**United      States**

**Securities      And Exchange Commission**

**Washington,      DC 20549**

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**FORM      10-Q**

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**(Mark      One)**

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

**For      the quarterly period ended September 30, 2006**

**or**

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

**For      the transition period from**
**                **
**      to**
**                **

**Commission      File Number: 1-8865**

**SIERRA      HEALTH SERVICES, INC.**

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

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

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

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

** **

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**Sierra      Health Services, Inc. **

**Quarterly      Report on Form 10-Q **

**For      The Period Ended September 30, 2006**

| **Part                I.** **Financial Information**                                                                                              | **Page                No.** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------|-----------------------------|
| Item                1. Financial                Statements (Unaudited):                                                                           |                        |
| Condensed                Consolidated Balance Sheets - September 30, 2006 and December 31,                2005                                    | 1                           |
| Condensed                Consolidated Statements of Income - three and nine months ended September                30, 2006 and 2005               | 2                           |
| Condensed                Consolidated Statements of Stockholders' Equity -                nine months ended September 30, 2006 and 2005                | 3                           |
| Condensed                Consolidated Statements of Cash Flows - nine months ended September                30,                2006 and 2005      | 4                           |
| Notes                to Condensed Consolidated Financial Statements                                                                               | 5-16                        |
| Item                2.  Management's                Discussion and Analysis of Financial Condition and Results of                Operations  | 17-29                       |
| Item                3. Quantitative                and Qualitative Disclosures About Market Risk                                             | 30                          |
| Item                4. Controls                and Procedures                                                                                | 30                          |
|                                                                                                                                              |                        |
| **Part                II. Other Information**                                                                                                          |                        |
| Item                1. Legal                Proceedings                                                                                      | 31                          |
| Item                1A. Risk                Factors                                                                                          | 32                          |
| Item                2. Unregistered                Sales of Equity Securities and Use of Proceeds                                            | 32-33                       |
| Item                3. Defaults                upon Senior Securities                                                                        | 33                          |
| Item                4. Submission                of Matters to a Vote of Security Holders                                                    | 33                          |
| Item                5. Other                Information                                                                                      | 33                          |
| Item                6. Exhibits                                                                                                              | 33                          |
| Signatures                                                                                                                                        | 34                          |

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Table          of Contents

**Part      I. Financial Information **

**Item      1.** **Financial      Statements**

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

**Condensed      Consolidated Balance Sheets **

*(in      thousands, except per share data) *

*(Unaudited)*

|                                                                                                                                                    |   | September                30, 2006 |     | December                31, 2005 |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------|----------|----------------------------------|--------|
| **Assets**                                                                                                                                              |   |                              |     |                             |   |
| Current                assets:                                                                                                                          |   |                              |     |                             |   |   |   |
| Cash                and cash equivalents                                                                                                                |   | $                                 | 77,925   |                             | $      | 88,059 |   |
| Investments                                                                                                                                             |   |                              | 243,332  |                             |   | 281,250 |   |
| Accounts                  receivable (less allowance for doubtful accounts: 2006 - $4,920;                  2005 -                  $5,792)             |   |                              | 26,445   |                             |   | 14,501 |   |
| Current                portion of deferred tax asset                                                                                                    |   |                              | 26,092   |                             |   | 23,949 |   |
| Prepaid                expenses and other current assets                                                                                                |   |                              | 81,688   |                             |   | 30,596 |   |
| Total                current assets                                                                                                                     |   |                              | 455,482  |                             |   | 438,355 |   |
|                                                                                                                                                    |   |                              |     |                             |   |   |   |
| Property                and equipment, net                                                                                                              |   |                              | 72,001   |                             |   | 71,357 |   |
| Restricted                cash and investments                                                                                                          |   |                              | 19,311   |                             |   | 18,252 |   |
| Goodwill                (less accumulated amortization: 2006 and 2005 - $6,972)                                                                         |   |                              | 14,782   |                             |   | 14,782 |   |
| Deferred                tax asset (less current portion)                                                                                                |   |                              | 14,354   |                             |   | 13,266 |   |
| Note                receivable (less valuation allowance: 2006 and 2005 -                $15,000)                                                       |   |                              | 47,000   |                             |   | 47,000 |   |
| Other                assets                                                                                                                             |   |                              | 95,187   |                             |   | 65,834 |   |
| Total                assets                                                                                                                             |   | $                                 | 718,117  |                             | $      | 668,846 |   |
|                                                                                                                                                    |   |                              |     |                             |   |   |   |
| **Liabilities                and stockholders’ equity**                                                                                           |   |                              |     |                             |   |   |   |
| Current                liabilities:                                                                                                                     |   |                              |     |                             |   |   |   |
| Accrued                and other current liabilities                                                                                                    |   | $                                 | 73,078   |                             | $      | 58,238 |   |
| Trade                accounts payable                                                                                                                   |   |                              | 2,165    |                             |   | 2,347 |   |
| Accrued                payroll and taxes                                                                                                                |   |                              | 28,216   |                             |   | 21,469 |   |
| Medical                claims payable                                                                                                                   |   |                              | 157,263  |                             |   | 135,867 |   |
| Unearned                premium revenue                                                                                                                 |   |                              | 52,566   |                             |   | 49,067 |   |
| Current                portion of long-term debt                                                                                                        |   |                              | 104      |                             |   | 106 |   |
| Total                current liabilities                                                                                                                |   |                              | 313,392  |                             |   | 267,094 |   |
|                                                                                                                                                    |   |                              |     |                             |   |   |   |
| Long-term                debt (less current portion)                                                                                                    |   |                              | 43,729   |                             |   | 52,307 |   |
| Other                liabilities                                                                                                                        |   |                              | 64,057   |                             |   | 65,193 |   |
| Total                liabilities                                                                                                                        |   |                              | 421,178  |                             |   | 384,594 |   |
|                                                                                                                                                    |   |                              |     |                             |   |   |   |
| Commitments                and contingencies                                                                                                            |   |                              |     |                             |   |   |   |
|                                                                                                                                                    |   |                              |     |                             |   |   |   |
| Stockholders’                equity:                                                                                                              |   |                              |     |                             |   |   |   |
| Preferred                  stock, $.01 par value, 1,000 shares authorized; none issued or                  outstanding                                  |   |                              | ¾   |                             |   | ¾ |   |
| Common                  stock, $.005 par value, 120,000 shares authorized; 2006 - 70,689;                  2005 -                  69,136 shares issued |   |                              | 354      |                             |   | 346 |   |
| Treasury                stock: 2006 - 13,579; 2005 - 11,006 common stock shares                                                                         |   |                              | (485,852 | )                                |   | (377,190 | ) |
| Additional                paid-in capital                                                                                                               |   |                              | 434,543  |                             |   | 400,287 |   |
| Accumulated                other comprehensive loss                                                                                                     |   |                              | (2,235   | )                                |   | (1,750 | ) |
| Retained                earnings                                                                                                                   |   |                              | 350,129  |                             |   | 262,559 |   |
| Total                stockholders’ equity                                                                                                         |   |                              | 296,939  |                             |   | 284,252 |   |
| Total                liabilities and stockholders’ equity                                                                                         |   | $                                 | 718,117  |                             | $      | 668,846 |   |

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Table          of Contents

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

**Condensed      Consolidated Statements Of Income**

*(In      thousands, except per share data)*

*(Unaudited)*

|                                                           |   | Three                  Months Ended September                  30, |    | Nine                  Months Ended September                  30, |   |
|----------------------------------------------------------------|--------|--------------------------------------------------------------------|---------|-------------------------------------------------------------------|--------|
|                                                           |   | 2006                                                               |    | 2005                                                              |   | 2006 |   | 2005 |   |
| Operating                  revenues:                           |   |                                                               |    |                                                              |   |   |   |   |   |   |   |
| Medical                  premiums                              |   | $                                                                  | 405,618 |                                                              | $      | 327,084 |   | $ | 1,220,726 |   | $ | 958,834 |   |
| Military                  contract revenues                    |   |                                                               | ¾  |                                                              |   | 11 |   |   | ¾ |   |   | 16,322 |   |
| Professional                  fees                             |   |                                                               | 13,300  |                                                              |   | 11,133 |   |   | 39,097 |   |   | 31,102 |   |
| Investment                  and other revenues                 |   |                                                               | 11,079  |                                                              |   | 9,215 |   |   | 32,860 |   |   | 25,071 |   |
| Total                                                          |   |                                                               | 429,997 |                                                              |   | 347,443 |   |   | 1,292,683 |   |   | 1,031,329 |   |
|                                                           |   |                                                               |    |                                                              |   |   |   |   |   |   |   |   |   |
| Operating                  expenses:                           |   |                                                               |    |                                                              |   |   |   |   |   |   |   |   |   |
| Medical                  expenses                              |   |                                                               | 323,694 |                                                              |   | 259,591 |   |   | 981,758 |   |   | 755,779 |   |
| Military                  contract expenses               |   |                                                               | ¾  |                                                              |   | (108 | ) |   | 138 |   |   | 2,265 |   |
| General                  and administrative expenses           |   |                                                               | 51,291  |                                                              |   | 43,451 |   |   | 152,914 |   |   | 127,082 |   |
| Total                                                          |   |                                                               | 374,985 |                                                              |   | 302,934 |   |   | 1,134,810 |   |   | 885,126 |   |
|                                                           |   |                                                               |    |                                                              |   |   |   |   |   |   |   |   |   |
| Operating                  income                         |   |                                                               | 55,012  |                                                              |   | 44,509 |   |   | 157,873 |   |   | 146,203 |   |
| Interest                  expense                              |   |                                                               | (1,015  | )                                                                 |   | (1,991 | ) |   | (2,793 | ) |   | (7,971 | ) |
| Other                  income (expense), net                   |   |                                                               | 14      |                                                              |   | 427 |   |   | (10 | ) |   | 828 |   |
|                                                           |   |                                                               |    |                                                              |   |   |   |   |   |   |   |   |   |
| Income                  before income taxes                    |   |                                                               | 54,011  |                                                              |   | 42,945 |   |   | 155,070 |   |   | 139,060 |   |
| Provision                  for income taxes               |   |                                                               | (19,082 | )                                                                 |   | (14,503 | ) |   | (53,936 | ) |   | (47,377 | ) |
| Net                  income                                    |   | $                                                                  | 34,929  |                                                              | $      | 28,442 |   | $ | 101,134 |   | $ | 91,683 |   |
|                                                           |   |                                                               |    |                                                              |   |   |   |   |   |   |   |   |   |
| Net                  income per common share                   |   | $                                                                  | 0.62    |                                                              | $      | 0.50 |   | $ | 1.78 |   | $ | 1.67 |   |
|                                                           |   |                                                               |    |                                                              |   |   |   |   |   |   |   |   |   |
| Net                  income per common share assuming dilution |   | $                                                                  | 0.56    |                                                              | $      | 0.43 |   | $ | 1.61 |   | $ | 1.38 |   |

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Table          of Contents

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

**Condensed      Consolidated Statements Of Stockholders' Equity**

*(In      thousands)*

*(Unaudited)*

|                                                                                                      |   | Common                Stock |   | In                Treasury |   | AdditionalPaid-in |   | DeferredCompen- |   | AccumulatedOtherComprehensive |   | Retained     |   | TotalStock-holders’ |    |
|-----------------------------------------------------------------------------------------------------------|--------|-----------------------------|--------|----------------------------|--------|-------------------|--------|-----------------|--------|-------------------------------|--------|--------------|--------|---------------------------|---------|
|                                                                                                      |   |
|                                                                                                      |   |
|                                                                                                      |   | Shares                      |   |  Amount               |   |  Shares      |   |  Amount    |   |  Capital                 |   |  sation |   |  Loss                |    |  Earnings |   |  Equity |   |
| Balance,                January 1, 2005                                                                   |   |                        | 61,954 |                       | $      | 310               |   |            | 9,192  |                          | $      | (237,876     | )      | $                         | 286,439 |   | $ | (288 | ) | $ | (245 | ) | $ | 153,357 |   | $ | 201,697 |   |
| Common                stock issued in connection with stock plans                                         |   |                        | 1,822  |                       |   | 9                 |   |            | (317   | )                             |   | 8,731        |   |                      | 21,875  |   |   | (5,248 | ) |   | ¾ |   |   | (5,771 | ) |   | 19,596 |   |
| Stock-based                compensation expense                                                           |   |                        | ¾ |                       |   | ¾            |   |            | ¾ |                          |   | ¾       |   |                      | 1,080   |   |   | 3,797 |   |   | ¾ |   |   | ¾ |   |   | 4,877 |   |
| Common                stock issued in connection with conversion of debentures                            |   |                        | 6,890  |                       |   | 34                |   |            | ¾ |                          |   | ¾       |   |                      | 62,966  |   |   | ¾ |   |   | ¾ |   |   | ¾ |   |   | 63,000 |   |
| Tax                benefits from share-based payment arrangements                                         |   |                        | ¾ |                       |   | ¾            |   |            | ¾ |                          |   | ¾       |   |                      | 17,470  |   |   | ¾ |   |   | ¾ |   |   | ¾ |   |   | 17,470 |   |
| Repurchase                of common stock shares                                                          |   |                        | ¾ |                       |   | ¾            |   |            | 2,186  |                          |   | (144,421     | )      |                      | ¾  |   |   | ¾ |   |   | ¾ |   |   | ¾ |   |   | (144,421 | ) |
| Treasury                shares not included in stock dividend                                             |   |                        | (1,869 | )                          |   | (9                | )      |            | ¾ |                          |   | ¾       |   |                      | ¾  |   |   | ¾ |   |   | ¾ |   |   | ¾ |   |   | (9 | ) |
| Comprehensive                income:                                                                      |   |                        |   |                       |   |              |   |            |   |                          |   |         |   |                      |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net                income                                                                                 |   |                        | ¾ |                       |   | ¾            |   |            | ¾ |                          |   | ¾       |   |                      | ¾  |   |   | ¾ |   |   | ¾ |   |   | 91,683 |   |   | 91,683 |   |
| Other                comprehensive income:                                                                |   |                        |   |                       |   |              |   |            |   |                          |   |         |   |                      |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net                unrealized holding loss on available-for-sale                investments ($231 pretax) |   |                        | ¾ |                       |   | ¾            |   |            | ¾ |                          |   | ¾       |   |                      | ¾  |   |   | ¾ |   |   | (1,059 | ) |   | ¾ |   |   | (1,059 | ) |
| Total                comprehensive income                                                                 |   |                        | ¾ |                       |   | ¾            |   |            | ¾ |                          |   | ¾       |   |                      | ¾  |   |   | ¾ |   |   | (1,059 | ) |   | 91,683 |   |   | 90,624 |   |
| Balance,                September 30, 2005                                                                |   |                        | 68,797 |                       | $      | 344               |   |            | 11,061 |                          | $      | (373,566     | )      |  $                   | 389,830 |   |  $ | (1,739 | ) |  $ | (1,304 | ) | $ | 239,269 |   | $ | 252,834 |   |
|                                                                                                      |   |                        |   |                       |   |              |   |            |   |                          |   |         |   |                      |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                                      |   |                        |   |                       |   |              |   |            |   |                          |   |         |   |                      |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                                      |   |                        |   |                       |   |              |   |            |   |                          |   |         |   |                      |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Balance,                January 1, 2006                                                                   |   |                        | 69,136 |                       | $      | 346               |   |            | 11,006 |                          | $      | (377,190     | )      | $                         | 400,287 |   | $ | ¾ |   | $ | (1,750 | ) | $ | 262,559 |   | $ | 284,252 |   |
| Common                stock issued in connection with stock plans                                         |   |                        | 624    |                       |   | 3                 |   |            | (562   | )                             |   | 19,095       |   |                      | 8,534   |   |   | ¾ |   |   | ¾ |   |   | (13,569 | ) |   | 14,063 |   |
| Stock-based                compensation expense                                                           |   |                        | ¾ |                       |   | ¾            |   |            | (1     | )                             |   | 23           |   |                      | 5,782   |   |   | ¾ |   |   | ¾ |   |   | 5 |   |   | 5,810 |   |
| Common                stock issued in connection with conversion of debentures                            |   |                        | 929    |                       |   | 5                 |   |            | ¾ |                          |   | ¾       |   |                      | 8,495   |   |   | ¾ |   |   | ¾ |   |   | ¾ |   |   | 8,500 |   |
| Excess                tax benefits from share-based payment arrangements                                  |   |                        | ¾ |                       |   | ¾            |   |            | ¾ |                          |   | ¾       |   |                      | 11,445  |   |   | ¾ |   |   | ¾ |   |   | ¾ |   |   | 11,445 |   |
| Repurchase                of common stock shares                                                          |   |                        | ¾ |                       |   | ¾            |   |            | 3,136  |                          |   | (127,780     | )      |                      | ¾  |   |   | ¾ |   |   | ¾ |   |   | ¾ |   |   | (127,780 | ) |
| Comprehensive                income:                                                                      |   |                        |   |                       |   |              |   |            |   |                          |   |         |   |                      |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net                income                                                                                 |   |                        | ¾ |                       |   | ¾            |   |            | ¾ |                          |   | ¾       |   |                      | ¾  |   |   | ¾ |   |   | ¾ |   |   | 101,134 |   |   | 101,134 |   |
| Other                comprehensive income:                                                                |   |                        |   |                       |   |              |   |            |   |                          |   |         |   |                      |    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net                unrealized holding loss on available-for-sale investments ($746                pretax) |   |                        | ¾ |                       |   | ¾            |   |            | ¾ |                          |   | ¾       |   |                      | ¾  |   |   | ¾ |   |   | (485 | ) |   | ¾ |   |   | (485 | ) |
| Total                comprehensive income                                                                 |   |                        | ¾ |                       |   | ¾            |   |            | ¾ |                          |   | ¾       |   |                      | ¾  |   |   | ¾ |   |   | (485 | ) |   | 101,134 |   |   | 100,649 |   |
| Balance,                September 30, 2006                                                                |   |                        | 70,689 |                       | $      | 354               |   |            | 13,579 |                          | $      | (485,852     | )      | $                         | 434,543 |   | $ | ¾ |   | $ | (2,235 | ) | $ | 350,129 |   | $ | 296,939 |   |

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Table          of Contents

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

**Condensed      Consolidated Statements Of Cash Flows**

*(In      thousands)*

*(Unaudited)*

|                                                                                                                |   | Nine                Months Ended September 30, |     |
|---------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------------|----------|
|                                                                                                                |   | 2006                                           |     | 2005 |   |
| Cash                flows from operating activities:                                                                |   |                                           |     |   |   |   |   |
| Net                income                                                                                           |   | $                                              | 101,134  |   | $ | 91,683 |   |
| Adjustments                  to reconcile net income to net cash provided                  by operating activities: |   |                                           |     |   |   |   |   |
| Depreciation                                                                                                        |   |                                           | 12,327   |   |   | 11,167 |   |
| Stock-based                compensation expense                                                                     |   |                                           | 5,810    |   |   | 4,877 |   |
| Excess                tax benefits from share-based payment arrangements                                            |   |                                           | (11,445  | ) |   | ¾ |   |
| Provision                for doubtful accounts                                                                      |   |                                           | 1,796    |   |   | 1,910 |   |
| Loss                on property and equipment dispositions                                                     |   |                                           | 213      |   |   | 131 |   |
| Change                in operating assets and liabilities:                                                          |   |                                           |     |   |   |   |   |
| Military                accounts receivable                                                                         |   |                                           | 21       |   |   | 24,487 |   |
| Deferred                tax asset                                                                                   |   |                                           | 8,459    |   |   | 13,801 |   |
| Other                current assets                                                                                 |   |                                           | (64,769  | ) |   | 2,521 |   |
| Other                assets                                                                                         |   |                                           | (4,270   | ) |   | (323 | ) |
| Accrued                payroll and taxes                                                                            |   |                                           | 6,747    |   |   | (4,141 | ) |
| Medical                claims payable                                                                               |   |                                           | 21,396   |   |   | 7,695 |   |
| Military                health care payable                                                                         |   |                                           | ¾   |   |   | (17,061 | ) |
| Other                current liabilities                                                                            |   |                                           | 14,121   |   |   | (19,928 | ) |
| Unearned                premium revenue                                                                             |   |                                           | 3,499    |   |   | 40,511 |   |
| Other                liabilities                                                                                    |   |                                           | (1,136   | ) |   | (4,385 | ) |
| Net                cash provided by operating activities                                                            |   |                                           | 93,903   |   |   | 152,945 |   |
|                                                                                                                |   |                                           |     |   |   |   |   |
| Cash                flows from investing activities:                                                                |   |                                           |     |   |   |   |   |
| Capital                expenditures, net of dispositions                                                            |   |                                           | (13,183  | ) |   | (8,566 | ) |
| Purchase                of investments, net of proceeds                                                             |   |                                           | 11,500   |   |   | (138,572 | ) |
| Net                cash used for investing activities                                                               |   |                                           | (1,683   | ) |   | (147,138 | ) |
|                                                                                                                |   |                                           |     |   |   |   |   |
| Cash                flows from financing activities:                                                                |   |                                           |     |   |   |   |   |
| Payments                on debt and capital leases , net of proceeds                                           |   |                                           | (82      | ) |   | (84 | ) |
| Purchase                of treasury stock                                                                      |   |                                           | (127,780 | ) |   | (144,421 | ) |
| Excess                tax benefits from share-based payment arrangements                                            |   |                                           | 11,445   |   |   | ¾ |   |
| Exercise                of stock in connection with stock plans                                                     |   |                                           | 14,063   |   |   | 19,596 |   |
| Net                cash used for financing activities                                                               |   |                                           | (102,354 | ) |   | (124,909 | ) |
|                                                                                                                |   |                                           |     |   |   |   |   |
| Net                decrease in cash and cash equivalents                                                            |   |                                           | (10,134  | ) |   | (119,102 | ) |
| Cash                and cash equivalents at beginning of period                                                     |   |                                           | 88,059   |   |   | 207,619 |   |
| Cash                and cash equivalents at end of period                                                           |   | $                                              | 77,925   |   | $ | 88,517 |   |
|                                                                                                                |   |                                           |     |   |   |   |   |
| Supplemental                condensed consolidated statement of cash flows                information:              |   |                                           |     |   |   |   |   |
| Cash                paid during the period for interest                                                             |   | $                                              | (2,672   | ) | $ | (8,533 | ) |
| Net                cash paid during the period for income taxes                                                     |   |                                           | (37,398  | ) |   | (33,410 | ) |
| Non-cash                investing and financing activities:                                                         |   |                                           |     |   |   |   |   |
| Senior                convertible debentures converted into Sierra common stock                                     |   |                                           | 8,500    |   |   | 63,000 |   |
| Additions                to capital leases                                                                     |   |                                           | ¾   |   |   | 19 |   |

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Table          of Contents

**Sierra              Health Services, Inc.**

**Notes              to Condensed Consolidated Financial Statements**

*(Unaudited)*

**1.**
**Basis      of Presentation**

**2.**
**Significant      Accounting Policies**

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

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Table          of Contents

**Sierra          Health Services, Inc.**

**Notes          to Condensed Consolidated Financial Statements**

*(Unaudited)*

**3.**
**Investments**

**4.**
**Long-Term      Debt**

*Sierra      Debentures*

----

Table          of Contents

**Sierra          Health Services, Inc.**

**Notes          to Condensed Consolidated Financial Statements**

*(Unaudited)*

*Revolving      Credit Facility - *

**5.**
**Employee      and Director Benefit Plans**

*Stock-Based      Compensation *

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Table          of Contents

**Sierra          Health Services, Inc.**

**Notes          to Condensed Consolidated Financial Statements**

*(Unaudited)*

|                                                                                 |   | Three                Months Ended     |   | Nine                Months Ended |   |
|--------------------------------------------------------------------------------------|--------|---------------------------------------|--------|----------------------------------|--------|
|                                                                                 |   | September                30, 2006     |   |
|                                                                                      |   | *(In                thousands)*  |
| Medical                expenses                                                 |   | $                                     | 250    |                             | $      | 671 |   |
| General                and administrative expenses                         |   |                                  | 2,518  |                             |   | 5,139 |   |
| Stock-based                compensation expense before income taxes        |   |                                  | 2,768  |                             |   | 5,810 |   |
| Income                tax benefit                                               |   |                                  | (969   | )                                |   | (2,034 | ) |
| Total                stock-based compensation expense after income taxes   |   | $                                     | 1,799  |                             | $      | 3,776 |   |

|                                                  |   | Three                Months Ended September 30, 2006         |    |
|-------------------------------------------------------|--------|--------------------------------------------------------------|---------|
|                                                  |   | UnderAPB                25                                   |    | As                Reported UnderSFAS                123R |   | Difference |   |
|                                                       |   | *(In                thousands, except per share data)*  |
| Operating                income                       |   | $                                                            | 55,999  |   | $ | 55,012 |   | $ | (987 | ) |
|                                                  |   |                                                         |    |   |   |   |   |   |   |   |
| Income                before income taxes             |   | $                                                            | 54,998  |   | $ | 54,011 |   | $ | (987 | ) |
|                                                  |   |                                                         |    |   |   |   |   |   |   |   |
| Net                income                             |   | $                                                            | 35,571  |   | $ | 34,929 |   | $ | (642 | ) |
|                                                  |   |                                                         |    |   |   |   |   |   |   |   |
| Net                income per share                   |   | $                                                            | 0.63    |   | $ | 0.62 |   | $ | (0.01 | ) |
| Net                income per share assuming dilution |   |                                                         | 0.57    |   |   | 0.56 |   |   | (0.01 | ) |
|                                                  |   |                                                         |    |   |   |   |   |   |   |   |
| Cash                flow from operating activities    |   | $                                                            | (45,009 | ) | $ | (46,194 | ) | $ | (1,185 | ) |
| Cash                flow from financing activities    |   |                                                         | (16,685 | ) |   | (15,500 | ) |   | 1,185 |   |

|                                                  |   | Nine                Months Ended September 30, 2006          |     |
|-------------------------------------------------------|--------|--------------------------------------------------------------|----------|
|                                                  |   | UnderAPB                25                                   |     | As                Reported UnderSFAS                123R |   | Difference |   |
|                                                  |   | *(In                thousands, except per share data)*  |
| Operating                income                       |   | $                                                            | 161,645  |   | $ | 157,873 |   | $ | (3,772 | ) |
|                                                  |   |                                                         |     |   |   |   |   |   |   |   |
| Income                before income taxes             |   | $                                                            | 158,842  |   | $ | 155,070 |   | $ | (3,772 | ) |
|                                                  |   |                                                         |     |   |   |   |   |   |   |   |
| Net                income                             |   | $                                                            | 103,586  |   | $ | 101,134 |   | $ | (2,452 | ) |
|                                                  |   |                                                         |     |   |   |   |   |   |   |   |
| Net                income per share                   |   | $                                                            | 1.82     |   | $ | 1.78 |   | $ | (0.04 | ) |
| Net                income per share assuming dilution |   |                                                         | 1.64     |   |   | 1.61 |   |   | (0.03 | ) |
|                                                  |   |                                                         |     |   |   |   |   |   |   |   |
| Cash                flow from operating activities    |   | $                                                            | 105,348  |   | $ | 93,903 |   | $ | (11,445 | ) |
| Cash                flow from financing activities    |   |                                                         | (113,799 | ) |   | (102,354 | ) |   | 11,445 |   |

----

Table          of Contents

**Sierra          Health Services, Inc.**

**Notes          to Condensed Consolidated Financial Statements**

*(Unaudited)*

|                                                                                                                                                                                |   | Three                Months Ended                            |   | Nine                Months Ended |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------------------------|--------|----------------------------------|--------|
|                                                                                                                                                                                |   | September                30, 2005                            |   |
|                                                                                                                                                                                     |   | *(In                thousands, except per share data)*  |
| Net                income, as reported                                                                                                                                         |   | $                                                            | 28,442 |                             | $      | 91,683 |   |
| Less:                  total stock-based employee compensation expense determined                  under fair value based methods for all awards,                  net of tax  |   |                                                         | (1,420 | )                                |   | (4,957 | ) |
| Pro                forma net income                                                                                                                                            |   | $                                                            | 27,022 |                             | $      | 86,726 |   |
|                                                                                                                                                                                |   |                                                         |   |                             |   |   |   |
| Net                income per share, as reported                                                                                                                               |   | $                                                            | 0.50   |                             | $      | 1.67 |   |
| Pro                forma net income, per share                                                                                                                                 |   |                                                         | 0.48   |                             |   | 1.58 |   |
|                                                                                                                                                                                |   |                                                         |   |                             |   |   |   |
| Net                income per share assuming dilution, as reported                                                                                                             |   | $                                                            | 0.43   |                             | $      | 1.38 |   |
| Pro                forma net income, per share                                                                                                                                 |   |                                                         | 0.41   |                             |   | 1.31 |   |

*Stock      Options and Employee Stock Purchase Plan*

|                                                     |   | Stock                Options                                   |                          |
|----------------------------------------------------------|--------|----------------------------------------------------------------|-------------------------------|
|                                                     |   | Three                Months Ended                September 30, |                          | Nine                Months Ended September 30, |   |
|                                                          |   |                                                           | 2006                (1)  |   |   | 2005                (1) |   |   | 2006                (1) |   |   | 2005 |   |
| Average                expected term (years)             |   |                                                           | ¾                        |   |   | ¾ |   |   | ¾ |   |   | 2.16 |   |
| Risk-free                interest rates                  |   |                                                           | ¾                        |   |   | ¾ |   |   | ¾ |   |   | 3.68 | % |
| Expected                volatility                       |   |                                                           | ¾                        |   |   | ¾ |   |   | ¾ |   |   | 50.60 | % |
| Dividend                yield                            |   |                                                           | ¾                        |   |   | ¾ |   |   | ¾ |   |   | ¾ |   |
| Weighted-average                fair value at grant date |   |                                                           | ¾                        |   |   | ¾ |   |   | ¾ |   | $ | 15.23 |   |

|   | (1) | No                stock options were granted during the                period. |
|--------|-----|--------------------------------------------------------------------------------|

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Table          of Contents

**Sierra          Health Services, Inc.**

**Notes          to Condensed Consolidated Financial Statements**

*(Unaudited)*

|                                                     |   | Purchase                Plan                                   |                    |
|----------------------------------------------------------|--------|----------------------------------------------------------------|-------------------------|
|                                                     |   | Three                Months Ended                September 30, |                    | Nine                Months Ended September 30, |   |
|                                                     |   |                                                           | 2006                (1) |   |   | 2005                  (1) |   |   | 2006 |   |   | 2005 |   |
| Average                expected term (years)             |   |                                                           | ¾                  |   |   | ¾ |   |   | .50 |   |   | .50 |   |
| Risk-free                interest rates                  |   |                                                           | ¾                  |   |   | ¾ |   |   | 4.32 | % |   | 2.58 | % |
| Expected                volatility                       |   |                                                           | ¾                  |   |   | ¾ |   |   | 34.70 | % |   | 27.76 | % |
| Dividend                yield                            |   |                                                           | ¾                  |   |   | ¾ |   |   | ¾ |   |   | ¾ |   |
| Weighted-average                fair value at grant date |   |                                                           | ¾                  |   |   | ¾ |   | $ | 9.95 |   | $ | 6.30 |   |

|   | (1) | No                shares were granted under the Purchase Plan during the                period. |
|--------|-----|-------------------------------------------------------------------------------------------------|

|                                                   |   |   |                                  |                          |   | Weighted                        |   |      |                        |
|--------------------------------------------------------|--------|--------|---------------------------------------|-------------------------------|--------|---------------------------------|--------|-----------|-----------------------------|
|                                                   |   | Number |                                  | Weighted                      |   | Average                         |   | Aggregate |                        |
|                                                   |   | Of     |                                  | Average                       |   | Contractual                Life |   | Intrinsic |                        |
|                                                   |   | Shares |                                  | Exercise                Price |   | Remaining                       |   | Value     |                        |
|                                                        |   |   | *(In                thousands)*  |                          |   |                            |   |      | *(In                years)* |   |   | *(In                thousands)* |   |
| Outstanding,                January 1, 2006       |   |   | 2,844                                 |                          | $      | 11.09                           |   |      |                        |   |   |   |   |
| Granted                                           |   |   | ¾                                |                          |   | ¾                          |   |      |                        |   |   |   |   |
| Exercised                                         |   |   | (966                                  | )                             |   | 8.03                            |   |      |                        |   |   |   |   |
| Canceled                                          |   |   | (50                                   | )                             |   | 9.04                            |   |      |                        |   |   |   |   |
| Outstanding,                September 30, 2006    |   |   | 1,828                                 |                          |   | 12.78                           |   |      | 5.82                        |   | $ | 45,802 |   |
|                                                   |   |   |                                  |                          |   |                            |   |      |                        |   |   |   |   |
| Exercisable                at September 30, 2006  |   |   | 659                                   |                          | $      | 12.69                           |   |      | 5.28                        |   | $ | 16,573 |   |

|                                                          |   | Number |                                  | Weighted-Average          |   |
|---------------------------------------------------------------|--------|--------|---------------------------------------|---------------------------|--------|
|                                                          |   | Of     |                                  | Grant                Date |   |
|                                                          |   | Shares |                                  | Fair                Value |   |
|                                                          |   |   | *(In                thousands)*  |                      |   |   |   |
| Nonvested                shares, January 1, 2006 (1)     |   |   | 1,558                                 |                      | $      | 6.44 |   |
| Granted                                                  |   |   | ¾                                |                      |   | ¾ |   |
| Vested                                                   |   |   | (523                                  | )                         |   | 5.92 |   |
| Canceled                                                 |   |   | (33                                   | )                         |   | 5.72 |   |
| Nonvested                shares, September 30, 2006 (1)  |   |   | 1,002                                 |                      | $      | 6.74 |   |

| (1) | Excludes                172,000 and 167,000 shares at January 1, 2006 and September 30, 2006,                respectively, which vested in 2005, but are not exercisable until                2008. |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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Table          of Contents

**Sierra          Health Services, Inc.**

**Notes          to Condensed Consolidated Financial Statements**

*(Unaudited)*

*Restricted      Stock Units*

|                                                              |   |   |                                  |      |   |
|-------------------------------------------------------------------|--------|--------|---------------------------------------|-----------|--------|
|                                                              |   | Number |                                  | Aggregate |   |
|                                                              |   | Of     |                                  | Intrinsic |   |
|                                                              |   | Shares |                                  | Value     |   |
|                                                              |   |   | *(In                thousands)*  |      |
| Outstanding,                January 1, 2006                  |   |   | ¾                                |      |   |   |   |
| Granted                                                      |   |   | 234                                   |      |   |   |   |
| Vested                                                       |   |   | ¾                                |      |   |   |   |
| Canceled                                                     |   |   | ¾                                |      |   |   |   |
| Outstanding, September                  30, 2006(1)(2)  |   |   | 234                                   |      | $      | 8,855 |   |

| (1) | Exercise                price for all Units is $0.00.     (2)  Does not include                406,000                shares that have vested but have not                settled. |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

*Supplemental      Executive Retirement Plan (“SERP”) *

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Table          of Contents

**Sierra          Health Services, Inc.**

**Notes          to Condensed Consolidated Financial Statements**

*(Unaudited)*

|                                                      |   | Three                  Months Ended September 30, |   |  Nine                  Months Ended September 30, |
|-----------------------------------------------------------|--------|---------------------------------------------------|--------|--------------------------------------------------------|
|                                                      |   | 2006                                              |   | 2005                                                   |   |  2006 |   | 2005 |
|                                                      |   | *(In                  thousands)*                 |
| Components                  of net periodic benefit cost: |   |                                              |   |                                                   |   |   |   |   |   |   |   |   |
| Service                  cost                        |   | $                                                 | 126    |                                                   | $ | 94 |   | $ | 378 |   | $ | 283 |
| Interest                  cost                       |   |                                              | 399    |                                                   |   | 321 |   |   | 1,197 |   |   | 962 |
| Amortization                  of prior service credits    |   |                                              | 302    |                                                   |   | 303 |   |   | 908 |   |   | 908 |
| Recognized                  actuarial loss           |   |                                              | 32     |                                                   |   | ¾ |   |   | 96 |   |   | ¾ |
| Net                  periodic benefit cost           |   | $                                                 | 859    |                                                   | $ | 718 |   | $ | 2,579 |   | $ | 2,153 |

**6.**
**Share      Repurchases **

**7.**
**Earnings      Per Share**

|                                                                           |   | Three                  Months Ended September                  30, |   |  Nine                  Months Ended September 30, |   |
|--------------------------------------------------------------------------------|--------|--------------------------------------------------------------------|--------|--------------------------------------------------------|--------|
|                                                                           |   | 2006                                                               |   | 2005                                                   |   |  2006 |   | 2005 |   |
|                                                                           |   | *(In                  thousands, except per share data)*           |   |
| Basic                  income per share:                                       |   |                                                               |   |                                                   |   |   |   |   |   |   |   |   |   |
| Net                  income                                               |   | $                                                                  | 34,929 |                                                   | $      | 28,442 |   | $ | 101,134 |   | $ | 91,683 |   |
|                                                                           |   |                                                               |   |                                                   |   |   |   |   |   |   |   |   |   |
| Weighted                  average common shares outstanding               |   |                                                               | 56,332 |                                                   |   | 56,770 |   |   | 56,706 |   |   | 54,818 |   |
|                                                                           |   |                                                               |   |                                                   |   |   |   |   |   |   |   |   |   |
| Net                  income per common share                              |   | $                                                                  | 0.62   |                                                   | $      | 0.50 |   | $ | 1.78 |   | $ | 1.67 |   |
|                                                                           |   |                                                               |   |                                                   |   |   |   |   |   |   |   |   |   |
| Diluted                  income per share:                                     |   |                                                               |   |                                                   |   |   |   |   |   |   |   |   |   |
| Net                  income                                               |   | $                                                                  | 34,929 |                                                   | $      | 28,442 |   | $ | 101,134 |   | $ | 91,683 |   |
| Interest                  expense on Sierra debentures, net of tax        |   |                                                               | 185    |                                                   |   | 239 |   |   | 562 |   |   | 1,066 |   |
| Income                  for purposes of computing diluted net income per share |   | $                                                                  | 35,114 |                                                   | $      | 28,681 |   | $ | 101,696 |   | $ | 92,749 |   |
|                                                                           |   |                                                               |   |                                                   |   |   |   |   |   |   |   |   |   |
| Weighted                  average common shares outstanding               |   |                                                               | 56,332 |                                                   |   | 56,770 |   |   | 56,706 |   |   | 54,818 |   |
| Dilutive                  options and restricted shares outstanding       |   |                                                               | 807    |                                                   |   | 1,676 |   |   | 943 |   |   | 2,020 |   |
| Dilutive                  impact of conversion of Sierra debentures       |   |                                                               | 5,517  |                                                   |   | 7,798 |   |   | 5,598 |   |   | 10,554 |   |
| Weighted                  average common shares outstanding assuming dilution  |   |                                                               | 62,656 |                                                   |   | 66,244 |   |   | 63,247 |   |   | 67,392 |   |
|                                                                           |   |                                                               |   |                                                   |   |   |   |   |   |   |   |   |   |
| Net                  income per common share assuming dilution            |   | $                                                                  | 0.56   |                                                   | $      | 0.43 |   | $ | 1.61 |   | $ | 1.38 |   |

----

Table          of Contents

**Sierra          Health Services, Inc.**

**Notes          to Condensed Consolidated Financial Statements**

*(Unaudited)*

**8.**
**Comprehensive      Income**

|                                                                                                             |   | Three                  Months Ended September 30, |   |  Nine                  Months Ended September 30, |   |
|------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------|--------|--------------------------------------------------------|--------|
|                                                                                                             |   | 2006                                              |   | 2005                                                   |   |  2006 |   |  2005 |   |
|                                                                                                             |   | *(In                  thousands)*                 |   |
|                                                                                                             |   |                                              |   |                                                   |   |   |   |   |   |   |   |   |   |
| Net                  income                                                                                      |   | $                                                 | 34,929 |                                                   | $      | 28,442 |   | $ | 101,134 |   | $ | 91,683 |   |
| Change                  in net unrealized holding gain (loss) on available-for-sale                  investments |   |                                              | 1,640  |                                                   |   | (909 | ) |   | (485 | ) |   | (1,059 | ) |
| Comprehensive                  income                                                                            |   | $                                                 | 36,569 |                                                   | $      | 27,533 |   | $ | 100,649 |   | $ | 90,624 |   |

**9.******Recently      Issued Accounting Standards****

*.      *

* *

**10.**
**Segment      Reporting**

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Table          of Contents

**Sierra          Health Services, Inc.**

**Notes          to Condensed Consolidated Financial Statements**

*(Unaudited)*

----

Table          of Contents

**Sierra          Health Services, Inc.**

**Notes          to Condensed Consolidated Financial Statements**

*(Unaudited)*

|                                                     |   | Managed                  Care And Corporate Operations |      | Military                  Health Services Operations |   |   Total |   |
|----------------------------------------------------------|--------|--------------------------------------------------------|-----------|------------------------------------------------------|--------|-------------------|--------|
|                                                     |   | *(In                  thousands)*                      |      |
| Three                  months ended September 30, 2006   |   |                                                   |
| Medical                  premiums                   |   | $                                                      | 405,618   |                                                 | $      | ¾            |   | $ | 405,618 |   |
| Professional                  fees                  |   |                                                   | 13,300    |                                                 |   | ¾            |   |   | 13,300 |   |
| Investment                  and other revenues      |   |                                                   | 11,075    |                                                 |   | 4                 |   |   | 11,079 |   |
| Total                  revenue                      |   | $                                                      | 429,993   |                                                 | $      | 4                 |   | $ | 429,997 |   |
|                                                     |   |                                                   |      |                                                 |   |              |   |   |   |   |
| Segment                  operating profit           |   | $                                                      | 55,008    |                                                 | $      | 4                 |   | $ | 55,012 |   |
| Interest                  expense                   |   |                                                   | (1,015    | )                                                    |   | ¾            |   |   | (1,015 | ) |
| Other                  income (expense), net        |   |                                                   | 14        |                                                 |   | ¾            |   |   | 14 |   |
| Income                  before income taxes         |   | $                                                      | 54,007    |                                                 | $      | 4                 |   | $ | 54,011 |   |
|                                                     |   |                                                   |      |                                                 |   |              |   |   |   |   |
| Three                  months ended September 30, 2005   |   |                                                   |      |                                                 |   |              |   |   |   |   |
| Medical                  premiums                   |   | $                                                      | 327,084   |                                                 | $      | ¾            |   | $ | 327,084 |   |
| Military                  contract revenues         |   |                                                   | ¾    |                                                 |   | 11                |   |   | 11 |   |
| Professional                  fees                  |   |                                                   | 11,133    |                                                 |   | ¾            |   |   | 11,133 |   |
| Investment                  and other revenues      |   |                                                   | 9,171     |                                                 |   | 44                |   |   | 9,215 |   |
| Total                  revenue                      |   | $                                                      | 347,388   |                                                 | $      | 55                |   | $ | 347,443 |   |
|                                                     |   |                                                   |      |                                                 |   |              |   |   |   |   |
| Segment                  operating profit           |   | $                                                      | 44,346    |                                                 | $      | 163               |   | $ | 44,509 |   |
| Interest                  expense                   |   |                                                   | (1,991    | )                                                    |   | ¾            |   |   | (1,991 | ) |
| Other                  income (expense), net        |   |                                                   | 408       |                                                 |   | 19                |   |   | 427 |   |
| Income                  before income taxes         |   | $                                                      | 42,763    |                                                 | $      | 182               |   | $ | 42,945 |   |
|                                                     |   |                                                   |      |                                                 |   |              |   |   |   |   |
| Nine                  months ended September 30, 2006    |   |                                                   |      |                                                 |   |              |   |   |   |   |
| Medical                  premiums                   |   | $                                                      | 1,220,726 |                                                 | $      | ¾            |   | $ | 1,220,726 |   |
| Professional                  fees                  |   |                                                   | 39,097    |                                                 |   | ¾            |   |   | 39,097 |   |
| Investment                  and other revenues      |   |                                                   | 32,812    |                                                 |   | 48                |   |   | 32,860 |   |
| Total                  revenue                      |   | $                                                      | 1,292,635 |                                                 | $      | 48                |   | $ | 1,292,683 |   |
|                                                     |   |                                                   |      |                                                 |   |              |   |   |   |   |
| Segment                  operating profit (loss)    |   | $                                                      | 157,963   |                                                 | $      | (90               | )      | $ | 157,873 |   |
| Interest                  expense                   |   |                                                   | (2,793    | )                                                    |   | ¾            |   |   | (2,793 | ) |
| Other                  income (expense), net        |   |                                                   | (10       | )                                                    |   | ¾            |   |   | (10 | ) |
| Income                  (loss) before income taxes  |   | $                                                      | 155,160   |                                                 | $      | (90               | )      | $ | 155,070 |   |
|                                                     |   |                                                   |      |                                                 |   |              |   |   |   |   |
| Nine                  months ended September 30, 2005    |   |                                                   |      |                                                 |   |              |   |   |   |   |
| Medical                  premiums                   |   | $                                                      | 958,834   |                                                 | $      | ¾            |   | $ | 958,834 |   |
| Military                  contract revenues         |   |                                                   | ¾    |                                                 |   | 16,322            |   |   | 16,322 |   |
| Professional                  fees                  |   |                                                   | 31,102    |                                                 |   | ¾            |   |   | 31,102 |   |
| Investment                  and other revenues      |   |                                                   | 24,551    |                                                 |   | 520               |   |   | 25,071 |   |
| Total                  revenue                      |   | $                                                      | 1,014,487 |                                                 | $      | 16,842            |   | $ | 1,031,329 |   |
|                                                     |   |                                                   |      |                                                 |   |              |   |   |   |   |
| Segment                  operating profit           |   | $                                                      | 131,626   |                                                 | $      | 14,577            |   | $ | 146,203 |   |
| Interest                  expense                   |   |                                                   | (7,961    | )                                                    |   | (10               | )      |   | (7,971 | ) |
| Other                  income (expense), net        |   |                                                   | 1,136     |                                                 |   | (308              | )      |   | 828 |   |
| Income                  before income taxes         |   | $                                                      | 124,801   |                                                 | $      | 14,259            |   | $ | 139,060 |   |

----

Table          of Contents

**Sierra          Health Services, Inc.**

**Notes          to Condensed Consolidated Financial Statements**

*(Unaudited)*

**11.**
**Commitments      and Contingencies**

*Litigation      and Legal Matters *
* *

*Shane*

*Shane*

*Shane*

----

Table          of Contents

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

**Condition              And Results Of Operations**

**Item      2.**

----

Table          of Contents

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

**Condition          And Results Of Operations**

**Summary      of Consolidated Results - Three Months Ended September 30, 2006 and      2005**

|                                                                                                     |   | Three                    Months EndedSeptember                    30, |    |  Percent                    Of RevenueThree                    Months EndedSeptember                    30, |   |  Increase                    (Decrease) |   |
|----------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------------------------------|---------|------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------|--------|
|                                                                                                     |   | 2006                                                                  |    | 2005                                                                                                             |   |  2006                                   |   | 2005 |   |  2006                    vs. 2005 |   |
| *(In                      thousands, except percentages, per share and                      membership)* |   |                                                             |    |                                                                                                             |   |
| Operating                    revenues:                                                                   |   |                                                                  |    |                                                                                                             |   |                                         |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Medical                    premiums                                                                 |   | $                                                                     | 405,618 |                                                                                                             | $      | 327,084                                      |   |   | 94.3 | % |   | 94.1 | % | $ | 78,534 |   |   | 24.0 | % |
| Military                    contract revenues                                                       |   |                                                                  | ¾  |                                                                                                             |   | 11                                           |   |   | ¾ |   |   | ¾ |   |   | (11 | ) |   | (100.0 | ) |
| Professional                    fees                                                                |   |                                                                  | 13,300  |                                                                                                             |   | 11,133                                       |   |   | 3.1 |   |   | 3.2 |   |   | 2,167 |   |   | 19.5 |   |
| Investment                    and other revenues                                                         |   |                                                                  | 11,079  |                                                                                                             |   | 9,215                                        |   |   | 2.6 |   |   | 2.7 |   |   | 1,864 |   |   | 20.2 |   |
| Total                                                                                               |   |                                                                  | 429,997 |                                                                                                             |   | 347,443                                      |   |   | 100.0 |   |   | 100.0 |   |   | 82,554 |   |   | 23.8 |   |
|                                                                                                     |   |                                                                  |    |                                                                                                             |   |                                         |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Operating                    expenses:                                                                   |   |                                                                  |    |                                                                                                             |   |                                         |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Medical                    expenses                                                                 |   |                                                                  | 323,694 |                                                                                                             |   | 259,591                                      |   |   | 75.3 |   |   | 74.7 |   |   | 64,103 |   |   | 24.7 |   |
| Medical                    care ratio                                                               |   |                                                                  | 77.3    | %                                                                                                                |   | 76.8                                         | %      |   |   |   |   |   |   |   |   |   |   | 0.5 |   |
| Military                    contract expenses                                                       |   |                                                                  | ¾  |                                                                                                             |   | (108                                         | )      |   | ¾ |   |   | ¾ |   |   | 108 |   |   | (100.0 | ) |
| General                    and administrative expenses                                              |   |                                                                  | 51,291  |                                                                                                             |   | 43,451                                       |   |   | 11.9 |   |   | 12.5 |   |   | 7,840 |   |   | 18.0 |   |
| Total                                                                                               |   |                                                                  | 374,985 |                                                                                                             |   | 302,934                                      |   |   | 87.2 |   |   | 87.2 |   |   | 72,051 |   |   | 23.8 |   |
|                                                                                                     |   |                                                                  |    |                                                                                                             |   |                                         |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                                     |   |                                                                  |    |                                                                                                             |   |                                         |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Operating                    income                                                            |   |                                                                  | 55,012  |                                                                                                             |   | 44,509                                       |   |   | 12.8 |   |   | 12.8 |   |   | 10,503 |   |   | 23.6 |   |
| Interest                    expense                                                                 |   |                                                                  | (1,015  | )                                                                                                                |   | (1,991                                       | )      |   | (0.2 | ) |   | (0.5 | ) |   | 976 |   |   | (49.0 | ) |
| Other                    income (expense), net                                                      |   |                                                                  | 14      |                                                                                                             |   | 427                                          |   |   | ¾ |   |   | 0.1 |   |   | (413 | ) |   | (96.7 | ) |
|                                                                                                     |   |                                                                  |    |                                                                                                             |   |                                         |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Income                    before income taxes                                                       |   |                                                                  | 54,011  |                                                                                                             |   | 42,945                                       |   |   | 12.6 |   |   | 12.4 |   |   | 11,066 |   |   | 25.8 |   |
| Provision                    for income taxes                                                       |   |                                                                  | (19,082 | )                                                                                                                |   | (14,503                                      | )      |   | (4.5 | ) |   | (4.2 | ) |   | (4,579 | ) |   | 31.6 |   |
| Tax                    rate                                                                         |   |                                                                  | 35.3    | %                                                                                                                |   | 33.8                                         | %      |   |   |   |   |   |   |   |   |   |   | 1.5 |   |
| Net                    income                                                                       |   | $                                                                     | 34,929  |                                                                                                             | $      | 28,442                                       |   |   | 8.1 | % |   | 8.2 | % | $ | 6,487 |   |   | 22.8 | % |
|                                                                                                     |   |                                                                  |    |                                                                                                             |   |                                         |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                                     |   |                                                                  |    |                                                                                                             |   |                                         |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net                    income per common share assuming dilution                                         |   | $                                                                     | 0.56    |                                                                                                             | $      | 0.43                                         |   |   |   |   |   |   |   | $ | 0.13 |   |   | 30.2 | % |
|                                                                                                     |   |                                                                  |    |                                                                                                             |   |                                         |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Membership                                                                                               |   |                                                                  |    |                                                                                                             |   |                                         |   |   |   |   |   |   |   |   |   |   |   |   |   |
| HMO:                                                                                                     |   |                                                                  |    |                                                                                                             |   |                                         |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Commercial                                                                                               |   |                                                                  | 273,600 |                                                                                                             |   | 251,000                                      |   |   |   |   |   |   |   |   | 22,600 |   |   | 9.0 | % |
| Medicare                                                                                                 |   |                                                                  | 57,000  |                                                                                                             |   | 55,200                                       |   |   |   |   |   |   |   |   | 1,800 |   |   | 3.3 |   |
| Medicaid                                                                                                 |   |                                                                  | 57,000  |                                                                                                             |   | 53,300                                       |   |   |   |   |   |   |   |   | 3,700 |   |   | 6.9 |   |
| Subtotal                    HMO                                                                          |   |                                                                  | 387,600 |                                                                                                             |   | 359,500                                      |   |   |   |   |   |   |   |   | 28,100 |   |   | 7.8 |   |
| PPO:                                                                                                     |   |                                                                  |    |                                                                                                             |   |                                         |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Commercial                                                                                               |   |                                                                  | 31,300  |                                                                                                             |   | 27,000                                       |   |   |   |   |   |   |   |   | 4,300 |   |   | 15.9 |   |
| Medicare                                                                                                 |   |                                                                  | 1,700   |                                                                                                             |   | ¾                                       |   |   |   |   |   |   |   |   | 1,700 |   |   | 100.0 |   |
| Subtotal                    PPO                                                                          |   |                                                                  | 33,000  |                                                                                                             |   | 27,000                                       |   |   |   |   |   |   |   |   | 6,000 |   |   | 22.2 |   |
| Medicare                    Part D                                                                       |   |                                                                  | 183,300 |                                                                                                             |   | ¾                                       |   |   |   |   |   |   |   |   | 183,300 |   |   | 100.0 |   |
| Medicare                    supplement                                                                   |   |                                                                  | 13,700  |                                                                                                             |   | 15,900                                       |   |   |   |   |   |   |   |   | (2,200 | ) |   | (13.8 | ) |
| Administrative                    services                                                               |   |                                                                  | 221,100 |                                                                                                             |   | 202,000                                      |   |   |   |   |   |   |   |   | 19,100 |   |   | 9.5 |   |
| Total                    membership                                                                 |   |                                                                  | 838,700 |                                                                                                             |   | 604,400                                      |   |   |   |   |   |   |   |   | 234,300 |   |   | 38.8 | % |
|                                                                                                     |   |                                                                  |    |                                                                                                             |   |                                         |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Member                    months                                                                         |   |                                                                  |    |                                                                                                             |   |                                         |   |   |   |   |   |   |   |   |   |   |   |   |   |
| HMO:                                                                                                     |   |                                                                  |    |                                                                                                             |   |                                         |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Commercial                                                                                               |   |                                                                  | 810,900 |                                                                                                             |   | 745,700                                      |   |   |   |   |   |   |   |   | 65,200 |   |   | 8.7 | % |
| Medicare                                                                                                 |   |                                                                  | 171,000 |                                                                                                             |   | 165,000                                      |   |   |   |   |   |   |   |   | 6,000 |   |   | 3.6 |   |
| Medicaid                                                                                                 |   |                                                                  | 171,600 |                                                                                                             |   | 159,000                                      |   |   |   |   |   |   |   |   | 12,600 |   |   | 7.9 |   |

----

Table          of Contents

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

**Condition          And Results Of Operations**

**Summary      of Consolidated Results - Nine Months Ended September 30, 2006 and      2005**

|                                                                                                     |   | Nine                      Months EndedSeptember                      30, |      |  Percent                      Of RevenueNine                      Months EndedSeptember                      30, |   |  Increase                      (Decrease) |   |
|----------------------------------------------------------------------------------------------------------|--------|--------------------------------------------------------------------------|-----------|-----------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------------|--------|
|                                                                                                     |   | 2006                                                                     |      | 2005                                                                                                                  |   |  2006                                     |   | 2005 |   |  2006                      vs. 2005 |   |
| *(In                      thousands, except percentages, per share and                      membership)* |   |                                                                |      |                                                                                                                  |   |
| Operating                      revenues:                                                                 |   |                                                                     |      |                                                                                                                  |   |                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Medical                      premiums                                                               |   | $                                                                        | 1,220,726 |                                                                                                                  | $      | 958,834                                        |   |   | 94.4 | % |   | 93.0 | % | $ | 261,892 |   |   | 27.3 | % |
| Military                      contract revenues                                                     |   |                                                                     | ¾    |                                                                                                                  |   | 16,322                                         |   |   | ¾ |   |   | 1.6 |   |   | (16,322 | ) |   | (100.0 | ) |
| Professional                      fees                                                              |   |                                                                     | 39,097    |                                                                                                                  |   | 31,102                                         |   |   | 3.0 |   |   | 3.0 |   |   | 7,995 |   |   | 25.7 |   |
| Investment                      and other revenues                                                  |   |                                                                     | 32,860    |                                                                                                                  |   | 25,071                                         |   |   | 2.6 |   |   | 2.4 |   |   | 7,789 |   |   | 31.1 |   |
| Total                                                                                               |   |                                                                     | 1,292,683 |                                                                                                                  |   | 1,031,329                                      |   |   | 100.0 |   |   | 100.0 |   |   | 261,354 |   |   | 25.3 |   |
|                                                                                                     |   |                                                                     |      |                                                                                                                  |   |                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Operating                      expenses:                                                                 |   |                                                                     |      |                                                                                                                  |   |                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Medical                      expenses                                                               |   |                                                                     | 981,758   |                                                                                                                  |   | 755,779                                        |   |   | 76.0 |   |   | 73.3 |   |   | 225,979 |   |   | 29.9 |   |
| Medical                      care ratio                                                             |   |                                                                     | 77.9      | %                                                                                                                     |   | 76.3                                           | %      |   |   |   |   |   |   |   |   |   |   | 1.6 |   |
| Military                      contract expenses                                                     |   |                                                                     | 138       |                                                                                                                  |   | 2,265                                          |   |   | ¾ |   |   | 0.2 |   |   | (2,127 | ) |   | (93.9 | ) |
| General                      and administrative expenses                                                 |   |                                                                     | 152,914   |                                                                                                                  |   | 127,082                                        |   |   | 11.8 |   |   | 12.3 |   |   | 25,832 |   |   | 20.3 |   |
| Total                                                                                               |   |                                                                     | 1,134,810 |                                                                                                                  |   | 885,126                                        |   |   | 87.8 |   |   | 85.8 |   |   | 249,684 |   |   | 28.2 |   |
|                                                                                                     |   |                                                                     |      |                                                                                                                  |   |                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Operating                      income                                                          |   |                                                                     | 157,873   |                                                                                                                  |   | 146,203                                        |   |   | 12.2 |   |   | 14.2 |   |   | 11,670 |   |   | 8.0 |   |
| Interest                      expense                                                               |   |                                                                     | (2,793    | )                                                                                                                     |   | (7,971                                         | )      |   | (0.2 | ) |   | (0.8 | ) |   | 5,178 |   |   | (65.0 | ) |
| Other                      income (expense), net                                                    |   |                                                                     | (10       | )                                                                                                                     |   | 828                                            |   |   | ¾ |   |   | 0.1 |   |   | (838 | ) |   | (101.2 | ) |
|                                                                                                     |   |                                                                     |      |                                                                                                                  |   |                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Income                      before income taxes                                                     |   |                                                                     | 155,070   |                                                                                                                  |   | 139,060                                        |   |   | 12.0 |   |   | 13.5 |   |   | 16,010 |   |   | 11.5 |   |
| Provision                      for income taxes                                                     |   |                                                                     | (53,936   | )                                                                                                                     |   | (47,377                                        | )      |   | (4.2 | ) |   | (4.6 | ) |   | (6,559 | ) |   | 13.8 |   |
| Tax                      rate                                                                       |   |                                                                     | 34.8      | %                                                                                                                     |   | 34.1                                           | %      |   |   |   |   |   |   |   |   |   |   | 0.7 |   |
| Net                      income                                                                     |   | $                                                                        | 101,134   |                                                                                                                  | $      | 91,683                                         |   |   | 7.8 | % |   | 8.9 | % | $ | 9,451 |   |   | 10.3 | % |
|                                                                                                     |   |                                                                     |      |                                                                                                                  |   |                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net                      income per common share assuming dilution                                       |   | $                                                                        | 1.61      |                                                                                                                  | $      | 1.38                                           |   |   |   |   |   |   |   | $ | 0.23 |   |   | 16.7 | % |
|                                                                                                     |   |                                                                     |      |                                                                                                                  |   |                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Member                      months                                                                       |   |                                                                     |      |                                                                                                                  |   |                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |
| HMO:                                                                                                     |   |                                                                     |      |                                                                                                                  |   |                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Commercial                                                                                               |   |                                                                     | 2,378,200 |                                                                                                                  |   | 2,192,300                                      |   |   |   |   |   |   |   |   | 185,900 |   |   | 8.5 | % |
| Medicare                                                                                                 |   |                                                                     | 509,700   |                                                                                                                  |   | 489,600                                        |   |   |   |   |   |   |   |   | 20,100 |   |   | 4.1 |   |
| Medicaid                                                                                                 |   |                                                                     | 507,600   |                                                                                                                  |   | 465,500                                        |   |   |   |   |   |   |   |   | 42,100 |   |   | 9.0 |   |

**Overview**

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Table          of Contents

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

**Condition          And Results Of Operations**

**Executive      Summary**

| · | Total                operating revenues improved by 25.3%. This increase was primarily                driven                by a 27.3% increase in medical premiums due to our participation                in the                new Medicare Part D prescription drug program (PDP), an increase                in our                HMO membership and premium rate increases. Also contributing to the                improvement in operating revenues was a 31.1% increase in investment                and                other revenues, which increased due to an increase in yield during                2006                and higher average invested                balances. |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | HMO                membership increased 7.8% as a result of new accounts and in-case                growth. |
|--------|-------------------------------------------------------------------------------------------------------------|

| · | Medical                expenses, as a percentage of medical premiums and professional fees,                or                medical care ratio, increased by 160 basis points as a result of                the much                higher medical care ratio related to the                PDP. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | General                and administrative (G&A) expenses as a percentage of medical premiums                decreased to 12.5% in 2006 from 13.3% in 2005. G&A expenses increased                20.3% primarily due to PDP related expenses, higher employee compensation                related expenses, premium taxes, and brokers’ fees. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | Operating                income from our managed care and corporate operations improved 20.0%                primarily driven by medical premium revenue growth from new members                and                premium rate increases. Our operating margin from our managed care                and                corporate operations, which is operating income divided by total                revenues,                decreased 80 basis points as a result of the lower operating margin                for                the PDP. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | We                repurchased 3.1 million shares of our common stock during 2006. Our                weighted average common shares outstanding assuming dilution has                decreased                from 67.4 million in 2005 to 63.2 million in 2006. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | Our                net income per common share assuming dilution increased                16.7%. |
|--------|--------------------------------------------------------------------------------------------------|

| · | It                currently appears unlikely that we will extend our contract with                our                current primary southern Nevada contracted hospital group, HCA Inc.                (HCA).                Our current contract is scheduled to expire on December 31, 2006.                While we                are now engaged in an effort to move our HCA hospital days to other                contracted hospitals, there will be emergency situations that will                require                us to use one or more HCA hospitals in 2007. See Medical Expenses                below                for more details. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | Cash                flows from operating activities decreased to $93.9 million from $152.9                during 2005. This decrease is mostly due to additional payments from                CMS                received in 2005 and not in 2006, see Medical Premiums below for                more                details, and negative cash flow of $39.1 million related to the PDP.                The                negative cash flow is primarily due to CMS reconciliation issues                and                insufficient funding from CMS for our reimbursable low-income subsidy                costs. These costs will be fully reimbursed after CMS performs their                year-end reconciliation. These decreases were partially offset by                an                increase in medical claims payable during 2006 compared to                2005. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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Table          of Contents

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

**Condition          And Results Of Operations**

**Results      Of Operations, Three Months Ended September 30, 2006, Compared To Three Months      Ended September 30, 2005**

*Medical      Premiums*

|                                                                     |  CMS selected us to participate in                the                new voluntary PDP for our Medicare Advantage plans as well as a                stand-alone program for 2006. We were also selected to participate                in a                local and regional Medicare Advantage PPO plans. Sierra Health and                Life                Insurance Company, Inc. (SHL) offers the stand-alone PDP, marketed                under                the brand name SierraRx, in eight regions covering Arizona, California,                Colorado, Idaho, Nevada, New Mexico, Oregon, Texas, Utah and Washington.                SHL has also been selected as a PDP sponsor in the same states for                auto-enrolled Medicare and Medicaid beneficiaries. SierraRx covers a                wide variety of preferred generic and brand name prescription drugs                that                are distributed through most major retail pharmacy chains and a large                number of independent pharmacies. At September 30, 2006, we had 183,300                beneficiaries enrolled in the PDP, the |
|--------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|  majority of which were                auto-enrolled beneficiaries. |

----

Table          of Contents

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

**Condition          And Results Of Operations**

*Professional      Fees*

*Investment      and Other Revenues - *

*Medical      Expenses*
*-      *

----

Table          of Contents

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

**Condition          And Results Of Operations**

*General      and Administrative Expenses*
* *

*Interest      Expense*

*Provision      for Income Taxes*

----

Table          of Contents

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

**Condition          And Results Of Operations**

**Results      Of Operations, Nine Months Ended September 30, 2006, Compared To Nine Months      Ended September 30, 2005**

*Medical      Premiums*

*Military      Contract Revenues*

*Professional      Fees*

*Investment      and Other Revenues - *

*Medical      Expenses*
*-      *

*Military      Contract Expenses*

*General      and Administrative Expenses*
* *

----

Table          of Contents

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

**Condition          And Results Of Operations**

*Interest      Expense*

*Provision      for Income Taxes*

*Liquidity      and Capital Resources*

|                                                            |   | Nine                Months Ended September 30, |     |
|-----------------------------------------------------------------|--------|------------------------------------------------|----------|
|                                                            |   | 2006                                           |     | 2005 |   |
|                                                            |   | *(In                thousands)*                |     |
| Sources                of cash:                                 |   |                                           |     |   |   |   |   |
| Cash                provided by operating activities            |   | $                                              | 93,903   |   | $ | 152,945 |   |
| Exercise                of stock in connection with stock plans |   |                                           | 14,063   |   |   | 19,596 |   |
| Other                                                           |   |                                           | 22,945   |   |   | ¾ |   |
| Total                cash sources                               |   |                                           | 130,911  |   |   | 172,541 |   |
|                                                            |   |                                           |     |   |   |   |   |
| Uses                of cash:                                    |   |                                           |     |   |   |   |   |
| Purchase                of investments, net of proceeds (1)     |   |                                           | ¾   |   |   | (138,572 | ) |
| Purchase                of treasury stock                       |   |                                           | (127,780 | ) |   | (144,421 | ) |
| Other                                                           |   |                                           | (13,265  | ) |   | (8,650 | ) |
| Total                cash uses                                  |   |                                           | (141,045 | ) |   | (291,643 | ) |
|                                                            |   |                                           |     |   |   |   |   |
| Net                decrease in cash                             |   | $                                              | (10,134  | ) | $ | (119,102 | ) |

----

Table          of Contents

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

**Condition          And Results Of Operations**

*Sierra      Debentures*

*Revolving      Credit Facility*

----

Table            of Contents

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

**Condition            And Results Of Operations**

*Sierra      Share Repurchases*

*Statutory      Capital and Deposit Requirements*

*Obligations      and Commitments*

*Recently      Issued Accounting Standards*

*.      *

----

Table            of Contents

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

**Condition            And Results Of Operations**

* *

***Ratings***

|                                                          |   | A.M.                Best Company, Inc. (2) |                           | Fitch                Ratings (1) |   | Standard                & Poor's Corp. (2) |   |
|---------------------------------------------------------------|--------|--------------------------------------------|--------------------------------|----------------------------------|--------|------------------------------------------------|--------|
|                                                          |   | Rating                                     |                           | Ranking                          |   | Rating                                         |   | Ranking |   | Rating |   | Ranking |   |
| Financial                strength rating:                     |   |                                       |                           |                             |   |                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |
| HMO                and health and life insurance subsidiaries |   |                                       | B++                Very Good   |                             |   | 5th                of 16                       |   |   | A-                Strong |   |   | 7th                of 23 |   |   | n/a |   |   | n/a |   |
|                                                          |   |                                       |                           |                             |   |                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Issuer                credit ratings:                         |   |                                       |                           |                             |   |                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |
| HMO                and health and life insurance subsidiaries |   |                                       | bbb+                Very Good  |                             |   | 8th                of 22                       |   |   | n/a |   |   | n/a |   |   | n/a |   |   | n/a |   |
| Parent                company                            |   |                                       | bb+                Speculative |                             |   | 11th                of 22                      |   |   | BBB                Good |   |   | 9th                of 23 |   |   | n/a |   |   | n/a |   |
|                                                          |   |                                       |                           |                             |   |                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Counterparty                credit rating                     |   |                                       | n/a                            |                             |   | n/a                                            |   |   | n/a |   |   | n/a |   |   | BB+                Speculative |   |   | 11th                of 22 |   |
|                                                          |   |                                       |                           |                             |   |                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Senior                convertible debentures                  |   |                                       | bb+                Speculative |                             |   | 11th                of 22                      |   |   | BBB-                Investment Grade |   |   | 10th                of 23 |   |   | BB+                Speculative |   |   | 11th                of 22 |   |

----

Table            of Contents

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

**Condition            And Results Of Operations**

*Other*

*Inflation*

*Critical      Accounting Policies and Estimates*

----

Table          of Contents

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

**Item      4. Controls and Procedures** 

*Evaluation      of Disclosure Controls and Procedures*

*Change      in Internal Control over Financial Reporting*

----

Table          of Contents

**Part      II. Other Information**

**Item      1. Legal Proceedings**

*Shane*

*Shane*

*Shane*

----

Table          of Contents

**Item      1A. Risk Factors**

**Item      2. Unregistered Sales of Equity Securities and Use of      Proceeds** 

|   | (c) | Below,                is a summary of stock repurchases for the nine months ended September                30,                2006. See Note 5, Share Repurchases, of our Notes to Condensed                Consolidated Financial Statements for information regarding our stock                repurchase plan. |
|--------|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| Period                                                                                                   |   | Total                  NumberOf                  SharesRepurchased                  (1) |   | AveragePrice                  PaidPer                  Share |   | Total                  NumberOf                  Shares PurchasedAs                  Part Of PubliclyAnnounced                  PlanOr                  Program |   | Approximate                  DollarValue                  Of SharesThat                  May Yet BePurchased                  UnderThe                  Plan (2) |
|----------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------------------------------------------------|--------|--------------------------------------------------------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                     |   | *(In                  thousands, except per share data)*                                |
| Beginning                  approximate dollar value of shares that may yet be                  purchased |   |                                                                                    |   | $42,125                                                      |
| January                  1, 2006 - January 31, 2006                                                      |   | 70                                                                                      |   | $39.30                                                       |   | 70                                                                                                                                                              |   | 39,392                                                                                                                                                           |
| February                  1, 2006 - February 28, 2006                                                    |   | 1,010                                                                                   |   | 40.35                                                        |   | 1,010                                                                                                                                                           |   | 73,675                                                                                                                                                           |
| March                  1, 2006 - March 31, 2006                                                          |   | 1,121                                                                                   |   | 42.49                                                        |   | 1,121                                                                                                                                                           |   | 26,056                                                                                                                                                           |
| April                  1, 2006 - April 30, 2006                                                          |   | 633                                                                                     |   | 39.97                                                        |   | 633                                                                                                                                                             |   | 75,764                                                                                                                                                           |
| May                  1, 2006 - May 31, 2006                                                              |   | 290                                                                                     |   | 39.15                                                        |   | 290                                                                                                                                                             |   | 64,427                                                                                                                                                           |
| June                  1, 2006 - June 30, 2006                                                            |   | ¾                                                                                  |   | ¾                                                       |   | ¾                                                                                                                                                          |   | 64,427                                                                                                                                                           |
| July                  1, 2006 - July 31, 2006                                                            |   | ¾                                                                                  |   | ¾                                                       |   | ¾                                                                                                                                                          |   | 64,427                                                                                                                                                           |
| August                  1, 2006 - August 31, 2006                                                        |   | ¾                                                                                  |   | ¾                                                       |   | ¾                                                                                                                                                          |   | 64,427                                                                                                                                                           |
| September                  1, 2006 - September 30, 2006                                                  |   | ¾                                                                                  |   | ¾                                                       |   | ¾                                                                                                                                                          |   | 64,427                                                                                                                                                           |

|   | (1) | Certain                repurchases were made pursuant to a 10b5-1                plan. |
|--------|-----|----------------------------------------------------------------------------------------|

|   | (2) | At                January 1, 2006, $42.1 million remained available for purchase under                previously approved plans. On February 16, 2006, April 20, 2006 and                October 19, 2006 our Board of Directors authorized $75.0 million                in                additional share repurchases for a total of $225.0 million. At                October 25, 2006, $139.4 million was available under the Board of                Directors’ authorized plan. The repurchase program has no stated                expiration date. |
|--------|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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|   | (d) | Below,                is a summary of 2¼% senior convertible debenture conversions for the nine                months ended September 30, 2006. See Note 4, Long-Term Debt, of our                Notes                to Condensed Consolidated Financial Statements for information regarding                our senior convertible debentures. |
|--------|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| Period                                                | Total                Dollar Value of Debentures Converted | Average                PricePaid                PerDebenture                                               | Total                Dollar ValueOf                DebenturesPurchasedAs                Part Of PubliclyAnnounced                PlanOr                Program | Approximate                DollarValue                Of DebenturesThat                May Yet BePurchased                UnderThe                Plan |
|-------------------------------------------------------|-----------------------------------------------------------|------------------------------------------------------------------------------------------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------|
| January                1, 2006 - January 31, 2006     | $500,000                                                  | 109.35                shares of common stock for each $1,000 principal amount of                debentures | none                                                                                                                                                           | none                                                                                                                                                   |
| February                1, 2006 - February 28, 2006   | ¾                                                    | ¾                                                                                                     | ¾                                                                                                                                                         | ¾                                                                                                                                                 |
| March                1, 2006 - March 31, 2006         | ¾                                                    | ¾                                                                                                     | ¾                                                                                                                                                         | ¾                                                                                                                                                 |
| April                1, 2006 - April 30, 2006         | ¾                                                    | ¾                                                                                                     | ¾                                                                                                                                                         | ¾                                                                                                                                                 |
| May                1, 2006 - May 31, 2006             | ¾                                                    | ¾                                                                                                     | ¾                                                                                                                                                         | ¾                                                                                                                                                 |
| June                1, 2006 - June 30, 2006           | ¾                                                    | ¾                                                                                                     | ¾                                                                                                                                                         | ¾                                                                                                                                                 |
| July                1, 2006 - July 31, 2006           | ¾                                                    | ¾                                                                                                     | ¾                                                                                                                                                         | ¾                                                                                                                                                 |
| August                1, 2006 - August 31, 2006       | ¾                                                    | ¾                                                                                                     | ¾                                                                                                                                                         | ¾                                                                                                                                                 |
| September                1, 2006 - September 30, 2006 | 8,000,000                                                 | 109.35                shares of common stock for each $1,000 principal amount of                debentures | none                                                                                                                                                           | none                                                                                                                                                   |

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

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

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

**Item      6.** **Exhibits**

| (10.1) | Sierra                Health Services, Inc. Supplemental Executive Retirement Plan III                effective                January 1, 2005.                                                    |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (31.1) | Rule                13a - 14(a) or 15d - 14(a) Certification of Chief Executive Officer.                                                                                                           |
| (31.2) | Rule                13a - 14(a) or 15d - 14(a) Certification of Chief Financial Officer.                                                                                                           |
| (32.1) | Certification                pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section                906 of                the Sarbanes-Oxley Act of 2002 of Principal Executive Officer. |
| (32.2) | Certification                pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section                906 of                the Sarbanes-Oxley Act of 2002 of Principal Financial Officer. |

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**Signatures**

|   | SIERRA                HEALTH SERVICES, INC. Registrant                By:/s/                MARC R. BRIGGS Marc                R. BriggsVice                President of Finance, Chief                Accounting Officer |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|