individuals  are enrolled in a plan), a 49.4% increase in Medicaid member months
and a 21.9% increase in commercial member months.  The growth in Medicare member
months  contributes  significantly  to the  increase in premium  revenues as the
Medicare  per member  premium  rates are more than three  times  higher than the
average commercial premium rate.

HMO premium rates for renewing  commercial groups increased on average 9% to 12%
while the overall rate increase,  including continuing business and new members,
resulted in an approximate  7.8% increase.  Managed  indemnity  rates  increased
approximately  17.8%.  We do not anticipate a rate increase for Medicaid in 2002
or 2003.  The basic  Medicare rate increase  received for the Las Vegas area was
approximately 2%. Our overall Medicare rate increase was approximately  7.4% due
primarily to the following:

     o    An increase in the Social HMO  membership as a percentage of our total
          Medicare membership. The Social HMO members have a higher average rate
          than our other  Medicare  members.  Over 97% of our Las Vegas,  Nevada
          Medicare members are enrolled in the Social HMO Medicare program.
     o    We  experienced  increased  risk factors in our Social HMO  membership
          which contributes to higher rates and corresponding medical expenses.
     o    We received rate increases in excess of 2% for  membership  outside of
          the Las Vegas area.

The Centers for Medicare and Medicaid  Services,  or CMS,  formerly known as the
Health Care  Financing  Administration,  or HCFA,  may  consider  adjusting  the
reimbursement  factor or changing  the program for the Social HMO members in the
future. At this time,  however,  the final reimbursement per member for 2004 has
not been  determined  and there is no guaranty that the Social HMO contract will
be renewed  beyond 2003. It should be noted that Congress has in the past agreed
to  extend  the  contract.  If the  reimbursement  for these  members  decreases
significantly and related benefit changes are not made timely,  there could be a
materially  adverse effect on our business.  Continued  medical  premium revenue
growth is principally  dependent  upon continued  enrollment in our products and
upon competitive and regulatory factors.

***Military  Contract  Revenues***  increased $14.9 million or 17.4%.  The increase in
revenue  is  primarily  the  result  of  additive   change  order  work  and  is
significantly  offset by increased  military contract  expenses  associated with
those change orders. The Congressionally approved Department of Defense, or DoD,
fiscal  year 2001  budget  included  several  sweeping  changes  to the  TRICARE
program.  In April 2001,  Sierra Military Health Services,  Inc., or SMHS, began
implementation  of a prescription  drug program for  beneficiaries  over age 65.
Likewise,  in  October  2001,  SMHS  implemented  TRICARE  for  Life  which is a
comprehensive  health care benefit to those retired military  beneficiaries over
age 65. Both of these program modifications  resulted from Congressional changes
to the program.  SMHS administers the expanded  benefits only to the over age 65
retiree military population.  SMHS does not directly fund claims payment or bear
any risk on these  program  modifications  for the actual  level of health  care
service utilization and does not record any claim payments or related revenue on
these program modifications.

In June 2002, SMHS began the fifth year of a five year contract with the DoD. In
October 2002, the DoD extended SMHS's  contract.  The new contract  extension is
renewable annually at the DoD's option for up to four additional years. However,
on August 1, 2002,  the DoD released a request for proposal for the  procurement
and subsequent award of three TRICARE managed care support contracts in place of
the current  seven  contracts.  SMHS expects to submit a bid proposal for one of
the three new regions within the coming months.  An announcement of the awarding
of these new contracts under the TRICARE Next Generation  program,  or T-Nex, is
not expected until the middle of 2003,  with a transition  period  expected into
mid to late  2004.  If the DoD  continues  with its  current  plan to reduce the
number of  contracts  from  seven to three and we were not able to obtain one of
the  three  new  contracts,  there  would be a  material  adverse  effect on our
business.

SMHS  incurred  $1.3 million in bid proposal  costs during the quarter which was
partially offset by a change order adjustment. We expect to incur additional bid
proposal costs in the fourth quarter and in 2003.

***Specialty Product Revenues***  increased $610,000 or 1.2%. The revenue increase was
from administrative  services revenue as workers' compensation insurance revenue
remained consistent between the quarters.

Workers'  compensation  net earned premiums are the end result of direct written
premiums,  plus the change in unearned  premiums,  plus  premiums  assumed  from
mandatory  reinsurance pools, less premiums ceded to reinsurers.  Direct written
premiums  decreased  from $47.6 million in 2001 to $46.1 million in 2002 or 3.2%
due  primarily to a 30.4%  decrease in premium  production  that was offset by a
37.5% increase in composite premium rates. Ceded reinsurance  premiums decreased
by $1.2 million due to the expiration of our low level reinsurance  agreement on
June 30, 2000 and a new reinsurance agreement with lower ceded premiums.

***Professional Fees*** increased by $840,000 or 12.0% as a result of increased visits
and activity at our provider subsidiaries.

***Investment  and Other Revenues***  increased  $560,000 or 12.4% due primarily to an
increase in the  average  invested  balance  offset by a decrease in the average
investment yield during the period.

***Medical Expenses*** increased $22.7 million or 14.5% due primarily to our increased
membership.   Medical   expenses  as  a  percentage  of  medical   premiums  and
professional  fees decreased to 79.3% from 81.7%.  The decrease is primarily due
to  premium  yields in excess of cost and  utilization  increases.  Our  medical
claims payable  liability  requires us to make  significant  estimates.  See the
discussion of our medical claims  payable  liability  under critical  accounting
policies and estimates for a further explanation.

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

***Military  Contract  Expenses***  increased $13.1 million or 15.6%.  The increase is
consistent with the increase in revenues discussed  previously and includes $1.3
million in bid proposal costs offset by a change order  adjustment.  Health care
delivery  expense  consists  primarily of costs to provide  managed  health care
services to eligible beneficiaries in accordance with Sierra's TRICARE contract.
Under the contract,  SMHS provides health care services to approximately 662,000
dependents of active duty military personnel and military retirees under the age
of 65 and their dependents through a network of approximately 50,000 health care
providers  and  certain  other  subcontractor  partnerships.  Also  included  in
military contract expenses are costs incurred to perform specific administrative
services,  such as health care appointment scheduling,  enrollment,  medical and
network  management  services as well as health care advice line  services,  and
other  administrative  functions of the military health care  subsidiary.  These
administrative  services  are  performed  for active duty  personnel  and family
members as well as retired military families.

***Specialty Product Expenses*** increased $2.7 million or 5.4%. Expenses increased in
the  workers'  compensation  operations  by $2.1  million and by $600,000 in the
administrative services operations.

The increase in workers'  compensation  insurance  segment expenses is primarily
due to the following:

o    In 2002, we recorded $5.5 million of net adverse loss development for prior
     accident  years  compared to net adverse loss  development  of $1.5 million
     recorded in 2001. Of the $5.5 million recorded,  $1.3 million is related to
     our mandatory participation in assumed reinsurance pools. The remaining net
     adverse loss development  recorded was largely attributable to higher costs
     per claim, or claim severity, in California.  Higher claim severity has had
     a negative impact on the entire California workers'  compensation  industry
     in the past few periods and this trend may continue.
o    The loss  and LAE  ratio  for the  2002  accident  year  was  lower  due to
     significant  premium  increases offset partly by the termination of the low
     level  reinsurance  agreement.  The lower loss and LAE ratio  resulted in a
     decrease  in  expense  of  approximately   $2.1  million.   The  low  level
     reinsurance  agreement  terminated  on June 30, 2000,  which  resulted in a
     higher risk  exposure on  policies  effective  after that date and a higher
     amount of net incurred loss and LAE.
o    A net increase in underwriting expenses, policyholders' dividends and other
     operating expenses of approximately $200,000.

Since 1999,  we have  experienced  adverse loss  development  on prior  accident
years.  Loss  reserves  are  evaluated  periodically  and  due to  the  inherent
uncertainty in projecting loss reserves,  it is possible that we may continue to
experience adverse development in the foreseeable future. Our reserve for losses
and LAE requires us to make  significant  estimates.  See the  discussion of our
reserves for losses and LAE under critical accounting policies and estimates for
a further explanation.

The net adverse loss  development  on prior  accident years included those years
that were covered by our low level  reinsurance  agreement.  This resulted in an
increase in the reinsurance recoverable balance which is then reduced by amounts
collected from reinsurers.  During the quarter,  we increased our ceded reserves
by $7.5  million  and  received  payments  from our  reinsurers  totaling  $23.6
million. Our net reinsurance recoverable decreased by $16.1 million in the third
quarter of 2002,  compared to a $2.0  million  decrease in the third  quarter of
2001.

In February 2002,  California  enacted  Assembly Bill 749. This new  legislation
will  increase  benefits  paid to  injured  workers  starting  January  1, 2003.
Increased  loss costs,  such as benefit  increases,  are normally built into the
rate making  process so that  premiums  are  increased  to cover the increase in
costs.  On October 18, 2002, the  California  Insurance  Commission  approved an
increase of 10.5% in pure premium rates for new and renewal  policies  effective
in 2003. In addition,  the  Commission  approved a 4.9% increase in pure premium
rates to the unexpired  terms of policies in force at January 1, 2003.  Although
we intend to increase our premiums, there is no assurance that our increase will
be sufficient  enough to cover the ultimate  cost  increases or that the WCIRB's
estimate is accurate. Assembly Bill 749 is effective for claims occurring on and
after January 1, 2003. However,  due to other statutes,  certain temporary total
disability claims with dates of injury prior to 2003 will automatically increase
to the new benefit levels effective January 1, 2003.

Reinsurance  contracts do not relieve us from our obligations to insured workers
or policyholders. At September 30, 2002, we had over $183 million in reinsurance
recoverable.  Prior to entering  into  reinsurance  agreements,  we evaluate the
financial  condition of our  reinsurers to minimize our exposure to  significant
losses from reinsurer insolvencies. At September 30, 2002, all of our reinsurers
were rated A+ or better by Fitch Ratings and the A.M. Best Company. Should these
companies  be unable to perform  their  obligations  to  reimburse  us for ceded
losses,  we would  experience  significant  losses  and it could have a material
adverse effect on our business.

The combined  ratio is a measurement of the workers'  compensation  underwriting
profit or loss and is the sum of the loss and LAE  ratio,  underwriting  expense
ratio and  policyholders'  dividend  ratio.  A combined  ratio of less than 100%
indicates an  underwriting  profit.  Our combined  ratio was 109.4%  compared to
105.5% for 2001.  The increase was  primarily  due to increased net adverse loss
development for prior accident years.

***General,  Administrative  and Marketing  Expenses,*** or G&A,  increased  $3.2
million or 10.8%.  The primary  increases in G&A  expenses were brokers fees
and facility lease expense. The increase in brokers fees is primarily due to the
growth in premium revenues. The increase in facility lease expense is due to the
rent  payments   associated   with  the   sale-leaseback   transaction  for  our
administrative  buildings now being recorded as an operating  expense instead of
depreciation and interest expense. As a percentage of revenues, G&A expenses
were 8.7% for 2002, compared to 9.1% in 2001. As a percentage of medical premium
revenue,  G&A expenses were 15.3% for 2002,  compared to 16.3% for 2001. Our
office buildings associated with the sale-leaseback  transaction  qualified as a
sale at the end of the first  quarter  of 2002.  This  resulted  in a  quarterly
increase in G&A expenses of  approximately  $1.1 million and a corresponding
decrease in interest expense. See Note 6 of the Notes to Condensed  Consolidated
Financial   Statements  for  a  further   explanation   of  the   sale-leaseback
transaction.

***Interest  Expense  and Other,  Net***  decreased  $2.6  million or 66.3%.  Interest
expense  related to the revolving  credit facility  decreased  $500,000 due to a
decrease  in the  average  balance of  outstanding  debt during the period and a
decrease in the weighted average cost of borrowing. Our average interest rate on
the revolving credit facility,  excluding the amortization of deferred financing
fees,  our interest rate swap  agreement  and fees on the unused  portion of the
credit  facility was 4.4% in 2002,  compared to 7.7% in 2001.  We incur a fee of
0.5% on the unused portion of the revolving credit facility. In addition, we are
amortizing $300,000 per quarter of deferred financing fees.

Interest  expense related to the  sale-leaseback  transaction  decreased by $1.5
million as the remaining  eight buildings have qualified as a sale since the end
of the third quarter of 2001. The quarterly impact of the entire  sale-leaseback
transaction  qualifying as a sale compared to the treatment  prior to qualifying
for a sale is a decrease in interest  expense of $2.4  million and a decrease in
depreciation  expense of $900,000  offset by an  increase  in  facility  rent on
office  buildings of $1.3  million and $1.6 million in facility  rent on medical
buildings.  See  Note  6  of  the  Notes  to  Condensed  Consolidated  Financial
Statements for a further explanation of the sale-leaseback transaction.

In addition, we had a net gain on the sale of assets of $240,000 in 2002.

***Provision  for Income Taxes*** was  recorded at $6.1  million for 2002  compared to
$2.3 million for 2001.  The effective tax rate for both periods was 33.5% and is
expected to increase  slightly in 2003.  Our ongoing  effective tax rate is less
than the statutory rate due primarily to tax preferred investments. The State of
Nevada is  considering  several  alternatives  to increase  tax revenues for the
state including imposing a gross receipts tax or corporate state income tax that
may begin in 2003. It is not anticipated that our results of operations would be
significantly impacted by this tax.

***Discontinued   Operations***   consist  entirely  of  our  Texas  HMO  health  care
operations.  We  elected  to  adopt  early  Statement  of  Financial  Accounting
Standards  No. 144,  "Accounting  for the  Impairment  or Disposal of Long-Lived
Assets",  or SFAS No. 144,  effective  January 1, 2001.  In the third quarter of
2001, we decided to exit the Texas HMO health care market and received  approval
from the Texas Department of Insurance in mid-October  2001. We ceased providing
HMO health care coverage on April 17, 2002. In accordance with SFAS No. 144, our
Texas  HMO  health  care  operations  are  now  reclassified  as a  discontinued
operation.  Net income from discontinued operations in the third quarter of 2002
was $1.9 million  compared to a loss of $12.1  million for the third  quarter of
2001. The utilization of prior premium deficiency reserves were $124,000 in 2002
and $7.1 million in 2001. The net income from discontinued operations in 2002 of
$1.9  million  was the  result of a gain on a debt  payment to  Kaiser-Texas  of
$628,000,  net of tax, and the reduction of our medical claims payable  reserve,
which resulted in a gain of $1.3 million, net of tax. See Note 3 of the Notes to
Condensed Consolidated Financial Statements.

**RESULTS OF OPERATIONS,  NINE MONTHS ENDED  SEPTEMBER 30, 2002,  COMPARED TO NINE
MONTHS ENDED SEPTEMBER 30, 2001.

*Total Operating  Revenues,***  increased  approximately  14.9% to $1.09 billion from
$952.4 million for 2001.

***Medical  Premiums***  from our HMO and  managed  indemnity  insurance  subsidiaries
increased  $113.2  million or 21.7%.  The  $113.2  million  increase  in premium
revenue reflects a 5.1% increase in Medicare member months (the number of months
individuals  are enrolled in a plan), a 60.5% increase in Medicaid member months
and a 27.1% increase in commercial member months.  The growth in Medicare member
months  contributes  significantly  to the  increase in premium  revenues as the
Medicare  per member  premium  rates are more than three  times  higher than the
average commercial premium rate.

HMO premium rates for renewing  commercial groups increased on average 9% to 12%
while the overall rate increase,  including continuing business and new members,
resulted in an approximate  7.5% increase.  Managed  indemnity  rates  increased
approximately  13.6%.  We do not anticipate a rate increase for Medicaid in 2002
or 2003.  The basic  Medicare rate increase  received for the Las Vegas area was
approximately 2%. Our overall Medicare rate increase was approximately  6.7% due
primarily to the following:

     o    An increase in the Social HMO  membership as a percentage of our total
          Medicare membership. The Social HMO members have a higher average rate
          than our other  Medicare  members.  Over 97% of our Las Vegas,  Nevada
          Medicare members are enrolled in the Social HMO Medicare program.
     o    We  experienced  increased  risk factors in our Social HMO  membership
          which contributes to higher rates and corresponding medical expenses.
     o    We received rate increases in excess of 2% for  membership  outside of
          the Las Vegas area.

The Centers for Medicare and Medicaid  Services,  or CMS,  formerly known as the
Health Care  Financing  Administration,  or HCFA,  may  consider  adjusting  the
reimbursement  factor or changing  the program for the Social HMO members in the
future. At this time,  however,  the final reimbursement per member for 2004 has
not been  determined  and there is no guaranty that the Social HMO contract will
be renewed  beyond 2003. It should be noted that Congress has in the past agreed
to  extend  the  contract.  If the  reimbursement  for these  members  decreases
significantly and related benefit changes are not made timely,  there could be a
materially  adverse effect on our business.  Continued  medical  premium revenue
growth is principally  dependent  upon continued  enrollment in our products and
upon competitive and regulatory factors.

***Military  Contract  Revenues***  increased  $24.1 million or 9.4%.  The increase in
revenue  is  primarily  the  result  of  additive   change  order  work  and  is
significantly  offset by increased  military contract  expenses  associated with
those change orders. The Congressionally approved Department of Defense, or DoD,
fiscal  year 2001  budget  included  several  sweeping  changes  to the  TRICARE
program. In April 2001, SMHS began implementation of a prescription drug program
for  beneficiaries  over age 65.  Likewise,  in October 2001,  SMHS  implemented
TRICARE for Life which is a  comprehensive  health care benefit to those retired
military  beneficiaries over age 65. Both of these  modifications  resulted from
Congressional  changes to the program.  SMHS  administers the expanded  benefits
only to the over age 65 retiree military population. SMHS does not directly fund
claims  payment or bear any risk on these program  modifications  for the actual
level of health care service  utilization and does not record any claim payments
or related revenue on these program modifications.

***Specialty Product Revenues***  increased $4.7 million or 3.4%. The revenue increase
was from the workers' compensation insurance segment as administrative  services
revenue remained consistent between the periods.

Workers'  compensation  net earned premiums are the end result of direct written
premiums,  plus the change in unearned  premiums,  plus  premiums  assumed  from
mandatory  reinsurance pools, less premiums ceded to reinsurers.  Direct written
premiums decreased from $143.0 million in 2001 to $132.4 million in 2002 or 7.4%
due  primarily  to a 26.7%  decrease in premium  production  that was  partially
offset  by a 26.3%  increase  in  composite  premium  rates.  Ceded  reinsurance
premiums  decreased by 107.9% due to the expiration of our low level reinsurance
agreement on June 30, 2000,  and a new  reinsurance  agreement  with lower ceded
premiums.  In  addition,  during the  second  quarter of 2002,  we  recorded  an
adjustment of our estimate of historical ceded premiums related to the low level
agreement which further reduced our ceded reinsurance by $2.0 million.

***Professional Fees*** increased $1.0 million or 4.5% as a result of increased visits
and activity at our provider subsidiaries.

***Investment and Other Revenues***  decreased $1.5 million or 9.2% due primarily to a
decrease in the average investment yield during the period offset by an increase
in the average invested balance.

***Medical Expenses*** increased $86.8 million or 19.6% due primarily to our increased
membership.   Medical   expenses  as  a  percentage  of  medical   premiums  and
professional  fees decreased to 80.5% from 81.4%.  The decrease is primarily due
to  premium  yields in  excess  of cost and  utilization  increases  which  were
partially  offset  by  higher  bed  days in 2002.  Our  medical  claims  payable
liability requires us to make significant  estimates.  See the discussion of our
medical  claims  payable  liability  under  critical   accounting  policies  and
estimates for a further explanation.

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

***Military  Contract  Expenses***  increased  $18.5 million or 7.4%.  The increase is
consistent  with the  increase in  revenues  discussed  previously.  Health care
delivery  expense  consists  primarily of costs to provide  managed  health care
services to eligible beneficiaries in accordance with Sierra's TRICARE contract.
Under the contract,  SMHS provides health care services to approximately 662,000
dependents of active duty military personnel and military retirees under the age
of 65 and their dependents through a network of approximately 50,000 health care
providers  and  certain  other  subcontractor  partnerships.  Also  included  in
military contract expenses are costs incurred to perform specific administrative
services,  such as health care appointment scheduling,  enrollment,  medical and
network  management  services as well as health care advice line  services,  and
other  administrative  functions of the military health care  subsidiary.  These
administrative  services  are  performed  for active duty  personnel  and family
members as well as retired military families.

***Specialty Product Expenses*** increased $7.7 million or 5.5%. Expenses increased in
the  workers'  compensation  operations  by  approximately  $7.2  million and by
$500,000 in administrative services operations.

The increase in workers'  compensation  insurance  segment expenses is primarily
due to the following:

o    Approximately  $3.0  million  in  additional  loss and LAE  related  to the
     increase in net earned premiums in 2002 compared to 2001.
o    In 2002,  we recorded  $10.8  million of net adverse loss  development  for
     prior  accident  years  compared to net adverse  loss  development  of $7.3
     million  recorded in 2001. Of the $10.8 million  recorded,  $1.3 million is
     related to our mandatory  participation in assumed  reinsurance  pools. The
     net adverse loss  development  recorded was largely  attributable to higher
     costs per claim,  or claim severity,  in California.  Higher claim severity
     has had a negative impact on the entire  California  workers'  compensation
     industry in the past few periods and this trend may continue.
o    The loss and LAE ratio for the 2002  accident year was lower by 1.6% due to
     significant  premium  increases  offset by the termination of the low level
     reinsurance agreement.  The lower loss and LAE ratio resulted in a decrease
     in  expense  of  approximately  $2.1  million.  The low  level  reinsurance
     agreement  terminated  on June 30,  2000,  which  resulted in a higher risk
     exposure on policies  effective  after that date and a higher amount of net
     incurred  loss  and  LAE.
o    A net increase in underwriting expenses, policyholders' dividends and other
     operating expenses of $2.8 million related primarily to the increase in net
     earned premiums.

Since 1999,  we have  experienced  adverse loss  development  on prior  accident
years.  Loss  reserves  are  evaluated  periodically  and  due to  the  inherent
uncertainty in projecting loss reserves,  it is possible that we may continue to
experience adverse development in the foreseeable future. Our reserve for losses
and LAE requires us to make  significant  estimates.  See the  discussion of our
reserves for losses and LAE under critical accounting policies and estimates for
a further explanation.

The net adverse loss  development  on prior  accident years included those years
that were covered by our low level  reinsurance  agreement.  This resulted in an
increase in the reinsurance recoverable balance which is then reduced by amounts
collected from  reinsurers.  During the nine months ended September 30, 2002, we
increased  our ceded  reserves by $28.2  million and received  payments from our
reinsurers totaling $62.3 million. Our net reinsurance  recoverable decreased by
$34.1 million for the nine months ended September 30, 2002,  compared to an $8.6
million decrease for the nine months ended September 30, 2001.

The combined  ratio is a measurement of the workers'  compensation  underwriting
profit or loss and is the sum of the loss and LAE  ratio,  underwriting  expense
ratio and  policyholders'  dividend  ratio.  A combined  ratio of less than 100%
indicates an  underwriting  profit.  Our combined  ratio was 107.9%  compared to
106.0% for 2001.  The increase was  primarily  due to increased net adverse loss
development for prior accident years.  Excluding adverse loss  development,  the
combined ratio would have been 99.8% for 2002 and 100.3% for 2001.

***General,   Administrative  and  Marketing   Expenses,***   or  G&A,   increased
approximately  $9.4 million or 10.8%. The primary  increases in G&A expenses
were payroll and benefits,  brokers fees,  which were primarily due to increased
premium  revenues,  and facility lease  expense.  The increase in facility lease
expense  is  due  to  the  rent  payments  associated  with  the  sale-leaseback
transaction for our administrative  buildings now being recorded as an operating
expense  instead of  depreciation  and interest  expense.  Our office  buildings
associated with the sale-leaseback transaction qualified as a sale at the end of
the first  quarter of 2002.  This  resulted in a  quarterly  increase in G&A
expenses of approximately $1.1 million and a corresponding  decrease in interest
expense. See Note 6 of the Notes to Condensed  Consolidated Financial Statements
for a further explanation of the sale-leaseback  transaction. As a percentage of
revenues,  G&A  expenses were 8.8% for 2002,  compared to 9.1% in 2001. As a
percentage of medical  premium  revenue,  G&A  expenses were 15.1% for 2002,
compared to 16.6% for 2001.

***Interest  Expense  and Other,  Net***  decreased  $8.3  million or 57.5%.  Interest
expense related to the revolving credit facility decreased $2.6 million due to a
decrease  in the  average  balance of  outstanding  debt during the period and a
decrease in the weighted average cost of borrowing. Our average interest rate on
the revolving credit facility,  excluding the amortization of deferred financing
fees,  our interest rate swap  agreement  and fees on the unused  portion of the
credit  facility was 6.0% in 2002,  compared to 8.8% in 2001.  We incur a fee of
0.5% on the unused portion of the revolving credit facility. In addition, we are
amortizing $300,000 per quarter of deferred financing fees.

Interest  expense related to the  sale-leaseback  transaction  decreased by $3.1
million as the remaining  eight buildings have qualified as a sale since the end
of the third quarter of 2001. See Note 6 of the Notes to Condensed  Consolidated
Financial   Statements  for  a  further   explanation   of  the   sale-leaseback
transaction.

CII Financial  debenture interest decreased by $1.2 million in 2002, as a result
of the restructuring of the debentures, which occurred during the second quarter
of 2001 when we recorded a net gain of $700,000 on the transaction.

We had a net gain on sale of assets of $100,000  in 2002,  compared to a loss of
$2.4 million in 2001. In addition,  we had various  other  increases in interest
and other expense totaling $400,000.

***Provision for Income Taxes*** was recorded at $15.1  million for 2002,  compared to
$5.9 million for 2001.  The effective  tax rate for both periods was 33.5%.  Our
ongoing  effective tax rate is less than the statutory rate due primarily to tax
preferred  investments.  The  State of Nevada is  considering  imposing  a gross
receipts  tax or corporate  state  income tax that may begin in 2003.  It is not
anticipated that our results of operations  would be  significantly  impacted by
this tax.

***Discontinued   Operations*s**   consist  entirely  of  our  Texas  HMO  health  care
operations.  Net income from  discontinued  operations  in 2002 was $1.9 million
compared to a loss of $13.4 million in 2001.  The  utilization  of prior premium
deficiency  reserves were $1.7 million in 2002,  and $15.6 million in 2001.  The
net income from  discontinued  operations  in 2002 was the result of a gain on a
debt payment to Kaiser-Texas  of $628,000,  net of tax, and the reduction of our
medical claims payable reserve, which resulted in a gain of $1.3 million, net of
tax. See Note 3 of the Notes to Condensed Consolidated Financial Statements.

**LIQUIDITY AND CAPITAL RESOURCES**

For continuing  operations,  we had cash in-flows from  operating  activities of
$139.9 million in 2002,  compared to $89.0 million in 2001.  After adjusting for
the timing of our Medicare  payment  received October 1, 2002, cash in-flows for
2002 would have been $168.6  million.  The  improvement  over 2001 is  primarily
attributable to increased cash from earnings,  reinsurance recoveries, an income
tax refund and an increase in medical premiums.

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

To further enhance SMHS' funding  resources,  on November 16, 2001, SMHS entered
into a securitization arrangement with General Electric Capital Corporation. The
arrangement   provides  for  the  sale  of  SMHS'  Federal  Government  accounts
receivable  to SMHS  Funding,  LLC.  SMHS Funding is a special  purpose  limited
liability company owned by SMHS and was formed for the purpose of purchasing all
receivables of SMHS. This entity is fully  consolidated into SMHS. SMHS Funding,
LLC may sell an undivided interest in certain of the receivables to a subsidiary
of General Electric Capital  Corporation in the event that additional  financing
by SMHS is warranted. This securitization  arrangement has not yet been utilized
and we do not anticipate utilizing it in 2002.

For continuing  operations,  cash used in investing  activities  during 2002 was
$115.9 million,  compared to $3.3 million in 2001. The 2002 amount included $5.6
million in net capital  expenditures  compared to $2.5 million in 2001.  The net
change in  investments  for the period was an increase in  investments of $110.3
million for 2002 and $840,000 for 2001 as  investments  were purchased with cash
from operations.

For continuing  operations,  cash used in financing  activities  during 2002 was
$15.6 million,  compared to $69.2 million in 2001. The 2002 amount  included net
payments of $39.0  million on the  revolving  credit  facility,  compared to net
payments of $41.0 million in 2001.  Additional payments of $3.6 million and $6.0
million  were made on other  outstanding  debt and  capital  leases for 2002 and
2001,  respectively.  Proceeds from the sale-leaseback  notes were $16.9 million
and $2.9 million for 2002 and 2001,  respectively.  Additionally,  $27.3 million
was  used in  2001  for  the  purchase  of CII  Financial's  7 1/2%  convertible
subordinated debentures.  In 2001, we have purchased $1.0 million in outstanding
CII Financial 9 1/2% senior  debentures.  Proceeds from the issuance of stock in
connection with stock plans were $10.2 million in 2002, compared to $2.2 million
in 2001.

Discontinued  Texas HMO health  care  operations  used cash of $30.5  million in
2002, compared to $26.4 million in 2001. The cash used in 2002 was primarily for
the run out of claims offset in part by premiums collected. Based on the current
estimated Texas HMO healthcare run-out costs and recorded  reserves,  we believe
we have  adequate  funds  available  and the  ability  to  invest,  should we be
required to do so, adequate funds in Texas to meet the  anticipated  obligations
for our members' claims.

**Revolving Credit Facility**

Our revolving credit facility balance  decreased from $89 million to $50 million
during the nine month period ended  September 30, 2002. The balance is reflected
as current  since the  credit  facility  matures  on  September  30,  2003.  The
availability  under the credit  facility  has been  reduced  to $101  million at
September 30, 2002, leaving $51 million available under the credit facility. The
total  availability,  however,  will be reduced by $6.0  million on December 31,
2002 and by $10.0 million on June 30, 2003.  Interest under the revolving credit
facility is variable and is based on Bank of America's  "prime rate" adjusted by
a margin.  The rate as of September 30, 2002, is 4.375%,  which is a combination
of the prime rate of 4.75%,  less a credit of .375%. We received .5% drop in the
prime rate as of November 7, 2002,  which makes our new rate 3.875%.  The margin
can fluctuate  based on our  completing  certain  transactions  or if we fail to
exceed  certain  financial  ratios.  The margin was  reduced by 1.0% on April 1,
2002, since we exceeded  certain ratio  requirements as of December 31, 2001. Of
the  outstanding  balance,  $25  million  is covered  by an  interest-rate  swap
agreement.  In accordance with Statement of Financial  Accounting  Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities", or SFAS No.
133, we increased our recorded  liability of the  interest-rate  swap  agreement
during 2002 by $115,000.

**Debentures**

In December 2000, CII Financial  commenced an offer to exchange its  outstanding
subordinated  debentures  for cash and/or new  debentures.  On May 7, 2001,  CII
Financial  closed  its  exchange  offer  on  $42.1  million  of its  outstanding
subordinated  debentures.  CII  Financial  purchased  $27.1 million in principal
amount of  subordinated  debentures  for $20.0  million in cash and issued $15.0
million in new 9 1/2% senior debentures, due September 15, 2004, in exchange for
$15.0  million  in  subordinated  debentures.  The  remaining  $5.0  million  in
subordinated  debentures were paid at maturity.  Since the time of the exchange,
Sierra has purchased $1.0 million in outstanding 9 1/2% senior  debentures which
are eliminated upon consolidation.

The  transaction was accounted for as a restructuring  of debt;  therefore,  all
future cash payments,  including  interest,  related to the  debentures  will be
reductions  of the  carrying  amount of the  debentures  and no future  interest
expense will be recognized.  Accordingly,  the 9 1/2% senior  debentures  have a
carrying  amount of $16.8 million,  which consists of principal  amount of $14.0
million and $2.8 million in future accrued interest.

The 9 1/2% senior  debentures pay interest,  which is due semi-annually on March
15 and September 15 of each year,  commencing on September 15, 2001.  The 9 1/2%
senior debentures rank senior to outstanding notes payable from CII Financial to
Sierra and CII Financial's guarantee of Sierra's revolving credit facility.  The
9 1/2%  senior  debentures  may be  redeemed  by CII  Financial  at any  time at
premiums  currently at 105% and declining to 100% for redemptions after April 1,
2004. In the event of a change in control of CII Financial, the holders of the 9
1/2% senior  debentures  may require that CII Financial  repurchase  them at the
then applicable redemption price, plus accrued and unpaid interest.

CII  Financial  is a  holding  company  and its  only  significant  asset is its
investment  in  California  Indemnity.  Of the  $27.3  million  in cash and cash
equivalents  held  at  September  30,  2002,  approximately  $26.7  million  was
designated for use only by the regulated insurance companies.  CII Financial has
limited  sources of cash and is  dependent  upon  dividends  paid by  California
Indemnity.  California Indemnity may pay a dividend,  without the prior approval
of the state insurance commissioner, only to the extent the cumulative amount of
dividends  or  distributions  paid or  proposed  to be paid in any year does not
exceed the amount shown as unassigned  funds (reduced by any unrealized gains or
losses  included  in any  such  amount)  on its  statutory  statement  as of the
previous December 31. In 2002,  California  Indemnity can pay dividends of up to
$2.1 million without the prior approval of the state insurance commissioner.  In
2002,  California Indemnity paid a dividend of $750,000 and in 2001,  California
Indemnity  received  prior  approval  to pay an  aggregate  of $10.0  million in
dividends. We are not in a position to assess the likelihood of obtaining future
approval for the payment of dividends other than those  specifically  allowed by
law without prior approval in each of our subsidiaries' state of domicile.

**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 $33.3 million at September 30, 2002. 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.   Additionally,   in
conjunction  with the exit from the  Texas HMO  health  care  market,  the Texas
Department of Insurance  approved a plan of withdrawal  and TXHC is now required
to maintain  deposits and net worth of at least $3.5 million.  We believe we are
in compliance  with our  regulatory  requirements.  We are limited by our credit
facility in the amount of funds we can invest in our Texas operations.

Of the $93.8  million in cash and cash  equivalents  held at September 30, 2002,
$48.8 million was designated for use only by the regulated subsidiaries. Amounts
are  available  for transfer to the holding  company from the HMO and  insurance
subsidiaries only to the extent that they can be remitted in accordance with the
terms of existing  management  agreements and by dividends.  The holding company
will not receive  dividends  from its  regulated  subsidiaries  if such dividend
payment would cause violation of statutory net worth and reserve requirements.

In California,  workers'  compensation  insurers are required to place qualified
securities on deposit with the state to cover  potential  workers'  compensation
claims. The amount of the deposit is calculated annually and is largely based on
the  amount of  workers'  compensation  insurance  premiums  earned  during  the
preceding three years. A credit for ceded reinsurance to companies authorized as
reinsurers  by the  California  Department of Insurance can reduce the amount of
deposit that a workers'  compensation insurer must place. However, any reduction
in the deposit for ceded  reinsurance  must then be made up by the  reinsurer so
that 100% of the deposit  requirements are met. Failure of the reinsurer to make
the  required  deposit  can result in a  disallowance  of the ceded  reinsurance
credit by the ceding insurance  company.  The ceding insurance company will then
either  have to place the  required  deposit  or show the ceded  reinsurance  as
unauthorized reinsurance, which in turn reduces its total statutory surplus.

Sierra's  workers'  compensation   insurance  companies  were  notified  by  the
California  Department  of  Insurance  in  August  of  2002,  that  some  of its
reinsurers  had  failed  to make the  required  deposit.  We have  notified  our
reinsurers  of this and they are in the process of making the required  deposit.
If the reinsurers were to fail to make the required  deposit,  this could have a
material  adverse effect on our workers'  compensation  insurance  subsidiaries'
ability to write business.

**Obligations and Commitments**

The following schedule  represents our obligations and commitments for long-term
debt,  capital  leases and  operating  leases at September  30,  2002.  With the
exception of our revolving  credit  facility,  the amounts  below  represent the
entire payment, principal and interest, on our outstanding obligations.

                                                     **Long-Term           Capital         Operating
                                                        DebtLeasesLeasesTotal**

(In thousands)
Continuing Operations
Payments due within 12 months...................       $51,541              $121         $ 17,808          $ 69,470
Payments due in 13 to 36 months.................        15,414               130           33,432            48,976
Payments due in 37 to 60 months.................            71                61           32,209            32,341
Payments due in more than 60 months.............           521               187          123,648           124,356
                                                        ------               ---          -------           -------
     Total Continuing Operations................       $67,547              $499         $207,097          $275,143
                                                        ======               ===          =======           =======

Discontinued Operations
Payments due within 12 months...................       $ 1,899              $235                           $  2,134
Payments due in 13 to 36 months.................         5,065                                                5,065
Payments due in 37 to 60 months.................        17,674                                               17,674
Payments due in more than 60 months.............                                                                  -
                                                        ------               ---                            -------
     Total Discontinued Operations..............       $24,638              $235                           $ 24,873
                                                        ======               ===                            =======

The amount  included in long-term debt payments for  discontinued  operations is
for a mortgage  loan  secured by certain  underlying  real estate  assets of the
discontinued  operations.  We are  actively  seeking a buyer for the real estate
assets and anticipate selling them within the next 12 months. As the real estate
assets are sold,  we are required to make  reductions  on the mortgage  note and
completely satisfy the obligation once all of the assets have been sold.

**Recent Accounting Pronouncements**

In April 2002, the FASB issued  Statement of Financial  Accounting  Standard No.
145,  "Recission  of FASB  Statements  No.  4,  44,  and 64,  Amendment  of FASB
Statement  No. 13, and  Technical  Corrections",  or SFAS No. 145.  SFAS No. 145
requires  that gains and losses from  extinguishment  of debt be  classified  as
extraordinary  items only if they meet the  criteria  in  Accounting  Principles
Board Opinion No. 30 ("Opinion No. 30").  Applying the provisions of Opinion No.
30  will  distinguish  transactions  that  are  part  of an  entity's  recurring
operations from those that are unusual and infrequent that meet the criteria for
classification  as an  extraordinary  item.  SFAS No.  145 is  effective  for us
beginning January 1, 2003, but we may adopt the provisions of SFAS No. 145 prior
to this date. We have not yet  completed our  evaluation of the impact from SFAS
No. 145 on our financial position and results of operations.

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

**Other**

Under our current  revolving credit facility,  which expires September 30, 2003,
we are limited to $20.2 million in capital  expenditures  for 2003.  Our planned
expenditures  include  a  new  provider  clinic,  digital  radiology  equipment,
upgrades  to our  disaster  recovery  systems,  various  computer  hardware  and
software,  furniture and equipment and other normal  capital  requirements.  Our
liquidity  needs over the next 12 months will primarily be for the capital items
noted above,  debt service and funds  required to exit the Texas HMO health care
market.  We believe that our existing working capital,  operating cash flow and,
if necessary,  equipment  leasing,  divestitures of certain  non-core assets and
amounts  available  under our credit  facility  and  securitization  arrangement
should  be  sufficient  to fund  our  capital  expenditures  and  debt  service.
Additionally,  subject to unanticipated cash  requirements,  we believe that our
existing  working  capital and operating  cash flow should enable us to meet our
liquidity needs on a long-term basis.

In the second quarter of 1997, our Board of Directors  authorized a $3.0 million
loan from us to our Chief Executive Officer, or CEO. In April 2000, our Board of
Directors  authorized an additional $2.5 million loan from us to the CEO. In the
second quarter of 2001, our Board of Directors  approved a loan amendment  which
extended the maturity of the principal  balance  along with accrued  interest to
December 31, 2003. During 2001, the CEO made payments of $898,000. No additional
payments  have been made during 2002 and as of September  30, 2002 the aggregate
principal balance outstanding and accrued interest for both instruments was $5.2
million.  All amounts borrowed bear interest at a rate equal to our current rate
on our revolving credit facility plus 10 basis points.  The amounts  outstanding
are  collateralized  by certain of the CEO's  assets and rights to  compensation
from us. The loan is pledged as collateral under our revolving credit facility.

We have a $25 million  interest-rate swap agreement,  which expires on September
29, 2003,  that allows us to mitigate the risk of interest rate  fluctuation  on
our credit  facility.  The intent of the agreement was to keep our interest rate
on $25 million of the credit facility  relatively fixed. In accordance with SFAS
No. 133, we recorded the interest-rate swap agreement to fair market value as of
September 30, 2002.  The fair market value  indicated  that we would need to pay
$800,000 to terminate the swap  agreement  compared to an indicated  fair market
value of $685,000 at December  31,  2001.  If the prime rate were to decrease by
1%, we estimate our maximum increase in annual expense  associated with the swap
to be approximately $250,000.

**Membership**
----------

                                                                           **Number of Members at September 30,
                                                                             20022001**Continuing Operations:
HMO
  Commercial..................................................              185,800                  168,200
  Medicare....................................................               47,100                   45,300
  Medicaid....................................................               34,900                   23,500
Managed Indemnity.............................................               26,700                   29,300
Medicare Supplement...........................................               19,900                   25,000
Administrative Services (1)...................................              219,600                  206,100
TRICARE Eligibles.............................................              662,300                  643,300
                                                                          ---------                ---------
Total Members, Continuing Operations..........................            1,196,300                1,140,700
                                                                          =========                =========

Discontinued Texas Operations:
-----------------------------
HMO
  Commercial..................................................                    -                   50,900
  Medicare (2) ...............................................                    -                   14,100
                                                                          ---------                ---------
Total Members, Discontinued Operations........................                    -                   65,000
                                                                          =========                =========

(1)  Restated to exclude the  workers'  compensation  ASO  membership  which was
     93,000 at September 30, 2001.

(2)  The 2001 Medicare  membership  does not include 5,400 Houston  members that
     the  Company  ceded  to  AmCare  Health  Plans  of  Texas,  Inc.,  under  a
     reinsurance agreement on December 1, 2000.

**ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

As of September 30, 2002, we had unrealized  holding gains on available for sale
investments  of $2.0  million  compared  to  unrealized  holding  losses of $5.6
million at December 31, 2001. This fluctuation is due primarily to a decrease in
the yield on Government obligations and a decrease in mortgage rates. 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.

**ITEM 4. CONTROLS AND PROCEDURES**

Based on the  evaluation  by the Chief  Executive  Officer  and Chief  Financial
Officer of the  Company as of a date  within 90 days of the filing  date of this
quarterly report,  those officers believe that the Company's disclosure controls
and procedures are reasonably  effective to ensure that the information required
to be included  in this  report has been  recorded,  processed,  summarized  and
reported on a timely basis.  There have not been any significant  changes in the
Company's internal controls or in other factors that could significantly  affect
these  controls and there have been no  corrective  actions taken with regard to
significant  deficiencies and material weaknesses subsequent to the date of such
officers' evaluation.

                  **SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES

                           PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS**

We are subject to various claims and other  litigation in the ordinary course of
business.  Such litigation includes, for example, claims of medical malpractice,
claims for coverage or payment for medical services  rendered to HMO members and
claims by providers for payment for medical  services  rendered to HMO and other
members.  Some litigation may also include claims for punitive  damages that are
not  covered by  insurance.  Also  included  in such  litigation  are claims for
workers'  compensation  and claims by providers for payment for medical services
rendered to injured  workers.  These actions are in various stages of litigation
and some may  ultimately  be brought to trial.  With respect to certain  pending
actions,  the Company  maintains  commercial  insurance  coverage  with  varying
deductibles  for which  the  Company  maintains  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,   based  on  information  presently
available, the ultimate resolution of these pending legal proceedings should not
have a material adverse effect on our financial condition.

**ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS**

        None

**ITEM 3. DEFAULTS UPON SENIOR SECURITIES**

        None

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

        None

**ITEM 5. OTHER INFORMATION**

        None

**ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K**

          (a)  Exhibits

               (99.1) Certification pursuant to 18 U.S.C. as adopted pursuant to
                    Section 906 of the  Sarbanes-Oxley  Act of 2002 of Principal
                    Executive Officer dated November 14, 2002.

               (99.2) Certification pursuant to 18 U.S.C. as adopted pursuant to
                    Section 906 of the  Sarbanes-Oxley  Act of 2002 of Principal
                    Financial Officer dated November 14, 2002.

          (b)  Reports on Form 8-K

               Current  Report on Form 8-K,  dated  August  14,  2002,  with the
               Securities  and  Exchange   Commission  in  connection  with  the
               Company's  Principal  Executive  Officer and Principal  Financial
               Officer  submitting sworn  statements  pursuant to the Securities
               and Exchange Commission Order No. 4-460.

               Current  Report on Form 8-K,  dated  September 5, 2002,  with the
               Securities  and  Exchange   Commission  in  connection  with  the
               announcement  of the  Company's  participation  in a health  care
               conference on September 18, 2002.

                                   **SIGNATURES**

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

                                   SIERRA HEALTH SERVICES, INC.
                                   ----------------------------
                                           (Registrant)

Date:  November 14, 2002               /s/  Paul H. Palmer
                                    -----------------------------------
                                    Paul H. Palmer
                                    Senior Vice President of Finance,
                                    Chief Financial Officer and Treasurer
                                    (Principal Financial and Accounting Officer)

                                  **CERTIFICATION**

I, Anthony M. Marlon, M.D., Chief Executive Officer, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Sierra Health Services,
Inc.;

2. Based on my  knowledge,  this  quarterly  report  does not contain any untrue
statement of a material fact or omit to state a material fact  necessary to make
the statements made, in light of the  circumstances  under which such statements
were made, not  misleading  with respect to the period covered by this quarterly
report;

3.  Based  on my  knowledge,  the  financial  statements,  and  other  financial
information  included in this quarterly  report,  fairly present in all material
respects the financial  condition,  results of operations  and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;

4.  The  registrant's  other  certifying  officers  and  I are  responsible  for
establishing and maintaining  disclosure  controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

     a. designed such disclosure controls and procedures to ensure that material
     information   relating  to  the  registrant,   including  its  consolidated
     subsidiaries,  is  made  known  to  us by  others  within  those  entities,
     particularly  during  the period in which  this  quarterly  report is being
     prepared;

     b. evaluated the effectiveness of the registrant's  disclosure controls and
     procedures  as of a date  within 90 days prior to the  filing  date of this
     quarterly report (the "Evaluation Date"); and

     c.  presented  in  this  quarterly   report  our   conclusions   about  the
     effectiveness  of the  disclosure  controls  and  procedures  based  on our
     evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation,  to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):

     a. all  significant  deficiencies  in the design or  operation  of internal
     controls which could adversely affect the  registrant's  ability to record,
     process,  summarize and report  financial data and have  identified for the
     registrant's auditors any material weaknesses in internal controls; and

     b. any fraud,  whether or not material,  that involves  management or other
     employees who have significant role in the registrant's  internal controls;
     and

6. The  registrant's  other  certifying  officers  and I have  indicated in this
quarterly  report  whether or not there  were  significant  changes in  internal
controls or in other factors that could  significantly  affect internal controls
subsequent  to the date of our most recent  evaluation,  including my corrective
actions with regard to significant deficiencies and material weaknesses.

Date:  November 14, 2002
                                                /s/ Anthony M. Marlon
                                                ---------------------
                                                Anthony M. Marlon
                                                Chief Executive Officer

                                  **CERTIFICATION**

I, Paul H. Palmer, Chief Financial Officer, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Sierra Health Services,
Inc.;

2. Based on my  knowledge,  this  quarterly  report  does not contain any untrue
statement of a material fact or omit to state a material fact  necessary to make
the statements made, in light of the  circumstances  under which such statements
were made, not  misleading  with respect to the period covered by this quarterly
report;

3.  Based  on my  knowledge,  the  financial  statements,  and  other  financial
information  included in this quarterly  report,  fairly present in all material
respects the financial  condition,  results of operations  and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;

4.  The  registrant's  other  certifying  officers  and  I are  responsible  for
establishing and maintaining  disclosure  controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

     a. designed such disclosure controls and procedures to ensure that material
     information   relating  to  the  registrant,   including  its  consolidated
     subsidiaries,  is  made  known  to  us by  others  within  those  entities,
     particularly  during  the period in which  this  quarterly  report is being
     prepared;

     b. evaluated the effectiveness of the registrant's  disclosure controls and
     procedures  as of a date  within 90 days prior to the  filing  date of this
     quarterly report (the "Evaluation Date"); and

     c.  presented  in  this  quarterly   report  our   conclusions   about  the
     effectiveness  of the  disclosure  controls  and  procedures  based  on our
     evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation,  to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):

     a. all  significant  deficiencies  in the design or  operation  of internal
     controls which could adversely affect the  registrant's  ability to record,
     process,  summarize and report  financial data and have  identified for the
     registrant's auditors any material weaknesses in internal controls; and

     b. any fraud,  whether or not material,  that involves  management or other
     employees who have significant role in the registrant's  internal controls;
     and

6. The  registrant's  other  certifying  officers  and I have  indicated in this
quarterly  report  whether or not there  were  significant  changes in  internal
controls or in other factors that could  significantly  affect internal controls
subsequent  to the date of our most recent  evaluation,  including my corrective
actions with regard to significant deficiencies and material weaknesses.

Date:  November 14, 2002
                                                   /s/ Paul H. Palmer
                                                   ------------------
                                                   Paul H. Palmer
                                                   Chief Financial Officer
```