~~UNITED STATESSECURITIES AND EXCHANGE~~United ~~COMMISSIONWashington, D.C. 20549~~ States

Securities And Exchange Commission

Washington, DC 20549

FORM 10-Q

(Mark One)

~~For~~R ~~the~~Quarterly ~~quarterly~~Report ~~period~~Pursuant ~~ended~~To Section 13 Or 15(d) Of The Securities Exchange Act Of 1934

ORFor the quarterly period ended September 30, 2007

~~For the transition period from ________to _________~~ or

~~Commission~~¨ ~~file~~Transition ~~number 1-8865~~ Report Pursuant To Section 13 Or 15(d) Of The Securities Exchange Act Of 1934

For the transition period from to

Commission File Number: 1-8865

SIERRA HEALTH SERVICES, INC.

(Exact Name of Registrant as Specified in Its Charter)


Nevada		88-0200415
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

2724 North Tenaya Way, Las Vegas, NV		89128
(Address of Principal Executive Offices)		(Zip Code)

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

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

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

Large accelerated filer R

Accelerated filer o

Non-accelerated filer o

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

The number of shares outstanding of the registrant's Common Stock as of November 2, 2007 was 56,193,000.

Sierra Health Services, Inc.

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

Quarterly Report on Form 10-Q

~~2724~~For The ~~North~~Period ~~Tenaya~~Ended ~~Way~~September ~~Las Vegas~~30, ~~Nevada 89128~~ 2007

(702) 242-7000

	Page No.
Part I. Financial Information
Item 1. Financial Statements (Unaudited):
Condensed Consolidated Balance Sheets – September 30, 2007 and December 31, 2006	1
Condensed Consolidated Statements of Income – three and nine months ended September 30, 2007 and 2006	2
Condensed Consolidated Statements of Stockholders' Equity – nine months ended September 30, 2007 and 2006	3
Condensed Consolidated Statements of Cash Flows – nine months ended September 30, 2007 and 2006	4
Notes to Condensed Consolidated Financial Statements	5-16
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations	17-30
Item 3. Quantitative and Qualitative Disclosures About Market Risk	31
Item 4. Controls and Procedures	31

Part II. Other Information
Item 1. Legal Proceedings	32-33
Item 1A. Risk Factors	33-34
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	34-35
Item 3. Defaults upon Senior Securities	35
Item 4. Submission of Matters to a Vote of Security Holders	35
Item 5. Other Information	35
Item 6. Exhibits	35
Signatures	36

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

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

As of July 25, 2005, there were 28,502,000 shares of common stock outstanding.

SIERRA HEALTH SERVICES, INC. Quarterly Report on Form 10-Q For the period ended June 30, 2005

PART I. FINANCIAL INFORMATION

Page No.

Item 1. Financial Statements (Unaudited):

Condensed Consolidated Balance Sheets - June 30, 2005 and December 31, 2004

Condensed Consolidated Statements of Operations - three and six months ended June 30, 2005 and 2004

Condensed Consolidated Statements of Cash Flows - six months ended June 30, 2005 and 2004

Notes to Condensed Consolidated Financial Statements

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Item 4. Controls and Procedures

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 3. Defaults upon Senior Securities

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

Item 5. Other Information

Item 6. Exhibits

Signatures

Table of Contents

~~PART~~ Part I. Financial ~~FINANCIAL INFORMATION~~Information

~~ITEM~~ Item 1. ~~FINANCIAL STATEMENTS~~ Financial Statements

~~SIERRA~~Sierra Health ~~HEALTH SERVICES~~Services, ~~INC~~Inc. ~~AND~~And ~~SUBSIDIARIES~~ Subsidiaries

~~CONDENSED~~Condensed Consolidated ~~CONSOLIDATED~~Balance ~~BALANCE SHEETS~~ Sheets

(In in thousands, except per share data)

(Unaudited)

		June 30, 2005				December 31, 2004
				September 30, 2007				December 31, 2006
ASSETS
Assets
Current Assets:
Current assets:
~~Cash and cash equivalents~~	Cash and cash equivalents	$	~~112,422~~	$	53,160	$	~~207,619~~	$	58,918
~~Investments~~	Investments		~~234,488~~		284,420		~~147,575~~		323,846
Accounts receivable (less allowance for doubtful accounts: 2005 - $5,794; 2004 - $5,380)			13,597				15,150
	Accounts receivable (less allowance for doubtful accounts:
Military accounts receivable (less allowance for doubtful accounts: 2005 - $400; 2004 - $100)			3,976				25,452
		2007-$7,400;2006-$5,518)			30,366				21,308
~~Current portion of deferred tax asset~~	Current portion of deferred tax asset		~~21,363~~		33,584		~~17,555~~		29,861
~~Prepaid expenses and other current assets~~	Prepaid expenses and other current assets		~~29,524~~		129,475		~~36,123~~		110,020
Total Current Assets			415,370				449,474
Total current assets					531,005				543,953
Property and equipment, net			~~69,302~~		64,197		~~71,152~~		71,893
Restricted cash and investments			~~17,309~~		17,274		~~21,853~~		19,428
Goodwill (less accumulated amortization: 2005 and 2004 - $6,972)			14,782				14,782
Goodwill					14,782				14,782
Deferred tax asset (less current portion)			~~12,472~~		28,762		~~13,275~~		18,656
Note receivable (less valuation allowance: 2005 and 2004 - $15,000)			47,000				47,000
Note receivable (less valuation allowance: 2007 and 2006 - $15,000)					47,000				47,000
Other assets			~~73,883~~		92,006		~~72,244~~		93,700
Total Assets		$	650,118			$	689,780
Total assets				$	795,026			$	809,412
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities and stockholders' equity
Current Liabilities:
Current liabilities:
~~Accrued and other current liabilities~~	Accrued and other current liabilities	$	~~56,875~~	$	85,389	$	~~76,256~~	$	99,314
~~Trade accounts payable~~	Trade accounts payable		~~6,733~~		2,082		~~7,123~~		1,552
~~Accrued payroll and taxes~~	Accrued payroll and taxes		~~27,382~~		29,351		~~27,668~~		25,925
~~Medical claims payable~~	Medical claims payable		~~121,521~~		191,122		~~119,337~~		222,895
Unearned premium revenue			16,201				50,763
	Premium deficiency reserve				22,081				1,076
Military health care payable			—				17,061
	Unearned premium revenue				52,207				52,075
~~Current portion of long-term debt~~	Current portion of long-term debt		97		153		~~100~~		116
Total Current Liabilities			228,809				298,308
Total current liabilities					382,385				402,953
Long-term debt (less current portion)			~~81,368~~		20,535		~~125,395~~		118,734
Other liabilities			~~60,957~~		91,062		~~64,380~~		71,007
Total Liabilities			371,134				488,083
Total liabilities					493,982				592,694
Commitments and contingencies
Stockholders' Equity:
Stockholders' equity:
Preferred stock, $.01 par value, 1,000 shares authorized; none issued or outstanding			—				—
	Preferred stock, $.01 par value, 1,000 shares authorized;
Common stock, $.005 par value, 60,000 shares authorized; 2005 - 38,218; 2004 - 35,573 shares issued			191				178
	none issued or outstanding				¾				¾
Treasury stock: 2005 - 9,765; 2004 - 9,192 common stock shares			(282,742	)			(237,876	)
	Common stock, $.005 par value, 120,000 shares authorized; 2007 – 73,582;
Additional paid-in capital			352,645				286,571
	2006 – 70,835 shares issued; 2007 – 56,180; 2006 – 53,824 shares outstanding				368				354
Deferred compensation			(3,628	)			(288	)
	Treasury stock at cost: 2007 – 17,402; 2006 – 17,011 common stock shares				(614,976	)			(600,539	)
Accumulated other comprehensive loss			(395	)			(245	)
	Additional paid-in capital				469,645				436,643
Retained earnings			212,913				153,357
	Accumulated other comprehensive loss				(7,408	)			(8,635	)
Total Stockholders' Equity			278,984				201,697
	Retained earnings				453,415				388,895
Total Liabilities And Stockholders' Equity		$	650,118			$	689,780
Total stockholders' equity					301,044				216,718
Total liabilities and stockholders' equity				$	795,026			$	809,412

See accompanying ~~notes~~Notes to ~~condensed~~Condensed ~~consolidated~~Consolidated ~~financial statements.~~Financial Statements

~~SIERRA HEALTH SERVICES, INC. AND SUBSIDIARIES~~Table of Contents

~~CONDENSED~~Sierra Health ~~CONSOLIDATED~~Services, ~~STATEMENTS~~Inc. OFAnd ~~OPERATIONS~~ Subsidiaries

Condensed Consolidated Statements Of Income

(In thousands, except per share data)

(Unaudited)

Operating Revenues:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2007			2006			2007			2006
Operating revenues:
Medical premiums	$	445,680		$	405,618		$	1,371,000		$	1,220,726
Professional fees		13,483			13,300			42,519			39,097
Investment and other revenues		9,761			11,079			32,089			32,860
Total		468,924			429,997			1,445,608			1,292,683

Operating expenses:
Medical expenses		375,075			323,694			1,172,597			981,758
General and administrative expenses		42,264			51,291			160,984			153,052
Total		417,339			374,985			1,333,581			1,134,810

Operating income		51,585			55,012			112,027			157,873
Interest expense		(584	)		(1,015	)		(3,576	)		(2,793	)
Other income (expense), net		279			14			1,773			(10	)

Income before income taxes		51,280			54,011			110,224			155,070
Provision for income taxes		(16,654	)		(19,082	)		(37,477	)		(53,936	)
Net income	$	34,626		$	34,929		$	72,747		$	101,134

Net income per common share	$	0.62		$	0.62		$	1.30		$	1.78

Net income per common share assuming dilution	$	0.59		$	0.56		$	1.24		$	1.61

~~Medical~~See ~~premiums~~ accompanying Notes to Condensed Consolidated Financial Statements

Military contract revenues

Professional fees

Investment and other revenues

Total

Operating Expenses:

Medical expenses

Military contract expenses

General and administrative expenses

Total

Operating Income From Continuing Operations

Interest expense

Other income (expense), net

Income From Continuing Operations Before Income Taxes

Provision for income taxes

Income From Continuing Operations

Loss from discontinued operations (net of income tax benefit of $839)

—

Net Income

Earnings Per Common Share:

Income from continuing operations

Loss from discontinued operations

Net Income

Earnings Per Common Share Assuming Dilution:

Income from continuing operations

Loss from discontinued operations

Net Income

See accompanying notes to condensed consolidated financial statements.

Table of Contents

~~SIERRA~~Sierra Health ~~HEALTH SERVICES~~Services, ~~INC~~Inc. ~~AND~~And ~~SUBSIDIARIES~~Subsidiaries

~~CONDENSED~~Condensed Consolidated ~~CONSOLIDATED~~Statements ~~STATEMENTS~~Of ~~OF CASH FLOWS~~Stockholders' Equity

(In thousands)

(Unaudited)

Six Months EndedJune 30,

		Common Stock			In Treasury				Additional Paid-in		Accumulated Other Comprehensive		Retained		Total Stock- holders'


		Shares		Amount	Shares		Amount		Capital		Loss		Earnings		Equity
Balance, January 1, 2006		69,136	$	346	11,006	$	(377,190)	$	400,287	$	(1,750)	$	262,559	$	284,252
Common stock issued in connection with stock plans		624		3	(562)		19,095		8,534		¾		(13,569)		14,063
Share-based compensation expense		¾		¾	(1)		23		5,782		¾		5		5,810
Common stock issued in connection with conversion of debentures		929		5	¾		¾		8,495		¾		¾		8,500
Excess tax benefits from share-based payment arrangements		¾		¾	¾		¾		11,445		¾		¾		11,445
Repurchase of common stock shares		¾		¾	3,136		(127,780)		¾		¾		¾		(127,780)
Comprehensive income:
	Net income	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		(485)		¾		(485)
Total comprehensive income		¾		¾	¾		¾		¾		(485)		101,134		100,649
Balance, September 30, 2006		70,689	$	354	13,579	$	(485,852)	$	434,543	$	(2,235)	$	350,129	$	296,939



Balance, January 1, 2007		70,835	$	354	17,011	$	(600,539)	$	436,643	$	(8,635)	$	388,895	$	216,718
Common stock activity in connection with stock plans		204		1	(194)		5,444		2,833		¾		(4,158)		4,120
Share-based compensation expense		¾		¾	¾		1,200		2,493		¾		198		3,891
Common stock issued in connection with conversion of debentures		2,543		13	¾		¾		23,243		¾		¾		23,256
Excess tax benefits from share-based payment arrangements		¾		¾	¾		¾		4,433		¾		¾		4,433
Repurchase of common stock shares		¾		¾	585		(21,081)		¾		¾		¾		(21,081)
Cumulative effect from adoption of FIN 48		¾		¾	¾		¾		¾		¾		(4,267)		(4,267)
Comprehensive income:
	Net income	¾		¾	¾		¾		¾		¾		72,747		72,747
	Other comprehensive income:
	Net unrealized holding gain on available-for-sale investments ($823 pretax)	¾		¾	¾		¾		¾		535		¾		535
	Unfunded portion of defined benefit pension plan ($1,064 pretax)	¾		¾	¾		¾		¾		692		¾		692
Total comprehensive income		¾		¾	¾		¾		¾		1,227		72,747		73,974
Balance, September 30, 2007		73,582	$	368	17,402	$	(614,976)	$	469,645	$	(7,408)	$	453,415	$	301,044

~~Cash~~See accompanying ~~Flows~~Notes ~~From~~to ~~Operating~~Condensed ~~Activities:~~Consolidated Financial Statements

Net income

Adjustments To Reconcile Net Income To Net Cash Provided By Operating Activities:

Loss from discontinued operations

Depreciation

Stock based compensation expense

Provision for doubtful accounts

Loss (gain) on property and equipment dispositions

Change In Operating Assets And Liabilities:

Military accounts receivable

Deferred tax asset

Other current assets

)

Other assets

)

Accrued payroll and taxes

Medical claims payable

Military health care payable

Other current liabilities

Unearned premium revenue

Other liabilities

Net Cash Provided By Operating Activities Of Continuing Operations

Cash Flows From Investing Activities:

Capital expenditures, net of dispositions

(Purchase of) proceeds from investments, net

Net Cash (Used For) Provided By Investing Activities Of Continuing Operations

Cash Flows From Financing Activities:

Payments on debt and capital leases

Purchase of treasury stock

Exercise of stock in connection with stock plans

Net Cash Used For Financing Activities Of Continuing Operations

Net cash provided by discontinued operations

Net (Decrease) Increase In Cash And Cash Equivalents

Cash And Cash Equivalents At Beginning Of Period

Cash And Cash Equivalents At End Of Period

Supplemental Condensed Consolidated Continuing Operations Statement Of Cash Flows Information:

Cash paid during the period for interest (net of amount capitalized)

Net cash paid during the period for income taxes

Non-Cash Investing And Financing Activities:

Assets and liabilities recorded in conjunction with the sale of the workers' compensation operations

Stock issued for exercise of options and related tax benefits

Additions to capital leases

See accompanying notes to condensed consolidated financial statements.

~~SIERRA HEALTH SERVICES, INC.NOTES TO~~Table ~~CONDENSED~~ of ~~CONSOLIDATED FINANCIAL STATEMENTS(Unaudited)~~Contents

1.Sierra Health ~~BASIS~~Services, OFInc. ~~PRESENTATION~~And Subsidiaries

~~The accompanying unaudited condensed consolidated financial~~Condensed ~~statements~~ Consolidated ~~include~~Statements ~~the~~Of ~~consolidated accounts of Sierra Health Services, Inc. and~~Cash its subsidiaries (collectively referred to herein as Sierra or the Company). All material intercompany balances and transactions have been eliminated. These statements and the Company's annual audited consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America; however, these statements do not contain all of the information and disclosures that would be required in a complete set of audited financial statements. They should, therefore, be read in conjunction with the Company's annual audited consolidated financial statements and related notes thereto for the year ended December 31, 2004. In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all material adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the financial results for the interim periods presented. Flows

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

The Company had previously reported the Texas health care operations as discontinued. The remaining Texas health care operations are currently being run out and therefore do not currently meet the criteria for discontinued operations. As a result the Company has reclassified the Texas health care operations to continuing operations for all periods presented.(Unaudited)

Certain amounts in the condensed consolidated financial statements for the three and six months ended June 30, 2004 have been reclassified to conform to the current presentation.

	Nine Months Ended September 30,
	2007			2006
Cash flows from operating activities:
Net income	$	72,747		$	101,134
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation		11,615			12,327
Share-based compensation expense		3,891			5,810
Excess tax benefits from share-based payment arrangements		(4,433	)		(11,445	)
Provision for doubtful accounts		5,222			1,796
Other adjustments		(1,083	)		213
Change in operating assets and liabilities:
Deferred tax asset		(14,105	)		(2,986	)
Other current assets		(26,810	)		(53,303	)
Other assets		(3,172	)		(4,270	)
Accrued payroll and taxes		3,426			6,747
Medical claims payable		(31,773	)		21,396
Other current liabilities		(1,980	)		14,121
Unearned premium revenue		132			3,499
Premium deficiency reserve		21,005			¾
Other liabilities		16,479			(1,136	)
Net cash provided by operating activities		51,161			93,903

Cash flows from investing activities:
Capital expenditures, net of dispositions		(2,967	)		(13,183	)
Purchase of investments, net of proceeds		34,832			11,500
Net cash provided by (used for) investing activities		31,865			(1,683	)

Cash flows from financing activities:
Payments on debt and capital leases		(78,494	)		(82	)
Purchase of treasury stock		(21,081	)		(127,780	)
Excess tax benefits from share-based payment arrangements		4,433			11,445
Proceeds from exercise of stock in connection with stock plans		6,358			14,063
Net cash used for financing activities		(88,784	)		(102,354	)

Net decrease in cash and cash equivalents		(5,758	)		(10,134	)
Cash and cash equivalents at beginning of period		58,918			88,059
Cash and cash equivalents at end of period	$	53,160		$	77,925

Supplemental condensed consolidated statement of cash flows information:
Cash paid during the period for interest	$	3,828		$	2,672
Net cash paid during the period for income taxes		57,615			37,398
Non-cash investing and financing activities:
Senior convertible debentures converted into Sierra common stock		23,256			8,500
Asset received in consideration for payment of a loan		6,815			¾
Additions to capital leases		212			¾
Cashless exercise of restricted stock units		2,237			¾
Investments purchased but not settled (received but not yet purchased)		9,222			(539	)

See accompanying Notes to Condensed Consolidated Financial Statements

2.Table of ~~EMPLOYEE STOCK PLANS~~Contents

Sierra Health Services, Inc.

~~The Company accounts for its stock-based compensation using~~ Notes ~~the intrinsic value method prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued~~ to ~~Employees,"~~Condensed ~~(APB~~Consolidated ~~No. 25) as~~Financial amended. Accordingly, no compensation cost has been recognized for the Company's employee stock plans except for those expenses associated with restricted stock units and certain stock options in which vesting was or has been agreed to be accelerated. Statements

The following table represents the effect on net income and earnings per share if the Company had applied the fair value based method and recognition provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (~~SFAS No. 123~~Unaudited)~~, to stock-based compensation:~~

~~(In~~1. Basis of ~~thousands, except per share data)~~Presentation

~~Net~~The accompanying ~~income~~unaudited condensed consolidated financial statements include the consolidated accounts of Sierra Health Services, Inc. ("Sierra", a holding company, together with its subsidiaries, collectively referred to herein as the "Company"). ~~reported~~All material intercompany balances and transactions have been eliminated. These statements and the Company's annual audited consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America; however, these statements do not contain all of the information and disclosures that would be required in a complete set of audited financial statements. They should, therefore, be read in conjunction with the Company's annual audited consolidated financial statements and related notes thereto for the year ended December 31, 2006. In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all material adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the financial results for the interim periods presented.

~~Less:~~The preparation ~~total~~of ~~stock-based~~financial ~~employee~~statements ~~compensation~~in ~~expense~~conformity ~~determined~~with ~~under~~accounting ~~fair~~principles generally ~~value~~accepted ~~based~~in ~~methods~~the ~~for~~United ~~all~~States ~~awards,~~of ~~net~~America requires management to make estimates and assumptions that affect the reported amounts of ~~tax~~assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Such estimates and assumptions could change in the future as more information becomes available, which could impact the amounts reported and disclosed herein. Actual results may differ materially from estimates.

~~Pro~~Certain amounts ~~Forma~~in ~~Net~~the ~~Income~~condensed consolidated financial statements for the three and nine months ended September 30, 2006 have been reclassified to conform to the current year presentation. Such reclassifications have no effect on net income as previously reported.

~~Net~~2. Pending Business ~~income per share, as reported~~Combination

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

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

Pro forma net income, per share

In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123 (revised 2004), "Share-Based Payment" (SFAS 123R), which replaces SFAS No. 123 and supercedes APB Opinion No. 25. SFAS 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values. The pro forma disclosures previously permitted under SFAS 123 no longer will be an alternative to financial statement recognition. Under SFAS 123R, the Company must determine the appropriate fair value model to be used for valuing share-based payments, the amortization method for compensation cost and the transition method to be used at date of adoption. The transition methods include prospective and retroactive adoption options. The prospective method requires that compensation expense be recorded for all unvested stock options and restricted stock at the beginning of the first quarter of adoption of SFAS 123R. The retroactive methods would record compensation expense for all unvested stock options and restricted stock beginning with the first period restated. Prior periods may be restated either as of the beginning of the year of adoption or for all periods presented.

On April 14, 2005, the Securities and Exchange Commission announced that the effective date of SFAS 123R would be postponed until January 1, 2006 for calendar year companies. The Company anticipates adopting the prospective method of SFAS 123R in 2006 and expects that the impact in 2006 will reduce its net income by approximately $2.5 to $3.0 million based on the options outstanding as of June 30, 2005 with vesting subsequent to December 31, 2005.

the Company and UnitedHealth Group have substantially complied with the request for 3. additional ~~INVESTMENTS~~information, unless the period is extended voluntarily by the parties or terminated sooner by the DOJ.

~~Of the cash and cash equivalents and current unrestricted~~On ~~investments~~ June 27, ~~that~~2007, ~~total~~the ~~$346.9~~Company’s ~~million~~stockholders inapproved the ~~accompanying Consolidated Balance~~Merger ~~Sheet~~ Agreement. On atAugust ~~June 30~~27, ~~2005~~2007, ~~$248.8 million is limited for use only by~~ the Company~~'s regulated~~ ~~subsidiaries.~~received ~~Such~~an ~~amounts~~order ~~are~~granting approval ~~available~~of ~~for~~the ~~transfer~~merger ~~to Sierra~~ from ~~the~~ ~~regulated subsidiaries only to~~ the ~~extent~~Commissioner ~~that~~of ~~they~~Nevada's ~~can~~Division beof ~~remitted in~~Insurance. ~~accordance~~ On ~~with~~September ~~terms~~6, ~~of existing management agreements and by dividends~~2007, ~~which customarily~~the ~~must~~Company bereceived ~~approved~~notice bythat ~~regulating~~the ~~state~~California ~~insurance departments. The~~Department ~~remainder~~ of isInsurance ~~available~~granted toapproval ~~Sierra~~of onthe ~~an unrestricted basis~~merger.

~~Investments consist primarily of U~~3.~~S. Government and its~~ Medicare ~~agencies'~~ Part ~~securities,~~D ~~municipal~~Prescription ~~bonds,~~Drug ~~corporate~~Program bonds, securities, and trust deed mortgage notes. At June 30, 2005, approximately 78% of the Company's investment portfolio is invested in U.S. Government and its agencies' securities and municipal bonds. All non-restricted investments that are designated as available-for-sale are classified as current assets and stated at fair value. Fair value is estimated primarily from published market values at the balance sheet date. These investments are available for use in the current operations regardless of contractual maturity dates. Restricted investments are classified as non-current assets. Realized gains and losses are calculated using the specific identification method and are included in investment and other revenues. Unrealized holding gains and losses on available-for-sale securities are included as a separate component of stockholders' equity, net of income tax effects, until realized. The Company does not have any held-to-maturity investments.("PDP")

The Company's ~~investments~~contracted inwith ~~trust~~the ~~deed~~Centers ~~mortgage~~for ~~notes~~Medicare ~~are stated~~and atMedicaid ~~cost~~Services ~~and~~("CMS") to ~~classified~~offer asa ~~current~~basic ~~assets~~stand-alone ifPDP ~~expected~~("Basic ~~maturity~~Plan") isto ~~within~~eligible Medicare ~~one~~ beneficiaries ~~year~~effective ofJanuary 1, 2006. The Company offered the Basic ~~balance~~Plan ~~sheet~~in ~~date.~~eight ~~Otherwise,~~regions ~~they~~covering ~~are~~Arizona, ~~classified~~California, asColorado, ~~long-term~~Idaho, ~~investments~~ Nevada, New Mexico, Oregon, Texas, Utah and Washington. The Company ~~does~~was ~~not~~also selected ~~believe~~as ~~any~~a ofPDP ~~its~~sponsor ~~investments~~in ~~were~~the ~~other~~same ~~than temporarily~~states ~~impaired~~for atauto-enrolled ~~June~~CMS ~~30, 2005~~subsidized beneficiaries.

~~The~~In 2007, the Company ~~entered~~expanded ~~into~~its aBasic ~~short~~Plan ~~sale~~offering ofto ~~U.S.~~30 ~~Treasury~~states ~~Bonds during~~and the ~~first quarter~~ District of ~~2005~~ Columbia. The ~~short~~Company ~~sale~~remains ~~did~~eligible ~~not~~as ~~meet the accounting definition of~~ a ~~hedge.~~PDP ~~The~~sponsor ~~position~~for ~~was~~its ~~adjusted~~2006 auto-enrolled toCMS ~~fair~~subsidized ~~value~~beneficiaries atin ~~March~~California 31and Nevada, ~~2005~~ and afor its 2006 ~~gain~~and ofnew ~~$500,000~~2007 ~~was~~auto-enrolled ~~included~~beneficiaries in ~~investment~~Arizona, ~~and~~Colorado, ~~other~~Idaho, Oregon, ~~revenues~~Utah ~~for~~and ~~the period~~Washington. ~~Interest~~The ~~income~~Company onis ~~the~~no ~~short~~longer ~~position~~a ~~and~~PDP ~~the~~sponsor ~~gain/loss on the position~~for is auto-enrolled ~~included~~beneficiaries in ~~investment~~New Mexico and ~~other~~Texas. For ~~revenues~~2007, ~~and~~the Company, for the ~~interest~~first ~~expense~~time, onoffers ~~the short~~an ~~position~~enhanced isbenefit ~~included~~plan ("Enhanced Plan") in ~~interest~~the ~~expense.~~same ~~During~~30 states and the ~~second~~District ~~quarter,~~of ~~the~~Columbia. The Enhanced Plan ~~position~~ provides ~~was~~brand ~~covered~~name and ~~the~~generic ~~Company~~prescription ~~recognized~~drug abenefits ~~loss~~through ofthe $1coverage gap.8 See ~~million~~Note 4 for further discussion of the premium deficiency ~~transaction~~ reserve associated with the Enhanced Plan.

4In 2008, the Company will continue to offer the Basic Plan in 30 states and the District of Columbia, but will be a PDP sponsor for auto-enrolled beneficiaries only in Arizona. ~~LONG~~The Company will no longer be a PDP sponsor for auto-~~TERM~~enrolled beneficiaries ~~DEBT~~in California, Colorado, Idaho, Nevada, Oregon, Utah and Washington as it did not meet the CMS benchmark in those states for 2008. The Company did not submit a bid to CMS for an Enhanced Plan offering for 2008 and therefore will not be offering this plan in 2008.

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

CMS shares in the risk of certain pharmacy costs related to the basic benefits covered in both of the Company’s stand-alone plans and its Medicare Advantage PDP. The Company recognizes a risk sharing receivable or payable based on the year-to-date activity. The risk sharing receivable or payable is accumulated for each contract and recorded in the Condensed Consolidated Balance Sheet in prepaid expenses and other current assets or accrued and other current liabilities depending on the net contract balance at the end of the reporting period. The Company had a $19.9 million and an $11.8 million risk sharing payable balance related to its Medicare Advantage PDP at September 30, 2007 and December 31, 2006, respectively, which is included in accrued and other current liabilities in the Condensed Consolidated Balance Sheet.

Payments from CMS for reinsurance and for cost sharing related to low income individuals ("Subsidies") are recorded as a payable when received. This payable is reduced when reinsurance is utilized and Subsidies are provided by the Company. This activity is accumulated and when the net balance for each contract is negative, it is reclassed to a receivable. The payable or receivable is recorded in the Condensed Consolidated Balance Sheet in

~~and 2018 or upon certain~~Table ~~corporate events including a change in control. In either case, the Company may choose to pay the purchase price~~ of ~~such debentures in cash or common stock or a combination of cash and common stock. The debentures can be redeemed by the Company for cash beginning on or after March 20, 2008.~~Contents

~~During~~prepaid expenses ~~the~~and ~~second~~other ~~quarter~~current ofassets ~~2005,~~or ~~the~~accrued ~~Company~~and ~~entered~~other ~~into~~current liabilities ~~privately~~ depending ~~negotiated~~on ~~transactions~~the ~~with~~net ~~three~~contract ~~debenture-holders~~balance ~~(holders) pursuant~~at tothe ~~which~~end of the ~~holders~~reporting ~~converted~~period. ~~the~~The Company ~~debentures~~had ~~they~~a ~~owned~~$42.2 ~~into~~million ~~Sierra~~and a $63.4 million receivable balance at September ~~common~~ 30, ~~stock~~2007 inand ~~accordance~~December ~~with~~31, ~~the~~2006, ~~indenture~~respectively, ~~governing~~for ~~the~~reinsurance ~~debentures.~~and InSubsidies ~~total~~ related to our stand-alone PDP, ~~$34.0~~which ~~million~~is included in ~~debentures~~prepaid ~~were~~and ~~converted~~other current assets in ~~these~~the ~~transactions~~Condensed ~~and approximately~~Consolidated 1Balance Sheet.9 A ~~million~~reconciliation of ~~shares~~the offinal ~~common~~risk ~~stock~~sharing, ~~were~~Subsidies, ~~issued.~~and Asreinsurance aamounts ~~result~~is ofusually ~~these~~ performed ~~transactions,~~in the ~~Company~~third ~~paid~~quarter ~~approximately~~following ~~$900,000~~the inplan ~~prepaid~~year. The ~~interest~~Company has asreceived anthe ~~incentive~~reconciliation for ~~conversion~~ ~~and~~the ~~wrote-off~~2006 ~~approximately~~plan ~~$600,000~~year inand ~~deferred~~received ~~debenture-related~~the final ~~costs~~ payment ~~for~~in athe ~~total~~fourth ~~current~~quarter ~~period expense~~ of ~~approximately $1~~2007.~~5 million.~~

~~Revolving~~4. Premium Deficiency ~~Credit Facility -~~ Reserves

~~The~~In 2007, the ~~credit~~Company ~~facility~~offered ~~remains~~its ~~secured~~Basic byPlan ~~guarantees~~and, byfor ~~certain of~~ the ~~Company's~~first ~~subsidiaries~~time, ~~and~~it aoffered ~~first~~an Enhanced ~~priority~~Plan. The ~~perfected~~Company ~~security~~engaged ~~interest~~independent actuarial consultants in ~~(i)~~developing ~~all of~~ the ~~capital~~Enhanced ~~stock~~Plan. The ofpremium ~~each~~structure offor the ~~Company's unregulated, material~~ ~~domestic~~ Enhanced ~~subsidiaries~~Plan ~~(direct~~was orbased ~~indirect)~~on asa ~~well~~projected aslevel ~~all~~ of ~~the~~utilization ~~capital stock~~per of member. The ~~certain~~Company's ~~regulated,~~experience ~~material~~so ~~domestic~~far ~~subsidiaries;~~in ~~and~~2007 ~~(ii)~~indicates ~~all~~it ~~other present~~has ~~and~~ experienced ~~future~~significantly ~~assets~~increased ~~and~~costs ~~properties~~from ofwhat the ~~Company~~actuarial ~~and those of its subsidiaries~~projections ~~that~~ anticipated. Based ~~guarantee~~on the ~~credit~~data ~~agreement~~available ~~obligations~~to ~~(including~~date, ~~without~~the ~~limitation, accounts~~estimated ~~receivable, inventory, real property, equipment, contracts, trademarks,~~2007 ~~copyrights,~~ pharmacy ~~patents, license rights~~ and ~~general~~administrative ~~intangibles)~~maintenance ~~subject,~~costs inwill ~~each case,~~exceed to the ~~exclusion~~estimated ~~of the capital stock of CII Financial, Inc. (CII) and~~2007 ~~certain other exclusions~~ premiums.

~~The~~For purposes ~~revolving~~of ~~credit~~analyzing ~~facility~~premium ~~has~~deficiencies, ~~covenants~~the ~~that~~Company ~~limit~~follows the guidance ~~Company's~~ provided ~~ability~~by ~~and~~ the ~~ability~~Financial Accounting Standards Board ("FASB") in Statement of Financial ~~the~~Accounting ~~Company's~~Standards ~~subsidiaries~~No. 60 "Accounting and Recording by Insurance Enterprises" ("SFAS 60"), which requires contracts to ~~dispose~~be grouped in a manner consistent with its method of ~~assets~~acquiring, ~~incur indebtedness~~servicing, ~~incur~~and ~~other~~measuring ~~liens,~~the profitability ~~make~~of ~~investments,~~such ~~loans~~contracts. Based oron the guidance provided in ~~advances~~ SFAS 60, ~~make~~the ~~acquisitions,~~Company ~~engage~~concluded inthat ~~mergers~~it orshould ~~consolidations,~~evaluate ~~make~~the ~~capital expenditures~~Enhanced Plan and the Basic ~~otherwise~~Plan ~~restrict~~separately ~~certain~~when ~~corporate~~determining ~~activities~~if a premium deficiency exists. SFAS ~~Under~~60 ~~the~~also ~~most~~requires a premium deficiency be recognized if ~~recent~~ the ~~amendment~~sum ~~dated~~of ~~October~~expected 19claim costs and claim adjustment expenses, ~~2004~~expected dividends to policyholders, ~~based~~unamortized onacquisition ~~the~~costs, and administrative maintenance costs exceeds related unearned premiums. The Company's ~~exceeding~~does not consider anticipated investment income in determining if a premium ~~certain~~ deficiency ~~leverage~~exists. ~~ratio~~During ~~requirement~~the first half of 2007, the Company's ~~ability~~recorded a $55.3 million pre-tax loss related to ~~pay~~the ~~dividends~~Enhanced Plan, ~~repurchase~~ ~~its~~which ~~common~~resulted ~~stock~~in ~~and~~a ~~prepay~~premium deficiency ~~other~~reserve ~~debt~~of is$39.3 ~~unlimited~~million ~~provided~~at ~~that~~June ~~the~~30, 2007. This ~~Company~~ represented ~~can~~the ~~still~~Company's ~~maintain~~estimate of the ~~required~~full ~~ratios~~year ~~after~~2007 ~~such~~losses ~~transaction~~for orthe ~~any~~Enhanced ~~borrowing~~ Plan ~~incurred~~based ason athe ~~result~~data ofavailable ~~such~~at ~~transaction~~that time. Based Inon ~~addition~~the data which is currently available, the Company isnow believes that the entire year ~~required~~ 2007 losses tofor ~~comply~~the ~~with~~Enhanced ~~specified~~Plan ~~financial~~will ~~ratios~~be as$58.9 ~~set~~million. The ~~forth~~Company has recorded an additional $3.6 million in premium deficiency reserves during the quarter ~~credit~~ended September 30, 2007. The change in estimate was ~~agreement~~ due to higher than projected utilization during the third quarter of 2007 and lower than projected risk share from CMS resulting in an $9.4 ~~The~~million ~~Company~~increase in ~~believes~~projected itmedical islosses, which was partially offset by a $5.8 million decrease in ~~compliance~~projected ~~with~~general ~~all~~and ~~covenants~~administrative expenses, due to better than expected collections of the members’ portion of the premiums. At ~~credit~~ September ~~agreement~~30, 2007, the remaining premium deficiency reserve balance for the Enhanced Plan was $22.1 million.

5. ~~SHARE REPURCHASES~~ Investments

~~From January 1, 2005 through June 30, 2005,~~ Of the ~~Company~~ ~~purchased~~ cash ~~approximately~~and ~~800,000~~cash ~~shares~~equivalents ofand ~~its~~current ~~common~~investments ~~stock,~~that intotal ~~the~~$337.6 ~~open market~~million or in the ~~through~~accompanying ~~negotiated~~Condensed ~~transactions,~~Consolidated ~~for~~Balance ~~$50.9~~Sheet ~~million~~ at anSeptember ~~average~~30, ~~cost per~~2007, ~~share of~~ $63307.~~57.~~4 ~~Since~~million ~~the~~is ~~repurchase~~limited ~~program~~for ~~began~~use inonly ~~early~~by ~~2003~~the ~~and~~Company's ~~through~~regulated ~~June~~ subsidiaries. Such ~~30,~~amounts ~~2005,~~are ~~the~~available ~~Company~~for ~~had~~transfer ~~purchased,~~to inSierra from the ~~open~~regulated ~~market~~subsidiaries oronly ~~through negotiated~~to ~~transactions,~~the ~~approximately~~extent ~~9.5~~that ~~million~~they ~~shares~~can ~~for~~be ~~$284.2~~remitted ~~million at~~in an accordance ~~average~~with ~~cost~~terms ~~per share~~ of ~~$29.86.~~existing Onmanagement ~~December~~agreements ~~7, 2004~~ and ~~again~~by ~~on May 24~~dividends, which ~~2005,~~ customarily ~~the~~must ~~Company's~~be ~~Board~~approved ofby ~~Directors~~regulating ~~authorized~~state ~~the~~insurance departments. The ~~Company~~remainder is available to ~~purchase~~Sierra on an unrestricted ~~additional~~ basis.

Investments consist primarily of U.S. Government and its agencies' securities, municipal bonds, corporate bonds, securities, trust deed mortgage notes, limited partnerships, and real estate joint ventures. At September 30, 2007, approximately 70% of the Company's investment portfolio is invested in U.S. Government and its agencies' securities and municipal bonds. All non-restricted investments that are designated as available-for-sale are classified

~~$50.0 million worth of its common stock. At June 30, 2005, $70.6~~Table ~~million was still available under the Board~~ of ~~Directors' authorized plan.~~Contents

~~The~~as current ~~Company's~~assets ~~revolving~~and ~~credit~~stated ~~facility,~~at asfair ~~amended,~~value. Fair value is estimated ~~currently~~ primarily ~~allows~~from published market values at the balance sheet date. These investments are available for ~~unlimited~~use ~~stock~~in ~~repurchases~~the ~~based~~current operations onregardless ~~meeting~~of acontractual ~~certain~~maturity dates. Restricted ~~covenant~~ investments ~~ratio~~are classified as non-current assets. The Company ~~has~~calculates realized ~~repurchased~~gains ~~17,000~~and ~~shares~~losses ~~for~~using $1the specific identification method and includes them in investment and other revenues.2 Unrealized ~~million~~holding atgains anand ~~average~~ losses ~~cost~~on available-for-sale investments are included as a separate component of stockholders' ~~$72~~equity, net of income tax effects, until realized.00 The Company ~~subsequent~~does not have any held-to-maturity ~~June~~investments. ~~30,~~The ~~2005~~Company ~~through~~does ~~July~~not believe 25any of its available-for-sale or restricted investments are other than temporarily impaired at September 30, ~~2005~~2007.

6The Company classifies investments in trust deed mortgage notes, limited partnerships, and real estate joint ventures as other investments. These ~~CII~~investments ~~FINANCIAL~~are classified as current assets if expected maturity is within one year of the balance sheet date. Otherwise, ~~INC~~they are classified as long-term investments and included in other assets in the Condensed Consolidated Balance Sheet. ~~DISCONTINUED~~The Company ~~OPERATIONS~~believes that no adjustments are required to its recorded amounts of investments in trust deed mortgage notes, limited partnerships or real estate joint ventures at September 30, 2007.

~~On January 15, 2003, the Company announced that it was exploring strategic alternatives to dispose of its workers' compensation company, CII~~6. ~~Sierra's Board of Directors approved the sale of the operations~~ Long-Term ~~on December 31, 2002. Accordingly, beginning in the fourth quarter of 2002, the Company reclassified its workers' compensation insurance business as discontinued operations.~~ Debt

OnSierra Debentures - In March 312003, ~~2004~~the Company issued $115.0 million aggregate principal amount of its 2¼% senior convertible debentures due March 15, 2023. The debentures are not guaranteed by any of Sierra's subsidiaries. The debentures pay interest, which is due semi-annually on March 15 and September 15 of each year. Each $1,000 principal amount of debentures is convertible, at the option of the holders, into 109.3494 shares of the Company's ~~completed~~common stock before March 15, 2023 if: (i) the ~~sale~~market price of the Company's common stock for at least 20 trading days in a period ~~California~~ of 30 ~~Indemnity~~consecutive ~~Insurance~~trading days ending on the last trading day of the preceding fiscal quarter exceeds 120% of the conversion price per share of the Company's common stock; (~~Cal~~ii) ~~Indemnity~~the debentures are called for redemption; (iii) there is an event of default with respect to the debentures; or (iv) specified corporate transactions have occurred. Beginning ~~Cal~~December ~~Indemnity~~2003, and for each subsequent period, the market price of the Company's common stock exceeded ~~subsidiaries,~~ 120% of ~~which~~the ~~were~~conversion ~~included~~price for at least 20 trading days in ~~the~~a ~~sale,~~period ~~are~~of ~~Commercial~~30 consecutive ~~Casualty~~trading ~~Insurance~~days. The conversion rate is subject to certain ~~Company,~~ adjustments. ~~Sierra~~This ~~Insurance~~conversion rate represents a conversion price of $9.145 per share. Holders of the debentures may require the Company to repurchase all or a portion of ~~Texas~~their debentures on March 15 in 2008, 2013 and 2018, ~~CII~~or ~~Insurance~~upon certain corporate events, including a change in control. In either case, the Company may choose to pay the purchase price of such debentures in cash or common stock or a combination of cash and common stock. The Company can redeem the debentures for cash beginning March 20, 2008.

~~The~~During the ~~Company~~first ~~received~~quarter ~~$14.2~~of ~~million~~2006, ina ~~cash~~debenture atholder ~~the~~("holder") ~~closing~~converted $500,000 ~~which~~ in debentures ~~was~~for ~~subsequently~~approximately ~~reduced~~54,000 byshares ~~$2.7~~of ~~million~~common ~~based on~~ stock. During the ~~final~~third ~~closing~~quarter ~~date balance~~of ~~sheet.~~2006, ~~The~~the ~~$2.7~~Company ~~million~~entered ~~adjustment~~into is a ~~timing~~privately ~~difference and is~~negotiated ~~expected~~ transaction towith bea ~~repaid~~holder pursuant to ~~the~~which ~~Company over~~ the ~~next~~holder ~~few~~converted ~~years~~$8.0 ~~The transaction~~million ~~also~~ in debentures ~~includes~~for aapproximately ~~note~~875,000 ~~receivable~~shares of ~~$62.0~~common ~~million,~~stock ~~plus~~in ~~accrued~~accordance ~~interest, payable~~with to the ~~Company~~indenture ingoverning ~~January~~the ~~2010~~debentures. ~~The~~During ~~note~~the ~~receivable~~first ~~can~~quarter beof ~~increased~~2007, orthe ~~decreased~~ Company ~~depending~~entered oninto ~~favorable~~one orprivately ~~adverse~~negotiated ~~claim~~transaction ~~and~~with ~~expense~~a ~~development~~holder ~~from~~pursuant ~~the~~ to ~~date~~which ofthe ~~closing~~holder ~~through~~converted ~~December~~an ~~31,~~aggregate ~~2009,~~of ~~and~~$21.7 ~~other~~million ~~offsets~~in ~~and~~debentures ~~additions~~for ~~based~~ approximately ~~on certain agreements between the parties~~2.4 ~~The $62.0~~ million ~~note receivable~~shares ~~can~~of becommon ~~increased~~stock onin aaccordance ~~dollar~~with ~~for~~the indenture ~~dollar~~governing ~~basis for~~ the ~~first~~debentures. ~~$15 million~~In inaddition, ~~positive~~two ~~loss~~other ~~reserve~~holders ~~development~~also converted ~~and~~ $1.505 ~~per~~million ~~dollar~~in ondebentures ~~any~~for ~~positive development~~approximately in168,000 ~~excess~~shares of ~~$15 million~~common stock. At ~~The~~September ~~note~~30, ~~receivable~~2007, ~~can~~the ~~also~~Company behad ~~decreased~~outstanding $20.2 on million ain ~~dollar~~aggregate ~~for~~principal ~~dollar~~amount ~~basis~~of ~~for~~its ~~the~~2¼% ~~first~~senior ~~$58~~convertible ~~million~~debentures due inMarch ~~adverse~~15, ~~loss development~~2023.

~~During~~Revolving Credit ~~the~~Facility ~~fourth~~- ~~quarter~~On ofMarch ~~2004~~3, 2003, the Company ~~engaged~~entered into a ~~new~~revolving ~~independent~~ credit ~~actuary to evaluate the loss development~~facility. Effective ~~Based~~June ~~on the independent actuarial projections~~26, ~~the Company recorded a $15.0 million valuation allowance at December 31~~2006, ~~2004 reducing~~ the ~~note~~current ~~receivable~~facility ~~to $47.0 million. The Company~~ was amended ~~required~~ to ~~engage~~extend athe ~~new~~maturity ~~actuary~~from toDecember ~~avoid a potential conflict of interest with its former actuary~~31, ~~who~~2009 ~~was still engaged by Cal Indemnity, and the resulting impact~~ to ~~internal controls. At~~ June 3026, ~~2005~~2011, increase the ~~Company~~availability from ~~received~~$140.0 ~~an updated~~million to ~~independent actuarial projection~~$250.0 ~~Based~~million onand reduce the drawn ~~updated~~and ~~projection~~undrawn fees. ~~no further~~The ~~adjustment is required at this time.~~current

A third-party claims administrator was engaged to administer claims for a period of 15 years. Under the terms of this agreement, the administrator will provide certain claims services for Cal Indemnity and its subsidiaries. Although the evaluation of the third-party claims administrator performance is controlled by Cal Indemnity's new parent company, Sierra will be responsible for this administrator's costs. Sierra must also provide certain transition services for varying terms to Cal Indemnity. The purchaser of Cal Indemnity will pay Sierra for these costs from an account consisting of the unallocated loss adjustment expense (ULAE) reserves and accrued liabilities as of the closing, a percentage of premiums earned after the closing, plus accrued interest on the ULAE reserves. In addition, Sierra is providing workers' compensation managed care services at market rates to Cal Indemnity. For the six months ended June 30, 2005, the Company recorded $1.5 million in administrative services revenue and operating expenses to provide the contractual administrative services.

Due to the disposal of the assets and liabilities of Cal Indemnity at March 31, 2004, the Company's

~~Consolidated Balance Sheet beginning~~Table ~~March 31, 2004 does not include the assets and liabilities~~ of ~~Cal Indemnity.~~Contents

~~The~~incremental borrowing ~~following~~rate ~~are~~is ~~the~~LIBOR ~~unaudited~~plus ~~condensed~~0.60%. The ~~statements~~facility ofis available for ~~operations~~ general ofcorporate purposes and at September 30, 2007, the ~~discontinued~~Company ~~operations~~had ofno outstanding ~~CII:~~balance on this facility.

		Three Months EndedMarch 31, 2004
	(In thousands)
Operating Revenues:
Specialty product revenues	$	19,015
Investment and other revenues		1,290
Total Revenues		20,305
Operating Expenses:
Specialty product expenses		21,917
Interest expense and other, net		(91	)
Total Expenses		21,826
Loss From Discontinued Operations Before Income Tax		(1,521	)
Income tax benefit		839
Net Loss From Discontinued Operations	$	(682	)

The credit facility remains secured by guarantees by certain of the Company's subsidiaries and a first priority perfected security interest in (i) all of the capital stock of each of the Company's unregulated, material domestic subsidiaries (direct or indirect) as well as all of the capital stock of certain regulated, material domestic subsidiaries; and (ii) all other present and future assets and properties of the Company and those of its subsidiaries that guarantee the credit agreement obligations (including, without limitation, accounts receivable, inventory, certain real property,

~~The~~equipment, contracts, ~~activity~~trademarks, ~~for 2004 is through the disposal date~~copyrights, ~~March 31~~patents, ~~2004.~~ ~~There~~license isrights noand ~~activity for the discontinued operations beyond that date. Any~~general ~~subsequent~~ intangibles) ~~activity~~subject, ~~related to this disposal has been reflected~~ in ~~continuing operations.~~each ~~Specialty~~case, ~~product~~to ~~revenues~~the ~~consist~~exclusion of ~~workers'~~the ~~compensation insurance~~capital ~~net~~stock ~~earned premiums. Specialty product expenses consist~~ of ~~loss and~~ ~~loss~~ CII Financial, ~~adjustment~~Inc. ~~expenses~~("CII") ~~incurred~~ and ~~general~~certain ~~and~~other ~~administrative expenses~~exclusions.

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

7. Employee and Director Benefit Plans

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

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

	Three Months Ended September 30,						Nine Months Ended September 30,
	2007			2006			2007			2006
	(In thousands)
Medical expenses	$	224		$	250		$	801		$	671
General and administrative expenses		673			2,518			3,090			5,139
Share-based compensation expense before income taxes		897			2,768			3,891			5,810
Income tax benefit		(314	)		(969	)		(1,362	)		(2,034	)
Net share-based compensation expense	$	583		$	1,799		$	2,529		$	3,776

For the nine months ended September 30, 2007 and 2006, net cash proceeds realized from stock option exercises and purchases under the Company's Employee Stock Purchase Plan ("Purchase Plan") were $6.4 million and $14.1 million, respectively, and the actual tax benefit realized from stock option exercises and purchases under the Purchase Plan was $5.1 million and $11.6 million, respectively.

Employee Stock Purchase Plan and Stock Options

The Company's Purchase Plan allows employees to purchase newly issued shares of common stock through payroll

7.Table of ~~EARNINGS PER SHARE:~~Contents

~~The~~deductions at ~~following~~85% ~~table~~of ~~provides~~the afair ~~reconciliation~~market value of ~~basic~~such shares on the lower of the first trading day of the plan period or the last trading day of the plan period as defined in the Purchase Plan. During 2007, 49,000 and 56,000 shares were ~~diluted~~ purchased ~~earnings~~at prices of $30.63 and $30.46 per share:, respectively. During 2006, 158,000 and 49,000 shares were purchased at prices of $30.67 and $34.43 per share, respectively. At September 30, 2007, the Company had 665,000 shares reserved for purchase under the Purchase Plan. There were no stock option grants during the periods ended September 30, 2007 or 2006.

~~Three~~The following ~~Months~~table ~~EndedJune~~reflects the activity of the stock option plans for the nine months ended September 30, 2007:

Basic Income (Loss) Per Share:

						Weighted
	Number			Weighted		Average		Aggregate
	Of			Average		Contractual Life		Intrinsic
	Shares			Exercise Price		Remaining		Value
	(In thousands)			(per share)		(In years)		(In thousands)
Outstanding, January 1, 2007		1,775		$	12.94
Granted		¾			¾
Exercised		(322	)		9.79
Cancelled		(26	)		17.94
Outstanding, September 30, 2007		1,427		$	13.56		4.83	$	40,845

Exercisable at September 30, 2007		891		$	10.52		4.72	$	28,211

~~Income~~The aggregate ~~from~~intrinsic ~~continuing~~value ~~operations~~in the table above represents the total pretax intrinsic value (the difference between the market price of the Company's stock on September 30, 2007 and the exercise price, times the number of shares) that would have been received by the option holders had all option holders exercised their options on September 30, 2007. This amount changes based on the market value of the Company's stock and the number of shares exercisable or outstanding. The total intrinsic value of options exercised during the three months ended September 30, 2007 and 2006 was $1.1 million and $3.4 million, respectively. The total intrinsic value of options exercised during the nine months ended September 30, 2007 and 2006 was $9.9 million and $32.1 million, respectively.

~~Loss~~The following table reflects the activity of the nonvested stock options for the ~~from~~ nine ~~discontinued~~months ~~operations~~ended September 30, 2007:

Net Income

	Number			Weighted-Average
	Of			Grant Date
	Shares			Fair Value
	(In thousands)			(per share)
Nonvested shares, January 1, 2007 ⁽¹⁾		803		$	7.34
Granted		¾			¾
Vested		(405	)		6.42
Canceled		(12	)		6.17
Nonvested shares, September 30, 2007 ⁽¹⁾		386		$	8.35

~~Weighted~~(1) ~~average~~Excludes ~~common~~164,000 and 150,000 shares ~~outstanding~~at January 1, 2007 and September 30, 2007, respectively, which vested in 2005, but are not exercisable until 2008.

~~Earnings~~As of September ~~Per~~30, ~~Common~~2007, ~~Share:~~the Company expects to recognize future total compensation cost of $1.6 million related to nonvested stock options over a weighted-average period of nine months.

Income from continuing operations

Loss from discontinued operations

Net Income

Diluted Income (Loss) Per Share:

Income from continuing operations

Loss from discontinued operations

Net Income

Interest expense on Sierra debentures, net of tax

Income For Purposes Of Computing Diluted Net Income Per Share

Weighted average common shares outstanding

Dilutive options and restricted shares outstanding

Dilutive impact of conversion of Sierra debentures

Weighted Average Common Shares Outstanding Assuming Dilution

Earnings Per Common Share Assuming Dilution:

Income from continuing operations

Loss from discontinued operations

Net Income

8.Table of ~~DEFINED BENEFIT PLAN~~Contents

~~The Company previously disclosed that it expected to~~Restricted ~~contribute~~ Stock approximately $1.1 million to its defined benefit plan in 2005 to fund expected benefit payments. For the six months ended June 30, 2005, the Company contributed $695,000 to the plan to fund benefit payments and anticipates making $365,000 in additional contributions during 2005.Units

In January 2007, the Company issued 2,000 units of restricted stock ("Units") to each of the five non-employee Directors. In January 2006, the Company issued 4,000 Units to each of the six non-employee Directors. Each Unit represents a nontransferable right to receive one share of the Company's common stock and there is no cost to the recipient to exercise the Units. The Units ~~following~~vest ~~table~~according ~~presents~~to ~~net~~a ~~periodic~~variety ~~benefit~~of ~~costs~~vesting schedules or earlier based on the occurrence of certain events, including a change of control in the Company. The fair value of the transactions was based on the number of Units issued and the Company's stock price on the date of issuance, which was $35.35 and $38.49 in 2007 and 2006, respectively. Total expense associated with the Units was $99,000 and $48,000 for the three months ended September 30, 2007 and 2006, respectively. Total expense associated with the Units ~~periods~~was ~~indicated:~~$284,000 and $287,000 for the nine months ended September 30, 2007 and 2006, respectively.

	Three Months EndedJune 30,				Six Months EndedJune 30,
	2005		2004		2005		2004
	(In thousands)
Components Of Net Periodic Benefit Cost:
Service cost	$	95	$	1	$	189	$	2
Interest cost		320		418		6		836
Amortization of prior service credits		302		303		6		606
Recognized actuarial loss		—		109		—		218
Net Periodic Benefit Cost	$	717	$	936	$	1,435	$	1,872

In August 2006, the Company issued 210,000 Units to certain members of its management. The Units vest according to a variety of vesting schedules, or earlier based on the occurrence of certain events, including a change of control in the Company. The majority of Units have a three year holding period from the date of grant. The fair value of the transaction was based on the number of Units issued, the Company's stock price on the date of issuance, which was $43.60, and an estimated forfeiture rate. A discount was applied to the Units with a holding period as a result of the lack of marketability between the vesting dates and settlement dates. The discount was estimated at the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions: expected volatility of 32.3%, risk-free interest rate of 4.8% and dividend rate of 0%. Total expense associated with the Units was $193,000 and $730,000 for the three and nine months ended September 30, 2007, which approximates the fair value of vested Units during the year. Total expense associated with the Units was $1.7 million for the three and nine months ended September 30, 2006.

9The Company allows employees to surrender vested Units ("Cashless Exercise") to pay for payroll withholdings. During ~~COMPREHENSIVE~~2007, ~~INCOME~~the Company had employees Cashless Exercise 11,000 Units to pay for $2.2 million in payroll withholdings.

The following table ~~presents~~reflects ~~comprehensive~~the ~~income~~activity ~~for~~of the ~~periods~~restricted ~~indicated~~stock unit plans for the nine months ended September 30, 2007:

	Three Months EndedJune 30,						Six Months EndedJune 30,
	Number				Aggregate
	2005			2004			2005			2004
	Of				Intrinsic
	(In thousands)
	Shares				Value
Net income	$	33,836		$	38,221		$	6		$	64,050
	(In thousands)
Change in unrealized holding loss on available-for-sale investments		289			(1,134	)		(150	)		(352	)
Outstanding, January 1, 2007(1)(2)		104
Comprehensive Income	$	34,125		$	37,087		$	6		$	63,698
Granted		10
Vested		(23	)
Canceled		(1	)
Outstanding, September 30, 2007(1)(3)		90		$	3,797

~~10.~~(1) ~~SEGMENT~~The ~~REPORTING~~Units have no exercise price.

The Company has two reportable segments based on the products and services offered: managed care and corporate operations, and military health services operations. The managed care segment includes managed health care services provided through our health maintenance organization (~~HMO~~2), ~~managed indemnity~~Does ~~plans,~~not ~~third-party~~include ~~administrative services programs for employer-funded health benefit plans and self-insured workers' compensation plans~~540,000 ~~multi-specialty~~Units ~~medical~~that ~~groups,~~have ~~other~~vested ~~ancillary~~but ~~services~~have ~~and~~not ~~corporate operations~~settled. ~~The~~These ~~military~~Units ~~health~~are ~~services~~included ~~segment administered a managed care federal contract for the Department of Defense's TRICARE program~~ in ~~Region~~outstanding 1shares.

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

As of September 30, 2007, the Company expects to recognize future total compensation cost of $2.7 million related to nonvested Units over a weighted-average period of 1.4 years.

~~Sierra Military Health Services LLC (SMHS) completed the~~Table ~~fifth year~~ of a five-year contract in May 2003. SMHS then operated under a negotiated contract extension period, which ended August 31, 2004. The new contractor became operational on September 1, 2004 and the new contract superseded the remainder of the Company's TRICARE Region 1 contract. On September 1, 2004, SMHS commenced an eight-month phase-out of operations at prices previously negotiated with the Department of Defense (DoD). SMHS does not meet the definition of discontinued operations since the Company did not dispose of the operations before the phase-out was complete.Contents

~~During the second quarter of 2005, the Company reached a~~Supplemental ~~negotiated~~ Executive ~~settlement~~Retirement ~~with~~Plan the DoD for certain outstanding change order and bid price adjustments related to option period six and the phase-out of its military health care operations. Included in the settlement was the determination of the final military health care payable balance.("SERP")

~~Through~~The Company ~~participation~~has ina ~~Medicare,~~non-qualified ~~TRICARE~~defined ~~and~~benefit ~~the~~retirement ~~Federal~~plan covering certain ~~Employees~~ key employees. The ~~Health~~Company ~~Benefit~~is ~~Plan~~informally ~~programs,~~funding the ~~Company~~benefits ~~generated~~through ~~approximately 38%~~the ~~and~~ purchase ~~58%~~ of ~~its~~life ~~total~~insurance ~~consolidated~~policies. ~~revenues~~Certain ~~from~~participant ~~agencies~~benefits are based on, among other things, the employee's average earnings of the ~~U.S.~~three ~~government~~highest years ~~for~~ over the ~~three~~five-year ~~and~~period ~~six~~prior ~~months~~to ~~ended~~retirement ~~June~~or 30termination, ~~2005~~ and ~~2004,~~length ~~respectively~~of service. Other ~~The TRICARE~~participant ~~revenue~~benefits isare ~~presented~~defined ~~below~~by in the ~~military~~plan ~~health~~and ~~services operations~~based ~~segment~~ on ~~and~~length of service. Any benefits attributable to service prior to the ~~remainder~~adoption of the ~~revenue~~plan ~~described~~are ~~above~~amortized isover ~~included~~the estimated remaining service period for those employees participating in the plan. During the ~~managed~~ quarter, ~~care~~four SERP participants retired and ~~corporate~~started ~~operations~~to ~~segment~~receive benefits under the plan.

~~The~~For the nine ~~Company~~months ~~evaluates~~ended ~~each~~September ~~segment's~~30, ~~performance~~2007 ~~based~~and on2006, the Company contributed $680,000 ~~segment~~ and ~~operating~~$548,000, ~~profit~~respectively to fund benefit payments. The ~~accounting~~Company’s ~~policies~~non- ofcurrent SERP ~~the~~balance ~~operating~~was ~~segments~~$31.1 ~~are~~million and $30.7 million at September 30, 2007 and ~~the~~ December ~~same~~31, as2006, ~~those~~respectively, ~~described~~which is included in ~~the~~other ~~summary~~liabilities ofin the Condensed ~~significant~~Consolidated ~~accounting~~Balance ~~policies~~Sheet.

	Three Months Ended September 30,				Nine Months Ended September 30,
	2007		2006		2007		2006
	(In thousands)
Components of net periodic benefit cost:
Service cost	$	139	$	126	$	417	$	378
Interest cost		426		399		1,278		1,197
Amortization of prior service credits		303		302		908		908
Recognized actuarial loss		52		32		157		96
Net periodic benefit cost	$	920	$	859	$	2,760	$	2,579

8. Share Repurchases

From January 1, 2007 through September 30, 2007, the Company purchased 585,000 shares of its common stock in the open market for $21.1 million at an average cost per share of $36.04. Since the repurchase program began in early 2003 and through September 30, 2007, the Company purchased, in the open market or through negotiated transactions, 29.2 million shares, adjusted for the two for one stock split effective December 30, 2005, for $651.9 million at an average cost per share of $22.29. On January 25, 2007, the Company's Board of Directors authorized an additional $50.0 million in share repurchases. At September 30, 2007, $53.1 million was still available under the Board of Directors' authorized plan. The repurchase program has no stated expiration date. The Company's revolving credit facility, as amended, currently allows for unlimited stock repurchases based on meeting a certain covenant ratio; however, effective March 11, 2007, the Company has halted its repurchase program pending the UnitedHealth Group merger.

~~Information concerning the operations~~ Table of ~~the reportable segments is as follows:~~Contents

	Managed CareAnd CorporateOperations			Military HealthServicesOperations			Total
	(In thousands)
Three Months Ended June 30, 2005
Medical premiums	$	320,395		$	—		$	320,395
Military contract revenues		—			9,952			9,952
Professional fees		10,116			—			10,116
Investment and other revenues		7,230			334			7,564
Total Revenue	$	337,741		$	10,286		$	348,027
Segment operating profit	$	44,350		$	12,020		$	56,370
Interest expense		(4,348	)		(1	)		(4,349	)
Other income (expense), net		654

9. Earnings Per Share

~~Income~~The following ~~Before~~table ~~Income~~provides ~~Taxes~~a reconciliation of basic and diluted income per share:

Three Months Ended June 30, 2004

	Three Months Ended September 30,				Nine Months Ended September 30,
	2007		2006		2007		2006
	(In thousands, except per share data)
Basic income per share:
Net income	$	34,626	$	34,929	$	72,747	$	101,134

Weighted average common shares outstanding		56,162		56,332		55,865		56,706

Net income per common share	$	0.62	$	0.62	$	1.30	$	1.78

Diluted income per share:
Net income	$	34,626	$	34,929	$	72,747	$	101,134
Interest expense on Sierra debentures, net of tax		74		185		242		562
Income for purposes of computing diluted net income per share	$	34,700	$	35,114	$	72,989	$	101,696

Weighted average common shares outstanding		56,162		56,332		55,865		56,706
Dilutive options and restricted shares outstanding		665		807		701		943
Dilutive impact of conversion of Sierra debentures		2,214		5,517		2,414		5,598
Weighted average common shares outstanding assuming dilution		59,041		62,656		58,980		63,247

Net income per common share assuming dilution	$	0.59	$	0.56	$	1.24	$	1.61

~~Medical premiums~~10. Comprehensive Income

~~Military~~The following ~~contract~~table ~~revenues~~presents comprehensive income for the periods indicated:

Professional fees

	Three Months Ended September 30,				Nine Months Ended September 30,
	2007		2006		2007		2006
	(In thousands)
Net income	$	34,626	$	34,929	$	72,747	$	101,134
Change in net unrealized holding loss on available-for-sale investments		1,892		1,640		535		(485	)
Change in unfunded portion of defined benefit pension plan		230		¾		692		¾
Comprehensive income	$	36,748	$	36,569	$	73,974	$	100,649

~~Investment and other revenues~~11. Income Taxes

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

Segment operating profit

Interest expense

Other income (expense), net

)

Income Before Income Taxes

Six Months Ended June 30, 2005

Medical premiums

Military contract revenues

Professional fees

Investment and other revenues

Total Revenue

Segment operating profit

Interest expense

Other income (expense), net

Income Before Income Taxes

Six Months Ended June 30, 2004

Medical premiums

Military contract revenues

Professional fees

Investment and other revenues

Total Revenue

Segment operating profit

Interest expense

Other income (expense), net

)

Income Before Income Taxes

~~11.~~Table of ~~COMMITMENTS AND CONTINGENCIES~~Contents

~~Litigation~~The Company ~~and~~adopted ~~Legal~~FIN ~~Matters~~48 as of January 1, 2007. The cumulative effect of adopting FIN 48 has resulted in an increase to our liability for uncertain tax positions of $4.3 million. This increase was accounted for as an adjustment to the beginning balance of retained earnings on the balance sheet. Including the cumulative effect increase, at the beginning of 2007, the Company had approximately $19.2 million of total gross unrecognized tax benefits.

~~Beginning in 1999, a series of class action lawsuits were filed against many major firms in the health benefits business.~~ The ~~Company has~~ ~~not been named as a defendant in these lawsuits. A multi-district litigation~~ total ~~panel~~ amount ~~has consolidated for pre-trial discovery some~~ of ~~these~~unrecognized ~~cases~~tax inbenefits ~~the~~that, ~~United States~~if ~~District Court for the Southern District of Florida~~recognized, ~~Miami~~would ~~Division.~~favorably Inaffect the ~~lead~~effective ~~case,~~income ~~known~~tax asrate ~~Shane,~~in ~~the~~future ~~amended~~periods ~~complaint~~was ~~alleges multiple violations under the Racketeer Influenced and Corrupt Organizations Act (RICO)~~$12. ~~The~~6 ~~suit~~million ~~seeks injunctive, compensatory and equitable relief~~ as ~~well as~~of ~~restitution,~~ adoption. Interest ~~costs, fees~~ and ~~interest~~penalties ~~payments.~~related ~~Discovery~~to ~~remains~~income ~~ongoing.~~tax Onmatters April 7, 2003, the United States Supreme Court determined that certain claims against certain defendants should be arbitrated. Subsequent lower court rulings have further resolved which of the plaintiffs' claims are ~~subject~~classified ~~to arbitration.~~as Ina ~~2004,~~component ~~the Court~~ of ~~Appeals~~income ~~for~~tax ~~the~~expense ~~Eleventh~~and ~~Circuit upheld a district court ruling certifying a plaintiff class in the Shane case. The district court has recently determined to bifurcate the case~~totaled $200, ~~holding a trial~~000 ~~phase~~ tax ~~limited~~benefit ~~to liability issues,~~ and ~~a second~~ $300,000 tax ifexpense ~~necessary, regarding damages. A trial date has been set~~ for ~~January 2006. Plaintiffs in~~ the ~~Shane proceeding~~three ~~have stated their intention to introduce evidence at trial concerning Sierra~~ and ~~other parties not named as defendants in the litigation. Two of the~~ nine ~~defendants,~~ months ~~Aetna~~ended September ~~Inc. and Cigna Corporation~~30, ~~have entered into settlement agreements, which have been approved by the district court~~2007. ~~Two of the other defendants, Wellpoint Inc. and Health Net Inc., have recently entered into settlement agreements whose approval is currently pending before the district court.~~

The Company ~~is subject to various claims~~ and ~~litigation~~its ~~in the~~subsidiaries ~~ordinary~~are ~~course~~subject ~~of business. Such litigation includes, but is not limited~~ to, claims of medical malpractice, claims for coverage or payment for medical services rendered to HMO and other members and claims by providers for payment for medical services rendered to HMO and other membersU. ~~Some litigation may also include claims for punitive damages that are not covered by insurance~~S. ~~In addition,~~federal ~~under~~income ~~the~~tax ~~terms~~as ~~of the note receivable due from the sale of Cal~~well ~~Indemnity, which is subject to adjustment based on loss development, the Company~~ as ~~can~~ income betax ~~indirectly affected by claims for workers' compensation and claims by providers for payment~~ of ~~medical~~multiple ~~services~~state ~~rendered to injured workers~~jurisdictions. Tax ~~These actions~~years ~~are~~1996 ~~in various stages of litigation and some may ultimately be brought~~ to ~~trial. With respect to certain pending actions, the Company maintains~~2007 ~~commercial~~ remain ~~insurance~~subject ~~coverage with varying deductibles for which the Company maintains estimated reserves for its self-insured portion based upon its current assessment of such litigation. Due~~ to ~~recent~~examination ~~unfavorable changes in the commercial insurance market, the Company has,~~ for ~~certain risks, purchased coverage with higher deductibles and lower limits of coverage~~U.S. Infederal ~~the~~income ~~opinion~~tax ~~of management, based on information presently available, the amount or range of any potential loss for certain claims~~ and ~~litigation~~tax ~~cannot~~years ~~be reasonably estimated~~2002 ~~or is not considered probable but the ultimate resolution of these pending legal~~ to ~~proceedings~~ 2004 ~~should~~remain ~~not~~subject ~~have~~to aexamination ~~material~~by ~~adverse~~major ~~effect~~state ~~on the Company's~~tax ~~financial condition~~ jurisdictions.

During the next 12 months, the Company expects a decrease of $1.8 million in gross unrecognized tax benefits associated with a request for change in accounting method.

12. Recently Issued Accounting Standards

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

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

13. Segment Reporting

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

~~MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL~~Table ~~CONDITION~~ of ~~AND RESULTS OF OPERATIONS~~Contents

~~ITEM~~The Company 2generated approximately 43% of its total consolidated revenues from agencies of the U.S. government for both the three month periods ended September 30, 2007 and 2006, through participation in Medicare and the Federal Employees Health Benefit Plan programs. The Company generated approximately 45% of its total consolidated revenues from agencies of the U.S. government for both the nine month periods ended September 30, 2007 and 2006.

The following discussion and analysis provides information which management believes is relevant for an assessment and understanding of our consolidated financial condition and results of operations. The discussion should be read in conjunction with our audited consolidated financial statements and accompanying notes for the year ended December 31, 2004, and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in our 2004 Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 14, 2005, and in conjunction with our unaudited condensed consolidated financial statements and accompanying notes for the three and six month periods ended June 30, 2005 and 2004, included in this Form 10-Q. ~~The information contained below is subject to risk factors.~~ Commitments We urge the reader to review carefully the section "Risk Factors" in Part 1, Item 1 of our 2004 Annual Report on Form 10-K for a more complete discussion of the risks associated with an investment in our securities. See "Note on Forward-Looking Statements and ~~Risk Factors" under Part 1,~~ ~~Item 1 of our 2004 Annual Report on Form 10-K.~~ Contingencies

~~This report on Form 10-Q contains "forward-looking~~Litigation ~~statements" within the meaning of Section 27A of the Securities Act of 1933~~ and ~~Section~~Legal ~~21E~~Matters. Although of the ~~Securities Exchange Act of 1934, both as amended. The~~Company ~~forward-looking statements regarding our business and results of operations~~ has ~~should~~ not bebeen ~~considered~~sued, bySierra ~~our~~was ~~stockholders~~identified orin ~~any~~discovery ~~reader~~submissions ~~of our business or financial information along with the risk factors discussed~~ in ~~our~~pending ~~2004 Annual~~class ~~Report~~ action onlitigation ~~Form~~against ~~10-K.~~major ~~All~~managed ~~statements~~care ~~other~~companies ~~than~~as ~~statements~~having ~~of historical fact are~~allegedly ~~forward-looking~~ participated ~~statements~~in ~~for~~an ~~purposes~~unlawful ofconspiracy ~~federal and state securities laws. The cautionary statements are made pursuant~~ to ~~the~~improperly ~~"safe harbor" provisions of the Private Securities Litigation Reform Act of 1995~~deny, asdiminish ~~amended, and identify important factors that could cause our actual results to differ materially from those expressed in any projected, estimated~~ or ~~forward-looking~~delay ~~statements~~ payments ~~relating~~ to usphysicians. ~~These~~In ~~forward-looking~~Re: ~~statements~~Managed ~~are~~Care ~~generally identified by their use of terms and phrases such as "anticipate~~Litigation,~~" "believe,"~~ ~~"continue,"~~MDL ~~"could," "estimate,"~~No. ~~"expect," "hope," "intend,"~~1334 ~~"may," "plan," "predict," "project," "seeks," "will," and other similar terms and phrases, including all references to assumptions~~ (S.D.Fl.).

~~Although~~Beginning in we1999, ~~believe~~a ~~that~~series ~~the~~of ~~expectations~~class ~~reflected~~action inlawsuits ~~any~~were offiled against many major firms ~~our~~ in ~~forward-looking~~the ~~statements~~health ~~are~~benefits ~~reasonable,~~business ~~actual~~alleging ~~results~~an ~~could~~unlawful ~~differ~~conspiracy to deny, ~~materially~~ diminish ~~from~~or ~~those~~delay ~~projected~~payments orto ~~assumed~~physicians. The Company has not been named as a defendant in ~~any~~these oflawsuits. ~~our~~A ~~forward~~multi-~~looking~~district litigation panel has consolidated ~~statements.~~ some ~~Readers~~of ~~are~~these ~~cautioned~~cases ~~not~~in tothe ~~place~~United ~~undue~~States ~~reliance~~District onCourt ~~these~~for the Southern ~~forward-looking~~ District ~~statements~~of ~~that~~Florida, ~~speak~~Miami ~~only~~Division. In the lead case, known as ofShane, the amended complaint alleges multiple violations under the ~~date~~Racketeer ~~hereof~~Influenced and Corrupt Organizations Act ("RICO"). WeThe ~~undertake~~suit seeks injunctive, compensatory no and ~~obligation~~equitable torelief ~~publish~~as ~~revised~~well ~~forward-looking~~as ~~statements~~restitution, tocosts, ~~reflect~~fees ~~events~~and orinterest payments. ~~circumstances~~ On ~~after~~April 7, 2003, the ~~date~~United ~~hereof~~States orSupreme toCourt ~~reflect~~determined ~~the~~that ~~occurrence~~certain ofclaims ~~unanticipated~~ against ~~events~~certain defendants should be arbitrated.

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

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

The Company is subject to other various claims and litigation in the ordinary course of business. Such litigation includes, but is not limited to, claims of medical malpractice, claims for coverage or payment for medical services rendered to HMO and other members, and claims by providers for payment for medical services rendered to HMO and other members. Some litigation may also include claims for punitive or other damages that are not covered by insurance. These actions are in various stages of litigation and some may ultimately be brought to trial.

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

~~Summary~~ Table of ~~Consolidated Results — Three Months Ended June 30, 2005 and 2004~~Contents

				Three Months Ended June 30,			Percent Of RevenueThree Months Ended June 30,					Increase (Decrease)
				2005		2004	2005		2004			2005 vs. 2004
	(In thousands, except percentages, per share and membership)
Operating Revenues:
	Medical premiums		$	320,395	$	280,661	92.1	%	63.6	%	$	39,734	14.2	%
	Military contract revenues			9,952		140,705	2.8		31.9			(130,753)	(92.9)
	Professional fees			10,116		8,085	2.9		1.8			2,031	25.1
	Investment and other revenues			7,564		11,838	2.2		2.7			(4,274)	(36.1)
Total				348,027		441,289	100.0		100.0			(93,262)	(21.1)
Operating Expenses:
	Medical expenses			251,233		218,413	72.2		49.5			32,820	15.0
		Medical Care Ratio		76.0%		75.6%							0.4
	Military contract expenses			(1,734)		116,420	(0.5)		26.4			(118,154)	(101.5)
	General and administrative expenses			42,158		45,289	12.1		10.2			(3,131)	(6.9)
Total				291,657		380,122	83.8		86.1			(88,465)	(23.3)
Operating Income				56,370		61,167	16.2		13.9			(4,797)	(7.8)
Interest expense				(4,349)		(1,175)	(1.3)		(0.3)			(3,174)	270.1
Other income (expense), net				302		41	0.1		—			261	636.6
Income Before Income Taxes				52,323		60,033	15.0		13.6			(7,710)	(12.8)
Provision for income taxes				(18,487)		(21,812)	(5.3)		(4.9)			3,325	(15.2)
	Tax Rate			35.3%		36.3%							(1.0)
Net Income			$	33,836	$	38,221	9.7	%	8.7	%	$	(4,385)	(11.5)	%
Earnings Per Common Share Assuming Dilution:
Net Income			$	1.01	$	1.10					$	(0.09)	(8.2)	%
HMO Membership:
	Commercial			245,100		215,700						29,400	13.6	%
	Medicare			54,700		52,200						2,500	4.8
	Medicaid			52,000		50,800						1,200	2.4
Total				351,800		318,700						33,100	10.4	%

cannot be reasonably estimated or is not considered probable. However, the ultimate resolutions of these pending legal proceedings are not expected to have a material adverse effect on the Company's financial condition, operating results and cash flows.

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

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

~~Summary~~ Table of ~~Consolidated Results — Six Months Ended June 30, 2005 and 2004~~ Contents

			Six Months Ended June 30,		Percent Of RevenueSix Months Ended June 30,		Increase (Decrease)
			2005	2004	2005	2004	2005 vs. 2004
	(In thousands, except percentages and per share)
Operating Revenues:
	Medical premiums	$

Management's Discussion And Analysis Of Financial

~~631,750~~ Condition And Results Of Operations

$Item 2.

The following discussion and analysis provides information that management believes is relevant for an assessment and understanding of our consolidated financial ~~546~~ condition and results of operations. The discussion should be read in conjunction with our audited consolidated financial statements and accompanying notes for the year ended December 31,~~099~~ 2006, and "Management's Discussion and Analysis of Financial Condition and Results of Operations," included in our 2006 Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 27, 2007 and accompanying notes for the three and nine month periods ended September 30, 2007 and 2006, included in this Form 10-Q. The information contained below is subject to risk factors. We urge the reader to review carefully the sections "Forward-Looking Statements" in Part I, Item 1 and "Risk Factors" in Part I, Item 1A of our 2006 Annual Report on Form 10-K as well as "Risk Factors" in Part II, Item 1A of this Form 10-Q for a more complete discussion of the risks associated with an investment in our securities.

92This report on Form 10-Q contains "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, both as amended.4 The forward-looking statements regarding our business and results of operations should be considered by our stockholders or any reader of our business or financial information along with the risk factors discussed in our 2006 Annual Report on Form 10-K. All statements, other than statements of historical fact, are forward-looking statements for purposes of federal and state securities laws. The cautionary statements are made pursuant to the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, as amended, and identify important factors that could cause our actual results to differ materially from those expressed in any projected, estimated or forward-looking statements relating to us. These forward-looking statements are generally identified by their use of terms and phrases such as "anticipate," "believe," "continue," "could," "estimate," "expect," "hope," "intend," "may," "plan," "predict," "project," "seeks," "will," and other similar terms and phrases, including all references to assumptions.

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

64.3

85,651

15.7

Military contract revenues

16,311

268,329

2.4

31.6

Professional fees

19,969

17,563

2.9

2.1

Investment and other revenues

15,856

17,524

2.3

2.0

(1,668)

Total

683,886

849,515

100.0

(165,629)

(19.5)

Operating Expenses:

Medical expenses

496,188

426,303

72.6

50.2

16.4

Medical Care Ratio

76.1%

75.6%

0.5

Military contract expenses

2,373

237,217

0.3

27.9

(99.0)

General and administrative expenses

83,631

82,321

12.2

9.7

1.6

Total

582,192

745,841

85.1

87.8

(163,649)

(21.9)

Operating Income From Continuing Operations

101,694

103,674

14.9

12.2

(1,980)

(1.9)

Interest expense

(5,980)

(2,340)

(3,640)

155.6

Other income (expense), net

401

311

345.6

Income Taxes

96,115

101,424

14.1

11.9

(5,309)

(5.2)

Provision for income taxes

(32,874)

(36,692)

(4.3)

3,818

(10.4)

Tax Rate

34.2%

36.2%

(2.0)

Income From Continuing Operations

63,241

64,732

9.3

7.6

(1,491)

(2.3)

(net of income tax benefit of $839)

—

(682)

—

(0.1)

682

(100.0)

Net Income

63,241

64,050

9.3

7.5

(809)

(1.3)

Earnings Per Common Share Assuming Dilution:

1.88

1.86

0.02

1.1

—

(0.02)

0.02

(100.0)

Net Income

1.88

1.84

0.04

2.2

Overview

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

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

~~negotiated price levels, by adopting quality assurance programs,~~Table ~~monitoring and coordinating utilization~~ of physician and hospital services and providing incentives to use cost-effective providers. Military contract expenses represent payments to providers for health care services rendered under the TRICARE program, administrative costs to operate the military health care subsidiary and subsequent to August 31, 2004 costs to phase-out the military health care operations. General and administrative expenses generally represent operational costs other than those directly associated with the delivery of health care services and military contract services.Contents

~~Executive~~ Summary of Consolidated Results – Three Months Ended September 30, 2007 and 2006

Continuing Operations

	Three Months Ended September 30,						Percent Of Revenue Three Months Ended September 30,						Increase (Decrease)
	2007			2006			2007			2006			2007 vs. 2006
	(In thousands, except percentages, per share and membership)
Operating revenues:
Medical premiums	$	445,680		$	405,618			95.0	%		94.3	%	$	40,062		9.9	%
Professional fees		13,483			13,300			2.9			3.1			183		1.4
Investment and other revenues		9,761			11,079			2.1			2.6			(1,318	)	(11.9	)
Total		468,924			429,997			100.0			100.0			38,927		9.1

Operating expenses:
Medical expenses		375,075			323,694			80.0			75.3			51,381		15.9
Medical care ratio		81.7	%		77.3	%										4.4
General and administrative expenses		42,264			51,291			9.0			11.9			(9,027	)	(17.6	)
Total		417,339			374,985			89.0			87.2			42,354		11.3


Operating income		51,585			55,012			11.0			12.8			(3,427	)	(6.2	)
Interest expense		(584	)		(1,015	)		(0.1	)		(0.2	)		431		(42.5	)
Other income (expense), net		279			14			¾			¾			265		1892.9

Income before income taxes		51,280			54,011			10.9			12.6			(2,731	)	(5.1	)
Provision for income taxes		(16,654	)		(19,082	)		(3.5	)		(4.5	)		2,428		(12.7	)
Tax rate		32.5	%		35.3	%										(2.8	)
Net income	$	34,626		$	34,929			7.4	%		8.1	%	$	(303	)	(0.9	)%


Net income per common share assuming dilution	$	0.59		$	0.56								$	0.03		5.4	%

Membership
HMO:
Commercial		282,400			273,600									8,800		3.2	%
Medicare		56,600			57,000									(400	)	(0.7	)
Medicaid		57,500			57,000									500		0.9
Subtotal HMO		396,500			387,600									8,900		2.3

Commercial PPO and HSA		37,900			31,300									6,600		21.1
Medicare PPO and PFFS		3,500			1,700									1,800		105.9
Medicare Part D-Basic		152,400			183,300									(30,900	)	(16.9	)
Medicare Part D-Enhanced		45,500			¾									45,500		100.0
Medicare supplement		12,500			13,700									(1,200	)	(8.8	)
Administrative services		228,500			221,100									7,400		3.3
Total membership		876,800			838,700									38,100		4.5	%

Member months
Commercial		950,700			903,600									47,100		5.2	%
Medicare HMO		170,000			171,000									(1,000	)	(0.6	)
Medicaid		171,800			171,600									200		0.1

~~Our HMO membership increased by 10.4% from 318,700 at June~~The ~~30, 2004, to 351,800 at June 30, 2005 from the addition of new accounts and~~ table ~~in-case~~ above ~~growth.~~should ~~Our~~be ~~aggregate~~reviewed ~~2005 premium rates increased by approximately 5.5% over 2004. The combination of these factors resulted~~ in aassociation ~~15.7%~~with increase in our medical premium revenues to $631.8 million, which was partially offset by an increase in medical expenses, which increased by 16.4% to $496.2 million. Medical expenses, as a percentage of medical premiums and professional fees, increased from 75.6% to 76.1%, or 50 basis points for the ~~six~~discussion ~~months ended June~~that ~~30, 2005~~ follows. ~~Our operating margin (operating income from continuing operations divided by total revenues) improved by 270 basis points to 14.9%.~~

Our military health services operations segment represented 2.5% of our operating revenues and 14.2% of our operating income for the six months ended June 30, 2005. This segment had operating income of $14.4 million for the six months ended June 30, 2005 compared to $32.0 million for the same period in 2004. We were not awarded the T-Nex North Region contract and our appeal to the United States General Accounting Office was denied in December 2003. Health care services under our TRICARE contract for Region 1 ended on August 31, 2004. On September 1, 2004, we entered an eight-month phase-out period at substantially reduced revenues and reduced earnings. During the second quarter of 2005, we reached a negotiated settlement with the Department of Defense (DoD) for certain outstanding change order and bid price adjustments related to option period six and the phase-out of our military health care operations. Included in the settlement was the determination of the final military health care payable balance. The gains recorded during the quarter, as described above, resulted in a net credit to expenses for the second quarter.

For the six months ended June 30, 2005, compared to 2004, investment and other revenues decreased from $17.5 million to $15.9 million, a decrease of $1.7 million or 9.5%. There was a $2.3 million increase in investment revenue offset by a decrease of $4.0 million related to the services we are providing relative to our sales agreement for the workers' compensation insurance operations, beginning April 1, 2004, and accrued interest on the associated note receivable. For a further description of this agreement, see below in the discussion of investment and other revenues.

For the six months ended June 30, 2005, compared to 2004, our general and administrative (G&A) expenses increased from $82.3 million to $83.6 million, an increase of $1.3 million or 1.6%. We had an increase of $5.9 million primarily due to higher employee compensation related expenses, premium

Table ~~taxes, and brokers' fees offset by a $4.6 million decrease for the cost to provide services related to the sale~~ of ~~the workers' compensation insurance operations referred to above.~~Contents

~~We had cash flows from operating activities~~ Summary of ~~continuing operations~~Consolidated ~~for~~Results ~~the~~– ~~six~~Nine ~~months~~Months ~~ended~~Ended ~~June~~September 30, ~~2005,~~2007 ~~of $41.6 million compared to $78.8 million for 2004. We received five monthly payments from the Centers for Medicare~~ and ~~Medicaid Services (CMS) during the first six months of 2005 and 2004 as~~ the January payments were received at the end of December. When the first quarters are adjusted to reflect three monthly payments from CMS, the cash flow from continuing operations would be $82.4 million in 2005 and $111.7 million in 2004. We believe presenting this adjustment for the timing of the CMS payments is useful for making a period-to-period comparison of our cash flow from continuing operations. The decrease in cash flow from continuing operations is primarily due to the timing of income tax payments, which represented a fluctuation of $22.3 million between the periods and cash flow from operations provided by the Military Health Services Operations of $26.0 million for 2004 compared to only $3.7 million for 2005. 2006

RESULTS OF OPERATIONS, THREE MONTHS ENDED JUNE 30, 2005, COMPARED TO THREE MONTHS ENDED JUNE 30, 2004

	Nine Months Ended September 30,						Percent Of Revenue Nine Months Ended September 30,						Increase (Decrease)
	2007			2006			2007			2006			2007 vs. 2006
(In thousands, except percentages, per share and membership)
Operating revenues:
Medical premiums	$	1,371,000		$	1,220,726			94.8	%		94.4	%	$	150,274		12.3	%
Professional fees		42,519			39,097			3.0			3.0			3,422		8.8
Investment and other revenues		32,089			32,860			2.2			2.6			(771	)	(2.3	)
Total		1,445,608			1,292,683			100.0			100.0			152,925		11.8

Operating expenses:
Medical expenses		1,172,597			981,758			81.1			76.0			190,839		19.4
Medical care ratio		83.0	%		77.9	%										5.1
General and administrative expenses		160,984			153,052			11.2			11.8			7,932		5.2
Total		1,333,581			1,134,810			92.3			87.8			198,771		17.5


Operating income		112,027			157,873			7.7			12.2			(45,846	)	(29.0	)
Interest expense		(3,576	)		(2,793	)		(0.2	)		(0.2	)		(783	)	28.0
Other income (expense), net		1,773			(10	)		0.1			¾			1,783		(17,830.0	)

Income before income taxes		110,224			155,070			7.6			12.0			(44,846	)	(28.9	)
Provision for income taxes		(37,477	)		(53,936	)		(2.6	)		(4.2	)		16,459		(30.5	)
Tax rate		34.0	%		34.8	%										(0.8	)
Net income	$	72,747		$	101,134			5.0	%		7.8	%	$	(28,387	)	(28.1	)%


Net income per common share assuming dilution	$	1.24		$	1.61								$	(0.37	)	(23.0	)%

Member months
Commercial		2,809,400			2,644,000									165,400		6.3	%
Medicare HMO		510,200			509,700									500		0.1
Medicaid		527,300			507,600									19,700		3.9

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

HMO and POS premium rates for renewing commercial groups increased approximately 4% while the overall recorded per member per month revenue increase, including new and continuing business, was approximately 7%, net of changes in benefits. We received a 1% increase in Medicaid rates for 2005 but we did not receive an increase in 2004.Overview

InWe are ~~December~~a managed ~~2003,~~health ~~President~~care ~~Bush~~organization ~~signed~~that ~~the~~provides ~~Medicare Prescription Drug, Improvement,~~ and ~~Modernization~~administers ~~Act~~the delivery of comprehensive ~~2003~~health ~~(MMA),~~care ~~into~~programs ~~law, which,~~with ~~among~~an ~~other~~emphasis ~~changes~~on toquality ~~Medicare,~~care ~~alters~~and ~~the Medicare+Choice program.~~cost ~~Under~~ management. Our ~~the~~strategy ~~MMA,~~has ~~Medicare+Choice~~been ~~plans,~~to ~~renamed~~develop ~~Medicare~~and ~~Advantage~~offer ~~plans,~~a ~~received~~portfolio of ~~increased~~ managed ~~funding~~health ~~from~~care ~~CMS~~products ~~starting~~to ~~March~~government ~~2004.~~agencies, ~~Because~~employer ofgroups, ~~the way in which the~~and ~~increased~~ individuals. We ~~funding~~derive ~~was~~revenues ~~calculated,~~primarily ~~both~~from our ~~non-Social~~health ~~HMO Medicare Advantage~~maintenance ~~benefit~~ organization ~~plans~~(HMO) and ~~our~~managed ~~Social~~indemnity ~~HMO~~plans. ~~benefit~~To ~~plans~~a ~~received~~lesser ~~the~~extent, ~~increased~~we ~~funding.~~also ~~MMA~~ derive ~~increased~~revenues ~~our~~from ~~Medicare~~professional ~~premium~~fees ~~rates~~(consisting byprimarily ~~over~~of ~~15%~~fees ~~starting~~for providing ~~March~~health 1,care ~~2004.~~services ~~The increased~~to ~~funding~~non-members, ~~was~~co-payment ~~used~~fees toreceived ~~reduce~~from members ~~beneficiary~~and ~~cost~~ancillary ~~sharing~~products), ~~enhance benefits,~~ and ~~stabilize~~investment ~~the~~and ~~provider~~other ~~network.~~revenue In(including fees ~~addition,~~for ~~some~~workers' ofcompensation ~~the~~third ~~funds~~party ~~were~~administration, ~~placed~~utilization ~~into~~ management aservices ~~benefit~~and ~~stabilization~~ancillary ~~fund~~products).

~~Effective~~Our principal ~~January~~expenses ~~2004,~~consist ~~CMS~~of ~~adopted~~medical aexpenses ~~new~~and ~~risk~~general ~~adjustment~~and administrative ~~payment~~ expenses. Medical ~~methodology~~expenses ~~for~~represent ~~Medicare~~capitation ~~beneficiaries~~fees ~~who~~and ~~are enrolled in managed care~~other ~~programs~~ fee-for-service payments, including ~~the~~hospital ~~Social~~per ~~HMO. For Social HMO members~~diems, ~~the~~paid ~~new~~to ~~methodology~~independently ~~includes~~ contracted aphysicians, ~~frailty~~hospitals ~~adjuster~~and ~~that~~other ~~uses~~health ~~measures~~care ofproviders ~~functional impairment~~ to cover ~~predict~~ members, ~~expenditures.~~pharmacy ~~CMS~~costs, isas ~~transitioning~~well toas the ~~new~~aggregate ~~payment~~expenses ~~methodology~~to onoperate aand manage ~~graduated~~ our ~~basis~~wholly-owned ~~from~~multi-specialty ~~2004~~medical ~~through~~group ~~2007.~~and Inother ~~2004, we were paid 90% based on the~~provider ~~previous~~ subsidiaries. As ~~payment~~a ~~approach~~provider ~~and~~of ~~10%~~health ~~based~~care onmanagement ~~the~~services, ~~new approach. Excluding the~~we ~~effects~~ seek ofto ~~MMA,~~positively ~~the~~affect ~~new~~quality ~~payment~~of ~~methodology~~care ~~reduced~~and ~~our~~expenses ~~rate increase~~ by 60contracting with ~~basis~~ physicians, ~~points.~~hospitals ~~The~~and ~~Social~~other ~~HMO~~health ~~program~~care ~~has~~providers ~~been~~at ~~administratively~~negotiated ~~extended by CMS~~price ~~through 2007. For 2005~~ levels, ~~2006~~by ~~and~~adopting ~~2007,~~quality weassurance ~~will be paid 70%~~programs, ~~50%~~monitoring and ~~25%, based~~coordinating on utilization ~~the~~of ~~previous~~physician ~~payment approach~~ and ~~30%,~~hospital ~~50%~~services and ~~75%,~~providing ~~based~~incentives ~~on the new~~to ~~approach,~~ use cost-effective ~~respectively~~providers. ~~The~~General ~~extension~~and ofadministrative ~~the~~expenses ~~Social HMO program will serve as a~~generally ~~transition~~ represent ~~plan~~operational socosts ~~that~~other wethan ~~can~~those ~~convert~~directly toassociated awith ~~Medicare Advantage plan in 2008. Our~~the ~~2005~~ delivery ~~annual Medicare increase, before the effect~~ of ~~the~~health ~~new~~care ~~payment approach and the~~ services.

~~MMA, would have been 7.9%. The new payment approach reduced this to~~Table ~~approximately 4% although the actual increase we received over the fourth quarter~~ of ~~2004 was approximately 2% as the increased MMA funds were received over the last 10 months of the year and included a proportionate share for January and February 2004.~~Contents

~~Early in 2005, CMS replaced its legacy Group Health Plan~~Pending ~~system. The~~ Business transition to the new system has led to some incorrect transactions and inconsistencies in the payments and data we have received from CMS. We have recorded our best estimate for Medicare premium revenues as of June 30, 2005 based on a detailed actuarial analysis.Combination

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

~~Our~~On May 16, ~~commercial~~2007, ~~membership~~we ~~increased~~and UnitedHealth Group received a request for additional information from ~~215,700~~the atAntitrust ~~June~~Division ~~30,~~of the U.S. Department of Justice (DOJ) ~~2004~~ regarding tothe ~~245~~proposed merger between the two companies. The information request,~~100~~ atalso ~~June~~known 30as a "second request," ~~2005.~~was issued under notification requirements of the HSR. The ~~increase~~effect inof ~~commercial~~the ~~membership~~second request is ~~attributed~~ to ~~in-case~~extend ~~growth,~~the ~~movement~~waiting ~~from~~period ~~self-insured~~imposed ~~plans~~by tothe ~~our~~HSR ~~commercial~~until 30 days after ~~products~~ we and ~~new~~UnitedHealth ~~accounts~~Group have substantially complied with the request for additional information, unless the period is extended voluntarily by the parties or terminated sooner by the DOJ.

~~Military~~On June 27, ~~Contract~~2007, ~~Revenues~~our stockholders approved the Merger Agreement. On August 27, 2007, we received an order granting approval of the merger from the Commissioner of Nevada's Division of Insurance. On September 6, 2007, we received notice that the California Department of Insurance granted approval of the merger.

~~SMHS completed the fifth year of a five-year contract in May~~Executive 2003. SMHS then operated under a negotiated contract extension period, which ended August 31, 2004. The new contractor became operational in Region 1 on September 1, 2004 and the new contract superseded the remainder of our TRICARE Region 1 contract. On September 1, 2004, SMHS commenced an eight-month phase-out of operations at prices previously negotiated with the DoD. SMHS does not meet the definition of discontinued operations since we did not dispose of the operations before the phase-out was complete. Summary

~~During the second quarter of 2005, we reached a negotiated~~Our ~~settlement~~ highlights ~~with~~for the ~~DoD~~nine ~~for~~months ~~certain~~ended ~~outstanding~~September ~~change~~30, ~~order~~2007 ~~and~~compared ~~bid price adjustments related~~ to ~~option period six and~~ the ~~phase-out of our military~~nine ~~health care operations. Included in the settlement was the determination of the final military health care payable balance. The segment operating profit of $12.0 million for the three~~ months ended ~~June~~September 30, ~~2005~~2006 ~~is primarily attributable to gains associated with the final change order and bid price adjustments and the phase-out contract.~~include:

~~SMHS~~· ~~recorded~~Total ~~the~~operating ~~remainder~~revenues ofincreased ~~the~~by ~~phase-out~~11.8%. ~~revenues~~This ~~during the~~improvement ~~second~~was ~~quarter~~primarily ofdriven ~~2005~~by a 12.3% ~~For~~increase ~~more~~in ~~information~~medical onpremiums ~~SMHS'~~due ~~results~~to ~~of operations,~~a ~~see~~38.0% ~~Note~~increase ~~10,~~in ~~Segment~~premiums ~~Reporting~~for our stand alone Medicare Part D prescription drug (PDP) programs, an increase in ~~the~~our ~~Notes~~commercial membership and premium rate increases. Also contributing to the ~~Condensed Consolidated~~improvement ~~Financial~~in ~~Statements~~operating revenues was an 8.8% increase in professional fees due to an increase in visits to our clinical subsidiaries.

~~Professional~~· ~~Fees~~HMO membership increased 2.3% as a result of new accounts and in-case growth on commercial membership and growth in Medicaid member months. This increase is net of the 11,000 commercial member terminations effective January 1, 2007, from three large employer groups that had been anticipated.

~~Investment~~· Medical expenses, as a percentage of medical premiums and ~~Other~~professional ~~Revenues~~fees, or medical care ratio, increased to 83.0% in 2007 from 77.9% in 2006. The increase in our medical care ratio is primarily related to the estimated full year 2007 pre-tax loss of $58.9 million related to our new enhanced PDP product that was recorded during the period, which significantly increased medical expenses. See Medical Expenses below for

Table ~~interest~~ of ~~approximately $500,000 on the note receivable in 2005 compared to approximately $600,000 in 2004.~~Contents

~~Excluding~~more ~~the workers' compensation related revenue decrease, we had an increase in investment and other revenues of $1~~details.0 million due to an increase in yield during 2005 and higher average invested balances partially offset by a loss on a short sale of U.S. Treasury bonds as described in Note 3, Investments, in the Notes to the Condensed Consolidated Financial Statements.

~~Medical~~· ~~Expenses~~General and administrative (G&A) expenses as a percentage of medical premiums decreased to 11.7% in 2007 from 12.5% in 2006. G&A expenses increased 5.2% primarily due to costs associated with our pending merger with UnitedHealth Group, increases in premium taxes and brokers' fees, and G&A costs related to our new enhanced PDP product.

· We ~~contract~~had ~~with~~operating ~~hospitals,~~income ~~physicians and other independent providers~~ of ~~health~~$112.0 ~~care~~million ~~under~~in ~~capitated~~2007 orcompared ~~discounted fee-for-service arrangements, including hospital per diems,~~ to ~~provide~~$157.9 ~~medical care~~million ~~services~~in ~~to members~~2006. ~~Capitated~~This ~~providers~~decrease ~~are~~is atrelated ~~risk~~to ~~for~~the a$58.9 ~~portion~~million ofoperating ~~the cost~~loss ofrecorded ~~medical~~during ~~care~~2007 ~~services~~related ~~provided~~ to our ~~members~~new inenhanced ~~the~~PDP ~~relevant~~product. ~~geographic areas;~~See ~~however,~~Medical weExpenses ~~are~~below ~~ultimately responsible~~ for ~~the~~more ~~provision~~details. ofThis ~~services~~decrease ~~to our~~was ~~members~~partially ~~should~~offset ~~the~~by ~~capitated~~an ~~provider~~increase bein ~~unable~~operating toincome ~~provide~~primarily ~~the~~driven ~~contracted services.~~by Wemedical ~~incurred~~premium ~~capitation~~revenue ~~expenses~~growth ~~with~~from ~~non-affiliated~~new ~~providers~~members ~~of $32.4 million~~ and ~~$28.9~~premium ~~million,~~rate ~~or 12~~increases.~~9% and 13.2%, of our total medical expenses for 2005 and 2004, respectively.~~

~~Military~~· ~~Contract~~Cash ~~Expenses~~flows from operating activities decreased to $51.2 million from $93.9 million during 2006. This decrease is mostly due to the timing of tax payments and a $19.3 million decrease in operating cash flows from our PDP plans during 2007 compared to 2006, which was primarily related to the timing of PDP payments during the year and operating losses related to our new enhanced PDP product. See Medical Expenses below for more details.

~~General~~Results Of ~~and~~Operations ~~Administrative~~For ~~Expenses.~~The Three Months Ended September 30, 2007 Compared To The Three Months Ended September 30, 2006

~~Interest~~Medical Premiums. ~~Expense~~The increase in medical premiums for 2007 reflects a 5.2% increase in commercial member months (the number of months individuals are enrolled in a plan). This increase is attributed to in-case growth, movement from self-insured plans to our commercial products and other new accounts, which was partially offset by 11,000 commercial member terminations effective January 1, 2007 from three large employer groups. Commercial premium rates for renewing commercial groups increased approximately 8.9% while the overall recorded per member per month revenue increase, including new and continuing business, was approximately 3.7%, net of changes in benefits.

~~Other~~The increase ~~Income~~in medical premiums for 2007 includes $19.2 million from our new stand-alone enhanced PDP product (~~Expense~~Enhanced Plan) that was effective January 1, 2007. This ~~Net~~was partially offset by a $6.4 million decrease in our stand-alone basic PDP plan (Basic Plan). We recognize medical premiums from our PDP plans as earned over the contract period.

In 2007, we expanded our offering of our Basic Plan to 30 states and the District of Columbia. We engaged a national marketing partner for our Basic Plan and we are using our established broker network in Nevada and Utah. Additionally, our Basic Plan remained eligible as a PDP sponsor for our 2006 auto-enrolled Medicare and Medicaid beneficiaries in California and Nevada, and for our 2006 and new 2007 auto-enrolled beneficiaries in Arizona, Colorado, Idaho, Oregon, Utah and Washington. Our Basic Plan is no longer a PDP sponsor for auto-enrolled beneficiaries in New Mexico and Texas. At September 30, 2007, we had 152,400 beneficiaries enrolled in our Basic Plan, the majority of which were auto-enrolled beneficiaries. In 2007, for the first time, we offered an Enhanced Plan, which provides brand name and generic prescription drug benefits through the coverage gap or "donut hole", in 30 states and the District of Columbia. Based on the data available to date, we now anticipate that estimated 2007 pharmacy and administrative maintenance costs will exceed estimated 2007 premiums by $58.9 million. See Medical Expenses below for more details. At September 30, 2007, we had 45,500 members enrolled in our Enhanced Plan. We do expect some new members to enroll in the Enhanced Plan during the fourth quarter as newly eligible Medicare beneficiaries can still enroll; however, existing Medicare beneficiaries cannot change stand-alone PDP plans during the year unless unusual circumstances exist.

In 2008, we will continue to offer our Basic Plan to 30 states and the District of Columbia. In 2008, we will be a PDP sponsor for auto-enrolled Medicare and Medicaid beneficiaries in Arizona. We will no longer be a PDP

Table ~~Provision~~ of for Income Taxes. The effective tax rate for 2005 was 35.3% compared to 36.3% for 2004. Our effective tax rate is greater than the 35% statutory federal rate due primarily to state income taxes partially offset by tax-preferred investments.Contents

~~Our~~sponsor for ~~effective~~auto-enrolled ~~tax~~Medicare ~~rate~~and isMedicaid ~~based~~beneficiaries onin ~~actual~~California, ~~or expected income~~Colorado, ~~statutory~~ Idaho, ~~tax~~Nevada, ~~rates~~Oregon, Utah and ~~tax~~Washington ~~planning~~as ~~opportunities~~we ~~available~~did tonot ~~us.~~meet Wethe ~~may~~Centers ~~use~~for ~~significant~~ Medicare ~~estimates~~ and ~~judgments~~Medicaid inServices ~~determining~~("CMS") ~~our~~benchmark ~~effective~~in ~~tax~~those ~~rate~~states for 2008. As Weof ~~are~~ September ~~occasionally audited by federal~~30, ~~state or local jurisdictions regarding compliance with federal~~2007, ~~state~~auto-enrolled ~~and~~Medicare ~~local tax laws~~ and ~~the~~Medicaid ~~recognition~~beneficiaries ofin ~~income~~these ~~and~~ states ~~deductibility~~accounted offor ~~expenses.~~approximately ~~Tax~~57% ~~assessments~~of ~~may~~our ~~not~~total ~~arise~~stand ~~until~~alone ~~several~~PDP ~~years after tax returns are filed~~membership. ~~While there is an element of uncertainty in~~ ~~predicting~~ Based ~~the~~on ~~outcome~~our ofprior ~~tax~~years' ~~audits~~experience, we ~~believe~~expect ~~that~~to ~~the~~retain ~~recorded~~a ~~tax~~small ~~assets~~percentage ~~and liabilities are appropriately stated based on our analyses~~ of ~~probable~~ ~~outcomes,~~ this ~~including~~population ~~interest~~through ~~and~~voluntary ~~other potential adjustments~~enrollment. We ~~Our~~did ~~tax~~not ~~assets~~submit ~~and~~a bid ~~liabilities~~ to ~~are~~CMS ~~adjusted~~for ~~based~~an onEnhanced ~~the~~Plan ~~most~~in ~~current~~2008 ~~facts~~ and ~~circumstances, including~~therefore ~~the~~will ~~progress~~not ofbe ~~audits,~~offering ~~case law and emerging legislation; any~~this ~~adjustments~~ plan for ~~are included in the effective tax rate in the period of adjustment~~2008.

~~RESULTS~~CMS shares OFin ~~OPERATIONS,~~a ~~SIX~~portion ~~MONTHS~~of ~~ENDED~~the ~~JUNE~~risk ~~30,~~of ~~2005,~~pharmacy costs related to the basic coverage ~~COMPARED~~ in TOour ~~SIX~~Basic ~~MONTHS~~Plan ~~ENDED~~and ~~JUNE~~our 30Enhanced Plan as well as our Medicare Advantage PDP. We recognize a risk sharing receivable or payable based on the year-to-date activity and a corresponding increase or decrease to medical premiums. The risk sharing receivable or payable is accumulated for each contract and recorded in prepaid expenses and other current assets or accrued and other current liabilities depending on the net contract balance at the end of the reporting period. See Note 3, ~~2004~~"Medicare Part D Prescription Drug Program", in the Notes to Condensed Consolidated Financial Statements.

~~Medical~~In 2007, we ~~Premiums~~continue to offer local and regional Medicare Advantage PPO (MAPPO) plans and for the first time, we are offering a Medicare Advantage Private Fee-For-Service (MAPFFS) plan. This plan is available in 28 states and the District of Columbia. The MAPFFS plan does not include Medicare Part D prescription drug coverage but does provide hospital and physician coverage. Members pay a monthly premium, co-payments and coinsurance, with reasonable out-of-pocket maximum amounts. Members also have unlimited network access. At September 30, 2007, we had 2,100 and 400 members enrolled in our regional and local MAPPO plans, respectively. At September 30, 2007, we had 1,000 members enrolled in our MAPFFS plan. In 2008, we will continue to offer our local and regional MAPPO plans as well as our MAPFFS plan.

~~HMO~~Effective January ~~and~~2004, ~~POS~~CMS ~~premium~~adopted ~~rates~~a ~~for~~new ~~renewing~~risk ~~commercial~~adjustment ~~groups~~payment methodology for Medicare ~~increased~~ beneficiaries ~~approximately~~enrolled 6%in ~~while~~managed care programs, including the ~~overall~~Social ~~recorded~~HMO, which has ~~per~~been ~~member~~administratively ~~per~~extended ~~month~~by CMS through 2007. For Social ~~revenue~~ HMO ~~increase~~members, ~~including~~the new ~~and~~methodology ~~continuing~~includes ~~business,~~a ~~was~~frailty ~~approximately~~adjuster ~~7%, net~~that uses measures of ~~changes~~functional inimpairment ~~benefits~~to predict expenditures. CMS Wehas transitioned ~~received~~to athe 1%new ~~increase~~payment inmethodology ~~Medicaid~~on ~~rates~~a ~~for~~graduated ~~2005~~basis from 2004 ~~but~~ through 2007 and we ~~did~~will ~~not~~be ~~receive~~completely antransitioned ~~increase~~to inthe ~~2004.~~new methodology effective

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

~~During~~For 2008, we ~~the~~will ~~second~~be ~~quarter~~fully oftransitioned ~~2005~~to a risk payment methodology; however, we ~~reached~~have been anotified ~~negotiated settlement~~by ~~with~~CMS ~~the~~that ~~DoD~~there ~~for~~will ~~certain~~continue ~~outstanding~~to ~~change~~be ~~order~~a ~~and~~frailty ~~bid~~factor ~~price~~component ~~adjustments~~ to ~~related~~our topayment ~~option~~through ~~period~~2010. The ~~six~~frailty ~~and~~factor ~~the~~will ~~phase-out~~be a component of ~~our~~the ~~military health~~risk ~~care~~score ~~operations.~~calculation ~~Included~~for informer ~~the~~Social ~~settlement~~HMO ~~was~~plans ~~the~~by ~~determination~~using 75%, 50% and 25% of the ~~final~~ ~~military~~current ~~health~~frailty ~~care~~factor ~~payable~~for ~~balance.~~plan ~~The~~years ~~segment~~2008, ~~operating~~2009 ~~profit~~and of2010, ~~$14~~ respectively.4 Even ~~million~~with ~~for~~ the ~~six~~additional ~~months~~frailty ~~ended~~factor ~~June 30~~component, ~~2005 includes operating profit~~we of believe ~~$12.0~~that ~~million~~a ~~for~~full ~~the~~transition ~~three~~to ~~months~~a ~~ended~~risk ~~June~~payment ~~30,~~methodology ~~2005,~~will ~~which~~likely ~~is primarily~~cause ~~attributable~~ our toper ~~gains~~member ~~associated~~payment ~~with~~in ~~the~~2008 ~~final~~to ~~change~~be ~~order~~less ~~and~~than ~~bid~~our ~~price adjustments~~per ~~and~~member ~~the~~payment ~~phase-out contract~~in 2007.

~~For~~Early in 2005, ~~more~~CMS ~~information~~replaced onits ~~SMHS'~~legacy ~~results~~Group ofHealth ~~operations,~~Plan ~~see~~system. The ~~Note~~ transition 10to the new system had led to some incorrect transactions and inconsistencies in the payments and data we received from CMS. We received overpayments, ~~Segment~~of ~~Reporting~~over $30 million, from CMS in excess of our current best estimate of Medicare premiums in 2005. We have made CMS aware of the overpayments ~~Notes~~and they are in the process of researching the various issues. We expect a portion of these funds to be settled with CMS over the ~~Condensed~~course ~~Consolidated~~of ~~Financial~~the next several quarters. Additionally, while we continue ~~Statements~~ to have some membership discrepancies with CMS in 2007, the 2006 membership discrepancies previously disclosed have largely been resolved with CMS and we believe that the appropriate revenue and expenses for these members have been recognized.

Professional Fees.

~~Investment~~Table of ~~and Other Revenues.~~ Contents

~~Excluding~~We contract with the ~~workers~~Division of Healthcare Financing and Policy of the state of Nevada (DHCFP) to provide health care coverage to certain Medicaid eligible individuals. To enroll in our Medicaid program, an individual must be eligible for the Temporary Assistance for Needy Families or the Children's Health ~~compensation~~Assurance ~~related~~Program ~~revenue~~categories of the state's Medicaid program. At ~~decrease~~ September 30, 2007, we had anapproximately ~~increase~~41,300 members enrolled in ~~investment~~this program. We ~~and~~also ~~other~~contract ~~revenues~~with ofthe ~~$2.3~~DHCFP ~~million~~to ~~due~~provide health care coverage to anthe ~~increase~~Nevada Check Up program, which covers certain uninsured children who do not qualify for Medicaid. At September 30, 2007, we had approximately 16,200 members enrolled in ~~yield~~this ~~during~~program. ~~2005~~We receive a monthly fee for each Medicaid and ~~higher~~Nevada ~~average~~Check ~~invested~~Up ~~balances partially~~member ~~offset~~enrolled by athe ~~loss~~state's onManaged Care Division and we also receive a ~~short~~per ~~sale~~case offee Ufor each Medicaid and Nevada Check Up eligible newborn delivery.S. ~~Treasury~~In ~~bonds~~the asfirst ~~described~~quarter inwe received a 1.0% ~~Note~~ rate increase 3,retroactive ~~Investments~~to January 1, in2007 ~~the~~and ~~Notes~~do tonot ~~the~~expect ~~Condensed~~to ~~Consolidated~~receive ~~Financial~~any further ~~Statements~~ rate increases for 2007.

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

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

~~General~~Professional Fees. ~~and~~The ~~Administrative~~increase ~~Expenses.~~in professional fees primarily resulted from increased visits to our clinical subsidiaries.

~~Interest~~Investment and ~~Expense~~Other Revenue. The decrease in investment and other revenue primarily resulted from a decrease in revenue related to our administrative services subsidiary and a decrease in yields on our investments. The decrease in yields is due to a declining exposure to investments in trust deed mortgage notes. While they have provided higher yields than our other investments, we have tried to reduce our exposure due to the continued deterioration of the real estate market. See Note 5, "Investments", in the Notes to Condensed Consolidated Financial Statements.

~~Other~~Medical Expenses. Our ~~Income~~medical care ratio increased 440 basis points to 81.7%. The increase in our medical care ratio is due primarily to an increase in the premium deficiency related to our Enhanced Plan, higher average bed days during 2007 for our Medicare HMO members, and the termination of our HCA Inc. (~~Expense~~HCA) contract on December 31, ~~Net~~2006.

~~Provision~~In 2007, we began to offer the Enhanced Plan, which provides brand name and generic prescription drug benefits through the coverage gap or "donut hole". We engaged independent actuarial consultants in developing the Enhanced Plan. The premium structure for ~~Income~~the ~~Taxes~~Enhanced Plan was based on a projected level of utilization per member. Our experience so far in 2007 indicates that we have experienced significantly increased costs from what the actuarial projections anticipated. During the first half of 2007, we recorded a $55.3 million pre-tax loss related to our Enhanced Plan, which resulted in a premium deficiency reserve of $39.3 million at June 30, 2007. This represented our estimate of the full year 2007 losses for the Enhanced Plan based on the data available at that time. Based on the most current data available to date, we now believe that the entire year 2007 losses for the Enhanced Plan will be $58.9 million. We recorded an additional $3.6 million in premium deficiency reserves during the quarter. The change in estimate was due to higher than projected utilization during the third quarter of 2007 and lower than projected risk share from CMS resulting in an $9.4 million increase in projected medical losses, which was partially offset by a $5.8 million decrease in our projected G&A expenses, due to better than expected

Discontinued Operations.

Table ~~operations on December 31, 2002. Accordingly, beginning in the fourth quarter~~ of ~~2002,~~ ~~we reclassified our workers' compensation insurance business as discontinued operations.~~Contents

Oncollections of ~~November~~the ~~25,~~members’ ~~2003,~~portion weof ~~announced~~the ~~that~~premiums. At weSeptember ~~had~~30, ~~reached~~2007, anour ~~agreement~~ premium todeficiency ~~sell~~reserve ~~California~~balance ~~Indemnity~~for ~~Insurance~~our ~~Company~~Enhanced ~~(Cal~~Plan ~~Indemnity), and its subsidiaries. Cal Indemnity~~ was ~~CII's only significant asset~~$22.1 ~~In the~~million. ~~fourth~~ See Note ~~quarter of 2003~~4, we"Premium ~~recorded~~Deficiency ~~a charge of $15.6 million~~Reserves", ~~gross~~in ~~and~~the ~~net~~Notes ~~of tax,~~ to ~~write~~Condensed ~~down~~Consolidated Financial ~~the~~Statements ~~investment~~for infurther ~~Cal~~discussion ~~Indemnity~~of toour ~~its~~Enhanced ~~estimated net sales proceeds~~Plan.

OnThe number ~~March~~of ~~31,~~days ~~2004~~in claims payable, wewhich ~~completed~~is the ~~sale~~medical ofclaims ~~Cal~~payable ~~Indemnity.~~balance ~~Cal~~ divided ~~Indemnity's~~by ~~subsidiaries,~~the ~~which~~average ~~were~~medical ~~included~~expense inper ~~the sale~~day, ~~are~~for ~~Commercial~~2007 was 47 compared to ~~Casualty~~ 45 for ~~Insurance~~2006. The ~~Company,~~increase ~~Sierra~~was ~~Insurance~~related ~~Company~~to ofan ~~Texas,~~increase ~~and~~in ~~CII~~claims ~~Insurance~~payable ~~Company~~ for provider disputes and the timing of claims payments.

~~LIQUIDITY~~We contract ~~AND~~with ~~CAPITAL~~hospitals, ~~RESOURCES~~physicians and other independent providers of health care under capitated or discounted fee-for-service arrangements, including hospital per diems, to provide medical care services to members. We also have an extensive pharmacy network to provide pharmaceuticals to our members. Capitated providers are at risk for a portion of the cost of medical care services provided to our members in the relevant geographic areas; however, we are ultimately responsible for the provision of services to our members should the capitated provider be unable to provide the contracted services. We incurred capitation expenses with non-affiliated providers of $32.7 million and $34.1 million, or 8.7% and 10.5%, of our total medical expenses for 2007 and 2006, respectively. Also included in medical expenses are the operating expenses of our medical provider subsidiaries and certain claims-related administrative expenses, which accounted for 26.5% and 28.2% of our total medical expenses for 2007 and 2006, respectively.

WeThe Las Vegas ~~had~~area ~~cash~~has ~~flows~~thirteen ~~from~~hospitals. Our ~~operating~~contract ~~activities~~with ~~for~~our ~~continuing~~2006 primary ~~operations~~ Las ofVegas ~~$41.6~~area ~~million~~contracted ~~for~~hospital ~~2005~~organization, ~~compared~~which toincludes ~~$78.8~~three ~~million~~hospitals − inSunrise ~~2004.~~Hospital ~~We received~~and ~~five~~Medical ~~monthly~~Center, ~~CMS~~Mountain ~~payments~~View ~~during~~Hospital ~~the~~and ~~first~~Southern ~~six~~Hills Hospital ~~months~~and ofMedical ~~2005~~Center ~~and~~− ~~2004~~owned by HCA, expired on December 31, as 2006. We ~~the~~have ~~January~~contracts ~~payments~~in ~~were~~place ~~received~~through at least the ~~end~~middle of ~~December.~~2008 with ~~When~~ the ~~first quarters~~remaining hospitals in southern Nevada. These contracts are based ~~adjusted~~on toa ~~reflect~~fixed ~~three~~per ~~monthly~~diem ~~payments~~rate ~~from~~structure ~~CMS,~~and ~~the~~in ~~cash~~some ~~flow~~circumstances are higher ~~from~~ than ~~continuing~~the ~~operations~~previous ~~would~~HCA becontract ~~$82~~rates.4 ~~million~~While inour ~~2005~~efforts ~~and~~to ~~$111.7~~move ~~million~~the inmajority ~~2004.~~ of our WeHCA ~~believe~~hospital ~~presenting~~days ~~this~~to ~~adjustment~~other ~~for~~contracted ~~the~~hospitals ~~timing~~have ofbeen ~~the~~successful, ~~CMS payments~~there is are ~~useful~~emergency ~~for~~and ~~making~~other asituations ~~period-to-period~~that ~~comparison~~have ofrequired ~~our~~us ~~cash~~to ~~flow~~use ~~from~~the HCA ~~continuing~~ hospitals ~~operations~~in 2007. In We2007, ~~used~~we ~~the~~have ~~majority~~negotiated ofa ~~the~~discount ~~cash flow~~ to ~~purchase~~billed ~~investments.~~ charges ~~The~~with ~~decrease~~HCA infor ~~cash~~our ~~flow~~commercial ~~from~~members ~~continuing~~based ~~operations~~on iscertain ~~primarily~~prompt pay terms; ~~due~~ however, tothese ~~the~~charges ~~timing~~are ofstill ~~income~~substantially ~~tax~~higher ~~payments,~~than ~~which~~our current ~~represented~~ commercial arates ~~fluctuation~~with ofour ~~$22~~contracted hospitals.3 ~~million~~We ~~between~~receive ~~the~~a ~~periods~~significant discount ~~and~~to ~~cash~~billed ~~flow from~~charges ~~operations~~for ~~provided~~services byrendered ~~the~~to ~~military~~Medicare ~~health~~and ~~services~~Medicaid members ~~operations~~at ofan ~~$26.0 million~~HCA ~~for~~hospital ~~2004~~because ~~compared~~we topay ~~only~~charges ~~$3.7~~at ~~million~~the ~~for~~established ~~2005~~Medicare and Medicaid rates.

WeGeneral and ~~expect~~Administrative ~~that~~Expenses. G&A ~~SMHS~~expenses decreased ~~will~~primarily ~~use~~due ~~approximately~~to $5a decrease in our premium deficiency reserve recorded in G&A related to our new enhanced PDP product, a decrease in expenses related to salaries and bonuses, and a decrease in share-based compensation expense.0 These ~~million~~decreases ofwere partially offset by an increase in ~~its~~ premium ~~cash~~taxes, asbrokers’ fees and costs associated with our pending merger with UnitedHealth Group. The decrease in the ~~payout~~premium ofdeficiency reserve recorded in G&A was related to better than expected collections for the members’ ~~remaining~~portion ~~liabilities~~of ~~will~~premiums. As ~~exceed~~a ~~SMHS'~~percentage of medical premiums, ~~accounts~~ G&A ~~receivable~~expenses were 9.5% and ~~other~~12.6% ~~non-cash~~for ~~asset~~2007 ~~balances~~and 2006, respectively.

~~Net cash used for investing activities during 2005 included~~Interest $6 Expense.1 ~~million~~Interest inexpense ~~capital~~decreased ~~expenditures~~due ~~associated~~to ~~with~~a ~~the~~decrease ~~continued~~in long-term ~~implementation~~ debt. At ofSeptember ~~new computer systems~~30, ~~leasehold improvements on facilities~~2007, ~~furniture~~ ~~and~~we ~~equipment~~had ~~and~~no ~~other~~balance ~~capital~~outstanding ~~purchases~~on ~~to support~~ our ~~growth. The~~ ~~net~~ credit ~~cash change in investments for the period was an increase in investments of $83~~facility.~~2 million as cash equivalents were used to purchase investments.~~

~~Net~~Provision for ~~cash~~Income ~~used~~Taxes. ~~for~~Our ~~financing~~effective ~~activities~~tax inrate ~~2005~~is ~~included payments~~lower onthan ~~our~~the statutory ~~revolving~~tax ~~credit~~rate ~~facility~~primarily ofdue ~~$10.0~~to ~~million.~~tax-preferred ~~Proceeds~~investment ~~from~~income and the ~~issuance~~ recognition of ~~stock~~tax benefits associated with a change in ~~connection~~accounting method for ~~with~~a ~~stock~~subsidiary, Health ~~plans~~Plan ~~were~~of ~~$13~~Nevada, Inc.3, ~~million~~which ~~and~~was approved ~~cash~~by the Internal Revenue Service in the third quarter of ~~$50~~ 2007.9 See ~~million~~Note ~~was~~11, ~~used~~"Income Taxes", in the Notes to ~~repurchase~~Condensed Consolidated ~~Sierra~~Financial ~~common~~Statements ~~stock~~for further discussion of our income taxes.

~~Discontinued~~Our effective ~~operations~~tax ~~provided~~rate ~~cash~~is ofbased $3on actual or expected income, statutory tax rates and tax planning opportunities available to us.7 We ~~million~~use significant estimates and judgments in ~~2004~~determining our effective tax rate. We are ~~primarily~~ occasionally asaudited aby ~~result~~federal, ofstate ~~the~~or ~~sale~~local ofjurisdictions ~~Cal~~regarding compliance ~~Indemnity.~~with federal, state and local tax

Sierra Debentures

~~Beginning December 2003~~Table ~~and for each subsequent period, the market price~~ of our common stock has exceeded 120% of the conversion price for at least 20 trading days in a period of 30 consecutive trading days. The conversion rate is subject to certain adjustments. This conversion rate initially represents a conversion price of $18.29 per share. Holders of the debentures may require us to repurchase all or a portion of their debentures on March 15 in 2008, 2013 and 2018 or upon certain corporate events including a change in control. In either case, we may choose to pay the purchase price of such debentures in cash or common stock or a combination of cash and common stock. The debentures can be redeemed by us for cash beginning on or after March 20, 2008.Contents

~~During~~ laws and the ~~second~~recognition ~~quarter~~ of ~~2005,~~income weand ~~entered~~deductibility ~~into~~of ~~privately~~expenses. Tax ~~negotiated~~ assessments ~~transactions~~may ~~with~~not ~~three~~arise ~~debenture-holders~~until ~~(holders)~~several ~~pursuant~~years toafter ~~which the~~tax ~~holders~~returns ~~converted~~are filed. While ~~the~~there ~~debentures~~is ~~they~~an ~~owned~~element ~~into~~of ~~our~~uncertainty ~~common~~in ~~stock~~predicting inthe ~~accordance~~ outcome ~~with~~of ~~the~~tax ~~indenture~~audits, ~~governing~~we believe that the ~~debentures.~~recorded Intax ~~total,~~assets ~~$34.0~~and ~~million~~liabilities in are ~~debentures~~appropriately ~~were~~stated ~~converted~~based inon ~~these~~our ~~transactions~~analyses ~~and~~of ~~approximately~~probable ~~1.9~~outcomes, ~~million~~including ~~shares~~ interest ofand ~~common~~other ~~stock~~potential ~~were issued~~adjustments. Our Astax aassets ~~result~~and liabilities ofare ~~these~~adjusted ~~transactions,~~based weon ~~paid approximately~~the ~~$900,000~~most incurrent ~~prepaid~~facts ~~interest~~and ascircumstances, including anthe ~~incentive~~progress ~~for~~of ~~conversion~~audits, ~~and~~case ~~wrote-off approximately $600~~law,~~000~~ inemerging ~~deferred~~legislation ~~debenture-related~~and interpretations; ~~costs~~any ~~for~~adjustments aare ~~total~~included ~~current period~~in ~~expense~~the ofeffective ~~approximately~~tax ~~$1.5~~rate ~~million~~in the current period.

~~Revolving~~Results Of ~~Credit~~Operations ~~Facility~~For The Nine Months Ended September 30, 2007 Compared To The Nine Months Ended September 30, 2006

OnMedical Premiums. ~~March~~The 3,increase ~~2003,~~in wemedical ~~entered~~premiums ~~into~~for a2007 ~~$65~~reflects a 6.03% ~~million~~increase ~~revolving credit~~in ~~facility,~~commercial ~~which~~member ~~replaced~~months. This ~~our~~increase ~~amended~~is attributed ~~and~~to ~~restated~~in-case ~~credit~~growth, ~~facility.~~movement ~~The facility~~from ~~was~~self-insured ~~set~~plans to ~~expire~~our oncommercial products ~~April~~and 30other new accounts, ~~2006.~~which ~~Effective~~was ~~October~~partially ~~19,~~offset ~~2004~~by 11,000 ~~the~~commercial ~~facility~~ member ~~was~~terminations ~~amended~~effective toJanuary ~~extend~~1, ~~the~~2007 ~~maturity~~from tothree ~~December~~large ~~31,~~employer groups. The ~~2009,~~ increase ~~the availability~~in tomedical ~~$100.0~~premiums ~~million~~for ~~and~~2007 ~~reduce~~also ~~the~~includes ~~interest rate~~a 3.9% ~~Effective~~increase ~~June~~in ~~24, 2005~~Medicaid wemember ~~elected~~months toand a 0.1% increase ~~the~~in ~~aggregate~~Medicare ~~commitments~~HMO member ofmonths ~~the~~as ~~facility~~well toas $~~140~~83.0 5 million. ~~The~~in ~~current~~medical ~~interest~~premiums ~~rate~~related isto ~~LIBOR~~our Enhanced ~~plus~~Plan ~~1.2%.~~that ~~The~~was ~~facility~~effective isJanuary ~~available for~~1, ~~general~~2007. This ~~corporate~~was ~~purposes~~partially offset ~~and~~by ata ~~June~~$24.6 ~~30,~~million ~~2005,~~decrease wein ~~did~~medical ~~not~~premiums ~~have~~related ~~an outstanding~~to ~~balance~~our ~~under the facility~~Basic Plan.

~~The credit facility is secured by guarantees by certain of~~Commercial ~~our~~ premium ~~subsidiaries~~rates ~~and~~for arenewing ~~first~~commercial ~~priority~~groups ~~perfected~~increased ~~security~~approximately ~~interest~~6.1% ~~in: (i) all of~~while the ~~capital~~overall ~~stock~~recorded ofper ~~each~~member ofper ~~our~~month ~~unregulated,~~revenue ~~material domestic subsidiaries (direct or indirect) as well as all of the capital stock of certain regulated~~increase, ~~material~~ ~~domestic~~including ~~subsidiaries;~~new and ~~(ii) all other present and future assets and~~ ~~properties~~ continuing ~~of ours and those of our subsidiaries that guarantee our credit agreement obligations (including~~business, ~~without~~was ~~limitation,~~approximately ~~accounts receivable~~3.8%, ~~inventory,~~ ~~real~~net ~~property,~~of ~~equipment,~~changes ~~contracts, trademarks, copyrights, patents, license rights and general intangibles) subject,~~ in ~~each case, to the exclusion~~ ~~of the capital stock of CII and certain other exclusions~~ benefits.

~~The revolving credit facility has covenants that limit our~~Professional ~~ability~~ Fees. ~~and~~The ~~the~~increase ~~ability of our subsidiaries to dispose of assets, incur indebtedness, incur other liens, make investments, loans or advances, make acquisitions, engage~~ in ~~mergers~~professional orfees ~~consolidations,~~primarily ~~make~~resulted ~~capital expenditures and~~from ~~otherwise~~ increased ~~restrict~~visits ~~certain corporate activities. Under the most recent amendment, based on us exceeding a certain covenant leverage ratio requirement, our ability~~ to ~~pay dividends, repurchase~~ our ~~common~~clinical ~~stock and prepay other debt is unlimited provided that we can still maintain the required ratios after such transaction or any borrowing incurred as a result of such transaction~~subsidiaries. ~~In addition, we are required to comply with specified financial ratios as set forth in the credit agreement. We believe that we are in compliance with all covenants of the credit agreement.~~

~~Sierra~~Investment and ~~Share~~Other ~~Repurchases~~Revenue. The decrease in investment and other revenue primarily resulted from a decrease in revenue related to our administrative services subsidiary. See Note 5, "Investments", in the Notes to Condensed Consolidated Financial Statements.

~~From~~Medical Expenses. Our ~~January~~medical 1,care ~~2005~~ratio ~~through~~increased ~~June~~to ~~30,~~83.0% from ~~2005,~~77.9%. The weincrease ~~purchased 800,000~~is ~~shares~~mainly ofdue ~~our~~to ~~common~~estimated ~~stock,~~losses infor the full ~~open~~year ~~market~~of or2007 ~~through~~from ~~negotiated transactions,~~our ~~for~~Enhanced ~~$50.9~~Plan ~~million~~recorded atin anthe ~~average~~year ~~cost~~and ~~per~~the termination ~~share~~ of ~~$63.57.~~our ~~On December~~HCA 7,contract ~~2004 and again~~ on ~~May~~December 2431, ~~2005, our Board of Directors authorized us to purchase an~~ 2006.

We incurred capitation expenses with non-affiliated providers of $99.8 million and $99.9 million, or 8.5% and 10.2% of our total medical expenses for 2007 and 2006, respectively. Also included in medical expenses are the operating expenses of our medical provider subsidiaries and certain claims-related administrative expenses, which accounted for 25.3% and 26.0% of our total medical expenses for 2007 and 2006, respectively.

General and Administrative Expenses. G&A expenses increased primarily due to costs associated with our pending merger with UnitedHealth Group, premium taxes, brokers' fees and our new Enhanced Plan. As a percentage of medical premiums, G&A expenses were 11.7% for 2007, compared to 12.5% for 2006.

Interest Expense. Interest Expense increased due to prepaid interest and other costs associated with debenture holders converting $23.3 million of our senior convertible debentures during 2007 and an increase in the average balance of our credit facility during 2007 compared to 2006, which resulted from a significant repurchase of shares in the fourth quarter of 2006. At September 30, 2007, we had nothing outstanding on our credit facility.

Provision for Income Taxes. Our effective tax rate is lower than the statutory tax rate primarily due to tax-preferred investment income and the recognition of previously unrecognized tax benefits associated with a change in accounting method for a subsidiary, Health Plan of Nevada, Inc., which was approved by the Internal Revenue

~~additional $50.0 million worth of our common stock. At June 30,~~Table ~~2005, $70.6 million was still available under the Board~~ of ~~Directors' authorized plan.~~Contents

~~Our~~Service in ~~revolving~~the ~~credit~~third ~~facility,~~quarter asof ~~amended, currently allows for unlimited stock repurchases~~2007. See WeNote ~~have~~11, ~~repurchased~~"Income 17Taxes",~~000~~ ~~shares~~in ~~for $1.2~~the ~~million~~ Notes atto anCondensed ~~average~~Consolidated ~~cost~~Financial ofStatements ~~$72.00~~for ~~subsequent~~further ~~to June 30, 2005 through July~~discussion ~~25,~~ of our ~~2005~~income taxes.

Liquidity And Capital Resources

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

	Nine Months Ended September 30,
	2007			2006
	(In thousands)
Sources of cash:
Cash provided by operating activities	$	51,161		$	93,903
Purchase of investments, net of proceeds		34,832			11,500
Exercise of stock in connection with stock plans		6,358			14,063
Other		4,433			11,445
Total cash sources		96,784			130,911

Uses of cash:
Purchase of treasury stock		(21,081	)		(127,780	)
Payment on debt and capital leases		(78,494	)		(82	)
Other		(2,967	)		(13,183	)
Total cash uses		(102,542	)		(141,045	)
Net decrease in cash	$	(5,758	)	$	(10,134	)

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

Cash flows from operating activities decreased to $51.2 million from $93.9 million during 2006. This decrease is mostly due to the timing of tax payments and a $19.3 million decrease in operating cash flows from our PDP plans during 2007 compared to 2006, which was primarily related to the timing of PDP activity during the year and operating losses related to our new enhanced PDP product. See Medical Expenses above for more details. We continue to have negative cash flow related to our Basic Plan due to the timing of reimbursement from CMS for our reimbursable low-income subsidy and reinsurance. These costs should be fully reimbursed after CMS performs its year-end reconciliation, which is expected to be in the third quarter following the plan year. We have received the reconciliation for the 2006 plan year and expect to receive final payment in the fourth quarter of 2007. We received an interim payment from CMS of $36.5 million, which represented our projected cash shortfall through June 30, 2007; however, we expect a total funding deficit of approximately $50-$70 million for 2007. While we are receiving our full payments from CMS related to our Enhanced Plan, we expect to incur losses of $58.9 million during the year on this product. We believe that our operating cash flows and available cash reserves will be sufficient to cover any negative cash flows related to our Basic Plan and Enhanced Plan. See Note 4, "Premium Deficiency Reserves", in the Notes to Condensed Consolidated Financial Statements for further discussion of our Enhanced Plan. We have received the reconciliation for the 2006 plan year and received final payment in the fourth quarter 2007.

Net cash used for investing activities during 2007 included capital expenditures associated with the continued implementation of new computer systems, leasehold improvements on facilities, furniture and equipment and other capital purchases to support our growth. The net cash change in investments for the period was a decrease in investments due to the timing of purchasing and selling investments.

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Sierra Debentures

In March 2003, we issued $115.0 million aggregate principal amount of 2¼% senior convertible debentures due March 15, 2023. The debentures pay interest, which is due semi-annually on March 15 and September 15 of each year. Each $1,000 principal amount of debentures is convertible, at the option of the holders, into 109.3494 shares of our common stock before March 15, 2023 if (i) the market price of our common stock for at least 20 trading days in a period of 30 consecutive trading days ending on the last trading day of the preceding fiscal quarter exceeds 120% of the conversion price per share of our common stock; (ii) the debentures are called for redemption; (iii) there is an event of default with respect to the debentures; or (iv) specified corporate transactions have occurred. Beginning December 2003 and for each subsequent period, the market price of our common stock has exceeded 120% of the conversion price for at least 20 trading days in a period of 30 consecutive trading days. The conversion rate is subject to certain adjustments. This conversion rate represents a conversion price of $9.145 per share. Holders of the debentures may require us to repurchase all or a portion of their debentures on March 15 in 2008, 2013 and 2018 or upon certain corporate events including a change in control. In either case, we may choose to pay the purchase price of such debentures in cash or common stock or a combination of cash and common stock. We can redeem the debentures for cash beginning March 20, 2008.

During the first quarter of 2006, a debenture holder (holder) converted $500,000 in debentures for approximately 54,000 shares of common stock. During the third quarter of 2006, we entered into a privately negotiated transaction with a holder pursuant to which the holder converted $8.0 million in debentures for approximately 875,000 shares of common stock in accordance with the indenture governing the debentures. During the first quarter of 2007, we entered into one privately negotiated transaction with a holder pursuant to which the holder converted an aggregate of $21.7 million in debentures for approximately 2.4 million shares of common stock in accordance with the indenture governing the debentures. In addition, two other holders also converted $1.5 million in debentures for approximately 168,000 shares of common stock. At September 30, 2007, we had outstanding $20.2 million in aggregate principal amount of our 2¼% senior convertible debentures due March 15, 2023.

Revolving Credit Facility

On March 3, 2003, we entered into a revolving credit facility. Effective June 26, 2006, this facility was amended to extend the expiration from December 31, 2009 to June 26, 2011, increase the availability from $140.0 million to $250.0 million and reduce the drawn and undrawn fees. The current incremental borrowing rate is LIBOR plus 0.60%. The facility is available for general corporate purposes and at September 30, 2007, we had nothing outstanding on this facility.

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

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

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

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Sierra Share Repurchase Program

From January 1, 2007 through September 30, 2007, we purchased 585,000 shares of our common stock in the open market for $21.1 million at an average cost per share of $36.04. Since the repurchase program began in early 2003 and through September 30, 2007, we purchased, in the open market or through negotiated transactions, 29.2 million shares, adjusted for the two for one stock split effective December 30, 2005, for $651.9 million at an average cost per share of $22.29. On January 25, 2007, our Board of Directors authorized an additional $50.0 million in share repurchases. At September 30, 2007, $53.1 million was still available under the Board of Directors' authorized plan. The repurchase programs have no stated expiration date. Our revolving credit facility, as amended, currently allows for unlimited stock repurchases based on meeting a certain covenant ratio; however, on March 11, 2007 we halted our repurchase program pending the UnitedHealth Group merger.

Statutory Capital and Deposit Requirements

Our HMO and insurance subsidiaries are required by state regulatory agencies to maintain certain deposits and must also meet certain net worth and reserve requirements. The HMO and insurance subsidiaries had ~~restricted~~ restricted assets on deposit in various states totaling $16.75 million at ~~June~~ September 30, ~~2005~~ 2007. The HMO and insurance subsidiaries must also meet requirements to ~~maintain~~ maintain minimum stockholders' equity, on a statutory basis, as well as ~~minimum~~ minimum risk-based capital requirements, which are determined annually. In We ~~conjunction~~ surrendered ~~with~~our ~~the~~HMO ~~exit~~license ~~from~~in ~~the~~ Texas ~~HMO~~during ~~health care market,~~ the ~~Texas Department~~year ~~of Insurance approved a plan of withdrawal~~ and ~~Texas~~are ~~Health~~no ~~Choice, L.C.,~~longer ~~is now~~ required to maintain ~~deposits~~a ~~of $1~~deposit.~~5 million and net worth of at least $3.5 million.~~ We believe we are in material compliance with our regulatory requirements.

Of the $~~112~~53.42 million in cash and cash equivalents held at ~~June~~ September 30, ~~2005~~2007, $6648.4 9 million was designated for use only by the regulated subsidiaries. Amounts are available for transfer to the ~~holding~~ parent company from the HMO and insurance subsidiaries only to the extent that they can be remitted in accordance with the terms of existing management agreements and by dividends. The ~~holding~~parent company will not receive dividends from its regulated ~~subsidiaries~~ subsidiaries if such dividend payment would cause a violation of statutory net worth and reserve requirements.

Obligations and Commitments

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

For additional information regarding our estimated contractual obligations and commitments at December 31, ~~2004~~2006, see "Contractual Obligations, Commitments and Off-Balance ~~Commitments~~Sheet Arrangements" included in the "Liquidity and ~~Capital~~ Capital Resources" section ~~included~~of in our ~~2004~~2006 Annual Report on Form 10-K filed with the Securities and Exchange Commission on ~~March~~February 1427, ~~2005~~2007.

Recently Issued Accounting Standards

In ~~December 2004~~ June 2006, the ~~Financial~~FASB ~~Accounting Standards Board~~ issued ~~Statement~~FASB ofInterpretation ~~Financial Accounting Standards~~ No. ~~123 (revised 2004)~~48, ~~"Share-Based~~ ~~Payment~~"Accounting ~~(SFAS~~for ~~123R),~~Uncertainty in Income ~~which~~Taxes ~~replaces~~- ~~SFAS~~an ~~No.~~Interpretation ~~123~~of ~~and supercedes~~FASB ~~APB~~Statement ~~Opinion~~ No. ~~25,~~ 109"~~Accounting~~ ~~for Stock Issued to~~(FIN ~~Employees~~ 48)." FIN ~~SFAS~~48 ~~123R~~clarifies ~~requires~~the ~~all~~accounting ~~share-based~~for ~~payments~~uncertainty toin ~~employees,~~income taxes ~~including~~ recognized ~~grants~~in ofan ~~employee~~enterprise's ~~stock~~financial ~~options,~~statements ~~to be recognized~~ in ~~the~~accordance ~~financial~~with Statement ~~statements~~ of ~~based~~Financial onAccounting ~~their~~Standards ~~fair values~~No. ~~The~~109, ~~pro~~"Accounting ~~forma~~for ~~disclosures~~Income ~~previously~~Taxes". ~~permitted~~FIN ~~under~~48 ~~SFAS~~prescribes ~~123~~a norecognition ~~longer~~threshold ~~will~~and bemeasurement ~~an alternative to financial statement~~attribute ~~recognition.~~ for ~~Under SFAS 123R, we must determine~~ the ~~appropriate fair value model~~ to financial bestatement ~~used~~recognition ~~for~~and ~~valuing~~measurement ~~share-based~~of ~~payments,~~a ~~the~~tax ~~amortization~~position ~~method~~taken ~~for~~or ~~compensation~~ expected ~~cost and the transition method~~ to be ~~used~~taken atin ~~date~~a oftax ~~adoption~~return. ~~The transition~~FIN ~~methods~~48 ~~include~~also ~~prospective~~provides ~~and~~guidance ~~retroactive adoption options. The~~on ~~prospective~~ derecognition, ~~method~~classification, ~~requires~~interest ~~that~~and ~~compensation~~penalties, ~~expense~~accounting bein ~~recorded for all~~interim ~~unvested~~ periods, ~~stock~~disclosure, ~~options~~ and ~~restricted~~transition. On ~~stock~~January at1, ~~the~~2007, ~~beginning~~we ~~of the first~~adopted ~~quarter~~ FIN ~~of adoption of SFAS 123R~~48. ~~The retroactive methods would record~~ Applying ~~compensation expense for all unvested stock options and restricted stock~~ the ~~beginning~~ provisions ~~with~~of ~~the first period restated. Prior~~ FIN

2628

~~periods may be restated either~~Table as of ~~the beginning of the year of adoption or for all periods presented.~~Contents

~~On April 14, 2005, the Securities and Exchange Commission~~48 ~~announced~~ to ~~that the effective date of SFAS 123R would be postponed until January~~all 1, tax ~~2006,~~positions ~~for~~resulted ~~calendar~~in ~~year~~a ~~companies.~~cumulative Weeffect ~~anticipate~~adjustment ~~adopting~~to ~~the~~beginning ~~prospective~~retained ~~method~~ earnings ~~of SFAS 123R~~ in ~~2006 and expect that~~ the ~~impact~~amount inof ~~2006 will reduce our net income by approximately~~ $24.~~5 to $~~3.0 million. For ~~based~~more information on the ~~options~~ ~~outstanding~~ adoption as of ~~June~~FIN 3048, ~~2005~~see ~~with~~Note ~~vesting~~11, ~~subsequent~~"Income Taxes", in the Notes to ~~December~~Condensed Consolidated ~~31,~~Financial ~~2005~~Statements.

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

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

Ratings

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

A.M. Best Company, Inc.

Fitch Ratings

Standard & Poor's Corp.

A.M. Best Company, Inc. (1)

Fitch Ratings (2)

Rating

Ranking

Rating

Ranking

~~Rating~~

~~Ranking~~

Financial Strength Rating:

Financial strength rating:

HMO and health and life insurance subsidiaries

B++ ~~Very~~ Good

5th of 16

~~BBB+~~A- ~~Good~~Strong

~~8th~~7th of 2423

~~n/a~~

Issuer Credit Ratings:

Issuer credit ratings:

HMO and health and life insurance subsidiaries

bbb+ ~~Very Good~~Adequate

~~9th~~8th of 22

n/a

~~n/a~~

Parent Company

bb Speculative

12th of 22

BB+ Speculative

11th of 24

n/a

Parent company

bb+ Speculative

11th of 22

BBB Good

9th of 23

Counterparty Credit Rating

n/a

BB Speculative

12th of 22

Senior convertible debentures

bb+ Speculative

11th of 22

BBB- Investment Grade

10th of 23

Senior Convertible Debentures

bb Speculative

12th of 22

BB+ Speculative

11th of 24

BB Speculative

12th of 22

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

		Standard & Poor's Corp. ⁽³⁾
	Rating		Ranking

Counterparty credit rating	BB+ Speculative		11th of 22

Senior convertible debentures	BB+ Speculative		11th of 22

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

~~We have a 2005 capital budget of approximately $30 million and are also limited in the amount of capital expenditures we can make by our revolving credit facility.~~ The ~~2005 planned expenditures are primarily for the~~ ~~preliminary~~ financial ~~construction~~strength ~~costs~~ratings ofreflect ~~a new medical clinic,~~ the ~~purchase~~opinion of ~~computer hardware~~each ~~and~~rating ~~software,~~agency ~~furniture~~on ~~and equipment and other normal capital requirements. Our liquidity needs over the next 12 months will primarily be for the capital items noted above. We believe that~~ our ~~existing working capital,~~ operating ~~cash~~performance ~~flow~~ and ~~amounts~~ability ~~available under our credit facility should be sufficient~~ to ~~fund~~meet ~~our~~obligations ~~capital expenditures and liquidity needs. Additionally, subject~~ to ~~unanticipated cash requirements~~policyholders, ~~we believe that our existing working~~and ~~capital~~ are not ~~and~~evaluations ~~operating~~directed ~~cash~~toward ~~flow~~the ~~should~~protection ~~enable~~of usinvestors toin ~~meet~~ our ~~liquidity~~common ~~needs on~~stock a or ~~long-term~~senior ~~basis~~convertible debentures.

Table of Contents

Inflation

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

care providers and other health care cost containment measures including member co-payments. There can be no assurance, however, that in the future, our ability to manage medical costs will not be negatively impacted by items such as technological advances, competitive pressures, applicable regulations, increases in pharmacy costs, utilization changes and catastrophic items, which could, in turn, result in medical cost increases equaling or exceeding premium increases.

Government Regulation

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

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

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

In addition to changes in existing laws and regulations, we are subject to audits, investigations and enforcement actions. These include, but are not limited to, possible government actions relating to ERISA, the Federal Employees Health Benefit Plan, the TRICARE contract, federal and state fraud and abuse laws and laws relating to utilization management and the delivery and payment of health care. In addition, our Medicare business is subject to Medicare regulations promulgated by CMS. Violation of government laws and regulations may result in an assessment of damages, civil or criminal fines or penalties, or other sanctions, including exclusion from participation in government programs. In addition, disclosure of any adverse investigation or audit results or sanctions could negatively affect our reputation in various markets and make it more difficult for us to sell our products and services.

In addition to the items described above, we urge you to review carefully the section "Risk Factors" in Part 1, Item 1 of our 2004 Annual Report on Form 10-K for a more complete discussion of the risks associated with an investment in our securities. See "Note on Forward-Looking Statements and Risk Factors" in Part 1, Item 1.

Critical Accounting Policies and Estimates

~~Our~~We prepared our condensed consolidated financial statements ~~have been prepared~~ in conformity with accounting principles generally accepted in the United States of America. In preparing these ~~financial~~condensed consolidated financial statements, we are required to make judgments, assumptions and estimates, which we believe are reasonable and prudent based on the available facts and circumstances. These judgments, assumptions and estimates affect certain of our revenues and expenses and their related balance sheet accounts and disclosure of our contingent assets and liabilities. We base our assumptions and estimates primarily on historical experience and trends and factor in known and projected trends. On an on-going basis, we re-evaluate our selection of assumptions and the method of calculating our estimates. Actual results, however, may materially differ from our calculated estimates and this difference would be reported in our current operations. Our critical accounting policies and estimates have been reviewed by the Audit Committee of our Board of Directors.

28For a more detailed description of all our critical accounting policies and estimates, see Part II, Item 7 of our 2006 Annual Report on Form 10-K. As of September 30, 2007, our critical accounting policies have not changed from those described in our 2006 Annual Report on Form 10-K. For a more extensive discussion of our accounting policies, see Note 2, "Summary of Significant Accounting Policies", in the Notes to the Consolidated Financial Statements in our 2006 Annual Report on Form 10-K.

contingent assets and liabilities. We base our assumptions and estimates primarily on historical experience and trends and factor in known and projected trends. On an on-going basis, we re-evaluate our selection of assumptions and the method of calculating our estimates. Actual results, however, may materially differ from our calculated estimates and this difference would be reported in our current operations. Our critical accounting policies and estimates have been reviewed by the Audit Committee of our Board of Directors.30

~~For a more detailed description of all our critical~~Table ~~accounting policies and estimates, see Part II, Item 7~~ of our 2004 Annual Report on Form 10-K. As of June 30, 2005, our critical accounting policies have not changed from those described in our 2004 Annual Report on Form 10-K. For a more extensive discussion of our accounting policies, see Note 2, Summary of Significant Accounting Policies, in the Notes to the Consolidated Financial Statements in our 2004 Annual Report on Form 10-K.Contents

~~Membership~~Item 3. Quantitative and Qualitative Disclosures About Market Risk

~~HMO:~~At September 30, 2007, we had unrealized holding losses on available for sale investments of $1.4 million, net of tax, compared to unrealized holding losses of $1.9 million, net of tax, at December 31, 2006. We believe that changes in market interest rates, resulting in unrealized holding gains or losses, should not have a material impact on future earnings or cash flows, as it is unlikely that we would need or choose to substantially liquidate our investment portfolio.

~~Commercial~~At September 30, 2007, we had outstanding $20.2 million in aggregate principal amount of our 2¼% senior convertible debentures due March 15, 2023. The debentures are fixed rate, and therefore, the interest expense on the debentures will not be impacted by future interest rate fluctuations. The borrowing rate on our revolving credit facility is currently LIBOR plus 0.60%. At September 30, 2007, we had nothing drawn on this facility.

~~Medicare~~At September 30, 2007, we had $67.3 million invested in trust deed mortgage notes and real estate joint ventures. Trust deed mortgage notes and real estate joint ventures are classified and accounted for as other investments. Our investments in trust deed mortgage notes are with numerous independent borrowers and are secured by real estate in several states. All of our trust deed mortgage notes require interest only payments with a balloon payment of the principal at maturity. Loan to value ratios for these investments are typically based on appraisals or other market data obtained at the time of loan origination and may not reflect subsequent changes in value estimates. As a result, there may be less security than anticipated at the time the loan was originally made. If the values of the underlying assets decrease and default occurs, we may not recover the full amount of the loan or any interest due. Our investments in real estate joint ventures consist of three independent projects and are secured by real estate in California, Nevada, and Utah. We evaluate our investments in trust deed mortgage notes and real estate joint ventures for recoverability on a quarterly basis, or more frequently if impairment indicators exist. Based on our most current assessment, we believe that no adjustments are required to the September 30, 2007 carrying value of our investments in trust deed mortgage notes and real estate joint ventures. However, if the real estate market continues to deteriorate, impairment adjustments may be required in future periods.

~~Medicaid~~Item 4. Controls and Procedures

Managed indemnity

Medicare supplement

Administrative services

Subtotal

TRICARE eligibles

Total Membership

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

At June 30, 2005, we had unrealized holding losses on available for sale investments of $395,000, net of tax, compared to unrealized holding losses of $245,000, net of tax, at December 31, 2004. We believe that changes in market interest rates, resulting in unrealized holding gains or losses, should not have a material impact on future earnings or cash flows, as it is unlikely that we would need or choose to substantially liquidate our investment portfolio.

At June 30, 2005, we had outstanding $81.0 million in aggregate principal amount of our 2¼% senior convertible debentures due March 15, 2023. The debentures are fixed rate, and therefore, the interest expense on the debentures will not be impacted by future interest rate fluctuations. The interest rate on our revolving credit facility is currently LIBOR plus 1.2%. At June 30, 2005, we do not have an outstanding balance on this facility.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

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

Change in Internal Control over Financial Reporting

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

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

ITEM 1. LEGAL PROCEEDINGS

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

Beginning in 1999, a series of class action lawsuits were filed against many major firms in the health benefits business. We have not been named as a defendant in these lawsuits. A multi-district litigation panel has consolidated for pre-trial discovery some of these cases in the United States District Court for the Southern District of Florida, Miami Division. In the lead case, known as Shane, the amended complaint alleges multiple violations under the Racketeer Influenced and Corrupt Organizations Act (RICO). The suit seeks injunctive, compensatory and equitable relief as well as restitution, costs, fees and interest payments. Discovery remains ongoing. On April 7, 2003, the United States Supreme Court determined that certain claims against certain defendants should be arbitrated. Subsequent lower court rulings have further resolved which of the plaintiffs' claims are subject to arbitration. In 2004, the Court of Appeals for the Eleventh Circuit upheld a district court ruling certifying a plaintiff class in the Shane case. The district court has recently determined to bifurcate the case, holding a trial phase limited to liability issues, and a second, if necessary, regarding damages. A trial date has been set for January 2006. Plaintiffs in the Shane proceeding have stated their intention to introduce evidence at trial concerning Sierra and other parties not named as defendants in the litigation. Two of the defendants, Aetna Inc. and Cigna Corporation, have entered into settlement agreements, which have been approved by the district court. Two of the other defendants, Wellpoint Inc. and Health Net Inc., have recently entered into settlement agreements whose approval is currently pending before the district court.

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

~~(c) Below, is a summary~~ Table of ~~stock repurchases for the six months ended June 30, 2005. See Note 5 of our Notes to Condensed Consolidated Financial Statements for information regarding our stock repurchase plan.~~Contents

(In thousands, except per share data) Period	Total NumberOf SharesRepurchased (1)	Average PricePaid Per Share	Total Number OfShares Purchased AsPart Of PubliclyAnnounced Plan OrProgram	ApproximateDollar Value OfShares ThatMay Yet BePurchased UnderThe Plan (2)
Beginning approximate dollar value of shares that may yet be purchased				$71,444
January 1, 2005 - January 31, 2005	42	$53.21	42	69,183
February 1, 2005 - February 28, 2005	79	58.29	79	64,604
March 1, 2005 - March 31, 2005	57	61.61	57	61,093
April 1, 2005 - April 30, 2005	80		80	56,205
May 1, 2005 - May 31, 2005	474	6	474	75,148
June 1, 2005 - June 30, 2005	68		68	70,602

Part II. Other Information

(Item 1). ~~Certain~~Legal ~~repurchases were made pursuant to a 10b5-1 plan.~~Proceedings

~~(2)~~Litigation and OnLegal ~~May~~Matters. ~~20,~~Although ~~2004,~~we ~~the~~have ~~Company's~~not ~~Board~~been ofsued, ~~Directors~~we ~~authorized~~were ~~the~~identified ~~Company~~in discovery tosubmissions ~~purchase~~in ~~$70.0~~pending ~~million~~class ofaction ~~its~~litigation ~~common~~against ~~stock.~~major Onmanaged care ~~December 7~~companies, ~~2004,~~as ~~the~~having ~~Company's~~allegedly ~~Board~~participated ofin ~~Directors~~an ~~authorized~~unlawful ~~the Company~~ conspiracy to improperly ~~purchase an additional $50.0 million of its common stock. On May 24~~deny, ~~2005,~~diminish ~~the~~or ~~Company's~~delay ~~Board~~payments ~~of Directors authorized the Company~~ to ~~purchase an additional $50~~physicians.0 ~~million~~In ofRe: ~~its~~Managed ~~common stock. The repurchase program has no stated expiration date~~Care Litigation, ~~and~~MDL ~~commenced~~No. ~~after~~1334 ~~the previously authorized share repurchase was completed~~(S.D.Fl.).

~~(d)~~Beginning in ~~Below~~1999, is a ~~summary~~series of ~~2¼%~~class ~~senior~~action ~~convertible~~lawsuits ~~debenture~~were ~~repurchases~~filed ~~for~~against many major firms in the ~~six~~health ~~months~~benefits ~~ended~~business ~~June~~alleging 30an unlawful conspiracy to deny, diminish ~~2005~~or delay payments to physicians. ~~See~~We ~~Note~~have 4not been named as a defendant in these lawsuits. A multi-district litigation panel has consolidated some of these ~~our~~cases ~~Notes~~in tothe ~~Condensed~~United ~~Consolidated~~States ~~Financial~~District ~~Statements~~Court for ~~information~~the ~~regarding~~Southern ~~our~~District ~~senior~~of Florida, ~~convertible~~Miami ~~debentures~~Division. In the lead case, known as Shane, the amended complaint alleges multiple violations under the Racketeer Influenced and Corrupt Organizations Act (RICO). The suit seeks injunctive, compensatory and equitable relief as well as restitution, costs, fees and interest payments. On April 7, 2003, the United States Supreme Court determined that certain claims against certain defendants should be arbitrated.

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

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

~~Total Dollar~~We are subject ~~Value OfDebentures~~to ~~Purchased AsPart~~other various claims and litigation in the ordinary course of Ofbusiness. Such ~~PubliclyAnnounced~~litigation ~~Plan~~includes, ~~OrProgram~~but is not limited to, claims of medical malpractice, claims for coverage or payment for medical services rendered to HMO and other members and claims by providers for payment for medical services rendered to HMO and other members. Some litigation may also include claims for punitive or other damages that are not covered by insurance. These actions are in various stages of litigation and some may ultimately be brought to trial.

~~ApproximateDollar~~For all claims ~~Value~~that ~~OfDebentures~~are ~~ThatMay~~considered ~~Yet~~probable and for which the amount of loss can be ~~BePurchased UnderThe~~reasonably ~~Plan~~estimated, we accrued amounts we believe to be appropriate, based on information presently available. With respect to certain pending actions, we maintain commercial insurance coverage with varying deductibles for which we maintain estimated reserves for our self-insured portion based upon our current assessment of such litigation. Due to recent unfavorable changes in the commercial insurance market, we have, for certain risks, purchased coverage with higher deductibles and lower limits of coverage. In the opinion of management, based on information presently available, the amount or range of any potential loss for certain claims and litigation cannot be reasonably estimated or is not considered probable. However, the ultimate resolutions of these pending legal proceedings are not expected to have a material adverse effect on our financial condition.

~~January~~On March 19, 12007, ~~2005~~a -purported ~~January~~class 31action complaint, ~~2005~~styled Edward Sara, on behalf of himself and all others similarly situated v. Sierra Health Services, Inc., Anthony M. Marlon, Charles L. Ruthe, Thomas Y. Hartley, Anthony L. Watson, Michael E. Luce and Albert L. Greene, was filed in the Eighth Judicial District Court for the State of Nevada in and for the County of Clark. The complaint names us and each of our directors as defendants (collectively, the "defendants"), and was filed by a purported stockholder of ours. The complaint alleges, among other things, that the defendants breached and/or aided the other defendants’ breaches of their fiduciary duties of

~~February 1, 2005 - February 28, 2005~~32

~~March~~Table of ~~1, 2005 - March 31, 2005~~Contents

~~April~~loyalty, due 1care, ~~2005~~independence, good faith and fair dealing in connection with the merger contemplated with UnitedHealth Group, the defendants breached their fiduciary duty to secure and obtain the best price reasonably available for us and our shareholders, and the defendants are engaging in self-dealing ~~April~~and 30unjust enrichment. The complaint seeks, ~~2005~~among other relief, (i) an injunction prohibiting the defendants from consummating the merger unless and until we adopt and implement a procedure or process to obtain the highest possible price for shareholders and (ii) the imposition of a constructive trust upon any benefits improperly received by the defendants as a result of the alleged wrongful conduct.

~~May~~On June 4, 12007, ~~2005~~we -and ~~May~~the 31defendants reached an agreement in principle to settle the lawsuit. As part of the settlement, ~~2005~~the defendants deny all allegations of wrongdoing, and we agreed to make certain additional disclosures in connection with the merger. The settlement will be subject to certain conditions, including court approval following notice to members of the proposed settlement class and consummation of the merger. If finally approved by the court, the settlement will resolve all of the claims that were or could have been brought on behalf of the proposed settlement class in the action being settled, including all claims relating to the merger, fiduciary obligations in connection with the merger, negotiations in connection with the merger and any disclosure made in connection with the merger. In addition, in connection with the settlement, the parties have agreed that, subject to approval of the court, we will pay plaintiffs’ counsel attorneys’ fees and expenses in the amount of $485,000. The merger may be consummated prior to final court approval of the settlement. The settlement will not affect the amount of merger consideration to be paid in the merger or any other provision of the merger agreement.

~~54.67 shares of common~~Item ~~stock~~1A. ~~for~~Risk ~~each $1,000 principal amount of debentures, $338,000 in cash as an incentive for conversion and accrued and unpaid interest thereon~~Factors

~~June~~As of September 130, ~~2005~~2007, we have additional risk factors that are not included in those described in our 2006 Annual Report on Form 10-K. ~~June~~For 30a detailed discussion of all other risks associated with an investment in our securities, see ~~2005~~"Risk Factors" in Part 1, Item 1A of our 2006 Annual Report on Form 10-K.

5There can be no assurance that the pending merger with UnitedHealth Group will be completed.

~~ITEM~~Our pending 3merger with UnitedHealth Group is subject to the expiration of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. We ~~DEFAULTS~~understand ~~UPON~~that ~~SENIOR~~the ~~SECURITIES~~American Medical Association, Consumers for Health Care Choices and the American Hospital Association have all contacted the Department of Justice and expressed their opposition to the merger on antitrust grounds. While we and UnitedHealth Group expect to have the waiting period expire in the ordinary course, we cannot grant assurances that the Department of Justice will not impose conditions on the completion of the merger or require changes in the transaction, which could result in the conditions to the merger not being satisfied.

~~None~~Whether or not the proposed merger with UnitedHealth Group is completed, the announcement and pendency of the proposed merger could cause disruptions in our businesses, which could have a material adverse effect on our operating results, financial condition and cash flows.

32Whether or not the proposed merger with UnitedHealth Group is completed, the announcement and pendency of the proposed merger could cause disruptions in our businesses. Specifically:

~~ITEM~~• 4.current ~~SUBMISSION~~and OFprospective ~~MATTERS~~employees TOmay Aexperience ~~VOTE~~uncertainty OFabout ~~SECURITY~~their ~~HOLDERS~~future roles with the combined company, which might adversely affect our ability to retain key managers and other employees;

~~Sierra~~• ~~held~~the ~~its~~merger ~~annual~~agreement ~~meeting~~with ofUnitedHealth ~~stockholders~~Group imposes certain restrictions on ~~May~~ ~~24,~~the ~~2005~~operations inof ~~Las~~our ~~Vegas,~~business ~~Nevada.~~until completion of the merger; and

~~The~~• ~~following~~current ~~persons~~or ~~were~~prospective ~~elected~~customers ~~directors~~may ~~for two-year~~experience ~~terms~~uncertainty ~~ending~~about inthe ~~2007~~consequences ~~based~~of on the ~~voting~~merger ~~results~~to ~~below:~~them resulting in possible loss of their business.

~~Name~~Our actual ~~For~~experience for our Enhanced Plan offered in January 2007 has varied materially from the actuarial assumptions used to develop the plan design for our 2007 bid. As a result, based on our current best estimate we have a $22.1 million premium deficiency reserve at September 30, 2007 which was based on the most current available data. If the assumptions used in our estimate are incorrect, it could materially adversely affect our operating results, financial position and cash flows.

~~Withheld~~33

~~Thomas~~Table of ~~Y. Hartley~~Contents

24Our bid proposal for our Enhanced Plan was based upon actuarial assumptions developed by independent actuaries using their national database regarding membership characteristics,~~472~~ estimated drug utilization and other factors. These actuarial assumptions were considered reasonable based upon the facts and circumstances known at the time we submitted our bid to CMS. However,~~725~~ our claims experience to date has varied materially from the actuarial assumptions. As a result, we have a $22.1 million premium deficiency reserve at September 30, 2007 based on our best estimate of the most current available data. If the assumptions used in our estimate are incorrect, our operating results, financial position and cash flows for the remainder of 2007 could be further materially adversely affected.

~~868,319~~Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

~~Michael~~(c) EBelow, is a summary of stock repurchases for the nine months ended September 30, 2007. ~~Luce~~See Note 8, "Share Repurchases", of our Notes to Condensed Consolidated Financial Statements for information regarding our stock repurchase plan.

25,151,323

Period

Total Number

Of Shares

Repurchased (1)

Average

Price Paid

Per Share

Total Number

Of Shares Purchased

As Part Of Publicly

Announced Plan

Or Program

Approximate Dollar

Value Of Shares

That May Yet Be

Purchased Under

The Plan (2)

(In thousands, except per share data)

Beginning approximate dollar value of shares that may yet be purchased

24,142

January 1, 2007 – January 31, 2007

500

35.80

500

56,251

February 1, 2007 – February 28, 2007

37.45

53,070

March 1, 2007 – March 31, 2007

53,070

April 1, 2007 – April 30, 2007

53,070

May 1, 2007 – May 31, 2007

53,070

June 1, 2007 – June 30, 2007

53,070

July 1, 2007 – July 31, 2007

53,070

August 1, 2007 – August 31, 2007

53,070

September 1, 2007 – September 30, 2007

53,070

~~189,721~~(1) Repurchases were made pursuant to a 10b5-1 plan.

~~Anthony~~(2) MAt January 1, 2007, $24.1 ~~Marlon~~million remained available for purchase under previously approved plans. On January 25, M2007, our Board of Directors authorized an additional $50.D0 million in share repurchases. The repurchase program has no stated expiration date; however we have halted our repurchase program pending the UnitedHealth Group merger.

~~23,965,249~~34

~~1,375,995~~Table of Contents

~~Anthony~~(d) LBelow, is a summary of 2¼% senior convertible debenture conversions for the nine months ended September 30, 2007. ~~Watson~~See Note 6, "Long-Term Debt", of our Notes to Condensed Consolidated Financial Statements for information regarding our senior convertible debentures.

25,149,962

Period

Total Dollar Value Of Debentures Converted

Average Price

Paid Per

Debenture

Total Dollar Value

Of Debentures

Purchased

As Part Of Publicly

Announced Plan

Or Program

Approximate Dollar

Value Of Debentures

That May Yet Be

Purchased Under

The Plan

January 1, 2007 – January 31, 2007

21,720,000

109.35 shares of common stock for each $1,000 principal amount of debentures

none

February 1, 2007 – February 28, 2007

March 1, 2007 – March 31, 2007

1,536,000

109.35 shares of common stock for each $1,000 principal amount of debentures

none

April 1, 2007 – April 30, 2007

May 1, 2007 – May 31, 2007

June 1, 2007 – June 30, 2007

July 1, 2007 – July 31, 2007

August 1, 2007 – August 31, 2007

September 1, 2007 – September 30, 2007

~~191,082~~Item 3. Defaults Upon Senior Securities

~~The following persons' terms as directors continued after the meeting and end in 2006.~~ None

~~Name Albert L~~Item 4. Submission Of ~~Greene~~Matters ~~Erin~~To E.A ~~MacDonald~~Vote ~~William~~Of J.Security ~~Raggio Charles L. Ruthe~~Holders

~~The stockholders ratified the appointment of Deloitte & Touche LLP as the Company's independent auditors for the year ending December 31, 2005. The voting results were as follows:~~ None

			Broker
For	Against	Abstain	Non-votes
25,313,729	20,142	7,173	0

Item 5. Other Information

~~ITEM 5. OTHER INFORMATION~~ None

~~None~~Item 6. Exhibits

ITEM 6. EXHIBITS

(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.

(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.

33Table of Contents

~~SIGNATURES~~Signatures

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

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

Date: November ~~July 26~~6, ~~2005~~ 2007

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