##### 









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, 2004                                                 
|  
|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                  

þ o


o


þ o






Document Incorporated by Reference


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


Proxy Statement for the Registrants 2005 Annual Meeting
of Stockholders










---



##### 



TABLE OF CONTENTS


|         |  |                                                                                           |  |           |    |  |  | 
|-------- |  | ----------------------------------------------------------------------------------------- |  | --------- | -- |  |  | 
|         |  |                                                                                           |  | Page     
|         |  |                                                                                           |  |          
|         |  |                                                                                           |  | PART I.   |    |  |  | 
|        
|        
|        
|        
|Item 1.  |  | Business                                                                                  |  |           | 3  | 
|        
|        
|        
|        
|Item 2.  |  | Properties                                                                                |  |           | 20 | 
|        
|        
|        
|        
|Item 3.  |  | Legal Proceedings                                                                         |  |           | 20 | 
|        
|        
|        
|        
|Item 4.  |  | Submission of Matters to a Vote of Security
    Holders                                   |  |           | 21 | 
|         |  |                                                                                           |  | PART II.  |    |  |  | 
|        
|        
|        
|        
|Item 5.  |  | Market for Our Common Equity and Related
    Stockholder Matters                          |  |           | 23 | 
|        
|        
|        
|        
|Item 6.  |  | Selected Financial Data                                                                   |  |           | 24 | 
|        
|        
|        
|        
|Item 7.  |  | Managements Discussion and Analysis
    of Financial Condition and Results of Operations |  |           | 25 | 
|        
|        
|        
|        
|Item 7A. |  | Quantitative and Qualitative Disclosures
    About Market Risk                            |  |           | 36 | 
|        
|        
|        
|        
|Item 8.  |  | Financial Statements and Supplementary
    Data                                           |  |           | 47 | 
|        
|        
|        
|        
|Item 9.  |  | Changes in and Disagreements with
    Accountants on Accounting and Financial Disclosure  |  |           | 76 | 
|        
|        
|        
|        
|Item 9A. |  | Controls and Procedures                                                                   |  |           | 76 | 
|        
|        
|        
|        
|Item 9B. |  | Other Information                                                                         |  |           | 77 | 
|         |  |                                                                                           |  | PART III. |    |  |  | 
|        
|        
|        
|        
|Item 10. |  | Directors and Executive Officers of the
    Company                                       |  |           | 79 | 
|        
|        
|        
|        
|Item 11. |  | Executive Compensation                                                                    |  |           | 79 | 
|        
|        
|        
|        
|Item 12. |  | Security Ownership of Certain Beneficial
    Owners and Management                        |  |           | 79 | 
|        
|        
|        
|        
|Item 13. |  | Certain Relationships and Related
    Transactions                                        |  |           | 79 | 
|        
|        
|        
|        
|Item 14. |  | Principal Accountant Fees and Services                                                    |  |           | 79 | 
|         |  |                                                                                           |  | PART IV.  |    |  |  | 
|        
|        
|        
|        
|Item 15. |  | Exhibits and Financial Statement
    Schedules                                            |  |           | 79 | 

1



---



##### 



Forward-looking Statements








| |   |                                                                                                                                                                                                                                                         
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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 healthcare industry, including our compliance with
    such regulations and their effect on certain of our unit costs
    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 us;                                                                                                                                                                                                       
|
| |  | 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;                                                                                                                                                                                                 
|
| |  | demographic changes; and                                                                                                                                                                                                                                
|
| |  | terrorism.                                                                                                                                                                                                                                              



2



---



##### 






PART I.







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

Overview






Market Opportunity




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





3



---



##### 









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



|                                             |  |                                                
|-------------------------------------------- |  | -----------------------------------------------
|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,        
| 30 million people in managed care in 2004, |  |  5 million people in managed care in 2004,    
| prescription drug coverage and             |  |  prescription drug coverage begins in 2006 and
| mandatory managed care in most states.     |  |  no mandatory managed care.                   











4



---



##### 









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





| |   |                                                                                             
| | - | --------------------------------------------------------------------------------------------
| |  | 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



|                     |  |      |      |  
|-------------------- |  | ---- | ---- | -
|State                |  | FMAP
|                     |  |     
|District of Columbia |  |      | 70.0 | %
|                    
|                    
|                    
|                    
|Florida              |  |      | 58.9 | %
|                    
|                    
|                    
|                    
|Illinois             |  |      | 50.0 | %
|                    
|                    
|                    
|                    
|Maryland             |  |      | 50.0 | %
|                    
|                    
|                    
|                    
|New Jersey           |  |      | 50.0 | %
|                    
|                    
|                    
|                    
|New York             |  |      | 50.0 | %
|                    
|                    
|                    
|                    
|Texas                |  |      | 60.9 | %



5



---



##### 













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





The AMERIGROUP Approach






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



6



---



##### 







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





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





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



Strategy




Increase our membership in existing and new markets through
internal growth and acquisitions.


7



---



##### 







Capitalize on our experience working in partnership with
state governments.


Focus on our medical home concept to provide
quality, cost-effective healthcare.




Utilize population-specific disease management programs and
related techniques to improve quality and reduce costs.


Products






| |   |                                        
| | - | ---------------------------------------
| |  | primary and specialty physician care,  
|
| |  | inpatient and outpatient hospital care,
|
| |  | emergency and urgent care,             
|
| |  | prenatal care,                         
|
| |  | laboratory and x-ray services,         

8



---



##### 





| |   |                                                                                    
| | - | -----------------------------------------------------------------------------------
| |  | home health and durable medical equipment,                                         
|
| |  | behavioral health services and substance abuse,                                    
|
| |  | 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.                          













9



---



##### 



Disease and Medical Management Programs




Marketing and Educational Programs










Community Partners




10



---



##### 



Provider Network




|                        |  |               |       |            |  |          |       |          |  |         |       |       |  |             |       |  |  |  |       |  |  |  |        |  |  |  |       | 
|----------------------- |  | ------------- | ----- | ---------- |  | -------- | ----- | -------- |  | ------- | ----- | ----- |  | ----------- | ----- |  |  |  | ----- |  |  |  | ------ |  |  |  | ----- | 
|                        |  | Service Areas
|                        |  |              
|                        |  |               |       | Maryland   |  |         
|                        |  | Texas         |       | New Jersey |  | and D.C. |       | Illinois |  | Florida |       | Total |  | New York(1)
|                        |  |               |       |            |  |          |       |          |  |         |       |       |  |            
|Primary care physicians |  |               | 1,787 |            |  |          | 1,873 |          |  |         | 1,635 |       |  |             | 570   |  |  |  | 1,629 |  |  |  | 7,494  |  |  |  | 1,559 | 
|                       
|                       
|                       
|                       
|Specialists             |  |               | 6,243 |            |  |          | 4,608 |          |  |         | 6,960 |       |  |             | 1,330 |  |  |  | 5,230 |  |  |  | 24,371 |  |  |  | 8,150 | 
|                       
|                       
|                       
|                       
|Hospitals               |  |               | 109   |            |  |          | 71    |          |  |         | 47    |       |  |             | 30    |  |  |  | 88    |  |  |  | 345    |  |  |  | 61    | 
|                       
|                       
|                       
|                       
|Ancillary providers     |  |               | 819   |            |  |          | 610   |          |  |         | 411   |       |  |             | 371   |  |  |  | 1,343 |  |  |  | 3,554  |  |  |  | 1,689 | 






|    |                                                                                                                                                                                                                                          
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Effective January 1, 2005, our provider network for New
    York became effective with the acquisition of CarePlus.
    Accordingly, our New York network is not included in our
    participating network total as of December 31, 2004.











Provider Payment Methods


Fee-for-Service.


11



---



##### 







| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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.                                                                                                                                                                                              

Capitation.




Our Health Plans




|                     |  |                              |  |                   
|-------------------- |  | ---------------------------- |  | ------------------
|Market               |  | Product                      |  | Term End Date     
|                     |  |                              |  |                   
|                    
|                    
|                    
|                    
|District of Columbia |  | TANF, SCHIP, FamilyCare      |  | July 31, 2005     
|                    
|                    
|                    
|                    
|Florida              |  | TANF, SSI, SCHIP             |  | June 30, 2006(a)  
|                    
|                    
|                    
|                    
|Florida              |  | SCHIP                        |  | September 30, 2005
|                    
|                    
|                    
|                    
|Florida              |  | SSI (Summit Care)            |  | June 30, 2005(b)  
|                    
|                    
|                    
|                    
|Illinois             |  | TANF, SCHIP                  |  | July 31, 2006(c)  
|                    
|                    
|                    
|                    
|Maryland(d)          |  | TANF, SSI, SCHIP             |  |                  
|                    
|                    
|                    
|                    
|New Jersey           |  | TANF, SSI, SCHIP, FamilyCare |  | June 30, 2005     
|                    
|                    
|                    
|                    
|New York             |  | TANF, SSI, FamilyCare        |  | September 30, 2005
|                    
|                    
|                    
|                    
|New York             |  | SCHIP                        |  | June 30, 2005     
|                    
|                    
|                    
|                    
|Texas                |  | TANF, SSI, SCHIP             |  | August 31, 2005   






|    |  |                                                                                 
|--- |  | --------------------------------------------------------------------------------
|(a) |  | This contract can be terminated by either party upon
    30 days notice.        
|   
|(b) |  | This contract can be terminated by either party upon
    60 days notice.        
|   
|(c) |  | This contract can be terminated by either party upon
    90 days written notice.
|   
|(d) |  | Our Maryland contract does not have a set term.                                 

12



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##### 





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





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





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





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





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



13



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##### 







| |         
| | --------
| | New York





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




Quality Management






| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Analysis of healthcare utilization data. To avoid
    duplication of services or medications, in conjunction with the
    PCPs, healthcare 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 healthcare 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.                                                                                                                                                                                       

14



---



##### 



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | 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




tm


Competition






| |   |                                                                                                                                                                                                                                                 
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Primary Care Case Management Programs (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.
|
| |  | 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 healthcare benefits through
    Medicaid.                                                                                                        





15



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##### 







Regulation






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







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





| |   |                                                             
| | - | ------------------------------------------------------------
| |  | 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.                                





16



---



##### 







| |   |                                                          
| | - | ---------------------------------------------------------
| |  | 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.











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

17



---



##### 





Federal Regulation




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















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







18



---



##### 







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







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





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



Customers




19



---



##### 



Employees




Available Information


www.amerigroupcorp.com







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










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





20



---



##### 










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



Executive Officers of the Company




|                      |  |     |    |          |  |                                                               
|--------------------- |  | --- | -- | -------- |  | --------------------------------------------------------------
|Name                  |  | Age |    | Position
|                      |  |     |    |         
|                     
|                     
|                     
|                     
|Jeffrey L. McWaters   |  |     | 48 |          |  | Chairman of the Board of Directors and Chief Executive Officer
|                     
|                     
|                     
|                     
|James G. Carlson      |  |     | 52 |          |  | President, Chief Operating Officer                            
|                     
|                     
|                     
|                     
|E. Paul Dunn, Jr.     |  |     | 51 |          |  | Executive Vice President, Chief Financial Officer             
|                     
|                     
|                     
|                     
|Stanley F. Baldwin    |  |     | 56 |          |  | Executive Vice President, General Counsel and Secretary       
|                     
|                     
|                     
|                     
|Janet M. Brashear     |  |     | 44 |          |  | Executive Vice President, Strategic Planning                  
|                     
|                     
|                     
|                     
|Catherine S. Callahan |  |     | 47 |          |  | Executive Vice President, Associate Services                  
|                     
|                     
|                     
|                     
|Nancy L. Grden        |  |     | 53 |          |  | Executive Vice President, Specialty Product Group             
|                     
|                     
|                     
|                     
|John E. Littel        |  |     | 40 |          |  | Executive Vice President, Government Relations                
|                     
|                     
|                     
|                     
|Leon A. Root, Jr.     |  |     | 51 |          |  | Executive Vice President, Chief Information Officer           
|                     
|                     
|                     
|                     
|Kathleen K. Toth      |  |     | 43 |          |  | Executive Vice President, Chief Accounting Officer            
|                     
|                     
|                     
|                     
|Richard C. Zoretic    |  |     | 46 |          |  | Executive Vice President, Chief Marketing Officer             
|                     
|                     
|                     
|                     
|Sherri E. Lee         |  |     | 53 |          |  | Senior Vice President, Treasurer                              

Jeffrey L. McWaters


James G. Carlson


E. Paul Dunn, Jr.


Stanley F. Baldwin







Lorenzo
Childress, Jr., M.D.,


21



---



##### 





Janet M. Brashear


Catherine S. Callahan


Nancy L. Grden


John E. Littel


Leon A. Root, Jr.


Kathleen K. Toth


Richard C. Zoretic


Sherri E. Lee


22



---



##### 






PART II.







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







|               |  |      |       |     |  |   |       | 
|-------------- |  | ---- | ----- | --- |  | - | ----- | 
|2003           |  | High |       | Low
|               |  |      |       |    
|              
|              
|              
|              
|First Quarter  |  | $    | 16.88 |     |  | $ | 12.00 | 
|              
|              
|              
|              
|Second Quarter |  |      | 19.30 |     |  |   | 13.63 | 
|              
|              
|              
|              
|Third Quarter  |  |      | 22.86 |     |  |   | 18.35 | 
|              
|              
|              
|              
|Fourth Quarter |  |      | 23.82 |     |  |   | 19.80 | 

|                                      |  |   |       |  |  |   |       | 
|------------------------------------- |  | - | ----- |  |  | - | ----- | 
|2004                                  |  |   |       | 
|                                      |  |   |       | 
|First Quarter                         |  | $ | 23.08 |  |  | $ | 18.23 | 
|                                     
|                                     
|                                     
|                                     
|Second Quarter                        |  |   | 24.75 |  |  |   | 19.61 | 
|                                     
|                                     
|                                     
|                                     
|Third Quarter                         |  |   | 28.46 |  |  |   | 22.03 | 
|                                     
|                                     
|                                     
|                                     
|Fourth Quarter                        |  |   | 38.44 |  |  |   | 26.50 | 
|                                     
|                                     
|                                     
|                                     
|December 31, 2004 Closing Sales Price |  | $ | 37.83 |  |  |   |       | 







Use of Proceeds from Public Offering






23



---



##### 








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



|                                                                                       |                                     |                                                |            |           |           |      |            |           |           |      |            |           |           |   |            |         |         |   |            |         |         | 
|-------------------------------------------------------------------------------------- | ----------------------------------- | ---------------------------------------------- | ---------- | --------- | --------- | ---- | ---------- | --------- | --------- | ---- | ---------- | --------- | --------- | - | ---------- | ------- | ------- | - | ---------- | ------- | ------- | 
|                                                                                       |                                     | Year ended December 31,                       
|                                                                                       |                                     |                                               
|                                                                                       |                                     | 2004                                           |            | 2003      |           | 2002 |            | 2001      |           | 2000
|                                                                                       |                                     |                                                |            |           |           |      |            |           |           |     
|                                                                                       |                                     | (Dollars in thousands, except per share data) 
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|Income Statement Data:                                                                 |                                     |                                                |            |           |           |      |            |           |           |      |            |           |           |   |            |         |         |   |            |        
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|Revenues:                                                                              |                                     |                                                |            |           |           |      |            |           |           |      |            |           |           |   |            |         |         |   |            |        
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                       | Premium                             |                                                | $          | 1,813,391 |           |      | $          | 1,615,508 |           |      | $          | 1,152,636 |           |   | $          | 880,510 |         |   | $          | 646,408 |        
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                       | Investment income                   |                                                |            | 10,340    |           |      |            | 6,726     |           |      |            | 8,026     |           |   |            | 10,664  |         |   |            | 13,107  |        
|                                                                                       |                                     |                                                |            |           |           |      |            |           |           |      |            |           |           |   |            |         |         |   |            |        
|                                                                                       |                                     | Total revenues                                 |            |           | 1,823,731 |      |            |           | 1,622,234 |      |            |           | 1,160,662 |   |            |         | 891,174 |   |            |         | 659,515 | 
|                                                                                       |                                     |                                                |            |           |           |      |            |           |           |      |            |           |           |   |            |         |         |   |            |        
|Expenses:                                                                              |                                     |                                                |            |           |           |      |            |           |           |      |            |           |           |   |            |         |         |   |            |        
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                       | Health benefits                     |                                                |            | 1,469,097 |           |      |            | 1,295,900 |           |      |            | 933,591   |           |   |            | 709,034 |         |   |            | 523,566 |        
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                       | Selling, general and administrative |                                                |            | 191,915   |           |      |            | 186,856   |           |      |            | 133,409   |           |   |            | 109,822 |         |   |            | 85,114  |        
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                       | Depreciation and amortization       |                                                |            | 20,750    |           |      |            | 23,650    |           |      |            | 13,149    |           |   |            | 9,348   |         |   |            | 6,275   |        
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                       | Interest                            |                                                |            | 731       |           |      |            | 1,913     |           |      |            | 791       |           |   |            | 763     |         |   |            | 781     |        
|                                                                                       |                                     |                                                |            |           |           |      |            |           |           |      |            |           |           |   |            |         |         |   |            |        
|                                                                                       |                                     | Total expenses                                 |            |           | 1,682,493 |      |            |           | 1,508,319 |      |            |           | 1,080,940 |   |            |         | 828,967 |   |            |         | 615,736 | 
|                                                                                       |                                     |                                                |            |           |           |      |            |           |           |      |            |           |           |   |            |         |         |   |            |        
|                                                                                       |                                     | Income before income taxes                     |            |           | 141,238   |      |            |           | 113,915   |      |            |           | 79,722    |   |            |         | 62,207  |   |            |         | 43,779  | 
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|Income tax expense                                                                     |                                     |                                                | 55,224     |           |           |      | 46,591     |           |           |      | 32,686     |           |           |   | 26,127     |         |         |   | 17,687     |        
|                                                                                       |                                     |                                                |            |           |           |      |            |           |           |      |            |           |           |   |            |         |         |   |            |        
|                                                                                       |                                     | Net income                                     |            |           | 86,014    |      |            |           | 67,324    |      |            |           | 47,036    |   |            |         | 36,080  |   |            |         | 26,092  | 
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|Accretion of redeemable preferred stock dividends                                      |                                     |                                                |           |           |           |      |           |           |           |      |           |           |           |   | (6,228     | )       |         |   | (7,284     | )      
|                                                                                       |                                     |                                                |            |           |           |      |            |           |           |      |            |           |           |   |            |         |         |   |            |        
|                                                                                       |                                     | Net income attributable to common stockholders |            | $         | 86,014    |      |            | $         | 67,324    |      |            | $         | 47,036    |   |            | $       | 29,852  |   |            | $       | 18,808  | 
|                                                                                       |                                     |                                                |            |           |           |      |            |           |           |      |            |           |           |   |            |         |         |   |            |        
|Basic net income per share                                                             |                                     | $                                              | 1.73       |           |           | $    | 1.56       |           |           | $    | 1.17       |           |           | $ | 4.04       |         |         | $ | 11.81      |        
|                                                                                       |                                     |                                                |            |           |           |      |            |           |           |      |            |           |           |   |            |         |         |   |            |        
|Weighted average number of shares outstanding                                          |                                     |                                                | 49,721,945 |           |           |      | 43,245,408 |           |           |      | 40,355,456 |           |           |   | 7,389,688  |         |         |   | 1,592,818  |        
|                                                                                       |                                     |                                                |            |           |           |      |            |           |           |      |            |           |           |   |            |         |         |   |            |        
|Diluted net income per share                                                           |                                     | $                                              | 1.66       |           |           | $    | 1.48       |           |           | $    | 1.10       |           |           | $ | 1.04       |         |         | $ | 0.78       |        
|                                                                                       |                                     |                                                |            |           |           |      |            |           |           |      |            |           |           |   |            |         |         |   |            |        
|Weighted average number of shares and dilutive potential common
    shares outstanding |                                     |                                                | 51,837,579 |           |           |      | 45,603,300 |           |           |      | 42,938,844 |           |           |   | 33,299,442 |         |         |   | 31,636,350 |        
|                                                                                       |                                     |                                                |            |           |           |      |            |           |           |      |            |           |           |   |            |         |         |   |            |        

|                    |                                                               |                        |   |         |  |      |   |         |  |      |   |         |  |  |   |         |  |  |   |         | 
|------------------- | ------------------------------------------------------------- | ---------------------- | - | ------- |  | ---- | - | ------- |  | ---- | - | ------- |  |  | - | ------- |  |  | - | ------- | 
|                    |                                                               | December 31,          
|                    |                                                               |                       
|                    |                                                               | 2004                   |   | 2003    |  | 2002 |   | 2001    |  | 2000
|                    |                                                               |                        |   |         |  |      |   |         |  |     
|                    |                                                               | (Dollars in thousands)
|                   
|                   
|                   
|                   
|Balance Sheet Data: |                                                               |                        |   |         |  |      |   |         |  |      |   |         |  |  |   |         |  |  |   |        
|                   
|                   
|                   
|                   
|                    | Cash and cash equivalents and short and long-term investments |                        | $ | 612,059 |  |      | $ | 535,103 |  |      | $ | 306,935 |  |  | $ | 301,837 |  |  | $ | 189,325 | 
|                   
|                   
|                   
|                   
|                    | Total assets                                                  |                        |   | 919,850 |  |      |   | 826,021 |  |      |   | 578,484 |  |  |   | 406,942 |  |  |   | 268,126 | 
|                   
|                   
|                   
|                   
|                    | Long-term debt                                                |                        |   |        |  |      |   |        |  |      |   | 50,000  |  |  |   |        |  |  |   | 6,177   | 
|                   
|                   
|                   
|                   
|                    | Total liabilities                                             |                        |   | 351,138 |  |      |   | 364,307 |  |      |   | 339,103 |  |  |   | 223,426 |  |  |   | 185,191 | 
|                   
|                   
|                   
|                   
|                    | Redeemable preferred stock                                    |                        |   |        |  |      |   |        |  |      |   |        |  |  |   |        |  |  |   | 78,190  | 
|                   
|                   
|                   
|                   
|                    | Stockholders equity                                          |                        |   | 568,712 |  |      |   | 461,714 |  |      |   | 239,381 |  |  |   | 183,516 |  |  |   | 4,745   | 

24



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##### 








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

Overview








| |   |                                                                                                                                                                                                                       
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | In a difficult state budgetary environment, we leveraged our
    partnerships with our states and negotiated a weighted average
    rate increase of 4.9% for each of the states budget years
    that began in 2004.
|
| |  | During the year of 2004, we successfully integrated members in
    Texas, Florida and the District of Columbia which came to us
    from competitors exiting these markets.                                           
|
| |  | We implemented new product or program expansions:                                                                                                                                                                     



| |   |                                                                                                                                                                                                                                                                                                                                                                                                
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The State of Texas awarded us a contract for the Travis service
    area, which includes Austin and seven additional counties,
    bringing the number of counties that we serve in Texas
    to 27. 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.
|
| |  | We successfully insourced our behavioral health benefits
    servicing eligible 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.                                 



| |   |                                                                                                                             
| | - | ----------------------------------------------------------------------------------------------------------------------------
| |  | Our 2004 same-store premium revenues increased 11.2% over 2003
    from expansion in existing service areas and new markets.











25



---



##### 















26



---



##### 





Discussion of Critical Accounting Policies






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





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





27



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##### 













|                                                                            |                         |                |         |           |           |      |         |           |           |   |         |         |         | 
|--------------------------------------------------------------------------- | ----------------------- | -------------- | ------- | --------- | --------- | ---- | ------- | --------- | --------- | - | ------- | ------- | ------- | 
|                                                                            |                         | 2004           |         | 2003      |           | 2002
|                                                                            |                         |                |         |           |           |     
|Medical claims payable as of January 1                                      |                         | $              | 239,532 |           |           | $    | 202,430 |           |           | $ | 180,346 |        
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Medical claims payable assumed from businesses acquired
    during the year |                         |                |        |           |           |      | 20,421  |           |           |   |        |        
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Health benefits expenses incurred during the year:                          |                         |                |         |           |           |      |         |           |           |   |         |        
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Related to current year |                |         | 1,505,482 |           |      |         | 1,355,065 |           |   |         | 988,628 |        
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Related to prior years  |                |         | (36,385   | )         |      |         | (59,165   | )         |   |         | (55,037 | )      
|                                                                            |                         |                |         |           |           |      |         |           |           |   |         |        
|                                                                            |                         | Total incurred |         |           | 1,469,097 |      |         |           | 1,295,900 |   |         |         | 933,591 | 
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|Health benefits payments during the year:                                   |                         |                |         |           |           |      |         |           |           |   |         |        
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Related to current year |                |         | 1,274,460 |           |      |         | 1,135,082 |           |   |         | 803,432 |        
|                                                                           
|                                                                           
|                                                                           
|                                                                           
|                                                                            | Related to prior years  |                |         | 192,916   |           |      |         | 144,137   |           |   |         | 108,075 |        
|                                                                            |                         |                |         |           |           |      |         |           |           |   |         |        
|                                                                            |                         | Total payments |         |           | 1,467,376 |      |         |           | 1,279,219 |   |         |         | 911,507 | 
|                                                                            |                         |                |         |           |           |      |         |           |           |   |         |        
|Medical claims payable as of December 31                                    |                         | $              | 241,253 |           |           | $    | 239,532 |           |           | $ | 202,430 |        
|                                                                            |                         |                |         |           |           |      |         |           |           |   |         |        



28



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##### 











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





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





| |                            
| | ---------------------------
| | Recent Accounting Standards

Shared-Based Payment, Accounting for Stock-Based Compensation Accounting for Stock Issued to
Employees Accounting for
Stock Based Compensation, Statement of Cash
Flows.


29



---



##### 











| |                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. A modified prospective method in which
    compensation cost is recognized beginning with the effective
    date (a) based on the requirements of
    SFAS No. 123(R) for all share-based payments granted
    after the effective date and (b) based on the requirements
    of SFAS No. 123 for all awards granted to employees
    prior to the effective date of SFAS No. 123(R) that
    remain unvested on the effective date.
|
| | 2. A modified retrospective method which
    includes the requirements of the modified prospective method
    described above, but also permits entities to restate based on
    the amounts previously recognized under SFAS No. 123
    for purposes of proforma disclosures either (a) all prior
    presented or (b) prior interim periods of the year of
    adoption.                                                            





Results of Operations




|                                             |  |                         |       |      |  |      |       |   |  |  |       |  
|-------------------------------------------- |  | ----------------------- | ----- | ---- |  | ---- | ----- | - |  |  | ----- | -
|                                             |  | Year ended December 31,
|                                             |  |                        
|                                             |  | 2004                    |       | 2003 |  | 2002
|                                             |  |                         |       |      |  |     
|Premium revenue                              |  |                         | 99.4  | %    |  |      | 99.6  | % |  |  | 99.3  | %
|                                            
|                                            
|                                            
|                                            
|Investment income                            |  |                         | 0.6   |      |  |      | 0.4   |   |  |  | 0.7   |  
|                                             |  |                         |       |      |  |      |       |   |  |  |       |  
|Total revenues                               |  |                         | 100.0 | %    |  |      | 100.0 | % |  |  | 100.0 | %
|                                             |  |                         |       |      |  |      |       |   |  |  |       |  
|Health benefits(1)                           |  |                         | 81.0  | %    |  |      | 80.2  | % |  |  | 81.0  | %
|                                            
|                                            
|                                            
|                                            
|Selling, general and administrative expenses |  |                         | 10.5  | %    |  |      | 11.5  | % |  |  | 11.5  | %
|                                            
|                                            
|                                            
|                                            
|Income before income taxes                   |  |                         | 7.7   | %    |  |      | 7.0   | % |  |  | 6.9   | %
|                                            
|                                            
|                                            
|                                            
|Net income                                   |  |                         | 4.7   | %    |  |      | 4.2   | % |  |  | 4.1   | %






|    |                                                                                                                                                                                    
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(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.

30



---



##### 





|                     |  |              |         |      |  |      |         |      |  |      |         |  |  |  |         |  |  |  |         | 
|-------------------- |  | ------------ | ------- | ---- |  | ---- | ------- | ---- |  | ---- | ------- |  |  |  | ------- |  |  |  | ------- | 
|                     |  | December 31,
|                     |  |             
|Market               |  | 2004         |         | 2003 |  | 2002 |         | 2001 |  | 2000
|                     |  |              |         |      |  |      |         |      |  |     
|Texas                |  |              | 394,000 |      |  |      | 343,000 |      |  |      | 296,000 |  |  |  | 214,000 |  |  |  | 139,000 | 
|                    
|                    
|                    
|                    
|Florida              |  |              | 229,000 |      |  |      | 221,000 |      |  |      |        |  |  |  |        |  |  |  |        | 
|                    
|                    
|                    
|                    
|Maryland             |  |              | 130,000 |      |  |      | 124,000 |      |  |      | 125,000 |  |  |  | 118,000 |  |  |  | 95,000  | 
|                    
|                    
|                    
|                    
|New Jersey           |  |              | 105,000 |      |  |      | 99,000  |      |  |      | 99,000  |  |  |  | 88,000  |  |  |  | 57,000  | 
|                    
|                    
|                    
|                    
|District of Columbia |  |              | 41,000  |      |  |      | 38,000  |      |  |      | 37,000  |  |  |  | 13,000  |  |  |  | 13,000  | 
|                    
|                    
|                    
|                    
|Illinois             |  |              | 37,000  |      |  |      | 32,000  |      |  |      | 34,000  |  |  |  | 39,000  |  |  |  | 29,000  | 
|                     |  |              |         |      |  |      |         |      |  |      |         |  |  |  |         |  |  |  |         | 
|Total                |  |              | 936,000 |      |  |      | 857,000 |      |  |      | 591,000 |  |  |  | 472,000 |  |  |  | 333,000 | 
|                     |  |              |         |      |  |      |         |      |  |      |         |  |  |  |         |  |  |  |         | 



Year Ended December 31, 2004 Compared to Year Ended
December 31, 2003




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







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





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





| |   |                                                                                                                                            
| | - | -------------------------------------------------------------------------------------------------------------------------------------------
| |  | an increase in premium taxes that the States of Texas and New
    Jersey began assessing in September 2003 and July 2004,
    respectively;

31



---



##### 





| |   |                                                                                                                                                                                                  
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | a decrease in purchased services related to strategic
    initiatives in 2003 for operational improvements, including
    expenses related to the implementation of the HIPAA
    guidelines; and
|
| |  | a decrease in experience rebate expense in our Texas market.                                                                                                                                     





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





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





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



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




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







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





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



32



---



##### 







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





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





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



Liquidity and Capital Resources










| |   |                                 
| | - | --------------------------------
| |  | Reductions in cash flows due to:



| |   |                                                                                                                                                                                                         
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | a change of $48.9 million in unearned revenue due to the
    early receipt of premium revenue received for two states in 2003
    versus one state in 2004 and 2002;                                    
|
| |  | a reduction in the increase in the claim liability of
    $15.0 million primarily related to the payment of provider
    settlements in 2004;                                                           
|
| |  | an increase of $9.7 million in the change of accounts
    payable, accrued and other due to an increase in premium tax
    payable and the accrual of a potential recoupment of premium in
    Maryland;



| |   |                                          
| | - | -----------------------------------------
| |  | Offset by increases in cash flows due to:



| |   |                                                                                                                                                                                             
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | a decrease in the reduction of prepaid expenses and other
    current assets of $5.2 million due to the accrual of an
    experience rebate receivable in 2003 that remains in
    2004; and

33



---



##### 





| |   |                                            
| | - | -------------------------------------------
| |  | an increase in net income of $18.7 million.















34



---



##### 





|                        |                             |                       |   |        |        |      |   |       |        |      |   |       |        |            |   |       |       |  |   |       |       |  |   |       |       |  |   |        |        | 
|----------------------- | --------------------------- | --------------------- | - | ------ | ------ | ---- | - | ----- | ------ | ---- | - | ----- | ------ | ---------- | - | ----- | ----- |  | - | ----- | ----- |  | - | ----- | ----- |  | - | ------ | ------ | 
|Contractual Obligations |                             | Total                 |   | 2005   |        | 2006 |   | 2007  |        | 2008 |   | 2009  |        | Thereafter
|                        |                             |                       |   |        |        |      |   |       |        |      |   |       |        |           
|Lease financing:        |                             |                       |   |        |        |      |   |       |        |      |   |       |        |            |   |       |       |  |   |       |       |  |   |       |       |  |   |       
|                       
|                       
|                       
|                       
|                        | Operating lease obligations |                       | $ | 57,001 |        |      | $ | 8,878 |        |      | $ | 8,474 |        |            | $ | 7,677 |       |  | $ | 5,262 |       |  | $ | 4,378 |       |  | $ | 22,332 |       
|                       
|                       
|                       
|                       
|                        | Capital lease obligations   |                       |   | 6,435  |        |      |   | 3,387 |        |      |   | 1,751 |        |            |   | 871   |       |  |   | 426   |       |  |   |      |       |  |   |       |       
|                        |                             |                       |   |        |        |      |   |       |        |      |   |       |        |            |   |       |       |  |   |       |       |  |   |       |       |  |   |       
|                        |                             | Total lease financing |   | $      | 63,436 |      |   | $     | 12,265 |      |   | $     | 10,225 |            |   | $     | 8,548 |  |   | $     | 5,688 |  |   | $     | 4,378 |  |   | $      | 22,332 | 
|                        |                             |                       |   |        |        |      |   |       |        |      |   |       |        |            |   |       |       |  |   |       |       |  |   |       |       |  |   |       

|                                                |  |       |    |             |  |             |    |             |  |             |   |             |  |            |   |  |  |   |   |  |  |   |   |  |  |   |   | 
|----------------------------------------------- |  | ----- | -- | ----------- |  | ----------- | -- | ----------- |  | ----------- | - | ----------- |  | ---------- | - |  |  | - | - |  |  | - | - |  |  | - | - | 
|                                                |  |       |    | Expiring in |  | Expiring in |    | Expiring in |  | Expiring in |   | Expiring in |  |           
|Commitments                                     |  | Total |    | 2005        |  | 2006        |    | 2007        |  | 2008        |   | 2009        |  | Thereafter
|                                                |  |       |    |             |  |             |    |             |  |             |   |             |  |           
|Lease guarantee related to Florida office space |  | $     | 99 |             |  | $           | 99 |             |  | $           |  |             |  | $          |  |  |  | $ |  |  |  | $ |  |  |  | $ |  | 
|                                                |  |       |    |             |  |             |    |             |  |             |   |             |  |            |   |  |  |   |   |  |  |   |   |  |  |   |   | 

Lease Financing


Operating Lease Obligations.


Capital Lease Obligations.


Long-term Borrowings


Credit Agreement.


Commitments


Lease Guarantee.


Regulatory Capital and Dividend Restrictions








35



---



##### 





Inflation






Off-Balance Sheet Arrangements









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



36



---



##### 



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.





| |   |                                                       
| | - | ------------------------------------------------------
| |  | 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 claims liability.              



| |                                                                                                                                                                                    
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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.





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





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





37



---



##### 















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





38



---



##### 















| |                                                               
| | --------------------------------------------------------------
| | Changes in healthcare laws could reduce our
    profitability.





39



---



##### 









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





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







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





40



---



##### 









| |                                                                                                                                                                                                          
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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.





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





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



Risks related to our business




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



41



---



##### 









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





| |                                                                                                                                                                                                                                 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We have a significant relationship with Cook
    Childrens Physician Network in Fort Worth, Texas. Any
    material modification or discontinuation of this relationship
    could negatively affect our results of operations.







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



42



---



##### 







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













| |   |                                                                                                 
| | - | ------------------------------------------------------------------------------------------------
| |  | 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 healthcare
    provider, and              
|
| |  | disparate information and record keeping systems.                                               





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



43



---



##### 







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





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










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





44



---



##### 







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









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





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





45



---



##### 





| |                                                                                                                                                                                      
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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.





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





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



tm






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



46



---



##### 



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM












Internal Control 
Integrated Framework,


KPMG, LLP






47



---



##### 








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

AMERIGROUP CORPORATION AND SUBSIDIARIES


CONSOLIDATED BALANCE SHEETS


DECEMBER 31, 2004 and 2003


|                                                                                                                                                 |                                                                                                                                                                    |                            |         |         |         |   |         |         |         | 
|------------------------------------------------------------------------------------------------------------------------------------------------ | ------------------------------------------------------------------------------------------------------------------------------------------------------------------ | -------------------------- | ------- | ------- | ------- | - | ------- | ------- | ------- | 
|                                                                                                                                                 |                                                                                                                                                                    | 2004                       |         | 2003   
|                                                                                                                                                 |                                                                                                                                                                    |                            |         |        
|                                                                                                                                                 |                                                                                                                                                                    | (Dollars in thousands)    
|                                                                                                                                                
|                                                                                                                                                
|                                                                                                                                                
|                                                                                                                                                
|ASSETS                                                                                                                                          
|                                                                                                                                                
|                                                                                                                                                
|                                                                                                                                                
|                                                                                                                                                
|Current assets:                                                                                                                                  |                                                                                                                                                                    |                            |         |         |         |   |         |        
|                                                                                                                                                
|                                                                                                                                                
|                                                                                                                                                
|                                                                                                                                                
|                                                                                                                                                 | Cash and cash equivalents                                                                                                                                          |                            | $       | 227,130 |         |   | $       | 84,030  |        
|                                                                                                                                                
|                                                                                                                                                
|                                                                                                                                                
|                                                                                                                                                
|                                                                                                                                                 | Short-term investments                                                                                                                                             |                            |         | 176,364 |         |   |         | 331,940 |        
|                                                                                                                                                
|                                                                                                                                                
|                                                                                                                                                
|                                                                                                                                                
|                                                                                                                                                 | Premium receivables                                                                                                                                                |                            |         | 44,081  |         |   |         | 38,259  |        
|                                                                                                                                                
|                                                                                                                                                
|                                                                                                                                                
|                                                                                                                                                
|                                                                                                                                                 | Deferred income taxes                                                                                                                                              |                            |         | 11,019  |         |   |         | 10,164  |        
|                                                                                                                                                
|                                                                                                                                                
|                                                                                                                                                
|                                                                                                                                                
|                                                                                                                                                 | Prepaid expenses and other current assets                                                                                                                          |                            |         | 18,737  |         |   |         | 15,995  |        
|                                                                                                                                                 |                                                                                                                                                                    |                            |         |         |         |   |         |        
|                                                                                                                                                 |                                                                                                                                                                    | Total current assets       |         |         | 477,331 |   |         |         | 480,388 | 
|                                                                                                                                                
|                                                                                                                                                
|                                                                                                                                                
|                                                                                                                                                
|Long-term investments                                                                                                                            |                                                                                                                                                                    |                            | 208,565 |         |         |   | 119,133 |        
|                                                                                                                                                
|                                                                                                                                                
|                                                                                                                                                
|                                                                                                                                                
|Investments on deposit for licensure                                                                                                             |                                                                                                                                                                    |                            | 38,365  |         |         |   | 35,346  |        
|                                                                                                                                                
|                                                                                                                                                
|                                                                                                                                                
|                                                                                                                                                
|Property and equipment, net                                                                                                                      |                                                                                                                                                                    |                            | 34,030  |         |         |   | 31,734  |        
|                                                                                                                                                
|                                                                                                                                                
|                                                                                                                                                
|                                                                                                                                                
|Software, net of accumulated amortization of $20,317 and $16,384
    at December 31, 2004 and 2003, respectively                                 |                                                                                                                                                                    |                            | 16,268  |         |         |   | 10,424  |        
|                                                                                                                                                
|                                                                                                                                                
|                                                                                                                                                
|                                                                                                                                                
|Other long-term assets                                                                                                                           |                                                                                                                                                                    |                            | 4,909   |         |         |   | 4,598   |        
|                                                                                                                                                
|                                                                                                                                                
|                                                                                                                                                
|                                                                                                                                                
|Goodwill and other intangible assets, net of accumulated
    amortization of $15,226 and $11,722 at December 31, 2004
    and 2003, respectively |                                                                                                                                                                    |                            | 140,382 |         |         |   | 144,398 |        
|                                                                                                                                                 |                                                                                                                                                                    |                            |         |         |         |   |         |        
|                                                                                                                                                 |                                                                                                                                                                    | $                          | 919,850 |         |         | $ | 826,021 |        
|                                                                                                                                                 |                                                                                                                                                                    |                            |         |         |         |   |         |        
|                                                                                                                                                
|                                                                                                                                                
|                                                                                                                                                
|                                                                                                                                                
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                            
|                                                                                                                                                
|                                                                                                                                                
|                                                                                                                                                
|                                                                                                                                                
|Current liabilities:                                                                                                                             |                                                                                                                                                                    |                            |         |         |         |   |         |        
|                                                                                                                                                
|                                                                                                                                                
|                                                                                                                                                
|                                                                                                                                                
|                                                                                                                                                 | Claims payable                                                                                                                                                     |                            | $       | 241,253 |         |   | $       | 239,532 |        
|                                                                                                                                                
|                                                                                                                                                
|                                                                                                                                                
|                                                                                                                                                
|                                                                                                                                                 | Accounts payable                                                                                                                                                   |                            |         | 4,826   |         |   |         | 5,523   |        
|                                                                                                                                                
|                                                                                                                                                
|                                                                                                                                                
|                                                                                                                                                
|                                                                                                                                                 | Unearned revenue                                                                                                                                                   |                            |         | 34,228  |         |   |         | 54,324  |        
|                                                                                                                                                
|                                                                                                                                                
|                                                                                                                                                
|                                                                                                                                                
|                                                                                                                                                 | Accrued payroll and related liabilities                                                                                                                            |                            |         | 18,606  |         |   |         | 17,700  |        
|                                                                                                                                                
|                                                                                                                                                
|                                                                                                                                                
|                                                                                                                                                
|                                                                                                                                                 | Accrued expenses and other current liabilities                                                                                                                     |                            |         | 35,068  |         |   |         | 31,358  |        
|                                                                                                                                                
|                                                                                                                                                
|                                                                                                                                                
|                                                                                                                                                
|                                                                                                                                                 | Current portion of capital lease obligations                                                                                                                       |                            |         | 3,168   |         |   |         | 4,373   |        
|                                                                                                                                                 |                                                                                                                                                                    |                            |         |         |         |   |         |        
|                                                                                                                                                 |                                                                                                                                                                    | Total current liabilities  |         |         | 337,149 |   |         |         | 352,810 | 
|                                                                                                                                                
|                                                                                                                                                
|                                                                                                                                                
|                                                                                                                                                
|Capital lease obligations less current portion                                                                                                   |                                                                                                                                                                    |                            | 2,878   |         |         |   | 6,146   |        
|                                                                                                                                                
|                                                                                                                                                
|                                                                                                                                                
|                                                                                                                                                
|Deferred income taxes and other long-term liabilities                                                                                            |                                                                                                                                                                    |                            | 11,111  |         |         |   | 5,351   |        
|                                                                                                                                                 |                                                                                                                                                                    |                            |         |         |         |   |         |        
|                                                                                                                                                 |                                                                                                                                                                    | Total liabilities          |         |         | 351,138 |   |         |         | 364,307 | 
|                                                                                                                                                 |                                                                                                                                                                    |                            |         |         |         |   |         |        
|Commitments and contingencies (note 11)                                                                                                          |                                                                                                                                                                    |                            |         |         |         |   |         |        
|                                                                                                                                                
|                                                                                                                                                
|                                                                                                                                                
|                                                                                                                                                
|Stockholders equity:                                                                                                                            |                                                                                                                                                                    |                            |         |         |         |   |         |        
|                                                                                                                                                
|                                                                                                                                                
|                                                                                                                                                
|                                                                                                                                                
|                                                                                                                                                 | Common stock, $0.01 par value. Authorized
    100,000,000 shares; issued and outstanding 50,529,724 and
    48,889,244 at December 31, 2004 and 2003, respectively |                            |         | 505     |         |   |         | 489     |        
|                                                                                                                                                
|                                                                                                                                                
|                                                                                                                                                
|                                                                                                                                                
|                                                                                                                                                 | Additional paid-in capital                                                                                                                                         |                            |         | 352,417 |         |   |         | 331,506 |        
|                                                                                                                                                
|                                                                                                                                                
|                                                                                                                                                
|                                                                                                                                                
|                                                                                                                                                 | Retained earnings                                                                                                                                                  |                            |         | 215,790 |         |   |         | 129,776 |        
|                                                                                                                                                
|                                                                                                                                                
|                                                                                                                                                
|                                                                                                                                                
|                                                                                                                                                 | Deferred compensation                                                                                                                                              |                            |         |        |         |   |         | (57     | )      
|                                                                                                                                                 |                                                                                                                                                                    |                            |         |         |         |   |         |        
|                                                                                                                                                 |                                                                                                                                                                    | Total stockholders equity |         |         | 568,712 |   |         |         | 461,714 | 
|                                                                                                                                                 |                                                                                                                                                                    |                            |         |         |         |   |         |        
|                                                                                                                                                 |                                                                                                                                                                    | $                          | 919,850 |         |         | $ | 826,021 |        
|                                                                                                                                                 |                                                                                                                                                                    |                            |         |         |         |   |         |        



48



---



##### 



AMERIGROUP CORPORATION AND SUBSIDIARIES


CONSOLIDATED INCOME STATEMENTS


|                      |                                                                                               |                                               |        |            |           |      |        |            |           |  |        |            |           | 
|--------------------- | --------------------------------------------------------------------------------------------- | --------------------------------------------- | ------ | ---------- | --------- | ---- | ------ | ---------- | --------- |  | ------ | ---------- | --------- | 
|                      |                                                                                               | Years Ended December 31,                     
|                      |                                                                                               |                                              
|                      |                                                                                               | 2004                                          |        | 2003       |           | 2002
|                      |                                                                                               |                                               |        |            |           |     
|                      |                                                                                               | (Dollars in thousands, except per share data)
|                     
|                     
|                     
|                     
|Revenues:             |                                                                                               |                                               |        |            |           |      |        |            |           |  |        |           
|                     
|                     
|                     
|                     
|                      | Premium                                                                                       |                                               | $      | 1,813,391  |           |      | $      | 1,615,508  |           |  | $      | 1,152,636  |          
|                     
|                     
|                     
|                     
|                      | Investment income                                                                             |                                               |        | 10,340     |           |      |        | 6,726      |           |  |        | 8,026      |          
|                      |                                                                                               |                                               |        |            |           |      |        |            |           |  |        |           
|                      |                                                                                               | Total revenues                                |        |            | 1,823,731 |      |        |            | 1,622,234 |  |        |            | 1,160,662 | 
|                      |                                                                                               |                                               |        |            |           |      |        |            |           |  |        |           
|Expenses:             |                                                                                               |                                               |        |            |           |      |        |            |           |  |        |           
|                     
|                     
|                     
|                     
|                      | Health benefits                                                                               |                                               |        | 1,469,097  |           |      |        | 1,295,900  |           |  |        | 933,591    |          
|                     
|                     
|                     
|                     
|                      | Selling, general and administrative                                                           |                                               |        | 191,915    |           |      |        | 186,856    |           |  |        | 133,409    |          
|                     
|                     
|                     
|                     
|                      | Depreciation and amortization                                                                 |                                               |        | 20,750     |           |      |        | 23,650     |           |  |        | 13,149     |          
|                     
|                     
|                     
|                     
|                      | Interest                                                                                      |                                               |        | 731        |           |      |        | 1,913      |           |  |        | 791        |          
|                      |                                                                                               |                                               |        |            |           |      |        |            |           |  |        |           
|                      |                                                                                               | Total expenses                                |        |            | 1,682,493 |      |        |            | 1,508,319 |  |        |            | 1,080,940 | 
|                      |                                                                                               |                                               |        |            |           |      |        |            |           |  |        |           
|                      |                                                                                               | Income before income taxes                    |        |            | 141,238   |      |        |            | 113,915   |  |        |            | 79,722    | 
|                     
|                     
|                     
|                     
|Income tax expense    |                                                                                               |                                               | 55,224 |            |           |      | 46,591 |            |           |  | 32,686 |           
|                      |                                                                                               |                                               |        |            |           |      |        |            |           |  |        |           
|                      |                                                                                               | Net income                                    |        | $          | 86,014    |      |        | $          | 67,324    |  |        | $          | 47,036    | 
|                      |                                                                                               |                                               |        |            |           |      |        |            |           |  |        |           
|Net income per share: |                                                                                               |                                               |        |            |           |      |        |            |           |  |        |           
|                     
|                     
|                     
|                     
|                      | Basic net income per share                                                                    |                                               | $      | 1.73       |           |      | $      | 1.56       |           |  | $      | 1.17       |          
|                      |                                                                                               |                                               |        |            |           |      |        |            |           |  |        |           
|                      | Weighted average number of common shares outstanding                                          |                                               |        | 49,721,945 |           |      |        | 43,245,409 |           |  |        | 40,355,456 |          
|                      |                                                                                               |                                               |        |            |           |      |        |            |           |  |        |           
|                      | Diluted net income per share                                                                  |                                               | $      | 1.66       |           |      | $      | 1.48       |           |  | $      | 1.10       |          
|                      |                                                                                               |                                               |        |            |           |      |        |            |           |  |        |           
|                      | Weighted average number of common shares and dilutive potential
    common shares outstanding |                                               |        | 51,837,579 |           |      |        | 45,603,300 |           |  |        | 42,938,844 |          
|                      |                                                                                               |                                               |        |            |           |      |        |            |           |  |        |           



49



---



##### 



AMERIGROUP CORPORATION AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY


|                                                                                                            |  |                        |            |            |  |          |     |          |  |               |         |        |  |   |         |  |  |   |      |   |  |   |         | 
|----------------------------------------------------------------------------------------------------------- |  | ---------------------- | ---------- | ---------- |  | -------- | --- | -------- |  | ------------- | ------- | ------ |  | - | ------- |  |  | - | ---- | - |  | - | ------- | 
|                                                                                                            |  | Common stock           |            | Additional |  |          |     |          |  | Total        
|                                                                                                            |  |                        |            | paid-in    |  | Retained |     | Deferred |  | stockholders
|                                                                                                            |  | Shares                 |            | Amount     |  | capital  |     | earnings |  | compensation  |         | equity
|                                                                                                            |  |                        |            |            |  |          |     |          |  |               |         |       
|                                                                                                            |  | (Dollars in thousands)
|                                                                                                           
|                                                                                                           
|                                                                                                           
|                                                                                                           
|Balances at January 1, 2002                                                                                 |  |                        | 39,703,380 |            |  | $        | 397 |          |  | $             | 168,478 |        |  | $ | 15,416  |  |  | $ | (775 | ) |  | $ | 183,516 | 
|                                                                                                           
|                                                                                                           
|                                                                                                           
|                                                                                                           
|Common stock issued upon exercise of stock options and purchases
    under the employee stock purchase plan |  |                        | 1,400,508  |            |  |          | 14  |          |  |               | 4,682   |        |  |   |        |  |  |   |     |   |  |   | 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                                                                               |  |                        | 41,103,888 |            |  |          | 411 |          |  |               | 176,935 |        |  |   | 62,452  |  |  |   | (417 | ) |  |   | 239,381 | 
|                                                                                                           
|                                                                                                           
|                                                                                                           
|                                                                                                           
|Common stock issued from public offering, net of expenses of
    $8,226                                     |  |                        | 6,325,000  |            |  |          | 63  |          |  |               | 138,766 |        |  |   |        |  |  |   |     |   |  |   | 138,829 | 
|                                                                                                           
|                                                                                                           
|                                                                                                           
|                                                                                                           
|Common stock issued upon exercise of stock options and purchases
    under the employee stock purchase plan |  |                        | 1,460,356  |            |  |          | 15  |          |  |               | 11,258  |        |  |   |        |  |  |   |     |   |  |   | 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                                                                               |  |                        | 48,889,244 |            |  |          | 489 |          |  |               | 331,506 |        |  |   | 129,776 |  |  |   | (57  | ) |  |   | 461,714 | 
|                                                                                                           
|                                                                                                           
|                                                                                                           
|                                                                                                           
|Common stock issued upon exercise of stock options and purchases
    under the employee stock purchase plan |  |                        | 1,640,480  |            |  |          | 16  |          |  |               | 12,902  |        |  |   |        |  |  |   |     |   |  |   | 12,918  | 
|                                                                                                           
|                                                                                                           
|                                                                                                           
|                                                                                                           
|Tax benefit from exercise of options                                                                        |  |                        |           |            |  |          |    |          |  |               | 8,009   |        |  |   |        |  |  |   |     |   |  |   | 8,009   | 
|                                                                                                           
|                                                                                                           
|                                                                                                           
|                                                                                                           
|Amortization of deferred compensation                                                                       |  |                        |           |            |  |          |    |          |  |               |        |        |  |   |        |  |  |   | 57   |   |  |   | 57      | 
|                                                                                                           
|                                                                                                           
|                                                                                                           
|                                                                                                           
|Net income                                                                                                  |  |                        |           |            |  |          |    |          |  |               |        |        |  |   | 86,014  |  |  |   |     |   |  |   | 86,014  | 
|                                                                                                            |  |                        |            |            |  |          |     |          |  |               |         |        |  |   |         |  |  |   |      |   |  |   |         | 
|Balances at December 31, 2004                                                                               |  |                        | 50,529,724 |            |  | $        | 505 |          |  | $             | 352,417 |        |  | $ | 215,790 |  |  | $ |     |   |  | $ | 568,712 | 
|                                                                                                            |  |                        |            |            |  |          |     |          |  |               |         |        |  |   |         |  |  |   |      |   |  |   |         | 



50



---



##### 



AMERIGROUP CORPORATION AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF CASH FLOWS


|                                                     |                                                                                        |                                                                                           |                                                   |                                                     |        |         |         |            |        |        |          |          |        |        |          |  
|---------------------------------------------------- | -------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------- | ------------------------------------------------- | --------------------------------------------------- | ------ | ------- | ------- | ---------- | ------ | ------ | -------- | -------- | ------ | ------ | -------- | -
|                                                     |                                                                                        | Years Ended December 31,                                                                 
|                                                     |                                                                                        |                                                                                          
|                                                     |                                                                                        | 2004                                                                                      |                                                   | 2003                                                |        | 2002   
|                                                     |                                                                                        |                                                                                           |                                                   |                                                     |        |        
|                                                     |                                                                                        | (Dollars in thousands)                                                                   
|                                                    
|                                                    
|                                                    
|                                                    
|Cash flows from operating activities:                |                                                                                        |                                                                                           |                                                   |                                                     |        |         |         |            |        |        |          |         
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Net income                                                                             |                                                                                           | $                                                 | 86,014                                              |        |         | $       | 67,324     |        |        | $        | 47,036   |       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Adjustments to reconcile net income to net cash provided by
    operating activities:  |                                                                                           |                                                   |                                                     |        |         |         |            |        |        |          |          |       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                        | Depreciation and amortization                                                             |                                                   |                                                     | 20,750 |         |         |            | 23,650 |        |          |          | 13,149 |       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                        | Loss on disposal or abandonment of property, equipment and
    software                   |                                                   |                                                     | 971    |         |         |            | 74     |        |          |          | 123    |       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                        | Deferred tax expense (benefit)                                                            |                                                   |                                                     | 2,878  |         |         |            | (3,272 | )      |          |          | 993    |       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                        | Amortization of deferred compensation                                                     |                                                   |                                                     | 57     |         |         |            | 360    |        |          |          | 358    |       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                        | Tax benefit related to exercise of stock options                                          |                                                   |                                                     | 8,009  |         |         |            | 4,547  |        |          |          | 3,775  |       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                        | Changes in assets and liabilities increasing
    (decreasing) cash flows from operations: |                                                   |                                                     |        |         |         |            |        |        |          |          |        |       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                        |                                                                                           | Premium receivables                               |                                                     |        | (5,822  | )       |            |        | (3,026 | )        |          |        | (6,058 | )       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                        |                                                                                           | Prepaid expenses and other current assets         |                                                     |        | (2,742  | )       |            |        | (7,954 | )        |          |        | (456   | )       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                        |                                                                                           | Other assets                                      |                                                     |        | (941    | )       |            |        | (750   | )        |          |        | (1,225 | )       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                        |                                                                                           | Claims payable                                    |                                                     |        | 1,721   |         |            |        | 16,681 |          |          |        | 22,084 |         
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                        |                                                                                           | Accounts payable, accrued expenses and other, net |                                                     |        | 9,234   |         |            |        | (494   | )        |          |        | 12,219 |         
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                        |                                                                                           | Unearned revenue                                  |                                                     |        | (20,096 | )       |            |        | 28,806 |          |          |        | 25,278 |         
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     |                                                                                        |                                                                                           | Other long-term liabilities                       |                                                     |        | 2,027   |         |            |        | 2,548  |          |          |        | 704    |         
|                                                     |                                                                                        |                                                                                           |                                                   |                                                     |        |         |         |            |        |        |          |         
|                                                     |                                                                                        |                                                                                           |                                                   | Net cash provided by operating activities           |        |         | 102,060 |            |        |        | 128,494  |          |        |        | 117,980  |  
|                                                     |                                                                                        |                                                                                           |                                                   |                                                     |        |         |         |            |        |        |          |         
|Cash flows from investing activities:                |                                                                                        |                                                                                           |                                                   |                                                     |        |         |         |            |        |        |          |         
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Proceeds from sale of available-for-sale securities                                    |                                                                                           |                                                   | 5,121,916                                           |        |         |         | 804,047    |        |        |          | 164,231  |       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Purchase of available-for-sale securities                                              |                                                                                           |                                                   | (4,972,080                                          | )      |         |         | (1,034,040 | )      |        |          | (153,781 | )     
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Proceeds from redemption of held-to-maturity securities                                |                                                                                           |                                                   | 74,971                                              |        |         |         | 190,360    |        |        |          | 113,875  |       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Purchase of held-to-maturity investments                                               |                                                                                           |                                                   | (158,663                                            | )      |         |         | (207,501   | )      |        |          | (103,377 | )     
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Purchase of property and equipment and software                                        |                                                                                           |                                                   | (25,727                                             | )      |         |         | (13,294    | )      |        |          | (20,830  | )     
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Proceeds from redemption of investments on deposit for licensure                       |                                                                                           |                                                   | 35,525                                              |        |         |         | 40,009     |        |        |          | 30,340   |       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Purchase of investments on deposit for licensure                                       |                                                                                           |                                                   | (38,544                                             | )      |         |         | (45,496    | )      |        |          | (30,898  | )     
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Purchase of contract rights and related assets                                         |                                                                                           |                                                   |                                                    |        |         |         | (8,581     | )      |        |          | (6,633   | )     
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Purchase price adjustment received                                                     |                                                                                           |                                                   | 512                                                 |        |         |         | 963        |        |        |          |         |       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Cash acquired through stock acquisition                                                |                                                                                           |                                                   |                                                    |        |         |         | 27,473     |        |        |          |         |       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Escrow deposit for pending acquisition and related costs                               |                                                                                           |                                                   |                                                    |        |         |         |           |        |        |          | (124,133 | )     
|                                                     |                                                                                        |                                                                                           |                                                   |                                                     |        |         |         |            |        |        |          |         
|                                                     |                                                                                        |                                                                                           |                                                   | Net cash provided by (used in) investing activities |        |         | 37,910  |            |        |        | (246,060 | )        |        |        | (131,206 | )
|                                                     |                                                                                        |                                                                                           |                                                   |                                                     |        |         |         |            |        |        |          |         
|Cash flows from financing activities:                |                                                                                        |                                                                                           |                                                   |                                                     |        |         |         |            |        |        |          |         
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Net (decrease) increase in bank overdrafts                                             |                                                                                           |                                                   | (5,315                                              | )      |         |         | 4,828      |        |        |          | (1,963   | )     
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Borrowings under credit facility                                                       |                                                                                           |                                                   |                                                    |        |         |         |           |        |        |          | 50,000   |       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Repayments of borrowings under credit facility                                         |                                                                                           |                                                   |                                                    |        |         |         | (50,000    | )      |        |          |         |       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Payment of debt issuance costs                                                         |                                                                                           |                                                   |                                                    |        |         |         | (1,428     | )      |        |          | (440     | )     
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Payment of capital lease obligations                                                   |                                                                                           |                                                   | (4,473                                              | )      |         |         | (4,902     | )      |        |          | (2,521   | )     
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Proceeds from exercise of common stock options and employee
    stock purchases        |                                                                                           |                                                   | 12,918                                              |        |         |         | 11,273     |        |        |          | 4,696    |       
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Proceeds from issuance of common stock upon public offering, net
    of issuance costs |                                                                                           |                                                   |                                                    |        |         |         | 138,829    |        |        |          |         |       
|                                                     |                                                                                        |                                                                                           |                                                   |                                                     |        |         |         |            |        |        |          |         
|                                                     |                                                                                        |                                                                                           |                                                   | Net cash provided by financing activities           |        |         | 3,130   |            |        |        | 98,600   |          |        |        | 49,772   |  
|                                                     |                                                                                        |                                                                                           |                                                   |                                                     |        |         |         |            |        |        |          |         
|Net increase (decrease) in cash and cash equivalents |                                                                                        |                                                                                           | 143,100                                           |                                                     |        |         | (18,966 | )          |        |        | 36,546   |         
|                                                    
|                                                    
|                                                    
|                                                    
|Cash and cash equivalents at beginning of year       |                                                                                        |                                                                                           | 84,030                                            |                                                     |        |         | 102,996 |            |        |        | 66,450   |         
|                                                     |                                                                                        |                                                                                           |                                                   |                                                     |        |         |         |            |        |        |          |         
|Cash and cash equivalents at end of year             |                                                                                        | $                                                                                         | 227,130                                           |                                                     |        | $       | 84,030  |            |        | $      | 102,996  |         
|                                                     |                                                                                        |                                                                                           |                                                   |                                                     |        |         |         |            |        |        |          |         
|Supplemental disclosures of cash flow information:   |                                                                                        |                                                                                           |                                                   |                                                     |        |         |         |            |        |        |          |         
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Cash paid for interest                                                                 |                                                                                           | $                                                 | 717                                                 |        |         | $       | 1,755      |        |        | $        | 767      |       
|                                                     |                                                                                        |                                                                                           |                                                   |                                                     |        |         |         |            |        |        |          |         
|                                                     | Cash paid for income taxes                                                             |                                                                                           | $                                                 | 53,628                                              |        |         | $       | 40,671     |        |        | $        | 27,795   |       
|                                                     |                                                                                        |                                                                                           |                                                   |                                                     |        |         |         |            |        |        |          |         
|Supplemental disclosures of non-cash activities:     |                                                                                        |                                                                                           |                                                   |                                                     |        |         |         |            |        |        |          |         
|                                                    
|                                                    
|                                                    
|                                                    
|                                                     | Property and equipment acquired under capital lease                                    |                                                                                           | $                                                 |                                                    |        |         | $       | 5,977      |        |        | $        | 7,775    |       
|                                                     |                                                                                        |                                                                                           |                                                   |                                                     |        |         |         |            |        |        |          |         





51



---



##### 



AMERIGROUP CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


December 31, 2004, 2003 and 2002


(Dollars in thousands, except for per share data)




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



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











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





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



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



52



---



##### 



AMERIGROUP CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)




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











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



|                       |  |           
|---------------------- |  | ----------
|                      
|                      
|                      
|                      
|Leasehold improvements |  | 3-15 years
|                      
|                      
|                      
|                      
|Furniture and fixtures |  | 5-7 years 
|                      
|                      
|                      
|                      
|Equipment              |  | 3-5 years 



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

Accounting for
the Costs of Software Developed or Obtained for Internal
Use.


53



---



##### 



AMERIGROUP CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)






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

Goodwill and Other
Intangible Assets Accounting for
Impairment or Disposal of Long-Lived Assets.




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





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





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

Accounting for Stock-Based Compensation Accounting for Stock Issued to Employees Accounting for Stock-Based Compensation


54



---



##### 



AMERIGROUP CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)




|                              |                                                                                                                                                     |      |   |        |  |      |   |        |  |  |   |        | 
|----------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------- | ---- | - | ------ |  | ---- | - | ------ |  |  | - | ------ | 
|                              |                                                                                                                                                     | 2004 |   | 2003   |  | 2002
|                              |                                                                                                                                                     |      |   |        |  |     
|Net income:                   |                                                                                                                                                     |      |   |        |  |      |   |        |  |  |   |       
|                             
|                             
|                             
|                             
|                              | Reported net income                                                                                                                                 |      | $ | 86,014 |  |      | $ | 67,324 |  |  | $ | 47,036 | 
|                             
|                             
|                             
|                             
|                              | Deduct: Total stock-based employee compensation expense
    determined under fair value based method for all awards, net of
    related tax effects |      |   | 9,321  |  |      |   | 9,577  |  |  |   | 5,800  | 
|                              |                                                                                                                                                     |      |   |        |  |      |   |        |  |  |   |       
|                              | Proforma net income                                                                                                                                 |      | $ | 76,693 |  |      | $ | 57,747 |  |  | $ | 41,236 | 
|                              |                                                                                                                                                     |      |   |        |  |      |   |        |  |  |   |       
|Basic net income per share:   |                                                                                                                                                     |      |   |        |  |      |   |        |  |  |   |       
|                             
|                             
|                             
|                             
|                              | Reported basic net income per share                                                                                                                 |      | $ | 1.73   |  |      | $ | 1.56   |  |  | $ | 1.17   | 
|                             
|                             
|                             
|                             
|                              | Proforma basic net income per share                                                                                                                 |      |   | 1.54   |  |      |   | 1.34   |  |  |   | 1.02   | 
|                             
|                             
|                             
|                             
|Diluted net income per share: |                                                                                                                                                     |      |   |        |  |      |   |        |  |  |   |       
|                             
|                             
|                             
|                             
|                              | Reported diluted net income per share                                                                                                               |      | $ | 1.66   |  |      | $ | 1.48   |  |  | $ | 1.10   | 
|                             
|                             
|                             
|                             
|                              | Proforma diluted net income per share                                                                                                               |      |   | 1.49   |  |      |   | 1.28   |  |  |   | 0.96   | 



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





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





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



55



---



##### 



AMERIGROUP CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)






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





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



Business Combinations.




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





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



56



---



##### 



AMERIGROUP CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)




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





|    |                            
|--- | ---------------------------
|(q) | Recent Accounting Standards

Shared-Based Payment, Accounting for Stock Issued to Employees, Statement of Cash Flows.








| |                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. A modified prospective method in which
    compensation cost is recognized beginning with the effective
    date (a) based on the requirements of
    SFAS No. 123(R) for all share-based payments granted
    after the effective date and (b) based on the requirements
    of SFAS No. 123 for all awards granted to employees
    prior to the effective date of SFAS No. 123(R) that
    remain unvested on the effective date.
|
| | 2. A modified retrospective method which
    includes the requirements of the modified prospective method
    described above, but also permits entities to restate based on
    the amounts previously recognized under SFAS No. 123
    for purposes of proforma disclosures either (a) all prior
    presented or (b) prior interim periods of the year of
    adoption.                                                            







|    |                        
|--- | -----------------------
|(r) | Risks and Uncertainties



57



---



##### 



AMERIGROUP CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)








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



|      |                                              |                                                  |   |            |         |            |   |       |   |  |   |   |    |  |   |         |         | 
|----- | -------------------------------------------- | ------------------------------------------------ | - | ---------- | ------- | ---------- | - | ----- | - |  | - | - | -- |  | - | ------- | ------- | 
|      |                                              |                                                  |   | Gross      |         | Gross      |   |      
|      |                                              |                                                  |   | unrealized |         | unrealized |   |      
|      |                                              | Carrying                                         |   | holding    |         | holding    |   | Fair 
|      |                                              | amount                                           |   | gains      |         | losses     |   | value
|      |                                              |                                                  |   |            |         |            |   |      
|2004: |                                              |                                                  |   |            |         |            |   |       |   |  |   |   |    |  |   |        
|     
|     
|     
|     
|      | Auction rate securities  available-for-sale |                                                  | $ | 150,401    |         |            | $ |      |   |  | $ |  |    |  | $ | 150,401 |        
|     
|     
|     
|     
|      | Held-to-maturity:                            |                                                  |   |            |         |            |   |       |   |  |   |   |    |  |   |         |        
|     
|     
|     
|     
|      |                                              | Commercial paper                                 |   |            | 18,476  |            |   |       |  |  |   |   | 6  |  |   |         | 18,470  | 
|     
|     
|     
|     
|      |                                              | Debt securities of government sponsored entities |   |            | 7,487   |            |   |       |  |  |   |   | 12 |  |   |         | 7,475   | 
|      |                                              |                                                  |   |            |         |            |   |       |   |  |   |   |    |  |   |        
|      |                                              | Total                                            |   | $          | 176,364 |            |   | $     |  |  |   | $ | 18 |  |   | $       | 176,346 | 
|      |                                              |                                                  |   |            |         |            |   |       |   |  |   |   |    |  |   |        
|2003: |                                              |                                                  |   |            |         |            |   |       |   |  |   |   |    |  |   |        
|     
|     
|     
|     
|      | Auction rate securities  available-for-sale |                                                  | $ | 329,690    |         |            | $ |      |   |  | $ |  |    |  | $ | 329,690 |        
|     
|     
|     
|     
|      | Held-to-maturity:                            |                                                  |   |            |         |            |   |       |   |  |   |   |    |  |   |         |        
|     
|     
|     
|     
|      |                                              | Commercial paper                                 |   |            | 1,000   |            |   |       |  |  |   |   |   |  |   |         | 1,000   | 
|     
|     
|     
|     
|      |                                              | Debt securities of government sponsored entities |   |            | 1,250   |            |   |       |  |  |   |   |   |  |   |         | 1,250   | 
|      |                                              |                                                  |   |            |         |            |   |       |   |  |   |   |    |  |   |        
|      |                                              | Total                                            |   | $          | 331,940 |            |   | $     |  |  |   | $ |   |  |   | $       | 331,940 | 
|      |                                              |                                                  |   |            |         |            |   |       |   |  |   |   |    |  |   |        

58



---



##### 



AMERIGROUP CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)




|      |                                              |                                                                                                |       |            |         |            |   |       |     |     |   |   |       |       |   |        |         |         | 
|----- | -------------------------------------------- | ---------------------------------------------------------------------------------------------- | ----- | ---------- | ------- | ---------- | - | ----- | --- | --- | - | - | ----- | ----- | - | ------ | ------- | ------- | 
|      |                                              |                                                                                                |       | Gross      |         | Gross      |   |      
|      |                                              |                                                                                                |       | unrealized |         | unrealized |   |      
|      |                                              | Carrying                                                                                       |       | holding    |         | holding    |   | Fair 
|      |                                              | amount                                                                                         |       | gains      |         | losses     |   | value
|      |                                              |                                                                                                |       |            |         |            |   |      
|2004: |                                              |                                                                                                |       |            |         |            |   |       |     |     |   |   |       |       |   |       
|     
|     
|     
|     
|      | Auction rate securities  available-for-sale |                                                                                                | $     | 36,756     |         |            | $ |      |     |     | $ |  |       |       | $ | 36,756 |        
|     
|     
|     
|     
|      | Held-to-maturity:                            |                                                                                                |       |            |         |            |   |       |     |     |   |   |       |       |   |        |        
|     
|     
|     
|     
|      |                                              | Municipal bonds                                                                                |       |            | 16,436  |            |   |       |    |     |   |   | 60    |       |   |        | 16,376  |        
|     
|     
|     
|     
|      |                                              | Debt securities of government sponsored entities, maturing
    within one year                 |       |            | 46,993  |            |   |       |    |     |   |   | 313   |       |   |        | 46,680  |        
|     
|     
|     
|     
|      |                                              | Debt securities of government sponsored entities, maturing
    between one year and five years |       |            | 108,380 |            |   |       |    |     |   |   | 1,074 |       |   |        | 107,306 |        
|      |                                              |                                                                                                |       |            |         |            |   |       |     |     |   |   |       |       |   |       
|      |                                              |                                                                                                | Total |            | $       | 208,565    |   |       | $   |    |   |   | $     | 1,447 |   |        | $       | 207,118 | 
|      |                                              |                                                                                                |       |            |         |            |   |       |     |     |   |   |       |       |   |       
|2003: |                                              |                                                                                                |       |            |         |            |   |       |     |     |   |   |       |       |   |       
|     
|     
|     
|     
|      | Auction rate securities  available-for-sale |                                                                                                | $     | 7,303      |         |            | $ |      |     |     | $ |  |       |       | $ | 7,303  |        
|     
|     
|     
|     
|      | Held-to-maturity:                            |                                                                                                |       |            |         |            |   |       |     |     |   |   |       |       |   |        |        
|     
|     
|     
|     
|      |                                              | Municipal bonds                                                                                |       |            | 7,115   |            |   |       | 3   |     |   |   |      |       |   |        | 7,118   |        
|     
|     
|     
|     
|      |                                              | Debt securities of government sponsored entities, maturing
    within one year                 |       |            | 1,500   |            |   |       | 1   |     |   |   |      |       |   |        | 1,501   |        
|     
|     
|     
|     
|      |                                              | Debt securities of government sponsored entities, maturing
    between one year and five years |       |            | 103,215 |            |   |       | 146 |     |   |   | 96    |       |   |        | 103,265 |        
|      |                                              |                                                                                                |       |            |         |            |   |       |     |     |   |   |       |       |   |       
|      |                                              |                                                                                                | Total |            | $       | 119,133    |   |       | $   | 150 |   |   | $     | 96    |   |        | $       | 119,187 | 
|      |                                              |                                                                                                |       |            |         |            |   |       |     |     |   |   |       |       |   |       

59



---



##### 



AMERIGROUP CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)




|      |                                                                                                |           |   |            |        |            |   |       |    |  |   |     |     |  |   |        |        | 
|----- | ---------------------------------------------------------------------------------------------- | --------- | - | ---------- | ------ | ---------- | - | ----- | -- |  | - | --- | --- |  | - | ------ | ------ | 
|      |                                                                                                |           |   | Gross      |        | Gross      |   |      
|      |                                                                                                |           |   | unrealized |        | unrealized |   |      
|      |                                                                                                | Amortized |   | holding    |        | holding    |   | Fair 
|      |                                                                                                | cost      |   | gains      |        | losses     |   | value
|      |                                                                                                |           |   |            |        |            |   |      
|2004: |                                                                                                |           |   |            |        |            |   |       |    |  |   |     |     |  |   |       
|     
|     
|     
|     
|      | Money market funds                                                                             |           | $ | 599        |        |            | $ |      |    |  | $ |    |     |  | $ | 599    |       
|     
|     
|     
|     
|      | U.S. Treasury securities, maturing within one year                                             |           |   | 5,933      |        |            |   |      |    |  |   | 7   |     |  |   | 5,926  |       
|     
|     
|     
|     
|      | Debt securities of government sponsored entities, maturing
    within one year                 |           |   | 11,373     |        |            |   |      |    |  |   | 69  |     |  |   | 11,304 |       
|     
|     
|     
|     
|      | Debt securities of government sponsored entities, maturing
    between one year and five years |           |   | 17,607     |        |            |   |      |    |  |   | 137 |     |  |   | 17,470 |       
|     
|     
|     
|     
|      | Cash escrow account                                                                            |           |   | 2,853      |        |            |   |      |    |  |   |    |     |  |   | 2,853  |       
|      |                                                                                                |           |   |            |        |            |   |       |    |  |   |     |     |  |   |       
|      |                                                                                                | Total     |   | $          | 38,365 |            |   | $     |   |  |   | $   | 213 |  |   | $      | 38,152 | 
|      |                                                                                                |           |   |            |        |            |   |       |    |  |   |     |     |  |   |       
|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 | 
|      |                                                                                                |           |   |            |        |            |   |       |    |  |   |     |     |  |   |       



60



---



##### 



AMERIGROUP CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)




|      |                                                  |                                       |   |                      |         |            |   |       |       |            |  |            |     |  |   |       |       |  |   |    |    |  |  |   |   | 
|----- | ------------------------------------------------ | ------------------------------------- | - | -------------------- | ------- | ---------- | - | ----- | ----- | ---------- |  | ---------- | --- |  | - | ----- | ----- |  | - | -- | -- |  |  | - | - | 
|      |                                                  | Less than 12 months                   |   | 12 months or greater
|      |                                                  |                                       |   |                     
|      |                                                  |                                       |   | Gross                |         |            |   |       |       | Gross      |  |           
|      |                                                  |                                       |   | unrealized           |         | Total      |   |       |       | unrealized |  | Total     
|      |                                                  |                                       |   | holding              |         | number of  |   | Fair  |       | holding    |  | number of 
|      |                                                  | Fair value                            |   | losses               |         | securities |   | value |       | losses     |  | securities
|      |                                                  |                                       |   |                      |         |            |   |       |       |            |  |           
|2004: |                                                  |                                       |   |                      |         |            |   |       |       |            |  |            |     |  |   |       |       |  |   |    |    |  |  |  
|     
|     
|     
|     
|      | Commercial paper                                 |                                       | $ | 14,970               |         |            | $ | 6     |       |            |  | 10         |     |  | $ |      |       |  | $ |   |    |  |  |  |  
|     
|     
|     
|     
|      | Debt securities of government sponsored entities |                                       |   | 179,771              |         |            |   | 1,567 |       |            |  | 91         |     |  |   | 5,962 |       |  |   | 38 |    |  |  | 3 |  
|     
|     
|     
|     
|      | Municipal bonds                                  |                                       |   | 16,376               |         |            |   | 60    |       |            |  | 8          |     |  |   |      |       |  |   |   |    |  |  |  |  
|     
|     
|     
|     
|      | U.S. Treasury securities                         |                                       |   | 5,926                |         |            |   | 7     |       |            |  | 7          |     |  |   |      |       |  |   |   |    |  |  |  |  
|      |                                                  |                                       |   |                      |         |            |   |       |       |            |  |            |     |  |   |       |       |  |   |    |    |  |  |  
|      |                                                  | Total temporarily impaired securities |   | $                    | 217,043 |            |   | $     | 1,640 |            |  |            | 116 |  |   | $     | 5,962 |  |   | $  | 38 |  |  |   | 3 | 
|      |                                                  |                                       |   |                      |         |            |   |       |       |            |  |            |     |  |   |       |       |  |   |    |    |  |  |  



|      |                                                  |       |   |            |  |            |   |     |  |  |  |    | 
|----- | ------------------------------------------------ | ----- | - | ---------- |  | ---------- | - | --- |  |  |  | -- | 
|      |                                                  |       |   | Gross      |  |           
|      |                                                  |       |   | unrealized |  | Total     
|      |                                                  | Fair  |   | holding    |  | number of 
|      |                                                  | value |   | losses     |  | securities
|      |                                                  |       |   |            |  |           
|2003: |                                                  |       |   |            |  |            |   |     |  |  |  |   
|     
|     
|     
|     
|      | Debt securities of government sponsored entities |       | $ | 26,283     |  |            | $ | 100 |  |  |  | 13 | 
|      |                                                  |       |   |            |  |            |   |     |  |  |  |   





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



|                                          |  |      |         |      |  |   |         |  
|----------------------------------------- |  | ---- | ------- | ---- |  | - | ------- | -
|                                          |  | 2004 |         | 2003
|                                          |  |      |         |     
|Leasehold improvements                    |  | $    | 17,506  |      |  | $ | 11,096  |  
|                                         
|                                         
|                                         
|                                         
|Furniture and fixtures                    |  |      | 11,918  |      |  |   | 11,445  |  
|                                         
|                                         
|                                         
|                                         
|Equipment                                 |  |      | 43,551  |      |  |   | 37,196  |  
|                                          |  |      |         |      |  |   |         |  
|                                          |  |      | 72,975  |      |  |   | 59,737  |  
|                                         
|                                         
|                                         
|                                         
|Accumulated depreciation and amortization |  |      | (38,945 | )    |  |   | (28,003 | )
|                                          |  |      |         |      |  |   |         |  
|                                          |  | $    | 34,030  |      |  | $ | 31,734  |  
|                                          |  |      |         |      |  |   |         |  

61



---



##### 



AMERIGROUP CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)




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



|    |              
|--- | -------------
|(a) | MethodistCare





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





|    |    
|--- | ---
|(c) | PHP







62



---



##### 



AMERIGROUP CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)




|                                                    |                           |   |         |         | 
|--------------------------------------------------- | ------------------------- | - | ------- | ------- | 
|                                                   
|                                                   
|                                                   
|                                                   
|Current assets, including cash and cash equivalents |                           | $ | 31,668  |        
|                                                   
|                                                   
|                                                   
|                                                   
|Intangible assets                                   |                           |   | 8,990   |        
|                                                   
|                                                   
|                                                   
|                                                   
|Goodwill                                            |                           |   | 107,085 |        
|                                                   
|                                                   
|                                                   
|                                                   
|Other assets                                        |                           |   | 2,482   |        
|                                                    |                           |   |         |        
|                                                    | Total assets acquired     |   |         | 150,225 | 
|                                                    |                           |   |         |        
|Claims payable                                      |                           |   | 20,574  |        
|                                                   
|                                                   
|                                                   
|                                                   
|Other liabilities                                   |                           |   | 6,030   |        
|                                                    |                           |   |         |        
|                                                    | Total liabilities assumed |   |         | 26,604  | 
|                                                    |                           |   |         |        
|                                                    | Net assets acquired       |   | $       | 123,621 | 
|                                                    |                           |   |         |        



|                      |  |   |       |              |  |  |          | 
|--------------------- |  | - | ----- | ------------ |  |  | -------- | 
|                      |  |   |       | Amortization
|                      |  |   |       | period      
|                      |  |   |       |             
|                     
|                     
|                     
|                     
|Membership rights     |  | $ | 8,650 |              |  |  | 10 years | 
|                     
|                     
|                     
|                     
|Non-compete agreement |  |   | 340   |              |  |  | 5 years  | 
|                      |  |   |       |              |  |  |          | 
|                      |  | $ | 8,990 |              |  |  |          | 
|                      |  |   |       |              |  |  |          | 



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





|    |              
|--- | -------------
|(d) | St. Augustine



63



---



##### 



AMERIGROUP CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)




|                      |  |         |  |              |         | 
|--------------------- |  | ------- |  | ------------ | ------- | 
|                      |  |         |  | Amortization
|                      |  |         |  | period      
|                      |  |         |  |             
|                     
|                     
|                     
|                     
|Membership rights     |  | $ 2,143 |  |              | 8 years | 
|                     
|                     
|                     
|                     
|Non-compete agreement |  | 8       |  |              | 3 years | 
|                      |  |         |  |              |         | 
|                      |  | $ 2,151 |  |              |         | 
|                      |  |         |  |              |         | 



|    |                                                   
|--- | --------------------------------------------------
|(e) | Summary of Goodwill and Acquired Intangible Assets



|                      |  |                |         |              |  |                |         |              |  |   |         |  |  |   |         |  
|--------------------- |  | -------------- | ------- | ------------ |  | -------------- | ------- | ------------ |  | - | ------- |  |  | - | ------- | -
|                      |  | 2004           |         | 2003        
|                      |  |                |         |             
|                      |  | Gross carrying |         | Accumulated  |  | Gross carrying |         | Accumulated 
|                      |  | amount         |         | amortization |  | amount         |         | amortization
|                      |  |                |         |              |  |                |         |             
|Goodwill              |  | $              | 143,944 |              |  | $              | (5,773  | )            |  | $ | 144,456 |  |  | $ | (5,773  | )
|                     
|                     
|                     
|                     
|Membership rights     |  |                | 11,216  |              |  |                | (9,213  | )            |  |   | 11,216  |  |  |   | (5,780  | )
|                     
|                     
|                     
|                     
|Non-compete agreement |  |                | 448     |              |  |                | (240    | )            |  |   | 448     |  |  |   | (169    | )
|                      |  |                |         |              |  |                |         |              |  |   |         |  |  |   |         |  
|                      |  | $              | 155,608 |              |  | $              | (15,226 | )            |  | $ | 156,120 |  |  | $ | (11,722 | )
|                      |  |                |         |              |  |                |         |              |  |   |         |  |  |   |         |  



|     |  |              |       | 
|---- |  | ------------ | ----- | 
|     |  | Estimated   
|     |  | amortization
|     |  | expense     
|     |  |             
|2005 |  | $            | 1,286 | 
|    
|    
|    
|    
|2006 |  |              | 549   | 
|    
|    
|    
|    
|2007 |  |              | 262   | 
|    
|    
|    
|    
|2008 |  |              | 76    | 
|    
|    
|    
|    
|2009 |  |              | 27    | 



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



|                                                                   |  |                          |        |      |  |      |        |   |  |   |        |  
|------------------------------------------------------------------ |  | ------------------------ | ------ | ---- |  | ---- | ------ | - |  | - | ------ | -
|                                                                   |  | Years Ended December 31,
|                                                                   |  |                         
|                                                                   |  | 2004                     |        | 2003 |  | 2002
|                                                                   |  |                          |        |      |  |     
|Income from continuing operations                                  |  | $                        | 55,224 |      |  | $    | 46,591 |   |  | $ | 32,686 |  
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Stockholders equity, tax benefit on exercise of stock
    options |  |                          | (8,009 | )    |  |      | (4,547 | ) |  |   | (3,775 | )
|                                                                   |  |                          |        |      |  |      |        |   |  |   |        |  
|                                                                   |  | $                        | 47,215 |      |  | $    | 42,044 |   |  | $ | 28,911 |  
|                                                                   |  |                          |        |      |  |      |        |   |  |   |        |  

64



---



##### 



AMERIGROUP CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)




|                              |                 |         |        |          |  |       |        |        |   |   |        |        | 
|----------------------------- | --------------- | ------- | ------ | -------- |  | ----- | ------ | ------ | - | - | ------ | ------ | 
|                              |                 | Current |        | Deferred |  | Total
|                              |                 |         |        |          |  |      
|Year ended December 31, 2004: |                 |         |        |          |  |       |        |        |   |   |        |       
|                             
|                             
|                             
|                             
|                              | U.S. federal    |         | $      | 44,235   |  |       | $      | 2,335  |   |   | $      | 46,570 | 
|                             
|                             
|                             
|                             
|                              | State and local |         |        | 8,111    |  |       |        | 543    |   |   |        | 8,654  | 
|                              |                 |         |        |          |  |       |        |        |   |   |        |       
|                              |                 | $       | 52,346 |          |  | $     | 2,878  |        |   | $ | 55,224 |       
|                              |                 |         |        |          |  |       |        |        |   |   |        |       
|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 |       
|                              |                 |         |        |          |  |       |        |        |   |   |        |       



|                                         |                                                                |                          |        |       |        |        |      |     |      |        |        |       |        |  |      |     |      |   |        |       |        |  |      |     |      | 
|---------------------------------------- | -------------------------------------------------------------- | ------------------------ | ------ | ----- | ------ | ------ | ---- | --- | ---- | ------ | ------ | ----- | ------ |  | ---- | --- | ---- | - | ------ | ----- | ------ |  | ---- | --- | ---- | 
|                                         |                                                                | Years Ended December 31,
|                                         |                                                                |                         
|                                         |                                                                | 2004                     |        | 2003  |        | 2002  
|                                         |                                                                |                          |        |       |        |       
|                                         |                                                                | Amount                   |        | %     |        | Amount |      | %   |      | Amount |        | %    
|                                         |                                                                |                          |        |       |        |        |      |     |      |        |        |      
|Tax expense at statutory rate            |                                                                | $                        | 49,434 |       |        |        | 35.0 |     |      | $      | 39,870 |       |        |  | 35.0 |     |      | $ | 27,902 |       |        |  | 35.0 |    
|                                        
|                                        
|                                        
|                                        
|Increase in income taxes resulting from: |                                                                |                          |        |       |        |        |      |     |      |        |        |       |        |  |      |     |      |   |        |       |        |  |      |    
|                                        
|                                        
|                                        
|                                        
|                                         | State and local income taxes, net of federal income tax effect |                          |        | 5,625 |        |        |      | 4.0 |      |        |        | 4,395 |        |  |      | 3.9 |      |   |        | 3,922 |        |  |      | 4.9 |     
|                                        
|                                        
|                                        
|                                        
|                                         | Effect of nondeductible expenses and other, net                |                          |        | 165   |        |        |      | 0.1 |      |        |        | 2,326 |        |  |      | 2.0 |      |   |        | 862   |        |  |      | 1.1 |     
|                                         |                                                                |                          |        |       |        |        |      |     |      |        |        |       |        |  |      |     |      |   |        |       |        |  |      |    
|                                         |                                                                | Total income tax expense |        | $     | 55,224 |        |      |     | 39.1 |        |        | $     | 46,591 |  |      |     | 40.9 |   |        | $     | 32,686 |  |      |     | 41.0 | 
|                                         |                                                                |                          |        |       |        |        |      |     |      |        |        |       |        |  |      |     |      |   |        |       |        |  |      |    

65



---



##### 



AMERIGROUP CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)




|                          |                                                                                                           |                                |   |        |         |   |   |        |        |  
|------------------------- | --------------------------------------------------------------------------------------------------------- | ------------------------------ | - | ------ | ------- | - | - | ------ | ------ | -
|                          |                                                                                                           | December 31,                  
|                          |                                                                                                           |                               
|                          |                                                                                                           | 2004                           |   | 2003  
|                          |                                                                                                           |                                |   |       
|Deferred tax assets:      |                                                                                                           |                                |   |        |         |   |   |       
|                         
|                         
|                         
|                         
|                          | Estimated claims incurred but not reported, a portion of which
    is deductible as paid for tax purposes |                                | $ | 2,160  |         |   | $ | 2,338  |       
|                         
|                         
|                         
|                         
|                          | Vacation, bonus and other accruals, deductible as paid for tax
    purposes                               |                                |   | 10,343 |         |   |   | 6,689  |       
|                         
|                         
|                         
|                         
|                          | Accounts receivable allowances, deductible as written off for
    tax purposes                            |                                |   | 590    |         |   |   | 762    |       
|                         
|                         
|                         
|                         
|                          | Start up costs, deductible in future periods for tax purposes                                             |                                |   | 552    |         |   |   | 718    |       
|                         
|                         
|                         
|                         
|                          | Goodwill, due to timing differences in book and tax amortization                                          |                                |   |       |         |   |   | 209    |       
|                         
|                         
|                         
|                         
|                          | Unearned revenue, a portion of which is includible in income as
    received for tax purposes             |                                |   | 2,636  |         |   |   | 4,330  |       
|                         
|                         
|                         
|                         
|                          | State net operating loss/credit carryforwards, deductible in
    future periods for tax purposes          |                                |   | 1,616  |         |   |   | 1,780  |       
|                          |                                                                                                           |                                |   |        |         |   |   |       
|                          |                                                                                                           | Gross deferred tax asset       |   |        | 17,897  |   |   |        | 16,826 |  
|                         
|                         
|                         
|                         
|Deferred tax liabilities: |                                                                                                           |                                |   |        |         |   |   |       
|                         
|                         
|                         
|                         
|                          | Goodwill, due to timing differences in book and tax amortization                                          |                                |   | (474   | )       |   |   |       |       
|                         
|                         
|                         
|                         
|                          | Property and equipment, due to timing differences in book and
    tax depreciation                        |                                |   | (8,822 | )       |   |   | (5,271 | )     
|                         
|                         
|                         
|                         
|                          | Deductible prepaid expenses and other                                                                     |                                |   | (2,217 | )       |   |   | (2,293 | )     
|                          |                                                                                                           |                                |   |        |         |   |   |       
|                          |                                                                                                           | Gross deferred tax liabilities |   |        | (11,513 | ) |   |        | (7,564 | )
|                          |                                                                                                           |                                |   |        |         |   |   |       
|                          |                                                                                                           | Net deferred tax asset         |   | $      | 6,384   |   |   | $      | 9,262  |  
|                          |                                                                                                           |                                |   |        |         |   |   |       







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



66



---



##### 



AMERIGROUP CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)










|    |                  
|--- | -----------------
|(8) | Stock Option Plan







67



---



##### 



AMERIGROUP CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)




|                                 |  |        |           |           |  |        |       |           |  |        |           |           |  |   |       |  |  |  |           |  |  |   |       | 
|-------------------------------- |  | ------ | --------- | --------- |  | ------ | ----- | --------- |  | ------ | --------- | --------- |  | - | ----- |  |  |  | --------- |  |  | - | ----- | 
|                                 |  | 2004   |           | 2003      |  | 2002  
|                                 |  |        |           |           |  |       
|                                 |  |        |           | Weighted- |  |        |       | Weighted- |  |        |           | Weighted-
|                                 |  |        |           | average   |  |        |       | average   |  |        |           | average  
|                                 |  |        |           | exercise  |  |        |       | exercise  |  |        |           | exercise 
|                                 |  | Shares |           | price     |  | Shares |       | price     |  | Shares |           | price    
|                                 |  |        |           |           |  |        |       |           |  |        |           |          
|Outstanding at beginning of year |  |        | 5,365,464 |           |  | $      | 10.50 |           |  |        | 4,829,868 |           |  | $ | 7.20  |  |  |  | 4,149,468 |  |  | $ | 3.96  | 
|                                
|                                
|                                
|                                
|Granted                          |  |        | 1,534,076 |           |  |        | 21.71 |           |  |        | 2,297,346 |           |  |   | 15.43 |  |  |  | 2,155,786 |  |  |   | 11.06 | 
|                                
|                                
|                                
|                                
|Exercised                        |  |        | 1,578,796 |           |  |        | 7.46  |           |  |        | 1,390,278 |           |  |   | 7.39  |  |  |  | 1,295,096 |  |  |   | 2.94  | 
|                                
|                                
|                                
|                                
|Forfeited                        |  |        | 511,872   |           |  |        | 15.84 |           |  |        | 371,472   |           |  |   | 10.26 |  |  |  | 180,290   |  |  |   | 9.54  | 
|                                 |  |        |           |           |  |        |       |           |  |        |           |           |  |   |       |  |  |  |           |  |  |   |       | 
|Outstanding at end of year       |  |        | 4,808,872 |           |  | $      | 14.73 |           |  |        | 5,365,464 |           |  | $ | 10.50 |  |  |  | 4,829,868 |  |  | $ | 7.20  | 
|                                 |  |        |           |           |  |        |       |           |  |        |           |           |  |   |       |  |  |  |           |  |  |   |       | 



|                         |  |             |           |              |  |                |     |             |  |                |       |  |  |  |           |  |  |   |       | 
|------------------------ |  | ----------- | --------- | ------------ |  | -------------- | --- | ----------- |  | -------------- | ----- |  |  |  | --------- |  |  | - | ----- | 
|                         |  |             |           | Weighted-    |  |                |     |             |  |               
|                         |  |             |           | average      |  |                |     |             |  |               
|                         |  |             |           | remaining    |  | Weighted-      |     |             |  | Weighted-     
|                         |  | Options     |           | contractual  |  | average        |     | Options     |  | average       
|Range of exercise prices |  | outstanding |           | life (years) |  | exercise price |     | exercisable |  | exercise price
|                         |  |             |           |              |  |                |     |             |  |               
|$0.00  $3.81            |  |             | 250,102   |              |  |                | 2.1 |             |  | $              | 0.70  |  |  |  | 250,102   |  |  | $ | 0.70  | 
|                        
|                        
|                        
|                        
|$3.82  $7.62            |  |             | 452,968   |              |  |                | 5.3 |             |  |                | 6.88  |  |  |  | 391,733   |  |  |   | 6.79  | 
|                        
|                        
|                        
|                        
|$7.63  $11.42           |  |             | 919,832   |              |  |                | 6.7 |             |  |                | 10.30 |  |  |  | 554,713   |  |  |   | 10.42 | 
|                        
|                        
|                        
|                        
|$11.43  $15.23          |  |             | 917,656   |              |  |                | 7.6 |             |  |                | 13.20 |  |  |  | 582,711   |  |  |   | 13.21 | 
|                        
|                        
|                        
|                        
|$15.24  $19.04          |  |             | 1,543,438 |              |  |                | 8.6 |             |  |                | 17.41 |  |  |  | 677,883   |  |  |   | 17.25 | 
|                        
|                        
|                        
|                        
|$19.05  $22.85          |  |             | 334,876   |              |  |                | 8.9 |             |  |                | 21.26 |  |  |  | 91,251    |  |  |   | 21.52 | 
|                        
|                        
|                        
|                        
|$22.86  $26.67          |  |             | 20,000    |              |  |                | 9.6 |             |  |                | 22.93 |  |  |  |          |  |  |   |      | 
|                        
|                        
|                        
|                        
|$30.46  $34.27          |  |             | 340,000   |              |  |                | 9.9 |             |  |                | 30.51 |  |  |  |          |  |  |   |      | 
|                        
|                        
|                        
|                        
|$34.28  $38.08          |  |             | 30,000    |              |  |                | 0.2 |             |  |                | 38.08 |  |  |  | 7,500     |  |  |   | 38.08 | 
|                         |  |             |           |              |  |                |     |             |  |                |       |  |  |  |           |  |  |   |       | 
|                         |  |             | 4,808,872 |              |  |                | 7.5 |             |  | $              | 14.73 |  |  |  | 2,555,893 |  |  | $ | 11.84 | 
|                         |  |             |           |              |  |                |     |             |  |                |       |  |  |  |           |  |  |   |       | 







68



---



##### 



AMERIGROUP CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)




|    |                   
|--- | ------------------
|(9) | Earnings Per Share



|                              |                                                                                               |                         |   |            |  |      |   |            |  |  |   |            | 
|----------------------------- | --------------------------------------------------------------------------------------------- | ----------------------- | - | ---------- |  | ---- | - | ---------- |  |  | - | ---------- | 
|                              |                                                                                               | Year Ended December 31,
|                              |                                                                                               |                        
|                              |                                                                                               | 2004                    |   | 2003       |  | 2002
|                              |                                                                                               |                         |   |            |  |     
|Basic net income per share:   |                                                                                               |                         |   |            |  |      |   |            |  |  |   |           
|                             
|                             
|                             
|                             
|                              | Net income                                                                                    |                         | $ | 86,014     |  |      | $ | 67,324     |  |  | $ | 47,036     | 
|                              |                                                                                               |                         |   |            |  |      |   |            |  |  |   |           
|                              | Net income attributable to common stockholders                                                |                         | $ | 86,014     |  |      | $ | 67,324     |  |  | $ | 47,036     | 
|                              |                                                                                               |                         |   |            |  |      |   |            |  |  |   |           
|                              | Weighted average number of common shares outstanding                                          |                         |   | 49,721,945 |  |      |   | 43,245,409 |  |  |   | 40,355,456 | 
|                              |                                                                                               |                         |   |            |  |      |   |            |  |  |   |           
|                              | Basic net income per share                                                                    |                         | $ | 1.73       |  |      | $ | 1.56       |  |  | $ | 1.17       | 
|                              |                                                                                               |                         |   |            |  |      |   |            |  |  |   |           
|Diluted net income per share: |                                                                                               |                         |   |            |  |      |   |            |  |  |   |           
|                             
|                             
|                             
|                             
|                              | Net income attributable to common stockholders                                                |                         | $ | 86,014     |  |      | $ | 67,324     |  |  | $ | 47,036     | 
|                              |                                                                                               |                         |   |            |  |      |   |            |  |  |   |           
|                              | Diluted net income attributable to common stockholders                                        |                         | $ | 86,014     |  |      | $ | 67,324     |  |  | $ | 47,036     | 
|                              |                                                                                               |                         |   |            |  |      |   |            |  |  |   |           
|                              | Weighted average number of common shares outstanding                                          |                         |   | 49,721,945 |  |      |   | 43,245,409 |  |  |   | 40,355,456 | 
|                             
|                             
|                             
|                             
|                              | Dilutive effect of stock options (as determined by applying the
    treasury stock method)    |                         |   | 2,115,634  |  |      |   | 2,357,891  |  |  |   | 2,583,388  | 
|                              |                                                                                               |                         |   |            |  |      |   |            |  |  |   |           
|                              | Weighted average number of common shares and dilutive potential
    common shares outstanding |                         |   | 51,837,579 |  |      |   | 45,603,300 |  |  |   | 42,938,844 | 
|                              |                                                                                               |                         |   |            |  |      |   |            |  |  |   |           
|                              | Diluted net income per share                                                                  |                         | $ | 1.66       |  |      | $ | 1.48       |  |  | $ | 1.10       | 
|                              |                                                                                               |                         |   |            |  |      |   |            |  |  |   |           



|     |                                    
|---- | -----------------------------------
|(10) | Fair Value of Financial Instruments











|     |                              
|---- | -----------------------------
|(11) | Commitments and Contingencies



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



69



---



##### 



AMERIGROUP CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)




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





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



|                         |  |      |         |      |  |   |        |  
|------------------------ |  | ---- | ------- | ---- |  | - | ------ | -
|                         |  | 2004 |         | 2003
|                         |  |      |         |     
|Equipment                |  | $    | 17,247  |      |  | $ | 17,268 |  
|                        
|                        
|                        
|                        
|Accumulated amortization |  |      | (11,781 | )    |  |   | (7,794 | )
|                         |  |      |         |      |  |   |        |  
|                         |  | $    | 5,466   |      |  | $ | 9,474  |  
|                         |  |      |         |      |  |   |        |  





|                                                         |                                                                  |                |        |                  |  |   |        |        | 
|-------------------------------------------------------- | ---------------------------------------------------------------- | -------------- | ------ | ---------------- |  | - | ------ | ------ | 
|                                                         |                                                                  | Capital Leases |        | Operating Leases
|                                                         |                                                                  |                |        |                 
|2005                                                     |                                                                  | $              | 3,387  |                  |  | $ | 8,878  |       
|                                                        
|                                                        
|                                                        
|                                                        
|2006                                                     |                                                                  |                | 1,751  |                  |  |   | 8,474  |       
|                                                        
|                                                        
|                                                        
|                                                        
|2007                                                     |                                                                  |                | 871    |                  |  |   | 7,677  |       
|                                                        
|                                                        
|                                                        
|                                                        
|2008                                                     |                                                                  |                | 426    |                  |  |   | 5,262  |       
|                                                        
|                                                        
|                                                        
|                                                        
|2009                                                     |                                                                  |                |       |                  |  |   | 4,378  |       
|                                                        
|                                                        
|                                                        
|                                                        
|Thereafter                                               |                                                                  |                |       |                  |  |   | 22,332 |       
|                                                         |                                                                  |                |        |                  |  |   |        |       
|                                                         | Total minimum lease payments                                     |                |        | 6,435            |  |   | $      | 57,001 | 
|                                                         |                                                                  |                |        |                  |  |   |        |       
|Amount representing interest                             |                                                                  |                | (389   | )                |  |   |        |       
|                                                         |                                                                  |                |        |                  |  |   |        |       
|                                                         | Present value of minimum lease payments                          |                |        | 6,046            |  |   |        |        | 
|                                                        
|                                                        
|                                                        
|                                                        
|Current installments of obligations under capital leases |                                                                  |                | (3,168 | )                |  |   |        |       
|                                                         |                                                                  |                |        |                  |  |   |        |       
|                                                         | Obligations under capital leases, excluding current installments |                | $      | 2,878            |  |   |        |        | 
|                                                         |                                                                  |                |        |                  |  |   |        |       





70



---



##### 



AMERIGROUP CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)




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







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







|    |                    
|--- | -------------------
|(f) | Other Contingencies



71



---



##### 



AMERIGROUP CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)






|     |                             
|---- | ----------------------------
|(12) | Employee Stock Purchase Plan





|     |                                     
|---- | ------------------------------------
|(13) | Quarterly Financial Data (unaudited)

|                                                                                       |  |                    |            |         |  |              |            |             |  |   |            |  |  |   |            | 
|-------------------------------------------------------------------------------------- |  | ------------------ | ---------- | ------- |  | ------------ | ---------- | ----------- |  | - | ---------- |  |  | - | ---------- | 
|                                                                                       |  | Three months ended
|                                                                                       |  |                   
|2004                                                                                   |  | March 31           |            | June 30 |  | September 30 |            | December 31
|                                                                                       |  |                    |            |         |  |              |            |            
|Premium revenue                                                                        |  | $                  | 422,335    |         |  | $            | 435,918    |             |  | $ | 468,156    |  |  | $ | 486,982    | 
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|Health benefits expenses                                                               |  |                    | 342,247    |         |  |              | 354,415    |             |  |   | 374,085    |  |  |   | 398,350    | 
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|Selling, general and administrative expenses                                           |  |                    | 45,487     |         |  |              | 43,728     |             |  |   | 52,124     |  |  |   | 50,576     | 
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|Income before income taxes                                                             |  |                    | 30,756     |         |  |              | 34,532     |             |  |   | 39,669     |  |  |   | 36,281     | 
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|Net income                                                                             |  |                    | 18,438     |         |  |              | 20,846     |             |  |   | 24,333     |  |  |   | 22,397     | 
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|Diluted net income per share                                                           |  |                    | 0.36       |         |  |              | 0.40       |             |  |   | 0.47       |  |  |   | 0.43       | 
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|Weighted average number of common shares and dilutive potential
    shares outstanding |  |                    | 51,258,930 |         |  |              | 51,582,960 |             |  |   | 51,955,940 |  |  |   | 52,552,486 | 

72



---



##### 



AMERIGROUP CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)


|                                                                                       |  |                    |            |         |  |              |            |             |  |   |            |  |  |   |            | 
|-------------------------------------------------------------------------------------- |  | ------------------ | ---------- | ------- |  | ------------ | ---------- | ----------- |  | - | ---------- |  |  | - | ---------- | 
|                                                                                       |  | 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                                                           |  |                    | 0.32       |         |  |              | 0.41       |             |  |   | 0.41       |  |  |   | 0.34       | 
|                                                                                      
|                                                                                      
|                                                                                      
|                                                                                      
|Weighted average number of common shares and dilutive potential
    shares outstanding |  |                    | 43,263,559 |         |  |              | 43,819,299 |             |  |   | 44,657,759 |  |  |   | 50,672,583 | 



|     |                 
|---- | ----------------
|(14) | Subsequent Event







73



---



##### 



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
















74



---



##### 



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   |     | Expense    |  | Expense     |     | of Year    
|                                           |  |           |     |            |  |             |     |            
|Year Ended December 31, 2004               |  | $         |    |            |  | $           |    |             |  | $ |    |  |  | $ |    | 
|                                          
|                                          
|                                          
|                                          
|Year Ended December 31, 2003               |  |           | 785 |            |  |             |    |             |  |   | 785 |  |  |   |    | 
|                                          
|                                          
|                                          
|                                          
|Year Ended December 31, 2002               |  |           |    |            |  |             | 785 |             |  |   |    |  |  |   | 785 | 

75



---



##### 








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








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



| |     |                                                  
| | --- | -------------------------------------------------
| | (a) | Evaluation of Disclosure Controls and Procedures.





| |     |                                           
| | --- | ------------------------------------------
| | (b) | Internal Control over Financial Reporting.

MANAGEMENTS REPORT ON INTERNAL CONTROL OVER FINANCIAL
REPORTING




Internal Control Integrated Framework






| |     |                              
| | --- | -----------------------------
| | (c) | Changes in Internal Controls.





| |     |      
| | --- | -----
| | (d) | Other





| |   |                                                                                                                                                                                                                           
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | pertain to the maintenance of records that in reasonable detail
    accurately and fairly reflect the transactions and dispositions
    of the assets of the company;                                                     
|
| |  | provide reasonable assurance that transactions are recorded as
    necessary to permit preparation of financial statements in
    accordance with U.S. generally accepted accounting
    principles, and that receipts and

76



---



##### 



| |   |                                                                                                                                                                                                                          
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | expenditures of the company are being made only in accordance
    with authorizations of management and directors of the
    company; and                                                                                
|
| |  | provide reasonable assurance regarding prevention or timely
    detection of unauthorized acquisition, use, or disposition of
    the companys assets that could have a material effect on
    the financial statements.





|         |                  
|-------- | -----------------
|Item 9B. | Other Information



77



---



##### 



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM






Internal Control  Integrated Framework,








Internal
Control  Integrated Framework, Internal Control 
Integrated Framework,










78



---



##### 






PART III.







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















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








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








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








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






PART IV.







|         |                                           
|-------- | ------------------------------------------
|Item 15. | Exhibits and Financial Statement Schedules

Financial Statements.




Financial Statement Schedules.




79



---



##### 



Exhibits.




|        |    |             |  |                                                                                                                                                                                                                                                                                                                                                                         
|------- | -- | ----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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. 333-37410)).                                                                                                                                                                 
|        | 10 | .6.7        |  | Amendment 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 January 1, 2005 (incorporated by
    reference to exhibit 10.6 to our Registration Statement on
    Form S-3 (no. 333-108831), filed on October 9,
    2003).
|        | 10 | .6.8        |  | Amendment 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 January 1, 2005 (incorporated
    by reference to exhibit 10.6 to our Registration Statement
    on Form S-3 (no. 333-108831), filed on October 9,
    2003).
|        | 10 | .7.1        |  | Amended and Restated Credit Agreement, among AMERIGROUP
    Corporation, the Guarantors, Lenders, and Arrangers, named
    therein, dated October 22, 2003 (incorporated by reference
    to exhibit 10.17.3 to our Quarterly Report on
    Form 10-Q for the quarter ended September 30, 2003,
    filed on November 5, 2003).                                         
|        | 10 | .7.2        |  | Amended and Restated Security Agreement, between Grantors of
    Bank of America, N.A. dated, October 22, 2003 (incorporated
    by reference to exhibit 10.17.4 to our Quarterly Report on
    Form 10-Q for the quarter ended September 30, 2003,
    filed on November 5, 2003).                                                                                     
|        | 10 | .7.3        |  | Amended and Restated Pledge Agreement between AMERIGROUP
    Corporation and Bank of America, N.A., dated October 22,
    2003 (incorporated by reference to exhibit 10.17.5 to our
    Quarterly Report on Form 10-Q for the quarter ended
    September 30, 2003, filed on November 5, 2003).                                                                         
|        | 10 | .7.4        |  | Amended and Restated Pledge Agreement (New Jersey) between
    AMERIGROUP Corporation and Bank of America, N.A., dated
    October 22, 2003 (incorporated by reference to exhibit
    10.17.6 to our Quarterly Report on Form 10-Q for the
    quarter ended September 30, 2003, filed on November 5,
    2003).                                                        
|        | 10 | .10         |  | Form 1994 Stock Plan of the Company (incorporated by reference
    to exhibit 10.10 to our Registration Statement on
    Form S-1 (No. 333-37410)).                                                                                                                                                                                                                     
|        | 10 | .11         |  | Form 2000 Equity Incentive Plan (incorporated by reference to
    exhibit 10.11 to our Registration Statement on
    Form S-1 (No. 333-37410)).                                                                                                                                                                                                                         
|        | 10 | .14         |  | Definitive Agreement dated October 26, 2004, between
    CarePlus, LLC and AMERIGROUP Corporation (incorporated by
    reference to our Current Report on Form 8-K, filed on
    November 1, 2004).                                                                                                                                                                     
|        | 10 | .15         |  | AMERIGROUP Corporation announces the appointment of E. Paul
    Dunn, Jr. as their new Executive Vice President and Chief
    Financial Officer effective November 8, 2004 (incorporated
    by reference to our Current Report on Form 8-K, filed on
    November 1, 2004).                                                                                            
|        | 10 | .16         |  | Form the Officer and Director Indemnification Agreement
    (incorporated by reference to exhibit 10.16 to our
    Registration Statement on Form S-1 (No. 333-37410).                                                                                                                                                                                                  
|        | 10 | .17         |  | Form of Employee Noncompete, Nondisclosure and Developments
    Agreement (incorporated by reference to exhibit 10.1 to our
    Current Report on Form 8-K, filed on February 23,
    2005).                                                                                                                                                                            
|        | 10 | .18         |  | Form of Incentive Stock Option Agreement (incorporated by
    reference to exhibit 10.2 to our Current Report of
    Form 8-K, filed on January 27, 2005).                                                                                                                                                                                                              

80



---



##### 



|        |    |             |  |                                                                                                                                                                                                                                                                                                                                                                                                   
|------- | -- | ----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|Number  |    | Description
|        |    |            
|        | 10 | .19         |  | Form of Nonqualified Stock Option Agreement (incorporated by
    reference to exhibit 10.3.1 to our Current Report on
    Form 8-K filed on February 8, 2005).                                                                                                                                                                                                                                    
|        | 10 | .20         |  | Form of AMERIGROUP Corporation Nonqualified Stock Option
    Agreement (incorporated by reference to exhibit 10.3 to our
    Current Form 8-K filed on January 27, 2005).                                                                                                                                                                                                                         
|        | 10 | .21         |  | The Board of Directors approved and adopted a resolution for
    director compensation practices on February 10, 2005
    (incorporated by reference to our Current Report on
    Form 8-K, filed on February 15, 2005).                                                                                                                                                                          
|        | 10 | .25.2       |  | Amendment No. 2, dated November 19, 2004, to the
    June 28, 2002 Medical Contract between the State of
    Florida, Agency for Health Care Administration and Physicians
    Healthcare Plans, Inc. (AHCA Contract No. FA523)
    (incorporated by reference to exhibit 10.25 to our
    Quarterly Report on Form 10-Q for the quarter ended
    September 30, 2004, filed on November 5, 2004).
|        | 10 | .45         |  | Form 2003 Equity Incentive Plan of the Company (incorporated by
    reference to exhibit 10.37 to our Quarterly Report on
    Form 10-Q for the quarter ended June 30, 2003, filed
    on August 11, 2003).                                                                                                                                                                                       
|        | 10 | .46         |  | Form 2003 Cash Incentive Plan of the Company (incorporated by
    reference to exhibit 10.38 to our Quarterly Report of
    Form 10-Q for the last quarter ended June 30, 2003,
    filed on August 11, 2003).                                                                                                                                                                                    
|        | 10 | .47         |  | Closing Agreement dated January 3, 2005, between CarePlus,
    LLC and AMERIGROUP Corporation (incorporated by reference to
    exhibit 10.47 to our Current Report on Form 8-K, filed
    on January 6, 2005).                                                                                                                                                                                   
|        | 10 | .48         |  | Form of Separation Agreement between AMERIGROUP Corporation and
    Lorenzo Childress, Jr., M.D. (incorporated by reference to
    exhibit 10.1 to our Current Report on Form 8-K filed
    March 4, 2005).                                                                                                                                                                                       
|        | 10 | .49         |  | Form of 2005 Executive Deferred Compensation Plan between
    AMERIGROUP Corporation and Executive Associates (incorporated by
    reference to exhibit 10.2 to our Current Report on
    Form 8-K filed March 4, 2005).                                                                                                                                                                          
|        | 10 | .50         |  | Form of 2005 Non-Employee Directors Deferred Compensation Plan
    between AMERIGROUP Corporation and Non-Executive Associates
    (incorporated by reference to exhibit 10.3 to our Current
    Report on Form 8-K filed March 4, 2005).                                                                                                                                                         
|        | 21 | .1          |  | List of Subsidiaries                                                                                                                                                                                                                                                                                                                                                                              
|        | 23 | .1          |  | Consent of KPMG, LLP, Independent Registered Public Accounting
    Firm, 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 8, 2005.                                                                                                                                                                                                                                                                      
|        | 31 | .2          |  | Certification of Chief Financial Officer pursuant to
    Section 302 of Sarbanes-Oxley Act of 2002, dated
    March 8, 2005.                                                                                                                                                                                                                                                                      
|        | 32 |             |  | Certification of Chief Executive Officer and Chief Financial
    Officer pursuant to Section 906 of Sarbanes-Oxley Act of
    2002, dated March 8, 2005.                                                                                                                                                                                                                                          

81



---



##### 



SIGNATURES






| |                       
| | ----------------------
| | AMERIGROUP Corporation



| |     |                      
| | --- | ---------------------
| | By: | /s/ E. Paul Dunn, Jr.

| |                                                                 
| | ----------------------------------------------------------------
| |                                                                 
| | Name: E. Paul Dunn, Jr.                                         
| | Title:  Executive Vice President and Chief Financial
    Officer



|                                                           |  |                                                           |  |               |  | 
|---------------------------------------------------------- |  | --------------------------------------------------------- |  | ------------- |  | 
|Signatures                                                 |  | Title                                                     |  | Date         
|                                                           |  |                                                           |  |              
|                                                          
|/s/ Jeffrey L. McWatersJeffrey
    L. McWaters             |  | Chairman and Chief Executive Officer                      |  | March 8, 2005
|                                                          
|/s/ E. Paul
    Dunn, Jr.E.
    Paul Dunn, Jr.             |  | Chief Financial Officer and
    Executive Vice President  |  | March 8, 2005
|                                                          
|/s/ Kathleen K. TothKathleen
    K. Toth                   |  | Chief Accounting Officer and
    Executive Vice President |  | March 8, 2005
|                                                          
|/s/ Thomas E. CappsThomas
    E. Capps                     |  | Director                                                  |  | March 8, 2005
|                                                          
|/s/ Jeffrey B. ChildJeffrey
    B. Child                   |  | Director                                                  |  | March 8, 2005
|                                                          
|/s/ William J. McBrideWilliam
    J. McBride               |  | Director                                                  |  | March 8, 2005
|                                                          
|/s/ Uwe E.
    Reinhardt, Ph.D.Uwe
    E. Reinhardt, Ph.D. |  | Director                                                  |  | March 8, 2005
|                                                          
|/s/ Richard D. ShirkRichard
    D. Shirk                   |  | Director                                                  |  | March 8, 2005

82



---



##### 



EXHIBIT INDEX


|        |    |             |  |                                                                                                                                                                                                                                                                                                                                                                         
|------- | -- | ----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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. 333-37410)).                                                                                                                                                                 
|        | 10 | .6.7        |  | Amendment 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 January 1, 2005 (incorporated by
    reference to exhibit 10.6 to our Registration Statement on
    Form S-3 (no. 333-108831), filed on October 9,
    2003).
|        | 10 | .6.8        |  | Amendment 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 January 1, 2005 (incorporated
    by reference to exhibit 10.6 to our Registration Statement
    on Form S-3 (no. 333-108831), filed on October 9,
    2003).
|        | 10 | .7.1        |  | Amended and Restated Credit Agreement, among AMERIGROUP
    Corporation, the Guarantors, Lenders, and Arrangers, named
    therein, dated October 22, 2003 (incorporated by reference
    to exhibit 10.17.3 to our Quarterly Report on
    Form 10-Q for the quarter ended September 30, 2003,
    filed on November 5, 2003).                                         
|        | 10 | .7.2        |  | Amended and Restated Security Agreement, between Grantors of
    Bank of America, N.A. dated, October 22, 2003 (incorporated
    by reference to exhibit 10.17.4 to our Quarterly Report on
    Form 10-Q for the quarter ended September 30, 2003,
    filed on November 5, 2003).                                                                                     
|        | 10 | .7.3        |  | Amended and Restated Pledge Agreement between AMERIGROUP
    Corporation and Bank of America, N.A., dated October 22,
    2003 (incorporated by reference to exhibit 10.17.5 to our
    Quarterly Report on Form 10-Q for the quarter ended
    September 30, 2003, filed on November 5, 2003).                                                                         
|        | 10 | .7.4        |  | Amended and Restated Pledge Agreement (New Jersey) between
    AMERIGROUP Corporation and Bank of America, N.A., dated
    October 22, 2003 (incorporated by reference to exhibit
    10.17.6 to our Quarterly Report on Form 10-Q for the
    quarter ended September 30, 2003, filed on November 5,
    2003).                                                        
|        | 10 | .10         |  | Form 1994 Stock Plan of the Company (incorporated by reference
    to exhibit 10.10 to our Registration Statement on
    Form S-1 (No. 333-37410)).                                                                                                                                                                                                                     
|        | 10 | .11         |  | Form 2000 Equity Incentive Plan (incorporated by reference to
    exhibit 10.11 to our Registration Statement on
    Form S-1 (No. 333-37410)).                                                                                                                                                                                                                         
|        | 10 | .14         |  | Definitive Agreement dated October 26, 2004, between
    CarePlus, LLC and AMERIGROUP Corporation (incorporated by
    reference to our Current Report on Form 8-K, filed on
    November 1, 2004).                                                                                                                                                                     
|        | 10 | .15         |  | AMERIGROUP Corporation announces the appointment of E. Paul
    Dunn, Jr. as their new Executive Vice President and Chief
    Financial Officer effective November 8, 2004 (incorporated
    by reference to our Current Report on Form 8-K, filed on
    November 1, 2004).                                                                                            
|        | 10 | .16         |  | Form the Officer and Director Indemnification Agreement
    (incorporated by reference to exhibit 10.16 to our
    Registration Statement on Form S-1 (No. 333-37410).                                                                                                                                                                                                  
|        | 10 | .17         |  | Form of Employee Noncompete, Nondisclosure and Developments
    Agreement (incorporated by reference to exhibit 10.1 to our
    Current Report on Form 8-K, filed on February 23,
    2005).                                                                                                                                                                            
|        | 10 | .18         |  | Form of Incentive Stock Option Agreement (incorporated by
    reference to exhibit 10.2 to our Current Report of
    Form 8-K, filed on January 27, 2005).                                                                                                                                                                                                              
|        | 10 | .19         |  | Form of Nonqualified Stock Option Agreement (incorporated by
    reference to exhibit 10.3.1 to our Current Report on
    Form 8-K filed on February 8, 2005).                                                                                                                                                                                                          
|        | 10 | .20         |  | Form of AMERIGROUP Corporation Nonqualified Stock Option
    Agreement (incorporated by reference to exhibit 10.3 to our
    Current Form 8-K filed on January 27, 2005).                                                                                                                                                                                               



---



##### 



|        |    |             |  |                                                                                                                                                                                                                                                                                                                                                                                                   
|------- | -- | ----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|Number  |    | Description
|        |    |            
|        | 10 | .21         |  | The Board of Directors approved and adopted a resolution for
    director compensation practices on February 10, 2005
    (incorporated by reference to our Current Report on
    Form 8-K, filed on February 15, 2005).                                                                                                                                                                          
|        | 10 | .25.2       |  | Amendment No. 2, dated November 19, 2004, to the
    June 28, 2002 Medical Contract between the State of
    Florida, Agency for Health Care Administration and Physicians
    Healthcare Plans, Inc. (AHCA Contract No. FA523)
    (incorporated by reference to exhibit 10.25 to our
    Quarterly Report on Form 10-Q for the quarter ended
    September 30, 2004, filed on November 5, 2004).
|        | 10 | .45         |  | Form 2003 Equity Incentive Plan of the Company (incorporated by
    reference to exhibit 10.37 to our Quarterly Report on
    Form 10-Q for the quarter ended June 30, 2003, filed
    on August 11, 2003).                                                                                                                                                                                       
|        | 10 | .46         |  | Form 2003 Cash Incentive Plan of the Company (incorporated by
    reference to exhibit 10.38 to our Quarterly Report of
    Form 10-Q for the last quarter ended June 30, 2003,
    filed on August 11, 2003).                                                                                                                                                                                    
|        | 10 | .47         |  | Closing Agreement dated January 3, 2005, between CarePlus,
    LLC and AMERIGROUP Corporation (incorporated by reference to
    exhibit 10.47 to our Current Report on Form 8-K, filed
    on January 6, 2005).                                                                                                                                                                                   
|        | 10 | .48         |  | Form of Separation Agreement between AMERIGROUP Corporation and
    Lorenzo Childress, Jr., M.D. (incorporated by
    reference to exhibit 10.1 to our Current Report on
    Form 8-K filed March 4, 2005).                                                                                                                                                                                       
|        | 10 | .49         |  | Form of 2005 Executive Deferred Compensation Plan between
    AMERIGROUP Corporation and Executive Associates (incorporated by
    reference to exhibit 10.2 to our Current Report on
    Form 8-K filed March 4, 2005).                                                                                                                                                                          
|        | 10 | .50         |  | Form of 2005 Non-Employee Directors Deferred Compensation Plan
    between AMERIGROUP Corporation and Non-Executive Associates
    (incorporated by reference to exhibit 10.3 to our Current
    Report on Form 8-K filed March 4, 2005).                                                                                                                                                         
|        | 21 | .1          |  | List of Subsidiaries                                                                                                                                                                                                                                                                                                                                                                              
|        | 23 | .1          |  | Consent of KPMG, LLP, Independent Registered Public Accounting
    Firm, 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 8, 2005.                                                                                                                                                                                                                                                                      
|        | 31 | .2          |  | Certification of Chief Financial Officer pursuant to
    Section 302 of Sarbanes-Oxley Act of 2002, dated
    March 8, 2005.                                                                                                                                                                                                                                                                      
|        | 32 |             |  | Certification of Chief Executive Officer and Chief Financial
    Officer pursuant to Section 906 of Sarbanes-Oxley Act of
    2002, dated March 8, 2005.