---

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

---

FORM 10-Q

---

(Mark One)


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

For the quarterly period ended June 30, 2004

OR



For the transition period from ________to _________

Commission file number    1-8865

Sierra Health Services, Inc.(Exact name of registrant as specified in its charter)



|Nevada                                                         | 88-0200415                             
|-------------------------------------------------------------- | ---------------------------------------
|(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number)

2724 North Tenaya Way
Las Vegas, Nevada     89128

(702) 242-7000

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file reports), and (2) has been subject to such filing
requirements for the past 90 days.    Yes

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

As of July 26, 2004,   there were  26,794,000  shares of common  stock
outstanding.

---



SIERRA HEALTH SERVICES, INC.

          Quarterly Report on Form 10-Q

For the period ended June 30, 2004



|PART I.   FINANCIAL INFORMATION                                                                                                                                                                                                                                                                                                                                                                       | Page No.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------
|                                                                                                                                                                                                                                                                                                                                                                                                     
|Item 1. Financial Statements (Unaudited):                                                                                                                                                                                                                                                                                                                                                             |         
|Condensed Consolidated Balance Sheets -
            
                   June 30, 2004 and December 31, 2003
          
        Condensed Consolidated Statement of Operations -
            
          three and six months ended June 30, 2004 and 2003
          
        Condensed Consolidated Statement of Cash Flows -
            
          three and six months ended June 30, 2004 and 2003 | 123     
|Notes to Condensed Consolidated Financial Statements                                                                                                                                                                                                                                                                                                                                                  | 4 - 17  
|Item 2.   Management's Discussion and Analysis of Financial
                      Condition and Results of Operations                                                                                                                                                                                                                                                                                 | 18 - 31 
|Item 3.   Quantitative and Qualitative Disclosures About Market Risk                                                                                                                                                                                                                                                                                                                                  | 32      
|Item 4.  Controls and Procedures                                                                                                                                                                                                                                                                                                                                                                      | 32      
|                                                                                                                                                                                                                                                                                                                                                                                                     
|PART II.  OTHER INFORMATION                                                                                                                                                                                                                                                                                                                                                                           |         
|                                                                                                                                                                                                                                                                                                                                                                                                     
|Item 1.   Legal Proceedings                                                                                                                                                                                                                                                                                                                                                                           | 33      
|Item 2.   Changes in Securities and Use of Proceeds                                                                                                                                                                                                                                                                                                                                                   | 34      
|Item 3. Defaults upon Senior Securities                                                                                                                                                                                                                                                                                                                                                               | 34      
|Item 4. Submission of Matters to a Vote of Security Holders                                                                                                                                                                                                                                                                                                                                           | 34 - 35 
|Item 5. Other Information                                                                                                                                                                                                                                                                                                                                                                             | 35      
|Item 6.   Exhibits and Reports on Form 8-K                                                                                                                                                                                                                                                                                                                                                            | 35 - 36 
|Signatures                                                                                                                                                                                                                                                                                                                                                                                            | 37      

---

i

PART I.  FINANCIAL INFORMATION

SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES

                      CONDENSED CONSOLIDATED BALANCE SHEETS

                      (In thousands, except per share data)

                                   (Unaudited)

`June 30,    December 31,
                                                                         2004          2003
                                                                     ------------  ------------
                              ASSETS                                                              
CURRENT ASSETS:
     Cash and Cash Equivalents..................................... $    177,310  $    118,473
     Investments...................................................      139,757       197,573
     Accounts Receivable (Less Allowance for Doubtful
         Accounts; 2004 - $6,421; 2003 - $7,342)...................       18,091        12,080
     Military Accounts Receivable (Less Allowance for Doubtful
         Accounts; 2004 and 2003 - $100)...........................       37,460        47,389
     Current Portion of Deferred Tax Asset.........................       26,698        33,708
     Prepaid Expenses and Other Current Assets.....................       47,454        37,478
     Assets of Discontinued Operations.............................        2,605       533,756
                                                                     ------------  ------------
         Total Current Assets......................................      449,375       980,457

PROPERTY AND EQUIPMENT, NET........................................       64,422        63,109
RESTRICTED CASH AND INVESTMENTS....................................       19,543        17,646
GOODWILL...........................................................       14,782        14,782
DEFERRED TAX ASSET (Less Current Portion)..........................       12,393        11,501
NOTE RECEIVABLE....................................................       62,000            --
OTHER ASSETS.......................................................       59,337        46,626
                                                                     ------------  ------------
TOTAL ASSETS....................................................... $    681,852  $  1,134,121
                                                                     ============  ============
                                                                                                  
               LIABILITIES AND STOCKHOLDERS' EQUITY                                               
CURRENT LIABILITIES:
     Accrued Liabilities........................................... $     82,416  $     56,327
     Trade Accounts Payable........................................       20,221        37,787
     Accrued Payroll and Taxes.....................................       29,758        15,879
     Medical Claims Payable........................................      113,101       103,749
     Unearned Premium Revenue......................................       20,202        45,888
     Military Health Care Payable..................................       65,366        76,605
     Current Portion of Long-Term Debt.............................           43           163
     Liabilities of Discontinued Operations........................          733       472,407
                                                                     ------------  ------------
         Total Current Liabilities.................................      331,840       808,805

LONG-TERM DEBT (Less Current Portion)..............................      115,288       116,645
OTHER LIABILITIES..................................................       67,560        57,907
                                                                     ------------  ------------
TOTAL LIABILITIES..................................................      514,688       983,357
                                                                     ------------  ------------
COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY:
  Preferred Stock, $.01 Par Value, 1,000
       Shares Authorized; None Issued or Outstanding
  Common Stock, $.005 Par Value, 60,000 Shares Authorized;
       2004 - 34,757; 2003 - 33,173 Shares Issued..................          174           166
  Treasury Stock: 2004 - 8,064; 2003 - 6,221 Common Stock Shares...     (187,877)     (112,737)
  Additional Paid-in Capital.......................................      265,081       227,417
  Deferred Compensation............................................       (4,319)          (22)
  Accumulated Other Comprehensive Loss.............................         (831)         (479)
  Retained Earnings................................................       94,936        36,419
                                                                     ------------  ------------
TOTAL STOCKHOLDERS' EQUITY.........................................      167,164       150,764
                                                                     ------------  ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY......................... $    681,852  $  1,134,121
                                                                     ============  ============`

See accompanying notes to condensed consolidated financial statements.

1

SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES

                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

                      (In thousands, except per share data)

                                   (Unaudited)

`Three Months Ended June 30,      Six Months Ended June 30,
                                                 ---------------------------     ---------------------------
                                                     2004          2003              2004          2003
OPERATING REVENUES:                              ------------  -------------     ------------  ------------- 
   Medical Premiums............................ $    280,661  $     239,142     $    546,099  $     474,222
   Military Contract Revenues..................      140,705        115,431          268,329        219,844
   Professional Fees...........................        8,085          9,715           17,563         18,419
   Investment and Other Revenues...............       11,788          5,917           17,438          9,990
                                                 ------------  -------------     ------------  -------------
         Total.................................      441,239        370,205          849,429        722,475
                                                 ------------  -------------     ------------  -------------
OPERATING EXPENSES:
   Medical Expenses............................      218,421        189,775          426,486        380,761
   Military Contract Expenses..................      116,420        113,347          237,217        215,143
   General and Administrative Expenses.........       45,231         33,787           82,399         68,000
                                                 ------------  -------------     ------------  -------------
         Total ................................      380,072        336,909          746,102        663,904
                                                 ------------  -------------     ------------  -------------
OPERATING INCOME FROM CONTINUING OPERATIONS....       61,167         33,296          103,327         58,571
Interest Expense...............................       (1,175)        (1,530)          (2,340)        (3,150)
Other Income (Expense), Net....................           41           (332)             163           (343)
                                                 ------------  -------------     ------------  -------------
INCOME FROM CONTINUING OPERATIONS
   BEFORE INCOME TAXES.........................       60,033         31,434          101,150         55,078
PROVISION FOR INCOME TAXES.....................      (21,812)       (10,924)         (36,614)       (19,140)
                                                 ------------  -------------     ------------  -------------
INCOME FROM CONTINUING OPERATIONS..............       38,221         20,510           64,536         35,938
LOSS FROM DISCONTINUED OPERATIONS
    (net of income tax benefit of $0,
     $987, $761, and $1,322), respectively.....           --           (245)            (486)          (651)
                                                 ------------  -------------     ------------  -------------
NET INCOME .................................... $     38,221  $      20,265     $     64,050  $      35,287
                                                 ============  =============     ============  =============
EARNINGS PER COMMON SHARE:
Income from Continuing Operations.............. $       1.43  $        0.75     $       2.40  $        1.27
Loss from Discontinued Operations..............           --          (0.01)           (0.02)         (0.02)
                                                 ------------  -------------     ------------  -------------
   Net Income ................................. $       1.43  $        0.74     $       2.38  $        1.25
                                                 ============  =============     ============  =============
EARNINGS PER COMMON SHARE ASSUMING DILUTION:
Income from Continuing Operations.............. $       1.10  $        0.68     $       1.85  $        1.18
Loss from Discontinued Operations..............           --          (0.01)           (0.01)         (0.02)
                                                 ------------  -------------     ------------  -------------
   Net Income ................................. $       1.10  $        0.67     $       1.84  $        1.16
                                                 ============  =============     ============  =============`

See accompanying notes to condensed consolidated financial statements.

2

SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES

                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

                                 (In thousands)

                                   (Unaudited)

`Six Months Ended June 30,
                                                                      ----------------------------
                                                                           2004          2003
                                                                      -------------  -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net Income ...................................................... $      64,050  $      35,287
   Adjustments to Reconcile Net Income to Net Cash
       Provided by Operating Activities:
          Loss from Discontinued Operations.........................           486            651
          Depreciation..............................................         8,274          7,715
          Deferred Compensation Expense.............................           951            293
          Provision for Doubtful Accounts...........................           750          1,201
          (Gain) Loss on Disposal of Assets.........................           (13)           789
   Changes in Assets and Liabilities:
          Other Assets .............................................        (2,027)        (5,335)
          Deferred Tax Asset........................................        23,948         12,156
          Other Liabilities.........................................       (11,562)         7,902
          Other Current Assets......................................          (441)       (10,872)
          Military Accounts Receivable..............................         9,929        (28,639)
          Military Health Care Payable..............................       (11,239)         9,053
          Medical Claims Payable....................................         9,352          5,912
          Accrued Payroll and Taxes.................................        13,879         10,044
          Unearned Premium Revenue..................................       (25,686)       (27,876)
                                                                      -------------  -------------
       Net Cash Provided by Operating Activities
          of Continuing Operations..................................        80,651         18,281
                                                                      -------------  -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
   Capital Expenditures, Net of Dispositions........................        (7,892)        (9,586)
   Change in Investments............................................        50,057         34,687
                                                                      -------------  -------------
       Net Cash Provided by Investing Activities of
          Continuing Operations.....................................        42,165         25,101
                                                                      -------------  -------------

CASH FLOWS FROM FINANCING ACTIVITIES:
   Payments on Debt and Capital Leases..............................        (1,524)       (60,460)
   Purchase of Treasury Stock.......................................       (82,759)       (34,267)
   Exercise of Stock in Connection with Stock Plans.................        16,920          4,294
   Proceeds from Senior Convertible Debentures......................            --        115,000
   Debt Issue Costs.................................................            --         (5,137)
                                                                      -------------  -------------
       Net Cash (Used for) Provided by Financing Activities of
          Continuing Operations.....................................       (67,363)        19,430
                                                                      -------------  -------------
NET CASH PROVIDED BY (USED FOR) DISCONTINUED OPERATIONS.............         3,384        (29,785)
                                                                      -------------  -------------
NET INCREASE IN CASH AND CASH EQUIVALENTS...........................        58,837         33,027

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD....................       118,473         45,778
                                                                      -------------  -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.......................... $     177,310  $      78,805
                                                                      =============  =============

Supplemental Condensed Consolidated Continuing Operations
  Statements of Cash Flows Information:
--------------------------------------------------------------------
  Cash Paid During the Period for Interest
   (Net of Amount Capitalized)...................................... $      (1,463) $      (1,125)
  Net Cash Paid During the Period for Income Taxes..................        (1,569)       (10,378)
Non-Cash Investing and Financing Activities:
  Assets and Liabilities Recorded in Conjunction with the Sale of
    the Workers' Compensation Operations............................        54,060             --
  Additions to Capital Leases.......................................            47             --`

See accompanying notes to condensed consolidated financial statements.

3

SIERRA HEALTH SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1. 	BASIS OF
PRESENTATION

The accompanying unaudited condensed consolidated
financial statements include the consolidated accounts of Sierra Health
Services, Inc. ("Sierra", a holding company, together with its subsidiaries,
collectively referred to herein as the "Company"). All material intercompany
balances and transactions have been eliminated. These statements and the
Company's annual audited consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the United States of
America; however, these statements do not contain all of the information and
disclosures that would be required in a complete set of audited financial
statements. They should, therefore, be read in conjunction with the Company's
annual audited consolidated financial statements and related notes thereto for
the year ended December 31, 2003. In the opinion of management, the accompanying
unaudited condensed consolidated financial statements reflect all material
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of the financial results for the interim periods presented.

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

4

2.	EMPLOYEE STOCK PLANS

Statement of Financial Accounting Standards No. 148,
"Accounting for Stock-Based Compensation - Transition and Disclosure"
requires prominent disclosures in interim as well as annual financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported net income.  The Company has continued to
account for its stock-based compensation using the intrinsic value method
prescribed by Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees," as amended.  Accordingly, no compensation cost
has been recognized for the Company's employee stock plans except for those
expenses associated with restricted stock units and certain stock options in
which vesting was or has been agreed to be accelerated.  Had compensation cost
for the Company's stock-based compensation plans been determined based on the
fair value at the grant dates for awards under those plans, the Company's net
income and earnings per share, would have been reduced to the pro forma amounts
indicated below:

`Three Months Ended June 30,      Six Months Ended June 30,
                                                 -----------------------------   ----------------------------
                                                      2004           2003            2004           2003
                                                 --------------  -------------   -------------  ------------- 
  (In thousands, except per share data)

Net income, as reported........................ $       38,221  $      20,265   $      64,050  $      35,287
Less: total stock-based employee compensation
   expense determined under fair value based
   methods for all  awards, net of tax.........         (1,484)        (2,319)         (2,842)        (3,417)
                                                 --------------  -------------   -------------  -------------
Pro forma net income .......................... $       36,737  $      17,946   $      61,208  $      31,870
                                                 ==============  =============   =============  =============

Net income per share, as reported.............. $         1.43  $        0.74   $        2.38  $        1.25
Pro forma net income, per share ...............           1.37           0.65            2.28           1.13

Net income per share
   assuming dilution, as reported.............. $         1.10  $        0.67   $        1.84  $        1.16
Pro forma net income, per share ...............           1.06           0.60            1.76           1.05`

3.	LONG-TERM DEBT

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

5

beginning on or after March 20, 2008.

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



Revolving Credit Facility.  On March 3, 2003, the
Company entered into a $65.0 million revolving credit facility, which replaced
its amended and restated credit facility.  The facility may be increased up to
an aggregate amount of $125.0 million upon receipt of new commitments from
existing or additional lenders.  Interest on the facility was initially LIBOR
plus 2.25% and is currently LIBOR plus 2.00%.  The facility will expire on April
30, 2006 but can be extended, at the sole discretion of each of the lenders,
until March 3, 2008.  The facility is available for general corporate purposes.
The Company has not yet drawn on this facility.



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

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

4.	SHARE REPURCHASE PROGRAM

From January 1, 2004 through
June 30, 2004, the Company purchased 2.2 million shares of its common stock, in
the open market or negotiated transactions, for $82.8 million at an average cost
of $37.38.  In addition to the remaining 56,000 shares its Board of
Directors has previously approved, the Company will then have available an additional
$70.0 million to be used for share repurchases based on approval by its Board
of Directors on May 20, 2004.  The Company's revolving credit facility, as
amended, allows for stock repurchases of up to $60.0 million from May 27, 2004
through December 31, 2004.  The Company purchased 528,000 shares for $22.8
million from May 27, 2004 through June 30, 2004.  From July 1, 2004 to July 21,
2004, the Company repurchased an additional 38,000 shares for $1.6 million at an
average cost of $43.70.



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

6

$43.20 per share, for a total of $21.6 million.  The closing price of the Company's common stock on the date of the
transaction, May 27, 2004, was $43.25.  The Company's Board of Directors
approved both of the purchases.



5. 	TEXAS DISCONTINUED OPERATIONS



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



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



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



`June 30,        December 31,
                                                              2004              2003
                                                        ----------------  ----------------
  (In thousands)                                                                          
ASSETS                                                                                    
 Cash and Cash Equivalents............................ $            396  $             47
 Investments..........................................            2,149             4,048
 Other Assets.........................................               60               115
                                                        ----------------  ----------------
ASSETS OF DISCONTINUED OPERATIONS.....................            2,605             4,210
                                                        ----------------  ----------------
LIABILITIES                                                                               
 Accounts Payable and Other Liabilities...............              616             2,658
 Medical Claims Payable...............................              117               202
                                                        ----------------  ----------------
LIABILITIES OF DISCONTINUED OPERATIONS................              733             2,860
                                                        ----------------  ----------------
NET ASSETS OF DISCONTINUED OPERATIONS................. $          1,872  $          1,350
                                                        ================  ================`

7

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

`Three Months Ended June 30,     Six Months Ended June 30,
                                                      ---------------------------    ---------------------------
                                                          2004          2003              2004          2003
                                                      ------------  -------------    -------------  ------------
  (In thousands)
Operating Revenues.................................. $         50  $          35    $          86  $         71
                                                      ------------  -------------    -------------  ------------

 Medical Expenses...................................           (8)           (72)            (183)       (1,451)
 General and Administrative Expenses, Net...........           58          1,234              (78)         (400)
 Interest Expense and Other, Net
   (including rental income)........................           --         (2,418)              73        (2,657)
                                                      ------------  -------------    -------------  ------------
 Total Expenses, Net................................           50         (1,256)            (188)       (4,508)
                                                      ------------  -------------    -------------  ------------
 Income from Discontinued Operations Before Taxes...           --          1,291              274         4,579
 Income Tax Provision...............................           --           (450)             (78)       (1,600)
                                                      ------------  -------------    -------------  ------------
 Net Income from Discontinued Operations............ $         --  $         841    $         196  $      2,979
                                                      ============  =============    =============  ============`

The operating revenues are all related to investment income.
All of the discontinued Texas HMO health care operations had previously been a
component of the "managed care and corporate operations" segment.

In the first quarter of 2003, the Company made an adjustment
due to continued favorable development.  The Company's estimate for medical
claims payable was reduced by $1.4 million and legal, restitution and other exit
related costs and the related accruals were reduced by $1.9 million.  Included
in the $1.9 million reduction is $1.2 million that had been originally recorded
as a charge in the third quarter of 2001.

In the second quarter of 2003, the Company determined that it
needed to increase its legal and restitution accruals by approximately $500,000.
Also in the second quarter of 2003, the remaining mortgage loan with Kaiser
Foundation Health Plan of Texas was paid off, resulting in a gain, net of tax,
of  $1.3 million.

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

Management believes that the remaining liabilities, at June
30, 2004, are appropriate and that no further revisions to the estimates are
necessary at this time.  Based on the current estimated Texas HMO health care
run-out costs and recorded reserves, the Company believes it has adequate funds
available and the ability to fund the anticipated obligations.



6.	CII FINANCIAL, INC. DISCONTINUED OPERATIONS



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

8

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



The Company received $14.2 million in cash at the closing,
subject to potential post closing adjustments with regard to the closing date
balance sheet. The transaction also includes a note receivable of $62.0 million,
plus accrued interest, payable to the Company in January 2010. The note
receivable can be increased or decreased depending on favorable or adverse claim
and expense development from the date of closing through December 31, 2009, and
other offsets and additions based on certain agreements between the parties.
The note receivable can be increased on a dollar for dollar basis for the first
$15 million in positive loss reserve development and $.50 per dollar on any
positive development in excess of $15 million.  The note receivable can also be
decreased on a dollar for dollar basis for the first $58 million in adverse loss
development.  Certain other contractual assets and liabilities were recorded in
conjunction with the sale including a current asset of $15.8 million and a non-
current asset of $7.1 million that represent Cal Indemnity's unallocated loss
adjustment expense ("ULAE") reserves to be paid to Sierra.  Offsetting
these assets is a current liability of $15.8 million and a non-current liability
of $7.1 million, which represent the contractual services to be performed by
Sierra.  Including the cash proceeds, net assets of $68.3 million were recorded
in conjunction with the sale of Cal Indemnity.  Previously, CII had recorded
valuation adjustments to reduce the business to its estimated net realizable
value upon disposition.  No further adjustments were required upon final
disposition; therefore, no gain or loss on the sale was recorded.



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



The Company's June 30, 2004 Condensed Consolidated Balance
Sheet does not include the assets and liabilities of Cal Indemnity due to the
disposal of those assets and liabilities at March 31, 2004.  The Company's
Condensed Consolidated Statement of Income for the six months ended June 30,
2004 reflects the activity of the discontinued operations through March 31,
2004, the disposal date.  Any subsequent activity related to this disposal will
be reflected in continuing operations.

9

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



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

10

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

`Three Months     Three Months      Six Months
                                           Ended June 30,   Ended March 31,  Ended June 30,
                                           -------------    ------------     -------------
                                               2003             2004             2003
                                           -------------    ------------     -------------
  (In thousands)
OPERATING REVENUES:
Specialty Product Revenues............... $      35,233    $     19,015    $       72,044
Investment and Other Revenues............         2,820           1,290             7,300
                                           -------------    ------------     -------------
    Total Revenues.......................        38,053          20,305            79,344
                                           -------------    ------------     -------------

OPERATING EXPENSES:
Specialty Product Expenses...............        41,362          21,917            86,747
Interest Expense and Other
  (Income) Expense, Net..................          (786)            (91)             (851)
                                           -------------    ------------     -------------
    Total Operating Expenses.............        40,576          21,826            85,896
                                           -------------    ------------     -------------

Loss from Discontinued
   Operations Before Income Tax .........        (2,523)         (1,521)           (6,552)

Income Tax Benefit.......................         1,437             839             2,922
                                           -------------    ------------     -------------
Net Loss from Discontinued
   Operations............................ $      (1,086)   $       (682)   $       (3,630)
                                           =============    ============     =============`

The activity for 2004 is through March 31, 2004, the disposal date.  There is no activity for the operations beyond that date.  Specialty
product revenues consist of workers' compensation insurance net earned premiums.  Specialty
product expenses consist of loss and loss adjustment expenses incurred and
general and administrative expenses.

11

7.	EARNINGS PER SHARE:



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

`Three Months Ended June 30,     Six Months Ended June 30,
                                                   ---------------------------    ---------------------------
                                                       2004           2003            2004           2003
                                                   -------------  ------------    -------------  ------------    
  (In thousands, except per share data)
BASIC INCOME (LOSS) PER SHARE
Income from continuing operations................ $      38,221  $     20,510    $      64,536  $     35,938
Loss from discontinued operations................            --          (245)            (486)         (651)
                                                   -------------  ------------    -------------  ------------
Net income....................................... $      38,221  $     20,265    $      64,050  $     35,287
                                                   =============  ============    =============  ============
Weighted average common shares outstanding.......        26,766        27,451           26,903        28,185
                                                   =============  ============    =============  ============
Earnings per common share:
Income from continuing operations................ $        1.43  $       0.75    $        2.40  $       1.27
Loss from discontinued operations................            --         (0.01)           (0.02)        (0.02)
                                                   -------------  ------------    -------------  ------------
Net income.......................................          1.43          0.74             2.38          1.25
                                                   =============  ============    =============  ============
DILUTED INCOME (LOSS) PER SHARE
Income from continuing operations................ $      38,221  $     20,510    $      64,536  $     35,938
Loss from discontinued operations................            --          (245)            (486)         (651)
                                                   -------------  ------------    -------------  ------------
Net income.......................................        38,221        20,265           64,050        35,287
Interest expense on Sierra Debentures,
   net of tax....................................           421            --              841            --
                                                   -------------  ------------    -------------  ------------
Income for purposes of computing diluted
   net income per share.......................... $      38,642  $     20,265    $      64,891  $     35,287
                                                   =============  ============    =============  ============
Weighted average common shares outstanding.......        26,766        27,451           26,903        28,185
Dilutive options and restricted shares
   outstanding...................................         2,005         2,543            2,134         2,262
Dilutive impact of conversion of
   Sierra Debentures.............................         6,288            --            6,288            --
                                                   -------------  ------------    -------------  ------------
Weighted average common shares outstanding
   assuming dilution.............................        35,059        29,994           35,325        30,447
                                                   =============  ============    =============  ============
Earnings per common share assuming dilution:
Income from continuing operations................ $        1.10 $        0.68   $         1.85  $       1.18
Loss from discontinued operations................            --         (0.01)           (0.01)        (0.02)
                                                   -------------  ------------    -------------  ------------
Net income....................................... $        1.10 $        0.67   $         1.84  $       1.16
                                                   =============  ============    =============  ============`

The Company evaluates the market price condition of its
convertible debentures each quarter to determine whether they will be
convertible, at the option of the holder, during the subsequent quarter. For the
quarters ended December 31, 2003, March 31, 2004 and June 30, 2004, the market
price condition was satisfied. As a result, the debentures were convertible, at
the option of the holder, at any time during the quarters ended March 31, 2004
and June 30, 2004 and are convertible at any time during the quarter ending
September 30, 2004. Although no debentures were converted as of June 30, 2004,
they are

12

considered common stock equivalents and are included in the calculation of weighted average common shares outstanding assuming dilution for the three
and six months ended June 30, 2004.

The Company issued 125,000 restricted stock units
("units") to certain executives in the second quarter of 2004.  For
the three and six months ended June 30, 2004, the units were not dilutive and,
therefore, were not included in the computation of diluted earnings per share.
For the six months ended June 30, 2004, stock options to purchase 17,000 shares
were not dilutive and, therefore, were also not included in the computation of
diluted earnings per share.

For the three and six months ended June 30, 2003, stock
options to purchase 259,000 and 281,000 shares, respectively, were not dilutive and, therefore,
were not included in the computation of diluted earnings per share.

8.	DEFINED BENEFIT PLAN

The Company previously disclosed that it expects to
contribute approximately $800,000 to its defined benefit plan in 2004 to fund
expected benefit payments.  As of June 30, 2004, the Company has contributed
$392,000 to the plan to fund benefit payments and anticipates making
approximately $400,000 in additional contributions during 2004.

`Three Months Ended June 30,    Six Months Ended June 30,
                                               ---------------------------    -------------------------
                                                   2004           2003            2004         2003
                                               -------------  ------------    ------------  -----------
  (In thousands)

Components of Net Periodic Benefit Cost:
Service Cost................................. $         106  $         81    $        212  $       158
Interest Cost................................           418           336             836          670
Amortization of Prior Service Credits........           303           232             606          463
Recognized Actuarial Loss....................           109           172             218          343
                                               -------------  ------------    ------------  -----------
Net Periodic Benefit Cost.................... $         936  $        821    $      1,872  $     1,634
                                               =============  ============    ============  ===========`

9.	COMPREHENSIVE INCOME

The following table presents comprehensive
income for the periods indicated:

`Three Months Ended June 30,      Six Months Ended June 30,
                                                     ---------------------------     ---------------------------
                                                         2004          2003              2004          2003
                                                     ------------  -------------     ------------  ------------- 
  (In thousands)
Net Income ........................................ $     38,221  $      20,265     $     64,050  $      35,287
Change in Unrealized Holding Gain
  on Available-for-Sale Investments, net of tax....       (1,134)          (708)            (352)           (35)
Change in Minimum Pension Liability, net of tax....           --            368               --            206
                                                     ------------  -------------     ------------  -------------
Comprehensive Income .............................. $     37,087  $      19,925     $     63,698  $      35,458
                                                     ============  =============     ============  =============`

13

10.	SEGMENT REPORTING

The Company has two reportable
segments based on the products and services offered:  managed care and corporate
operations, and military health services operations. The managed care segment
includes managed health care services provided through an HMO, managed indemnity
plans, third-party administrative services programs for employer-funded health
benefit plans and self-insured workers' compensation plans, multi-specialty
medical groups, workers' compensation administration services, other ancillary
services and corporate operations.  The military health services segment
administers a managed care federal contract for the Department of Defense's
("DoD") TRICARE program in Region 1.  The military health services segment
includes an allocation for estimated corporate overhead of $1.0 million per
quarter for direct and indirect services provided to Sierra Military Health Services LLC, ("SMHS").

SMHS
completed the fifth year of a five-year contract in May 2003.  SMHS is currently
operating in a negotiated contract extension period which will end August 31,
2004.  In August 2002, the DoD requested proposals for managed care services
under the TRICARE Next Generation ("T-Nex") contract.  The Company
submitted its proposal in January 2003 for the T-Nex North Region contract,
which includes Region 1, as well as Michigan, Ohio, Kentucky, Indiana, Illinois,
Wisconsin, Virginia and North Carolina.  In August 2003, the DoD awarded the T-
Nex North Region contract to a competitor and the General Accounting Office
denied the Company's protest of the award in December 2003.  The new contractor
is scheduled to be operational in Region 1 on September 1, 2004 and the new
contract will supersede the remainder of the Company's current TRICARE Region 1
contract.  After the new contractor is operational on September 1, 2004, SMHS
will commence a six-month phase-out of operations at prices previously
negotiated with the DoD.  SMHS does not meet the definition of discontinued
operations since the Company does not have plans to dispose of the operations
before the phase-out is complete.

The Company evaluates each segment's performance based on
segment operating profit.  The accounting policies of the operating segments are
the same as those described in the summary of significant accounting
policies.

14

`Managed Care   Military Health
                                               and Corporate      Services
                                                Operations       Operations         Total
                                              ---------------  ---------------  --------------
  (In thousands)                                                                              
Three Months Ended June 30, 2004                                                              
Medical Premiums............................ $       280,661  $            --  $      280,661
Military Contract Revenues..................              --          140,705         140,705
Professional Fees...........................           8,085               --           8,085
Investment and Other Revenues...............          11,502              286          11,788
                                              ---------------  ---------------  --------------
   Total Revenue............................ $       300,248  $       140,991  $      441,239
                                              ===============  ===============  ==============

Segment Operating Profit.................... $        36,596  $        24,571  $       61,167
Interest Expense............................          (1,150)             (25)         (1,175)
Other Income (Expense), Net.................              73              (32)             41
                                              ---------------  ---------------  --------------
Income from Continuing Operations
   Before Income Taxes...................... $        35,519  $        24,514  $       60,033
                                              ===============  ===============  ==============
                                                                                              
Three Months Ended June 30, 2003                                                              
Medical Premiums............................ $       239,142  $            --  $      239,142
Military Contract Revenues..................              --          115,431         115,431
Professional Fees...........................           9,715               --           9,715
Investment and Other Revenues...............           5,323              594           5,917
                                              ---------------  ---------------  --------------
   Total Revenue............................ $       254,180  $       116,025  $      370,205
                                              ===============  ===============  ==============

Segment Operating Profit.................... $        30,618  $         2,678  $       33,296
Interest Expense............................          (1,446)             (84)         (1,530)
Other Income (Expense), Net.................            (712)             380            (332)
                                              ---------------  ---------------  --------------
Income from Continuing Operations
   Before Income Taxes...................... $        28,460  $         2,974  $       31,434
                                              ===============  ===============  ==============
                                                                                              
Six Months Ended June 30, 2004                                                                
Medical Premiums............................ $       546,099  $            --  $      546,099
Military Contract Revenues..................              --          268,329         268,329
Professional Fees...........................          17,563               --          17,563
Investment and Other Revenues...............          16,507              931          17,438
                                              ---------------  ---------------  --------------
   Total Revenue............................ $       580,169  $       269,260  $      849,429
                                              ===============  ===============  ==============

Segment Operating Profit.................... $        71,284  $        32,043  $      103,327
Interest Expense............................          (2,297)             (43)         (2,340)
Other Income (Expense), Net.................             200              (37)            163
                                              ---------------  ---------------  --------------
Income from Continuing Operations
   Before Income Taxes...................... $        69,187  $        31,963  $      101,150
                                              ===============  ===============  ==============
                                                                                              
Six Months Ended June 30, 2003                                                                
Medical Premiums............................ $       474,222  $            --  $      474,222
Military Contract Revenues..................              --          219,844         219,844
Professional Fees...........................          18,419               --          18,419
Investment and Other Revenues...............           9,159              831           9,990
                                              ---------------  ---------------  --------------
   Total Revenue............................ $       501,800  $       220,675  $      722,475
                                              ===============  ===============  ==============

Segment Operating Profit.................... $        53,039  $         5,532  $       58,571
Interest Expense............................          (3,020)            (130)         (3,150)
Other Income (Expense), Net.................            (705)             362            (343)
                                              ---------------  ---------------  --------------
Income from Continuing Operations
   Before Income Taxes...................... $        49,314  $         5,764  $       55,078
                                              ===============  ===============  ==============`

15



Of the cash and cash equivalents and current investments
that total $317.1 million in the accompanying Consolidated Balance Sheet at June
30, 2004, $183.2 million is limited for use only by the Company's regulated
subsidiaries.  Such amounts are available for transfer to Sierra from the
regulated subsidiaries only to the extent that they can be remitted in
accordance with terms of existing management agreements and by dividends, which
customarily must be approved by regulating state insurance departments.  The
remainder is available to Sierra on an unrestricted basis.

Investments consist primarily of U.S. Government and its
agencies' securities, municipal bonds, corporate bonds, securities and first
trust deed mortgage notes.  At June 30, 2004, approximately 90% of the Company's
investment portfolio is invested in U.S. Government and its agencies' securities
and municipal bonds.  All non-restricted investments that are designated as
available-for-sale are classified as current assets.  These investments are
available for use in the current operations regardless of contractual maturity
dates.  Restricted investments are classified as non-current assets. Realized
gains and losses are calculated using the specific identification method and are
included in investment and other revenues.  Unrealized holding gains and losses
on available-for-sale securities are included as a separate component of
stockholders' equity, net of income tax effects, until realized.

Investments that the Company has the intention and ability to
hold to maturity are stated at amortized cost and categorized as held-to-
maturity.  All of the Company's held-to-maturity investments were part of the
discontinued workers' compensation operations.  At June 30, 2004, the Company
does not have any held-to-maturity investments and all investments have been
stated at their fair value.  Fair value is estimated primarily from published
market values at balance sheet date. The Company does not believe it has any
other than temporary investment impairments.

12.	COMMITMENTS AND CONTINGENCIES

On March 15, 2004, SMHS entered into a lease assignment
agreement relative to one of its administrative locations.  The agreement
assigns the remainder of the lease term, which expires September 30, 2012.
Under the assignment SMHS remains contingently liable should the new tenant not
perform under its obligation.  At June 30, 2004, the future lease payments due
under the lease agreement total $5.5 million.  SMHS did not record a liability
for its obligation under this agreement as the likelihood of performance is
considered remote at this time and SMHS would have the ability to sublease or
enter into another assignment arrangement if required to perform on this
obligation.

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

16

Significantly, the court denied the industry defendants' motion with respect to plaintiffs' derivative RICO claims.
On September 19, 2003, the industry defendants appealed the district court's arbitration order to the Eleventh Circuit. Discovery is ongoing
and a trial date has been set for September 13, 2004. In the meantime, two of
the defendants, Aetna Inc. and Cigna Corporation, have entered into settlement
agreements which have been approved by the Court.

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

17

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

ITEM 2.

The following discussion and analysis provides
information which management believes is relevant for an assessment and
understanding of our consolidated financial condition and results of operations.
The discussion should be read in conjunction with our audited consolidated
financial statements and accompanying notes for the year ended December 31,
2003, and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included in our 2003 annual report on Form 10-K filed
with the Securities and Exchange Commission on March 5, 2004, and in conjunction
with our unaudited condensed consolidated financial statements and accompanying
notes for the three and six month periods ended June 30, 2004 and 2003, included
in this Form 10-Q. The information contained below is subject to risk factors.
We urge the reader to review carefully the section "Risk Factors" in Part 1,
Item 1 of our 2003 annual report on Form 10-K for a more complete discussion of
the risks associated with an investment in our securities. See "Note on Forward-
Looking Statements and Risk Factors" under Part 1, Item 1 of our 2003 annual
report on Form 10-K.

This report on Form 10-Q contains "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933
and Section 21E of the Securities Exchange Act of 1934, both as amended.  The
forward-looking statements regarding our business and results of operations
should be considered by our stockholders or any reader of our business or
financial information along with the risk factors discussed in our 2003 annual
report on Form 10-K.  All statements other than statements of historical fact
are forward-looking statements for purposes of federal and state securities
laws. The cautionary statements are made pursuant to the "safe harbor"
provisions of the Private Securities Litigation Reform Act of 1995, as amended,
and identify important factors that could cause our actual results to differ
materially from those expressed in any projected, estimated or forward-looking
statements relating to us.  These forward-looking statements are generally
identified by their use of terms and phrases such as "anticipate,"
"believe," "could,"  "estimate,"
"expect,"  "hope,"  "intend,"  "may,"
"plan,"  "predict,"  "project,"
"seeks," "will," "continue," and other similar
terms and phrases, including all references to assumptions.

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

Overview

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

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

18

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

Executive Summary

Continuing Operations.  Our operating results for the six months ended June 30, 2004, were
significantly improved over the six months ended June 30, 2003.  Our income from continuing
operations increased by 79.6% to $64.5 million.  The improvement in the 2004 operating results
was primarily driven by medical premium revenue growth from new members, rate increases, an
expansion of our operating margin and contractual settlements and other adjustments at our
Military operation.  Our HMO membership increased by 13.2% from 281,600 at June 30, 2003 to
318,700 at June 30, 2004.  Our aggregate 2004 premium rates increased by approximately 5.3%
over 2003.  The combination of these factors resulted in a 15.2% increase in our medical
premium revenues to $546.1 million, which was partially offset by an increase in medical
expenses, which increased by 12.0% to $426.5 million.  Medical expenses, as a percentage of
medical premiums and professional fees, decreased from 77.3% to 75.7%, or 160 basis points for
the six months ended June 30, 2004.  Our operating margin, which is the operating income from
continuing operations divided by total revenues, improved by 410 basis points to 12.2%.

Our Military Health Services Operations segment represented 31.7% of our operating revenues
and 31.0% of our operating income from continuing operations for the six months ended June 30,
2004.  This segment had income before income taxes of $32.0 million for the six months ended
June 30, 2004, compared to $5.8 million for the same period in 2003.  For 2003, excluding
TRICARE Next Generation, or T-Nex, bid related expenses, the Military Health Services
Operations segment would have had income before income taxes of $10.1 million.   The
improvement over 2003 is primarily due to change orders and final bid price adjustments on
option periods three and four of the TRICARE Region 1 contract.  The impact on income before
taxes of the change orders, final bid price adjustments for option periods three and four and other
contractual settlements was an increase of $16.3 million.

We did not win the T-Nex North Region contract and our appeal to the United States General
Accounting Office was denied in December 2003.  Health care services under our current
TRICARE contract for Region 1 will end on August 31, 2004.  We will then have a six-month
phase-out at substantially reduced revenues and earnings.

For the six months ended June 30, 2004 compared to June 30, 2003, investment and other
revenues increased from $10.0 million to $17.4 million, an increase of $7.4 million or 74.6%.    Of
the increase, $5.9 million is related to the services we are providing relative to our sales
agreement for the workers' compensation insurance operations, beginning April 1, 2004.  For a
further description of this agreement, see below in the discussion of Discontinued Operations.

For the six months ended June 30, 2004 compared to June 30, 2003, our general and
administrative, or G&A, expenses increased from $68.0 million to $82.4 million, an increase of
approximately $14.4 million or 21.2%.  Of the increase, $5.9 million is for the cost to provide
services related to the sale of the workers' compensation insurance operations referred to above.
The remaining increase is due to increases in payroll and benefits, premium taxes and legal
expenses.  As a percentage of total operating revenues, G&A expenses were 9.7% for 2004,
compared to 9.4% in 2003.  As a percentage of medical premium revenue, G&A expenses were
15.1% for 2004, compared to 14.3% for 2003.  Excluding the services relative to our sales agreement for the workers'
compensation insurance opeations described above, our G&A expenses, as a percentage of total operating revenues and medical premium revenue for
the six month period, were 9.1% and 14.0%, respectively.

19

We had cash flows from operating activities of continuing operations for the six months ended
June 30, 2004, of $80.7 million compared to $18.3 million for 2003.  We received five monthly
payments from the Centers for Medicare and Medicaid Services
during the first two quarters of 2004 and 2003 as the January payments were received at the end of December.  When the first
quarters are adjusted to reflect three monthly payments from CMS, the cash flow from continuing
operations would be $113.6 million in 2004 and $48.2 million in 2003.  We believe presenting this
adjustment for the timing of the CMS payments is useful for making a six-month period-to-period
comparison of our cash flow from continuing operations.  The improvement in cash flows from
continuing operations over 2003 is primarily attributable to cash from earnings and the decrease
in cash related to the increase in the military accounts receivable balance that occurred from
December 31, 2002 to June 30, 2003.

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

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

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

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

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

20



RESULTS OF OPERATIONS, THREE MONTHS ENDED JUNE 30, 2004,
COMPARED TO THREE MONTHS ENDED JUNE 30, 2003



Total Operating Revenues increased approximately
19.2% from $370.2 million to $441.2 million.



The change in operating revenues was comprised of the
following:

- An increase in medical premiums of $41.5
million
- An increase in military contract revenues of $25.3
million
- A decrease in professional fees of $1.6 million
- An increase in investment and other revenues of $5.9
million

Medical Premiums from our HMO and managed
indemnity insurance subsidiaries increased from $239.1 million to $280.7
million, an increase of $41.5 million or 17.4%. The increase in premium revenue
reflects a 5.6% increase in Medicare member months (the number of months
individuals are enrolled in a plan), a 32.9% increase in Medicaid member months
and a 10.8% 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.  Of the 32.9% increase in Medicaid member
months, 19.0% is due to the expansion of our Medicaid service area to Reno
beginning February 2004.

HMO and POS premium rates for renewing commercial groups
increased approximately 6% while the overall recorded per member per month
revenue increase, including new and continuing business, was approximately 3%,
net of changes in benefits.  We did not receive a Medicaid rate increase in 2004
or 2003.  The basic Medicare rate increase received for 2004 was approximately
2.2%.  In addition, we received a Medicare rate increase on March 1, 2004, of
over 15% due to the Medicare Prescription Drug, Improvement, and Modernization
Act of 2003, or MMA, as described below.

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

Effective January 2004, CMS adopted a new risk adjustment
payment methodology for Medicare beneficiaries who are enrolled in managed care
programs, including the Social HMO. In addition, CMS has revised the payment
factors for the Social HMO members to include a frailty adjuster that uses
measures of functional impairment to predict expenditures.  Under the new
payment methodology, we are being paid 90% based on the previous payment
approach and 10% based on the new approach for 2004.  For 2004, excluding the
effects of MMA, the new payment methodology reduced our rate increase by 60
basis points.  For 2005 we will be paid 70% based on the previous payment
approach and 30% based on the new approach.  The Social HMO program was due to
expire at the end of 2003; however, CMS administratively extended the Social HMO
program for one year, through 2004.  If the Social HMO contract is not renewed
beyond 2004, we would seek to transfer the members into one of our traditional
Medicare plans.  This transfer would allow for the continuity of care of our
members but without the additional Social HMO specific benefits that are
currently available to them and the associated higher

21

premiums we receive.  There are activities taking place on a federal level to continue the program,
but there is no guarantee at this time that the Social HMO contract will be
renewed beyond 2004.

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

Our commercial membership increased from 194,100 at June 30,
2003 to 215,700 at June 30, 2004.  Our commercial member retention was
approximately 95% for our second quarter 2004 renewals, which represent
approximately 7% of our total commercial membership.  The increase in commercial
membership during the second quarter of 2004 is primarily attributed to in-case
growth, movement from self-insured plans to our commercial products and new
accounts.



Military Contract Revenues increased from $115.4
million to $140.7 million, an increase of $25.3 million or 21.9%. The increased
revenue is primarily the result of increased health care bid revenue consistent
with the terms of Sierra Military Health Services LLC, or SMHS' negotiated contract extension for the first year beyond
the original five-year term.  In addition, incremental change order revenues and
final bid price adjustments on option periods three and four contributed to the
higher revenue for 2004.  The final bid price adjustments resulted in revenue
increases of approximately $6.1 million for Option Period 3 (June 1, 2000 to May
31, 2001), which is 3.4% of the final revenue settlement amount for that period
and $4.3 million for Option Period 4 (June 1, 2001 to May 31, 2002), which is
2.3% of the final revenue settlement amount for that period.  The impact on
income before taxes of the final bid price adjustments for option periods three
and four was an increase of $6.6 million.  The total impact on income
before taxes of the change orders, bid price adjustments and other contractual
settlements was an increase of $16.3 million.



SMHS completed the
fifth year of a five-year contract in May 2003.  SMHS is currently operating in
a negotiated contract extension period, which will end August 31, 2004.  In
August 2002, the Department of Defense, or DoD, requested proposals for managed
care services under the T-Nex contract.  We submitted our proposal in January
2003 for the T-Nex North Region contract, which includes Region 1, as well as
Michigan, Ohio, Kentucky, Indiana, Illinois, Wisconsin, Virginia and North
Carolina.  In August 2003, the DoD awarded the T-Nex North Region contract to a
competitor and the General Accounting Office denied our protest of the award in
December 2003.  The new contractor is scheduled to be operational in Region 1 on
September 1, 2004 and the new contract will supersede the remainder of our
current TRICARE Region 1 contract.  After the new contractor is operational on
September 1, 2004, SMHS will commence a six-month phase-out of operations at
prices previously negotiated with the DoD.  SMHS does not meet the definition of
discontinued operations since we do not have plans to dispose of the operations
before the phase-out is complete.



In March 2004, SMHS entered into a definitive
agreement with the new T-Nex North Region Contractor to provide certain
transition services and to sell certain portions of its TRICARE business,
including its provider network and certain other assets.  The value of the
transaction is up to $4 million with the final value contingent on SMHS'
operational performance through August 2004.  SMHS recorded revenue of
approximately $200,000 pursuant to this agreement in the second quarter of
2004.



Professional Fees decreased from $9.7 million to $8.1
million, a decrease of $1.6 million, or 16.8% primarily as a result of the
outsourcing of our eye care unit in late 2003.  The outsourcing of these
services reduced both our revenue and corresponding expenses.



Investment and Other Revenues increased from $5.9
million to $11.8 million, an increase of $5.9 million or 99.2%.  The increase in
administrative services revenue is due to the services we are providing relative
to our sales agreement for the workers' compensation insurance operations,
beginning April 1, 2004.  On March 31, 2004, we completed the sale of the
workers' compensation insurance operations and we have been engaged to
administer claims for a period of fifteen years as well as perform certain
transition and

22

managed care services.  Total revenue associated with these services for 2004 was $5.9 million.  The cost to provide these services is
reflected in our general and administrative expenses.  In addition we recorded
accrued interest of $620,000 on the $62.0 million note receivable.

Medical Expenses increased from $189.8 million
to $218.4 million, an increase of $28.6 million or 15.1%.  The increase is due
primarily to our increased membership, which is in part offset by a lower
medical care ratio.  This ratio, which is medical expenses as a percentage of
medical premiums and professional fees, decreased from 76.3% to 75.6%.  The
favorable decrease in our medical care ratio is due primarily to premium
increases in excess of cost increases.  We incurred some favorable development
on prior period claims during the quarter, which were more than offset by
contractual allowances we recorded to cover ongoing provider disputes and negotiations.  The
number of days in claims payable, which is the medical claims payable balance
divided by the average medical expense per day for the period, at June 30, 2004,
was 47.1 compared to 49.8 at June 30, 2003.  In an effort to further improve
service and customer relations with our medical providers, we have enhanced
several claims processes, including electronic data interchange and optical
character recognition, to reduce the time required to make claim payments.  The
decrease in days in claims payable is primarily a result of these
enhancements.

We contract with hospitals, physicians and other independent
contracted providers of health care under capitated or discounted fee-for-
service arrangements, including hospital per diems, to provide medical care
services to members.  Capitated providers are at risk for a portion of the cost
of medical care services provided to our members in the relevant geographic
areas; however, we are ultimately responsible for the provision of services to
our members should the capitated provider be unable to provide the contracted
services.  We incurred capitation expenses with non-affiliated providers of
$28.9 million and $25.0 million, or 13.2% and 13.2%, of our total medical
expenses for 2004 and 2003, respectively.



Military Contract Expenses increased from $113.3
million to $116.4 million, an increase of $3.1 million or 2.7%. The increase is
consistent with the increase in revenues discussed previously and includes T-Nex
bid related costs of $2.0 million in 2003.  In addition, the 2004 contract
expenses included final bid price adjustments on option periods three and four
of the TRICARE Region 1 contract.  The final adjustments resulted in a contract
expense increase of approximately $1.9 million for Option Period 3, which is
0.9% of the final contract expense settlement amount for that period and a
contract expense increase of $1.9 million for Option Period 4, which is 0.8 % of
the final contract expense settlement amount for that period.  There were no
final settlements of bid price adjustments in 2003.  Included in our military
contract expenses is an allocation for estimated corporate overhead of $1.0
million per quarter for direct and indirect services provided to SMHS.



Health care delivery expense consists primarily of costs to
provide managed health care services to eligible beneficiaries in accordance
with Sierra's TRICARE contract.  Under the contract, SMHS provides health care
services to 710,000 eligible individuals of active duty military personnel,
military retirees under the age of 65 and dependents of military retirees
through a network of approximately 50,300 health care providers and certain
other subcontractor partnerships.  Also included in military contract expenses
are costs incurred to perform specific administrative services, such as health
care appointment scheduling, enrollment, medical and network management services
as well as health care advice line services, and other administrative functions
of the military health care subsidiary. These administrative services are
performed for active duty personnel and family members as well as retired
military families.



General and Administrative Expenses increased
from $33.8 million to $45.2 million, an increase of approximately $11.4 million
or 33.9%.  The primary increase in G&A expenses is the $5.9 million to
provide services relative to our sales agreement for the workers' compensation
insurance operations as

23

discussed above.  The remaining increases in G&A expenses are primarily due to increases in payroll and benefits and legal
expenses.  As a percentage of revenues, G&A expenses were 10.3% for 2004,
compared to 9.1% in 2003.   As a percentage of medical premium revenue, G&A
expenses were 16.1% for 2004, compared to 14.1% for 2003.  Excluding the
services relative to our sales agreement for the workers' compensation insurance operations described above, our G&A expenses, as a percentage of total
operating revenues and medical premium revenue for the three month period, were
9.0% and 14.0%, respectively.



Interest Expense decreased from $1.5 million to
$1.2 million, a decrease of $355,000 or 23.2%.  The decrease is due to costs
incurred relative to the new senior convertible debentures in 2003.  We continue
to incur a fee of 0.375% on the unused portion of our revolving credit facility.



Other Income (Expense), Net resulted in income of
$41,000 for 2004 compared to expense of $332,000 for 2003.  The expense in 2003
was primarily related to the loss on sale of certain assets.



Provision for Income Taxes was recorded at $21.8
million for 2004 compared to $10.9 million for 2003. The effective tax rate for
2004 was 36.3% compared to 34.8% for 2003. Our effective tax rate is greater
than the statutory rate due primarily to state income taxes and other non-
deductible expenses.



Discontinued Operations consist of our Texas HMO
health care operations and the CII workers' compensation operations. The net
loss from discontinued operations for 2003 was $245,000.  We have discontinued
paying Texas claims, as our evidence of coverage requires that all claims must
be settled within 18 months of the time of service.



Discontinued Texas HMO health care operations. There is
very little activity remaining relative to our discontinued Texas operations and
there was no income or loss for the current period.

Discontinued CII workers' compensation operations.  On
March 31, 2004, we completed the sale of CII's subsidiary, Cal Indemnity.  The
activity related to this transaction, subsequent to the March 31, 2004 closing
date, has been discussed above.

The sale of Cal Indemnity includes a note receivable of $62.0
million, plus accrued interest, payable in January 2010. The note receivable can
be increased or decreased depending on favorable or adverse claim and expense
development from the date of closing through December 31, 2009, and other
offsets and additions based on certain agreements between the parties.  Interest
accrues quarterly on the note at 4.0%.



RESULTS OF OPERATIONS, SIX MONTHS ENDED JUNE 30, 2004,
COMPARED TO SIX MONTHS ENDED JUNE 30, 2003

Total Operating Revenues increased approximately
17.6% from $722.5 million to $849.4 million.



The change in operating revenues was comprised of the
following:

- An increase in medical premiums of $71.9
million
- An increase in military contract revenues of $48.5
million
- A decrease in professional fees of $856,000
- An increase in investment and other revenues of $7.4
million

Medical Premiums from our HMO and managed
indemnity insurance subsidiaries increased from $474.2 million to $546.1
million, an increase of $71.9 million or 15.2%. The increase in premium revenue
reflects a 5.9% increase in Medicare member months (the number of months
individuals are enrolled in a plan), a

24

27.5% increase in Medicaid member months and an 11.4% increase in commercial member months.  The growth in
Medicare member months contributes significantly to the increase in premium revenues as the Medicare per member premium rates are more than three times higher than the
average commercial premium rate.

HMO and POS premium rates for renewing commercial groups
increased approximately 6% while the overall recorded per member per month
revenue increase, including new and continuing business, was approximately 4%,
net of changes in benefits.  We did not receive a Medicaid rate increase in 2004
or 2003.  The basic Medicare rate increase received in 2004 was approximately
2.2%.  Our overall Medicare rate increase was approximately 12.5% due primarily
to the impact of the MMA, as previously described, which started in March
2004.

Our commercial membership increased from 194,100 at June 30,
2003 to 215,700 at June 30, 2004.  Our commercial member retention was
approximately 95% on renewals through June 30, 2004, which represents
approximately 53% of our total commercial membership.

Military Contract Revenues increased from
$219.8 million to $268.3 million, an increase of $48.5 million or 22.1%.  The
increased revenue is primarily the result of increased health care bid revenue
consistent with the terms of SMHS' negotiated contract extension for the first
year beyond the original five-year term.  In addition, incremental change order
revenues and final bid price adjustments on option periods three and four
contributed to the higher revenue for 2004.  The final bid price adjustments
resulted in revenue increases of approximately $6.1 million for Option Period 3
(June 1, 2000 to May 31, 2001), which is 3.4% of the final revenue settlement
amount for that period and $4.3 million for Option Period 4 (June 1, 2001 to May
31, 2002), which is 2.3% of the final revenue settlement amount for that
period.  The impact on income before taxes of the final bid price adjustments
for option periods three and four was an increase of $6.6 million.  The
total impact on income before taxes of the change orders, bid price adjustments
and other contractual settlements was an increase of $16.3 million.



In March 2004, SMHS entered into a definitive
agreement with the new T-Nex North Region Contractor to provide certain
transition services and to sell certain portions of its TRICARE business,
including its provider network and certain other assets.  The value of the
transaction is up to $4 million with the final value contingent on SMHS'
operational performance through August 2004.  SMHS has recorded revenue of
approximately $700,000 pursuant to this agreement during 2004.



Professional Fees decreased from $18.4 million to
$17.6 million, a decrease of $856,000, or 4.6% primarily as a result of the
outsourcing of our eye care unit in late 2003.  The outsourcing of these
services reduced both our revenue and corresponding expenses.



Investment and Other Revenues increased from $10.0
million to $17.4 million, an increase of $7.4 million or 74.6%.  The increase in
administrative services revenue is due to the services we are providing relative
to our sales agreement for the workers' compensation insurance operations,
beginning April 1, 2004.  On March 31, 2004, we completed the sale of the
workers' compensation insurance operations and we have been engaged to
administer claims for a period of fifteen years as well as perform certain
transition and managed care services.  Total revenue associated with these
services for 2004 was $5.9 million.  The cost to provide these services is
reflected in our general and administrative expenses.  The remaining increase in
investment and other revenues is due to higher average invested balances, the
accrued interest on our note receivable and an increase in net gains on the sale
of investments.



Medical Expenses increased from $380.8 million to
$426.5 million, an increase of $45.7 million or 12.0%.  The increase is due
primarily to our increased membership, which is in part offset by a lower
medical care ratio.  This ratio, which is medical expenses as a percentage of
medical premiums and professional fees, decreased from 77.3% to 75.7%.  The
favorable decrease in our medical care ratio is due primarily to premium
increases in excess of cost increases.  We incurred capitation expenses with

25

non-affiliated providers of $55.8 million and $49.0 million, or 13.1% and 12.9%,
of our total medical
expenses for the six months ended June 20, 2004 and 2003, respectively.



Military Contract Expenses increased from $215.1
million to $237.2 million, an increase of $22.1 million or 10.3%. The increase
is consistent with the increase in revenues discussed previously and includes T-
Nex related costs of $4.3 million in 2003.  In addition, the 2004 contract
expenses included final bid price adjustments on option periods three and four
of the TRICARE Region 1 contract.  The final adjustments resulted in a contract
expense increase of approximately $1.9 million for Option Period 3, which is
0.9% of the final contract expense settlement amount for that period and a
contract expense increase of $1.9 million for Option Period 4, which is 0.8 % of
the final contract expense settlement amount for that period.  There were no
final settlements of bid price adjustments in 2003.  Included in our military
contract expenses is an allocation for estimated corporate overhead of $1.0
million per quarter for direct and indirect services provided to SMHS.



General and Administrative Expenses increased
from $68.0 million to $82.4 million, an increase of approximately $14.4 million
or 21.2%. The primary increase in G&A expenses is the $5.9 million to
provide services relative to our sales agreement for the workers' compensation
insurance operations as discussed above.  The remaining increases in G&A
expenses are primarily due to increases in payroll and benefits, premium taxes
and legal expenses.  As a percentage of revenues, G&A expenses were 9.7% for
2004, compared to 9.4% in 2003.  As a percentage of medical premium revenue,
G&A expenses were 15.1% for 2004, compared to 14.3% for 2003.  Excluding the
services relative to our sales agreement for the workers' compensation insurance operations described above, our G&A expenses, as a percentage of total
operating revenues and medical premium revenue for the six month period, were
9.1% and 14.0%, respectively.



Interest Expense decreased from $3.2 million to
$2.3 million, a decrease of approximately $800,000 or 25.7%.  The decrease was
primarily due to the write off of the remaining deferred financing fees on the
amended and restated credit facility of approximately $800,000 in 2003.



Other Income (Expense), Net resulted in income of
$163,000 for 2004 compared to expense of $343,000 for 2003.  The expense in 2003
was primarily related to the loss on sale of certain assets.



Provision for Income Taxes was recorded at $36.6
million for 2004 compared to $19.1 million for 2003. The effective tax rate for
2004 was 36.2% compared to 34.8% for 2003. Our effective tax rate is greater
than the statutory rate due primarily to state income taxes and other non-
deductible expenses.



Discontinued Operations consist of our Texas HMO
health care operations and the CII workers' compensation operations. The net
loss from discontinued operations for 2004 was $486,000 compared to $651,000 for
2003.  The Texas HMO health care operations had net income of $196,000 for 2004,
which was offset by a net loss on the CII workers' compensation operations of
$682,000.  We have discontinued paying Texas claims, as our evidence of coverage
requires that all claims must be settled within 18 months of the time of
service.



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



Discontinued CII workers' compensation operations.  On
March 31, 2004, we completed the sale of CII's subsidiary, Cal Indemnity.  Our
Condensed Consolidated Statement of Income for the six months ended June 30,
2004 reflects the activity of the discontinued operations through March 31,
2004, the disposal date.  Any future activity related to this disposal will be
reflected in continuing operations as previously discussed.

26

The discontinued workers' compensation operations for 2004
had a net loss of $682,000 compared to a
loss of $3.6 million for 2003.  Net earned premiums decreased by $53.0 million or 73.6% and investment and other
revenue decreased by $6.0 million or 82.3% as the 2004 results include activity
through March 31, 2004.  Expenses decreased in the CII workers' compensation
operations by $64.1 million or 74.6% due to the overall decrease in
premiums.



LIQUIDITY AND CAPITAL RESOURCES

We had cash flows from
operating activities for continuing operations of $80.7 million for the six
months ended June 30, 2004 compared to  $18.3 million in 2003.  We received five
monthly CMS payments during the first six months of 2004 and 2003 as the January
payments were received at the end of December.  When the first quarters are
adjusted to reflect three monthly payments from CMS, the cash flow from
continuing operations would be $113.6 million in 2004 and $48.2 million in 2003.
We believe presenting this adjustment for the timing of the CMS payments is
useful for making a six-month period-to-period comparison of our cash flow from
continuing operations.  We used the majority of the cash flow for the repurchase
of the Company's common stock.  The improvement in cash flows from continuing
operations over 2003 is primarily attributable to cash from earnings and the
decrease in cash related to the increase in the military accounts receivable
balance that occurred from December 31, 2002 to June 30, 2003.

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.

We expect that the loss of the T-Nex contract will adversely
affect our cash flow from operations starting in the fourth quarter of 2004
through the first half of 2005.  During the phase-out period, we expect that
SMHS will use $35.0 million to $40.0 million of its cash, as the payout of the
remaining liabilities will exceed SMHS' accounts receivable and other non-cash
asset balances.



Net cash used for investing activities of continuing
operations during 2004 included $9.2 million in capital expenditures associated
with clinical expansion, continued implementation of new computer systems,
leasehold improvements on facilities, furniture and equipment and other capital
purchases to support our growth.  The net cash change in investments for the
year was a decrease in investments of $50.1 million as investments were
converted to cash equivalents.



Net cash used for financing activities of continuing
operations during 2004 included net payments of $1.5 million on debt related
items.  Proceeds from the issuance of stock in connection with stock plans were
$16.9 million and cash of $82.8 million was used to repurchase Sierra stock.



Discontinued operations provided cash of $3.4 million in
2004, compared to cash used of $29.8 million in 2003. Cash provided in 2004 was
primarily the result of the sale of Cal Indemnity.

27

Sierra Debentures

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



Sierra used the net proceeds of the offering to repay the
$39.0 million outstanding under the then existing credit facility and to
contribute $35.0 million to SMHS.  The $35.0 million contribution to SMHS was
subsequently repaid to Sierra in February 2004.  Sierra also used $19.9 million
of the proceeds to purchase 1.6 million shares of Sierra's common stock under
our repurchase program. The remainder of the net proceeds were used for working
capital and general corporate purposes including additional share
repurchases.



Revolving Credit
Facility



On March 3, 2003, we
entered into a $65.0 million revolving credit facility, which replaced our
amended and restated credit facility.  The facility may be increased up to an
aggregate amount of $125.0 million upon receipt of new commitments from existing
or additional lenders.  Interest on the facility was initially LIBOR plus 2.25%
and is currently LIBOR plus 2.00%.  The facility will expire on April 30, 2006,
but can be extended, at the sole discretion of each of the lenders, until March
3, 2008.  The facility is available for general corporate purposes.  We have not
yet drawn on this facility.



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



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



Sierra Share Repurchase Program

From January 1, 2004 through
June 30, 2004, we purchased 2.2 million shares of our common stock, in the open
market or negotiated transactions, for $82.8 million at an
average cost of $37.38.  In addition to

28

the remaining 56,000 shares that our Board of Directors has previously approved, we will then have available an additional
$70.0 million to be used for share repurchases based on approval by our Board
of Directors on May 20, 2004.  Our revolving credit facility, as amended, allows
for stock repurchases of up to $60.0 million from May 27, 2004 through December
31, 2004.  We purchased 528,000 shares for $22.8 million from May 27, 2004
through June 30, 2004.  From July 1,
2004 to July 21, 2004, we repurchased an additional 38,000 shares for $1.6 million at an average cost of $43.70.



Included in the repurchases for the first quarter of 2004 are
500,000 shares we purchased from our CEO, at $32.00 per share, for a total of
$16.0 million.  The closing price of our common stock on the date of the
transaction, February 11, 2004, was $32.35.  Included in the repurchases for the
second quarter of 2004 are an additional 500,000 shares we purchased from our
CEO, at $43.20 per share, for a total of $21.6 million.  The closing price of
our common stock on the date of the transaction, May 27, 2004, was $43.25.  Our
Board of Directors approved both of the purchases.



Statutory Capital and Deposit Requirements

Our HMO and insurance
subsidiaries are required by state regulatory agencies to maintain certain
deposits and must also meet certain net worth and reserve requirements.  The HMO
and insurance subsidiaries, including the discontinued operations, had
restricted assets on deposit in various states totaling $21.0 million at June
30, 2004. The HMO and insurance subsidiaries must also meet requirements to
maintain minimum stockholders' equity, on a statutory basis, as well as minimum
risk-based capital requirements, which are determined annually.  In conjunction
with the exit from the Texas HMO health care market, the Texas Department of
Insurance approved a plan of withdrawal and Texas Health Choice, L.C., is now
required to maintain deposits of $1.5 million and net worth of at least $3.5
million. We believe we are in material compliance with our regulatory
requirements.



Of the $177.7 million in cash and cash equivalents held at
June 30, 2004, including discontinued operations, $396,000 was held by
discontinued operations and  $86.8 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.



Obligations and Commitments

The following schedule represents our obligations and
commitments for long-term debt, capital leases and operating leases at June 30,
2004.  The amounts presented below include all future payments associated with
each obligation including interest expense.

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

Continuing Operations
------------------------
Payments due within 12 months............. $   2,587  $      83  $  19,912  $  22,582
Payments due in 13 to 36 months...........     5,175        165     39,327     44,667
Payments due in 37 to 60 months...........     5,175         99     36,106     41,380
Payments due in more than 60 months.......   151,225        107    106,381    257,713
                                            ---------  ---------  ---------  ---------
     Total Continuing Operations.......... $ 164,162  $     454  $ 201,726  $ 366,342
                                            =========  =========  =========  =========
Discontinued Operations
------------------------
Payments due within 12 months............. $      --  $     235  $      --  $     235
Payments due in 13 to 36 months...........        --         --         --         --
Payments due in 37 to 60 months...........        --         --         --         --
Payments due in more than 60 months.......        --         --         --         --
                                            ---------  ---------  ---------  ---------
     Total Discontinued Operations........ $      --  $     235  $      --  $     235
                                            =========  =========  =========  =========`

29

Other



We have a 2004 capital budget of $16.9 million and are also
limited in the amount of capital expenditures we can purchase by our revolving
credit facility.  The 2004 planned expenditures are primarily for a new medical
clinic, the purchase of computer hardware and software, furniture and equipment
and other normal capital requirements.  Our liquidity needs over the next 12
months will primarily be for the capital items noted above and the phase-out of
the Military operations.  We believe that our existing working capital,
operating cash flow and, if necessary, equipment leasing, divestitures of
certain non-core assets and amounts available under our credit facility should
be sufficient to fund our capital expenditures and debt service.  Additionally,
subject to unanticipated cash requirements, we believe that our existing working
capital and operating cash flow should enable us to meet our liquidity needs on
a long-term basis.



Inflation



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



Government Regulation

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



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



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



In addition to changes in existing laws and regulations, we
are subject to audits, investigations and enforcement actions.  These include
possible government actions relating to ERISA, the Federal Employees Health
Benefit Plan, federal and state fraud and abuse laws and laws relating to
utilization >management and the delivery and payment of health care.  In addition, our Medicare business is subject to Medicare regulations
promulgated by CMS.  Violation of government laws and regulations may result in

30

an assessment of damages, civil or criminal fines or penalties, or other sanctions,
including exclusion from participation in government programs.  In addition,
disclosure of any adverse investigation or audit results or sanctions could
negatively affect our reputation in various markets and make it more difficult
for us to sell our products and services.

In addition to the items described above, we urge you to
review carefully the section "Risk Factors" in Part 1, Item 1 of our
2003 Form 10-K for a more complete discussion of the risks associated with an
investment in our securities.  See "Note on Forward-Looking Statements and
Risk Factors" in Part 1, Item 1.

Critical Accounting Policies and Estimates

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

For a more detailed description of our critical accounting
policies and estimates, see Part II, Item 7 of our 2003 annual report on Form
10-K and for a more extensive discussion of our accounting policies, see Note 2,
Summary of Significant Accounting Policies, in the Notes to the Consolidated
Financial Statements in our 2003 annual report on Form 10-K filed on March 5,
2004.

Membership

`Number of Members at June 30,
                                              -----------------------------
                                                   2004           2003
                                              --------------  -------------
HMO
  Commercial................................        215,700        194,100
  Medicare..................................         52,200         49,600
  Medicaid..................................         50,800         37,900
Managed Indemnity...........................         24,800         25,000
Medicare Supplement.........................         16,700         18,400
Administrative Services.....................        173,700        186,500
TRICARE Eligibles...........................        710,400        672,200
                                              --------------  -------------
Total Members...............................      1,244,300      1,183,700
                                              ==============  =============`

31

ITEM 3.   QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKET RISK

At June 30, 2004, we had
unrealized holding losses on available for sale investments of $831,000, net of
tax, compared to unrealized holding losses of $479,000, net of tax, at December
31, 2003.  We believe that changes in market interest rates, resulting in
unrealized holding gains or losses, should not have a material impact on future
earnings or cash flows, as it is unlikely that we would need or choose to
substantially liquidate our investment portfolio.



At June 30, 2004, we had outstanding $115.0 million in
aggregate principal amount of our 21⁄4% senior convertible debentures due March
15, 2023.  The debentures are fixed rate, and therefore, the interest expense on
the debentures will not be impacted by future interest rate fluctuations.  The
interest rate on our revolving credit facility was initially LIBOR plus 2.25%
and is currently LIBOR plus 2.00%; we have not yet drawn on this facility.



ITEM 4.
CONTROLS AND PROCEDURES



Evaluation of Disclosure Controls and Procedures

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



Change in Internal Control over Financial Reporting

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

32

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

ITEM 1.	LEGAL PROCEEDINGS

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

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

33

ITEM 2.	CHANGES IN SECURITIES AND USE
OF PROCEEDS

(e)  Below, is a summary of stock repurchases for the six
months ended June 30, 2004.  See Note 4 of our Notes to Condensed Consolidated
Financial Statements for information regarding our stock repurchase plan.

`Total number      Maximum number
                                                                            of shares purchased   of shares that
(In thousands, except per share data)        Total number        Average    as part of publicly     may yet be
                                              of shares        price paid      announced plan    purchased under
                 Period                      repurchased (1)    per share        or program      the plan (2)(3)
-------------------------------------------  -------------    ------------- -------------------- ----------------  
Beginning shares available to be purchased                                                                 2,270
January 1, 2004 - January 31, 2004                     --               --                   --            2,270
February 1, 2004 - February 29, 2004 (4)              663           $31.86                  663            1,607
March 1, 2004 - March 31, 2004                        317            34.19                  317            1,290
April 1, 2004 - April 30, 2004                         16            34.91                   16            1,274
May 1, 2004 - May 31, 2004                            590            39.20                  590              684
June 1, 2004 - June 30, 2004 (5)                      628            43.20                  628               56 (3)`





ITEM 3.	DEFAULTS UPON SENIOR
SECURITIES

None

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



Sierra held its annual meeting of stockholders on May 20,
2004 in Las Vegas, Nevada.

34

The following persons were elected directors for two-year
terms ending in 2006 based on the voting results below:

|NameAlbert L. GreeneErin E. MacDonaldWilliam J. RaggioCharles L. Ruthe | For23,811,59124,303,15821,772,41823,165,586 | Withheld1,409,960918,3933,449,1332,055,965
|---------------------------------------------------------------------- | ------------------------------------------- | ------------------------------------------

The following persons' terms as directors continued after the
meeting and end in 2005.



|NameThomas Y. HartleyMichael E. LuceAnthony M. Marlon, M.D.Anthony L. Watson
|----------------------------------------------------------------------------

The stockholders also amended the Company's employee stock
purchase plan to increase by 900,000 the number of shares of common stock
reserved for issuance to participants.  The voting results were as follows:





|For18,890,157 | Against2,404,306 | Abstain43,668 | BrokerNon-votes0
|------------- | ---------------- | ------------- | ----------------

The stockholders also ratified the appointment of Deloitte
& Touche LLP as the Company's independent auditors for the year ending
December 31, 2004.  The voting results were as follows:





|For24,876,208 | Against329,083 | Abstain16,260 | BrokerNon-votes0
|------------- | -------------- | ------------- | ----------------





ITEM 5.	OTHER INFORMATION

None

ITEM
6.	EXHIBITS AND REPORTS ON FORM 8-K

(a)	Exhibits



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

35



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



(b)	Reports on Form 8-K



Current Report on Form 8-K, dated April 15, 2004, with the
Securities and Exchange Commission announcing the completion of the sale of the
Company's workers' compensation subsidiary on March 31, 2004.



Current Report on Form 8-K, dated April 26, 2004, with the
Securities and Exchange Commission announcing the Company's operating results
for the quarter ended March 31, 2004.



Current Report on Form 8-K, dated May 3, 2004, with the
Securities and Exchange Commission announcing the Company's participation in a
small and mid-cap conference on May 5, 2005.



Current Report on Form 8-K, dated May 13, 2004, with the
Securities and Exchange Commission announcing the Company's participation in a
health care conference on May 19, 2004.



Current Report on Form 8-K, dated May 18, 2004, with the
Securities and Exchange Commission announcing that its subsidiary Sierra
Military Health Services, Inc. will experience higher than expected income for
the second quarter of 2004.





36

SIGNATURES

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



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

Date: July 27, 2004

37