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

FORM 10-Q

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

For Quarterly Period Ended June 30, 2005
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission File Number 1-8538

USHEALTH GROUP, INC.
(Exact Name of Registrant as Specified in its Charter)

DELAWARE	73-1165000
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification Number)
3100 Burnett Plaza, 801 Cherry Street, Unit 33, Fort Worth, Texas	76102
(Address of Principal Executive Offices)	(Zip Code)

Registrant's Telephone Number, including Area Code
(817) 878-3300

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

Yes             X                  No                    

Indicate, by check mark, whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).

 Yes                                  No            X     

Common Stock — Par value $0.01; 50,763,826 shares outstanding at August 2, 2005.

USHEALTH GROUP, INC.
INDEX TO FORM 10-Q

PART I — FINANCIAL INFORMATION		Page No.
Item 1 –	Financial Statements
	USHEALTH Group, Inc. Condensed Consolidated Balance Sheets at June 30, 2005 and December 31, 2004	3
	USHEALTH Group, Inc. Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2005 and 2004	4
	USHEALTH Group, Inc. Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three and Six Months Ended June 30, 2005 and 2004	5
	USHEALTH Group, Inc. Consolidated Statement of Changes in Stockholders' Equity for the Three and Six Months Ended June 30, 2005 and June 30, 2004	6
	USHEALTH Group, Inc. Condensed Consolidated Statements of Cash Flows for the Three and Six Months Ended June 30, 2005 and June 30, 2004	7
	Notes to Condensed Consolidated Financial Statements	8
Item 2 –	Management’s Discussion and Analysis of Financial Condition and Results of Operations
	General	15
	Business Overview	15
	Forward – Looking Statements	16
	Operating Results	17
	Financial Condition	20
	Liquidity, Capital Resources and Statutory Capital and Surplus	22
Item 3 –	Quantitative and Qualitative Disclosures About Market Risk	23
Item 4 –	Controls and Procedures	23
PART II — OTHER INFORMATION
Item 6 –	Exhibits	24

USHEALTH GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS

		June 30, 2005 (Unaudited)			December 31, 2004
Assets	(in thousands, except share data)
Investments:
Fixed Maturities:
Available-for-sale, at fair value (amortized cost $97,799
and $96,940)	$	100,504		$	99,729
Short-term investments		6,377			4,703
Other investments, at market value (cost $352 and $353)		352			388
Total Investments		107,233			104,820
Cash		1,357			1,041
Accrued investment income		1,339			1,348
Receivables from agents, net of allowance for doubtful
accounts of $3,654 and $3,601		2,626			3,498
Deferred policy acquisition costs, net		19,982			20,700
Property and equipment, net of accumulated depreciation
of $5,303 and $4,891		1,630			1,942
Other assets		5,277			6,759
Total Assets	$	139,444		$	140,108
Liabilities and Stockholders' Equity
Liabilities:
Policy liabilities and accruals:
Future policy benefits	$	53,091		$	53,493
Claim reserves		25,331			24,619
Total Policy Liabilities and Accruals		78,422			78,112
Accounts payable and other liabilities		10,694			10,778
Notes payable to bank		50			250
Notes payable to related party		16,724			16,228
Total Liabilities		105,890			105,368
Stockholders' Equity:
Common stock ($0.01 par value, 75,000,000 shares
authorized; 50,763,826 and 50,606,876 shares
issued and outstanding)		508			506
Capital in excess of par value		66,580			66,580
Accumulated other comprehensive income		2,705			2,824
Retained deficit		(36,239	)		(35,170	)
Total Stockholders' Equity		33,554			34,740
Total Liabilities and Stockholders' Equity	$	139,444		$	140,108

See the Notes to the Condensed Consolidated Financial Statements.

USHEALTH GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

	Three Months Ended June 30,						Six Months Ended June 30,
		2005			2004			2005			2004
	(in thousands, except per share data)
Revenues:
Premiums:
First-year premium	$	3,027		$	3,995		$	6,369		$	8,002
Renewal premium		17,440			19,043			35,425			38,829
Total premiums		20,467			23,038			41,794			46,831
Net investment income		1,373			1,329			2,743			2,731
Fee and service income		833			919			1,627			1,908
Other insurance revenues		320			481			671			967
Net realized loss on investments		(8	)		(3	)		(12	)		(5	)
Total revenues		22,985			25,764			46,823			52,432
Benefits, claims and expenses:
Benefits and claims		13,648			14,933			28,252			31,170
Change in deferred policy acquisition costs		345			68			717			311
Commissions		2,162			2,517			4,488			5,195
General and administrative expenses		5,365			5,104			10,915			10,402
Fee and service operating expenses		718			688			1,374			1,458
Taxes, licenses and fees		797			967			1,614			1,886
Interest expense on notes payable		269			253			532			505
Total expenses		23,304			24,530			47,892			50,927
(Loss) income from continuing operations before
income taxes		(319	)		1,234			(1,069	)		1,505
Federal income taxes		-			-			-			-
Net (loss) income from continuing operations		(319	)		1,234			(1,069	)		1,505
Loss from discontinued operations before income taxes		-			(185	)		-			(385	)
Federal income tax expense		-			-			-			-
Net loss from discontinued operations		-			(185	)		-			(385	)
Net (loss) income		(319	)		1,049			(1,069	)		1,120
Preferred stock dividends		-			-			-			430
(Loss) income applicable to common stockholders	$	(319	)	$	1,049		$	(1,069	)	$	690
Basic and diluted (loss) earnings from continuing
operations per common share	$	(.01	)	$	.02		$	(.02	)	$	.03
Basic and diluted (loss) earnings per
common share	$	(.01	)	$	.02		$	(.02	)	$	.02
Weighted average shares outstanding:
Basic		50,764			50,532			50,713			32,643
Diluted		50,764			50,758			50,713			32,867

See the Notes to the Condensed Consolidated Financial Statements.

USHEALTH GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)

	Three Months Ended June 30,						Six Months Ended June 30,
		2005			2004			2005			2004
	(in thousands)
Net (loss) income	$	(319	)	$	1,049		$	(1,069	)	$	1,120
Other comprehensive income (loss):
Unrealized holding gain (loss) arising during period		1,740			(4,226	)		(131	)		(2,352	)
Reclassification adjustment of loss on sales
of investments included in net income		8			3			12			5
Comprehensive income (loss)	$	1,429		$	(3,174	)	$	(1,188	)	$	(1,227	)

See the Notes to the Condensed Consolidated Financial Statements.

USHEALTH GROUP, INC.
CONSOLIDATED
STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
(Unaudited)
(in thousands, except share data)

	Common Stock				Capital in Excess Of		Accumulated Other Comp.			Retained			Total Stockholders'
		Shares		Amount		Par Value		Income (Loss)			Deficit			Equity
Balance at January 1, 2005		50,606,876	$	506	$	66,580	$	2,824		$	(35,170	)	$	34,740
Net loss										(1,069		)	(1,069		)
Other comprehensive loss							(119		)				(119		)
Common stock issued and other		156,950		2									2
Balance at June 30, 2005		50,763,826	$	508	$	66,580	$	2,705		$	(36,239	)	$	33,554

See the Notes to the Condensed Consolidated Financial Statements.

USHEALTH GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

	Three Months Ended June 30,						Six Months Ended June 30,
		2005			2004			2005			2004
	(in thousands)
Cash Flows From Operating Activities:
Net (loss) income	$	(319	)	$	1,049		$	(1,069	)	$	1,120
Adjustments to reconcile net (loss) income to cash
provided by operating activities
(Increase) decrease in accrued investment income		(2	)		18			9			(42	)
Decrease in deferred policy acquisition costs		345			67			718			310
Decrease in receivables from agents		389			138			819			508
Provision for uncollectible agent receivables		24			40			53			113
Decrease in other assets		622			183			1,482			435
(Decrease) increase in policy liabilities and accruals		(565	)		(1,022	)		310			(621	)
Increase (decrease) in accounts payable and
other liabilities		18			(214	)		(84	)		(997	)
Interest expense on note payable to related party		251			238			496			473
Other, net		391			436			778			819
Net Cash Provided By Operating Activities		1,154			933			3,512			2,118
Cash Flows From Investing Activities:
Purchases of fixed maturity investments		(3,068	)		(4,390	)		(5,942	)		(14,261	)
Sales of fixed maturity investments		653			528			1,381			4,241
Maturities and calls of fixed maturity investments		1,881			2,402			3,340			5,792
Net (increase) decrease in short-term and other
investments		(264	)		1,065			(1,674	)		1,360
Property and equipment purchased		(52	)		(34	)		(101	)		(37	)
Net Cash Used For Investing Activities		(850	)		(429	)		(2,996	)		(2,905	)
Cash Flows From Financing Activities:
Repayment of notes payable		(200	)		-			(200	)		(250	)
Net Cash Used For Financing Activities		(200	)		-			(200	)		(250	)
Increase (Decrease) In Cash During Period		104			504			316			(1,037	)
Cash At Beginning Of Period		1,253			703			1,041			2,244
Cash At End Of Period	$	1,357		$	1,207		$	1,357		$	1,207

See the Notes to the Condensed Consolidated Financial Statements.

USHEALTH GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2005
(Unaudited)

NOTE 1 — DESCRIPTION OF BUSINESS

USHEALTH Group, Inc. (“USHEALTH”), formerly Ascent Assurance, Inc., is the successor to a Delaware company originally incorporated in 1982 as an insurance holding company. USHEALTH, through its applicable subsidiaries, is engaged in the development, marketing, underwriting and administration of medical expense and supplemental health insurance products, primarily to self-employed individuals and small business owners.

The Company’s revenues result primarily from premiums and fees from the insurance products sold by its wholly-owned subsidiaries National Foundation Life Insurance Company (“NFL”), Freedom Life Insurance Company of America (“FLICA”), National Financial Insurance Company (“NFIC”) and American Insurance Company of Texas (“AICT”), and together with NFL, NFIC and FLICA, collectively, the “Insurance Subsidiaries”, and marketed by NationalCare^® Marketing, Inc. (“NCM”) and AmeriCare Benefits, Inc. (“ACB”), also wholly-owned subsidiaries. The Company, through applicable subsidiaries, also derives fee and service revenue from (i) telemarketing services, (ii) renewal commissions for prior year sales of both affiliated and unaffiliated insurance products, and (iii) commissions on the sale of the benefits of unaffiliated membership benefit programs.

NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation.    The accompanying unaudited condensed consolidated financial statements of the Company are prepared in accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X, and do not include all of the information and footnotes required by accounting principles generally accepted in the United States (“GAAP”) for complete financial statements. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the 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. The Company’s significant accounting estimates relate to investments, agent receivables, deferred policy acquisition costs, deferred tax assets, claim reserves, future policy benefit reserves, reinsurance and statutory accounting practices. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Certain reclassifications of prior years’ amounts have been made to conform to the 2005 financial statement presentation. The financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in USHEALTH’s Annual Report on Form 10-K for the year ended December 31, 2004.

Cash Equivalents.    Cash equivalents consist of highly liquid instruments with maturities at the time of acquisition of three months or less. Cash equivalents are stated at cost, which approximates fair value.

Short-Term Investments.    Short-term investments are stated at cost, which approximates fair value.

Investments.    The Company’s fixed maturity portfolio is classified as available-for-sale and is carried at estimated fair value. Equity securities consisting of common stocks, which are included in other investments, are also carried at estimated fair value. Changes in aggregate unrealized appreciation or depreciation on fixed maturity and equity securities are reported directly in stockholders’ equity and, accordingly, will have no effect on current operations.

Deferred Policy Acquisition Costs (“DPAC”).    Policy acquisition costs consisting of commissions and other policy issue costs, which vary with and are primarily related to the production of new business, are deferred and amortized over periods not to exceed the estimated premium-paying periods of the related policies. Also included in Other Assets is the value of business acquired. The amortization of these costs is based on actuarially estimated future premium revenues, and the amortization rate is adjusted periodically to reflect actual experience. Projected future levels of premium revenue are estimated using assumptions as to interest, mortality, morbidity and withdrawals consistent with those used in calculating liabilities for future policy benefits.

Agent Receivables.    In the ordinary course of business, a subsidiary of USHEALTH advances commissions on policies written by its general agencies and their agents. Net agent receivables were approximately $2.6 million and $3.5 million at June 30, 2005 and December 31, 2004, respectively. Such subsidiary is reimbursed for these advances from the commissions earned over the respective policy’s life. In the event that policies lapse prior to the time the subsidiary has been fully reimbursed, the general agencies or the individual agents, as the case may be, are responsible for reimbursing the subsidiary for the outstanding balance of the commission advances. A reserve for uncollectible agents’ balances is routinely established based upon historical experience and projected commission earnings. As of June 30, 2005 and December 31, 2004, the Company’s allowances for uncollectible commission advances were approximately $3.7 million and $3.6 million, respectively.

Property and Equipment.    Property and equipment is stated on the basis of cost and consists primarily of furniture, fixtures, leasehold improvements and software. Depreciation is computed principally by the straight-line method for financial reporting purposes using estimated useful lives of 3 to 10 years.

Future Policy Benefits.    Liabilities for future policy benefits not yet incurred are computed primarily using the net level premium method including actuarial assumptions as to investment yield, mortality, morbidity, withdrawals, persistency and other assumptions, which were appropriate at the time the policies were issued. Assumptions used are based on the experience of each of the Insurance Subsidiaries, as adjusted to provide for possible adverse deviation. Generally, these actuarial assumptions are fixed and, absent material adverse benefit experience, are not adjusted.

Claim Reserves.    Claim reserves represent the estimated liabilities on claims reported plus claims incurred but not yet reported. The process of estimating claim reserves involves the active participation of experienced actuaries with input from the underwriting, claims, and finance departments. The inherent uncertainty in estimating claim reserves is increased when significant changes occur. Changes impacting the Insurance Subsidiaries include: (1) changes in economic conditions; (2) changes in state or federal laws and regulations, particularly insurance reform measures; (3) writings of significant blocks of new business and (4) significant changes in claims payment patterns. Because claim reserves are estimates, management monitors reserve adequacy over time, evaluating new information as it becomes available and adjusting claim reserves as necessary. Such adjustments are reflected in current operations.

Notes Payable.    Notes payable are stated at cost, which approximates fair value.

Federal Income Taxes.    The Company records income taxes based on the asset and liability approach, which requires the recognition of deferred tax liabilities and assets for the expected future tax consequence of temporary differences between the carrying amounts and the tax basis of assets and liabilities. The tax effect of future taxable temporary differences (liabilities) and future deductible temporary differences (assets) are separately calculated and recorded when such differences arise. A valuation allowance, reducing any recognized deferred tax asset, must be recorded if it is determined that it is more likely than not that such deferred tax asset will not be realized. Net deferred tax assets of $17.9 million and $17.8 million at June 30, 2005 and December 31, 2004, respectively, were fully reserved.

Recognition of Revenue.    Premium revenues from insurance contracts are recognized when due from policyholders. Fee and service income is recognized when earned, the services have been provided and collection is reasonably assured.

Earnings Per Share.    Under GAAP, there are two measures of earnings per share: “basic earnings per share” and “diluted earnings per share”. Basic earnings per share are computed by dividing income available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share reflect the potential dilution that could occur if securities or other contracts to issue common stock were converted or exercised. For the six months ended June 30, 2005, stock options of 5,380,469 were anti-dilutive and were not included in the computation of diluted earnings per share because to do so would have been anti-dilutive. For the six months ended June 30, 2004, 43,995,026 of common shares attributable to the conversion of USHEALTH’s Series B convertible participating preferred stock (see the Notes to the Condensed Consolidated Financial Statements – Note 4 – Conversion of Redeemable Convertible Preferred Stock) were included in the computation of basic and diluted earnings per share as of March 15, 2004. To include the common shares attributable to the conversion of USHEALTH’s preferred stock in the computation of diluted earnings per share from the beginning of 2004 would have been anti-dilutive. For the six months ended June 30, 2004, only 231,950 of 870,300 outstanding stock options were dilutive and included in the computation of diluted earnings per share.

The following table reflects the calculation of basic and diluted EPS (in thousands, except for per share data):

	Three Months Ended June 30,						Six Months Ended June 30,
		2005			2004			2005			2004
	(amounts in thousands, except per share amounts)
(Loss) income from continuing operations	$	(319	)	$	1,234		$	(1,069	)	$	1,505
Loss from discontinued operations		-			(185	)		-			(385	)
Net (loss) income		(319	)		1,049			(1,069	)		1,120
Preferred stock dividends		-			-			-			(430	)
(Loss) income applicable to common stockholders	$	(319	)	$	1,049		$	(1,069	)	$	690
Weighted average shares outstanding:
Basic		50,764			50,532			50,713			32,643
Diluted		50,764			50,758			50,713			32,867
Basic and diluted (loss) earnings per share from
continuing operations	$	(.01	)	$	.02		$	(.02	)	$	.03
Basic and diluted loss per share from
discontinued operations	$	-		$	-		$	-		$	(.01	)
Basic and diluted (loss) earnings per common share	$	(.01	)	$	.02		$	(.02	)	$	.02

Recently Issued Accounting Pronouncements.    In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 123 (revised 2004) (“FAS 123R”), Share-Based Payment. FAS123R eliminates the alternative to use APB No. 25‘s, “Accounting for Stock Issued to Employees,” intrinsic value method of accounting that was provided in Statement 123 as originally issued. This Statement establishes standards for accounting for transactions in which an entity exchanges its equity instruments for goods or services. It requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award (with limited exceptions). That cost will be recognized over the period during which an employee is required to provide service, usually the vesting period, in exchange for the award. FAS123R is effective as of the beginning of the first interim period or annual reporting period that begins after June 15, 2005. Disclosed at Note 7 – Employee Benefit Plans is the effect on net loss and loss per share for the years presented if the Company had applied the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation which the Company does not believe will significantly differ from the effects of adopting FAS123R.

NOTE 3 – DISCONTINUED OPERATIONS

On October 29, 2004, USHEALTH sold its printing subsidiary, Westbridge Printing Services, Inc. (“WPS”), to an unrelated party and exited the printing business. In accordance with Statement of Financial Accounting Standard No. 144 Accounting for the Impairment or Disposal of Long-Lived Assets, the Company’s printing subsidiary is reported as discontinued operations in the accompanying consolidated financial statements. The operating loss of WPS for the three months and six months ended June 30, 2004 is reflected in discontinued operations. Revenues from the discontinued operations of WPS for the three months and six months ended June 30, 2004 were approximately $1.0 million and $2.0 million, respectively.

NOTE 4 – CONVERSION OF REDEEMABLE CONVERTIBLE PREFERRED STOCK

On March 15, 2004, USHEALTH’s common shareholders approved an amendment to the Company’s Certificate of Incorporation to increase the authorized number of shares of common stock to 75 million shares from 30 million shares. The approval of this amendment resulted in the automatic conversion of all 37,504 outstanding shares of the Company’s Series B convertible participating preferred stock (“Series B Preferred Stock”) into 43,995,026 shares of common stock. Preferred stock dividends of $430,000 accrued through March 15, 2004 were forgiven by preferred stockholders and, as a result, were credited to capital in excess of par value, and had no impact on total stockholders’ equity. All outstanding shares of the Series B Preferred Stock were held by Special Situations Holdings, Inc. – Westbridge (“SSHW”), the Company’s largest shareholder. The conversion of the Series B Preferred Stock increased the ownership percentage of SSHW in the Company’s common stock to approximately 93% from 49%.

NOTE 5 – RELATED PARTY TRANSACTION

On April 18, 2005, SSHW (USHEALTH’s largest stockholder) announced that it intends to take USHEALTH private through a “short-form” merger before year end 2005. SSHW currently owns approximately 93% of USHEALTH outstanding common stock which, under Delaware law, is sufficient to effectuate the merger without necessity of seeking approval by either the USHEALTH Board of Directors or its common stockholders. Common stockholders as of the effective date of the merger will receive $.31 in cash for each share of USHEALTH common stock held.

NOTE 6 — FINANCING ACTIVITIES

CSFB Financing.    USHEALTH received debt financing to fund an $11 million capital contribution to FLICA in April 2001 from Credit Suisse First Boston Management LLC (“CSFBM”), which is an affiliate of SSHW (USHEALTH’s largest stockholder). The credit agreement relating to that loan (“CSFBM Credit Agreement”) provided USHEALTH with total loan commitments of $11 million, all of which were drawn in April 2001. Under restructured terms effective December 31, 2003, the loan bears interest at a rate of 6% per annum and matures in March 2010.

Absent any acceleration following an event of default, the Company may elect to pay interest in kind by issuance of additional notes. During the six months ended June 30, 2005, USHEALTH issued $496,000 in additional notes for payment of interest in kind, which increased the note payable balance at June 30, 2005 to approximately $16.7 million.

USHEALTH’s obligations to CSFBM are secured, pursuant to a guarantee and security agreement and pledge agreements, by substantially all of the assets of USHEALTH and its subsidiaries (excluding the capital stock and the assets of AICT, FLICA, NFL, NFIC, NCM, USHEALTH Funding, Inc. and USHEALTH Administrators, Inc. (formerly Ascent Management, Inc.), some or all of which is pledged as collateral for bank financing described below). USHEALTH’s subsidiaries (other than those listed above) have also guaranteed USHEALTH’s obligations under the CSFBM Credit Agreement. Under this agreement, the Company is required to meet certain restrictive requirements including minimum statutory capital and surplus and RBC ratios for its Insurance Subsidiaries, and other customary covenants. At June 30, 2005, there were no events of default.

Bank Financing.    The majority of commission advances to NCM and ACB agents are financed through USHEALTH Funding, Inc. (“UFI”), an indirect wholly owned subsidiary of USHEALTH. On December 31, 2003, UFI entered into a Credit Agreement (the “Credit Agreement”) with Frost National Bank (“Frost”) that provides UFI with a $3.0 million revolving loan facility, the proceeds of which are used to purchase agent advance receivables from NCM and ACB. The amounts outstanding under the Credit Agreement as of June 30, 2005 and December 31, 2004 were $50,000 and $250,000, respectively. The Credit Agreement as amended matures on January 15, 2007, at which time the outstanding principal and interest will be due and payable.

UFI’s obligations under the Credit Agreement are secured by liens upon substantially all of UFI’s assets. UFI’s principal assets at June 30, 2005 are net agent receivables of $2.6 million. In addition, NCM, ACB and USHEALTH have guaranteed UFI’s obligation under the Credit Agreement, and have pledged all of the issued and outstanding shares of the capital stock of UFI, NFL, and FLICA as collateral for those guaranties (the “Guaranty Agreements”). USHEALTH, certain of its subsidiaries, CSFBM and Frost have entered into an Intercreditor and Subordination Agreement dated as of December 31, 2003 to give effect to a subordination of the notes payable to CSFBM to up to $10 million in borrowings under the Credit Agreement. As of June 30, 2005, there were no events of default under the Credit or Guaranty Agreements.

NOTE 7 — EMPLOYEE BENEFIT PLANS

USHEALTH applies the intrinsic value method, in accordance with APB 25, in accounting for its stock options issued to employees of one of its subsidiaries and non-employee directors. Accordingly, no compensation expense has been recognized for options granted with an exercise price equal to market value at the date of grant. USHEALTH applies the fair value method in accounting for stock options issued to consultants (including marketing agents).

Compensation cost recognized in the income statement for stock-based employee and consultants (including marketing agents) compensation awards was approximately $0 and $200 for the three months ended June 30, 2005 and 2004, respectively, and $104 and $1,200 for the six months ended June 30, 2005 and June 30, 2004, respectively.

The following table illustrates the effect on loss applicable to common stockholders and loss per share if USHEALTH had applied the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation.

	Three Months Ended June 30,						Six Months Ended June 30,
		2005			2004			2005			2004
(Loss) income from continuing operations	$	(319	)	$	1,234		$	(1,069	)	$	1,505
Total stock-based employee compensation
expense determined under fair value
based method for all awards,
net of related tax effects		(77	)		(3	)		(158	)		(27	)
Proforma (loss) income from continuing
operations		(396	)		1,231			(1,227	)		1,478
Loss from discontinued operations		-			(185	)		-			(385	)
Proforma net (loss) income		(396	)		1,046			(1,227	)		1,093
Preferred stock dividends		-			-			-			430
Proforma (loss) income applicable to
common stockholders	$	(396	)	$	1,046		$	(1,227	)	$	663
(Loss) earnings per share from continuing
operations:
Basic and diluted - as reported	$	(.01	)	$	.02		$	(.02	)	$	.03
Basic and diluted -proforma	$	(.01	)	$	.02		$	(.02	)	$	.03
Loss per share from discontinued
operations:
Basic and diluted - as reported	$	-		$	-		$	-		$	(.01	)
Basic and diluted - proforma	$	-		$	-		$	-		$	(.01	)
(Loss) earnings per share:
Basic and diluted - as reported	$	(.01	)	$	.02		$	(.02	)	$	.02
Basic and diluted - proforma	$	(.01	)	$	.02		$	(.02	)	$	.02

For purposes of pro forma disclosure, the estimated fair value of the stock compensation is amortized to expense over the stock’s vesting period. The effect on net loss of the stock compensation amortization for the year presented above is not likely to be representative of the effects on reported income for future years.

NOTE 8 — COMMITMENTS AND CONTINGENCIES

In the normal course of its business operations, the Company is involved in various claims, other business related suits (alleging actual as well as substantial exemplary damages) and regulatory matters. In the opinion of management, the Company is not a party to any pending litigation which is reasonably likely to have an adverse result or disposition that would have a material adverse effect on the Company’s business, consolidated financial position or consolidated results of operations.

The Company’s Insurance Subsidiaries are subject to extensive governmental regulation and supervision at both federal and state levels. Such regulation includes premium rate levels, premium rate increases, policy forms, minimum loss ratios, dividend payments, claims settlement, licensing of insurers and their agents, capital adequacy, transfer of control, and amount and type of investments. Additionally, there are numerous health care reform proposals and regulatory initiatives under consideration, which if enacted, could have significant impact on the Company’s results of operations.

ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

GENERAL

USHEALTH Group, Inc. (“USHEALTH”), formerly Ascent Assurance, Inc., is the successor to a Delaware company incorporated in 1982 as an insurance holding company. USHEALTH, through its applicable subsidiaries, is engaged in the development, marketing, underwriting and administration of medical expense and supplemental health insurance products, primarily to self-employed individuals and small business owners.

The following discussion provides management’s assessment of financial condition at June 30, 2005 as compared to December 31, 2004 and results of operations for the three months and six months ended June 30, 2005 as compared to the comparable 2004 period for the Company. This discussion updates the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s 2004 Report on Form 10-K and should be read in conjunction therewith.

Business Overview.    The Company’s revenues result primarily from premiums and fees from the insurance products sold by its wholly owned subsidiaries National Foundation Life Insurance Company (“NFL”), Freedom Life Insurance Company of America (“FLICA”), National Financial Insurance Company (“NFIC”) and American Insurance Company of Texas (“AICT”), and together with NFL, NFIC and FLICA, collectively, the “Insurance Subsidiaries” and marketed by NationalCare^® Marketing, Inc. (“NCM”) and AmeriCare Benefits, Inc. (“ACB”), also wholly owned subsidiaries. The Company, through applicable subsidiaries, also derives fee and service revenue from (i) telemarketing services, (ii) renewal commissions for prior year sales of both affiliated and unaffiliated insurance products, and (iii) commissions on the sale of benefits of unaffiliated membership benefit programs.

The Company’s operations are comprised of one segment, Accident and Health insurance. The principal products currently marketed by NCM and ACB and underwritten by NFL and FLICA are medical expense reimbursement policies. These products are designed with flexibility as to benefits, deductibles, coinsurance and premium payments, which can be adapted to meet regional sales or competitive needs, as well as those of the individual policyholders. The principal product groups currently underwritten by NFL and FLICA are comprehensive major medical products, hospital/surgical medical expense products and supplemental specified disease products:

• Comprehensive major medical products are generally designed to reimburse insureds for eligible expenses incurred for hospital confinement, surgical expenses, physician services, outpatient services and the cost of inpatient medicines.

• Hospital/surgical medical expense products are similar to comprehensive major medical products except that benefits are generally limited to medical and surgical services received in a hospital either as an inpatient or outpatient (services such as outpatient physician office visits and outpatient prescription drugs are excluded) and deductibles and coinsurance provisions are generally higher.

• Supplemental specified disease products include blanket group accident coverages, blanket group hospital daily indemnity coverages, as well as individual indemnity policies for hospital confinement and convalescent care for treatment of specified diseases and “event specific” individual policies, which provide fixed benefits or lump sum payments directly to the insured upon diagnosis of certain types of internal cancer or heart disease.

Prior to 1998, some of the Insurance Subsidiaries also actively underwrote Medicare Supplement products designed to provide reimbursement for certain expenses not covered by the Medicare program. Such Insurance Subsidiaries continue to receive renewal premiums on Medicare Supplement policies sold prior to that date.

Forward-Looking Statements.    Statements contained in this analysis and elsewhere in this document that are not based on historical information are forward-looking statements and are based on management’s projections, estimates and assumptions. In particular, forward-looking statements can be identified by the use of words such as “may”, “will”, “should”, “expect”, “anticipate”, “estimate”, “continue”, or similar words. Management cautions readers regarding its forward-looking statements. The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking statements. Various statements contained in the Management’s Discussion and Analysis of Results of Operation and Financial Condition, are forward-looking statements. These forward-looking statements are based on the intent, belief or current expectations of USHEALTH and members of its senior management team. While USHEALTH’s management believes that its expectations are based on reasonable assumptions within the bounds of its knowledge of its business and operations, prospective investors are cautioned that any such forward-looking statements are not guarantees of future performance, and involve risks and uncertainties, and that actual results may differ materially from those contemplated by such forward-looking statements.

Important factors known to management that could cause actual results to differ materially from those contemplated by the forward-looking statements in this Report include, but are not limited to:

• any limitation imposed on the Insurance Subsidiaries’ ability to control the impact of rising health care costs, especially prescription drugs, and rising medical service utilization rates through product and benefit design, underwriting criteria, premium rate increases, utilization management and negotiation of favorable provider contracts;

• the impact of changing health care trends on the Insurance Subsidiaries’ ability to accurately estimate claim and settlement expense reserves;

• the ability of the Company to fund competitive commission advances to its agents from internally generated cash flow or external financing;

• developments in health care reform and other regulatory issues, including the Health Insurance Portability and Accountability Act of 1996 and increased privacy regulation, and changes in laws and regulations in key states where the Company operates;

• USHEALTH’s ability to make additional investment in its Insurance Subsidiaries in the form of capital contributions, if needed, in order for such subsidiary to comply with regulatory capital or debt covenant requirements;

• default by issuers of fixed maturity investments owned by the Insurance Subsidiaries; and

• the loss of key management personnel.

Subsequent written or oral statements attributable to USHEALTH or persons acting on its behalf are expressly qualified in their entirety by the cautionary statements in this Report and those in USHEALTH’s reports previously filed with the SEC. Copies of these filings may be obtained by contacting USHEALTH or the SEC.

OPERATING RESULTS

Consolidated results of operations for USHEALTH are reported for the three and six months ended June 30, 2005 and 2004. (In thousands except insurance operating ratios.)

	Three Months Ended June 30,						Six Months Ended June 30,
		2005			2004			2005			2004
Premiums	$	20,467		$	23,038		$	41,794		$	46,831
Other insurance revenue		320			481			671			967
Net investment income		1,373			1,329			2,743			2,731
Net realized loss on investments		(8	)		(3	)		(12	)		(5	)
Total insurance revenues		22,152			24,845			45,196			50,524
Benefits and claims		13,648			14,933			28,252			31,170
Commissions		2,162			2,517			4,488			5,195
Change in deferred policy acquisition costs		345			68			717			311
General and administrative expense		5,365			5,104			10,915			10,402
Taxes, licenses and fees		797			967			1,614			1,886
Interest expense on bank facilities		16			15			32			32
Interest expense on note payable to related party		253			238			500			473
Total insurance operating expenses		22,586			23,842			46,518			49,469
Insurance operating results		(434	)		1,003			(1,322	)		1,055
Fee and service income		833			919			1,627			1,908
Fee and service expenses		718			688			1,374			1,458
Fee and service results		115			231			253			450
(Loss) income from continuing operations before
income taxes		(319	)		1,234			(1,069	)		1,505
Federal income taxes		-			-			-			-
(Loss) income from continuing operations		(319	)		1,234			(1,069	)		1,505
Loss from discontinued operations before
income taxes (1)		-			(185	)		-			(385	)
Federal income tax expense		-			-			-			-
Loss from discontinued operations		-			(185	)		-			(385	)
Net (loss) income		(319	)		1,049			(1,069	)		1,120
Preferred stock dividends		-			-			-			430
(Loss) income applicable to common Stockholders	$	(319	)	$	1,049		$	(1,069	)	$	690
Insurance operating ratios*
Benefits and claims		66.7	%		64.8	%		67.6	%		66.6	%
Commissions		10.6	%		10.9	%		10.7	%		11.1	%
Change in deferred policy acquisition costs		1.7	%		0.3	%		1.7	%		0.7	%
General and administrative expenses		25.8	%		21.7	%		25.7	%		21.8	%
Taxes, licenses and fees		3.9	%		4.2	%		3.9	%		4.0	%

(1) In October 2004, the Company sold its printing subsidiary, Westbridge Printing Services, Inc. (“WPS”). The operating results of WPS are presented as loss from discontinued operations.

*Ratios are calculated as a percent of premium with the exception of the general and administrative expense ratio, which is calculated as a percent of premiums plus other insurance revenue.

Overview.    For the second quarter of 2005, loss from continuing operations was ($319,000) compared to income from continuing operations of $1.2 million for the corresponding period in 2004. The ($1.5) million decrease in income from continuing operations was principally due to a ($1.4) million decrease in insurance operating results. For the six months ended June 30, 2005, loss from continuing operations was ($1.1) million compared to $1.5 million for the corresponding period in 2004. The ($2.6) million decrease in income from continuing operations was principally due to a ($2.4) million decrease in insurance operating results and a ($197,000) decrease in fee and service results.

The decline in insurance operating results for 2005 is partially attributable to planned marketing and administrative infrastructure initiatives, which increased general and administrative expense by approximately $527,000 for the second quarter of 2005 and $1.1 million for the six months ended June 30, 2005 as compared to the corresponding prior year periods. The general and administrative expense ratio was also adversely impacted by a decline in premium revenue during 2005 that resulted in decreased coverage of fixed overhead expenses and accounted for approximately $333,000 and $595,000 of the decline in insurance operating results for the second quarter and year to date 2005, respectively. In addition, the claims and benefits ratio for the second quarter of 2005 was 1.9 percentage points higher than the second quarter of 2004, which accounted for approximately $400,000 of the decrease in insurance operating results for the quarter and year to date 2005.

On October 29, 2004, the Company sold its printing subsidiary and exited the printing business. The losses from discontinued operations for the three months and six months ended June 30, 2004 of ($185,000) and ($385,000), respectively, represented operating losses.

On March 15, 2004, USHEALTH’s shareholders approved an amendment to the Company’s Certificate of Incorporation to increase the authorized number of shares of common stock to 75 million shares from 30 million shares. The approval of this amendment resulted in the automatic conversion of all 37,504 outstanding shares of the Company’s convertible participating Series B preferred stock into 43,995,026 shares of common stock. As a result, preferred stock dividends of $430,000 accrued through March 15, 2004 were credited to capital in excess of par value and had no impact on total stockholders’ equity. All shares of the Series B preferred stock were held by Special Situations Holdings, Inc. – Westbridge (“SSHW”), the Company’s largest shareholder. The conversion of Series B preferred stock increased the ownership of SSHW in the Company’s common stock to approximately 93% from 49%.

On April 18, 2005, SSHW announced that it intends to take USHEALTH private through a “short-form” merger before year end 2005. Under Delaware law, SSHW’s 93% common stock ownership position is sufficient to effectuate the merger without necessity of seeking approval by either the USHEALTH Board of Directors or its common stockholders. Common stockholders as of the effective date of the merger will receive $.31 in cash for each share of USHEALTH common stock held.

The following narratives discuss the principal components of insurance operating results.

Premiums.    The Insurance Subsidiaries’ premium revenue is derived principally from the following medical expense reimbursement products: comprehensive major medical, hospital/surgical medical expense and supplemental products, including specified disease coverage and Medicare supplement. Comprehensive major medical products are generally designed to reimburse insureds for eligible expenses incurred for hospital confinement, surgical expenses, physician services, outpatient services, and the cost of laboratory and diagnostic services, as well as inpatient medicines. Hospital surgical medical expense products are similar to comprehensive major medical products with respect to benefits for inpatient services, except that deductibles and coinsurance provisions are generally higher. However, benefits for outpatient services are generally more limited under hospital/surgical medical expense coverage than comprehensive major medical coverage. Supplemental products include blanket group accident coverage, blanket group hospital daily indemnity coverage, as well as individual indemnity policies for hospital confinement and convalescent care for treatment of specified diseases and “event specific” individual policies, which provide fixed benefits or lump sum payments directly to the insured upon diagnosis of certain types of internal cancer or heart disease. Prior to 1998, the Insurance Subsidiaries also underwrote Medicare supplement products and continue to receive renewal premiums from such policies.

Premium revenue, in thousands, for each major product line is set forth below:

	Three Months Ended June 30,				Six Months Ended June 30,
		2005		2004		2005		2004
Major medical:
First-year	$	2,931	$	3,859	$	6,176	$	7,724
Renewal		9,878		10,734		20,070		21,823
Subtotal		12,809		14,593		26,246		29,547
Supplemental specified disease:
First-year		14		67		32		139
Renewal		4,663		4,935		9,430		10,017
Subtotal		4,677		5,002		9,462		10,156
Medicare supplement:
Renewal		2,584		3,064		5,277		6,292
Subtotal		2,584		3,064		5,277		6,292
Other		397		379		809		836
Consolidated Premium Revenue	$	20,467	$	23,038	$	41,794	$	46,831

Total premiums decreased $2.6 million, or 11.2%, for the second quarter of 2005 as compared to the second quarter of 2004. Total premiums decreased $5.0 million, or 10.8%, for the six months ended June 30, 2005 as compared to the 2004 corresponding period. Major medical premiums declined due to lower new business sales and a disciplined pricing philosophy focused upon profitability. In addition, supplemental specified disease and Medicare supplement premiums declined due to normal lapsing of policies.

The accident and health insurance industry is highly competitive and includes a large number of insurance companies, many of which have substantially greater financial resources, broader and more diversified product lines than the Company. Starting in 2004, and accelerating in 2005, a number of new and formidable competitors have entered the individual health insurance marketplace. As a result, the competition for new individual health insurance customers has intensified. This competition for market share in the individual health market is creating significant pricing pressure on all carriers. The Company is evaluating its market position. If current individual health insurance market pricing trends continue, the Company’s ability to sell new individual health insurance policies may be adversely impacted and result in an accelerating decline in premium revenue.

Benefits and Claims.    Benefits and claims are comprised of (1) claims paid, (2) changes in claim reserves for claims incurred (whether or not reported), and (3) changes in future policy benefit reserves (see Financial Condition – “Claims Reserves” and “Future Policy Benefit Reserves”). The increase in the benefits and claims ratio from 64.8% for the second quarter of 2004 to 66.7% for the second quarter of 2005 and from 66.6% for year to date June 30, 2004 to 67.6% for year to date June 30, 2005 is principally due to the increased severity and frequency of major medical claims reported in the second quarter of 2005.

For the past several years, the costs of medical services covered by the Company’s major medical insurance policies has increased dramatically, with medical inflation averaging 15% to 20% annually in comparison to an average increase in the consumer price index of 3%. To maintain a consistent ratio of claims and benefits to premium into future periods, the Company must accurately estimate future medical inflation and implement timely premium rate increases for both new major medical product sales and the majority of its in force insurance policies, including supplemental specified disease and Medicare supplement policies.

FINANCIAL CONDITION

Investments.    The following table summarizes the Company’s fixed maturity securities, excluding short-term investments. All of the Company’s fixed maturity securities are classified as available-for-sale and are carried at fair value. Investments in the debt securities of corporations are principally in publicly traded bonds.

	June 30, 2005			December 31, 2004
Fixed Maturity Securities		Fair Value	%		Fair Value	%
	(in 000’s)			(in 000’s)
U.S. Government and governmental agencies
and authorities (except mortgage backed)	$	10,873	10.8	$	10,912	10.9
Finance companies		22,705	22.6		23,083	23.1
Public utilities		10,154	10.1		10,123	10.2
Mortgage-backed securities		21,584	21.5		20,420	20.5
States, municipalities and political subdivisions		3,323	3.3		2,309	2.3
All other corporate bonds		31,865	31.7		32,882	33.0
Total fixed maturity securities	$	100,504	100.0	$	99,729	100.0

The following table indicates by rating the composition of the Company’s fixed maturity securities portfolio, excluding short-term investments.

	June 30, 2005			December 31, 2004
Composition of Fixed Maturity Securities by Rating		Fair Value	%		Fair Value	%
	(in 000’s)			(in 000’s)
Ratings
Investment grade:
U.S. Government and agencies	$	22,071	22.0	$	19,892	19.9
AAA		12,286	12.2		12,384	12.4
AA		3,872	3.8		4,069	4.1
A		31,420	31.3		32,545	32.6
BBB		27,754	27.6		28,505	28.6
Non-Investment grade:
BB		2,211	2.2		1,785	1.8
B and below		890	0.9		549	0.6
Total fixed maturity securities	$	100,504	100.0	$	99,729	100.0

The Company monitors the financial condition and operations of securities rated below investment grade and of certain investment grade securities on which there are concerns regarding credit quality. In evaluating fixed maturities to determine whether any of the unrealized losses are other than temporary, management’s assessments as to the nature of declines in fair values are based upon historical operating trends, business prospects, status of the industry in which the company operates, analyst ratings on the issuer and sector, the quality of the investments, the severity and duration of the unrealized losses and the Company’s ability or intent to hold the investments. If fair value is less than the carrying value and the decline is determined to be other than temporary, an appropriate write-down is recorded.

The scheduled contractual maturities of the Company’s fixed maturity securities, excluding short-term investments and certificates of deposit, at June 30, 2005 and December 31, 2004 are shown in the table below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without penalties.

	June 30, 2005			December 31, 2004
Composition of Fixed Maturity Securities by Maturity		Fair Value	%		Fair Value	%
	(in 000’s)			(in 000’s)
Scheduled Maturity
Due in one year or less	$	4,852	4.8	$	2,003	2.0
Due after one year through five years		27,086	27.0		29,122	29.2
Due after five years through ten years		31,198	31.0		33,540	33.6
Due after ten years		15,784	15.7		14,644	14.7
Mortgage-backed and asset-backed securities		21,584	21.5		20,420	20.5
Total fixed maturity securities	$	100,504	100.0	$	99,729	100.0

Claim Reserves.    Claim reserves are established by the Insurance Subsidiaries for benefit payments which have already been incurred by the policyholder, but which have not been paid by the applicable Insurance Subsidiary. Claim reserves totaled $25.3 million at June 30, 2005 as compared to $24.6 million at December 31, 2004. The process of estimating claim reserves involves the active participation of experienced actuaries with input from the underwriting, claims, and finance departments. The inherent uncertainty in estimating claim reserves is increased when significant changes occur. Changes impacting the Insurance Subsidiaries include: (1) changes in economic conditions; (2) changes in state or federal laws and regulations, particularly insurance reform measures; (3) writings of significant blocks of new business and (4) significant changes in claims payment patterns. Because claim reserves are estimates, management monitors reserve adequacy over time, evaluating new information as it becomes available and adjusting claim reserves as necessary. Such adjustments are reflected in current operations.

Management considers many factors when setting reserves including: (1) historical trends; (2) current legal interpretations of coverage and liability; (3) loss payments and pending levels of unpaid claims; and (4) product mix. Based on these considerations, management believes that adequate provision has been made for the claim reserves of the Insurance Subsidiaries. Actual claims paid may deviate, perhaps substantially, from such reserves.

Future Policy Benefit Reserves.    Policy benefit reserves are established by each applicable Insurance Subsidiary for benefit payments that have not been incurred, but are estimated to be incurred, in the future. Policy benefit reserves totaled $53.1 million at June 30, 2005 as compared to $53.5 million at December 31, 2004. Policy benefit reserves are calculated according to the net level premium reserve method and are equal to the discounted present value of the applicable Insurance Subsidiary’s expected future policyholder benefits minus the discounted present value of its expected future net premiums.

These present value determinations are based upon assumed fixed investment yields, the age of the insured(s) at the time of policy issuance, expected morbidity and persistency rates, and expected future policyholder benefits. In determining the morbidity, persistency rate, claim cost and other assumptions used in determining the Insurance Subsidiaries’ future policy benefit reserves, each Insurance Subsidiary relies primarily upon its own benefit payment history and upon information developed in conjunction with actuaries and industry data. Persistency rates have a direct impact upon their policy benefit reserves because the determinations for these reserves are, in part, a function of the number of policies in force and expected to remain in force to maturity. If persistency is higher or lower than expected, future policyholder benefits will also be higher or lower because of the different than expected number of policies in force, and the policy benefit reserves will be increased or decreased accordingly.

In accordance with GAAP, actuarial assumptions of each of the Insurance Subsidiaries are generally fixed, and absent materially adverse benefit experience, are not generally adjusted. The Insurance Subsidiaries each monitor the adequacy of their policy benefit reserves on an ongoing basis by periodically analyzing the accuracy of their actuarial assumptions. The adequacy of policy benefit reserves may also be impacted by the development of new medicines and treatment procedures which may alter the incidence rates of illness and the treatment methods for illness and accident (such as out-patient versus in-patient care) or prolong life expectancy. Changes in coverage provided by major medical insurers or government plans may also affect the adequacy of reserves if, for example, such developments had the effect of increasing or decreasing the incidence rate and per claim costs of occurrences against which the applicable Insurance Subsidiary insures. An increase in either the incidence rate or the per claim costs of such occurrences could result in the need for the Insurance Subsidiaries to post additional reserves, which could have a material adverse effect upon USHEALTH’s liquidity, capital resources and results of operations.

LIQUIDITY, CAPITAL RESOURCES AND STATUTORY CAPITAL AND SURPLUS

General.    The primary sources of cash for the Company’s consolidated operations are premiums and fees from insurance policies, sales and maturity of invested assets and investment income, while the primary uses of cash are payments of insurance policy benefits, claims and commissions, and general operating expenses. Net cash provided by operations totaled $1.2 million and $3.5 million for the three and six months ended 2005 and totaled $0.9 million and $2.2 million for the three and six months ended 2004.

USHEALTH is a holding company, the principal assets of which consist of the capital stock of its subsidiaries and invested assets. USHEALTH’s principal sources of funds are comprised of dividends from its non-insurance subsidiaries. The Insurance Subsidiaries are precluded from paying dividends without prior approval of the Texas Insurance Commissioner, as the Insurance Subsidiaries’ earned surplus is negative due to statutory losses incurred prior to 2003. USHEALTH’s principal uses of cash are for general and administrative expenses and to make discretionary additional investments in its Insurance Subsidiaries in the form of capital contributions to maintain desired statutory capital and surplus levels. USHEALTH made no capital contributions to its Insurance Subsidiaries during the six months ended June 30, 2005 and June 30, 2004. As of June 30, 2005, USHEALTH had approximately $4.2 million in unrestricted cash and invested assets.

Related Party Financing.    USHEALTH received debt financing to fund an $11 million capital contribution to FLICA in April 2001 from Credit Suisse First Boston Management LLC, (“CSFBM”), which is an affiliate of Special Situations Holdings, Inc. – Westbridge (“SSHW”) (USHEALTH’s largest common stockholder), and a subsidiary of Credit Suisse First Boston LLC (“CSFB”). The Credit Agreement relating to that loan (“CSFBM Credit Agreement”) provided USHEALTH with total loan commitments of $11 million, all of which were drawn in April 2001. Under restructured terms effective December 31, 2003, the loan bears interest at a rate of 6% per annum and matures in March 2010. Absent any acceleration following an event of default, USHEALTH may elect to pay interest in kind by issuance of additional notes. During the six months ended June 30, 2005, USHEALTH issued $496,000 in additional notes for payment of interest in kind which increased the notes payable balance to CSFBM at June 30, 2005 to approximately $16.7 million. USHEALTH’s obligations to CSFBM are secured, pursuant to a guaranty and security agreement and pledge agreements, by substantially all of the assets of USHEALTH and its subsidiaries (excluding the capital stock and the assets of AICT, FLICA, NFL, NFIC, NCM, USHEALTH Funding, Inc. and USHEALTH Administrators, Inc. (formerly Ascent Management, Inc.), some or all of which is pledged as collateral for bank financing described below). USHEALTH’s subsidiaries (other than those listed above) have also guaranteed USHEALTH’s obligations under the CSFBM Credit Agreement. At June 30, 2005, there were no events of default.

Bank Financing.    The majority of commission advances to NCM and ACB agents are financed through USHEALTH Funding, Inc. (“UFI”), an indirect wholly owned subsidiary of USHEALTH. On December 31, 2003, UFI entered into a Credit Agreement (the “Credit Agreement”) with Frost National Bank (“Frost”) that provides UFI with a $3.0 million revolving loan facility, the proceeds of which are used to purchase agent advance receivables from NCM and ACB. As of June 30, 2005 and December 31, 2004, $50,000 and $250,000, respectively, were outstanding under the Credit Agreement. The Credit Agreement, as amended, matures on January 15, 2007, at which time the outstanding principal and interest will be due and payable. The Company maintains an agent receivable financing arrangement to facilitate growth in new business sales.

UFI’s obligations under the Credit Agreement are secured by liens upon substantially all of UFI’s assets. UFI’s principal assets at June 30, 2005 are net agent receivables of $2.6 million. In addition, NCM, ACB and USHEALTH have guaranteed UFI’s obligation under the Credit Agreement, and have pledged all of the issued and outstanding shares of the capital stock of UFI, NFL, and FLICA as collateral for those guaranties (the “Guaranty Agreements”). As of June 30, 2005, there were no events of default under the Credit or Guaranty Agreements.

Inflation.    Inflation impacts claim costs and overall operating costs and, although inflation has been lower the last few years, hospital and medical costs have still increased at a higher rate than general inflation, especially prescription drug costs. New, more expensive and wider use of pharmaceuticals is inflating health care costs. The Insurance Subsidiaries will continue to establish premium rates in accordance with trends in hospital and medical costs along with concentrated efforts in various cost containment programs. However, there can be no assurance that these efforts will fully offset the impact of inflation or that increases in premium rates will equal or exceed increasing health care costs.

ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

USHEALTH has no material changes to the disclosure concerning market risk made in its Annual Report on Form 10-K for the year ended December 31, 2004.

ITEM 4 – CONTROLS AND PROCEDURES

Evaluation of disclosure controls and procedures.    Under the supervision and with the participation of USHEALTH’s management, including the Chief Executive Officer and Chief Financial Officer, the Company has evaluated the effectiveness of its disclosure controls and procedures as of June 30, 2005, the end of the period covered by this report. Based on such evaluation, USHEALTH’s Chief Executive Officer and Chief Financial Officer have concluded that, as of June 30, 2005, the end of the period covered by this report, the Company’s disclosure controls and procedures were effective to ensure that information required to be disclosed by USHEALTH in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission.

Changes in internal control over financial reporting.    There were no changes in the Company’s internal controls over financial reporting that have materially affected, or, are reasonably likely to materially affect, these controls during the period covered by this quarterly report.

PART II

ITEM 6 — EXHIBITS

(a) Exhibits:

The following exhibits are filed herewith. Exhibits incorporated by reference are indicated in the parentheses following the description.

3.1 Second Amended and Restated Certificate of Incorporation of the Company filed with the Secretary of State of Delaware on March 24, 1999 (incorporated by reference to Exhibit 3.1 to the Company’s Form 8-A filed on March 25, 1999).

3.2 Amended and Restated By-Laws of the Company, effective as of March 24, 1999 (incorporated by reference to Exhibit 3.2 to the Company’s Form 8-A filed on March 25, 1999).

3.3 Amendment to the By-Laws of the Company, effective as of April 5, 2000 (incorporated by reference to Exhibit 3.3 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2000).

3.4 Certificate of Elimination of Series A Preferred Stock of the Company dated December 31, 2003 (incorporated by reference to Exhibit 3.1 to the Company’s 8-K filed on January 6, 2004).

3.5 Certificate of Designation for Series B Convertible Participating Preferred Stock of the Company dated December 31, 2003 (incorporated by reference to Exhibit 3.2 to the Company’s 8-K filed on January 6, 2004).

3.6 Certificate of Amendment of the Second Amended and Restated Certificate of Incorporation dated March 3, 2005 (incorporated by reference to Exhibit 3.6 to USHEALTH’s 10K for the year ended December 31, 2004).

4.1 Form of Common Stock Certificate (incorporated by reference to Exhibit 4.1 to the Company’s Form 8-A filed on March 25, 1999).

4.2 Form of Warrant Certificate, included in the Form of Warrant Agreement (incorporated by reference to Exhibit 4.2 to the Company’s Form 8-A filed on March 25, 1999).

4.3 Form of Warrant Agreement dated as of March 24, 1999, between Company and LaSalle National Bank, as warrant agent (incorporated by reference to Exhibit 4.3 to the Company’s Form 8-A filed on March 25, 1999).

4.4 Form of Preferred Stock Certificate (incorporated by reference to Exhibit 4.4 to the Company’s Annual Report on Form 10-K for the year ended December 31, 1998).

10.1 Second Amended and Restated Receivables Purchase and Sale Agreement, dated as of June 6, 1997 between National Foundation Life Insurance Company, National Financial Insurance Company, American Insurance Company of Texas, Freedom Life Insurance Company of America, and Westbridge Funding Corporation (incorporated by reference to Exhibit 10.5 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 1997).

10.2 Amended and Restated Non-Insurance Company Sellers Receivables Purchase and Sale Agreement, dated as of June 6, 1997 between American Senior Security Plans, L.L.C., Freedom Marketing, Inc., Health Care-One Insurance Agency, Health Care-One Marketing Group, Inc., LSMG, Inc., Senior Benefits of Texas, Inc., and Westbridge Marketing Corporation (incorporated by reference to Exhibit 10.6 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 1997).

10.3 Lock-Up Agreement, dated as of September 16, 1998, by and among the Company and Credit Suisse First Boston Corporation (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed on September 21, 1998).

10.4 Stock Purchase Agreement, dated as of September 16, 1998, between the Company and Credit Suisse First Boston Corporation (incorporated by reference to Exhibit 10.2 to the Company’s Form 8-K filed on September 21, 1998).

10.5 Registration Rights Agreement dated as of March 24, 1999 between the Company and Special Situations Holdings, Inc. – Westbridge (incorporated by reference to Exhibit 10.13 to the Company’s Annual Report on Form 10-K for the year ended December 31, 1998).

10.6 1999 Stock Option Plan dated as of March 24, 1999 (incorporated by reference to the Company’s Schedule 14A filed with the Commission on April 30, 1999).

10.7 Credit Agreement dated April 17, 2001 between the Company and Credit Suisse First Boston Management Corporation (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed April 25, 2001).

10.8 Guaranty and Security Agreement dated April 17, 2001 among Foundation Financial Services, Inc., NationalCare® Marketing, Inc., LifeStyles Marketing Group, Inc., Precision Dialing Services, Inc., Senior Benefits L.L.C. and Westbridge Printing Services, Inc., and Credit Suisse First Boston Management Corporation (incorporated by reference to Exhibit 10.2 to the Company's Form 8-K filed April 25, 2001).

10.9 Pledge Agreement dated April 17, 2001 between the Company and Credit Suisse First Boston Management Corporation (incorporated by reference to Exhibit 10.3 to the Company’s Form 8-K filed April 25, 2001).

10.10 Employment Agreement dated as of December 18, 2002, by and between the Company, Ascent Management, Inc. and Mr. Patrick J. Mitchell (incorporated by reference to Exhibit 10.36 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2002).

10.11 Employment Agreement dated as of December 18, 2002, by and between the Company, Ascent Management, Inc. and Mr. Patrick H. O’Neill (incorporated by reference to Exhibit 10.37 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2002).

10.12 Employment Agreement dated as of January 10, 2003, by and between the Company, Ascent Management, Inc. and Mr. Konrad H. Kober (incorporated by reference to Exhibit 10.38 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2002).

10.13 Employment Agreement dated as of January 10, 2003, by and between the Company, Ascent Management, Inc. and Ms. Cynthia B. Koenig (incorporated by reference to Exhibit 10.39 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2002).

10.14 First Amendment to Credit Agreement dated February 26, 2003 between the Company and Credit Suisse First Boston Management Corporation (incorporated by reference to Exhibit 10.45 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2002).

10.15 Exchange Agreement among the Company, Credit Suisse First Boston Management, LLC, and Special Situations Holdings, Inc. – Westbridge dated December 31, 2003 (incorporated by reference to Exhibit 10.1 to the Company’s 8-K filed on January 6, 2004).

10.16 First Amendment to Registration Rights Agreement between the Company and Special Situations Holdings, Inc. – Westbridge dated December 31, 2003 (incorporated by reference to Exhibit 10.2 to the Company’s 8-K filed on January 6, 2004).

10.17 Second Amendment to Credit Agreement dated December 31, 2003 between the Company and Credit Suisse First Boston Management, LLC (incorporated by reference to Exhibit 10.3 to the Company’s 8-K filed on January 6, 2004).

10.18 First Amendment and Waiver to Guaranty and Security Agreement dated December 31, 2003 between Foundation Financial Services, Inc., NationalCare® Marketing, Inc., Lifestyles Marketing Group, Inc., Precision Dialing Services, Inc., Senior Benefits, LLC, and Westbridge Printing Services, Inc. and Credit Suisse First Boston Management, LLC (incorporated by reference to Exhibit 10.4 to the Company's 8-K filed on January 6, 2004).

10.19 Intercreditor and Subordination Agreement among the Frost National Bank, Credit Suisse First Boston Management, LLC, and the Company and named subsidiaries dated December 31, 2003 (incorporated by reference to Exhibit 10.5 to the Company’s 8-K filed on January 6, 2004).

10.20 Credit Agreement dated as of December 31, 2003 among Ascent Funding, Inc., the Company, NationalCare^® Marketing, Inc. and the Frost National Bank including exhibits to such agreement, Pledge and Security Agreement dated December 31, 2003 between NationalCare^® Marketing, Inc. and Frost National Bank, Pledge and Security Agreement dated December 31, 2003 between the Company and Frost National Bank, Revolving Promissory Note dated December 31, 2003 between Ascent Funding, Inc. and Frost National Bank, Security Agreement dated December 31, 2003 between Ascent Funding, Inc. and Frost National Bank, Waiver of Jury Trial and Notice of Final Agreement dated December 31, 2003 between Ascent Funding, Inc. and Frost National Bank and Intercreditor and Subordination Agreement among Frost National Bank, Credit Suisse First Boston Management, LLC and the Company and named subsidiaries dated December 31, 2003 (incorporated by reference to Exhibit 10.49 to the Company’s 10-K for the year ended December 31, 2003).

10.21 Extension of Employment Agreement dated as of March 16, 2004 by and between the Company, Ascent Management, Inc. and Mr. Patrick J. Mitchell (incorporated by reference to Exhibit 10.39 to the Company’s 10Q for the quarter ended March 31, 2004).

10.22 Extension of Employment Agreement dated as of March 16, 2004 by and between the Company, Ascent Management, Inc. and Mr. Patrick H. O’Neill (incorporated by reference to Exhibit 10.40 to the Company’s 10Q for the quarter ended March 31, 2004).

10.23 First Amendment To Credit Agreement And Security Agreement dated as of July 6, 2004 between Ascent Funding, Inc., the Company, NationalCare® Marketing, Inc., AmeriCare Benefits, Inc. and Frost National Bank including exhibits to such agreement, Guaranty Agreement between AmeriCare Benefits, Inc. and Frost National Bank; First Restated Guaranty Agreement between NationalCare® Marketing, Inc. and Frost National Bank dated July 6, 2004; First Amendment to Intercreditor and Subordination Agreement among Frost National Bank, Credit Suisse First Boston Management, LLC and the Company and named subsidiaries dated as of July 6, 2004 (incorporated by reference to Exhibit 10.41 to the Company’s 10Q for the quarter ended September 30, 2004).

10.24 Employment Agreement dated as of September 1, 2004 by and between the Company and Mr. Benjamin M. Cutler (incorporated by reference to Exhibit 10.42 to the Company’s 10Q for the quarter ended September 30, 2004).

10.25 Third Amendment to Credit Agreement dated September 1, 2004 between the Company and Credit Suisse First Boston Management, LLC (incorporated by reference to Exhibit 10.43 to the Company’s 10Q for the quarter ended September 30, 2004).

10.26 First Amendment to Pledge Agreement dated October 28, 2004 between the Company and Credit Suisse First Boston Management, LLC (incorporated by reference to Exhibit 10.44 to the Company’s 10Q for the quarter ended September 30, 2004).

10.27 Second Amendment and Consent to Guaranty and Security Agreement dated October 28, 2004 between Foundation Financial Services, Inc., NationalCare® Marketing, Inc., Lifestyles Marketing Group, Inc., Precision Dialing Services, Inc., Senior Benefits LLC, and Westbridge Printing Services, Inc. and Credit Suisse First Boston Management LLC (incorporated by reference to Exhibit 10.45 to the Company's 10Q for the quarter ended September 30, 2004).

10.28 Sale and Purchase Agreement dated October 29, 2004 between the Company and Printers Alliance, Inc. (incorporated by reference to Exhibit 10.46 to the Company’s 10Q for the quarter ended September 30, 2004).

10.29 Second Amendment to Credit Agreement, dated as of December 29, 2004, among Ascent Funding, Inc., the Company, NationalCare® Marketing, Inc., AmeriCare Benefits, Inc. and the Frost National Bank; Waiver of Jury Trial and Notice of Final Agreement between Ascent Funding Inc. and The Frost National Bank dated December 29, 2004 (incorporated by reference to Exhibit 10.29 to USHEALTH’s 10K for the year ended December 31, 2004).

10.30 Consent Related to Intercreditor and Subordination Agreement among the Frost National Bank, Credit Suisse First Boston Management, LLC, and the Company and named subsidiaries dated December 29, 2004 (incorporated by reference to Exhibit 10.30 to USHEALTH’s 10K for the year ended December 31, 2004).

31.1* Certification of Benjamin M. Cutler, Chairman and Chief Executive Officer of the Company pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2* Certification of Cynthia B. Koenig, Chief Financial Officer and Treasurer of the Company pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1* Certification of Benjamin M. Cutler, Chairman and Chief Executive Officer and Cynthia B. Koenig, Senior Vice President, Chief Financial Officer and Treasurer of the Company pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

Form 10-Q

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

USHEALTH GROUP, INC.

/s/ Cynthia B. Koenig                                   
Cynthia B. Koenig
Senior Vice President,
Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)

Dated at Fort Worth, Texa
August 3, 2005