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UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549


Form 10-K

|   |  |                                                                                             
|-- |  | --------------------------------------------------------------------------------------------
|þ  |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR
    15(d) OF THE SECURITIES EXCHANGE ACT OF 1934    
|  
|   |  | For the fiscal year ended December 31,
    2003                                             
|  
|or
|  
|o  |  | 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 001-31574

AMERIGROUP Corporation

(Exact name of registrant as specified in its
charter)


|                                                                                                |  |                                     
|----------------------------------------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                                                        |  | 54-1739323                          
|(State or Other Jurisdiction of Incorporation
    or Organization)                              |  | (I.R.S. Employer Identification No.)
|                                                                                               
|4425 Corporation Lane, Virginia Beach,
    Virginia(Address of principal executive
    offices) |  | 23462(Zip Code)                     

Registrants telephone number, including
area code:

(757) 490-6900


Securities registered pursuant to
Section 12(b) of the Act:

|                             |  |                                          
|---------------------------- |  | -----------------------------------------
|Title of Each Class          |  | Name of Each Exchange on Which Registered
|                             |  |                                          
|Common Stock, $.01 par value |  | New York Stock Exchange                  

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 þ          No o

Indicate by
check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of the registrants
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or
any amendment to this
10-K.     o

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

The aggregate
market value of common stock held by non-affiliates at
June 30, 2003 was $765,154,561.

The number of
shares of common stock, $0.01 par value, outstanding as of
March 2, 2004, was 24,631,252.

Document Incorporated by Reference

Part III of this Report incorporates by
reference information from the definitive

Proxy Statement for the Registrants 2004
Annual Meeting of Stockholders




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TABLE OF CONTENTS

|                                |  |                                                                                           |  |           |    |  |  | 
|------------------------------- |  | ----------------------------------------------------------------------------------------- |  | --------- | -- |  |  | 
|                                |  |                                                                                           |  | Page     
|                                |  |                                                                                           |  |          
|                                |  |                                                                                           |  | PART I.   |    |  |  | 
|Item  1.                        |  | Business                                                                                  |  |           | 2  | 
|Item 2.                         |  | Properties                                                                                |  |           | 18 | 
|Item  3.                        |  | Legal Proceedings                                                                         |  |           | 19 | 
|Item 4.                         |  | Submission of Matters to a
    Vote of Security Holders                                   |  |           | 20 | 
|                                |  |                                                                                           |  | PART II.  |    |  |  | 
|Item  5.                        |  | Market for Our Common Equity
    and Related Stockholder Matters                          |  |           | 22 | 
|Item 6.                         |  | Selected Financial Data                                                                   |  |           | 23 | 
|Item  7.                        |  | Managements Discussion
    and Analysis of Results of Operations and Financial Condition |  |           | 25 | 
|Item 7A.                        |  | Quantitative and Qualitative
    Disclosures About Market Risk                            |  |           | 34 | 
|Item 8.                         |  | Financial Statements and
    Supplementary Data                                           |  |           | 47 | 
|Item  9.                        |  | Changes in and Disagreements
    with Accountants on Accounting and Financial Disclosure  |  |           | 71 | 
|Item 9A.                        |  | Controls and Procedures                                                                   |  |           | 71 | 
|                                |  |                                                                                           |  | PART III. |    |  |  | 
|Item 10.                        |  | Directors and Executive
    Officers of the Company                                       |  |           | 71 | 
|Item 11.                        |  | Executive Compensation                                                                    |  |           | 71 | 
|Item 12.                        |  | Security Ownership of
    Certain Beneficial Owners and Management                        |  |           | 72 | 
|Item 13.                        |  | Certain Relationships and
    Related Transactions                                        |  |           | 72 | 
|Item 14.                        |  | Principal Accountant Fees
    and Services                                                |  |           | 72 | 
|                                |  |                                                                                           |  | PART IV.  |    |  |  | 
|Item 15.                        |  | Exhibits, Financial
    Statement Schedules and Reports on Form 8-K                       |  |           | 72 | 
|Amended and Restated Contract  
|Amended and Restated contracts 
|Amended and Restated Contracts 
|Amendent 8.to the 2002 Contract
|Code of Ethics                 
|List of Subsidiaries           
|Consent of KPMG                
|Certification                  
|Certification                  
|Certification                  



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PART I.






|        |         
|------- | --------
|Item 1. | Business

Overview

We are a multi-state managed health care company
focused on serving people who receive health care benefits
through publicly sponsored programs, including Medicaid, State
Childrens Health Insurance Program, or SCHIP and
FamilyCare. We believe that we are better qualified and
positioned than many of our competitors to meet the unique needs
of our target populations because of our focus on providing
managed care to these populations, our medical management
programs and our community-based education and outreach
programs. Unlike many managed care organizations that attempt to
serve the general commercial population, as well as Medicare and
Medicaid populations, we are focused exclusively on the
Medicaid, SCHIP and FamilyCare populations. We do not currently
offer Medicare or commercial products. In general, as compared
to commercial or Medicare populations, our target population is
younger, accesses health care in an inefficient manner and has a
greater percentage of medical expenses related to obstetrics,
diabetes, circulatory and respiratory conditions. We design our
programs to address the particular needs of our members, for
whom we facilitate access to health care benefits pursuant to
agreements with the applicable regulatory authority. We combine
medical, social and behavioral health services to help our
members obtain quality health care in an efficient manner. Our
success in establishing and maintaining strong relationships
with state governments, providers and members has enabled us to
obtain new contracts and to establish a leading market position
in many of the markets we serve. Providers are hospitals,
physicians and ancillary medical programs that provide medical
services to our members. Members are said to be
enrolled with our health plans to receive benefits.
Accordingly, our total membership is generally referred to as
our enrollment. As of December 31, 2003, we provided an
array of products to approximately 857,000 members in Texas,
Florida, Maryland, New Jersey, the District of Columbia and
Illinois.

We were incorporated in Delaware on
December 9, 1994 as AMERICAID Community Care by a team of
experienced senior managers led by Jeffrey L. McWaters, our
Chairman and Chief Executive Officer. From 1994 through 1995, we
were involved primarily in financial planning, recruiting and
training personnel, developing products and markets and
negotiating contracts with various state governments. During
1996, we began enrolling Medicaid members in our
Fort Worth, New Jersey and Chicago plans, and in 1997, we
obtained a contract and began enrolling members in our Houston
plan. In 1999, we began operating in Maryland and the District
of Columbia, and obtained a contract and began enrolling members
in our Dallas plan. Our operations in Maryland and the District
of Columbia are the result of acquiring contract rights from
Prudential Health Care. Effective January 1, 2003, we began
operations in Florida as a result of an acquisition of PHP
Holdings, Inc. and its subsidiary Physicians Health Plans, Inc.,
or PHP. In addition, in Texas, Florida, New Jersey and the
District of Columbia, we have increased membership through
acquisitions of Medicaid contract rights and related assets of
other health plans in these service areas.

Market Opportunity



| |                          
| | -------------------------
| | Emergence of managed care

Health care in the United States has grown from a
$27 billion industry in 1960 to a highly regulated market
of approximately $1.6 trillion in 2002, an increase of 9.3% from
2001, according to the federal governments Centers for
Medicare & Medicaid Services, or CMS.

CMS projects total U.S. health care spending
to reach $3.4 trillion in 2013, growing at an average annual
rate of 7.3% during the forecasted period of 2002 through 2013.
In response to the dramatic increases in health care-related
costs in the late 1960s, Congress enacted the Federal Health
Maintenance Organization Act of 1973, a statute designed to
encourage the establishment and expansion of care and cost
management. The private sector responded to this legislation by
forming health maintenance organizations, or HMOs. HMOs were
intended to address the needs of employers, insurers, government
entities and health care providers who sought a cost-effective
alternative to traditional indemnity insurance. Since the
establishment of HMOs, enrollment has increased more than
twelve-fold from 6.0 million in 1976 to nearly
76.1 million in 2002. Over that time, many HMOs have been
formed to focus on a specific or specialty population of health
care such as commercial plans

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for employees, Medicare, Medicaid, dental care
and behavioral health care. Additionally, HMOs have been formed
in a variety of sizes, from small community-based plans to
multi-state organizations.


Despite these efforts to organize care delivery,
the costs associated with medical care have continued to
increase. As a result, it has become increasingly important for
HMOs to understand the populations they serve in order to
develop an infrastructure and programs tailored to the medical
and social profiles of their members.



| |                                            
| | -------------------------------------------
| | Medicaid, SCHIP and FamilyCare
    Programs

Medicaid, a state-administered program, was
enacted in 1965 to make Federal matching funds available to all
states for the delivery of health care benefits to eligible
individuals, principally those with incomes below specified
levels who meet other state-specified requirements. Medicaid is
structured to allow each state to establish its own eligibility
standards, benefits package, payment rates and program
administration under broad federal guidelines. By contrast,
Medicare, in which we do not currently participate, is a program
administered by the federal government and is made available to
the aged and disabled. Some of the differences between Medicaid
and Medicare are set forth below:

|                                                 |  |                                                     
|------------------------------------------------ |  | ----------------------------------------------------
|Medicaid                                         |  | Medicare                                            
|                                                 |  |                                                     
| state administered,                            |  |  federally operated,                               
| state and matching federal funds,              |  |  federal funds only,                               
| average age of our members is 14,              |  |  average age of recipients is over 70,             
| 27 million people in managed
    care in 2003, |  |  5 million people in managed care
    in 2003,     
| prescription drug coverage, and                |  |  prescription drug coverage begins in
    2006, and
| mandatory managed care in most states.         |  |  no mandatory managed care.                        

We do not currently offer Medicare products or
participate in the Medicare program. However, CMS has announced
demonstration projects, which would allow HMOs to cover Medicare
dual-eligible members to be reimbursed for the acute care
medical cost currently funded by Medicare. The benefits for this
program would be similar to the benefits provided by Medicaid
for non-dual eligible members. If we decide to participate in
any of the programs and are selected by CMS to participate, some
of our revenue would be funded by Medicare.

Most states determine threshold Medicaid
eligibility by reference to other federal financial assistance
programs, including Temporary Assistance to Needy Families, or
TANF, and Supplemental Security Income, or SSI.

TANF provides assistance to low-income families
with children and was adopted to replace the Aid to Families
with Dependent Children program. SSI is a federal program that
provides assistance to low-income aged, blind or disabled
individuals. However, states can broaden eligibility criteria.

SCHIP, developed in 1997, is a federal/state
matching program that provides health care coverage to children
not otherwise covered by Medicaid or other insurance programs.
SCHIP enables a segment of the large uninsured population in the
United States to receive health care benefits. States have the
option of administering SCHIP through their Medicaid programs.
SCHIP enrollment reached 5.8 million in fiscal 2003, an
approximate 9% increase over 2002 enrollment figures.

FamilyCare programs have been established in
several states including New Jersey and the District of
Columbia. The New Jersey FamilyCare Health Coverage Act is a
Medicaid expansion program providing health care access to an
estimated 64,000 previously uninsured or underinsured New Jersey
residents in fiscal 2004. New Jersey FamilyCare is a voluntary
federal and state-funded health insurance program created to
help uninsured families, single adults and couples without
dependent children obtain affordable health care coverage. The
FamilyCare program in the District of Columbia provides services
to approximately 98,000 primarily low-income pregnant women,
children and adults in fiscal 2004.

Nationally, approximately 62% of Medicaid
spending is directed toward hospital, physician and other acute
care services, and the remaining approximately 38% is for
nursing home and other long-term care. In general, inpatient and
emergency room utilization tends to be higher within the
Medicaid population than among the

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general population because of the inability to
afford access to a primary care physician, or PCP, leading to
the postponement of treatment until acute care is required.


The highest health care expenses for the
non-elderly and disabled Medicaid population include:



| |   |                         
| | - | ------------------------
| |  | obstetrics,             
|
| |  | respiratory illness,    
|
| |  | diabetes,               
|
| |  | neonatal care,          
|
| |  | sickle cell disease, and
|
| |  | HIV/ AIDS.              

In fiscal year 2003, the federal government spent
approximately $161 billion on Medicaid and states spent an
additional approximately $121 billion. Federal government
estimates indicate that total Medicaid outlays may reach
approximately $311 billion for fiscal year 2004, with an
additional approximately $5.2 billion spent on SCHIP
programs. Key factors driving Medicaid spending include:



| |   |                                                                                             
| | - | --------------------------------------------------------------------------------------------
| |  | number of eligible individuals who enroll,                                                  
|
| |  | price of medical and long-term care services,                                               
|
| |  | use of covered services,                                                                    
|
| |  | state decisions regarding optional services and
    optional eligibility groups, and        
|
| |  | effectiveness of programs to reduce costs of
    providing benefits, including managed care.



| |                 
| | ----------------
| | Medicaid Funding

The federal government pays a share of the
medical assistance expenditures under each states Medicaid
program. That share, known as the Federal Medical Assistance
Percentage, or FMAP, is determined annually by a formula that
compares the states average per capita income level with
the national average per capita income level. Thus, states with
higher per capita income levels are reimbursed a smaller share
of their costs than states with lower per capita income levels.
The FMAP cannot be lower than 50% or higher than 83%. In 2003,
the FMAPs varied from 50% in 13 states and five territories
to 76.6% in Mississippi, and 57% overall. In addition, the
Balanced Budget Act of 1997 permanently raised the FMAP for the
District of Columbia from 50% to 70%. The states fiscal
2004 FMAPs for the markets in which we have contracts are:

|                     |  |      |      |  
|-------------------- |  | ---- | ---- | -
|State                |  | FMAP
|                     |  |     
|New Jersey           |  |      | 50.0 | %
|Texas                |  |      | 60.2 | %
|Maryland             |  |      | 50.0 | %
|Illinois             |  |      | 50.0 | %
|District of Columbia |  |      | 70.0 | %
|Florida              |  |      | 58.9 | %

The federal government also matches
administrative costs, generally about 50%, although higher
percentages are paid for certain activities and functions, such
as development of automated claims processing systems. Federal
payments have no set limits (other than for SCHIP programs), but
rather are made on a matching basis. In 2002, 43% of total
federal funds provided to states were spent on Medicaid, the
highest category of federal funds provided to states.

State governments pay the share of Medicaid and
SCHIP costs not paid by the Federal government. Some states
require counties to pay part of the states share of
Medicaid costs. In 2002, Medicaid was the second largest

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category of state spending, following spending on
elementary and secondary education, and made up over 21% of
total state spending.


Federal law establishes general rules governing
how states administer their Medicaid and SCHIP programs. Within
those rules, states have considerable flexibility, including
flexibility in how they set most provider prices and service
utilization controls. Generally, state Medicaid budgets are
developed and approved annually by the states governors
and legislatures. Medicaid expenditures are monitored during the
year against budgeted amounts. Federal law requires states to
offer at least two HMOs in any urban market with mandatory HMO
enrollment. If Medicaid HMO market departures result in only one
or no HMOs in an urban area, the affected state must also offer
the fee-for-service Medicaid program.

Under the Health Insurance Flexibility and
Accountability Demonstration Program (HIFA), states can seek
waivers from specific provisions of federal Medicaid
requirements to increase the number of individuals with health
coverage through current Medicaid and SCHIP resource levels.
Currently, eight states are involved in either approved waiver
programs or pending applications. The current federal
administration has emphasized providing coverage to populations
with income below 200 percent of the federal poverty level.



| |                      
| | ---------------------
| | Medicaid Managed Care

Historically, the traditional Medicaid programs
made payments directly to providers after delivery of care.
Under this approach, recipients received care from disparate
sources, as opposed to being cared for in a systematic way. As a
result, care for routine needs was often accessed through
emergency rooms or not at all.

The delivery of episodic health care under the
traditional Medicaid program limited the ability of the states
to provide quality care, implement preventive measures and
control health care costs. Over the past decade, in response to
rising health care costs and in an effort to ensure quality
health care, the federal government has expanded the ability of
state Medicaid agencies to explore, and, in some cases, mandate
the use of managed care for Medicaid beneficiaries. If Medicaid
managed care is not mandatory, individuals entitled to Medicaid
may choose either the traditional Medicaid program or a managed
care plan, if available. According to information published by
CMS, from 1993 to 1998 managed care enrollment among Medicaid
beneficiaries increased more than three-fold. All the markets in
which we operate, except Illinois, have state-mandated Medicaid
managed care programs in place.

The AMERIGROUP Approach

Unlike many managed care organizations that
attempt to serve the general population, as well as Medicare and
Medicaid populations, we are focused exclusively on serving
people who receive health care benefits through publicly
sponsored programs. We do not currently offer Medicare or
commercial products. Our success in establishing and maintaining
strong relationships with state governments, providers and
members has enabled us to obtain new contracts and to establish
a strong market position in the markets we serve. We have been
able to accomplish this by addressing the various needs of these
constituent groups.



| |                  
| | -----------------
| | State Governments

We have been successful in bidding for contracts
and implementing new products because of our ability to
facilitate access to quality health care services in a
cost-effective manner. Our education and outreach programs, our
disease and medical management programs and our information
systems benefit the communities we serve while providing the
state governments with predictability of cost. Our education and
outreach programs are designed to decrease the use of emergency
care services as the primary access to health care through the
provision of programs like member health education seminars and
system-wide 24-hour on-call nurses. Our information systems are
designed to measure and track our performance enabling us to
demonstrate the effectiveness of our programs to the government.
While we promote ourselves directly in applying for new
contracts or seeking to add new benefit plans, we believe that
our ability to obtain additional contracts and expand our
service areas within a state results primarily from our
demonstration of prior success in facilitating access to quality
care, while reducing and managing costs, and our
customer-focused approach to working in partnership

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with state governments. We believe we will also
benefit from this experience when bidding for and acquiring
contracts in new state markets.




| |          
| | ---------
| | Providers

In each of the communities where we operate, we
have established extensive provider networks and have been
successful in continuing to establish new provider
relationships. We have accomplished this by working closely with
physicians to help them operate efficiently by providing
financial, statistical and utilization information, physician
and patient educational programs and disease and medical
management programs, as well as by adhering to a prompt payment
policy. In addition, as we increase our market penetration, we
provide our physicians with a growing base of potential patients
in the markets they serve. This network of providers and
relationships assists us in implementing preventive care
methods, managing costs and improving access to health care for
members. We believe that our experience working and contracting
with Medicaid providers will give us a competitive advantage in
entering new markets. While we do not directly market to or
through our providers, they are important in helping us attract
new members and retain existing members.



| |        
| | -------
| | Members

In both signing up new members and retaining
existing members, we focus on our understanding of the unique
needs of the Medicaid, SCHIP and FamilyCare populations. We have
developed a system that provides our members with appropriate
access to care. We supplement this care with community-based
education and outreach programs designed to improve the
well-being of our members. These programs not only help our
members control and manage their medical care, but also have
been proven to decrease the incidence of emergency room care,
which is traumatic for the individual and expensive and
inefficient for the health care system. We also help our members
access prenatal care which improves outcomes for our members and
is less costly than unmanaged care. As our presence in a market
matures, these programs, and other value-added services, help us
build and maintain membership levels.



| |            
| | -----------
| | Communities

We focus on the members we serve and the
communities where they live. Many of our associates, including
the sales force and outreach staff, are a part of the
communities we serve. We are active in our members
communities through education and outreach programs. We often
provide programs in our members physician offices,
churches and community centers. Upon entering a new market, we
use these programs and other advertising to create brand
awareness and loyalty in the community.

Strategy

Our objective is to become the leading managed
care organization in the United States focused on serving people
who receive health care benefits through publicly sponsored
programs. To achieve this objective we intend to:

Increase our membership in existing and new
markets through internal growth and
acquisitions.We intend to increase
our membership in existing and new markets through development
and implementation of community-specific products, alliances
with key providers, sales and marketing efforts and
acquisitions. We facilitate access to a broad continuum of
health care supported by numerous services such as neonatal
intensive care and high-risk pregnancy programs. These products
and services are developed and administered by us but are also
designed to attract and retain our providers, who are critical
to our overall success. Through strategic and selective
contracting with providers, we are able to customize our
provider networks to meet the unique clinical, cultural and
socio-economic needs of our members. Our providers often are
located in the inner-city neighborhoods where our members live,
thereby providing accessibility to, and an understanding of, the
needs of our members. For example, in our voluntary Chicago
market, we have a sales force to recruit potential members who
are currently in the traditional fee-for-service Medicaid
system. The overall effect of this comprehensive approach
reinforces our broad brand-name recognition as a leading managed
health care company serving people who receive publicly
sponsored health care benefits, while complying with
state-mandated marketing guidelines.

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We may also choose to increase membership by
acquiring Medicaid contracts and other related assets from
competitors in our existing markets. Since 1996, we have
developed markets in Texas, New Jersey and Illinois and acquired
additional Medicaid contracts and related assets in New Jersey,
Texas, Florida, Maryland and the District of Columbia. We
evaluate potential new markets using our established government
relationships and our historical experience in managing Medicaid
populations. Our management team is experienced in identifying
markets for development of new operations, including
complementary businesses, identifying and executing acquisitions
and integrating these businesses into our existing operations.
For example, in 2003, we began operations in Florida as a result
of acquisitions of PHP and St. Augustine Medicaid, or St.
Augustine, a division of AvMed, Inc., resulting in approximately
219,000 members in the Miami/ Fort Lauderdale, Orlando and
Tampa markets.


Capitalize on our experience working in
partnership with state governments.We
continually strive to be an industry-recognized leader in
government relations and an important resource to our state
government customers. For example, we have a dedicated
legislative affairs team with experience at the federal, state
and local levels. We are, and intend to continue to be, an
active and leading participant in the formulation and
development of new policies and programs for publicly sponsored
health care benefits. This also enables us to competitively
expand our service areas and to implement new products.

Focus on our medical home concept
to provide quality, cost-effective health
care.We believe that the care the
Medicaid population has historically received can be
characterized as uncoordinated, episodic and short-term focused.
In the long-term, this approach is less desirable for the
patient and more expensive for the state.

Our approach to serving the Medicaid and
historically uninsured populations is based on offering a
comprehensive range of medical and social services intended to
improve the well-being of the member while lowering the overall
cost of providing benefits. Unlike traditional Medicaid, each of
our members has a primary contact, usually a PCP, to coordinate
and administer the provision of care, as well as enhanced
benefits, such as 24-hour on-call nurses. We refer to this
coordinated approach as a medical home.

Utilize population-specific disease management
programs and related techniques to improve quality and reduce
costs.An integral part of our medical
home concept is continual quality management. To help the
physician improve the quality of care and improve the health
status of our members, we have developed a number of programs
and procedures to address high frequency, chronic or high-cost
conditions such as pregnancy, respiratory conditions, diabetes,
sickle cell and congestive heart failure. Our procedures include
case and disease management, pre-admission certification,
concurrent review of hospital admissions, discharge planning,
retrospective review of claims, outcome studies and management
of inpatient, ambulatory and alternative care. These policies
and programs are designed to consistently provide high quality
care and cost-effective service to our members.

Products

We have developed several products through which
we offer a range of health care services. These products are
also community-based and seek to address the social and economic
issues faced by the populations we serve. Additionally, we seek
to establish strategic relationships with prestigious medical
centers, childrens hospitals and federally qualified
health centers to assist in implementing our products and
medical management programs within the communities we serve. Our
health plans cover various services that vary by state and may
include:



| |   |                                                
| | - | -----------------------------------------------
| |  | primary and specialty physician care,          
|
| |  | inpatient and outpatient hospital care,        
|
| |  | emergency and urgent care,                     
|
| |  | prenatal care,                                 
|
| |  | laboratory and x-ray services,                 
|
| |  | home health and durable medical equipment,     
|
| |  | behavioral health services and substance abuse,

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| |   |                                                                                    
| | - | -----------------------------------------------------------------------------------
| |  | long-term and nursing home care,                                                   
|
| |  | 24-hour on-call nurses,                                                            
|
| |  | vision care and exam allowances,                                                   
|
| |  | dental care,                                                                       
|
| |  | chiropractic care,                                                                 
|
| |  | podiatry,                                                                          
|
| |  | prescriptions and limited over-the-counter drugs,                                  
|
| |  | assistance with obtaining transportation for
    office or health education visits,
|
| |  | memberships in the Boys and Girls Clubs, and                                       
|
| |  | welcome calls and health status calls to
    coordinate care.                      

Our products, which we may offer under different
names in different markets, focus on specific populations within
the Medicaid, FamilyCare and SCHIP programs. The average
premiums for our products vary significantly due to differences
in the benefits offered and underlying medical conditions in the
populations covered.

AMERICAID, our principal product, is our
family-focused Medicaid managed health care product designed for
the TANF population that consists primarily of low-income
children and their mothers. We currently offer our AMERICAID
product in all markets we serve. As of December 31, 2003,
we had approximately 587,000 AMERICAID members.

AMERIKIDS is our managed health care product for
uninsured children not eligible for Medicaid. This product is
designed for children in the SCHIP initiative. We began offering
AMERIKIDS in Maryland and Washington, D.C. when we acquired
Prudentials contract rights and other related assets in
those areas in 1999. We began offering AMERIKIDS in New Jersey
and Texas in 2000 and Chicago in 2003. We began offering
AMERIKIDS in Florida when we acquired PHPs contract rights
and other related assets in 2003. As of December 31, 2003,
we had approximately 180,000 AMERIKIDS members.

AMERIPLUS is our managed health care product for
SSI recipients. This population consists of the low-income aged,
blind and disabled. We began offering this product in 1998 and
currently offer it in New Jersey, Maryland, Houston and Florida.
We expect our AMERIPLUS membership to grow as more states
include SSI benefits in mandatory managed care programs. As of
December 31, 2003, we had approximately 74,000 AMERIPLUS
members. Included in this number are approximately 540 members
added through a Florida program called Summit Care. Summit Care
is a pilot program by the State of Florida to help seniors live
safely in their homes as an alternative to nursing home care.

AMERIFAM is our FamilyCare managed health care
product designed for uninsured segments of the population other
than SCHIP eligibles. AMERIFAMs current focus is the
families of our SCHIP and Medicaid children. We offer this
product in Washington, D.C. and New Jersey where the
program covers parents of SCHIP and Medicaid children. As of
December 31, 2003, we had approximately
16,000 AMERIFAM members.

As of December 31, 2003, of our 857,000
members, 91% were enrolled in TANF, SCHIP and FamilyCare
programs. The remaining 9% were enrolled in SSI programs. Of
these SSI enrollees, approximately 7,000 were members to whom we
provided limited administrative services but did not provide
health benefits.

Disease and Medical Management
Programs

We provide specific disease and medical
management programs designed to meet the special health care
needs of our members with chronic illnesses, to manage excessive
costs and to improve the overall health of our members. We
currently offer disease and medical management programs in areas
such as neonatal, high-risk pregnancy, asthma and other
respiratory conditions, congestive heart failure, sickle cell
disease, diabetes and HIV. These programs focus on preventing
acute occurrences associated with chronic conditions by
identifying at-risk members, monitoring their conditions and
pro-actively managing their care. We also employ tools such as

8



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##### Table of Contents



utilization review and pre-certification to
reduce the excessive costs often associated with uncoordinated
health care programs.


Marketing and Educational Programs

An important aspect of our comprehensive approach
to health care delivery is our marketing and educational
programs, which we administer system-wide for our providers and
members. We often provide our educational programs in
members homes and our marketing and educational programs
in churches and community centers. The programs we have
developed are specifically designed to increase awareness of
various diseases, conditions and methods of prevention in a
manner that supports the providers, while meeting the unique
needs of our members. For example, we conduct health promotion
events in physicians offices that target respiratory
conditions, immunization and other health issues. Direct
provider marketing is supported by traditional marketing venues
such as direct mail, telemarketing, television, radio and
cooperative advertising with participating medical groups.

We believe that we can also increase and retain
membership through marketing and education initiatives. We have
a dedicated staff that actively supports and educates
prospective and existing members and community organizations.
Through programs such as Safe Kids, and Taking Care of Baby and
Me®, a prenatal program for pregnant moms and their babies,
we promote a healthy lifestyle, safety and good nutrition to our
members. In addition to these personal health-related programs,
we remain committed to the communities we serve.

We have developed specific strategies for
building relationships with key community organizations, which
help enhance community support for our products and improve
service to members. We regularly participate in local events and
festivals and organize community health fairs to promote healthy
lifestyle practices. Equally important, our associates help
support community groups by serving as board members and
volunteers. In the aggregate, these activities serve to act not
only as a referral channel, but also reinforce the AMERIGROUP
brand and foster member loyalty.

In several markets, we provide value-added
benefits as a means to attract and retain members. These
benefits include free memberships to the local Boys and Girls
Clubs and vouchers for over-the-counter medications. We believe
that our comprehensive approach to health care positions us well
to serve our members, their providers and the communities in
which they both live and work.

Community Partners

We believe community focus and understanding are
important to attracting and retaining members. To assist in
establishing our community presence in a new market, we seek to
establish relationships with prestigious medical centers,
childrens hospitals and federally qualified health centers
to offer our products and programs. For example, we have a
strategic relationship with Memorial Hermann Healthcare System
in Houston, granting us the right to actively market their name
and logo in advertising of our Medicaid products.

Provider Network

We facilitate access to health care services to
our members through mutually non-exclusive contracts with PCPs,
specialists, hospitals and ancillary providers. Either prior to
or concurrently with bidding for new contracts, we establish a
provider network in each of our service areas. The following
table shows the total number of PCPs, specialists, hospitals and
ancillary providers participating in our network as of
December 31, 2003:

|                        |  |               |       |            |  |                   |       |          |  |         |       |       |  |  |       |  |  |  |       |  |  |  |        | 
|----------------------- |  | ------------- | ----- | ---------- |  | ----------------- | ----- | -------- |  | ------- | ----- | ----- |  |  | ----- |  |  |  | ----- |  |  |  | ------ | 
|                        |  |              
|                        |  | Service Areas
|                        |  |              
|                        |  | Texas         |       | New Jersey |  | Maryland and D.C. |       | Illinois |  | Florida |       | Total
|                        |  |               |       |            |  |                   |       |          |  |         |       |      
|Primary care physicians |  |               | 1,317 |            |  |                   | 1,816 |          |  |         | 1,569 |       |  |  | 495   |  |  |  | 1,673 |  |  |  | 6,870  | 
|Specialists             |  |               | 4,322 |            |  |                   | 4,560 |          |  |         | 6,626 |       |  |  | 1,083 |  |  |  | 5,306 |  |  |  | 21,897 | 
|Hospitals               |  |               | 63    |            |  |                   | 71    |          |  |         | 47    |       |  |  | 21    |  |  |  | 96    |  |  |  | 298    | 
|Ancillary providers     |  |               | 667   |            |  |                   | 552   |          |  |         | 342   |       |  |  | 423   |  |  |  | 882   |  |  |  | 2,866  | 

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The PCP is a critical component in care delivery,
and also in the management of costs and the attraction and
retention of new members. PCPs include family and general
practitioners, pediatricians, internal medicine physicians and
OB/ GYNs. These physicians provide preventive and routine health
care services and are responsible for making referrals to
specialists, hospitals and other providers. Health care services
provided directly by PCPs include the treatment of illnesses not
requiring referrals, periodic physician examinations, routine
immunizations, well child care and other preventive health care
services.

Specialists provide medical care to members
generally upon referral by the PCPs. However, we have identified
specialists that are part of the ongoing care of our members,
such as allergists, oncologists and surgeons, which our members
may access directly without first obtaining a PCP referral. Our
contracts with both the PCPs and specialists usually are for
one-to two-year periods and automatically renew for successive
one-year periods subject to termination by us for cause, if
necessary, based on provider conduct or other appropriate
reasons. The contracts generally can be canceled by either party
upon 90 to 120 days prior written notice.

Our contracts with hospitals are usually for
one-to two-year periods and automatically renew for successive
one-year periods. Generally, our hospital contracts may be
terminated by either party without cause with 90 to
150 days prior written notice. Pursuant to the contract,
the hospital is paid for all pre-authorized medically necessary
inpatient and outpatient services and all covered emergency and
medical screening services provided to members. With the
exception of emergency services, most inpatient hospital
services require advance approval from the members PCP and
our medical management department. We require hospitals in our
network to participate in utilization review and quality
assurance programs.

We have also contracted with other ancillary
providers for physical therapy, mental health and chemical
dependency care, home health care, vision care, diagnostic
laboratory tests, x-ray examinations, ambulance services and
durable medical equipment. Additionally, we have contracted with
dental vendors that provide routine dental care in markets where
routine dental care is a covered benefit and with a national
pharmacy benefit manager that provides a local pharmacy network
in our markets where pharmacy is a covered benefit.

In order to ensure the quality of our medical
care providers, we credential and re-credential our providers
using standards that are supported by the National Committee for
Quality Assurance. Additionally, we provide feedback and
evaluations on quality and medical management to them in order
to improve the quality of care provided, increase their support
of our programs and enhance our ability to attract and retain
providers.

Provider Payment Methods

Fee-for-Service.This is a reimbursement mechanism that pays providers based upon
services performed. For the year ended December 31, 2003,
approximately 93% of our expenses for direct health benefits
were on a fee-for-service reimbursement basis, including fees
paid to third-party vendors for ancillary services such as
pharmacy, mental health, dental and vision benefits. The primary
fee-for-service arrangements are maximum allowable fee schedule,
per diem, case rates, percent of charges or any combination
thereof. The following is a description of each of these
mechanisms:



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Maximum Allowable Fee
    Schedule.Providers are paid the
    lesser of billed charges or a specified fixed payment for a
    covered service. The maximum allowable fee schedule is developed
    using, among other indicators, the state fee-for-service
    Medicaid program fee schedule, Medicare fee schedules, medical
    costs trends and market conditions.                                                                                                                  
|
| | Per Diem and Case
    Rates.Hospital facility costs are
    typically reimbursed at negotiated per diem or case rates, which
    vary by level of care within the hospital setting. Lower rates
    are paid for lower intensity services, such as a low birth
    weight newborn baby who stays in the hospital a few days longer
    than the mother, compared to higher rates for a neonatal
    intensive care unit stay for a baby born with severe
    developmental disabilities.
|
| | Percent of Charges.We contract with providers to pay them an agreed-upon percent of
    their standard charges for covered services. This is typically
    done where hospitals are reimbursed under the state
    fee-for-service Medicaid program on a percent of charges basis.                                                                                                                                                                                                      

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Capitation.Some of
our PCPs and specialists are paid on a fixed-fee per member
basis, also known as capitation. Our arrangements with ancillary
providers for vision, dental, home health, laboratory, durable
medical equipment, mental health and chemical dependency
services may also be capitated.

We review the fees paid to providers periodically
and make adjustments as necessary. Generally, the contracts with
the providers do not allow for automatic annual increases in
payments. Among the factors generally considered in adjustments
are changes to state Medicaid fee schedules, competitive
environment, current market conditions, anticipated utilization
patterns and projected medical expenses. In order to enable us
to better monitor quality and meet our state contractual
encounter reporting obligations, it is our intention to increase
the number of providers we pay on a fee-for-service basis and
reduce the number of capitation contracts we have. States use
the encounter data to monitor quality of care to members and to
set premium rates.

Our Health Plans

We have five active health plan subsidiaries
offering health care services in Texas, Florida, Maryland, New
Jersey, the District of Columbia and Illinois. We expect our
relationship with these jurisdictions to continue. Each of our
health plans have one or more contracts that expire at various
times, as set forth below:

|                     |  |                              |  |                               
|-------------------- |  | ---------------------------- |  | ------------------------------
|Market               |  | Product                      |  | Term End Date                 
|                     |  |                              |  |                               
|Texas                |  | TANF, SSI, SCHIP             |  | August 31, 2004               
|Florida              |  | TANF, SSI, SCHIP             |  | June 30, 2004(a)              
|Florida              |  | SCHIP                        |  | September 30, 2004(b) and 2005
|Florida              |  | SSI (Summit Care)            |  | June 30, 2005(c)              
|New Jersey           |  | TANF, SSI, SCHIP, FamilyCare |  | June 30, 2004                 
|Maryland(d)          |  | TANF, SSI, SCHIP             |  |                              
|District of Columbia |  | TANF, SCHIP, FamilyCare      |  | July 31, 2004                 
|Illinois             |  | TANF, SCHIP                  |  | July 31, 2004                 



---



|    |  |                                                                         
|--- |  | ------------------------------------------------------------------------
|(a) |  | This contract can be terminated by either party
    upon 30 days notice.
|   
|(b) |  | This contract covers approximately 13,000 members
    in two counties.  
|   
|(c) |  | This contract can be terminated by either party
    upon 60 days notice.
|   
|(d) |  | Our Maryland contract does not have a set term.                         



| |      
| | -----
| | Texas

Our Texas subsidiary, AMERIGROUP Texas, Inc., is
licensed as an HMO and became operational in September 1996. Our
current service areas include the cities of Fort Worth,
Dallas and Houston and the surrounding counties. As of
December 31, 2003, we had approximately 343,000 members in
Texas, consisting of approximately 144,000 members in Houston,
approximately 93,000 members in Dallas and approximately 106,000
members in Fort Worth. Based on information available to
us, we believe we have the largest Medicaid membership in each
of our Fort Worth and Houston markets and the second
largest Medicaid membership in our Dallas market. We offer
AMERICAID in each of our Texas markets and AMERIPLUS in Houston.
The Texas Health and Human Services Commission has selected
AMERIGROUP Texas, Inc. to begin serving Medicaid recipients,
effective May 1, 2004, in the Travis service area. Our TANF
contract in Fort Worth, our TANF and SCHIP contracts in
Dallas and our TANF, SCHIP and SSI contracts in Houston are set
to expire on August 31, 2004; however, we expect the
contracts to be extended through calendar year 2004. We plan to
participate in a re-procurement process of all product contracts
and all service areas in 2004 for an early 2005 effective date.



| |        
| | -------
| | Florida

Our Florida subsidiary, AMERIGROUP Florida, Inc.,
is licensed as an HMO and became operational in January 2003
with the acquisition of PHP. In July 2003, we acquired the
Medicaid contract rights and related

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assets of St. Augustine. Our current service
areas include the metropolitan areas of Miami/
Fort Lauderdale, Orlando and Tampa that include 13 counties
in Florida. We did not have any membership for December 2002. As
of December 31, 2003, we had approximately 221,000 members,
consisting of approximately 47,000 members in Miami/
Fort Lauderdale, 42,000 members in Orlando and 132,000
members in Tampa. Based on information available to us, we
believe we have the largest Medicaid membership in the Orlando
and Tampa markets and the fourth largest Medicaid membership in
our Miami/ Fort Lauderdale market. Our TANF, SSI and SCHIP
contracts expire June 30, 2004 and can be terminated by
either party upon 30 days notice. A new TANF contract will
be issued for a July 1, 2004 effective date covering a two
year span (through June 30, 2006). Our Summit Care contract
expires June 30, 2005 and can be terminated by either party
upon 60 days notice. As a result of a successful Florida
SCHIP re-bid in 2003, individual county contracts were
consolidated into one contract covering six counties effective
through September 30, 2005. An additional two-county SCHIP
contract will be re-bid this year for a two-year term effective
October 1, 2004.




| |           
| | ----------
| | New Jersey

Our New Jersey subsidiary, AMERIGROUP New Jersey,
Inc., is licensed as an HMO and became operational in February
1996. Our current service areas include 20 of the 21 counties in
New Jersey. As of December 31, 2003, we had approximately
99,000 members in New Jersey. Based on information available to
us, we believe we have the third largest Medicaid membership in
New Jersey. We offer AMERICAID, AMERIPLUS, AMERIKIDS and
AMERIFAM in New Jersey. Our contract with the State of New
Jersey expires on June 30, 2004 but will be extended by
contract amendment for an additional year.



| |         
| | --------
| | Maryland

Our Maryland subsidiary, AMERIGROUP Maryland,
Inc., a Managed Care Organization, is authorized to operate as a
managed care organization in Maryland and became operational in
June 1999. Our current service areas include 20 of the 24
counties in Maryland. As of December 31, 2003, we had
approximately 124,000 members in Maryland. Based on information
available to us, we believe we have the largest Medicaid
membership in Maryland. We offer AMERICAID, AMERIPLUS and
AMERIKIDS in Maryland. Our contract with the State of Maryland
does not have a set term. We can terminate our contract with
Maryland by notifying the State by October 1st of any given
year for an effective termination date of January 1st of
the following year. The State may waive this timeframe if the
circumstances warrant, including but not limited to reduction in
rates outside the normal rate setting process or an MCO exit
from the program.



| |                     
| | --------------------
| | District of Columbia

AMERIGROUP Maryland, Inc., a Managed Care
Organization, is also licensed as an HMO in the District of
Columbia and became operational there in August 1999. As of
December 31, 2003, we had approximately 38,000 members in
the District of Columbia. Based on information available to us,
we believe we have the largest Medicaid membership in the
District of Columbia. We offer AMERICAID, AMERIKIDS and AMERIFAM
in the District of Columbia. Our contract with the District of
Columbia extends through July 31, 2004, with the
Districts option to continue contract extensions for
additional one year terms through July 31, 2007.



| |         
| | --------
| | Illinois

Our Illinois subsidiary, AMERIGROUP Illinois,
Inc., is licensed as an HMO and became operational in April
1996. Our current service area includes the counties of Cook and
DuPage in the Chicago area. In Chicago, enrollment in a Medicaid
managed care plan is voluntary. As of December 31, 2003, we
had approximately 32,000 members in Chicago. Based on
information available to us, we believe we have the second
largest Medicaid health plan membership in Cook County. We offer
AMERICAID and AMERIKIDS in the Chicago area. Our contract with
the State of Illinois, which can be terminated by either party
with 90 days written notice, extends through July 31,
2004, and includes an automatic renewal provision for two
consecutive one-year terms, thereby extending the contract
through July 31, 2006.

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Quality Management

We have a comprehensive quality management plan
designed to improve access to cost-effective quality care. We
have developed policies and procedures to ensure that the health
care services arranged by our health plans meet the professional
standards of care established by the industry and the medical
community. These procedures include:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Analysis of health care utilization
    data.To avoid duplication of services
    or medications, in conjunction with the PCPs, health care
    utilization data is analyzed and, through comparative provider
    data and periodic meetings with physicians, we identify areas in
    which a physicians utilization rate differs significantly
    from the rates of other physicians. On the basis of this
    analysis, we suggest opportunities for improvement and follow-up
    with the PCP to monitor utilization.                                                                                                                                                                                                                                                                                                                                        
|
| |  | Medical care satisfaction
    studies.We evaluate the quality and
    appropriateness of care provided to our health plan members by
    reviewing health care utilization data and responses to member
    and physician questionnaires and grievances.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| |  | Clinical care
    oversight.Each of our health plans
    has a medical advisory committee comprised of physician
    representatives and chaired by the plans medical director.
    This committee reviews credentialing, approves clinical
    protocols and practice guidelines and evaluates new physician
    group candidates. Based on regular reviews, the medical
    directors who head these committees develop recommendations for
    improvements in the delivery of medical care.                                                                                                                                                                                                                                                                                                                                                                     
|
| |  | Quality improvement
    plan.A quality improvement plan is
    implemented in each of our health plans and is governed by a
    quality management committee. The quality management committee
    is comprised of senior management at our health plans, who
    review and evaluate the quality of our health services and are
    responsible for the development of quality improvement plans
    spanning both clinical quality and customer service quality.
    These plans are developed from provider and membership feedback,
    satisfaction surveys and results of action plans. Our corporate
    quality improvement council oversees and meets regularly with
    our health plan quality management committees to help ensure
    that we have a coordinated, quality-focused approach relating to
    our members, providers and state governments.

Management Information Systems

The ability to access data and translate it into
meaningful information is essential to our being able to operate
across a multi-state service area in a cost-effective manner.
Our centralized computer-based information systems support our
core processing functions under a set of integrated databases.
This integrated approach helps to assure that consistent sources
of claim and member information are provided across all of our
health plans. We use these systems for billing, claims
processing, utilization management, marketing and sales
tracking, financial and management accounting, medical cost
trending, reporting, planning and analysis. The systems also
support our internal member and provider service functions,
including on-line access to member eligibility verification, PCP
membership roster and claims status.

We estimate that our current claims payment
system could be at full capacity within the next 12 months.
Accordingly, in November 2003, we signed a software licensing
agreement with The Trizetto Group, Inc. for their Facets
Extended EnterpriseTM administrative system (Facets).
We currently expect that Facets will meet our software needs for
an estimated ten years and will support our long-term growth
strategies.

Competition

Our principal competitors for state contracts,
members and providers consist of the following types of
organizations:



| |   |                                                                                                                                                                                                                                                       
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Primary Care Case Management Programs, or
    PCCMs  Programs established by the states through
    contracts with PCPs to provide primary care services to the
    Medicaid recipient, as well as provide limited oversight over
    other services.

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##### Table of Contents





| |   |                                                                                                                                                                                      
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Commercial HMOs  National and regional
    commercial managed care organizations that have Medicaid and
    Medicare members in addition to members in private commercial
    plans.
|
| |  | Medicaid HMOs  Managed care
    organizations that focus solely on serving people who receive
    health care benefits through Medicaid.                                            

We will continue to face varying levels of
competition as we expand in our existing service areas or enter
new markets. In Illinois, where enrollment in a managed care
plan is voluntary, we also compete for members with the
traditional means for accessing care, including hospitals and
other health care providers. Health care reform proposals may
cause a number of commercial managed care organizations already
in our service areas to decide to enter or exit the Medicaid
market. However, the licensing requirements and bidding and
contracting procedures in some states present barriers to entry
into the Medicaid managed health care industry.

We compete with other managed care organizations
to obtain state contracts, as well as to attract new members and
to retain existing members. States generally use either a formal
proposal process reviewing many bidders, or award individual
contracts to qualified applicants that apply for entry to the
program. In order to be awarded a state contract, state
governments consider many factors, which include providing
quality care, satisfying financial requirements, demonstrating
an ability to deliver services, and establishing networks and
infrastructure. People who wish to enroll in a managed health
care plan or to change health care plans typically choose a plan
based on the service offered, ease of access to services, a
specific provider being part of the network and the availability
of supplemental benefits.

In addition to competing for members, we compete
with other managed care organizations to enter into contracts
with independent physicians, physician groups and other
providers. We believe the factors that providers consider in
deciding whether to contract with us include potential member
volume, reimbursement rates, our medical management programs,
timeliness of reimbursement and administrative service
capabilities.

Regulation

Our health care operations are regulated at both
state and federal levels. Government regulation of the provision
of health care products and services is a changing area of law
that varies from jurisdiction to jurisdiction. Regulatory
agencies generally have discretion to issue regulations and
interpret and enforce laws and rules. Changes in applicable laws
and rules may also occur periodically.



| |              
| | -------------
| | HMOs and MCOs

Our five health plan subsidiaries are authorized
to operate as an HMO in each of Texas, Florida, New Jersey, the
District of Columbia and Illinois, and a MCO in Maryland. In
each of the jurisdictions in which we operate, we are regulated
by the relevant health, insurance and/or human services
departments that oversee the activities of HMOs and MCOs
providing or arranging to provide services to Medicaid enrollees.

The process for obtaining the authorization to
operate as an HMO or MCO is lengthy and complicated, and
requires demonstration to the regulators of the adequacy of the
health plans organizational structure, financial
resources, utilization review, quality assurance programs and
complaint procedures. Both under state HMO and MCO statutes and
state insurance laws, our health plan subsidiaries must comply
with minimum net worth requirements and other financial
requirements, such as minimum capital, deposit and reserve
requirements. Insurance regulations may also require the prior
state approval of acquisitions of other managed care
organizations businesses and the payment of dividends, as
well as notice for loans or the transfer of funds. Each of our
subsidiaries is also subject to periodic reporting requirements.
In addition, each health plan must meet numerous criteria to
secure the approval of state regulatory authorities before
implementing operational changes, including the development of
new product offerings and, in some states, the expansion of
service areas.

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| |         
| | --------
| | Medicaid

Medicaid was established under the
U.S. Social Security Act of 1965. It is a joint
federal-state program in which each state:



| |   |                                                                 
| | - | ----------------------------------------------------------------
| |  | establishes its own eligibility standards,                      
|
| |  | determines the type, amount, duration and scope
    of services,
|
| |  | sets the rate of payment for services, and                      
|
| |  | administers its own program.                                    

Medicaid policies for eligibility, services,
rates and payment are complex, and vary considerably among
states, and the state policies may change from time-to-time.

States are also permitted by the federal
government to seek waivers from requirements of the Social
Security Act. The waivers most relevant to us are the
Section 1915(b) freedom of choice waivers that enable:



| |   |                                                              
| | - | -------------------------------------------------------------
| |  | mandating Medicaid enrollment into managed care,             
|
| |  | utilizing a central broker for enrollment into
    plans,    
|
| |  | using cost savings to provide additional
    services, and   
|
| |  | limiting the number of providers for additional
    services.

Waivers are approved for two-year periods and can
be renewed on an ongoing basis if the state applies. A 1915(b)
waiver cannot negatively impact beneficiary access or quality of
care and must be cost-effective. Managed care initiatives may be
state-wide and required for all classes of Medicaid eligible
recipients, or may be limited to service areas and classes of
recipients. All jurisdictions in which we operate, except
Illinois, have some sort of mandatory Medicaid program. However,
under the waivers pursuant to which the mandatory programs have
been implemented, there must be at least two managed care plans
operating from which Medicaid eligible recipients may choose.

Many states, including Maryland, operate under a
Section 1115 demonstration rather than a 1915(b) waiver.
This is a more expansive form of waiver that enables the state
to have a Medicaid program that is broader than typically
permitted under the Social Security Act. For example,
Marylands 1115 waiver allows it to include more
individuals in its managed care program than typically allowed
under Medicaid.

In all the states in which we operate, we must
enter into a contract with the states Medicaid regulator
in order to be a Medicaid managed care organization. States
generally use either a formal proposal process, reviewing many
bidders, or award individual contracts to qualified applicants
that apply for entry to the program. Although other states have
done so in the past and may do so in the future, currently
Texas, Florida and the District of Columbia are the only
jurisdictions in which we operate that use competitive bidding
processes.

The contractual relationship with the state is
generally for a period of one to two years and renewable on an
annual or biannual basis. The contracts with the states and
regulatory provisions applicable to us generally set forth in
great detail the requirements for operating in the Medicaid
sector including provisions relating to:



| |   |                                                         
| | - | --------------------------------------------------------
| |  | eligibility, enrollment and disenrollment
    processes,
|
| |  | covered services,                                       
|
| |  | eligible providers,                                     
|
| |  | subcontractors,                                         
|
| |  | record-keeping and record retention,                    
|
| |  | periodic financial and informational reporting,         
|
| |  | quality assurance,                                      

15



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##### Table of Contents





| |   |                                                           
| | - | ----------------------------------------------------------
| |  | marketing,                                                
|
| |  | financial standards,                                      
|
| |  | timeliness of claims payment,                            
|
| |  | health education and wellness and prevention
    programs,
|
| |  | safeguarding of member information,                       
|
| |  | fraud and abuse detection and reporting,                  
|
| |  | grievance procedures, and                                 
|
| |  | organization and administrative systems.                  

A health plans compliance with these
requirements is subject to monitoring by the state regulator and
by CMS. A health plan is subject to periodic comprehensive
quality assurance evaluation by a third-party reviewing
organization and generally by the insurance department of the
jurisdiction that licenses the health plan. A health plan must
also submit quarterly and annual statutory financial statements
and utilization reports, as well as many other reports.

Federal Regulation



| |      
| | -----
| | HIPAA

In accordance with the Health Insurance
Portability and Accountability Act of 1996, or HIPAA, health
plans are required to comply with new regulations relating to
standards for electronic transactions and code sets, privacy of
health information, security of health care information,
national provider identifiers, and national employer identifiers.

In August 2000, the Department of Health and
Human Services, or HHS, issued new standards for submitting
electronic claims and other administrative health care
transactions. These regulations are codified at 42 C.F.R.
Part 162. Health care organizations that filed a written
compliance plan by October 2002 were required to comply with the
new standards as of October 16, 2003. The regulations
requirements apply when a transaction is transmitted using
electronic media. Health plans are required to have
the capacity to accept and send all covered transactions in a
standardized electronic format. In anticipation that the
industry as a whole would not be prepared to achieve compliance
with the regulatory requirements by October 16, 2003, and
in furtherance of our best efforts to achieve compliance by the
earliest possible date, we developed a contingency plan to
achieve compliance in coordination with efforts undertaken by
the state Medicaid agencies, our contracted clearinghouses and
our providers.

On July 24, 2003, CMS publicly released a
document outlining its guidance on compliance with transactions
and code sets after October 16, 2003. In the guidance, CMS
stated that it will focus on obtaining voluntary compliance by
using a complaint-driven process. If CMS received a complaint,
CMS will evaluate the entitys good faith
efforts to comply with the standards. CMS has stated that
it will not impose penalties on covered entities that deploy
contingencies (in order to ensure the smooth flow of payments)
if they have made reasonable and diligent efforts to become
compliant and, in the case of health plans, to facilitate the
compliance of their trading partners. In determining whether a
good faith effort has been made, CMS will place a strong
emphasis on sustained and demonstrable progress.

On April 14, 2003, health plans and
providers were required to be in compliance with HHS privacy
regulations. The regulations are designed to protect member
information, medical records and other personal health
information kept and used by health care providers, hospitals,
health plans and health insurers, and health care
clearinghouses. We have implemented the programs and systems
that were required for compliance with the new privacy
regulations by the required deadline. To verify our compliance,
we were audited by Utilization Review Accreditation Commission
and obtained full accreditation for compliance with their
privacy standards.

On February 20, 2003, HHS published its
final security regulations. The security rule applies only to
protected health information in electronic form, and is
specifically concerned with security information systems.

16



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##### Table of Contents



While we fully expect to be compliant with the
security rule by the April 2005 compliance date, we have not yet
determined the specific acts, costs or risks involved in
achieving such timely compliance.


AMERIGROUP had expenses of approximately
$2.6 million and $2.5 million on HIPAA compliance in
2003 and 2002, respectively. Additional costs may be incurred in
2004 in complying with the transaction standards and with the
security regulations. We are in the process of interpreting the
security regulations and cannot estimate the cost of compliance
at this time. Further, compliance with these regulations
requires changes to many of the procedures we previously used to
conduct our business, which may lead to additional costs that we
have not yet identified. We do not know whether, or the extent
to which, we will be able to recover from the states our costs
of complying with these new regulations.



| |                                          
| | -----------------------------------------
| | New Medicaid Managed Care
    Regulations

On January 19, 2001, HHS issued new Medicaid
managed care regulations to implement certain provisions of the
Balanced Budget Act of 1997, or BBA. These provisions permit
states to require certain Medicaid beneficiaries to enroll in
managed care programs, give states more flexibility to develop
their managed care programs and provide certain new protections
for Medicaid beneficiaries. States had until August 13,
2003 to bring their Medicaid managed care programs into
compliance with the requirements of the rule.

The rule implements BBA provisions intended to
(i) give states the flexibility to enroll certain Medicaid
recipients in managed care plans without a federal waiver if the
state provides the recipients with a choice of managed care
plans; (ii) establish protections for members in areas such
as quality assurance, grievance rights and coverage of emergency
services; and (iii) eliminate certain requirements viewed
by the states as impediments to the growth of managed care
programs, such as the enrollment composition requirement, the
right to disenroll without cause at any time, and the
prohibition against enrollee cost sharing. The rule also
establishes strict requirements intended to ensure that state
Medicaid managed care capitation rates are actuarially sound.

According to HHS, this requirement eliminates the
generally outdated regulatory ceiling on what states may pay
managed care plans, a particularly important provision as more
state Medicaid programs include people with chronic illnesses
and disabilities in managed care.

Although some of the states in which we operate
have already implemented requirements similar to those provided
for in the rule, the manner in which the rule is implemented in
each of the states could increase our health care costs and
administrative expenses, reduce our reimbursement rates, and
otherwise adversely affect our business, results of operations,
and financial condition.



| |                
| | ---------------
| | Medicaid Reform

As part of the current Administrations 2004
Budget submission to Congress in January 2003, HHS announced
principles for Medicaid reform. HHSs proposal would have
established two capped allotments for the states combining both
Medicaid and SCHIP funds, one for acute care and one for long
term care. Under this proposal, all mandatory populations and
benefits would continue to be covered as required under current
law. States, however, would be given flexibility for optional
populations and benefits. The proposal would be revenue-neutral
over a ten-year period, although states would receive an
additional $13.0 billion over the first seven years, with
corresponding funding reductions in years eight through
ten.

The proposal was meant to provide increased
flexibility to the states in managing their Medicaid and SCHIP
programs, in particular in the design of benefit packages for
optional populations. Governors working in concert with HHS were
unable to reach agreement on these principles and the proposal
has been currently set aside. In the Presidents Budget
that was released on February 2, 2004, the Administration
did not include the Medicaid reform proposal that it had
submitted the previous year due to the concerns of the
governors. Rather, the Administration stated in the budget
document it would work individually with states and continue to
look for new and innovative ways to address the challenges
facing Medicaid. The budget document states that the
Administration hopes in the future it will be able to pass
legislation similar to its proposal from last year. It is
uncertain whether this proposal from last year, or a variation
thereof, will be enacted sometime in the future.

17



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##### Table of Contents





| |                                 
| | --------------------------------
| | Patients Rights
    Legislation

The United States Congress has considered several
versions of patients rights legislation in previous
sessions. Though no bill has been introduced in the 108th
Congress, it is likely to remain an issue. Legislation could
expand our potential exposure to lawsuits and increase our
regulatory compliance costs. Depending on the final form of any
patients rights legislation, such legislation could, among
other things, expose us to liability for economic and punitive
damages for making determinations that deny benefits or delay
beneficiaries receipt of benefits as a result of our
medical necessity or other coverage determinations. There are
significant differences between the Senate, House of
Representatives and the current Administrations positions,
which could again delay any final bill. We cannot predict
whether patients rights legislation will be enacted into
law or, if enacted, what final form such legislation might take.



| |                           
| | --------------------------
| | Other Fraud and Abuse Laws

Investigating and prosecuting health care fraud
and abuse has become a top priority for law enforcement
entities. The funding of such law enforcement efforts has
increased in the past few years and these increases are expected
to continue. The focus of these efforts has been directed at
participants in public government health care programs such as
Medicaid. These regulations and contractual requirements
applicable to participants in these programs are complex and
changing. We have re-emphasized our regulatory compliance
efforts for these programs, but ongoing vigorous law enforcement
and the highly technical regulatory scheme mean that compliance
efforts in this area will continue to require substantial
resources.

Customers

As of December 31, 2003, we served members
who received health care benefits through our 13 contracts with
the regulatory entities in the jurisdictions in which we
operate. Five of these contracts, which are with the States of
Texas, Florida, Maryland and New Jersey, individually accounted
for 10% or more of our revenues for the year ended
December 31, 2003, with the largest of these contracts
representing approximately 20% of our revenues.

Employees

As of December 31, 2003, we had
approximately 2,100 employees. Our employees are not represented
by a union. We believe our relationships with our employees are
good.

Available Information

We file annual, quarterly and current reports,
proxy statements and all amendments to these reports and other
information with the United States Securities and Exchange
Commission, or SEC. We make available free of charge on or
through our website at www.amerigroupcorp.com our Annual Report
on Form 10-K, Quarterly Reports on Form 10-Q, Current
Reports on Form 8-K, and all amendments to those reports as
soon as reasonably practicable after such material is
electronically filed with or furnished to the SEC. Further, we
will provide, without charge upon written request, a copy of our
Annual Report on Form 10-K, Quarterly Reports on
Form 10-Q, Current Reports on Form 8-K, and all
amendments to those reports. Requests for copies should be
addressed to Investor Relations, AMERIGROUP Corporation, 4425
Corporation Lane, Virginia Beach, VA 23462.






|        |           
|------- | ----------
|Item 2. | Properties

We do not own any real property. We lease office
space in Virginia Beach, Virginia, where our headquarters, call,
claims and data centers are located. We also lease real property
in each of the health plan locations. We are obligated by
various insurance and Medicaid regulatory authorities to have
offices in the service areas where we provide Medicaid benefits.

The lease for our Virginia Beach call and data
centers facility terminates in September 2004. We entered into a
15-year lease, dated as of September 15, 2003, for a new
106,000 square-foot building in Virginia Beach,

18



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##### Table of Contents



Virginia, construction for which is scheduled to
be completed in September 2004. At this facility we will locate
our Virginia Beach call center, our primary data center and
other support functions.







|        |                  
|------- | -----------------
|Item 3. | Legal Proceedings

On July 18, 2002, Texas Childrens
Hospital, or TCH, in Houston filed suit in State District Court
against AMERIGROUP Texas, Inc., our Texas subsidiary, seeking to
be paid full-billed charges for all services rendered to our
Texas subsidiarys Medicaid members since October 1999. Our
Texas subsidiary does not have a contract with TCH to provide
services to its Medicaid members. When TCH provides services to
our members, it does so as a non-network provider. On
January 17, 2003, the physicians of Baylor College of
Medicine, or Baylor, non-network providers who provide medical
services at TCH, filed suit against our Texas subsidiary seeking
full-billed charges for services provided since October 1999 to
our Texas Medicaid members. On July 7, 2003, TCH and Baylor
added AMERIGROUP Corporation as an additional defendant to the
lawsuits, alleging that we are directly liable for the
obligations of our Texas subsidiary.

Our Texas subsidiarys contracts with the
State of Texas provide a methodology for compensating
non-network providers for services provided to our Medicaid
members and the State of Texas has approved our Texas
subsidiarys current non-network provider payment
methodology. TCH and Baylor each assert that they are not a
party to the contract our Texas subsidiary has with the State of
Texas and, therefore, they are not obligated to accept the
payments determined in accordance with our State contract. The
State approved our subsidiarys payment methodology for the
period prior to January 1, 2003 and determined that it was
appropriate with respect to compensating non-network providers
other than TCH and Baylor. Therefore, we believe that our
payment methodology approved by the State should be equally
applicable to TCH and Baylor. We believe that our methodology
for calculating payments to TCH and Baylor as non-network
providers is appropriate and we will vigorously defend against
the claims of TCH and Baylor. If we are required to pay
full-billed charges to TCH and Baylor at the conclusion of
litigation and all appeals, it could have a material adverse
effect on us.

On July 21, 2003, we filed a motion with the
Court to abate the suit and have the issues resolved through an
administrative procedure by the Texas Health and Human Services
Commission, or HHSC, which we believe has exclusive jurisdiction
to resolve out-of-network provider complaints concerning
reimbursements by Medicaid managed care organizations.

On November 10, 2003, the Court granted our
Motion to Abate the claims of TCH and Baylor and further ordered
that there be no further discovery or other action by the
parties on these claims until TCH and Baylor have completed the
administrative process with HHSC. To our knowledge TCH has not
initiated an administrative complaint in accordance with the
courts order. However, in March 2004 we received notice
from HHSC that it had commenced a review of certain claims
payment issues raised by TCH in early 2002, which are part of
the subject matter of the lawsuit.

TCH and Baylor requested an early review of the
Courts decision by the Court of Appeals in a Writ of
Mandamus action. The Court has not rendered a decision in this
mandamus action.

In May 2002, Capital Health Systems, or Capital,
in New Jersey filed an action against our New Jersey subsidiary,
in the Superior Court of New Jersey, Mercer County Law Division,
seeking to be paid full-billed charges for all services rendered
to our New Jersey subsidiarys Medicaid members since
January 1, 2002. Our New Jersey subsidiary has not had a
contract with Capital to provide services to its Medicaid
members since December 31, 2001. As a result, services
provided by Capital to our members since January 1, 2002
have been provided as a non-network provider. Capital asserts
that our New Jersey subsidiary agreed to pay full-billed charges
upon the expiration of our contract with them on
December 31, 2001. The Court ruled in favor of Capital on
August 8, 2003, and determined that our New Jersey
subsidiary entered into a new contract with Capital as of
December 31, 2001. Capital filed a notice of motion for
summary judgment on damages on September 12, 2003, seeking
approximately $8.5 million. Capitals motion was
denied on December 5, 2003. We have petitioned the Appeals
Court for leave to file an interlocutory appeal of the
Courts summary judgment on the issue of liability. The
petition is currently pending before the appellate division. On
February 20, 2004, the court adjourned the March 1,
2004 trial on the issue of damages.

19



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##### Table of Contents



We disagree with the Courts ruling and
believe that we have provided payment to Capital in an
appropriate manner. Once a determination of damages is made, we
intend to appeal the ruling. Our payments to Capital in their
role as a non-network provider were based upon our understanding
of the usual and customary reimbursement practices in New
Jersey. Effective July 1, 2003, New Jersey mandated that
payments to non-network facilities for emergency services be
limited to the States Medicaid fee-for-service rates. If
we are required to pay full-billed charges to Capital at the
conclusion of all appeals, it could have a material adverse
effect on us.

We are from time-to-time the subject matter of,
or involved in, other legal proceedings including claims for
reimbursement by providers. We believe that any liability or
loss resulting from such matters will not have a material
adverse effect on our financial position or results of
operations.






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

None.

Executive Officers of the Company

Our executive officers, their ages and positions
as of February 29, 2004, are as follows:

|                             |  |     |    |          |  |                                                                   
|---------------------------- |  | --- | -- | -------- |  | ------------------------------------------------------------------
|Name                         |  | Age |    | Position
|                             |  |     |    |         
|Jeffrey L. McWaters          |  |     | 47 |          |  | Chairman of the Board of Directors and Chief
    Executive Officer
|James G. Carlson             |  |     | 51 |          |  | President, Chief Operating Officer                                
|Lorenzo Childress, Jr., M.D. |  |     | 57 |          |  | Executive Vice President, Chief Medical Officer                   
|Stanley F. Baldwin           |  |     | 55 |          |  | Executive Vice President, General Counsel and
    Secretary       
|James E. Hargroves           |  |     | 61 |          |  | Executive Vice President, Corporate Development                   
|Catherine S. Callahan        |  |     | 46 |          |  | Executive Vice President, Administrative Services                 
|Nancy L. Grden               |  |     | 52 |          |  | Executive Vice President, Planning and Development                
|Leon A. Root, Jr.            |  |     | 50 |          |  | Executive Vice President, Chief Information
    Officer           
|Kathleen K. Toth             |  |     | 42 |          |  | Executive Vice President, Chief Accounting Officer                
|John E. Littel               |  |     | 39 |          |  | Senior Vice President, Government Relations                       
|Sherri E. Lee                |  |     | 52 |          |  | Senior Vice President, Treasurer                                  
|Richard C. Zoretic           |  |     | 45 |          |  | Senior Vice President, Chief Marketing Officer                    

Jeffrey L. McWatershas been our Chairman of the Board
of Directors and Chief Executive Officer since he founded our
company in December 1994. From 1991 to 1994, Mr. McWaters
served as President and Chief Executive Officer of Options
Mental Health, a national managed behavioral health care company
and prior to that, in various senior operating positions with
EQUICOR-Equitable HCA Corporation and CIGNA HealthCare.
Mr. McWaters is Vice Rector of the Board of Visitors of the
College of William and Mary, a director of the American
Association of Health Plans and a member of the New York
Stock Exchange Listed Companies Advisory Board.

James G. Carlsonjoined us as our President and
Chief Operating Officer in April 2003. Prior to joining us,
Mr. Carlson co-founded Workscape, Inc. in 1999, a privately
held provider of benefits and workforce management solutions,
for which he also served as Chief Executive Officer and a
Director. From 1995 to 1998, Mr. Carlson served as
Executive Vice President of UnitedHealth Group and President of
the UnitedHealthcare business unit, which served more than
10 million members in HMO and PPO plans nationwide.

Lorenzo Childress,
Jr., M.D.has served as our
Chief Medical Officer since 1995. From 1992 to 1995,
Dr. Childress was the Chief Operating Officer and Medical
Director of Metro Medical Group, an indirect wholly owned
subsidiary of the Henry Ford Health System.

Stanley F. Baldwinhas served as our General Counsel
and Secretary since 1997. Prior to that, Mr. Baldwin held
senior officer and General Counsel positions with EPIC
Healthcare Group, Inc., EQUICOR-Equitable HCA

20



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##### Table of Contents



Corporation and CIGNA Healthplans, Inc.
Mr. Baldwin is a member of the Bar of Tennessee and the Bar
of Texas.


James E. Hargroveshas served as our head of
Corporate Development since joining us in 1996. From 1994 to
1996, Mr. Hargroves was the President, founder and
principal of Waterline Advisory Group, Inc., a corporate
intermediary firm that provided merger and acquisition advisory
services to health-related businesses, insurers, physicians and
others.

Catherine S. Callahanjoined us in 1999 and serves as
our head of Associate Services. From 1991 to 1999,
Ms. Callahan was Chief Administrative Officer of FHC Health
System.

Nancy L. Grdenjoined us as our head of Planning
and Development in 2001. Prior to joining us, Ms. Grden
served as President and Founder of Avenir, LLC, a consulting
firm specializing in new ventures, and as Chief Executive
Officer for Lifescape, LLC, a web-based workplace services
company, from 1998 to 2000. She previously served as Executive
Vice President and Chief Marketing Officer for ValueOptions, a
national managed behavioral health care company, from 1992 to
1998.

Leon A.
Root, Jr.joined us in May
2002 as a Senior Vice President and has served as our Chief
Information Officer since June 2003. From 2001 to 2002,
Mr. Root served as Senior Vice President and Chief
Information Officer at Medunite, Inc., a private e-commerce
company. From 1998 to 2001, Mr. Root served as Senior Vice
President of McKessonHBOC Business System Division.

Kathleen K. Tothjoined us in 1995 and serves as
our Chief Accounting Officer. Prior to joining us, Ms. Toth
was the Vice President of Service Operations at Options Mental
Health from 1992 to 1995. Ms. Toth also worked for CIGNA
Healthplan of Texas, Inc. as Director of Financial Services and
for EQUICOR Health Plan of Florida as Controller from 1987 to
1992. Ms. Toth is a certified public accountant.

John E. Litteljoined us in 2001 as head of
Government Relations. Mr. Littel has served in a variety of
positions in federal and state governments, including as Deputy
Secretary of Health and Human Resources for the Commonwealth of
Virginia, where he was responsible for the states welfare
reform and health care initiatives. Mr. Littel is a member
of the Bar of Pennsylvania.

Sherri E. Leejoined us in 1998 as our Chief
Financial Officer and Treasurer. In 2001, Ms. Lee resigned
her position as Chief Financial Officer, but continues to serve
as Treasurer. Ms. Lee served as Executive Vice
President  Finance of Pharmacy Corporation of America
and prior to that, as Senior Vice President and Controller for
Beverly Enterprises, Inc. Ms. Lee is a certified public
accountant.

Richard C. Zoreticwas named as our Chief Marketing
Officer on September 23, 2003. Before joining us,
Mr. Zoretic served as Senior Vice President of network
operations and distribution at CIGNA Dental Health since
February 2003. From November 2001 to February 2003,
Mr. Zoretic worked as a senior manager for Deloitte
Consultings global management consulting practice,
specializing in the health plan segment. From March 2000 to
October 2001, Mr. Zoretic was an Executive Vice President
and General Manager of Workscape, Inc., a privately held
provider of benefits and workforce management solutions. From
October 1995 to March 2000, Mr. Zoretic served in a variety
of leadership positions at United Healthcare Group, including
President of United Healthcares Middle Market Business
segment and Regional Operating President of United
Healthcares Mid-Atlantic operations, including its
Maryland plan, for which he also served as Chief Executive
Officer.

21



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##### Table of Contents






PART II.






|        |                                                                 
|------- | ----------------------------------------------------------------
|Item 5. | Market for Our Common Equity and Related
    Stockholder Matters

Our common stock has been listed on the
New York Stock Exchange under the symbol AGP
since January 3, 2003. From November 6, 2001 until
January 2, 2003, our common stock was quoted on the NASDAQ
National Market. Prior to November 6, 2001, there was no
public market for our common stock.

The following table sets forth, for the periods
indicated, the range of high and low sales price for our common
stock for the periods indicated.

|               |  |      |       |     |  |   |       | 
|-------------- |  | ---- | ----- | --- |  | - | ----- | 
|2002           |  | High |       | Low
|               |  |      |       |    
|First Quarter  |  | $    | 30.19 |     |  | $ | 20.65 | 
|Second Quarter |  |      | 35.49 |     |  |   | 20.25 | 
|Third Quarter  |  |      | 34.29 |     |  |   | 21.72 | 
|Fourth Quarter |  |      | 35.38 |     |  |   | 25.90 | 

|                                      |  |   |       |  |  |  |       | 
|------------------------------------- |  | - | ----- |  |  |  | ----- | 
|2003                                  |  |   |       | 
|                                      |  |   |       | 
|First Quarter                         |  |   | 33.76 |  |  |  | 24.00 | 
|Second Quarter                        |  |   | 38.60 |  |  |  | 27.26 | 
|Third Quarter                         |  |   | 45.71 |  |  |  | 36.70 | 
|Fourth Quarter                        |  |   | 47.64 |  |  |  | 39.60 | 
|December 31, 2003 Closing Sales Price |  | $ | 42.65 |  |  |  |       | 

On March 2, 2004, the last reported sales
price of the Common Stock was $42.72 per share as reported
on the New York Stock Exchange. As of March 2, 2004,
we had 42 shareholders of record.

We have never declared or paid any cash dividends
on our common stock. We currently anticipate that we will retain
any future earnings for the development and operation of our
business. Also, as long as our credit facility is outstanding,
we are not able to pay dividends to our stockholders without the
consent of our lenders. Accordingly, we do not anticipate
declaring or paying any cash dividends in the foreseeable future.

In addition, our ability to pay dividends is
dependent on cash dividends from our subsidiaries. State
insurance and Medicaid regulations limit the ability of our
subsidiaries to pay dividends to us.

Use of Proceeds from Public Offering

On October 16, 2003, we completed a public
offering of 3,162,500 shares of common stock, including an
over-allotment issuance of 412,500 shares. The shares of
common stock sold in the offering were registered under the
Securities Act of 1933, as amended, on a Registration Statement
on Form S-3, Registration Number 333-108831, which was
declared effective by the Securities and Exchange Commission on
October 9, 2003, and a Registration Statement on
Form S-3, Registration Number 333-109609, filed with
the Securities and Exchange Commission pursuant to
Rule 462(b) of the General Rules and Regulations under the
Securities Act of 1933, as amended, on October 9, 2003. All
3,162,500 shares sold in the public offering were sold at a
price of $46.50 per share for an aggregate offering price
of $147.1 million. We received proceeds from the offering
of approximately $138.8 million, net of approximately
$7.4 million of underwriting fees and $0.9 million of
expenses. On October 21, 2003, we used $30.0 million
of proceeds from the offering to repay the outstanding balance
of our then-existing credit facility. The balance of
approximately $108.8 million will be used for general
corporate purposes, including acquisitions of businesses, asset
and technologies.

Banc of America Securities LLC and Credit Suisse
First Boston LLC acted as joint book-running managers of the
offering. CIBC World Markets Corp. and Stephens Inc. acted as
representatives of the underwriters.

22



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Forward-looking Statements

This Annual Report on Form 10-K, and other
information we provide from time-to-time, contains certain
forward-looking statements as that term is defined
by Section 27A of the Securities Act of 1933, as amended,
and Section 21E of the Securities Exchange Act of 1934, as
amended. All statements regarding our expected future financial
position, membership, results of operations or cash flows, our
continued performance improvements, our ability to service our
debt obligations and refinance our debt obligations, our ability
to finance growth opportunities, our ability to respond to
changes in government regulations and similar statements
including, without limitation, those containing words such as
believes, anticipates,
expects, may, will,
should, estimates, intends,
plans, and other similar expressions are
forward-looking statements.

Forward-looking statements involve known and
unknown risks and uncertainties that may cause our actual
results in future periods to differ materially from those
projected or contemplated in the forward-looking statements as a
result of, but not limited to, the following factors:



| |   |                                                                                                                                                                                                                                                         
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | national, state and local economic conditions,
    including their effect on the rate increase process, timing of
    payments, as well as their effect on the availability and cost
    of labor, utilities and materials,                             
|
| |  | the effect of government regulations and changes
    in regulations governing the health care industry, including our
    compliance with such regulations and their effect on certain of
    our unit cost and our ability to manage our medical costs,
|
| |  | changes in Medicaid payment levels and
    methodologies and the application of such methodologies by the
    government,                                                                                                                               
|
| |  | liabilities and other claims asserted against the
    company,                                                                                                                                                                                          
|
| |  | our ability to attract and retain qualified
    personnel,                                                                                                                                                                                              
|
| |  | our ability to maintain compliance with all
    minimum capital requirements,                                                                                                                                                                           
|
| |  | the availability and terms of capital to fund
    acquisitions and capital improvements,                                                                                                                                                                
|
| |  | the competitive environment in which we operate,                                                                                                                                                                                                        
|
| |  | our ability to maintain and increase membership
    levels, and                                                                                                                                                                                         
|
| |  | demographic changes.                                                                                                                                                                                                                                    

Investors should also refer to the section
entitled Risk Factors following section 7A
entitled Quantitative and Qualitative Disclosures About
Market Risk for a discussion of risk factors. Given these
risks and uncertainties, we can give no assurances that any
forward-looking statements will, in fact, transpire and,
therefore, caution investors not to place undue reliance on them.






|        |                        
|------- | -----------------------
|Item 6. | Selected Financial Data

The following selected consolidated financial
data should be read in connection with the financial statements
and related notes and Managements Discussion and Analysis
of Financial Condition and Results of Operations appearing
elsewhere in this Form 10-K. Selected financial data as of
and for each of the years in the five-year

23



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##### Table of Contents



period ended December 31, 2003 are derived
from our consolidated financial statements, which have been
audited by KPMG LLP, independent certified public accountants.


|                                                                                       |                                     |                                                |            |           |           |      |            |           |           |      |            |         |         |   |            |         |         |   |            |         |         | 
|-------------------------------------------------------------------------------------- | ----------------------------------- | ---------------------------------------------- | ---------- | --------- | --------- | ---- | ---------- | --------- | --------- | ---- | ---------- | ------- | ------- | - | ---------- | ------- | ------- | - | ---------- | ------- | ------- | 
|                                                                                       |                                     |                                               
|                                                                                       |                                     | Year ended December 31,                       
|                                                                                       |                                     |                                               
|                                                                                       |                                     | 2003                                           |            | 2002      |           | 2001 |            | 2000      |           | 1999
|                                                                                       |                                     |                                                |            |           |           |      |            |           |           |     
|                                                                                       |                                     |                                               
|                                                                                       |                                     | (Dollars in thousands, except per share data) 
|Income Statement Data:                                                                 |                                     |                                                |            |           |           |      |            |           |           |      |            |         |         |   |            |         |         |   |            |        
|Revenues:                                                                              |                                     |                                                |            |           |           |      |            |           |           |      |            |         |         |   |            |         |         |   |            |        
|                                                                                       | Premium                             |                                                | $          | 1,615,508 |           |      | $          | 1,152,636 |           |      | $          | 880,510 |         |   | $          | 646,408 |         |   | $          | 392,296 |        
|                                                                                       | Investment income                   |                                                |            | 6,726     |           |      |            | 8,026     |           |      |            | 10,664  |         |   |            | 13,107  |         |   |            | 6,404   |        
|                                                                                       |                                     |                                                |            |           |           |      |            |           |           |      |            |         |         |   |            |         |         |   |            |        
|                                                                                       |                                     | Total revenues                                 |            |           | 1,622,234 |      |            |           | 1,160,662 |      |            |         | 891,174 |   |            |         | 659,515 |   |            |         | 398,700 | 
|                                                                                       |                                     |                                                |            |           |           |      |            |           |           |      |            |         |         |   |            |         |         |   |            |        
|Expenses:                                                                              |                                     |                                                |            |           |           |      |            |           |           |      |            |         |         |   |            |         |         |   |            |        
|                                                                                       | Health benefits                     |                                                |            | 1,295,900 |           |      |            | 933,591   |           |      |            | 709,034 |         |   |            | 523,566 |         |   |            | 334,192 |        
|                                                                                       | Selling, general and administrative |                                                |            | 186,856   |           |      |            | 133,409   |           |      |            | 109,822 |         |   |            | 85,114  |         |   |            | 52,846  |        
|                                                                                       | Depreciation and amortization       |                                                |            | 23,650    |           |      |            | 13,149    |           |      |            | 9,348   |         |   |            | 6,275   |         |   |            | 3,635   |        
|                                                                                       | Interest                            |                                                |            | 1,913     |           |      |            | 791       |           |      |            | 763     |         |   |            | 781     |         |   |            | 811     |        
|                                                                                       |                                     |                                                |            |           |           |      |            |           |           |      |            |         |         |   |            |         |         |   |            |        
|                                                                                       |                                     | Total expenses                                 |            |           | 1,508,319 |      |            |           | 1,080,940 |      |            |         | 828,967 |   |            |         | 615,736 |   |            |         | 391,484 | 
|                                                                                       |                                     |                                                |            |           |           |      |            |           |           |      |            |         |         |   |            |         |         |   |            |        
|                                                                                       |                                     | Income before income taxes                     |            |           | 113,915   |      |            |           | 79,722    |      |            |         | 62,207  |   |            |         | 43,779  |   |            |         | 7,216   | 
|Income tax (expense) benefit                                                           |                                     |                                                | (46,591    | )         |           |      | (32,686    | )         |           |      | (26,127    | )       |         |   | (17,687    | )       |         |   | 4,100      |        
|                                                                                       |                                     |                                                |            |           |           |      |            |           |           |      |            |         |         |   |            |         |         |   |            |        
|                                                                                       |                                     | Net income                                     |            |           | 67,324    |      |            |           | 47,036    |      |            |         | 36,080  |   |            |         | 26,092  |   |            |         | 11,316  | 
|Accretion of redeemable preferred stock dividends                                      |                                     |                                                |           |           |           |      |           |           |           |      | (6,228     | )       |         |   | (7,284     | )       |         |   | (7,284     | )      
|                                                                                       |                                     |                                                |            |           |           |      |            |           |           |      |            |         |         |   |            |         |         |   |            |        
|                                                                                       |                                     | Net income attributable to common stockholders |            | $         | 67,324    |      |            | $         | 47,036    |      |            | $       | 29,852  |   |            | $       | 18,808  |   |            | $       | 4,032   | 
|                                                                                       |                                     |                                                |            |           |           |      |            |           |           |      |            |         |         |   |            |         |         |   |            |        
|Basic net income per share                                                             |                                     | $                                              | 3.11       |           |           | $    | 2.33       |           |           | $    | 8.08       |         |         | $ | 23.62      |         |         | $ | 7.11       |        
|                                                                                       |                                     |                                                |            |           |           |      |            |           |           |      |            |         |         |   |            |         |         |   |            |        
|Weighted average number of shares outstanding                                          |                                     |                                                | 21,622,704 |           |           |      | 20,177,728 |           |           |      | 3,694,844  |         |         |   | 796,409    |         |         |   | 567,146    |        
|                                                                                       |                                     |                                                |            |           |           |      |            |           |           |      |            |         |         |   |            |         |         |   |            |        
|Diluted net income per share                                                           |                                     | $                                              | 2.95       |           |           | $    | 2.19       |           |           | $    | 2.08       |         |         | $ | 1.55       |         |         | $ | 0.66       |        
|                                                                                       |                                     |                                                |            |           |           |      |            |           |           |      |            |         |         |   |            |         |         |   |            |        
|Weighted average number of shares and dilutive
    potential common shares outstanding |                                     |                                                | 22,801,650 |           |           |      | 21,469,422 |           |           |      | 16,649,721 |         |         |   | 15,818,175 |         |         |   | 14,695,324 |        
|                                                                                       |                                     |                                                |            |           |           |      |            |           |           |      |            |         |         |   |            |         |         |   |            |        

|                    |                                                                   |                        |   |         |  |      |   |         |  |      |   |         |  |  |   |         |  |  |   |         |  
|------------------- | ----------------------------------------------------------------- | ---------------------- | - | ------- |  | ---- | - | ------- |  | ---- | - | ------- |  |  | - | ------- |  |  | - | ------- | -
|                    |                                                                   |                       
|                    |                                                                   | December 31,          
|                    |                                                                   |                       
|                    |                                                                   | 2003                   |   | 2002    |  | 2001 |   | 2000    |  | 1999
|                    |                                                                   |                        |   |         |  |      |   |         |  |     
|                    |                                                                   |                       
|                    |                                                                   | (Dollars in thousands)
|Balance Sheet Data: |                                                                   |                        |   |         |  |      |   |         |  |      |   |         |  |  |   |         |  |  |   |        
|                    | Cash and cash equivalents and short and long-term
    investments |                        | $ | 535,103 |  |      | $ | 306,935 |  |      | $ | 301,837 |  |  | $ | 189,325 |  |  | $ | 166,218 |  
|                    | Total assets                                                      |                        |   | 826,021 |  |      |   | 578,484 |  |      |   | 406,942 |  |  |   | 268,126 |  |  |   | 222,321 |  
|                    | Long-term debt (including current portion and
    capital leases) |                        |   | 10,518  |  |      |   | 59,443  |  |      |   | 4,188   |  |  |   | 6,594   |  |  |   | 8,010   |  
|                    | Total liabilities                                                 |                        |   | 364,307 |  |      |   | 339,103 |  |      |   | 223,426 |  |  |   | 185,191 |  |  |   | 166,426 |  
|                    | Redeemable preferred stock                                        |                        |   |        |  |      |   |        |  |      |   |        |  |  |   | 78,190  |  |  |   | 70,906  |  
|                    | Stockholders equity (deficit)                                    |                        |   | 461,714 |  |      |   | 239,381 |  |      |   | 183,516 |  |  |   | 4,745   |  |  |   | (15,011 | )

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|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|Item 7. | Managements Discussion and Analysis
    of Results of Operations and Financial Condition

Overview

We are a multi-state managed health care company
focused on serving people who receive health care benefits
through publicly sponsored programs, including Medicaid, SCHIP
and FamilyCare. We were founded in December 1994 with the
objective to become the leading managed care organization in the
United States focused on serving people who receive these types
of benefits. Calendar year 2003 was our second full-year as a
public company and our first year trading on the New York
Stock Exchange.

In 2003 we increased our total revenues by 39.8%
over 2002. Our 2003 revenue growth came from a number of factors
including:



| |   |                                      
| | - | -------------------------------------
| |  | External growth through acquisitions:



| |   |                                                                                                                                                                                                                                                                                                                                                                    
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Effective January 1, 2003, we acquired the
    outstanding stock of PHP Holdings, Inc. and its subsidiary,
    Physicians Healthcare Plans, Inc. (together, PHP). With the
    acquisition of PHP, we began providing our products to
    approximately 193,000 additional members located in three
    Florida markets: Tampa, Orlando and Fort Lauderdale/ Miami.
|
| |  | Effective July 1, 2003, we acquired the
    Medicaid contract rights and related assets of St. Augustine
    which operates in nine counties in the Miami/
    Fort Lauderdale, Orlando and Tampa markets and served
    approximately 26,000 members.                                                                                                             



| |   |                                                                                                                                                                                                                                                             
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Obtaining rate increases from the states in which
    we operate  In a difficult state budgetary
    environment, we leveraged our partnerships with our states and
    received rate increases.                                                           
|
| |  | Successfully integrating members we received from
    a competitor exiting a market  During the third
    quarter of 2003, we successfully integrated approximately 28,000
    members in Texas which came to us from a competitor exiting that
    market.
|
| |  | Implementing new product or program expansions:                                                                                                                                                                                                             



| |   |                                                                                                                                                                                                                                                                                                                                                                           
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | We expanded into two new counties in Florida.                                                                                                                                                                                                                                                                                                                             
|
| |  | We successfully insourced our behavioral health
    benefits servicing approximately 463,000 members in four states
    and the District of Columbia. We believe this strategy optimizes
    member health status, and reinforces our mission to coordinate
    our members physical and behavioral health and positions us well
    for future growth in existing states.



| |   |                                                                                                          
| | - | ---------------------------------------------------------------------------------------------------------
| |  | Expanding in existing service areas 
    Our 2003 same-store premium revenues increased 11.5% over 2002.

Recent developments:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The State of Florida oversubscribed its SCHIP or
    Florida Healthy Kids program and thus faced a state funding
    shortfall. The initial response from the State was to create a
    temporary waiting list. Florida recently announced a plan to
    possibly fund up to 90,000 additional SCHIP members.                                                                                                                                                                                                                                
|
| |  | The State of Texas has announced its intent to
    award AMERIGROUP a contract for the Travis Service Area, which
    includes Austin and 7 additional counties, bringing the number
    of counties that we serve in the State to 27. We are currently
    finalizing the terms with the State and expect operations to
    begin in summer 2004. While initial estimates of growth are
    modest, this service area complements our long-term growth
    strategy. Currently, these counties are served by only one other
    health plan.

In 2003, our health benefits ratio was 80.2%
versus 81.0% in the 2002. Through effective early case finding,
disease management, reductions in membership related to less
profitable products and continued improvement in our claims
payment efficiencies, our medical costs remain stable and
predictable.

Technological improvements during the last year
helped us to maintain our SG&A ratio consistent with the
prior year at 11.5%. An example of our technological
improvements is the 52% increase in usage of our

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Interactive Voice Response system, which handled
1.3 million calls in 2003 without the interaction of a live
representative agent. Over the last several years, our efforts
to leverage our expenses have proven successful, resulting in a
decreasing SG&A ratio.


Cash and investments totaled $535.1 million
at the end of 2003. A portion of this cash is regulated by state
capital requirements. However, $199.9 million of our cash
and investments was unregulated and held at the parent level.

We expect acquisitions to continue to be an
important part of our growth strategy. Over 45% of our
membership has resulted from nine acquisitions and we are
currently evaluating potential acquisition opportunities. We
believe the proceeds from our recent public offering, our
undrawn credit facility and our cash flows from operating
activities position us to take advantage of acquisition
opportunities.

Discussion of Critical Accounting
Policies

In the ordinary course of business, we have made
a number of estimates and assumptions relating to the reporting
of results of operations and financial condition in the
preparation of our financial statements in conformity with
accounting principles generally accepted in the United States of
America. We base our estimates on historical experience and on
various other assumptions that we believe to be reasonable under
the circumstances. Actual results could differ from those
estimates and the differences could be significant. We believe
that the following discussion addresses our critical accounting
policies, which are those that are most important to the
portrayal of our financial condition and results of operations
and require managements most difficult, subjective and
complex judgments, often as a result of the need to make
estimates about the effect of matters that are inherently
uncertain.



| |                    
| | -------------------
| | Revenue recognition

We generate revenues primarily from premiums we
receive from the states in which we operate to arrange for
health benefit services for our members. We generally receive
premiums in advance of arranging for services, and recognize
premium revenue during the period in which we are obligated to
provide services to our members. A fixed premium per member per
month is paid to us to arrange for health care benefit services
for our members pursuant to our contracts in each of our
markets. In all of our states except Florida, we receive
supplemental payments for obstetric delivery. Upon delivery of a
newborn, each state is notified according to our contract. We
recognize revenue in the period that the newborn is delivered
and related services were provided to our member. Additionally,
in some states we receive supplemental payments for certain
services such as high cost drugs and early childhood prevention
screenings. Any amounts that have not been received from the
state by the end of the period are recorded on our balance sheet
as premium receivables. We also generate income from investments.



| |                                                          
| | ---------------------------------------------------------
| | Estimating health benefits expense and
    claims payable

Our results of operations depend on our ability
to effectively manage expenses related to health benefits, as
well as our ability to accurately predict costs incurred in
recording the amounts in our consolidated financial statements.
Expenses related to health benefits have two components: direct
medical expenses and medically related administrative costs.
Direct medical expenses include fees paid to hospitals,
physicians and providers of ancillary medical services, such as
pharmacy, laboratory, radiology, dental and vision. Medically
related administrative costs include expenses related to
services such as health promotion, quality assurance, case
management, disease management and 24-hour on-call nurses.
Direct medical expenses also include estimates of medical
expenses incurred but not yet reported, or IBNR. For the year
ended December 31, 2003, approximately 93% of our direct
medical payments related to fees paid on a fee-for-service basis
to our PCPs, specialist physicians and other providers,
including fees paid to third-party vendors for ancillary
services. The balance related to fees paid on a capitation, or
per member, basis. Primary care and specialist physicians not
paid on a capitated basis are paid on a maximum allowable fee
schedule set forth in the contracts with our providers. We
reimburse hospitals on a negotiated per diem, case rate or an
agreed upon percent of their standard charges. In Maryland, the
state sets the amount reimbursed to hospitals.

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We have used the same methodology for estimating
our medical expenses and medical liabilities since our
inception, and have refined our assumptions to take into account
our maturing claims and market experience. As medical
utilization patterns and cost trends change from year-to-year,
our underlying claims payments reflect the variations in
experience. Our estimates are revised based upon actual claims
payments using historical per-member, per-month claims cost,
including provider settlements, changes in the age and gender of
our membership and variations in the severity of medical
conditions. These variations are considered in determining our
current medical liabilities and adjusted to reflect expected
changes in cost or utilization patterns.

There are certain aspects of the managed care
business that are not predictable with consistency. These
aspects include the incidences of illness or disease state
(e.g., cardiac heart failure cases, cases of upper respiratory
illness, diabetes, the number of full-term versus premature
births, and the number of neonatal intensive care babies) as
well as non-medical aspects, such as changes in provider
contracting and contractual benefits. Therefore, we must rely
upon our historical experience, as continually monitored, to
reflect the ever-changing mix and growth of members.

Monthly, we estimate our IBNR based on a number
of factors, including authorization data and prior claims
experience. Authorization data is information captured in our
medical management system, which identifies services requested
by providers or members. The medical cost related to these
authorizations is estimated by pricing the approved services
using contractual or historical amounts adjusted for known
variables such as historical claims trends. These estimated
costs are included as a component of IBNR. As part of this
review, we also consider the costs to process medical claims,
and estimates of amounts to cover uncertainties related to
fluctuations in claims payment patterns, membership, products
and authorization trends. These estimates are adjusted as more
information becomes available and any adjustments are included
in current operations. We utilize the services of independent
actuarial consultants, who are contracted to review our
estimates quarterly. Judgments are made based on knowledge and
experience about past and current events. There is a likelihood
that actual results could be materially different if different
assumptions or conditions prevail.

Also included in claims payable are estimates for
provider settlements due to clarification of contract terms,
out-of-network reimbursement and claims payment differences, as
well as amounts due to or from contracted providers under
risk-sharing arrangements.

The following table shows the components of the
change in medical claims payable for the years ended
December 31, 2003, 2002 and 2001 (in thousands):

|                                                                            |                         |                |          |           |           |      |          |         |         |  |          |         |         | 
|--------------------------------------------------------------------------- | ----------------------- | -------------- | -------- | --------- | --------- | ---- | -------- | ------- | ------- |  | -------- | ------- | ------- | 
|                                                                            |                         | 2003           |          | 2002      |           | 2001
|                                                                            |                         |                |          |           |           |     
|Medical claims payable as of January 1                                      |                         |                | $202,430 |           |           |      | $180,346 |         |         |  | $150,462 |        
|Medical claims payable assumed from businesses
    acquired during the year |                         |                | 20,421   |           |           |      |         |         |         |  |         |        
|Health benefits expenses incurred during the year:                          |                         |                |          |           |           |      |          |         |         |  |          |        
|                                                                            | Related to current year |                |          | 1,355,065 |           |      |          | 988,628 |         |  |          | 768,519 |        
|                                                                            | Related to prior years  |                |          | (59,165   | )         |      |          | (55,037 | )       |  |          | (59,485 | )      
|                                                                            |                         |                |          |           |           |      |          |         |         |  |          |        
|                                                                            |                         | Total incurred |          |           | 1,295,900 |      |          |         | 933,591 |  |          |         | 709,034 | 
|Health benefits payments during the year:                                   |                         |                |          |           |           |      |          |         |         |  |          |        
|                                                                            | Related to current year |                |          | 1,135,082 |           |      |          | 803,432 |         |  |          | 597,332 |        
|                                                                            | Related to prior years  |                |          | 144,137   |           |      |          | 108,075 |         |  |          | 81,818  |        
|                                                                            |                         |                |          |           |           |      |          |         |         |  |          |        
|                                                                            |                         | Total payments |          |           | 1,279,219 |      |          |         | 911,507 |  |          |         | 679,150 | 
|                                                                            |                         |                |          |           |           |      |          |         |         |  |          |        
|Medical claims payable as of December 31                                    |                         |                | $239,532 |           |           |      | $202,430 |         |         |  | $180,346 |        
|                                                                            |                         |                |          |           |           |      |          |         |         |  |          |        

Changes in estimates of incurred claims for prior
years recognized during 2003, 2002 and 2001 were attributable to
lower than anticipated utilization and pricing of medical
services.

Due to the variable nature of claims, our
methodology includes adding a factor to compensate for
uncertainty. The more precisely we have been able to predict
claims patterns, the lower the required factor for

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##### Table of Contents



uncertainty. The health benefits expenses
incurred during the period related to prior years relate almost
entirely to revisions in estimates for the immediately preceding
year. The application of our methodology, even in a changing
environment, has resulted in reversals of estimated incurred
claims related to the prior year in each of the years in the
three year period ended December 31, 2003. The resulting
impact on operations is a function of the variation of the
change in estimate from year-to-year. In certain circumstances
we adjust claims for overpayments. A portion of these
adjustments may not be collected, so we estimate a historical
factor to offset the expected recoupment.


Changes in estimates are primarily the result of
obtaining more complete claims information that directly
correlates with the claims and provider reimbursement trends.
Since our estimates are based upon the blended per-member,
per-month claims experience, changes cannot typically be
explained by any single factor, but are the result of a number
of interrelated variables, all influencing the resulting
experience. These variables include fluctuations in claims
payment patterns, changes in membership levels, number and mix
of products, benefit structure, severity of illness and
authorization trends. We believe there will be less volatility
as we increase in size and gain more maturity in our markets.

We believe that the amount of claims payable is
adequate to cover our ultimate liability for unpaid claims as of
December 31, 2003; however, actual claim payments and other
items may differ from established estimates. Assuming a
hypothetical 1% difference between our December 31, 2003
estimates of claims payable and actual claims payable, net
income for the year ended December 31, 2003 would increase
or decrease by approximately $1.4 million and diluted
earnings per share would increase or decrease by approximately
$0.06 per share.



| |             
| | ------------
| | Income taxes

On a quarterly basis, we estimate our required
tax liability and assess the recoverability of our deferred tax
assets. Our taxes payable are estimated based on enacted rates,
including estimated tax rates in states where we do business
applied to the income expected to be taxed currently. Management
assesses the realizability of our deferred tax assets based on
the availability of carrybacks of future deductible amounts and
managements projections for future taxable income. We
cannot guarantee that we will generate income in future years.
Historically we have not experienced significant differences in
our estimates of our tax accrual.



| |                                   
| | ----------------------------------
| | Goodwill and intangible
    assets

As of December 31, 2003 and 2002, we had
goodwill and other intangible assets of $144.4 million and
$26.0 million, respectively, net of accumulated
amortization. We review our intangible assets with defined lives
for impairment whenever events or changes in circumstances
indicate we might not recover their carrying value. We assess
our goodwill for impairment at least annually. In assessing the
recoverability of these assets, we must make assumptions
regarding estimated future utility and cash flows and other
internal and external factors to determine the fair value of the
respective assets. If these estimates or their related
assumptions change in the future, we may be required to record
impairment charges for these assets.

Results of Operations

The following table sets forth selected operating
ratios for the years ended December 31, 2003, 2002 and
2001. All ratios, with the exception of the health benefits
ratio, are shown as a percentage of total revenues.

|                                             |  |      |       |      |  |      |       |   |  |  |       |  
|-------------------------------------------- |  | ---- | ----- | ---- |  | ---- | ----- | - |  |  | ----- | -
|                                             |  | 2003 |       | 2002 |  | 2001
|                                             |  |      |       |      |  |     
|Premium revenue                              |  |      | 99.6  | %    |  |      | 99.3  | % |  |  | 98.8  | %
|Investment income                            |  |      | 0.4   |      |  |      | 0.7   |   |  |  | 1.2   |  
|                                             |  |      |       |      |  |      |       |   |  |  |       |  
|Total revenues                               |  |      | 100.0 | %    |  |      | 100.0 | % |  |  | 100.0 | %
|                                             |  |      |       |      |  |      |       |   |  |  |       |  
|Health benefits(1)                           |  |      | 80.2  | %    |  |      | 81.0  | % |  |  | 80.5  | %
|Selling, general and administrative expenses |  |      | 11.5  | %    |  |      | 11.5  | % |  |  | 12.3  | %
|Income before income taxes                   |  |      | 7.0   | %    |  |      | 6.9   | % |  |  | 7.0   | %
|Net income                                   |  |      | 4.2   | %    |  |      | 4.1   | % |  |  | 4.0   | %



---



|    |                                                                                                                                                                                        
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The health benefits ratio is shown as a
    percentage of premium revenue because there is a direct
    relationship between the premium received and the health
    benefits provided.

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##### Table of Contents



The following table sets forth the approximate
number of our members in each of our service areas for the
periods presented.

|                      |  |              |         |      |  |      |         |      |  |      |         |  |  |  |         |  |  |  |         | 
|--------------------- |  | ------------ | ------- | ---- |  | ---- | ------- | ---- |  | ---- | ------- |  |  |  | ------- |  |  |  | ------- | 
|                      |  |             
|                      |  | December 31,
|                      |  |             
|Market                |  | 2003         |         | 2002 |  | 2001 |         | 2000 |  | 1999
|                      |  |              |         |      |  |      |         |      |  |     
|Houston               |  |              | 144,000 |      |  |      | 139,000 |      |  |      | 100,000 |  |  |  | 57,000  |  |  |  | 40,000  | 
|Dallas                |  |              | 93,000  |      |  |      | 84,000  |      |  |      | 64,000  |  |  |  | 42,000  |  |  |  | 34,000  | 
|Fort Worth            |  |              | 106,000 |      |  |      | 73,000  |      |  |      | 50,000  |  |  |  | 40,000  |  |  |  | 33,000  | 
|New Jersey            |  |              | 99,000  |      |  |      | 99,000  |      |  |      | 88,000  |  |  |  | 57,000  |  |  |  | 46,000  | 
|Maryland              |  |              | 124,000 |      |  |      | 125,000 |      |  |      | 118,000 |  |  |  | 95,000  |  |  |  | 83,000  | 
|District of Columbia  |  |              | 38,000  |      |  |      | 37,000  |      |  |      | 13,000  |  |  |  | 13,000  |  |  |  | 12,000  | 
|Chicago               |  |              | 32,000  |      |  |      | 34,000  |      |  |      | 39,000  |  |  |  | 29,000  |  |  |  | 20,000  | 
|Tampa                 |  |              | 132,000 |      |  |      |        |      |  |      |        |  |  |  |        |  |  |  |        | 
|Orlando               |  |              | 42,000  |      |  |      |        |      |  |      |        |  |  |  |        |  |  |  |        | 
|Miami/ Ft. Lauderdale |  |              | 47,000  |      |  |      |        |      |  |      |        |  |  |  |        |  |  |  |        | 
|                      |  |              |         |      |  |      |         |      |  |      |         |  |  |  |         |  |  |  |         | 
|Total                 |  |              | 857,000 |      |  |      | 591,000 |      |  |      | 472,000 |  |  |  | 333,000 |  |  |  | 268,000 | 
|                      |  |              |         |      |  |      |         |      |  |      |         |  |  |  |         |  |  |  |         | 

Year Ended December 31, 2003 Compared to
Year Ended December 31, 2002



| |         
| | --------
| | Revenues

Premium revenue for the year ended
December 31, 2003 increased $462.9 million, or 40.2%,
from $1,152.6 million in 2002. The increase was primarily due to
the acquisition of PHP (193,000 members) and St. Augustine
(26,000 members) as well as internal growth in overall
membership. Total membership increased 45.0% to 857,000 as of
December 31, 2003 from 591,000 as of December 31, 2002.

Investment income decreased $1.3 million to
$6.7 million for the year ended December 31, 2003. The
decrease in investment income is primarily due to the continued
decline in market interest rates and increased levels of
tax-advantaged securities partially offset by an increase in
overall cash and investments levels throughout the year. Cash
and investments levels have increased due to proceeds from our
public offering and cash generated from operations.



| |                
| | ---------------
| | Health benefits

Expenses relating to health benefits for the year
ended December 31, 2003 increased $362.3 million, or
38.8%, to $1,295.9 million from $933.6 million for the
year ended December 31, 2002. The increase was primarily
due to the increase in membership. The health benefits ratio, as
a percentage of premium revenue, for the year ended
December 31, 2003 was 80.2% compared to 81.0% in 2002.



| |                                                 
| | ------------------------------------------------
| | Selling, general and administrative
    expenses

Selling, general and administrative expenses
increased $53.5 million to $186.9 million for the year
ended December 31, 2003 compared to $133.4 million in
2002. The increase in selling, general and administrative
expenses was primarily due to an increase in wages and related
expenses for additional staff to support our increased
membership, expenses related to implementation of the HIPAA
guidelines, as well as expenses related to market development
activities. Our selling, general and administrative expense
ratio to revenue was 11.5% for both the years ended
December 31, 2003 and 2002.



| |                 
| | ----------------
| | Interest expense

Interest expense was $1.9 million and
$0.8 million for the years ended December 31, 2003 and
2002, respectively. The increase primarily relates to increased
average borrowings under our revolving credit facility to
partially finance the PHP acquisition. On October 21, 2003,
we used a portion of the net proceeds from our October 16,
2003 public offering to repay the outstanding balance under our
revolving credit facility.

29



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##### Table of Contents





| |                           
| | --------------------------
| | Provision for income taxes

Income tax expense for 2003 was
$46.6 million with an effective tax rate of 40.9% as
compared to the $32.7 million for 2002 with an effective
tax rate of 41.0%.



| |           
| | ----------
| | Net income

Net income for 2003 rose $20.3 million to
$67.3 million, or $2.95 per diluted share, compared to
$47.0 million, or $2.19 per diluted share in 2002.
Diluted earnings per share rose 34.7% as compared to an increase
in net income of 43.2%, due to the increase in shares
outstanding primarily resulting from the issuance of
3,162,500 shares from our October 16, 2003 public
offering.

Year Ended December 31, 2002 Compared to
Year Ended December 31, 2001



| |         
| | --------
| | Revenues

Premium revenue for the year ended
December 31, 2002 increased $272.1 million, or 30.9%,
to $1,152.6 million from $880.5 million for the year
ended December 31, 2001. The increase was principally due
to internal growth in overall membership and, to a lesser
extent, the acquisition of the Medicaid contracts and related
assets of Humanas Houston, Texas business in August 2001
(15,000 members), MethodistCares Houston, Texas business
in January 2002 (11,000 members) and the acquisition of the
Medicaid line of business of CCHP of Washington, D.C. in
July 2002 (23,000 members). Total membership increased 25.2% to
591,000 as of December 31, 2002 from 472,000 as of
December 31, 2001.

Investment income decreased $2.6 million to
$8.0 million for the year ended December 31, 2002. The
decrease in investment income is primarily due to the continued
decline in market interest rates and increased levels of
tax-advantaged securities partially offset by an increase in
overall cash and investments levels throughout the year. Cash
and investment levels primarily increased due to proceeds from
our initial public offering and cash generated from operations.



| |                
| | ---------------
| | Health benefits

Expenses relating to health benefits for the year
ended December 31, 2002 increased $224.6 million, or
31.7%, to $933.6 million from $709.0 million for the
year ended December 31, 2001. The increase was primarily
due to the increase in membership. The health benefits ratio, as
a percentage of premium revenue, for the year ended
December 31, 2002 was 81.0% compared to 80.5% in 2001. The
slight increase in the health benefits ratio is primarily due to
variations in levels of seasonality from 2001 to 2002 and
changes in the mix of members by product.



| |                                                 
| | ------------------------------------------------
| | Selling, general and administrative
    expenses

Selling, general and administrative expenses
increased $23.6 million to $133.4 million for the year
ended December 31, 2002 compared to $109.8 million in
2001. The increase in selling, general and administrative
expenses was primarily due to an increase in wages and related
expenses for additional staff to support our increased
membership, expenses related to the implementation and closing
of our acquisition of PHP in Florida, expenses related to
implementation of HIPAA as well as expenses related to market
development activities. Our selling, general and administrative
expense ratio to revenue was 11.5% and 12.3% for the year ended
December 31, 2002 and 2001, respectively. The decrease in
the ratio was a result of economies of scale and of fixed costs
being spread over a larger membership base.

30



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| |                 
| | ----------------
| | Interest expense

Interest expense was $0.8 million for each
of the years ended December 31, 2002 and 2001.



| |                           
| | --------------------------
| | Provision for income taxes

Income tax expense for 2002 was
$32.7 million with an effective tax rate of 41.0% as
compared to $26.1 million in 2001 and an effective tax rate
of 42.0%. The effective tax rate decreased in 2002 due primarily
to increased levels of investments in tax-advantaged securities.



| |           
| | ----------
| | Net income

Net income for 2002 rose $10.9 million to
$47.0 million, or $2.19 per diluted share, compared to
$36.1 million, or $2.08 per diluted share in 2001.
Diluted earnings per share rose only 5.3% as compared to an
increase in net income of 30.2% due to the increase in shares
outstanding which is primarily the result of the issuance of
4,985,000 shares from our November 2001 initial public
offering.

Liquidity and Capital Resources

Our primary sources of liquidity are cash and
cash equivalents, short and long-term investments, cash flow
from operations and borrowings under our credit facility. As of
December 31, 2003, we had cash and cash equivalents of
$407.2 million, short and long-term investments of
$127.9 million and restricted investments on deposit for
licensure of $35.3 million. As of December 31, 2003,
there were no borrowings outstanding under our
$95.0 million credit facility. Cash and investments totaled
$535.1 million at December 31, 2003. A portion of this
cash is regulated by state capital requirements. However,
$199.9 million of our cash and investments were unregulated
and held at the parent level.

On October 16, 2003, we completed a public
offering of 3,162,500 shares of common stock at
$46.50 per share, including an over-allotment issuance of
412,500 shares. Net proceeds from the offering, after fees
and expenses, were approximately $138.8 million. On
October 21, 2003, we used $30.0 million of proceeds
from the offering to repay the outstanding balance under our
credit facility.

Cash flows from operations was
$128.4 million for the year ended December 31, 2003
compared to $117.9 million for the year ended
December 31, 2002. The increase in cash from operations is
primarily due to the impact of an early receipt of premium
revenue received in 2003 attributable to operations in 2004 and
increases in depreciation and amortization expense. As of
December 31, 2003, we had working capital of
$127.6 million.

Cash used in investing activities decreased to
$27.8 million for the year ended December 31, 2003
from $143.5 million for the year ended December 31,
2002. The decrease in cash used in investing activities was
primarily due to an escrow deposit made in connection with the
acquisition of PHP and related costs of $124.1 million in
2002. We currently anticipate that our 2004 capital expenditures
will be approximately $34 million.

Our investment policies are designed to provide
liquidity, preserve capital and maximize total return on
invested assets. As of December 31, 2003, our investment
portfolio consisted primarily of fixed-income securities. The
weighted average maturity is less than six months. We utilize
investment vehicles such as municipal bonds, commercial paper,
U.S. government backed agencies, auction rate securities
and U.S. Treasury instruments. The states in which we
operate prescribe the types of instruments in which our
subsidiaries may invest their cash. The weighted average taxable
equivalent yield on consolidated investments as of
December 31, 2003 was approximately 1.56%.

Cash provided by financing activities was
$98.6 million and $49.8 million for the year ended
December 31, 2003 and December 31, 2002,
respectively. Cash provided by financing activities in 2003
consisted primarily of net proceeds from our public offering of
$138.8 million partially offset by $50.0 million in
repayments of borrowings under our credit facility. Cash
provided by financing activities in 2002 consisted primarily of
proceeds from our credit facility of $50.0 million.

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On October 22, 2003, we entered into a
$95.0 million Amended and Restated Credit Agreement with
Bank of America, N.A., Wachovia Bank, National Association,
Credit Suisse First Boston and CIBC World Markets Corp. The
Credit Agreement contains a provision which allows us to obtain,
subject to certain conditions, an increase in revolving
commitments of up to an additional $30.0 million. The
proceeds of the Credit Agreement are available for general
corporate purposes, including, without limitation, permitted
acquisitions of businesses, assets and technologies. The
borrowings under the Credit Agreement will accrue interest at
one of the following rates, at our option: Eurodollar plus the
applicable margin or an alternate base rate plus the applicable
margin. The applicable margin for Eurodollar borrowings is
between 2.00% and 2.50% and the applicable margin for alternate
base rate borrowings is between 1.00% and 1.50%. The applicable
margin will vary depending on our leverage ratio. The Credit
Agreement is secured by the assets of AMERIGROUP Corporation and
by the commons stock of its direct, wholly owned subsidiaries.
There is a commitment fee on the unused portion of the Credit
Agreement that ranges from 0.375% to 0.50%, depending on the
leverage ratio. The Credit Agreement terminates on
October 22, 2006.

Our subsidiaries are required to maintain minimum
statutory capital requirements prescribed by various
jurisdictions, including the departments of insurance in each of
the states in which we operate. As of December 31, 2003,
our subsidiaries were in compliance with all minimum statutory
capital requirements. We believe that we will continue to be in
compliance with these requirements for the next twelve months.

We believe that internally generated funds and
available funds under our revolving credit facility will be
sufficient to support continuing operations, capital
expenditures and our growth strategy for at least 12 months.

The following table summarizes our material
contractual obligations, including both on- and off-balance
sheet arrangements, and our commitments at December 31,
2003 (in thousands):

|                        |                             |                       |   |        |        |      |   |       |        |      |   |       |        |            |   |       |       |  |   |       |       |  |   |       |       |  |   |        |        | 
|----------------------- | --------------------------- | --------------------- | - | ------ | ------ | ---- | - | ----- | ------ | ---- | - | ----- | ------ | ---------- | - | ----- | ----- |  | - | ----- | ----- |  | - | ----- | ----- |  | - | ------ | ------ | 
|Contractual Obligations |                             | Total                 |   | 2004   |        | 2005 |   | 2006  |        | 2007 |   | 2008  |        | Thereafter
|                        |                             |                       |   |        |        |      |   |       |        |      |   |       |        |           
|Lease financing:        |                             |                       |   |        |        |      |   |       |        |      |   |       |        |            |   |       |       |  |   |       |       |  |   |       |       |  |   |       
|                        | Operating lease obligations |                       | $ | 62,848 |        |      | $ | 8,309 |        |      | $ | 8,234 |        |            | $ | 7,893 |       |  | $ | 6,941 |       |  | $ | 4,895 |       |  | $ | 26,576 |       
|                        | Capital lease obligations   |                       |   | 11,334 |        |      |   | 4,794 |        |      |   | 3,589 |        |            |   | 1,675 |       |  |   | 868   |       |  |   | 408   |       |  |   |       |       
|                        |                             |                       |   |        |        |      |   |       |        |      |   |       |        |            |   |       |       |  |   |       |       |  |   |       |       |  |   |       
|                        |                             | Total lease financing |   | $      | 74,182 |      |   | $     | 13,103 |      |   | $     | 11,823 |            |   | $     | 9,568 |  |   | $     | 7,809 |  |   | $     | 5,303 |  |   | $      | 26,576 | 
|                        |                             |                       |   |        |        |      |   |       |        |      |   |       |        |            |   |       |       |  |   |       |       |  |   |       |       |  |   |       

|                     |  |   |   |  |  |   |   |  |  |   |   |  |  |   |   |  |  |   |   |  |  |   |   |  |  |   |   | 
|-------------------- |  | - | - |  |  | - | - |  |  | - | - |  |  | - | - |  |  | - | - |  |  | - | - |  |  | - | - | 
|Long-term Borrowings |  |   |   |  |  |   |   |  |  |   |   |  |  |  
|                     |  |   |   |  |  |   |   |  |  |   |   |  |  |  
|Credit agreement     |  | $ |  |  |  | $ |  |  |  | $ |  |  |  | $ |  |  |  | $ |  |  |  | $ |  |  |  | $ |  | 
|                     |  |   |   |  |  |   |   |  |  |   |   |  |  |   |   |  |  |   |   |  |  |   |   |  |  |   |   | 

|                                                |                   |       |       |             |  |             |       |             |  |             |     |             |  |            |   |   |  |   |   |   |  |   |   |   |  |   |   |   | 
|----------------------------------------------- | ----------------- | ----- | ----- | ----------- |  | ----------- | ----- | ----------- |  | ----------- | --- | ----------- |  | ---------- | - | - |  | - | - | - |  | - | - | - |  | - | - | - | 
|                                                |                   |       |       | Expiring in |  | Expiring in |       | Expiring in |  | Expiring in |     | Expiring in |  |           
|Commitments                                     |                   | Total |       | 2004        |  | 2005        |       | 2006        |  | 2007        |     | 2008        |  | Thereafter
|                                                |                   |       |       |             |  |             |       |             |  |             |     |             |  |           
|Purchase obligations                            |                   | $     | 8,579 |             |  | $           | 8,579 |             |  | $           |    |             |  | $          |  |   |  | $ |  |   |  | $ |  |   |  | $ |  |  
|Lease guarantee related to Florida office space |                   |       | 844   |             |  |             | 676   |             |  |             | 168 |             |  |            |  |   |  |   |  |   |  |   |  |   |  |   |  |  
|                                                |                   |       |       |             |  |             |       |             |  |             |     |             |  |            |   |   |  |   |   |   |  |   |   |   |  |   |   |  
|                                                | Total commitments |       | $     | 9,423       |  |             | $     | 9,255       |  |             | $   | 168         |  |            | $ |  |  |   | $ |  |  |   | $ |  |  |   | $ |  | 
|                                                |                   |       |       |             |  |             |       |             |  |             |     |             |  |            |   |   |  |   |   |   |  |   |   |   |  |   |   |  

Lease Financing

Operating Lease
Obligations.Our operating lease
obligations are primarily for payments under non-cancelable
office space leases.

Capital Lease
Obligations.Our capital lease
obligations are primarily related to leased furniture, fixtures
and equipment. The terms of these leases are normally between
three and five years.

Long-term Borrowings

Credit Agreement.On
October 22, 2003, we entered into a $95.0 million
Amended and Restated Credit Agreement (Credit Agreement) with a
syndicate of banks. The Credit Agreement contains a provision
which allows us to obtain, subject to certain conditions, an
increase in revolving commitments of up to an additional

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$30.0 million. The proceeds of the Credit
Agreement are available for general corporate purposes,
including, without limitation, permitted acquisitions of
businesses, assets and technologies. The commitment fee on the
unused portion of the Credit Agreement ranges from 0.375% to
0.50%, depending on our leverage ratio. The Credit Agreement
terminates on October 22, 2006 and was undrawn as of
December 31, 2003.


Commitments

Purchase
Obligations.Under certain contracts,
we are committed to spend approximately $8.6 million on
software licensing and implementation expenses for our new
claims payment system and leasehold improvements relating to a
new building under construction in Virginia Beach, Virginia that
we will begin leasing in 2004.

Lease Guarantee.In
connection with our acquisition of PHP, we agreed to guarantee a
certain lease for office space operated by the former management
of PHP. The lease term ends in March 2005.

Regulatory Capital and Dividend
Restrictions

Our operations are conducted through our wholly
owned subsidiaries, which include HMOs and one managed care
organization, or MCO. HMOs and MCOs are subject to state
regulations that, among other things, may require the
maintenance of minimum levels of statutory capital, as defined
by each state, and restrict the timing, payment and amount of
dividends and other distributions that may be paid to their
stockholders. Additionally, state regulatory agencies may
require individual HMOs to maintain statutory capital
levels higher than the state regulations. As of
December 31, 2003, we believe our subsidiaries are in
compliance with all minimum statutory capital requirements. We
believe that we will continue to be in compliance with these
requirements at least through the end of 2004.

As of December 31, 2003, our subsidiaries
had aggregate statutory capital and surplus of approximately
$106.9 million, compared with the required minimum
aggregate statutory capital and surplus requirements of
approximately $63.1 million.

The National Association of Insurance
Commissioners, or NAIC, has adopted rules which, to the extent
that they are implemented by the states, set new minimum net
worth requirements for insurance companies, HMOs and other
entities bearing risk for health care coverage. The requirements
take the form of risk-based capital rules. The change in rules
for insurance companies became effective as of December 31,
1998. Illinois, Texas and the District of Columbia adopted
various forms of the rules as of December 31, 1999, 2000
and 2003, respectively. Since our Maryland subsidiary is
licensed in both the District of Columbia and Maryland, the
highest risk-based capital requirement between the two will
prevail. New Jersey and Florida have not yet adopted risk-based
capital as their net worth requirements. The NAICs HMO
rules, if adopted by these states in their proposed form, may
increase the minimum capital required for our subsidiaries.
Effective December 31, 2003, these plans are required to
maintain a statutory capital level greater than the state
regulations.

Inflation

Although the general rate of inflation has
remained relatively stable and health care cost inflation has
stabilized in recent years, the national health care cost
inflation rate still exceeds the general inflation rate. We use
various strategies to mitigate the negative effects of health
care cost inflation. Specifically, our health plans try to
control medical and hospital costs through contracts with
independent providers of health care services. Through these
contracted care providers, our health plans emphasize preventive
health care and appropriate use of specialty and hospital
services.

While we currently believe our strategies to
mitigate health care cost inflation will continue to be
successful, competitive pressures, new health care and
pharmaceutical product introductions, demands from health care
providers and customers, applicable regulations or other factors
may affect our ability to control the impact of health care cost
increases.

33



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##### Table of Contents



Off-Balance Sheet Arrangements

The Companys off-balance sheet arrangements
include future minimum rental commitments of $62.8 million
and a lease guarantee of $0.8 million, both of which are
disclosed in Note 12(c) to the consolidated financial
statements. The Company has no investments, loans or any other
known contractual arrangements with special-purpose entities,
variable interest entities or financial partnerships.

Compliance Costs

The federal regulations promulgated under HIPAA
relating to privacy, standard transactions and security were
issued in proposed form in 1998. We met the compliance date of
April 2003 for privacy rules and must comply by October 16,
2003 for transactions and April 2005 for security. The final
security rule was issued in February 2003 and we have not fully
assessed the cost of complying with these regulations. The fact
that either state or federal rules may supersede the other,
depending on the nature of the particular requirement, will
require interpretations for which there is likely to be little
precedent. We have implemented the programs and systems that
were required for compliance with the new privacy regulations by
April 2003 and continue work for transactions and security
compliance. In order to comply with the requirements, we will
have to employ additional or different programs and systems. We
had expenses of approximately $2.5 million on HIPAA
compliance in 2002. For 2003, we had expenses of approximately
$2.6 million on HIPAA compliance. Additional costs will be
incurred in 2004 in complying with the security regulations
which require compliance by April 2005. We are in the process of
interpreting the security regulations and cannot estimate the
cost of compliance at this time. We expect to be fully compliant
by the required dates. Further, compliance with these
regulations are requiring changes to many of the procedures we
currently use to conduct our business, which may lead to
additional costs that we have not yet identified. We do not know
whether, or the extent to which, we will be able to recover from
the states our costs of complying with these new regulations.






|         |                                                               
|-------- | --------------------------------------------------------------
|Item 7A. | Quantitative and Qualitative Disclosures
    About Market Risk

As of December 31, 2003 we had short-term
investments of $8.8 million, long-term investments of
$119.1 million and investments on deposit for licensure of
$35.3 million. These investments consist of highly liquid
investments with maturities between three and twenty-four
months. These investments are subject to interest rate risk and
will decrease in value if market rates increase. Credit risk is
managed by investing in money market funds, U.S. Treasury
securities, cash escrow accounts, asset-backed securities, debt
securities of government sponsored entities, municipal bonds and
auction rate securities. Our investment policies are subject to
revision based upon market conditions and our cash flow and tax
strategies, among other factors. We have the ability to hold
these investments to maturity, and as a result, we would not
expect the value of these investments to decline significantly
as a result of a sudden change in market interest rates. As of
December 31, 2003, a hypothetical 1% change in interest
rates would result in an approximate $1.6 million change in
our annual investment income.

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##### Table of Contents



RISK FACTORS

Risks related to being a regulated
entity



| |                                                                                                                                                                                          
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Changes in government regulations designed
    to protect providers and members rather than our stockholders
    could force us to change how we operate and could harm our
    business.

Our business is extensively regulated by the
states in which we operate and by the federal government. These
laws and regulations are generally intended to benefit and
protect providers and health plan members rather than
stockholders. Changes in existing laws and rules, the enactment
of new laws and rules and changing interpretations of these laws
and rules could, among other things:



| |   |                                                           
| | - | ----------------------------------------------------------
| |  | force us to change how we do business,                    
|
| |  | restrict revenue and enrollment growth,                   
|
| |  | increase our health benefits and administrative
    costs,
|
| |  | impose additional capital requirements, and               
|
| |  | increase or change our liability.                         

For example, in Texas, our health care operations
may be affected by laws passed in the 2003 Texas legislative
session, as well as new regulations adopted by the Texas
Department of Insurance, which became effective in October 2002.
The new laws include:



| |   |                                                                                                         
| | - | --------------------------------------------------------------------------------------------------------
| |  | a requirement that premium and maintenance taxes
    apply to Medicaid and SCHIP programs,              
|
| |  | new disclosure requirements regarding provider
    fee schedules and coding procedures,                 
|
| |  | more stringent prompt pay requirements that may
    become applicable to Medicaid and SCHIP programs,   
|
| |  | new requirements for establishing a special
    investigative unit to investigate fraudulent claims, and
|
| |  | new requirements for monitoring and supervising
    the activities of provider groups.                  



| |                                                                                                                                                                                        
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If state regulators do not approve payments
    of dividends, distributions or administrative fees by our
    subsidiaries to us, it could negatively affect our business
    strategy.

We principally operate through our health plan
subsidiaries. These subsidiaries are subject to regulations that
limit the amount of dividends and distributions that can be paid
to us without prior approval of, or notification to, state
regulators. We also have administrative services agreements with
our subsidiaries in which we agree to provide them with services
and benefits (both tangible and intangible) in exchange for the
payment of a fee. If the regulators were to deny our
subsidiaries requests to pay dividends to us or restrict
or disallow the payment of the administrative fee, the funds
available to our company as a whole would be limited, which
could harm our ability to implement our business strategy.



| |                                                                     
| | --------------------------------------------------------------------
| | Regulations could limit our profits as a
    percentage of revenues.

Our New Jersey and Maryland subsidiaries are
subject to minimum medical expense levels as a percentage of
premium revenue. In New Jersey, contractual sanctions may be
imposed if these levels are not met. In addition, our Texas
plans are required to pay a rebate to the state in the event
profits exceed established levels. These regulatory
requirements, changes in these requirements and additional
requirements by our other regulators could limit our ability to
increase our overall profits as a percentage of revenues, which
could harm our operating results. We have been required, and may
in the future be required, to make payments to the states as a
result of not meeting these expense and profit levels.

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| |                                                                                                                                                 
| | ------------------------------------------------------------------------------------------------------------------------------------------------
| | Our failure to comply with government
    regulations could subject us to civil and criminal penalties and
    limitations on our profitability.

Violation of the laws or regulations governing
our operations could result in the imposition of sanctions, the
cancellation of our contracts to provide services, or in the
extreme case, the suspension or revocation of our licenses. For
example, in two markets in which we operate we are required to
spend a minimum percentage of our premium revenue on medical
expenses. In one market, if we fail to comply with this
requirement, we could be required to pay monetary damages.
Additionally, we could be required to file a corrective plan of
action with the state and we could be subject to further fines
and additional corrective measures if we did not comply with the
corrective plan of action. In the other market, our failure to
comply could affect future rate determinations. These
regulations could limit the profits we can obtain.

While we have not been subject to any fines or
violations that were material, we cannot assure you that we will
not become subject to material fines or other sanctions in the
future. If we became subject to material fines or if other
sanctions or other corrective actions were imposed upon us, our
ability to continue to operate our business could be materially
and adversely affected.

In the past we have been subject to sanctions as
a result of violations of marketing regulations and timeliness
of the payment requirements. For example, in August 2000, our
Illinois plan received a sanction for violations of marketing
rules. In 2003, our Florida plan was fined for marketing
violations that occurred prior to and shortly after the
acquisition of PHP Holdings, Inc. and its subsidiary, Physician
Healthcare Plans, Inc., together PHP. In New Jersey, from
time-to-time, we are fined for failing to meet the timeliness of
payment requirements. Additionally, in July 2003, our New Jersey
subsidiary received a notice of deficiency for failure to
maintain provider network requirements in one New Jersey county
as required by our Medicaid contract with New Jersey. We
submitted to the State a corrective action plan and a request
for a waiver of certain contractual provisions on
August 10, 2003. On October 3, 2003, the State of New
Jersey denied our request for a waiver, but granted an extension
until November 28, 2003 to correct the network deficiency.
Prior to the expiration of this extension, AMERIGROUP requested
and received an additional extension to January 30, 2004 at
which time AMERIGROUP requested a waiver to certain network
requirements. AMERIGROUP is awaiting a determination by the
State of New Jersey on its requested waiver. There can be no
assurances that such a waiver will be granted.

On October 12, 2001, we responded to a Civil
Investigative Demand, or CID, of the HMO industry by the Office
of the Attorney General of the State of Texas relating to
processing of provider claims. We understand from the Office of
the Attorney General that responses were required from the nine
largest HMOs in Texas, of which we are the ninth. The other
eight are HMOs that primarily provide commercial products. The
CID is being conducted in connection with allegations of unfair
contracting, delegating and payment practices and violations of
the Texas Deceptive Trade Practices  Consumer
Protection Act and article 21.21 of the Texas Insurance Code by
HMOs. In meetings with representatives of the Attorney General,
they agreed that our required response would be limited to
providing information relating to our payment of hospital claims
only. In addition, based upon our discussions with the Office of
the Attorney General, it is our understanding that we are not
currently the target of any investigation by that Office. On
October 19, 2001 we filed our response to the CID including
all information that we believed was required to be produced. On
October 26, 2001, we received a request from the Office of
the Attorney General that we clarify and supplement certain of
our responses. We responded with a second filing on
December 21, 2001 and supplemental filings thereafter.
These additional filings were materials provided for
clarification of the original submission and were not the result
of an expansion of the scope of the CID. The Office of the
Attorney General could request additional information or
clarification that could be costly and time consuming for us to
produce.

The Health Insurance Portability and
Accountability Act of 1996, or HIPAA, broadened the scope of
fraud and abuse laws applicable to health care companies. HIPAA
created civil penalties for, among other things, billing for
medically unnecessary goods or services. HIPAA establishes new
enforcement mechanisms to combat fraud and abuse, including a
whistle-blower program. Further, a new regulation promulgated
pursuant to HIPAA imposes civil and criminal penalties for
failure to comply with the health records privacy standards set
forth in the regulation. The Department of Health and Human
Services, or HHS, press release related to the new regulation
calls on Congress to enact legislation to fortify
penalties and to create a private right of action under HIPAA.

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Although no such penalties or private cause of
action have yet been created, we do not know when or if such
sanctions may be enacted. HHS also issued its interim fiscal
rule on enforcement of the privacy regulations in April 2003.
Enforcement of the privacy regulations is handled under the
Office of Civil Rights.


The federal government has enacted, and state
governments are enacting, other fraud and abuse laws as well.
Our failure to comply with HIPAA or these other laws could
result in criminal or civil penalties and exclusion from
Medicaid or other governmental health care programs and could
lead to the revocation of our licenses. These penalties or
exclusions, were they to occur, would negatively impact our
ability to operate our business.



| |                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------
| | Compliance with new federal and state rules
    and regulations may require us to make unanticipated
    expenditures.

In August 2000, HHS issued a new regulation under
HIPAA requiring the use of uniform electronic data transmission
standards for health care claims and payment transactions
submitted or received electronically. We and the other health
organizations that filed a written compliance plan by October
2002 were required to comply with the new transactions
regulation by October 16, 2003. In July 2003, CMS issued
its guidance on the October 2003 compliance deadline for the
HIPAA transactions and code set rules, stating that enforcement
by CMS will be on a complaint-driven basis. Also in August 2000,
HHS proposed a regulation that would require health care
participants to implement organizational and technical practices
to protect the security of electronically maintained or
transmitted health-related information. This security
regulation, finalized in February 2003, requires compliance by
April 2005. In December 2000, HHS issued a new regulation
mandating heightened privacy and confidentiality protections
under HIPAA, which became effective on April 14, 2001 and
which required full compliance on or before April 14, 2003.
To the extent that state laws impose stricter privacy standards
than the HIPAA privacy regulations or to the extent that a state
seeks and receives an exception from HHS regarding certain state
laws, such laws will not be preempted.

The states ability to promulgate stricter
rules regarding privacy and uncertainty regarding many aspects
of the regulations make compliance with the relatively new
regulatory landscape difficult. Our existing programs and
systems may not enable us to comply in all respects with these
new regulations. We have implemented the programs and systems
that are required for compliance with the new privacy
regulations. In order to comply with the regulatory
requirements, we were required to employ additional or different
programs and systems. We had expenditures of approximately
$2.6 million and $2.5 million on HIPAA compliance in
2003 and 2002, respectively. Additional costs may be incurred in
2004 in complying with the security regulations which require
compliance by April 2005 and with the transaction standards
regulations, which are currently being implemented in accordance
with our contingency plans. We are in the process of
interpreting the security regulations and cannot estimate the
cost of compliance at this time. We expect to be fully compliant
by the required dates. Further, compliance with these pervasive
regulations will require changes to many of the procedures we
currently use to conduct our business, which may lead to
additional costs that we have not yet identified. We do not know
whether, or the extent to which, we will be able to recover our
costs of complying with these new regulations from the states.
The new regulations and related costs to comply with the new
regulations could have a material adverse effect on our
business. In addition, failure to comply with the new
regulations could also have a material adverse effect on our
business.

In January 2001, CMS published new federal
regulations regarding Medicaid managed care. On
June 14, 2002, CMS published final regulations that
replaced the January regulations in their entirety. The final
regulations implement requirements of the Balanced Budget Act of
1997 that are intended to give states more flexibility in their
administration of Medicaid managed care programs, provide
certain new patient protections for Medicaid managed care
enrollees, and require states rates to meet new actuarial
soundness requirements. The effective date for compliance with
the regulation was August 13, 2003, with an extension
provided to states operating under an 1115 demonstration waiver
with a three-year BBA extension. If states fail to comply with
the new regulations they could lose their funding from the
federal fund matching program. The new regulations have been
reflected in amendments in our contracts or new contracts with
the Medicaid agencies in our various markets, with the exception
of the Maryland market which currently operates under the 1115
demonstration waiver with the BBA extension. Compliance with
these new provisions have required changes to many of the

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procedures we currently use to conduct our
business, which may lead to additional costs that we have not
yet identified.




| |                                                                
| | ---------------------------------------------------------------
| | Changes in health care laws could reduce
    our profitability.

Numerous proposals relating to changes in health
care law have been introduced, some of which have been passed by
Congress and the states in which we operate or may operate in
the future. Changes in applicable laws and regulations are
continually being considered and interpretations of existing
laws and rules may also change from time to time. We are unable
to predict what regulatory changes may occur or what effect any
particular change may have on our business. Although some of the
recent changes in government regulations, such as the removal of
the requirements on the enrollment mix between commercial and
public sector membership, have encouraged managed care
participation in public sector programs, we are unable to
predict whether new laws or proposals will continue to favor or
hinder the growth of managed health care.

An example is state and federal legislation that
would enable physicians to collectively bargain with managed
health care organizations. The legislation, as currently
proposed, generally contains an exemption for public sector
managed health care organizations. If legislation of this type
were passed without this exemption, it would negatively impact
our bargaining position with many of our providers and might
result in an increase in our cost of providing medical benefits.

We cannot predict the outcome of these
legislative or regulatory proposals, nor the effect which they
might have on us. Legislation or regulations that require us to
change our current manner of operation, provide additional
benefits or change our contract arrangements could seriously
harm our operations and financial results.



| |                                                                          
| | -------------------------------------------------------------------------
| | Changes in federal funding mechanisms could
    reduce our profitability.

As part of the current Administrations 2004
Budget submission to Congress, HHS announced principles for
Medicaid reform. HHSs proposal would have established two
capped allotments for the states combining both Medicaid and
SCHIP funds, one for acute care and one for long-term care.
Under this proposal, all mandatory populations and benefits
would continue to be covered as required under current law.
States, however, would be given flexibility for optional
populations and benefits. The proposal would be revenue-neutral
over a ten-year period, although states would receive an
additional $13.0 billion over the first seven years, with
corresponding funding reductions in years eight through ten.

The proposal was meant to provide increased
flexibility to the states in managing their Medicaid and SCHIP
programs, in particular in the design of benefit packages for
optional populations. Governors working in concert with HHS were
unable to reach agreement on these principles and the proposal
was set aside for the time being. It is uncertain as to when, if
at all, this proposal, or a variation thereof, will be enacted.
Congress instead passed a $20.0 billion fiscal relief
program for the states, which included a $10.0 billion
increase in the share of medical assistance expenditures under
each states Medicaid program, known as FMAP.

If HHSs proposal is ultimately adopted and
the number of persons enrolled in Medicaid or SCHIP decreases in
the states in which we operate or the volume of health care
services provided is reduced, our growth, operations and
financial performance could be adversely affected.



| |                                                                                                   
| | --------------------------------------------------------------------------------------------------
| | Reductions in Medicaid funding by the
    states could substantially reduce our
    profitability.

Most of our revenues come from state government
Medicaid premiums. The base premium rate paid by each state
differs, depending on a combination of various factors such as
defined upper payment limits, a members health status,
age, gender, county or region, benefit mix and member
eligibility categories. Future levels of Medicaid premium rates
may be affected by continued government efforts to contain
medical costs and may further be affected by state and federal
budgetary constraints. Changes to Medicaid programs could reduce
the number of persons enrolled or eligible, reduce the amount of
reimbursement or payment levels, or increase our administrative
or health care costs under such programs. States periodically
consider reducing or reallocating the amount of money they spend
for Medicaid. We believe that additional reductions in Medicaid
payments could substantially reduce our profitability. Further,
our contracts with the states are subject to cancellation by the
state

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in the event of unavailability of state funds. In
some jurisdictions, such cancellation may be immediate and in
other jurisdictions a notice period is required.


State governments generally are experiencing
budgetary shortfalls. Budget problems in the states in which we
operate could result in limited increases or even decreases in
the premiums paid to us by the states. The State of Illinois,
which accounts for approximately 4% of our total enrollment as
of December 31, 2003, reduced the Medicaid premiums it pays
to us by approximately 5% in 2003 and 6% in 2002, due to state
budgetary concerns. If any state in which we operate were to
decrease premiums paid to us, or pay us less than the amount
necessary to keep pace with our cost trends, it could have a
material adverse effect on our profitability.



| |                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------
| | If state governments do not renew our
    contracts with them on favorable terms, our business will
    suffer.

As of December 31, 2003, we served members
who received health care benefits through 13 contracts with the
regulatory entities in the jurisdictions in which we operate.
Five of these contracts, which are with the states of Texas,
Florida, Maryland and New Jersey individually accounted for 10%
or more of our revenues for the year ended December 31,
2003, with the largest of these contracts representing
approximately 20% of our revenues. If any of our contracts were
not renewed on favorable terms or were terminated for cause or
if we were to lose a contract in a re-bidding process, our
business would suffer. All our contracts have been extended
until at least mid-2004 Termination or non-renewal of any single
contract could materially impact our revenues and operating
results.

Some of our contracts are subject to a re-bidding
process. For example, we are subject to a re-bidding process in
each of our three Texas markets and for our SCHIP contracts in
each of our three Florida markets. Our Texas markets are re-bid
every six years and the re-bidding process is scheduled to occur
in 2004. In Florida, six of eight counties currently under
contract were re-bid in April 2003. Our re-bid resulted in the
retention of four current counties and our selection as a new
carrier in two additional counties. The Florida SCHIP contracts
are re-bid every two or four years. If we lost a contract
through the re-bidding process, our operating results could be
materially and adversely affected.



| |                                                                                                                                                                                                          
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If a state fails to renew its federal
    waiver application for mandated Medicaid enrollment into managed
    care or such application is denied, our membership in that state
    will likely decrease.

States may only mandate Medicaid enrollment into
managed care under federal waivers or demonstrations. Waivers
and programs under demonstrations are approved for two-year
periods and can be renewed on an ongoing basis if the state
applies. We have no control over this renewal process. If a
state does not renew its mandated program or the federal
government denies the states application for renewal, our
business would suffer as a result of a likely decrease in
membership.



| |                                                                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We rely on the accuracy of eligibility
    lists provided by the state government. Inaccuracies in those
    lists would negatively affect our results of
    operations.

Premium payments to us are based upon eligibility
lists produced by the state government. From time-to-time,
states require us to reimburse them for premiums paid to us
based on an eligibility list that a state later discovers
contains individuals who are not in fact eligible for a
government sponsored program or are eligible for a different
premium category or a different program. Alternatively, a state
could fail to pay us for members for whom we are entitled to
payment. Our results of operations would be adversely affected
as a result of such reimbursement to the state if we had made
related payments to providers and were unable to recoup such
payments from the providers.



| |                                                                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If state regulatory agencies require a
    statutory capital level higher than the state regulations we may
    be required to make additional capital
    contributions.

Our operations are conducted through our wholly
owned subsidiaries, which include HMOs and one managed care
organization, or MCO. HMOs and MCOs are subject to state
regulations that, among other things, require the maintenance of
minimum levels of statutory capital, as defined by each state.
Additionally, state regulatory agencies may require, at their
discretion, individual HMOs to maintain statutory capital
levels higher

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than the state regulations. If this were to occur
to one of our subsidiaries, we may be required to make
additional capital contributions to the affected subsidiary. Any
additional capital contribution made to one of the affected
subsidiaries could have a material adverse effect on our
liquidity and our ability to grow.


Risks related to our business



| |                                                                                                                                   
| | ----------------------------------------------------------------------------------------------------------------------------------
| | Receipt of inadequate or significantly
    delayed premiums would negatively impact our revenues,
    profitability and cash flow.

Most of our revenues are generated by premiums
consisting of fixed monthly payments per member. These premiums
are fixed by contract, and we are obligated during the contract
period to facilitate access to health care services as
established by the state governments. We have less control over
costs related to the provision of health care than we do over
our selling, general and administrative expenses. Historically,
our expenses related to health benefits as a percentage of
premium revenue have fluctuated. For example, our expenses
related to health benefits were 80.2% of our premium revenue in
2003, and 81.0% of our premium revenue in 2002. If premiums are
not increased and expenses related to health benefits rise, our
earnings could be impacted negatively. In addition, our actual
health benefits costs may exceed our estimated costs. The
premiums we receive under our current contracts may therefore be
inadequate to cover all claims, which could cause our profits to
decline.

Maryland sets the rates that must be paid to
hospitals by all payors. It is possible for the state to
increase rates payable to the hospitals without granting a
corresponding increase in premiums to us. If this were to occur,
or if other states were to take similar actions, our
profitability would be harmed.

Premiums are contractually payable to us before
or during the month for services that we are obligated to
provide to our members. Our cash flow would be negatively
impacted if premium payments are not made according to contract
terms.



| |                                                                                      
| | -------------------------------------------------------------------------------------
| | Our inability to manage medical costs
    effectively would reduce our profitability.

Our profitability depends, to a significant
degree, on our ability to predict and effectively manage medical
costs. Changes in health care regulations and practices, level
of use of health care services, hospital costs, pharmaceutical
costs, major epidemics, new medical technologies and other
external factors, including general economic conditions such as
inflation levels, are beyond our control and could reduce our
ability to predict and effectively control the costs of health
care services. Although we have been able to manage medical
costs through a variety of techniques, including various payment
methods to primary care physicians and other providers, advance
approval for hospital services and referral requirements,
medical management and quality management programs, our
information systems and reinsurance arrangements, we may not be
able to continue to manage costs effectively in the future. It
is possible that claims previously denied and claims previously
paid to non-network providers will be appealed and subsequently
reprocessed at different amounts. This would result in an
adjustment to claims expense. If our costs for medical services
increase, our profits could be reduced, or we may not remain
profitable.



| |                                                                                                                              
| | -----------------------------------------------------------------------------------------------------------------------------
| | Our limited ability to predict our incurred
    medical expenses accurately could negatively impact our reported
    results.

Our medical expenses include estimates of medical
expenses incurred but not yet reported, or IBNR. We estimate our
IBNR medical expenses based on a number of factors, including
authorization data, prior claims experience, maturity of
markets, complexity and mix of products and stability of
provider networks. Adjustments, if necessary, are made to
medical expenses in the period during which the actual claim
costs are ultimately determined or when criteria used to
estimate IBNR change. We utilize the services of independent
actuaries who are contracted on a regular basis to calculate and
review the adequacy of our medical liabilities, in addition to
using our internal resources. We cannot be sure that our IBNR
estimates are adequate or that adjustments to such IBNR
estimates will not harm our results of operations. Further, our
inability to accurately estimate IBNR may also affect our
ability to take timely corrective actions, further exacerbating
the extent of the harm on our results.

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We maintain reinsurance to protect us against
severe or catastrophic medical claims, but we cannot assure you
that such reinsurance coverage will be adequate or available to
us in the future or that the cost of such reinsurance will not
limit our ability to obtain it.



| |                                                                                                                                 
| | --------------------------------------------------------------------------------------------------------------------------------
| | Difficulties in executing our acquisition
    strategy or integrating acquired business could adversely affect
    our business.

Historically, acquisitions including the
acquisition of Medicaid contract rights and related assets of
other health plans, both in our existing service areas and in
new markets, has accounted for a significant amount of our
growth. Although we cannot predict our rate of growth as the
result of acquisitions with complete accuracy, we believe that
acquisitions similar in nature to those we have historically
executed will be important to our growth strategy. Many of the
other potential purchasers of these assets have greater
financial resources than we have. In addition, many of the
sellers are interested in either (1) selling, along with their
Medicaid assets, other assets in which we do not have an
interest; or (2) selling their companies, including their
liabilities, as opposed to just the assets of the ongoing
business. Therefore, we cannot be sure that we will be able to
complete acquisitions on terms favorable to us or that we can
obtain the necessary financing for these acquisitions.

We are currently evaluating potential
acquisitions that would increase our membership, as well as
acquisitions of complementary health care service businesses.
These potential acquisitions are at various stages of
consideration and discussion and we may enter into letters of
intent or other agreements relating to these proposals at any
time. However, we cannot predict when or whether we will
actually acquire these businesses.

We are generally required to obtain regulatory
approval from one or more state agencies when making
acquisitions. In the case of an acquisition of a business
located in a state in which we do not currently operate, we
would be required to obtain the necessary licenses to operate in
that state. In addition, although we may already operate in a
state in which we acquire a new business, we will be required to
obtain additional regulatory approval if, as a result of the
acquisition, we will operate in an area of the state in which we
did not operate previously. There can be no assurance that we
would be able to comply with these regulatory requirements for
an acquisition in a timely manner, or at all.

Our existing credit facility imposes certain
restrictions on acquisitions. We may not be able to meet these
restrictions.

In addition to the difficulties we may face in
identifying and consummating acquisitions, we will also be
required to integrate our acquisitions with our existing
operations. This may include the integration of:



| |   |                                                                                                 
| | - | ------------------------------------------------------------------------------------------------
| |  | additional employees who are not familiar with
    our operations,                              
|
| |  | existing provider networks, which may operate on
    different terms than our existing networks,
|
| |  | existing members, who may decide to switch to
    another health care provider, and             
|
| |  | disparate information and record keeping systems.                                               

We may be unable to successfully identify,
consummate and integrate future acquisitions, including
integrating the acquired businesses on to our technology
platform, or to implement our operations strategy in order to
operate acquired businesses profitably. We also may be unable to
obtain sufficient additional capital resources for future
acquisitions. There can be no assurance that incurring expenses
to acquire a business will result in the acquisition being
consummated. These expenses could impact our selling, general
and administrative expense ratio. If we are unable to
effectively execute our acquisition strategy or integrate
acquired businesses, our future growth will suffer and our
results of operations could be harmed.



| |                                                                                 
| | --------------------------------------------------------------------------------
| | Failure of a new business would negatively
    impact our results of operations.

Start-up costs associated with a new business can
be substantial. For example, in order to obtain a certificate of
authority in most jurisdictions, we must first establish a
provider network, have systems in place and demonstrate our
ability to be able to obtain a state contract and process
claims. If we were unsuccessful in obtaining the necessary
license, winning the bid to provide service or attracting
members in numbers sufficient to

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cover our costs, the new business would fail. We
also could be obligated by the state to continue to provide
services for some period of time without sufficient revenue to
cover our ongoing costs or recover start-up costs. The loss of
the costs associated with starting up the business could have a
significant impact on our results of operations.




| |                                                                                                                                                             
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Ineffective management of rapid growth or
    our inability to grow could negatively affect our results of
    operations, financial condition and business.

We have experienced rapid growth. In 1996, our
first full year of operations, we had $22.9 million of
premium revenue. In 2003, we had $1,615.5 million in
premium revenue. This increase represents a compound annual
growth rate of 83.7%.

Depending on acquisition and other opportunities,
we expect to continue to grow rapidly. Continued growth could
place a significant strain on our management and on other
resources. We anticipate that continued growth, if any, will
require us to continue to recruit, hire, train and retain a
substantial number of new and highly skilled medical,
administrative, information technology, finance and other
support personnel. Our ability to compete effectively depends
upon our ability to implement and improve operational, financial
and management information systems on a timely basis and to
expand, train, motivate and manage our work force. If we
continue to experience rapid growth, our personnel, systems,
procedures and controls may be inadequate to support our
operations, and our management may fail to anticipate adequately
all demands that growth will place on our resources. In
addition, due to the initial costs incurred upon the acquisition
of new businesses, rapid growth could adversely affect our
short-term profitability. Our inability to manage growth
effectively or our inability to grow could have a negative
impact on our business, operating results and financial
condition.



| |                                                                                                                           
| | --------------------------------------------------------------------------------------------------------------------------
| | We are subject to competition that impacts
    our ability to increase our penetration of the markets that we
    service.

We compete for members principally on the basis
of size and quality of provider network, benefits provided and
quality of service. We compete with numerous types of
competitors, including other health plans and traditional state
Medicaid programs that reimburse providers as care is provided.
Some of the health plans with which we compete have
substantially larger enrollments, greater financial and other
resources and offer a broader scope of products than we do.

While many states mandate health plan enrollment
for Medicaid eligible participants, the programs are voluntary
in other states, such as Illinois. Subject to limited exceptions
by federally approved state applications, the federal government
requires that there be choice for Medicaid recipients among
managed care programs. Voluntary programs and mandated
competition will impact our ability to increase our market share.

In addition, in most states in which we operate
we are not allowed to market directly to potential members, and
therefore, we rely on creating name brand recognition through
our community-based programs. Where we have only recently
entered a market or compete with health plans much larger than
we are, we may be at a competitive disadvantage unless and until
our community-based programs and other promotional activities
create brand awareness.



| |                                                                                               
| | ----------------------------------------------------------------------------------------------
| | Restrictions and covenants in our credit
    facility could limit our ability to take actions.

On October 22, 2003, we entered into a new
$95.0 million Amended and Restated Credit Agreement with
four lenders. The credit facility contains a provision which
allows us to obtain, subject to certain conditions, an increase
in revolving commitments of up to an additional
$30.0 million. Our Credit Agreement is secured by the
assets of AMERIGROUP and by the common stock of its direct,
wholly owned subsidiaries. Pursuant to the Credit Agreement, we
must meet certain financial covenants. As of December 31,
2003, we were in compliance with such covenants. These financial
covenants include meeting certain financial ratios, a limit on
annual capital expenditures, and a minimum net worth
requirement. As of December 31, 2003, the credit facility
was undrawn.

Events beyond our control, such as prevailing
economic conditions and changes in the competitive environment,
could impair our operating performance, which could affect our
ability to comply with the terms of

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the credit facility. Breaching any of the
covenants or restrictions could result in the unavailability of
the facility or a default under the credit facility. We cannot
assure you that our assets or cash flow will be sufficient to
fully repay outstanding borrowings under the credit facility or
that we would be able to restructure such indebtedness on terms
favorable to us. If we were unable to repay, refinance or
restructure our indebtedness under the credit facility, the
lenders could proceed against the collateral securing the
indebtedness.




| |                                                                                                                                                                                                                                                             
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The loss of the services of our Chairman of
    the Board of Directors and Chief Executive Officer would harm
    our operations; our inability to find a suitable replacement for
    our Chief Financial Officer could negatively impact our
    business.

We are highly dependent on the efforts of
Mr. Jeffrey McWaters, our Chairman of the Board of
Directors and Chief Executive Officer. Mr. McWaters, as our
founder, has been instrumental in developing our mission and
forging our relationships with our government client-customers
and the communities we serve. We cannot assure you that we will
be able to retain Mr. McWaters or attract a suitable
replacement or additional personnel if required. We have an
employment agreement with Mr. McWaters that continues from
year-to-year unless terminated by either party on 30 days
written notice. We cannot be sure that the employment agreement
creates sufficient incentives for Mr. McWaters to continue
his employment with us. While we believe that we could find a
replacement for Mr. McWaters if he were to leave, the loss
of his services could harm our operations.

Our Chief Financial Officer resigned effective
October 1, 2003. Although we intend to hire a new Chief
Financial Officer, doing so might be difficult or take an
extended period of time, which could negatively impact our
business.



| |                                                                                                          
| | ---------------------------------------------------------------------------------------------------------
| | Our inability to maintain satisfactory
    relationships with providers would harm our
    profitability.

Our profitability depends, in large part, upon
our ability to contract favorably with hospitals, physicians and
other health care providers. Our provider arrangements with our
primary care physicians and specialists usually are for one to
two-year periods and automatically renew for successive one-year
terms, subject to termination by us for cause based on provider
conduct or other appropriate reasons. The contracts generally
may be canceled by either party upon 90 to 120 days prior
written notice. Our contracts with hospitals are usually for one
to two-year periods and automatically renew for successive
one-year periods, subject to termination for cause due to
provider misconduct or other appropriate reasons. Generally, our
hospital contracts may be canceled by either party without cause
on 90 to 150 days prior written notice. There can be no
assurance that we will be able to continue to renew such
contracts or enter into new contracts enabling us to service our
members profitably. We will be required to establish acceptable
provider networks prior to entering new markets. Although we
have established long-term relationships with many of our
providers, we may be unable to enter into agreements with
providers in new markets on a timely basis or under favorable
terms. If we are unable to retain our current provider contracts
or enter into new provider contracts timely or on favorable
terms, our profitability will be harmed.

On occasion, our members obtain care from
providers that are not in our network and with which we do not
have contracts. To the extent that we know of such instances, we
attempt to redirect their care to a network provider. We have
generally reimbursed non-network providers at the rates paid to
comparable network providers or at the applicable rate that the
provider could have received under the traditional
fee-for-service Medicaid program or at a discount therefrom. In
some instances, we pay non-network providers pursuant to the
terms of our contracts with the State. However, some non-network
providers have requested that we pay them at their highest
billing rate, or full-billed charges. Full-billed
charges are significantly more than the amount the non-network
providers could otherwise receive under the traditional
fee-for-service Medicaid program. Additionally, some non-network
providers in New Jersey and Texas have filed lawsuits seeking
reimbursements of full-billed charges from us for services they
provided to our members. The Texas trial court ruled in November
2003 to abate the lawsuit brought by out-of-network providers
pending the providers exhaustion of administrative
remedies with HHSC. To our knowledge TCH has not initiated an
administrative complaint in accordance with the courts
order. However, in March 2004 we received notice that HHSC had
commenced a review of certain claims payment issues raised by
TCH in early 2002, which are part of the subject matter of the
lawsuit.

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On August 8, 2003, the Court ruled against
our New Jersey subsidiary. Although no amount of damages has
been determined thus far, a notice of motion for summary
judgment on damages was filed on September 12, 2003,
seeking approximately $8.5 million. The Court denied the
motion on December 5, 2003. We have petitioned the Appeals
Court for move to file an interlocutory appeal of the Superior
Courts summary judgement on the issue of liability. The
petition is currently pending before the appellate division. On
February 20, 2004, the court adjourned the March 1,
2004 trial on the issue of damages. To the extent that
non-network providers are successful in obtaining payment at
rates in excess of the rates that we have historically paid to
non-network providers, our profitability could be materially
adversely affected. See Business  Legal
Proceedings.



| |                                                                                                                                                                                                 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We are dependent on our relationship with
    Cook Childrens Physician Network. Any material
    modification or discontinuation of this relationship could harm
    our results of operations.

Cook Childrens Physician Network is our
exclusive provider network for pediatric services in
Fort Worth, where we had approximately 106,000 members as
of December 31, 2003. If the terms of our contract with
Cook Childrens Physician Network were to change
significantly or Cook Childrens Physician Network was to
terminate its agreement with us, our costs to provide health
care in this area could increase. We could lose members if Cook
Childrens Physician Network chose to associate with
another HMO or if it obtained its own contract with the state to
provide health care services to Medicaid recipients.



| |                                                                                                            
| | -----------------------------------------------------------------------------------------------------------
| | Negative publicity regarding the managed
    care industry may harm our business and operating
    results.

In the past, the managed care industry has
received negative publicity. This publicity has led to increased
legislation, regulation, review of industry practices and
private litigation in the commercial sector. These factors may
adversely affect our ability to market our services, require us
to change our services and increase the regulatory burdens under
which we operate, further increasing the costs of doing business
and adversely affecting our operating results.



| |                                                                                                                         
| | ------------------------------------------------------------------------------------------------------------------------
| | We may be subject to claims relating to
    medical malpractice, which could cause us to incur significant
    expenses.

Our providers and employees involved in medical
care decisions may be exposed to the risk of medical malpractice
claims. In addition, some states are considering legislation
that permits managed care organizations to be held liable for
negligent treatment decisions or benefits coverage
determinations. Claims of this nature, if successful, could
result in substantial damage awards against us and our providers
that could exceed the limits of any applicable insurance
coverage. Therefore, successful malpractice or tort claims
asserted against us, our providers or our employees could
adversely affect our financial condition and profitability.

In addition, we may be subject to other
litigation that may adversely affect our business or results of
operations. We maintain errors and omissions insurance and such
other lines of coverage as we believe is reasonable in light of
our experience to date. However, this insurance may not be
sufficient or available at a reasonable cost to protect us from
liabilities that might adversely affect our business or results
of operations. Even if any claims brought against us were
unsuccessful or without merit, we would still have to defend
ourselves against such claims. Any such defenses may be
time-consuming and costly, and may distract our
managements attention. As a result, we may incur
significant expenses and may be unable to effectively operate
our business.



| |                                                                                                                                                                                          
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Changes in the number of Medicaid
    eligibles, or benefits provided to Medicaid eligibles or a
    change in mix of Medicaid eligibles could cause our operating
    results to suffer.

Historically, the number of persons eligible to
receive Medicaid benefits has increased more rapidly during
periods of rising unemployment, corresponding to less favorable
general economic conditions. However, during such economic
downturns, state budgets could decrease, causing states to
attempt to cut health care programs, benefits and rates. If this
were to happen while our membership was increasing, our results
of operations could suffer. Conversely, the number of persons
eligible to receive Medicaid benefits may grow more slowly or
even decline if economic conditions improve, thereby causing our
operating results to suffer. In either case, in the

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event that the company experiences a change in
product mix to less profitable product lines, our profitability
could be negatively impacted.




| |                                                                                                    
| | ---------------------------------------------------------------------------------------------------
| | Changes in SCHIP rules restricting
    eligibility could cause our operating results to
    suffer.

The states in which we operate have experienced
budget deficits. In Florida, Texas and Maryland, the rules
governing SCHIP have either recently changed, or will likely
change in the near future, to restrict or limit eligibility for
benefits through the imposition of waiting periods, enrollment
caps and/or new or increased co-payments. These changes in SCHIP
eligibility could cause us to experience a net loss in SCHIP
membership. If the states in which we operate continue to
restrict or limit SCHIP eligibility, our operating results could
suffer.



| |                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------
| | Our inability to integrate, manage and grow
    our information systems effectively could disrupt our
    operations.

Our operations are significantly dependent on
effective information systems. The information gathered and
processed by our information systems assists us in, among other
things, monitoring utilization and other cost factors,
processing provider claims and providing data to our regulators.
Our providers also depend upon our information systems for
membership verifications, claims status and other information.

Our information systems and applications require
continual maintenance, upgrading and enhancement to meet our
operational needs. Moreover, our acquisition activity requires
frequent transitions to or from, and the integration of, various
information systems. We are continually upgrading and expanding
our information systems capabilities. If we experience
difficulties with the transition to or from information systems
or are unable to properly maintain or expand our information
systems, we could suffer, among other things, from operational
disruptions, loss of existing members and difficulty in
attracting new members, regulatory problems and increases in
administrative expenses.

We estimate that our current claims payment
system could be at full capacity within the next 12 months.
Accordingly, on November 26, 2003, we announced that we
signed a software licensing agreement with The Trizetto Group,
Inc. for the Facets Extended EnterpriseTM
administrative system. We currently expect that the Facets
software will meet our needs for approximately the next ten
years and support our long-term growth strategies. We currently
estimate implementation of the new system by the end of 2004.
However, if we cannot execute a successful system conversion,
our operations could be disrupted, which would have a negative
impact on our profitability and our ability to grow could be
harmed.



| |                                                          
| | ---------------------------------------------------------
| | Acts of terrorism could cause our business
    to suffer.

Our profitability depends, to a significant
degree, on our ability to predict and effectively manage medical
costs. If acts of terrorism were to occur in markets in which we
operate, our business could suffer. The results of terrorist
acts could lead to higher than expected medical costs, network
and information technology disruptions, and other related
factors beyond our control, which would cause our business to
suffer.

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INDEPENDENT AUDITORS REPORT

The Board of Directors

AMERIGROUP Corporation and Subsidiaries:


We have audited the accompanying consolidated
balance sheets of AMERIGROUP Corporation and subsidiaries as of
December 31, 2003 and 2002, and the related consolidated
income statements and statements of stockholders equity
and cash flows for each of the years in the three-year period
ended December 31, 2003. These consolidated financial
statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.

We conducted our audits in accordance with
auditing standards generally accepted in the United States of
America. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.

In our opinion, the consolidated financial
statements referred to above present fairly, in all material
respects, the financial position of AMERIGROUP Corporation and
subsidiaries as of December 31, 2003 and 2002, and the
results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 2003 in
conformity with accounting principles generally accepted in the
United States of America.

As discussed in note 2 to the consolidated
financial statements, effective July 1, 2001, AMERIGROUP
Corporation adopted the provisions of Statement of Financial
Accounting Standards No. 141, Business Combinations,
and certain provisions of Statement of Financial Accounting
Standards No. 142 (SFAS No. 142), Goodwill and
Other Intangible Assets, as required for goodwill and
intangible assets arising from business combinations consummated
after June 30, 2001. As further discussed in Note 2 to
the consolidated financial statements, in 2002, AMERIGROUP
Corporation adopted the provisions of SFAS No. 142 as
required for goodwill and intangible assets resulting from
business combinations consummated prior to June 30, 2001.

February 11, 2004

Norfolk, Virginia


/s/ KPMG LLP

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|        |                                                
|------- | -----------------------------------------------
|Item 8. | Financial Statements and Supplementary
    Data

AMERIGROUP CORPORATION AND
SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 2003 and 2002


|                                                                                                                                                |                                                                                                                                                                   |                            |         |         |         |   |         |         |         | 
|----------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------- | ------- | ------- | ------- | - | ------- | ------- | ------- | 
|                                                                                                                                                |                                                                                                                                                                   | 2003                       |         | 2002   
|                                                                                                                                                |                                                                                                                                                                   |                            |         |        
|                                                                                                                                                |                                                                                                                                                                   |                           
|                                                                                                                                                |                                                                                                                                                                   | (Dollars in thousands)    
|ASSETS                                                                                                                                         
|Current assets:                                                                                                                                 |                                                                                                                                                                   |                            |         |         |         |   |         |        
|                                                                                                                                                | Cash and cash equivalents                                                                                                                                         |                            | $       | 407,220 |         |   | $       | 207,996 |        
|                                                                                                                                                | Short-term investments                                                                                                                                            |                            |         | 8,750   |         |   |         | 27,581  |        
|                                                                                                                                                | Premium receivables                                                                                                                                               |                            |         | 38,259  |         |   |         | 35,233  |        
|                                                                                                                                                | Deferred income taxes                                                                                                                                             |                            |         | 10,164  |         |   |         | 5,627   |        
|                                                                                                                                                | Prepaid expenses and other current assets                                                                                                                         |                            |         | 15,995  |         |   |         | 7,998   |        
|                                                                                                                                                |                                                                                                                                                                   |                            |         |         |         |   |         |        
|                                                                                                                                                |                                                                                                                                                                   | Total current assets       |         |         | 480,388 |   |         |         | 284,435 | 
|Property and equipment, net                                                                                                                     |                                                                                                                                                                   |                            | 31,103  |         |         |   | 28,277  |        
|Software, net of accumulated amortization of
    $16,384 and $10,253 at December 31, 2003 and 2002,
    respectively                            |                                                                                                                                                                   |                            | 11,055  |         |         |   | 11,966  |        
|Goodwill and other intangible assets, net of
    accumulated amortization of $11,722 and $5,873 at
    December 31, 2003 and 2002, respectively |                                                                                                                                                                   |                            | 144,398 |         |         |   | 26,040  |        
|Long-term investments                                                                                                                           |                                                                                                                                                                   |                            | 119,133 |         |         |   | 71,358  |        
|Investments on deposit for licensure                                                                                                            |                                                                                                                                                                   |                            | 35,346  |         |         |   | 29,559  |        
|Other long-term assets                                                                                                                          |                                                                                                                                                                   |                            | 4,598   |         |         |   | 2,716   |        
|Escrow deposit for pending acquisition and
    related costs                                                                                    |                                                                                                                                                                   |                            |        |         |         |   | 124,133 |        
|                                                                                                                                                |                                                                                                                                                                   |                            |         |         |         |   |         |        
|                                                                                                                                                |                                                                                                                                                                   | $                          | 826,021 |         |         | $ | 578,484 |        
|                                                                                                                                                |                                                                                                                                                                   |                            |         |         |         |   |         |        
|LIABILITIES AND STOCKHOLDERS
    EQUITY                                                                                                       
|Current liabilities:                                                                                                                            |                                                                                                                                                                   |                            |         |         |         |   |         |        
|                                                                                                                                                | Claims payable                                                                                                                                                    |                            | $       | 239,532 |         |   | $       | 202,430 |        
|                                                                                                                                                | Unearned revenue                                                                                                                                                  |                            |         | 54,324  |         |   |         | 25,518  |        
|                                                                                                                                                | Accounts payable                                                                                                                                                  |                            |         | 5,523   |         |   |         | 9,405   |        
|                                                                                                                                                | Accrued expenses, capital leases and other
    current liabilities                                                                                                |                            |         | 53,431  |         |   |         | 42,905  |        
|                                                                                                                                                |                                                                                                                                                                   |                            |         |         |         |   |         |        
|                                                                                                                                                |                                                                                                                                                                   | Total current liabilities  |         |         | 352,810 |   |         |         | 280,258 | 
|Long-term debt                                                                                                                                  |                                                                                                                                                                   |                            |        |         |         |   | 50,000  |        
|Deferred income taxes, capital leases and other
    long-term liabilities                                                                       |                                                                                                                                                                   |                            | 11,497  |         |         |   | 8,845   |        
|                                                                                                                                                |                                                                                                                                                                   |                            |         |         |         |   |         |        
|                                                                                                                                                |                                                                                                                                                                   | Total liabilities          |         |         | 364,307 |   |         |         | 339,103 | 
|                                                                                                                                                |                                                                                                                                                                   |                            |         |         |         |   |         |        
|Commitments and contingencies
    (note 12)                                                                                                     |                                                                                                                                                                   |                            |         |         |         |   |         |        
|Stockholders equity:                                                                                                                           |                                                                                                                                                                   |                            |         |         |         |   |         |        
|                                                                                                                                                | Common stock, $.01 par value. Authorized
    100,000,000 shares; issued and outstanding 24,444,622 and
    20,551,944 at December 31, 2003 and 2002, respectively |                            |         | 244     |         |   |         | 205     |        
|                                                                                                                                                | Additional paid-in capital                                                                                                                                        |                            |         | 331,751 |         |   |         | 177,141 |        
|                                                                                                                                                | Retained earnings                                                                                                                                                 |                            |         | 129,776 |         |   |         | 62,452  |        
|                                                                                                                                                | Deferred compensation                                                                                                                                             |                            |         | (57     | )       |   |         | (417    | )      
|                                                                                                                                                |                                                                                                                                                                   |                            |         |         |         |   |         |        
|                                                                                                                                                |                                                                                                                                                                   | Total stockholders equity |         |         | 461,714 |   |         |         | 239,381 | 
|                                                                                                                                                |                                                                                                                                                                   |                            |         |         |         |   |         |        
|                                                                                                                                                |                                                                                                                                                                   | $                          | 826,021 |         |         | $ | 578,484 |        
|                                                                                                                                                |                                                                                                                                                                   |                            |         |         |         |   |         |        

See accompanying notes to consolidated financial
statements.

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AMERIGROUP CORPORATION AND
SUBSIDIARIES

CONSOLIDATED INCOME STATEMENTS

|                      |                                                                                               |                                                   |        |            |           |      |        |            |           |  |        |            |         | 
|--------------------- | --------------------------------------------------------------------------------------------- | ------------------------------------------------- | ------ | ---------- | --------- | ---- | ------ | ---------- | --------- |  | ------ | ---------- | ------- | 
|                      |                                                                                               |                                                  
|                      |                                                                                               | Year Ended December 31,                          
|                      |                                                                                               |                                                  
|                      |                                                                                               | 2003                                              |        | 2002       |           | 2001
|                      |                                                                                               |                                                   |        |            |           |     
|                      |                                                                                               |                                                  
|                      |                                                                                               | (Dollars in thousands, except for per share data)
|Revenues:             |                                                                                               |                                                   |        |            |           |      |        |            |           |  |        |           
|                      | Premium                                                                                       |                                                   | $      | 1,615,508  |           |      | $      | 1,152,636  |           |  | $      | 880,510    |        
|                      | Investment income                                                                             |                                                   |        | 6,726      |           |      |        | 8,026      |           |  |        | 10,664     |        
|                      |                                                                                               |                                                   |        |            |           |      |        |            |           |  |        |           
|                      |                                                                                               | Total revenues                                    |        |            | 1,622,234 |      |        |            | 1,160,662 |  |        |            | 891,174 | 
|                      |                                                                                               |                                                   |        |            |           |      |        |            |           |  |        |           
|Expenses:             |                                                                                               |                                                   |        |            |           |      |        |            |           |  |        |           
|                      | Health benefits                                                                               |                                                   |        | 1,295,900  |           |      |        | 933,591    |           |  |        | 709,034    |        
|                      | Selling, general and administrative                                                           |                                                   |        | 186,856    |           |      |        | 133,409    |           |  |        | 109,822    |        
|                      | Depreciation and amortization                                                                 |                                                   |        | 23,650     |           |      |        | 13,149     |           |  |        | 9,348      |        
|                      | Interest                                                                                      |                                                   |        | 1,913      |           |      |        | 791        |           |  |        | 763        |        
|                      |                                                                                               |                                                   |        |            |           |      |        |            |           |  |        |           
|                      |                                                                                               | Total expenses                                    |        |            | 1,508,319 |      |        |            | 1,080,940 |  |        |            | 828,967 | 
|                      |                                                                                               |                                                   |        |            |           |      |        |            |           |  |        |           
|                      |                                                                                               | Income before income taxes                        |        |            | 113,915   |      |        |            | 79,722    |  |        |            | 62,207  | 
|Income tax expense    |                                                                                               |                                                   | 46,591 |            |           |      | 32,686 |            |           |  | 26,127 |           
|                      |                                                                                               |                                                   |        |            |           |      |        |            |           |  |        |           
|                      |                                                                                               | Net income                                        |        |            | 67,324    |      |        |            | 47,036    |  |        |            | 36,080  | 
|                      | Accretion of redeemable preferred stock dividends                                             |                                                   |        |           |           |      |        |           |           |  |        | (6,228     | )      
|                      |                                                                                               |                                                   |        |            |           |      |        |            |           |  |        |           
|                      | Net income attributable to common stockholders                                                |                                                   | $      | 67,324     |           |      | $      | 47,036     |           |  | $      | 29,852     |        
|                      |                                                                                               |                                                   |        |            |           |      |        |            |           |  |        |           
|Net income per share: |                                                                                               |                                                   |        |            |           |      |        |            |           |  |        |           
|                      | Basic net income per share                                                                    |                                                   | $      | 3.11       |           |      | $      | 2.33       |           |  | $      | 8.08       |        
|                      |                                                                                               |                                                   |        |            |           |      |        |            |           |  |        |           
|                      | Weighted average number of common shares
    outstanding                                      |                                                   |        | 21,622,704 |           |      |        | 20,177,728 |           |  |        | 3,694,844  |        
|                      |                                                                                               |                                                   |        |            |           |      |        |            |           |  |        |           
|                      | Diluted net income per share                                                                  |                                                   | $      | 2.95       |           |      | $      | 2.19       |           |  | $      | 2.08       |        
|                      |                                                                                               |                                                   |        |            |           |      |        |            |           |  |        |           
|                      | Weighted average number of common shares and
    dilutive potential common shares outstanding |                                                   |        | 22,801,650 |           |      |        | 21,469,422 |           |  |        | 16,649,721 |        
|                      |                                                                                               |                                                   |        |            |           |      |        |            |           |  |        |           

See accompanying notes to consolidated financial
statements.

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##### Table of Contents



AMERIGROUP CORPORATION AND
SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS
EQUITY

|                                                                                                            |  |                        |            |                      |  |            |     |          |  |          |            |               |  |              |     |        |  |   |         |   |  |   |         |   |  |   |        |   |  |   |         |  
|----------------------------------------------------------------------------------------------------------- |  | ---------------------- | ---------- | -------------------- |  | ---------- | --- | -------- |  | -------- | ---------- | ------------- |  | ------------ | --- | ------ |  | - | ------- | - |  | - | ------- | - |  | - | ------ | - |  | - | ------- | -
|                                                                                                            |  |                        |            |                      |  |            |     |          |  |          |            |               |  |             
|                                                                                                            |  |                        |            | Series D convertible |  |            |     |          |  |          |            |              
|                                                                                                            |  | Common stock           |            | preferred stock      |  | Additional |     | Retained |  |          |            | Total        
|                                                                                                            |  |                        |            |                      |  | paid-in    |     | earnings |  | Deferred |            | stockholders
|                                                                                                            |  | Shares                 |            | Amount               |  | Shares     |     | Amount   |  | capital  |            | (deficit)     |  | compensation |     | equity
|                                                                                                            |  |                        |            |                      |  |            |     |          |  |          |            |               |  |              |     |       
|                                                                                                            |  |                       
|                                                                                                            |  | (Dollars in thousands)
|Balances at January 1, 2001                                                                                 |  |                        | 907,782    |                      |  | $          | 9   |          |  |          | 3,710,775  |               |  | $            | 37  |        |  | $ | 20,270  |   |  | $ | (14,436 | ) |  | $ | (1,135 | ) |  | $ | 4,745   |  
|Common stock issued upon exercise of stock
    options and warrants                                         |  |                        | 227,205    |                      |  |            | 3   |          |  |          |           |               |  |              |    |        |  |   | 237     |   |  |   |        |   |  |   |       |   |  |   | 240     |  
|Common stock issued upon compeletion of initial
    public offering, net of expenses of $7,577              |  |                        | 4,985,000  |                      |  |            | 50  |          |  |          |           |               |  |              |    |        |  |   | 77,168  |   |  |   |        |   |  |   |       |   |  |   | 77,218  |  
|Conversion of convertible preferred stock                                                                   |  |                        | 12,607,880 |                      |  |            | 126 |          |  |          | (3,710,775 | )             |  |              | (37 | )      |  |   | 71,009  |   |  |   |        |   |  |   |       |   |  |   | 71,098  |  
|Common stock issued upon exercise of
    Series E mandatorily redeemable preferred stock warrants           |  |                        | 1,123,823  |                      |  |            | 11  |          |  |          |           |               |  |              |    |        |  |   | (8      | ) |  |   |        |   |  |   |       |   |  |   | 3       |  
|Accreted dividends on redeemable preferred stock                                                            |  |                        |           |                      |  |            |    |          |  |          |           |               |  |              |    |        |  |   |        |   |  |   | (6,228  | ) |  |   |       |   |  |   | (6,228  | )
|Amortization of deferred compensation                                                                       |  |                        |           |                      |  |            |    |          |  |          |           |               |  |              |    |        |  |   |        |   |  |   |        |   |  |   | 360    |   |  |   | 360     |  
|Net income                                                                                                  |  |                        |           |                      |  |            |    |          |  |          |           |               |  |              |    |        |  |   |        |   |  |   | 36,080  |   |  |   |       |   |  |   | 36,080  |  
|                                                                                                            |  |                        |            |                      |  |            |     |          |  |          |            |               |  |              |     |        |  |   |         |   |  |   |         |   |  |   |        |   |  |   |         |  
|Balances at December 31, 2001                                                                               |  |                        | 19,851,690 |                      |  |            | 199 |          |  |          |           |               |  |              |    |        |  |   | 168,676 |   |  |   | 15,416  |   |  |   | (775   | ) |  |   | 183,516 |  
|Common stock issued upon exercise of stock
    options and purchases under the employee stock purchase plan |  |                        | 700,254    |                      |  |            | 6   |          |  |          |           |               |  |              |    |        |  |   | 4,690   |   |  |   |        |   |  |   |       |   |  |   | 4,696   |  
|Tax benefit from exercise of options                                                                        |  |                        |           |                      |  |            |    |          |  |          |           |               |  |              |    |        |  |   | 3,775   |   |  |   |        |   |  |   |       |   |  |   | 3,775   |  
|Amortization of deferred compensation                                                                       |  |                        |           |                      |  |            |    |          |  |          |           |               |  |              |    |        |  |   |        |   |  |   |        |   |  |   | 358    |   |  |   | 358     |  
|Net income                                                                                                  |  |                        |           |                      |  |            |    |          |  |          |           |               |  |              |    |        |  |   |        |   |  |   | 47,036  |   |  |   |       |   |  |   | 47,036  |  
|                                                                                                            |  |                        |            |                      |  |            |     |          |  |          |            |               |  |              |     |        |  |   |         |   |  |   |         |   |  |   |        |   |  |   |         |  
|Balances at December 31, 2002                                                                               |  |                        | 20,551,944 |                      |  |            | 205 |          |  |          |           |               |  |              |    |        |  |   | 177,141 |   |  |   | 62,452  |   |  |   | (417   | ) |  |   | 239,381 |  
|Common stock issued from public offering, net of
    expenses of $8,226                                     |  |                        | 3,162,500  |                      |  |            | 32  |          |  |          |           |               |  |              |    |        |  |   | 138,797 |   |  |   |        |   |  |   |       |   |  |   | 138,829 |  
|Common stock issued upon exercise of stock
    options and purchases under the employee stock purchase plan |  |                        | 730,178    |                      |  |            | 7   |          |  |          |           |               |  |              |    |        |  |   | 11,266  |   |  |   |        |   |  |   |       |   |  |   | 11,273  |  
|Tax benefit from exercise of options                                                                        |  |                        |           |                      |  |            |    |          |  |          |           |               |  |              |    |        |  |   | 4,547   |   |  |   |        |   |  |   |       |   |  |   | 4,547   |  
|Amortization of deferred compensation                                                                       |  |                        |           |                      |  |            |    |          |  |          |           |               |  |              |    |        |  |   |        |   |  |   |        |   |  |   | 360    |   |  |   | 360     |  
|Net income                                                                                                  |  |                        |           |                      |  |            |    |          |  |          |           |               |  |              |    |        |  |   |        |   |  |   | 67,324  |   |  |   |       |   |  |   | 67,324  |  
|                                                                                                            |  |                        |            |                      |  |            |     |          |  |          |            |               |  |              |     |        |  |   |         |   |  |   |         |   |  |   |        |   |  |   |         |  
|Balances at December 31, 2003                                                                               |  |                        | 24,444,622 |                      |  | $          | 244 |          |  |          |           |               |  | $            |    |        |  | $ | 331,751 |   |  | $ | 129,776 |   |  | $ | (57    | ) |  | $ | 461,714 |  
|                                                                                                            |  |                        |            |                      |  |            |     |          |  |          |            |               |  |              |     |        |  |   |         |   |  |   |         |   |  |   |        |   |  |   |         |  

See accompanying notes to consolidated financial
statements.

49



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##### Table of Contents



AMERIGROUP CORPORATION AND
SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH
FLOWS

|                                                   |                                                                                             |                                                                                           |                                                   |                                           |        |        |         |          |        |        |          |          |       |         |         |  
|-------------------------------------------------- | ------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------- | ------------------------------------------------- | ----------------------------------------- | ------ | ------ | ------- | -------- | ------ | ------ | -------- | -------- | ----- | ------- | ------- | -
|                                                   |                                                                                             |                                                                                          
|                                                   |                                                                                             | Year Ended December 31,                                                                  
|                                                   |                                                                                             |                                                                                          
|                                                   |                                                                                             | 2003                                                                                      |                                                   | 2002                                      |        | 2001  
|                                                   |                                                                                             |                                                                                           |                                                   |                                           |        |       
|                                                   |                                                                                             |                                                                                          
|                                                   |                                                                                             | (Dollars in thousands)                                                                   
|Cash flows from operating activities:              |                                                                                             |                                                                                           |                                                   |                                           |        |        |         |          |        |        |          |         
|                                                   | Net income                                                                                  |                                                                                           | $                                                 | 67,324                                    |        |        | $       | 47,036   |        |        | $        | 36,080   |      
|                                                   | Adjustments to reconcile net income to net cash
    provided by operating activities:       |                                                                                           |                                                   |                                           |        |        |         |          |        |        |          |          |      
|                                                   |                                                                                             | Depreciation and amortization                                                             |                                                   |                                           | 23,650 |        |         |          | 13,149 |        |          |          | 9,348 |        
|                                                   |                                                                                             | Deferred tax (benefit) expense                                                            |                                                   |                                           | (3,272 | )      |         |          | 993    |        |          |          | (124  | )      
|                                                   |                                                                                             | Amortization of deferred compensation                                                     |                                                   |                                           | 360    |        |         |          | 358    |        |          |          | 360   |        
|                                                   |                                                                                             | Tax benefit related to exercise of stock options                                          |                                                   |                                           | 4,547  |        |         |          | 3,775  |        |          |          |      |        
|                                                   |                                                                                             | Changes in assets and liabilities increasing
    (decreasing) cash flows from operations: |                                                   |                                           |        |        |         |          |        |        |          |          |       |        
|                                                   |                                                                                             |                                                                                           | Premium receivables                               |                                           |        | (3,026 | )       |          |        | (6,058 | )        |          |       | (13,579 | )      
|                                                   |                                                                                             |                                                                                           | Prepaid expenses and other current assets         |                                           |        | (7,954 | )       |          |        | (456   | )        |          |       | (254    | )      
|                                                   |                                                                                             |                                                                                           | Other assets                                      |                                           |        | (750   | )       |          |        | (1,225 | )        |          |       | 744     |        
|                                                   |                                                                                             |                                                                                           | Claims payable                                    |                                           |        | 16,681 |         |          |        | 22,084 |          |          |       | 29,884  |        
|                                                   |                                                                                             |                                                                                           | Accounts payable, accrued expenses and other, net |                                           |        | (494   | )       |          |        | 12,219 |          |          |       | 9,934   |        
|                                                   |                                                                                             |                                                                                           | Unearned revenue                                  |                                           |        | 28,806 |         |          |        | 25,278 |          |          |       | 240     |        
|                                                   |                                                                                             |                                                                                           | Other long-term liabilities                       |                                           |        | 2,548  |         |          |        | 704    |          |          |       | (150    | )      
|                                                   |                                                                                             |                                                                                           |                                                   |                                           |        |        |         |          |        |        |          |         
|                                                   |                                                                                             |                                                                                           |                                                   | Net cash provided by operating activities |        |        | 128,420 |          |        |        | 117,857  |          |       |         | 72,483  |  
|                                                   |                                                                                             |                                                                                           |                                                   |                                           |        |        |         |          |        |        |          |         
|Cash flows from investing activities:              |                                                                                             |                                                                                           |                                                   |                                           |        |        |         |          |        |        |          |         
|                                                   | Proceeds from redemption of held-to-maturity
    investments                                |                                                                                           |                                                   | 191,657                                   |        |        |         | 219,656  |        |        |          | 196,267  |      
|                                                   | Purchase of held-to-maturity investments                                                    |                                                                                           |                                                   | (220,601                                  | )      |        |         | (211,158 | )      |        |          | (257,541 | )    
|                                                   | Purchase of property and equipment and software                                             |                                                                                           |                                                   | (13,220                                   | )      |        |         | (20,707  | )      |        |          | (8,608   | )    
|                                                   | Proceeds from redemption of investments on
    deposit for licensure                        |                                                                                           |                                                   | 40,009                                    |        |        |         | 30,340   |        |        |          | 29,318   |      
|                                                   | Purchase of investments on deposit for licensure                                            |                                                                                           |                                                   | (45,496                                   | )      |        |         | (30,898  | )      |        |          | (34,955  | )    
|                                                   | Purchase of contract rights and related assets                                              |                                                                                           |                                                   | (8,581                                    | )      |        |         | (6,633   | )      |        |          | (2,617   | )    
|                                                   | Purchase price adjustment received                                                          |                                                                                           |                                                   | 963                                       |        |        |         |         |        |        |          |         |      
|                                                   | Cash acquired through stock acquisition                                                     |                                                                                           |                                                   | 27,473                                    |        |        |         |         |        |        |          |         |      
|                                                   | Escrow deposit for pending acquisition and
    related costs                                |                                                                                           |                                                   |                                          |        |        |         | (124,133 | )      |        |          |         |      
|                                                   |                                                                                             |                                                                                           |                                                   |                                           |        |        |         |          |        |        |          |         
|                                                   |                                                                                             |                                                                                           |                                                   | Net cash used in investing activities     |        |        | (27,796 | )        |        |        | (143,533 | )        |       |         | (78,136 | )
|                                                   |                                                                                             |                                                                                           |                                                   |                                           |        |        |         |          |        |        |          |         
|Cash flows from financing activities:              |                                                                                             |                                                                                           |                                                   |                                           |        |        |         |          |        |        |          |         
|                                                   | Borrowings under credit facility                                                            |                                                                                           |                                                   |                                          |        |        |         | 50,000   |        |        |          |         |      
|                                                   | Net increase (decrease) in bank overdrafts                                                  |                                                                                           |                                                   | 4,828                                     |        |        |         | (1,963   | )      |        |          | 913      |      
|                                                   | Repayments of borrowings under credit facility                                              |                                                                                           |                                                   | (50,000                                   | )      |        |         |         |        |        |          | (6,177   | )    
|                                                   | Payment of debt issuance costs                                                              |                                                                                           |                                                   | (1,428                                    | )      |        |         | (440     | )      |        |          | (672     | )    
|                                                   | Payment of capital lease obligations                                                        |                                                                                           |                                                   | (4,902                                    | )      |        |         | (2,521   | )      |        |          | (1,314   | )    
|                                                   | Proceeds from exercise of common stock options,
    warrants and employee stock purchases   |                                                                                           |                                                   | 11,273                                    |        |        |         | 4,696    |        |        |          | 243      |      
|                                                   | Proceeds from issuance of common stock upon the
    public offerings, net of issuance costs |                                                                                           |                                                   | 138,829                                   |        |        |         |         |        |        |          | 77,218   |      
|                                                   | Redemption of Series E mandatorily
    redeemable preferred stock                           |                                                                                           |                                                   |                                          |        |        |         |         |        |        |          | (13,320  | )    
|                                                   |                                                                                             |                                                                                           |                                                   |                                           |        |        |         |          |        |        |          |         
|                                                   |                                                                                             |                                                                                           |                                                   | Net cash provided by financing activities |        |        | 98,600  |          |        |        | 49,772   |          |       |         | 56,891  |  
|                                                   |                                                                                             |                                                                                           |                                                   |                                           |        |        |         |          |        |        |          |         
|Net increase in cash and cash equivalents          |                                                                                             |                                                                                           | 199,224                                           |                                           |        |        | 24,096  |          |        |        | 51,238   |         
|Cash and cash equivalents at beginning of period   |                                                                                             |                                                                                           | 207,996                                           |                                           |        |        | 183,900 |          |        |        | 132,662  |         
|                                                   |                                                                                             |                                                                                           |                                                   |                                           |        |        |         |          |        |        |          |         
|Cash and cash equivalents at end of period         |                                                                                             | $                                                                                         | 407,220                                           |                                           |        | $      | 207,996 |          |        | $      | 183,900  |         
|                                                   |                                                                                             |                                                                                           |                                                   |                                           |        |        |         |          |        |        |          |         
|Supplemental disclosures of cash flow information: |                                                                                             |                                                                                           |                                                   |                                           |        |        |         |          |        |        |          |         
|                                                   | Cash paid for interest                                                                      |                                                                                           | $                                                 | 1,755                                     |        |        | $       | 767      |        |        | $        | 822      |      
|                                                   |                                                                                             |                                                                                           |                                                   |                                           |        |        |         |          |        |        |          |         
|                                                   | Cash paid for income taxes                                                                  |                                                                                           | $                                                 | 40,671                                    |        |        | $       | 27,795   |        |        | $        | 20,841   |      
|                                                   |                                                                                             |                                                                                           |                                                   |                                           |        |        |         |          |        |        |          |         
|Supplemental disclosures of non-cash activities:   |                                                                                             |                                                                                           |                                                   |                                           |        |        |         |          |        |        |          |         
|                                                   | Property and equipment acquired under capital
    lease                                     |                                                                                           | $                                                 | 5,977                                     |        |        | $       | 7,775    |        |        | $        | 5,086    |      
|                                                   |                                                                                             |                                                                                           |                                                   |                                           |        |        |         |          |        |        |          |         

Effective January 1, 2003, we completed our
acquisition of PHP Holdings, Inc. and its subsidiary, Physicians
Healthcare Plans, Inc. The escrow deposit for pending
acquisition and related costs of $124,133 was paid in 2003 and,
as a result, we recorded the estimated fair values of the assets
acquired and liabilities assumed (see note 5(d)).

See accompanying notes to consolidated financial
statements.

50



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##### Table of Contents



AMERIGROUP CORPORATION AND
SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

December 31, 2003, 2002 and
2001


(Dollars in thousands, except for per share
data)




|    |                                                           
|--- | ----------------------------------------------------------
|(1) | Corporate Organization and Principles of
    Consolidation



| |                               
| | ------------------------------
| | (a) Corporate
    Organization

AMERIGROUP Corporation, a Delaware corporation
(the Company), is a multi-state managed health care
company focused on serving people who receive health care
benefits through public-sponsored programs, including Medicaid,
State Childrens Health Insurance Program, or SCHIP, and
FamilyCare.

During 1995, we incorporated wholly owned
subsidiaries in New Jersey, Illinois and Texas to develop, own
and operate health maintenance organizations (HMOs) in those
states. During 1996, we began enrolling Medicaid members in
HMOs: AMERIGROUP New Jersey, Inc., AMERIGROUP Illinois, Inc. and
AMERIGROUP Texas, Inc. During 1999, we incorporated a wholly
owned subsidiary in Delaware, AMERIGROUP Maryland, Inc., a
Managed Care Organization, to develop, own and operate a managed
care organization (MCO) in Maryland and an HMO in the
District of Columbia. Effective January 1, 2003, AMERIGROUP
Maryland Inc., a Managed Care Organization, changed its domicile
of incorporation to the District of Columbia. During 2001, we
incorporated a wholly owned subsidiary in Florida, AMERIGROUP
Florida, Inc., an HMO, to develop, own and operate an HMO in
Florida. Effective January 1, 2003, AMERIGROUP Corporation
acquired PHP Holdings, Inc. and its subsidiary, Physicians
Health Plans, Inc. (together, PHP) and merged it with AMERIGROUP
Florida, Inc.

On November 9, 2001, we completed our
initial public offering of 4,985,000 shares of common
stock, including an over-allotment issuance of
585,000 shares at a price per share of $17.00. We received
net proceeds from the offering of $77,218. In conjunction with
the offering, all Series A, B, C and D preferred stock in
the aggregate was converted into 12,607,880 shares of
common stock. The proceeds from the offering were used to repay
the balance of our long-term debt facility of $4,352 and to
redeem the Series E mandatorily redeemable preferred stock
for $13,320. In addition, 1,123,823 shares of common stock
were issued upon the exercise of all outstanding Series E
warrants.

On October 16, 2003, we completed a public
offering of 3,162,500 shares of common stock, including an
over-allotment issuance of 412,500 shares at a price of
$46.50 per share. We received net proceeds from the
offering of $138,830. On October 21, 2003, we used $30,000
of proceeds from the offering to repay the outstanding balance
of our credit facility.



|    |                            
|--- | ---------------------------
|(b) | Principles of Consolidation

The consolidated financial statements include the
financial statements of AMERIGROUP Corporation and our five
wholly owned subsidiaries: AMERIGROUP New Jersey, Inc.,
AMERIGROUP Illinois, Inc., AMERIGROUP Texas, Inc. and AMERIGROUP
Florida, Inc., each a Health Maintenance Organization;
AMERIGROUP Maryland, Inc., a Managed Care Organization and PHP
Holdings, Inc., a holding company that is the parent company of
AMERIGROUP Florida, Inc. All significant intercompany balances
and transactions have been eliminated in consolidation.



|    |                                                             
|--- | ------------------------------------------------------------
|(2) | Summary of Significant Accounting Policies and
    Practices



| |                     
| | --------------------
| | (a) Cash Equivalents

We consider all highly liquid temporary
investments with original maturities of three months or less to
be cash equivalents. We had cash equivalents of $323,190 and
$107,978 at December 31, 2003 and 2002, respectively, which
consist of money market funds, U.S. Treasury securities,
certificates of deposit, asset-backed securities, auction rate
securities and debt securities of government sponsored entities.

51



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##### Table of Contents



AMERIGROUP CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)



|    |                                                                             
|--- | ----------------------------------------------------------------------------
|(b) | Short and Long-Term Investments and
    Investments on Deposit for Licensure

Short and long-term investments and investments
on deposit for licensure at December 31, 2003 and 2002
consist of money market funds, U.S. Treasury securities,
cash escrow accounts, asset-backed securities, debt securities
of government sponsored entities, municipal bonds and auction
rate securities. We consider all investments with original
maturities greater than three months but less than twelve months
to be short-term investments. We classify our debt and equity
securities in one of three categories: trading,
available-for-sale or held-to-maturity. Trading securities are
bought and held principally for the purpose of selling them in
the near term. Held-to-maturity securities are those securities
in which we have the ability and intent to hold the security
until maturity. All other securities not included in trading or
held-to-maturity are classified as available-for-sale. At
December 31, 2003 and 2002, all of our securities are
classified as held-to-maturity.

Held-to-maturity securities are recorded at
amortized cost, adjusted for the amortization or accretion of
premiums or discounts. A decline in the market value of any
held-to-maturity security below cost that is deemed other than
temporary results in a reduction in carrying amount to fair
value. The impairment is charged to earnings and a new cost
basis for the security is established. Premiums and discounts
are amortized or accreted over the life of the related
held-to-maturity security as an adjustment to yield using the
effective-interest method. Dividend and interest income is
recognized when earned.



|    |                       
|--- | ----------------------
|(c) | Property and Equipment

Property and equipment are stated at cost less
accumulated depreciation and amortization. Depreciation on
property and equipment is calculated on the straight-line method
over the estimated useful lives of the assets. Property and
equipment held under leasehold improvements are amortized on the
straight-line method over the shorter of the lease term or
estimated useful life of the asset. The estimated useful lives
are as follows:

|                       |  |  |                 | 
|---------------------- |  |  | --------------- | 
|Leasehold improvements |  |  | Length of lease | 
|Furniture and fixtures |  |  | 5-7 years       | 
|Equipment              |  |  | 3-5 years       | 



|    |         
|--- | --------
|(d) | Software

Software is stated at cost less accumulated
amortization, and in accordance with Statement of Position 98-1,
Accounting for the Costs of Software Developed or Obtained
for Internal Use. Software is amortized over its estimated
useful life of three years, using the straight-line method.



|    |                                   
|--- | ----------------------------------
|(e) | Goodwill and Other
    Intangibles

Goodwill represents the excess of aggregate
purchase price over the estimated fair value of net assets
acquired. Goodwill acquired prior to July 1, 2001, was
amortized on a straight-line basis over 18 months to
20 years, the expected periods to be benefited. In
accordance with Statement of Financial Accounting Standards
No. 142, Goodwill and Other Intangible Assets(SFAS No. 142), goodwill acquired subsequent to
July 1, 2001 is not amortized but instead is tested for
impairment at least annually. In addition, all goodwill acquired
prior to July 2001 is no longer amortized effective
January 1, 2002 but instead is tested for impairment at
least annually. SFAS No. 142 also requires that
intangible assets with estimable useful lives be amortized over
their respective estimated useful lives to their estimated
residual values, and reviewed for impairment in accordance with
Statement of Financial Accounting Standards No. 144,
Accounting for Impairment or Disposal of Long-Lived
Assets.

52



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##### Table of Contents



AMERIGROUP CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

The following table presents net income and net
income per share exclusive of goodwill amortization expense for
2003, 2002 and 2001.

|                              |                                          |      |   |        |  |      |   |        |  |  |   |        | 
|----------------------------- | ---------------------------------------- | ---- | - | ------ |  | ---- | - | ------ |  |  | - | ------ | 
|                              |                                          | 2003 |   | 2002   |  | 2001
|                              |                                          |      |   |        |  |     
|Net income:                   |                                          |      |   |        |  |      |   |        |  |  |   |       
|                              | Reported net income                      |      | $ | 67,324 |  |      | $ | 47,036 |  |  | $ | 36,080 | 
|                              | Goodwill amortization, net of tax effect |      |   |       |  |      |   |       |  |  |   | 567    | 
|                              |                                          |      |   |        |  |      |   |        |  |  |   |       
|                              | Adjusted net income                      |      | $ | 67,324 |  |      | $ | 47,036 |  |  | $ | 36,647 | 
|                              |                                          |      |   |        |  |      |   |        |  |  |   |       
|Basic net income per share:   |                                          |      |   |        |  |      |   |        |  |  |   |       
|                              | Reported basic net income per share      |      | $ | 3.11   |  |      | $ | 2.33   |  |  | $ | 8.08   | 
|                              | Goodwill amortization per basic share    |      |   |       |  |      |   |       |  |  |   | 0.15   | 
|                              |                                          |      |   |        |  |      |   |        |  |  |   |       
|                              | Adjusted basic net income per share      |      | $ | 3.11   |  |      | $ | 2.33   |  |  | $ | 8.23   | 
|                              |                                          |      |   |        |  |      |   |        |  |  |   |       
|Diluted net income per share: |                                          |      |   |        |  |      |   |        |  |  |   |       
|                              | Reported diluted net income per share    |      | $ | 2.95   |  |      | $ | 2.19   |  |  | $ | 2.08   | 
|                              | Goodwill amortization per diluted share  |      |   |       |  |      |   |       |  |  |   | 0.03   | 
|                              |                                          |      |   |        |  |      |   |        |  |  |   |       
|                              | Adjusted diluted net income per share    |      | $ | 2.95   |  |      | $ | 2.19   |  |  | $ | 2.11   | 
|                              |                                          |      |   |        |  |      |   |        |  |  |   |       



|    |             
|--- | ------------
|(f) | Other Assets

Other assets include deposits, debt issuance
costs and cash surrender value of life insurance policies.



|    |             
|--- | ------------
|(g) | Income Taxes

Income taxes are accounted for under the asset
and liability method. Deferred tax assets and liabilities are
recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases
and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates
is recognized in income in the period that includes the
enactment date.



|    |                         
|--- | ------------------------
|(h) | Stock-Based Compensation

As permitted under Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based
Compensation(SFAS No. 123), we have chosen to
account for stock-based compensation using the intrinsic value
method prescribed in Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees(APB Opinion No. 25), and related interpretations.
Accordingly, compensation cost for stock options is measured as
the excess, if any, of the estimated fair value of our stock at
the date of grant over the amount an employee must pay to
acquire the stock. In December 2002, Statement of Financial
Accounting Standards No. 148, Stock-Based Compensation(SFAS No. 148), was issued which requires that we
illustrate the effect on net income and net income per share if
we had applied the fair value principles included in
SFAS No. 123 for

53



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##### Table of Contents



AMERIGROUP CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

both annual and interim financial statements. The
following table illustrates the effect on net income and
earnings per share if the company had applied the fair value
recognition.

|                              |                                                                                                                                                     |      |   |        |  |      |   |        |  |  |   |        | 
|----------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------- | ---- | - | ------ |  | ---- | - | ------ |  |  | - | ------ | 
|                              |                                                                                                                                                     | 2003 |   | 2002   |  | 2001
|                              |                                                                                                                                                     |      |   |        |  |     
|Net income:                   |                                                                                                                                                     |      |   |        |  |      |   |        |  |  |   |       
|                              | Reported net income                                                                                                                                 |      | $ | 67,324 |  |      | $ | 47,036 |  |  | $ | 36,080 | 
|                              | Deduct: Total stock-based employee compensation
    expense determined under fair value based method for all awards,
    net of related tax effects |      |   | 9,577  |  |      |   | 5,800  |  |  |   | 807    | 
|                              |                                                                                                                                                     |      |   |        |  |      |   |        |  |  |   |       
|                              | Proforma net income                                                                                                                                 |      | $ | 57,747 |  |      | $ | 41,236 |  |  | $ | 35,273 | 
|                              |                                                                                                                                                     |      |   |        |  |      |   |        |  |  |   |       
|Basic net income per share:   |                                                                                                                                                     |      |   |        |  |      |   |        |  |  |   |       
|                              | Reported basic net income per share                                                                                                                 |      | $ | 3.11   |  |      | $ | 2.33   |  |  | $ | 8.08   | 
|                              | Proforma basic net income per share                                                                                                                 |      |   | 2.67   |  |      |   | 2.04   |  |  |   | 7.86   | 
|Diluted net income per share: |                                                                                                                                                     |      |   |        |  |      |   |        |  |  |   |       
|                              | Reported diluted net income per share                                                                                                               |      | $ | 2.95   |  |      | $ | 2.19   |  |  | $ | 2.08   | 
|                              | Proforma diluted net income per share                                                                                                               |      |   | 2.56   |  |      |   | 1.92   |  |  |   | 2.04   | 



|    |                
|--- | ---------------
|(i) | Premium Revenue

We record premium revenue based on membership and
premium information from each state. Premiums are due monthly
and are recognized as revenue during the period in which we are
obligated to provide service to members. In all of our markets,
except Florida, we receive payments under each states
obstetric delivery supplements program. Upon delivery of a
newborn, each state is notified according to our contract. We
recognize revenue in the period that the newborn is delivered
and related services were provided to our member. Additionally,
in some states we receive supplemental payments for certain
services such as high cost drugs and early childhood prevention
screenings. Any amounts that have not been received from the
state by the end of the period are recorded on our balance sheet
as premium receivables.



|    |                          
|--- | -------------------------
|(j) | Experience Rebate Payable

Experience rebate payable, included in accrued
expenses, capital leases and other current liabilities, consists
of estimates of amounts due under contracts with a state
government. These amounts are computed based on a percentage of
the contract profits, as defined, in the contract with the
state. The profitability computation includes premium revenue
received from the state less actual medical and administrative
costs incurred and paid and less estimated unpaid claims payable
for the applicable membership. The unpaid claims payable
estimates are based on historical payment patterns using
actuarial techniques. A final settlement is generally made
334 days after the contract period ends using paid claims
data. Any adjustment made to the experience rebate payable as a
result of final settlement is included in current operations.



|    |               
|--- | --------------
|(k) | Claims Payable

Accrued medical expenses for inpatient,
outpatient surgery, emergency room, specialist, pharmacy and
ancillary medical claims include amounts billed and not paid and
an estimate of cost incurred for unbilled services provided.
These liabilities are principally based on historical payment
patterns using actuarial techniques. In addition, claims
processing costs are accrued based on an estimate of the costs
necessary to process unpaid claims. Claims payable are reviewed
and adjusted periodically and, as adjustments are made,
differences are included in current operations. Claims payable
also includes estimates of amounts due to or from contracted
providers under risk-sharing arrangements. The arrangements are
typically based upon quality measures as well as medical
results. Estimates relating to risk-sharing arrangements are
calculated as a

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AMERIGROUP CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

percentage, typically 25% to 50%, of the
differences between actual results and specified targets of
medical expense and may include a sharing of profits in excess
of the targeted medical and administrative expenses, typically
7% to 10% of total premiums covered under the contract.



|    |                   
|--- | ------------------
|(l) | Stop-loss Coverage

Stop-loss premiums, net of recoveries, are
included in health benefits expense in the accompanying
Consolidated Income Statements.



|    |                                    
|--- | -----------------------------------
|(m) | Impairment of Long-Lived
    Assets

We adopted SFAS No. 144 on
January 1, 2002. The adoption of SFAS No. 144 did
not affect our financial statements.

In accordance with SFAS No. 144,
long-lived assets, such as property and equipment and purchased
intangibles subject to amortization, are reviewed for impairment
whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to estimated
undiscounted future cash flows expected to be generated by the
asset. If the carrying amount of an asset exceeds its estimated
future cash flows, an impairment charge is recognized by the
amount by which the carrying amount of the asset exceeds the
fair value of the asset. Assets to be disposed of would be
separately presented in the balance sheet and reported at the
lower of the carrying amount or fair value less costs to sell,
and are no longer depreciated. The assets and liabilities of a
group classified as held for sale would be presented separately
in the appropriate asset and liability sections of the balance
sheet. No impairment of long-lived assets was recorded in 2003,
2002 or 2001.

Goodwill is tested annually for impairment, and
is tested for impairment more frequently if events and
circumstances indicate that the asset might be impaired. An
impairment loss is recognized to the extent that the carrying
amount exceeds the assets fair value. This determination
is made at the reporting unit level and consists of two steps.
First, we determine the fair value of a reporting unit and
compare it to its carrying amount. Second, if the carrying
amount of a reporting unit exceeds its fair value, an impairment
loss is recognized for any excess of the carrying amount of the
reporting units goodwill over the implied fair value of
that goodwill. The implied fair value of goodwill is determined
by allocating the fair value of the reporting unit in a manner
similar to a purchase price allocation, in accordance with
SFAS No. 141. The residual fair value after this allocation
is the implied fair value of the reporting unit goodwill. No
impairment of goodwill was recorded in 2003, 2002 or 2001.



|    |                     
|--- | --------------------
|(n) | Net Income Per Share

Basic net income per share has been computed by
dividing net income attributable to common stockholders by the
weighted average number of common shares outstanding. Diluted
net income per share reflects the potential dilution that could
occur assuming the inclusion of dilutive potential common shares
and has been computed by dividing net income attributable to
common stockholders by the weighted average number of common
shares and dilutive potential common shares outstanding.
Dilutive potential common shares include all outstanding stock
options and warrants after applying the treasury stock method
and convertible redeemable preferred stock to the extent it is
dilutive.



|    |                 
|--- | ----------------
|(o) | Use of Estimates

Our management has made a number of estimates and
assumptions relating to the reporting of assets and liabilities
and the disclosure of contingent assets and liabilities at the
date of the consolidated financial statements and the reported
amounts of revenues and expenses during the reporting period to
prepare these consolidated financial statements in conformity
with generally accepted accounting principles. Actual results
could differ from those estimates.

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AMERIGROUP CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)



|    |                  
|--- | -----------------
|(p) | Reclassifications

Certain reclassifications have been made to prior
year amounts to conform to the current year presentation.



|    |                        
|--- | -----------------------
|(q) | Risks and Uncertainties

Our profitability depends in large part on
accurately predicting and effectively managing health benefits
expense. We continually review our premium and benefit structure
to reflect its underlying claims experience and revised
actuarial data; however, several factors could adversely affect
the health benefits expense. Certain of these factors, which
include changes in health care practices, inflation, new
technologies, major epidemics, natural disasters and malpractice
litigation, are beyond any health plans control and could
adversely affect our ability to accurately predict and
effectively control health care costs. Costs in excess of those
anticipated could have a material adverse effect on our results
of operations.

At December 31, 2003, we served members who
received health care benefits through nine contracts with the
regulatory entities in the jurisdictions in which we operate.
Five of these contracts individually accounted for 10% or more
of our revenues for the year ended December 31, 2003, with
the largest of these contracts representing approximately 20% of
our revenues.



|    |                                                                             
|--- | ----------------------------------------------------------------------------
|(3) | Short and Long-Term Investments and
    Investments on Deposit for Licensure

The amortized cost, gross unrealized holding
gains, gross unrealized holding losses and fair value for
held-to-maturity short-term investments are as follows at
December 31, 2003 and 2002:

|      |                                                  |           |   |            |        |            |   |       |   |  |   |   |   |  |   |        |        | 
|----- | ------------------------------------------------ | --------- | - | ---------- | ------ | ---------- | - | ----- | - |  | - | - | - |  | - | ------ | ------ | 
|      |                                                  |           |   | Gross      |        | Gross      |   |      
|      |                                                  |           |   | unrealized |        | unrealized |   |      
|      |                                                  | Amortized |   | holding    |        | holding    |   | Fair 
|      |                                                  | cost      |   | gains      |        | losses     |   | value
|      |                                                  |           |   |            |        |            |   |      
|2003: |                                                  |           |   |            |        |            |   |       |   |  |   |   |   |  |   |       
|      | Commercial paper                                 |           | $ | 1,000      |        |            | $ |      |   |  | $ |  |   |  | $ | 1,000  |       
|      | Auction rate securities                          |           |   | 6,500      |        |            |   |      |   |  |   |  |   |  |   | 6,500  |       
|      | Debt securities of government sponsored entities |           |   | 1,250      |        |            |   |      |   |  |   |  |   |  |   | 1,250  |       
|      |                                                  |           |   |            |        |            |   |       |   |  |   |   |   |  |   |       
|      |                                                  | Total     |   | $          | 8,750  |            |   | $     |  |  |   | $ |  |  |   | $      | 8,750  | 
|      |                                                  |           |   |            |        |            |   |       |   |  |   |   |   |  |   |       
|2002: |                                                  |           |   |            |        |            |   |       |   |  |   |   |   |  |   |       
|      | Money market funds                               |           | $ | 8,000      |        |            | $ |      |   |  | $ |  |   |  | $ | 8,000  |       
|      | Asset-backed securities                          |           |   | 7,306      |        |            |   | 1     |   |  |   |  |   |  |   | 7,307  |       
|      | Debt securities of government sponsored entities |           |   | 12,275     |        |            |   | 6     |   |  |   |  |   |  |   | 12,281 |       
|      |                                                  |           |   |            |        |            |   |       |   |  |   |   |   |  |   |       
|      |                                                  | Total     |   | $          | 27,581 |            |   | $     | 7 |  |   | $ |  |  |   | $      | 27,588 | 
|      |                                                  |           |   |            |        |            |   |       |   |  |   |   |   |  |   |       

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AMERIGROUP CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

The amortized cost, gross unrealized holding
gains, gross unrealized holding losses and fair value for
held-to-maturity long-term investments are as follows at
December 31, 2003 and 2002:

|      |                                                                                                |           |   |            |         |            |   |     |     |  |   |    |    | 
|----- | ---------------------------------------------------------------------------------------------- | --------- | - | ---------- | ------- | ---------- | - | --- | --- |  | - | -- | -- | 
|      |                                                                                                |           |   | Gross      |         | Gross     
|      |                                                                                                |           |   | unrealized |         | unrealized
|      |                                                                                                | Amortized |   | holding    |         | holding   
|      |                                                                                                | cost      |   | gains      |         | losses    
|      |                                                                                                |           |   |            |         |           
|2003: |                                                                                                |           |   |            |         |            |   |     |     |  |   |   
|      | Municipal bonds                                                                                |           | $ | 7,115      |         |            | $ | 3   |     |  | $ |   |   
|      | Debt securities of government sponsored entities,
    maturing within one year                 |           |   | 1,500      |         |            |   | 1   |     |  |   |   |   
|      | Debt securities of government sponsored entities,
    maturing between one year and five years |           |   | 103,215    |         |            |   | 146 |     |  |   | 96 |   
|      | Auction rate securities                                                                        |           |   | 7,303      |         |            |   |    |     |  |   | 3  |   
|      |                                                                                                |           |   |            |         |            |   |     |     |  |   |   
|      |                                                                                                | Total     |   | $          | 119,133 |            |   | $   | 150 |  |   | $  | 99 | 
|      |                                                                                                |           |   |            |         |            |   |     |     |  |   |   
|2002: |                                                                                                |           |   |            |         |            |   |     |     |  |   |   
|      | Municipal bonds                                                                                |           | $ | 13,402     |         |            | $ | 31  |     |  | $ |   |   
|      | Debt securities of government sponsored entities,
    maturing                                 |           |   | 55,956     |         |            |   | 312 |     |  |   |   |   
|      | within one year Auction rate securities                                                        |           |   | 2,000      |         |            |   |    |     |  |   |   |   
|      |                                                                                                |           |   |            |         |            |   |     |     |  |   |   
|      |                                                                                                | Total     |   | $          | 71,358  |            |   | $   | 343 |  |   | $  |   | 
|      |                                                                                                |           |   |            |         |            |   |     |     |  |   |   

As a condition for licensure by various state
governments to operate HMOs or MCOs, we are required to maintain
certain funds on deposit with or under the control of the
various departments of insurance. Accordingly, at
December 31, 2003 and 2002, the amortized cost, gross
unrealized holding gains, gross unrealized holding losses and
fair value for these held-to-maturity securities are summarized
as follows:

|      |                                                                                                |           |   |            |        |            |   |       |     |  |   |    |    |  |   |        |        | 
|----- | ---------------------------------------------------------------------------------------------- | --------- | - | ---------- | ------ | ---------- | - | ----- | --- |  | - | -- | -- |  | - | ------ | ------ | 
|      |                                                                                                |           |   | Gross      |        | Gross      |   |      
|      |                                                                                                |           |   | unrealized |        | unrealized |   |      
|      |                                                                                                | Amortized |   | holding    |        | holding    |   | Fair 
|      |                                                                                                | cost      |   | gains      |        | losses     |   | value
|      |                                                                                                |           |   |            |        |            |   |      
|2003: |                                                                                                |           |   |            |        |            |   |       |     |  |   |    |    |  |   |       
|      | Money market funds                                                                             |           | $ | 4,718      |        |            | $ |      |     |  | $ |   |    |  | $ | 4,718  |       
|      | U.S. Treasury securities, maturing within
    one year                                         |           |   | 5,543      |        |            |   | 18    |     |  |   |   |    |  |   | 5,561  |       
|      | U.S. Treasury securities, maturing between
    one year and five years                         |           |   | 407        |        |            |   | 1     |     |  |   |   |    |  |   | 408    |       
|      | Debt securities of government sponsored entities,
    maturing between one year and five years |           |   | 22,432     |        |            |   | 61    |     |  |   | 4  |    |  |   | 22,489 |       
|      | Cash escrow account                                                                            |           |   | 2,246      |        |            |   |      |     |  |   |   |    |  |   | 2,246  |       
|      |                                                                                                |           |   |            |        |            |   |       |     |  |   |    |    |  |   |       
|      |                                                                                                | Total     |   | $          | 35,346 |            |   | $     | 80  |  |   | $  | 4  |  |   | $      | 35,422 | 
|      |                                                                                                |           |   |            |        |            |   |       |     |  |   |    |    |  |   |       
|2002: |                                                                                                |           |   |            |        |            |   |       |     |  |   |    |    |  |   |       
|      | U.S. Treasury securities, maturing within
    one year                                         |           | $ | 1,203      |        |            | $ |      |     |  | $ |   |    |  | $ | 1,203  |       
|      | U.S. Treasury securities, maturing between
    one year and five years                         |           |   | 5,543      |        |            |   |      |     |  |   | 54 |    |  |   | 5,489  |       
|      | Debt securities of government sponsored entities,
    maturing within one year                 |           |   | 22,003     |        |            |   | 152   |     |  |   |   |    |  |   | 22,155 |       
|      | Cash escrow account                                                                            |           |   | 810        |        |            |   |      |     |  |   |   |    |  |   | 810    |       
|      |                                                                                                |           |   |            |        |            |   |       |     |  |   |    |    |  |   |       
|      |                                                                                                | Total     |   | $          | 29,559 |            |   | $     | 152 |  |   | $  | 54 |  |   | $      | 29,657 | 
|      |                                                                                                |           |   |            |        |            |   |       |     |  |   |    |    |  |   |       

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AMERIGROUP CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

The state governments in which we operate require
us to maintain investments on deposit in specific dollar amounts
based on either formulas or set amounts as determined by state
regulations. We purchase interest-based investments with a fair
value equal to or greater than the required dollar amount. The
interest that accrues on these investments is not restricted and
is available for withdrawal.

The following table summarizes our
held-to-maturity investments with gross unrealized holding
losses at December 31, 2003.

|                                                 |                                       |       |        |            |  |   |     |     | 
|------------------------------------------------ | ------------------------------------- | ----- | ------ | ---------- |  | - | --- | --- | 
|                                                 |                                       |       |        | Gross     
|                                                 |                                       |       |        | unrealized
|                                                 |                                       | Fair  |        | holding   
|Description of Securities                        |                                       | value |        | losses    
|                                                 |                                       |       |        |           
|Auction rate securities                          |                                       | $     | 800    |            |  | $ | 3   |    
|Debt securities of government sponsored entities |                                       |       | 26,283 |            |  |   | 100 |    
|                                                 |                                       |       |        |            |  |   |     |    
|                                                 | Total temporarily impaired securities |       | $      | 27,083     |  |   | $   | 103 | 
|                                                 |                                       |       |        |            |  |   |     |    

One auction rate security and thirteen debt
securities of government sponsored entities had temporary
declines in value as of December 31, 2003. All temporary
declines in value of held-to-maturity investments have
experienced declines in value for less than twelve months. The
temporary declines in value are primarily due to fluctuations in
market interest rates.



|    |                            
|--- | ---------------------------
|(4) | Property and Equipment, Net

Property and equipment, net at December 31,
2003 and 2002 is summarized as follows:

|                                               |  |      |         |      |  |   |         |  
|---------------------------------------------- |  | ---- | ------- | ---- |  | - | ------- | -
|                                               |  | 2003 |         | 2002
|                                               |  |      |         |     
|Leasehold improvements                         |  | $    | 11,096  |      |  | $ | 7,427   |  
|Furniture and fixtures                         |  |      | 6,669   |      |  |   | 6,709   |  
|Equipment                                      |  |      | 41,341  |      |  |   | 31,068  |  
|                                               |  |      |         |      |  |   |         |  
|                                               |  |      | 59,106  |      |  |   | 45,204  |  
|Less accumulated depreciation and amortization |  |      | (28,003 | )    |  |   | (16,927 | )
|                                               |  |      |         |      |  |   |         |  
|                                               |  | $    | 31,103  |      |  | $ | 28,277  |  
|                                               |  |      |         |      |  |   |         |  



|    |             
|--- | ------------
|(5) | Acquisitions



| |           
| | ----------
| | (a) Humana

Effective August 1, 2001, we purchased
certain assets of Humana Inc.s (Humana) Houston, Texas
Medicaid line of business. The assets purchased consisted of
Humanas rights to provide managed care services to its
Medicaid members. We utilized the purchase method of accounting.
We paid $1,048 in cash including transaction costs, resulting in
goodwill of the same amount. We operated as a Medicaid HMO in
Houston, Texas prior to this acquisition.



|    |              
|--- | -------------
|(b) | MethodistCare

Effective January 1, 2002, we purchased
certain assets of MethodistCare, Inc.s (MethodistCare)
Houston, Texas Medicaid line of business. The assets purchased
consisted of MethodistCares rights to provide managed care
services to its Medicaid members. We paid $1,232 in cash
including transaction costs, resulting in goodwill of the same
amount.

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AMERIGROUP CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)



|    |                              
|--- | -----------------------------
|(c) | Capital Community Health Plan

Effective July 1, 2002, we purchased the
Medicaid contracts and related assets of Capital Community
Health Plan, or CCHP, in Washington, D.C. for $6,970,
including acquisition costs. The assets purchased consisted
primarily of CCHPs rights to provide managed care services
to its Medicaid members. During 2003, we settled on the final
purchase price as provided under the asset purchase agreement
and reduced goodwill by $963. Goodwill and other intangibles
totaling $6,007 included $423 for identifiable intangibles
allocated to the membership purchased. Identifiable intangibles
with definite useful lives are being amortized based on the
timing of related cash flows over eight years.



|    |                                      
|--- | -------------------------------------
|(d) | Physicians Healthcare Plans,
    Inc.

Effective January 1, 2003, we completed our
acquisition of PHP Holdings, Inc. and its subsidiary, Physicians
Healthcare Plans, Inc. (together, PHP) pursuant to the terms of
a merger agreement entered into on August 22, 2002 for
$124,260, including acquisition costs of $1,260.

Established in 1992, PHP served 193,000 Medicaid
and State Childrens Health Insurance Program
(SCHIP) members at December 31, 2002 in twelve
counties including the metropolitan areas of Orlando, Tampa and
Ft. Lauderdale/Miami. PHP also served Medicare and
commercial members which were spun off from PHP prior to
December 31, 2002 and not acquired by us.

Of the $124,260 acquisition cost which includes
transaction costs, approximately $50,000 was financed through
our then-existing credit facility with the balance funded
through unregulated cash. Goodwill and other intangibles
totaling $116,587 includes $8,990 of identifiable intangibles
allocated to the rights to membership and a non-compete
agreement. Intangible assets related to the non-compete
agreement and rights to membership are being amortized based on
the timing of related cash flows with an expected amortization
of five to eleven years. A portion of the purchase price remains
in escrow pending various settlement provisions between us and
the former shareholders of PHP Holdings, Inc. Purchase price
adjustments may arise in the future as a result of these
settlements.

The following table summarizes the fair values of
the assets acquired and liabilities assumed at the date of
acquisition.

|                                                        |                           |   |         |         | 
|------------------------------------------------------- | ------------------------- | - | ------- | ------- | 
|Current assets, including cash and cash
    equivalents |                           | $ | 31,668  |        
|Intangible assets                                       |                           |   | 8,990   |        
|Goodwill                                                |                           |   | 107,597 |        
|Other assets                                            |                           |   | 2,482   |        
|                                                        |                           |   |         |        
|                                                        | Total assets acquired     |   |         | 150,737 | 
|Claims payable                                          |                           |   | 20,421  |        
|Other liabilities                                       |                           |   | 6,056   |        
|                                                        |                           |   |         |        
|                                                        | Total liabilities assumed |   |         | 26,477  | 
|                                                        |                           |   |         |        
|                                                        | Net assets acquired       |   | $       | 124,260 | 
|                                                        |                           |   |         |        

The following unaudited pro forma summary
information presents the consolidated income statement
information for the twelve month period ended December 31,
2002 as if the PHP transaction had been

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AMERIGROUP CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

consummated on January 1, 2002, and does not
purport to be indicative of what would have occurred had the
acquisition been made at that date or of the results which may
occur in the future.

|                             |  |   |           | 
|---------------------------- |  | - | --------- | 
|Premium revenue              |  | $ | 1,412,916 | 
|                             |  |   |           | 
|Net income                   |  | $ | 55,035    | 
|                             |  |   |           | 
|Diluted net income per share |  | $ | 2.56      | 
|                             |  |   |           | 

The unaudited pro forma summary information
reflects adjustments made to our historical financial statements
by including the applicable results of operations of PHPs
Medicaid and SCHIP lines of business in Florida prior to the
acquisition.



|    |                           
|--- | --------------------------
|(e) | St. Augustine, AvMed, Inc.

Effective July 1, 2003, we purchased the
Medicaid contracts and related assets known as St. Augustine for
$8,581. The assets purchased consisted primarily of St.
Augustines rights to provide managed care services to its
26,000 Medicaid members who receive health care benefits under
Floridas Medicaid program in nine counties in the Miami/
Ft. Lauderdale, Orlando and Tampa markets. Goodwill and
other intangibles totaling $8,581 includes $2,151 for
identifiable intangibles allocated to a non-compete agreement
and the rights to the membership. Intangible assets related to
the non-compete agreement and the rights to the membership are
being amortized based on the timing of related cash flows with
an expected amortization of three to eight years.



|    |             
|--- | ------------
|(6) | Income Taxes

Income tax expense (benefit) for the years ended
December 31, 2003, 2002 and 2001 consists of the following:

|                              |                 |         |        |          |  |       |        |        |   |   |        |        | 
|----------------------------- | --------------- | ------- | ------ | -------- |  | ----- | ------ | ------ | - | - | ------ | ------ | 
|                              |                 | Current |        | Deferred |  | Total
|                              |                 |         |        |          |  |      
|Year ended December 31, 2003: |                 |         |        |          |  |       |        |        |   |   |        |       
|                              | U.S. federal    |         | $      | 42,238   |  |       | $      | (2,409 | ) |   | $      | 39,829 | 
|                              | State and local |         |        | 7,625    |  |       |        | (863   | ) |   |        | 6,762  | 
|                              |                 |         |        |          |  |       |        |        |   |   |        |       
|                              |                 | $       | 49,863 |          |  | $     | (3,272 | )      |   | $ | 46,591 |       
|                              |                 |         |        |          |  |       |        |        |   |   |        |       
|Year ended December 31, 2002: |                 |         |        |          |  |       |        |        |   |   |        |       
|                              | U.S. federal    |         | $      | 25,798   |  |       | $      | 854    |   |   | $      | 26,652 | 
|                              | State and local |         |        | 5,895    |  |       |        | 139    |   |   |        | 6,034  | 
|                              |                 |         |        |          |  |       |        |        |   |   |        |       
|                              |                 | $       | 31,693 |          |  | $     | 993    |        |   | $ | 32,686 |       
|                              |                 |         |        |          |  |       |        |        |   |   |        |       
|Year ended December 31, 2001: |                 |         |        |          |  |       |        |        |   |   |        |       
|                              | U.S. federal    |         | $      | 22,685   |  |       | $      | (222   | ) |   | $      | 22,463 | 
|                              | State and local |         |        | 3,566    |  |       |        | 98     |   |   |        | 3,664  | 
|                              |                 |         |        |          |  |       |        |        |   |   |        |       
|                              |                 | $       | 26,251 |          |  | $     | (124   | )      |   | $ | 26,127 |       
|                              |                 |         |        |          |  |       |        |        |   |   |        |       

60



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##### Table of Contents



AMERIGROUP CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

Income tax expense differed from the amounts
computed by applying the U.S. federal income tax rate to
income before income taxes as a result of the following:

|                                         |                                                                    |                          |        |       |        |        |      |     |      |        |        |       |        |  |      |     |      |   |        |       |        |  |      |     |      |  
|---------------------------------------- | ------------------------------------------------------------------ | ------------------------ | ------ | ----- | ------ | ------ | ---- | --- | ---- | ------ | ------ | ----- | ------ |  | ---- | --- | ---- | - | ------ | ----- | ------ |  | ---- | --- | ---- | -
|                                         |                                                                    |                         
|                                         |                                                                    | Years ended December 31,
|                                         |                                                                    |                         
|                                         |                                                                    |                          |        |       |        |       
|                                         |                                                                    | 2003                     |        | 2002  |        | 2001  
|                                         |                                                                    |                          |        |       |        |       
|                                         |                                                                    | Amount                   |        | %     |        | Amount |      | %   |      | Amount |        | %    
|                                         |                                                                    |                          |        |       |        |        |      |     |      |        |        |      
|Tax expense at statutory rate            |                                                                    | $                        | 39,870 |       |        |        | 35.0 | %   |      | $      | 27,902 |       |        |  | 35.0 | %   |      | $ | 21,772 |       |        |  | 35.0 | %  
|Increase in income taxes resulting from: |                                                                    |                          |        |       |        |        |      |     |      |        |        |       |        |  |      |     |      |   |        |       |        |  |      |    
|                                         | State and local income taxes, net of federal
    income tax effect |                          |        | 4,395 |        |        |      | 3.9 |      |        |        | 3,922 |        |  |      | 4.9 |      |   |        | 2,382 |        |  |      | 3.8 |     
|                                         | Effect of nondeductible expenses and other, net                    |                          |        | 2,326 |        |        |      | 2.0 |      |        |        | 862   |        |  |      | 1.1 |      |   |        | 1,973 |        |  |      | 3.2 |     
|                                         |                                                                    |                          |        |       |        |        |      |     |      |        |        |       |        |  |      |     |      |   |        |       |        |  |      |    
|                                         |                                                                    | Total income tax expense |        | $     | 46,591 |        |      |     | 40.9 | %      |        | $     | 32,686 |  |      |     | 41.0 | % |        | $     | 26,127 |  |      |     | 42.0 | %
|                                         |                                                                    |                          |        |       |        |        |      |     |      |        |        |       |        |  |      |     |      |   |        |       |        |  |      |    

The tax effects of temporary differences that
give rise to significant portions of the deferred tax assets and
deferred tax liabilities at December 31, 2003 and 2002 are
presented below:

|                          |                                                                                                           |                                                          |   |        |        |   |      |        |        |  
|------------------------- | --------------------------------------------------------------------------------------------------------- | -------------------------------------------------------- | - | ------ | ------ | - | ---- | ------ | ------ | -
|                          |                                                                                                           |                                                         
|                          |                                                                                                           | December 31,                                            
|                          |                                                                                                           |                                                         
|                          |                                                                                                           | 2003                                                     |   | 2002  
|                          |                                                                                                           |                                                          |   |       
|Deferred tax assets:      |                                                                                                           |                                                          |   |        |        |   |      |       
|                          | Estimated claims incurred but not reported, a
    portion of which is deductible as paid for tax purposes |                                                          | $ | 2,338  |        |   | $    | 2,238  |       
|                          | Vacation, bonus and other accruals, deductible as
    paid for tax purposes                               |                                                          |   | 5,844  |        |   |      | 2,529  |       
|                          | Contractual allowances, deductible as written off
    for tax purposes                                    |                                                          |   | 762    |        |   |      | 1,235  |       
|                          | Other expenses, deductible in future periods for
    tax purposes                                         |                                                          |   | 1,563  |        |   |      | 859    |       
|                          | Goodwill, due to timing differences in book and
    tax amortization                                      |                                                          |   | 209    |        |   |      | 117    |       
|                          | Unearned revenue, included in income as received
    for tax purposes                                     |                                                          |   | 4,330  |        |   |      | 1,965  |       
|                          | State net operating loss/credit carryforwards,
    deductible in future periods for tax purposes          |                                                          |   | 1,780  |        |   |      | 785    |       
|                          |                                                                                                           |                                                          |   |        |        |   |      |       
|                          |                                                                                                           | Gross deferred tax assets before valuation
    allowance |   |        | 16,826 |   |      |        | 9,728  |  
|Less: Valuation allowance |                                                                                                           |                                                          |  |        |        |   | (785 | )     
|                          |                                                                                                           |                                                          |   |        |        |   |      |       
|                          | Net deferred tax assets                                                                                   |                                                          |   | 16,826 |        |   |      | 8,943  |       
|Deferred tax liabilities: |                                                                                                           |                                                          |   |        |        |   |      |       
|                          | Property and equipment, due to timing differences
    in book and tax depreciation                        |                                                          |   | (5,271 | )      |   |      | (3,659 | )     
|                          | Deductible prepaid expenses and other                                                                     |                                                          |   | (2,293 | )      |   |      | (2,064 | )     
|                          |                                                                                                           |                                                          |   |        |        |   |      |       
|                          |                                                                                                           | Gross deferred tax liabilities                           |   |        | (7,564 | ) |      |        | (5,723 | )
|                          |                                                                                                           |                                                          |   |        |        |   |      |       
|                          |                                                                                                           | Net deferred tax asset                                   |   | $      | 9,262  |   |      | $      | 3,220  |  
|                          |                                                                                                           |                                                          |   |        |        |   |      |       

The valuation allowance for deferred tax assets
decreased by $785 in 2003 which decreased income tax expense by
the same amount. The decrease in this allowance was due to the
utilization of a state tax credit carryforward that we had
previously established a valuation allowance for in 2002. The
increase in the valuation allowance of $785 in 2002 increased
income tax by the same amount. The allowance was established in
2002 as the state tax credit carryforward was only available for
use to the extent our regular tax liability exceeded the
alternative minimum tax liability for a given year. Future
projections in 2002 did not show the regular tax liability
exceeding the alternative minimum tax; however, the credit was
utilized in 2003. In assessing the realizability of

61



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AMERIGROUP CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

deferred tax assets, we consider whether it is
more likely than not that some portion or all of the deferred
tax assets will not be realized. The ultimate realization of
deferred tax assets is dependent upon the generation of future
taxable income during the periods in which those temporary
differences become deductible. We consider the scheduled
reversal of deferred tax liabilities, projected future taxable
income, and tax planning strategies in making this assessment.
In order to fully realize the deferred tax asset, we will need
to generate future taxable income of $1,780 prior to the
expiration of a state net operating loss carryforward in 2022
and 2023. Based upon the level of historical taxable income and
projections for future taxable income over the periods in which
the deferred tax assets are deductible, we believe it is more
likely than not that we will realize the benefits of those
deductible differences at December 31, 2003. The amount of
the deferred tax asset considered realizable, however, could be
reduced in the near term if estimates of future taxable income
during the carryforward period are reduced.

Income taxes payable were $7,005 and $2,360 at
December 31, 2003 and 2002 and were included in accrued
expenses, capital leases and other current liabilities.



|    |               
|--- | --------------
|(7) | Long-Term Debt

On October 22, 2003, we entered into a
$95,000 Amended and Restated Credit Agreement (Credit Agreement)
with a syndicate of banks. The Credit Agreement contains a
provision which allows us to obtain, subject to certain
conditions, an increase in revolving commitments of up to an
additional $30,000. The proceeds of the Credit Agreement are
available for general corporate purposes, including, without
limitation, permitted acquisitions of businesses, assets and
technologies. The borrowings under the Credit Agreement will
accrue interest at one of the following rates, at our option:
Eurodollar plus the applicable margin or an alternate base rate
plus the applicable margin. The applicable margin for Eurodollar
borrowings is between 2.00% and 2.50% and the applicable margin
for alternate base rate borrowings is between 1.00% and 1.50%.
The applicable margin will vary depending on our leverage ratio.
The Credit Agreement is secured by substantially all of the
assets of AMERIGROUP Corporation and its wholly owned
subsidiary, PHP Holdings, Inc., including the stock of their
respective wholly owned managed care subsidiaries. There is a
commitment fee on the unused portion of the Credit Agreement
that ranges from 0.375% to 0.50%, depending on the leverage
ratio. The Credit Agreement terminates on October 22, 2006
and was undrawn as of December 31, 2003.

During 2001, we entered into a Credit and
Guaranty Agreement with a syndicate of banks to obtain a $60,000
revolving credit facility. In July 2002, we expanded the
facility to include an additional bank and to increase the
revolving credit facility to $75,000. The facility was secured
by the assets of AMERIGROUP Corporation and by the common stock
of its direct, wholly owned subsidiaries. At December 31,
2002, $50,000 was outstanding under the facility. Amounts
outstanding under the facility accrued interest at one of the
following rates, at our option: LIBOR plus the applicable margin
or an alternate bank rate plus the applicable margin. The
applicable margin for LIBOR borrowings was between 2.0% and
2.5%. The applicable margin for alternate bank rate borrowings
was between 1.0% and 1.5%. The applicable margin varied
depending on our leverage ratio. We also paid a 0.50% commitment
fee on the unused portion of the facility. This credit facility
was repaid during 2003 and replaced with the Credit Agreement.

Pursuant to the Credit Agreement, we must meet
certain financial covenants. These financial covenants include
meeting certain financial ratios, a limit on annual capital
expenditures, and a minimum net worth requirement.

62



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##### Table of Contents



AMERIGROUP CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)



|    |                           
|--- | --------------------------
|(8) | Redeemable Preferred Stock

Redeemable preferred stock is summarized as
follows:

|                                                                     |  |          |            |          |  |          |         |          |  |        |            |        |  |        |         |        |  |  |            |   |  |   |         |   |  |  |            |   |  |   |         |  
|-------------------------------------------------------------------- |  | -------- | ---------- | -------- |  | -------- | ------- | -------- |  | ------ | ---------- | ------ |  | ------ | ------- | ------ |  |  | ---------- | - |  | - | ------- | - |  |  | ---------- | - |  | - | ------- | -
|                                                                     |  |          |            |          |  |          |         |         
|                                                                     |  | Series A |            | Series B |  | Series C |         | Series E
|                                                                     |  |          |            |          |  |          |         |         
|                                                                     |  | Shares   |            | Amount   |  | Shares   |         | Amount   |  | Shares |            | Amount |  | Shares |         | Amount
|                                                                     |  |          |            |          |  |          |         |          |  |        |            |        |  |        |         |       
|Balances at January 1, 2001                                          |  |          | 8,000,000  |          |  | $        | 15,464  |          |  |        | 7,025,000  |        |  | $      | 25,324  |        |  |  | 6,480,000  |   |  | $ | 25,528  |   |  |  | 2,000,000  |   |  | $ | 11,874  |  
|Accreted dividends                                                   |  |          |           |          |  |          | 1,058   |          |  |        |           |        |  |        | 1,792   |        |  |  |           |   |  |   | 1,932   |   |  |  |           |   |  |   | 1,446   |  
|Conversion of Series A, B and C preferred
    stock to common shares |  |          | (8,000,000 | )        |  |          | (16,522 | )        |  |        | (7,025,000 | )      |  |        | (27,116 | )      |  |  | (6,480,000 | ) |  |   | (27,460 | ) |  |  |           |   |  |   |        |  
|Redemption of Series E mandatorily
    redeemable preferred stock    |  |          |           |          |  |          |        |          |  |        |           |        |  |        |        |        |  |  |           |   |  |   |        |   |  |  | (2,000,000 | ) |  |   | (13,320 | )
|                                                                     |  |          |            |          |  |          |         |          |  |        |            |        |  |        |         |        |  |  |            |   |  |   |         |   |  |  |            |   |  |   |         |  
|Balances at December 31, 2001                                        |  |          |           |          |  | $        |        |          |  |        |           |        |  | $      |        |        |  |  |           |   |  | $ |        |   |  |  |           |   |  | $ |        |  
|                                                                     |  |          |            |          |  |          |         |          |  |        |            |        |  |        |         |        |  |  |            |   |  |   |         |   |  |  |            |   |  |   |         |  



| |                  
| | -----------------
| | Series A, B and C

The Series A, B and C preferred stock were
convertible to common shares on a two-for-one basis, at the
option of the preferred stockholder. The Series A, B and C
preferred stock carried a noncumulative 10% dividend payable
upon approval by the Board of Directors. We accreted dividends
on Series A, B and C using the interest method and added
the accrued dividends to the applicable redeemable preferred
stock issue balance.

The Series A, B and C preferred stock was
converted into 10,752,493 shares of common stock concurrent
with our initial public offering.



| |         
| | --------
| | Series E

During July 1998, we issued 1,000,000 units
of its Series E Mandatorily Redeemable Preferred Stock and
Warrants (Series E) at a price of $5.00 per unit (the
first tranche). During January 1999, we issued an additional
1,000,000 units of the Series E at a price of
$5.00 per unit (the second tranche). Each unit included a
share of Series E preferred stock and an unattached warrant
to purchase 0.5625 shares of common stock at a price of
$0.02 per share. Of the gross proceeds of $5.00, $0.80 has
been allocated to the warrants issued based on fair value. The
fair value of the warrants sold was determined by our Board of
Directors and was consistent with the exercise price of our
stock options at the time of issuance. Concurrent with the
offering, the warrants were exercised for 1,123,823 shares
of common stock. The remaining amount of $4.20 is attributable
to Series E stock. The redeemable preferred stock was
recorded at its original fair value of $4.20 per share,
plus accreted dividends.

63



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AMERIGROUP CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

In accordance with the terms of the Series E
mandatorily redeemable preferred stock, dividends per share
accrued as follows:

|                   |  |               |      |                |  |   |      | 
|------------------ |  | ------------- | ---- | -------------- |  | - | ---- | 
|                   |  | First Tranche |      | Second Tranche
|                   |  |               |      |               
|September 30, 1998 |  | $             | 2.05 |                |  | $ |     | 
|December 31, 1998  |  |               |     |                |  |   |     | 
|March 31, 1999     |  |               |     |                |  |   | 2.05 | 
|June 30, 1999      |  |               |     |                |  |   |     | 
|September 30, 1999 |  |               |     |                |  |   |     | 
|December 31, 1999  |  |               |     |                |  |   |     | 
|March 31, 2000     |  |               |     |                |  |   |     | 
|June 30, 2000      |  |               |     |                |  |   |     | 
|September 30, 2000 |  |               |     |                |  |   |     | 
|December 31, 2000  |  |               | 0.10 |                |  |   |     | 
|March 31, 2001     |  |               | 0.15 |                |  |   |     | 
|June 30, 2001      |  |               | 0.16 |                |  |   | 0.10 | 
|September 30, 2001 |  |               | 0.16 |                |  |   | 0.15 | 

The total of these dividends was charged to
retained earnings on the interest method.

The Series E stock, with cumulative
dividends, was redeemed concurrent with our initial public
offering.



|    |                  
|--- | -----------------
|(9) | Stock Option Plan

In May 2003, our shareholders approved and we
adopted the 2003 Equity Incentive Plan (2003 Plan), which
provides for the granting of stock options, restricted stock,
phantom stock and stock bonuses to employees, directors and
consultants. We reserved for issuance a maximum of
1,650,000 shares of common stock under the 2003 Plan. In
addition, shares remaining available for issuance under our 2000
Stock Plan (described below) and our 1994 Stock Plan (described
below) will be available for issuance under the 2003 Plan. Under
all plans, an options maximum term is ten years. As of
December 31, 2003, we had a total of 1,311,878 options
available for issuance under our 2003 Plan, 2000 Plan and 1994
Plan.

In July 2000, we adopted the 2000 Equity
Incentive Plan (2000 Plan), which provides for the granting of
stock options, restricted stock, phantom stock and stock bonuses
to employees, directors and consultants. We reserved for
issuance a maximum of 2,064,000 shares of common stock
under the 2000 Plan at inception. In addition, shares remaining
available for issuance under our 1994 Stock Plan (described
below) were available for issuance under the 2000 Plan. Twenty
percent of the options vest upon grant date or at an
employees hiring anniversary date, whichever is later, and
five percent at the end of each three-month period thereafter.

In 1994, we established the 1994 Stock Plan (1994
Plan), which provides for the granting of either incentive stock
options or nonqualified options to purchase shares of our common
stock by employees, directors and consultants of the Company for
up to 2,099,500 shares of common stock as of
December 31, 1999. On February 9, 2000, we increased
the number of options available for grant to 2,249,500.

64



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##### Table of Contents



AMERIGROUP CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

A summary of stock plans at December 31,
2003, 2002, and 2001 and the changes during the years then ended
follows:

|                                 |  |        |           |           |  |        |       |           |  |        |           |           |  |   |       |  |  |  |           |  |  |   |       | 
|-------------------------------- |  | ------ | --------- | --------- |  | ------ | ----- | --------- |  | ------ | --------- | --------- |  | - | ----- |  |  |  | --------- |  |  | - | ----- | 
|                                 |  |        |           |           |  |       
|                                 |  | 2003   |           | 2002      |  | 2001  
|                                 |  |        |           |           |  |       
|                                 |  |        |           | Weighted- |  |        |       | Weighted- |  |        |           | Weighted-
|                                 |  |        |           | average   |  |        |       | average   |  |        |           | average  
|                                 |  |        |           | exercise  |  |        |       | exercise  |  |        |           | exercise 
|                                 |  | Shares |           | price     |  | Shares |       | price     |  | Shares |           | price    
|                                 |  |        |           |           |  |        |       |           |  |        |           |          
|Outstanding at beginning of year |  |        | 2,414,934 |           |  | $      | 14.39 |           |  |        | 2,074,734 |           |  | $ | 7.92  |  |  |  | 1,776,029 |  |  | $ | 4.61  | 
|Granted                          |  |        | 1,148,673 |           |  |        | 30.85 |           |  |        | 1,077,893 |           |  |   | 22.12 |  |  |  | 637,366   |  |  |   | 15.45 | 
|Exercised                        |  |        | 695,139   |           |  |        | 14.78 |           |  |        | 647,548   |           |  |   | 5.87  |  |  |  | 218,428   |  |  |   | 1.61  | 
|Forfeited                        |  |        | 185,736   |           |  |        | 20.52 |           |  |        | 90,145    |           |  |   | 19.07 |  |  |  | 120,233   |  |  |   | 10.25 | 
|                                 |  |        |           |           |  |        |       |           |  |        |           |           |  |   |       |  |  |  |           |  |  |   |       | 
|Outstanding at end of year       |  |        | 2,682,732 |           |  | $      | 20.93 |           |  |        | 2,414,934 |           |  | $ | 14.39 |  |  |  | 2,074,734 |  |  | $ | 7.92  | 
|                                 |  |        |           |           |  |        |       |           |  |        |           |           |  |   |       |  |  |  |           |  |  |   |       | 

The following table summarizes information
related to the stock options outstanding at December 31,
2003:

|                         |  |             |           |              |  |                |     |             |  |                |       |  |  |  |           |  |  |   |       | 
|------------------------ |  | ----------- | --------- | ------------ |  | -------------- | --- | ----------- |  | -------------- | ----- |  |  |  | --------- |  |  | - | ----- | 
|                         |  |             |           | Weighted-    |  |                |     |             |  |               
|                         |  |             |           | average      |  |                |     |             |  |               
|                         |  |             |           | remaining    |  | Weighted-      |     |             |  | Weighted-     
|                         |  | Options     |           | contractual  |  | average        |     | Options     |  | average       
|Range of exercise prices |  | outstanding |           | life (years) |  | exercise price |     | exercisable |  | exercise price
|                         |  |             |           |              |  |                |     |             |  |               
|$0.00  $4.54            |  |             | 366,398   |              |  |                | 2.7 |             |  | $              | 1.00  |  |  |  | 357,153   |  |  | $ | 0.95  | 
|$4.55  $9.07            |  |             | 102,122   |              |  |                | 5.7 |             |  | $              | 8.60  |  |  |  | 90,215    |  |  | $ | 8.60  | 
|$9.08  $13.60           |  |             | 5,550     |              |  |                | 6.2 |             |  | $              | 11.78 |  |  |  | 3,087     |  |  | $ | 11.73 | 
|$13.61  $18.14          |  |             | 502,167   |              |  |                | 7.0 |             |  | $              | 15.43 |  |  |  | 269,509   |  |  | $ | 15.25 | 
|$18.15  $22.67          |  |             | 553,078   |              |  |                | 7.8 |             |  | $              | 21.25 |  |  |  | 251,855   |  |  | $ | 21.25 | 
|$22.68  $27.21          |  |             | 649,417   |              |  |                | 8.4 |             |  | $              | 26.50 |  |  |  | 292,936   |  |  | $ | 26.46 | 
|$27.22  $31.75          |  |             | 300,000   |              |  |                | 9.4 |             |  | $              | 31.26 |  |  |  |          |  |  | $ |      | 
|$31.76  $36.28          |  |             | 3,000     |              |  |                | 0.2 |             |  | $              | 33.55 |  |  |  | 3,000     |  |  | $ | 33.55 | 
|$36.29  $40.81          |  |             |          |              |  |                |    |             |  | $              |      |  |  |  |          |  |  | $ |      | 
|$40.82  $45.35          |  |             | 201,000   |              |  |                | 8.3 |             |  | $              | 43.03 |  |  |  | 7,812     |  |  | $ | 43.32 | 
|                         |  |             |           |              |  |                |     |             |  |                |       |  |  |  |           |  |  |   |       | 
|                         |  |             | 2,682,732 |              |  |                | 7.2 |             |  | $              | 20.93 |  |  |  | 1,275,567 |  |  | $ | 14.74 | 
|                         |  |             |           |              |  |                |     |             |  |                |       |  |  |  |           |  |  |   |       | 

On February 11, 2004, we granted an
additional 539,729 options at an exercise price of $37.07.

We apply APB Opinion No. 25 and related
interpretations in accounting for our stock plans. Accordingly,
compensation cost related to stock options issued to employees
would be recorded on the date of grant only if the current
market price of the underlying stock exceeded the exercise
price. During 2000, we recorded deferred charges of $1,833,
representing the difference between the exercise price and the
deemed fair value of our common stock for the options granted in
2000. The deferred compensation is being amortized to expense
over the period the options vest, generally four to five years.
We recognized $360, $358 and $360 in non-cash compensation
expense related to the amortization of deferred compensation
during 2003, 2002 and 2001, respectively.

The fair value of each option grant is estimated
on the date of grant using an option pricing model with the
following assumptions: no dividend yield for all years,
risk-free interest rate of 3.2%, 3.6% and 4.3%, expected life of
6.7, 4.0 and 3.5 years and volatility of 44.6%, 49.7% and
0.0%, for the years ended December 31, 2003, 2002 and 2001,
respectively. Volatility is estimated to be zero in 2001 because
our common stock was not publicly traded until November 6,
2001.

65



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##### Table of Contents



AMERIGROUP CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)



|     |                   
|---- | ------------------
|(10) | Earnings Per Share

The following table sets forth the calculation of
basic and diluted net income per share:

|                              |                                                                                                                                             |                         |   |            |  |      |   |            |  |  |   |            |  
|----------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------- | - | ---------- |  | ---- | - | ---------- |  |  | - | ---------- | -
|                              |                                                                                                                                             |                        
|                              |                                                                                                                                             | Year ended December 31,
|                              |                                                                                                                                             |                        
|                              |                                                                                                                                             | 2003                    |   | 2002       |  | 2001
|                              |                                                                                                                                             |                         |   |            |  |     
|Basic net income per share:   |                                                                                                                                             |                         |   |            |  |      |   |            |  |  |   |           
|                              | Net income                                                                                                                                  |                         | $ | 67,324     |  |      | $ | 47,036     |  |  | $ | 36,080     |  
|                              | Less: Accretion of convertible redeemable
    preferred stock dividends                                                                     |                         |   |           |  |      |   |           |  |  |   | (6,228     | )
|                              |                                                                                                                                             |                         |   |            |  |      |   |            |  |  |   |           
|                              | Net income attributable to common stockholders                                                                                              |                         | $ | 67,324     |  |      | $ | 47,036     |  |  | $ | 29,852     |  
|                              |                                                                                                                                             |                         |   |            |  |      |   |            |  |  |   |           
|                              | Weighted average number of common shares
    outstanding                                                                                    |                         |   | 21,622,704 |  |      |   | 20,177,728 |  |  |   | 3,694,844  |  
|                              |                                                                                                                                             |                         |   |            |  |      |   |            |  |  |   |           
|                              | Basic net income per share                                                                                                                  |                         | $ | 3.11       |  |      | $ | 2.33       |  |  | $ | 8.08       |  
|                              |                                                                                                                                             |                         |   |            |  |      |   |            |  |  |   |           
|Diluted net income per share: |                                                                                                                                             |                         |   |            |  |      |   |            |  |  |   |           
|                              | Net income attributable to common stockholders                                                                                              |                         | $ | 67,324     |  |      | $ | 47,036     |  |  | $ | 29,852     |  
|                              | Plus: Accretion of convertible preferred stock
    dividends assuming conversion                                                            |                         |   |           |  |      |   |           |  |  |   | 4,782      |  
|                              |                                                                                                                                             |                         |   |            |  |      |   |            |  |  |   |           
|                              | Diluted net income attributable to common
    stockholders                                                                                  |                         | $ | 67,324     |  |      | $ | 47,036     |  |  | $ | 34,634     |  
|                              |                                                                                                                                             |                         |   |            |  |      |   |            |  |  |   |           
|                              | Weighted average number of common shares
    outstanding                                                                                    |                         |   | 21,622,704 |  |      |   | 20,177,728 |  |  |   | 3,694,844  |  
|                              | Dilutive effect of stock options and warrants (as
    determined by applying the treasury stock method) and
    convertible preferred stock |                         |   | 1,178,946  |  |      |   | 1,291,694  |  |  |   | 12,954,877 |  
|                              |                                                                                                                                             |                         |   |            |  |      |   |            |  |  |   |           
|                              | Weighted average number of common shares and
    dilutive potential common shares outstanding                                               |                         |   | 22,801,650 |  |      |   | 21,469,422 |  |  |   | 16,649,721 |  
|                              |                                                                                                                                             |                         |   |            |  |      |   |            |  |  |   |           
|                              | Diluted net income per share                                                                                                                |                         | $ | 2.95       |  |      | $ | 2.19       |  |  | $ | 2.08       |  
|                              |                                                                                                                                             |                         |   |            |  |      |   |            |  |  |   |           



|     |                                    
|---- | -----------------------------------
|(11) | Fair Value of Financial Instruments

The fair value of a financial instrument is the
amount at which the instrument could be exchanged in a current
transaction between willing parties. The following methods and
assumptions were used to estimate the fair value of each class
of financial instruments:

Cash and cash equivalents, premium receivables,
prepaid expenses and other current assets, accounts payable,
unearned revenue, accrued expenses and other current liabilities
and claims payable: The carrying amounts approximate fair value
because of the short maturity of these items.

Short-term investments, long-term investments and
investments on deposit for licensure: The carrying amounts
approximate their fair values, which were determined based upon
quoted market prices (note 3).

Long-term debt: The carrying amount of long-term
debt approximates fair value as the interest rate of the
outstanding debt fluctuates with market interest rates.

66



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##### Table of Contents



AMERIGROUP CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)



|     |                              
|---- | -----------------------------
|(12) | Commitments and Contingencies



| |                                     
| | ------------------------------------
| | (a) Minimum Reserve
    Requirements

Regulations governing our managed care operations
in New Jersey, Texas, Illinois, Maryland, Florida and the
District of Columbia require the applicable subsidiary to meet
certain minimum net worth requirements. Each subsidiary was in
compliance with its requirements at December 31, 2003.



|    |            
|--- | -----------
|(b) | Malpractice

We maintain professional liability coverage for
certain claims which is provided by independent carriers and is
subject to annual coverage limits. Professional liability
policies are on a claims-made basis and must be renewed or
replaced with equivalent insurance if claims incurred during its
term, but asserted after its expiration, are to be insured.



|    |                 
|--- | ----------------
|(c) | Lease Agreements

We are obligated under capital leases covering
certain office equipment that expires at various dates during
the next five years. At December 31, 2003 and 2002, the
gross amount of office equipment and related accumulated
amortization recorded under capital leases was as follows:

|                              |  |      |        |      |  |   |        | 
|----------------------------- |  | ---- | ------ | ---- |  | - | ------ | 
|                              |  | 2003 |        | 2002
|                              |  |      |        |     
|Equipment                     |  | $    | 17,268 |      |  | $ | 11,291 | 
|Less accumulated amortization |  |      | 7,794  |      |  |   | 2,857  | 
|                              |  |      |        |      |  |   |        | 
|                              |  | $    | 9,474  |      |  | $ | 8,434  | 
|                              |  |      |        |      |  |   |        | 

Amortization of assets held under capital leases
is included with depreciation expense.

We also lease office space under operating leases
which expire at various dates through 2019. Future minimum
payments by year and in the aggregate under all non-cancelable
leases are as follows at December 31, 2003:

|                                                                   |                                                                      |                |        |                  |  |   |        |        | 
|------------------------------------------------------------------ | -------------------------------------------------------------------- | -------------- | ------ | ---------------- |  | - | ------ | ------ | 
|                                                                   |                                                                      | Capital Leases |        | Operating Leases
|                                                                   |                                                                      |                |        |                 
|2004                                                               |                                                                      | $              | 4,794  |                  |  | $ | 8,309  |       
|2005                                                               |                                                                      |                | 3,589  |                  |  |   | 8,234  |       
|2006                                                               |                                                                      |                | 1,675  |                  |  |   | 7,893  |       
|2007                                                               |                                                                      |                | 868    |                  |  |   | 6,941  |       
|2008                                                               |                                                                      |                | 408    |                  |  |   | 4,895  |       
|Thereafter                                                         |                                                                      |                |       |                  |  |   | 26,576 |       
|                                                                   |                                                                      |                |        |                  |  |   |        |       
|                                                                   | Total minimum lease payments                                         |                |        | 11,334           |  |   | $      | 62,848 | 
|                                                                   |                                                                      |                |        |                  |  |   |        |       
|Less amount representing interest                                  |                                                                      |                | (816   | )                |  |   |        |       
|                                                                   |                                                                      |                |        |                  |  |   |        |       
|                                                                   | Present value of minimum lease payments                              |                |        | 10,518           |  |   |        |        | 
|Less: Current installments of obligations under
    capital leases |                                                                      |                | (4,373 | )                |  |   |        |       
|                                                                   |                                                                      |                |        |                  |  |   |        |       
|                                                                   | Obligations under capital leases, excluding
    current installments |                | $      | 6,145            |  |   |        |        | 
|                                                                   |                                                                      |                |        |                  |  |   |        |       

In connection with our acquisition of PHP
effective January 1, 2003, AMERIGROUP Corporation agreed to
guarantee a certain lease for office space occupied by a
business operated by former management of PHP. Minimum lease
payments under the guaranteed lease as of December 31, 2003
are $676 and $168 in 2004 and 2005, respectively. The fair value
of the stand ready obligation under the guarantee is $34 and has
been reflected

67



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##### Table of Contents



AMERIGROUP CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

in the December 31, 2003 consolidated
balance sheet. If the lessee defaults due to non-payment, all
future rental payments are accelerated, subject to our right to
cure, by bringing the payments up to date. The lease term ends
in March 2005.

Total rent expense for all office space and
office equipment under non-cancelable operating leases was
approximately $8,187, $5,459 and $3,476 in 2003, 2002 and 2001,
respectively, and is included in selling, general and
administrative expenses in the accompanying Consolidated Income
Statements.



|    |                            
|--- | ---------------------------
|(d) | Deferred Compensation Plans

Our employees have the option to participate in a
deferred compensation plan sponsored by the Company. All
full-time and most part-time employees of AMERIGROUP Corporation
and subsidiaries may elect to participate in this plan. This
plan is exempt from income taxes under Section 401(k) of
the Internal Revenue Code. Participants may contribute a certain
percentage of their compensation subject to maximum federal and
plan limits. We may elect to match a certain percentage of each
employees contributions up to specified limits. For the
years ended December 31, 2003, 2002 and 2001, the matching
contribution under the plan in total was $720, $794 and $389,
respectively.

During 2003, we added a long-term cash incentive
award designed to retain certain key executives. Each eligible
participant is assigned a cash target, the payment of which is
deferred for three years. The amount of the target is dependent
upon the participants performance against individual major
job objectives in the first year of the program. The target
award amount is funded equally over the three year period, with
the funding being dependent upon the Company meeting its
financial goals each year. An executive is eligible for payment
of a long-term incentive earned in any one year only if the
executive remains employed with the Company and is in good
standing at the beginning of the third following year. The
funding for the long-term cash incentive award was $1,326 at
December 31, 2003 and was included in accrued expenses,
capital leases and other current liabilities.



|    |                  
|--- | -----------------
|(e) | Legal Proceedings

On July 18, 2002, Texas Childrens
Hospital (TCH) in Houston filed suit in State District
Court against AMERIGROUP Texas, Inc., our Texas subsidiary,
seeking to be paid full-billed charges for all services rendered
to our Texas subsidiarys Medicaid members since October
1999. Our Texas subsidiary does not have a contract with TCH to
provide services to its Medicaid members. When TCH provides
services to our members, it does so as a non-network provider.
On January 17, 2003, the physicians of Baylor College of
Medicine (Baylor), non-network providers who provide medical
services at TCH, filed suit against our Texas subsidiary seeking
full-billed charges for services provided since October 1999 to
our Texas Medicaid members. On July 7, 2003, TCH and Baylor
added AMERIGROUP Corporation as an additional defendant to the
lawsuits, alleging that we are directly liable for the
obligations of our Texas subsidiary. The trial court ruled in
November 2003 to abate the lawsuit pending TCHs exhaustion
of its administrative remedies with the Texas Health and Human
Services Commission (HHSC). To our knowledge TCH has not
initiated an administrative complaint in accordance with the
courts order. However, in March 2004 we received notice
that HHSC had commenced a review of certain claims payment
issues raised by TCH in early 2002 and which are part of the
subject matter of the lawsuit.

In May 2002, Capital Health Systems (Capital) in
New Jersey filed an action in the Superior Court of New Jersey
(the Court) against AMERIGROUP New Jersey, Inc., our New Jersey
subsidiary, seeking to be paid full-billed charges for all
services rendered to our New Jersey subsidiarys Medicaid
members since January 1, 2002. Our New Jersey subsidiary
has not had a contract with Capital to provide services to its
Medicaid members since December 31, 2001. As a result,
services provided by Capital to our members since
January 1, 2002 have been provided as a non-network
provider. Capital asserts that our New Jersey subsidiary agreed
to pay full-billed charges upon the expiration of our contract
with them on December 31, 2001. The Court ruled in favor of
Capital on August 8, 2003, and determined that our New
Jersey subsidiary entered into a new contract with Capital as of

68



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##### Table of Contents



AMERIGROUP CORPORATION AND
SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

December 31, 2001. Capital filed a notice of
motion for summary judgment on damages on September 12,
2003, seeking approximately $8.5 million. Capitals
motion was denied on December 5, 2003. We have petitioned
the Appeals Court of New Jersey for leave to file an appeal of
the Courts summary judgment on the issue of liability. The
petition is currently pending before the appellate division.
Once a determination of damages is made, we intend to appeal the
ruling.

We believe in both cases that we have paid the
providers in an appropriate manner. We have recorded in our
financial statements amounts that represent our best estimates
of outcomes that are reasonably probable. There can be no
assurances that the ultimate outcome of either or both of these
matters will not be materially different and could have a
material effect on our consolidated financial position, results
of operations, or liquidity.



|    |                     
|--- | --------------------
|(f) | Purchase Obligations

Under certain contracts, we are committed to
spend approximately $8,600 on software licensing and
implementation expenses for our new claims payment system and
leasehold improvements relating to a new building under
construction in Virginia Beach, Virginia that we will begin
leasing in 2004.



|     |                             
|---- | ----------------------------
|(13) | Employee Stock Purchase Plan

On February 15, 2001, the Board of Directors
approved and we adopted an Employee Stock Purchase Plan. All
employees are eligible to participate except those employees who
have been employed by us less than 90 days, whose customary
employment is less than 20 hours per week or any employee
who owns five percent or more of our common stock. Eligible
employees may join the plan every six months. Purchases of
common stock are priced at the lower of the stock price less 15%
on the first day or the last day of the six month period. We
have reserved for issuance 600,000 shares of common stock.
We issued 35,039 and 52,706 shares under the Employee Stock
Purchase Plan in 2003 and 2002, respectively.



|     |                                     
|---- | ------------------------------------
|(14) | Quarterly Financial Data (unaudited)

|                                                                                       |  |                    |            |         |  |              |            |             |  |   |            |  |  |   |            | 
|-------------------------------------------------------------------------------------- |  | ------------------ | ---------- | ------- |  | ------------ | ---------- | ----------- |  | - | ---------- |  |  | - | ---------- | 
|                                                                                       |  |                   
|                                                                                       |  | Three months ended
|                                                                                       |  |                   
|2003                                                                                   |  | March 31           |            | June 30 |  | September 30 |            | December 31
|                                                                                       |  |                    |            |         |  |              |            |            
|Premium revenue                                                                        |  | $                  | 389,562    |         |  | $            | 392,331    |             |  | $ | 411,277    |  |  | $ | 422,338    | 
|Health benefits expenses                                                               |  |                    | 317,298    |         |  |              | 310,536    |             |  |   | 328,235    |  |  |   | 339,831    | 
|Selling, general and administrative expenses                                           |  |                    | 44,070     |         |  |              | 46,945     |             |  |   | 46,781     |  |  |   | 49,060     | 
|Income before income taxes                                                             |  |                    | 23,570     |         |  |              | 30,265     |             |  |   | 30,911     |  |  |   | 29,169     | 
|Net income                                                                             |  |                    | 13,694     |         |  |              | 17,977     |             |  |   | 18,185     |  |  |   | 17,468     | 
|Diluted net income per share                                                           |  |                    | 0.63       |         |  |              | 0.82       |             |  |   | 0.81       |  |  |   | 0.69       | 
|Weighted average number of common shares and
    dilutive potential shares outstanding |  |                    | 21,631,779 |         |  |              | 21,909,649 |             |  |   | 22,328,879 |  |  |   | 25,336,292 | 

|                                                                                       |  |                    |            |         |  |              |            |             |  |   |            |  |  |   |            | 
|-------------------------------------------------------------------------------------- |  | ------------------ | ---------- | ------- |  | ------------ | ---------- | ----------- |  | - | ---------- |  |  | - | ---------- | 
|                                                                                       |  |                   
|                                                                                       |  | Three months ended
|                                                                                       |  |                   
|2002                                                                                   |  | March 31           |            | June 30 |  | September 30 |            | December 31
|                                                                                       |  |                    |            |         |  |              |            |            
|Premium revenue                                                                        |  | $                  | 270,842    |         |  | $            | 276,821    |             |  | $ | 297,025    |  |  | $ | 307,948    | 
|Health benefits expenses                                                               |  |                    | 223,001    |         |  |              | 221,481    |             |  |   | 240,407    |  |  |   | 248,702    | 
|Selling, general and administrative expenses                                           |  |                    | 29,921     |         |  |              | 32,318     |             |  |   | 33,927     |  |  |   | 37,243     | 
|Income before income taxes                                                             |  |                    | 16,986     |         |  |              | 21,662     |             |  |   | 21,102     |  |  |   | 19,972     | 
|Net income                                                                             |  |                    | 9,886      |         |  |              | 12,916     |             |  |   | 12,450     |  |  |   | 11,784     | 
|Diluted net income per share                                                           |  |                    | 0.47       |         |  |              | 0.60       |             |  |   | 0.58       |  |  |   | 0.54       | 
|Weighted average number of common shares and
    dilutive potential shares outstanding |  |                    | 21,244,538 |         |  |              | 21,493,134 |             |  |   | 21,478,501 |  |  |   | 21,661,514 | 

69



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##### Table of Contents



INDEPENDENT AUDITORS REPORT

The Board of Directors

AMERIGROUP Corporation


Under date of February 11, 2004, we reported
on the consolidated balance sheets of AMERIGROUP Corporation and
subsidiaries as of December 31, 2003 and 2002, and the
related consolidated income statements and statements of
stockholders equity and cash flows for each of the years
in the three-year period ended December 31, 2003, which are
included herein. In connection with our audits of the
aforementioned consolidated financial statements, we also
audited the related financial statement schedule,
Schedule II  Schedule of Valuation and
Qualifying Accounts, which is also included herein. This
financial statement schedule is the responsibility of the
Companys management. Our responsibility is to express an
opinion on the financial statement schedule based on our audits.

In our opinion, the financial statement schedule,
Schedule II  Schedule of Valuation and
Qualifying Accounts, when considered in relation to the basic
consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth
therein.

/s/ KPMG LLP

February 11, 2004

Norfolk, Virginia


70



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##### Table of Contents



SCHEDULE OF VALUATION AND QUALIFYING
ACCOUNTS

|                                           |  |           |     |            |  |             |     |             |  |   |     |  |  |   |     | 
|------------------------------------------ |  | --------- | --- | ---------- |  | ----------- | --- | ----------- |  | - | --- |  |  | - | --- | 
|                                           |  |           |     | Additions- |  | Deductions- |     |            
|                                           |  | Balance   |     | Amounts    |  | Amounts     |     |            
|                                           |  | Beginning |     | Charged to |  | Credited to |     | Balance End
|Valuation Allowance on Deferred Tax Assets |  | of Year   |     | Expenses   |  | Expenses    |     | of Year    
|                                           |  |           |     |            |  |             |     |            
|Year Ended December 31, 2003               |  | $         | 785 |            |  | $           |    |             |  | $ | 785 |  |  | $ |    | 
|Year Ended December 31, 2002               |  |           |    |            |  |             | 785 |             |  |   |    |  |  |   | 785 | 
|Year Ended December 31, 2001               |  |           |    |            |  |             |    |             |  |   |    |  |  |   |    | 






|        |                                                                                         
|------- | ----------------------------------------------------------------------------------------
|Item 9. | Changes in and Disagreements with
    Accountants on Accounting and Financial Disclosure

None.






|         |                        
|-------- | -----------------------
|Item 9A. | Controls and Procedures

(a) Evaluation of Disclosure Controls and
Procedures.

Our Chief Executive Officer and Chief Accounting
Officer have evaluated the effectiveness of our disclosure
controls and procedures (as such term is defined in
Rules 13a-14(c) and 15d-14(c) under the Securities Exchange
Act of 1934 as amended) as of a date within 90 days of the
filing date of this annual report (the Evaluation
Date). Based on such evaluation, our Chief Executive
Officer and Chief Accounting Officer have concluded that, as of
the Evaluation Date, our disclosure controls and procedures are
effective in alerting them on a timely basis to material
information relating to AMERIGROUP (including its consolidated
subsidiaries) required to be included in our reports filed or
submitted under the Securities Exchange Act of 1934, as amended.

(b) Changes in Internal Controls.

Since the Evaluation Date, there have not been
any significant changes in our internal controls or in other
factors that could significantly affect such controls.




PART III.






|         |                                                    
|-------- | ---------------------------------------------------
|Item 10. | Directors and Executive Officers of the
    Company

The information regarding compliance with
Section 16(a) of the Securities and Exchange Act of 1934 is
incorporated herein by reference from the section entitled
Section 16(a) Beneficial Ownership Reporting
Compliance of our definitive Proxy Statement (the
Proxy Statement) to be filed pursuant to
Regulation 14A of the Securities Exchange Act of 1934, as
amended, for our Annual Meeting of Stockholders to be held on
Wednesday, May 12, 2004. The Proxy Statement will be filed
within 120 days after the end of our fiscal year ended
December 31, 2003.

The information regarding Executive Officers is
contained in Part I of this Report under the caption
Executive Officers of the Company.

The information regarding directors is
incorporated herein by reference from the section entitled
PROPOSAL #1: ELECTION OF DIRECTORS in the Proxy
Statement.

The information regarding the Companys code
of ethics is incorporated herein by reference from the section
entitled Corporate Governance in the Proxy Statement.






|         |                       
|-------- | ----------------------
|Item 11. | Executive Compensation

Information regarding executive compensation is
incorporated herein by reference from the section entitled
Executive Officer Compensation in the Proxy
Statement.

71



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##### Table of Contents








|         |                                                                   
|-------- | ------------------------------------------------------------------
|Item 12. | Security Ownership of Certain Beneficial
    Owners and Management

Information regarding security ownership of
certain beneficial owners and management is incorporated herein
by reference from the sections entitled Security Ownership
of Certain Beneficial Owners and Management in the Proxy
Statement.

Securities Authorized for Issuance under
Equity Compensation Plans

|                                                               |  |                   |           |                  |  |                         |       |  |  |  |           | 
|-------------------------------------------------------------- |  | ----------------- | --------- | ---------------- |  | ----------------------- | ----- |  |  |  | --------- | 
|                                                               |  | Number of         |           | Weighted-        |  | Number of securities   
|                                                               |  | securities to be  |           | average exercise |  | remaining available for
|                                                               |  | issued upon       |           | price of         |  | future issuance under  
|                                                               |  | exercise of       |           | outstanding      |  | equity compensation    
|                                                               |  | outstanding       |           | options,         |  | plans (excluding       
|                                                               |  | options, warrants |           | warrants and     |  | securities reflected in
|                                                               |  | and rights        |           | rights           |  | the first column)(1)   
|                                                               |  |                   |           |                  |  |                        
|Equity compensation plans approved by security
    holders     |  |                   | 2,682,732 |                  |  | $                       | 20.93 |  |  |  | 1,824,133 | 
|Equity compensation plans not approved by
    security holders |  |                   |          |                  |  |                         |      |  |  |  |          | 
|Total                                                          |  |                   | 2,682,732 |                  |  | $                       | 20.93 |  |  |  | 1,824,133 | 
|                                                               |  |                   |           |                  |  |                         |       |  |  |  |           | 



---



|    |                                                                                                                                                                                                                                                                   
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Includes a total of 1,311,878 shares not yet
    issued as of December 31, 2003 under the 1994 Stock Plan,
    the 2000 Equity Incentive Plan and the 2003 Equity Incentive
    Plan and 512,255 shares not yet issued under the Employee
    Stock Purchase Plan.

In 2003, we issued options to purchase
1,148,673 shares of common stock to employees. All of these
options were granted under AMERIGROUPs 2000 Equity
Incentive Plan.






|         |                                                   
|-------- | --------------------------------------------------
|Item 13. | Certain Relationships and Related
    Transactions

Information regarding certain relationships and
related transactions is incorporated herein by reference from
the section entitled Certain Relationships and Related
Transactions in the Proxy Statement.






|         |                                           
|-------- | ------------------------------------------
|Item 14. | Principal Accountant Fees and
    Services

Information regarding principal accountant fees
and services is incorporated herein by reference from the
section entitled Proposal #2: APPOINTMENT OF
INDEPENDENT AUDITORS in the Proxy Statement.




PART IV.






|         |                                                                    
|-------- | -------------------------------------------------------------------
|Item 15. | Exhibits, Financial Statement Schedules and
    Reports on Form 8-K

(a)(1) Financial Statements.

The following financial statements are filed:
Independent Auditors Report, Consolidated Balance Sheets,
Consolidated Income Statements, Consolidated Statements of
Stockholders Equity, Consolidated Statements of Cash
Flows, and Notes to Consolidated Financial Statements.

(a)(2) Financial Statement Schedules.

The following financial statement schedule is
filed: Schedule of Valuation and Qualifying Accounts

(b) Reports on Form 8-K.

We furnished a report on Form 8-K on
February 17, 2004, announcing our earnings for the three
and twelve months ended December 31, 2003.

We filed a report on Form 8-K on
November 12, 2003, disclosing an update to litigation
involving our Texas subsidiary (See Part II, Item 1.
Legal Proceedings).

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We furnished a report on Form 8-K on
October 30, 2003, announcing our earnings for the three and
nine months ended September 30, 2003.

(c) Exhibits.

The following exhibits, which are furnished with
this annual report or incorporated herein by reference, are
filed as part of this annual report.

|        |    |             |  |                                                                                                                                                                                                                               
|------- | -- | ----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|Number  |    | Description
|        |    |            
|        | 3  | .1          |  | Amended and Restated Certificate of Incorporation
    of the Company (incorporated by reference to exhibit 3.1 to
    our Registration Statement on Form S-3 (No. 333-108831)).                                               
|        | 3  | .2          |  | By-Laws of the Company (incorporated by reference
    to exhibit 3.2 to our Registration Statement on
    Form S-3 (No. 333-108831)).                                                                                         
|        | 4  | .1          |  | Form of share certificate for common stock
    (incorporated by reference to exhibit 4.1 to our
    Registration Statement on Form S-1 (No. 333-347410)).                                                                     
|        | 4  | .2          |  | AMERIGROUP Corporation Second Restated Investor
    Rights Agreement, dated July 28, 1998 (incorporated by
    reference to exhibit 4.2 to our Registration Statement on
    Form S-1 (No. 333-347410)).                      
|        | 10 | .6.2        |  | Amendments to Amended and Restated Contract
    between State of New Jersey, Department of Human Services,
    Division of Medical Assistance and Health Services and
    AMERIGROUP New Jersey, Inc., dated October 1, 2003. 
|        | 10 | .6.3        |  | Amendments to Amended and Restated Contract
    between State of New Jersey, Department of Human Services,
    Division of Medical Assistance and Health Services and
    AMERIGROUP New Jersey, Inc., dated November 1, 2003.
|        | 10 | .6.4        |  | Amendments to Amended and Restated Contract
    between State of New Jersey, Department of Human Services,
    Division of Medical Assistance and Health Services and
    AMERIGROUP New Jersey, Inc., dated November 1, 2003.
|        | 10 | .23.1       |  | Amendment No. 8, to the 2002 Contract for
    Services between the HHS and HMO (Childrens Health Insurance
    Program Agreement), dated September 1, 2002.                                                                   
|        | 14 | .1          |  | Code of Ethics for Executives and Senior
    Financial Officers.                                                                                                                                                              
|        | 21 | .1          |  | List of Subsidiaries                                                                                                                                                                                                          
|        | 23 | .1          |  | Consent of KPMG LLP, Independent Accountants,
    with respect to financial statements of the registrant.                                                                                                                     
|        | 31 | .1          |  | Certification of Chief Executive Officer pursuant
    to Section 302 of Sarbanes-Oxley Act of 2002, dated
    March 9, 2004.                                                                                                  
|        | 31 | .2          |  | Certification of Chief Accounting Officer
    pursuant to Section 302 of Sarbanes-Oxley Act of 2002,
    dated March 9, 2004.                                                                                                 
|        | 32 |             |  | Certification of Chief Executive Officer and
    Chief Accounting Officer pursuant to Section 906 of
    Sarbanes- Oxley Act of 2002, dated March 9, 2004.                                                                    

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SIGNATURES

Pursuant to the requirements of Section 13
or 15(d) of the Securities Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Virginia
Beach, Commonwealth of Virginia, on March 9, 2004.



| |                       
| | ----------------------
| | AMERIGROUP CORPORATION



| |     |                     
| | --- | --------------------
| | By: | /s/ KATHLEEN K. TOTH

| |                       
| | ----------------------
| |                       
| | Name: Kathleen K. Toth

| |        |                             
| | ------ | ----------------------------
| | Title: | Executive Vice President and

| |                               
| | ------------------------------
| | Chief Accounting Officer      
| | (principal accounting officer)

Pursuant to the requirements of the Securities
Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in the
capacities and on the dates indicated.

|                                                   |  |                                                 |  |               |  | 
|-------------------------------------------------- |  | ----------------------------------------------- |  | ------------- |  | 
|                                                   |  |                                                 |  |              
|Signatures                                         |  | Title                                           |  | Date         
|                                                   |  |                                                 |  |              
|                                                  
|/s/ JEFFREY L. MCWATERSJeffrey L. McWaters         |  | Chairman, Chief Executive Officer and President |  | March 9, 2004
|                                                  
|/s/ KATHLEEN K. TOTHKathleen K. Toth               |  | Chief Accounting Officer                        |  | March 9, 2004
|                                                  
|/s/ CARLOS A. FERRERCarlos A. Ferrer               |  | Director                                        |  | March 9, 2004
|                                                  
|/s/ WILLIAM J. MCBRIDEWilliam J. McBride           |  | Director                                        |  | March 9, 2004
|                                                  
|/s/ UWE E. REINHARDT, PH.D.Uwe E. Reinhardt, Ph.D. |  | Director                                        |  | March 9, 2004
|                                                  
|/s/ RICHARD D. SHIRKRichard D. Shirk               |  | Director                                        |  | March 9, 2004
|                                                  
|/s/ JEFFREY B. CHILDJeffrey B. Child               |  | Director                                        |  | March 9, 2004

74