##### 









UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549


FORM 10-Q

|   |  |                                                                                             
|-- |  | --------------------------------------------------------------------------------------------
|þ  |  | QUARTERLY REPORT PURSUANT TO SECTION 13
    OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
|  
|   |  | For the quarterly period ended
    September 30, 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



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AMERIGROUP Corporation

(Exact name of registrants 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,
    VA                      |  | 23462                                   
|(Address of principal executive
    offices)                       |  | (Zip Code)                              

Registrants telephone number, including
area code: (757) 490-6900

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

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

As of November 1, 2004, there were
25,025,034 shares outstanding of AMERIGROUPs common
stock, par value $0.01.



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##### 



AMERIGROUP CORPORATION AND
SUBSIDIARIES

TABLE OF CONTENTS

|                              |  |                                                                                                                         |  |   
|----------------------------- |  | ----------------------------------------------------------------------------------------------------------------------- |  | --
|PART I. FINANCIAL INFORMATION
|Item 1.                       |  | Financial Statements                                                                                                    |  |   
|                              |  | Condensed Consolidated Balance Sheets as of
    September 30, 2004 and December 31, 2003                                |  | 3 
|                              |  | Condensed Consolidated Income Statements for the
    three and nine month periods ended September 30, 2004 and
    2003 |  | 4 
|                              |  | Condensed Consolidated Statements of Cash Flows
    for the nine month periods ended September 30, 2004 and 2003        |  | 5 
|                              |  | Notes to Condensed Consolidated Financial
    Statements                                                                |  | 6 
|Item 2.                       |  | Managements Discussion and Analysis of
    Financial Condition and Results of Operations                               |  | 9 
|Item 3.                       |  | Quantitative and Qualitative Disclosures About
    Market Risk                                                          |  | 15
|Item 4.                       |  | Controls and Procedures                                                                                                 |  | 15
|                             
|PART II. OTHER INFORMATION   
|Item 1.                       |  | Legal Proceedings                                                                                                       |  | 17
|Item 2.                       |  | Unregistered Sales of Equity Securities and Use
    of Proceeds                                                         |  | 17
|Item 3.                       |  | Defaults Upon Senior Securities                                                                                         |  | 17
|Item 4.                       |  | Submission of Matters to a Vote of Security
    Holders                                                                 |  | 17
|Item 5.                       |  | Other Information                                                                                                       |  | 17
|Item 6.                       |  | Exhibits                                                                                                                |  | 18

2



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##### 



PART I. FINANCIAL INFORMATION



|        |                     
|------- | --------------------
|Item 1. | Financial Statements

AMERIGROUP CORPORATION AND
SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE
SHEETS

(Dollars in thousands)


|                                                                          |                                                                                                                                                                                     |                            |         |              |         |   |         |         |         | 
|------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------- | ------- | ------------ | ------- | - | ------- | ------- | ------- | 
|                                                                          |                                                                                                                                                                                     | September 30,              |         | December 31,
|                                                                          |                                                                                                                                                                                     | 2004                       |         | 2003        
|                                                                          |                                                                                                                                                                                     |                            |         |             
|ASSETS                                                                   
|Current assets:                                                           |                                                                                                                                                                                     |                            |         |              |         |   |         |        
|                                                                          | Cash and cash equivalents                                                                                                                                                           |                            | $       | 296,123      |         |   | $       | 407,220 |        
|                                                                          | Short-term investments                                                                                                                                                              |                            |         | 66,783       |         |   |         | 8,750   |        
|                                                                          | Premium receivables                                                                                                                                                                 |                            |         | 43,920       |         |   |         | 38,259  |        
|                                                                          | Deferred income taxes                                                                                                                                                               |                            |         | 11,641       |         |   |         | 10,164  |        
|                                                                          | Prepaid expenses and other current assets                                                                                                                                           |                            |         | 13,488       |         |   |         | 15,995  |        
|                                                                          |                                                                                                                                                                                     |                            |         |              |         |   |         |        
|                                                                          |                                                                                                                                                                                     | Total current assets       |         |              | 431,955 |   |         |         | 480,388 | 
|Long-term investments                                                     |                                                                                                                                                                                     |                            | 220,839 |              |         |   | 119,133 |        
|Investments on deposit for licensure                                      |                                                                                                                                                                                     |                            | 37,663  |              |         |   | 35,346  |        
|Property and equipment, net                                               |                                                                                                                                                                                     |                            | 34,264  |              |         |   | 31,734  |        
|Software, net                                                             |                                                                                                                                                                                     |                            | 11,636  |              |         |   | 10,424  |        
|Other long-term assets                                                    |                                                                                                                                                                                     |                            | 4,939   |              |         |   | 4,598   |        
|Goodwill and other intangible assets, net                                 |                                                                                                                                                                                     |                            | 141,481 |              |         |   | 144,398 |        
|                                                                          |                                                                                                                                                                                     |                            |         |              |         |   |         |        
|                                                                          |                                                                                                                                                                                     | $                          | 882,777 |              |         | $ | 826,021 |        
|                                                                          |                                                                                                                                                                                     |                            |         |              |         |   |         |        
|                                                                         
|LIABILITIES AND STOCKHOLDERS
    EQUITY                                 
|Current liabilities:                                                      |                                                                                                                                                                                     |                            |         |              |         |   |         |        
|                                                                          | Claims payable                                                                                                                                                                      |                            | $       | 236,224      |         |   | $       | 239,532 |        
|                                                                          | Accounts payable                                                                                                                                                                    |                            |         | 2,739        |         |   |         | 5,523   |        
|                                                                          | Accrued expenses, capital leases and other
    current liabilities                                                                                                                  |                            |         | 64,026       |         |   |         | 53,431  |        
|                                                                          | Unearned revenue                                                                                                                                                                    |                            |         | 30,574       |         |   |         | 54,324  |        
|                                                                          |                                                                                                                                                                                     |                            |         |              |         |   |         |        
|                                                                          |                                                                                                                                                                                     | Total current liabilities  |         |              | 333,563 |   |         |         | 352,810 | 
|Deferred income taxes, capital leases and other
    long-term liabilities |                                                                                                                                                                                     |                            | 10,894  |              |         |   | 11,497  |        
|                                                                          |                                                                                                                                                                                     |                            |         |              |         |   |         |        
|                                                                          |                                                                                                                                                                                     | Total liabilities          |         |              | 344,457 |   |         |         | 364,307 | 
|                                                                          |                                                                                                                                                                                     |                            |         |              |         |   |         |        
|Stockholders equity:                                                     |                                                                                                                                                                                     |                            |         |              |         |   |         |        
|                                                                          | Common stock, $.01 par value. Authorized
    100,000,000 shares; issued and outstanding 25,009,134 and
    24,444,622 at September 30, 2004 and December 31,
    2003, respectively |                            |         | 250          |         |   |         | 244     |        
|                                                                          | Additional paid-in capital                                                                                                                                                          |                            |         | 344,677      |         |   |         | 331,751 |        
|                                                                          | Retained earnings                                                                                                                                                                   |                            |         | 193,393      |         |   |         | 129,776 |        
|                                                                          | Deferred compensation                                                                                                                                                               |                            |         |             |         |   |         | (57     | )      
|                                                                          |                                                                                                                                                                                     |                            |         |              |         |   |         |        
|                                                                          |                                                                                                                                                                                     | Total stockholders equity |         |              | 538,320 |   |         |         | 461,714 | 
|                                                                          |                                                                                                                                                                                     |                            |         |              |         |   |         |        
|                                                                          |                                                                                                                                                                                     | $                          | 882,777 |              |         | $ | 826,021 |        
|                                                                          |                                                                                                                                                                                     |                            |         |              |         |   |         |        

See accompanying notes to condensed consolidated
financial statements.

3



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##### 



AMERIGROUP CORPORATION AND
SUBSIDIARIES

CONDENSED CONSOLIDATED INCOME
STATEMENTS

(Dollars in thousands, except for per share
data)


|                      |                                                                                               |                            |        |                     |         |      |        |            |         |  |        |            |           |  |        |            |           | 
|--------------------- | --------------------------------------------------------------------------------------------- | -------------------------- | ------ | ------------------- | ------- | ---- | ------ | ---------- | ------- |  | ------ | ---------- | --------- |  | ------ | ---------- | --------- | 
|                      |                                                                                               |                            |        |                    
|                      |                                                                                               | Three Months               |        | Nine Months        
|                      |                                                                                               | ended September 30,        |        | ended September 30,
|                      |                                                                                               |                            |        |                    
|                      |                                                                                               | 2004                       |        | 2003                |         | 2004 |        | 2003      
|                      |                                                                                               |                            |        |                     |         |      |        |           
|Revenues:             |                                                                                               |                            |        |                     |         |      |        |            |         |  |        |            |           |  |        |           
|                      | Premium                                                                                       |                            | $      | 468,156             |         |      | $      | 411,277    |         |  | $      | 1,326,409  |           |  | $      | 1,193,170  |          
|                      | Investment income                                                                             |                            |        | 2,822               |         |      |        | 1,494      |         |  |        | 6,999      |           |  |        | 4,875      |          
|                      |                                                                                               |                            |        |                     |         |      |        |            |         |  |        |            |           |  |        |           
|                      |                                                                                               | Total revenues             |        |                     | 470,978 |      |        |            | 412,771 |  |        |            | 1,333,408 |  |        |            | 1,198,045 | 
|                      |                                                                                               |                            |        |                     |         |      |        |            |         |  |        |            |           |  |        |           
|Expenses:             |                                                                                               |                            |        |                     |         |      |        |            |         |  |        |            |           |  |        |           
|                      | Health benefits                                                                               |                            |        | 374,085             |         |      |        | 328,235    |         |  |        | 1,070,747  |           |  |        | 956,069    |          
|                      | Selling, general and administrative                                                           |                            |        | 52,124              |         |      |        | 46,781     |         |  |        | 141,339    |           |  |        | 137,796    |          
|                      | Depreciation and amortization                                                                 |                            |        | 4,935               |         |      |        | 6,379      |         |  |        | 15,825     |           |  |        | 17,873     |          
|                      | Interest                                                                                      |                            |        | 165                 |         |      |        | 465        |         |  |        | 540        |           |  |        | 1,561      |          
|                      |                                                                                               |                            |        |                     |         |      |        |            |         |  |        |            |           |  |        |           
|                      |                                                                                               | Total expenses             |        |                     | 431,309 |      |        |            | 381,860 |  |        |            | 1,228,451 |  |        |            | 1,113,299 | 
|                      |                                                                                               |                            |        |                     |         |      |        |            |         |  |        |            |           |  |        |           
|                      |                                                                                               | Income before income taxes |        |                     | 39,669  |      |        |            | 30,911  |  |        |            | 104,957   |  |        |            | 84,746    | 
|Income tax expense    |                                                                                               |                            | 15,336 |                     |         |      | 12,726 |            |         |  | 41,340 |            |           |  | 34,890 |           
|                      |                                                                                               |                            |        |                     |         |      |        |            |         |  |        |            |           |  |        |           
|                      |                                                                                               | Net income                 |        | $                   | 24,333  |      |        | $          | 18,185  |  |        | $          | 63,617    |  |        | $          | 49,856    | 
|                      |                                                                                               |                            |        |                     |         |      |        |            |         |  |        |            |           |  |        |           
|Net income per share: |                                                                                               |                            |        |                     |         |      |        |            |         |  |        |            |           |  |        |           
|                      | Basic net income per share                                                                    |                            | $      | 0.98                |         |      | $      | 0.86       |         |  | $      | 2.57       |           |  | $      | 2.40       |          
|                      |                                                                                               |                            |        |                     |         |      |        |            |         |  |        |            |           |  |        |           
|                      | Weighted average number of common shares
    outstanding                                      |                            |        | 24,952,531          |         |      |        | 21,041,556 |         |  |        | 24,766,971 |           |  |        | 20,801,852 |          
|                      |                                                                                               |                            |        |                     |         |      |        |            |         |  |        |            |           |  |        |           
|                      | Diluted net income per share                                                                  |                            | $      | 0.94                |         |      | $      | 0.81       |         |  | $      | 2.47       |           |  | $      | 2.27       |          
|                      |                                                                                               |                            |        |                     |         |      |        |            |         |  |        |            |           |  |        |           
|                      | Weighted average number of common shares and
    dilutive potential common shares outstanding |                            |        | 25,977,970          |         |      |        | 22,328,879 |         |  |        | 25,799,638 |           |  |        | 21,956,769 |          
|                      |                                                                                               |                            |        |                     |         |      |        |            |         |  |        |            |           |  |        |           

See accompanying notes to condensed consolidated
financial statements.

4



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##### 



AMERIGROUP CORPORATION AND
SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH
FLOWS

(Dollars in thousands)


|                                                                            |                                                                                       |                                                                                           |                                                              |                                                         |        |         |          |          |        |        |         |  
|--------------------------------------------------------------------------- | ------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------- | ------------------------------------------------------------ | ------------------------------------------------------- | ------ | ------- | -------- | -------- | ------ | ------ | ------- | -
|                                                                            |                                                                                       |                                                                                          
|                                                                            |                                                                                       | Nine Months                                                                              
|                                                                            |                                                                                       | ended September 30,                                                                      
|                                                                            |                                                                                       |                                                                                          
|                                                                            |                                                                                       | 2004                                                                                      |                                                              | 2003                                                   
|                                                                            |                                                                                       |                                                                                           |                                                              |                                                        
|Cash flows from operating activities:                                       |                                                                                       |                                                                                           |                                                              |                                                         |        |         |          |         
|                                                                            | Net income                                                                            |                                                                                           | $                                                            | 63,617                                                  |        |         | $        | 49,856   |       
|                                                                            | Adjustments to reconcile net income to net cash
    provided by operating activities: |                                                                                           |                                                              |                                                         |        |         |          |          |       
|                                                                            |                                                                                       | Depreciation and amortization                                                             |                                                              |                                                         | 15,825 |         |          |          | 17,873 |       
|                                                                            |                                                                                       | Loss on disposal or abandonment of property,
    equipment and software                   |                                                              |                                                         | 951    |         |          |          | 12     |       
|                                                                            |                                                                                       | Deferred tax benefit                                                                      |                                                              |                                                         | (827   | )       |          |          | (2,126 | )     
|                                                                            |                                                                                       | Amortization of deferred compensation                                                     |                                                              |                                                         | 57     |         |          |          | 270    |       
|                                                                            |                                                                                       | Tax benefit related to exercise of stock options                                          |                                                              |                                                         | 4,881  |         |          |          | 3,285  |       
|                                                                            |                                                                                       | Changes in assets and liabilities increasing
    (decreasing) cash flows from operations: |                                                              |                                                         |        |         |          |          |        |       
|                                                                            |                                                                                       |                                                                                           | Premium receivables                                          |                                                         |        | (5,661  | )        |          |        | 1,604  |        
|                                                                            |                                                                                       |                                                                                           | Prepaid expenses and other current assets                    |                                                         |        | 2,507   |          |          |        | 185    |        
|                                                                            |                                                                                       |                                                                                           | Other assets                                                 |                                                         |        | (814    | )        |          |        | (843   | )      
|                                                                            |                                                                                       |                                                                                           | Claims payable                                               |                                                         |        | (3,308  | )        |          |        | 4,197  |        
|                                                                            |                                                                                       |                                                                                           | Accounts payable, accrued expenses and other
    liabilities |                                                         |        | 14,050  |          |          |        | (8,702 | )      
|                                                                            |                                                                                       |                                                                                           | Unearned revenue                                             |                                                         |        | (23,750 | )        |          |        | 3,733  |        
|                                                                            |                                                                                       |                                                                                           | Other long-term liabilities                                  |                                                         |        | 1,406   |          |          |        | 259    |        
|                                                                            |                                                                                       |                                                                                           |                                                              |                                                         |        |         |          |         
|                                                                            |                                                                                       |                                                                                           |                                                              | Net cash provided by operating activities               |        |         | 68,934   |          |        |        | 69,603  |  
|                                                                            |                                                                                       |                                                                                           |                                                              |                                                         |        |         |          |         
|Cash flows from investing activities:                                       |                                                                                       |                                                                                           |                                                              |                                                         |        |         |          |         
|                                                                            | Proceeds from redemption of held-to-maturity
    investments                          |                                                                                           |                                                              | 120,768                                                 |        |         |          | 159,995  |       
|                                                                            | Purchase of held-to-maturity investments                                              |                                                                                           |                                                              | (280,507                                                | )      |         |          | (158,925 | )     
|                                                                            | Purchase of property, equipment and software                                          |                                                                                           |                                                              | (17,176                                                 | )      |         |          | (9,754   | )     
|                                                                            | Proceeds from redemption of investments on
    deposit for licensure                  |                                                                                           |                                                              | 35,525                                                  |        |         |          | 10,170   |       
|                                                                            | Purchase of investments on deposit for licensure                                      |                                                                                           |                                                              | (37,842                                                 | )      |         |          | (15,419  | )     
|                                                                            | Purchase of contract rights and related assets,
    net of adjustments                |                                                                                           |                                                              | 48                                                      |        |         |          | (7,550   | )     
|                                                                            | Cash acquired through stock acquisition                                               |                                                                                           |                                                              |                                                        |        |         |          | 27,483   |       
|                                                                            |                                                                                       |                                                                                           |                                                              |                                                         |        |         |          |         
|                                                                            |                                                                                       |                                                                                           |                                                              | Net cash (used in) provided by investing
    activities |        |         | (179,184 | )        |        |        | 6,000   |  
|                                                                            |                                                                                       |                                                                                           |                                                              |                                                         |        |         |          |         
|                                                                            | Cash flows from financing activities:                                                 |                                                                                           |                                                              |                                                         |        |         |          |          |       
|                                                                            | Net (decrease) increase in bank overdrafts                                            |                                                                                           |                                                              | (5,315                                                  | )      |         |          | 1,071    |       
|                                                                            | Repayments of borrowings under credit facility                                        |                                                                                           |                                                              |                                                        |        |         |          | (20,000  | )     
|                                                                            | Payment of capital lease obligations                                                  |                                                                                           |                                                              | (3,583                                                  | )      |         |          | (3,037   | )     
|                                                                            | Proceeds from exercise of common stock options                                        |                                                                                           |                                                              | 8,051                                                   |        |         |          | 8,861    |       
|                                                                            |                                                                                       |                                                                                           |                                                              |                                                         |        |         |          |         
|                                                                            |                                                                                       |                                                                                           |                                                              | Net cash used in financing activities                   |        |         | (847     | )        |        |        | (13,105 | )
|                                                                            |                                                                                       |                                                                                           |                                                              |                                                         |        |         |          |         
|Net (decrease) increase in cash and cash
    equivalents                    |                                                                                       |                                                                                           | (111,097                                                     | )                                                       |        |         | 62,498   |         
|Cash and cash equivalents at beginning of period                            |                                                                                       |                                                                                           | 407,220                                                      |                                                         |        |         | 207,996  |         
|                                                                            |                                                                                       |                                                                                           |                                                              |                                                         |        |         |          |         
|Cash and cash equivalents at end of period                                  |                                                                                       | $                                                                                         | 296,123                                                      |                                                         |        | $       | 270,494  |         
|                                                                            |                                                                                       |                                                                                           |                                                              |                                                         |        |         |          |         
|Supplemental disclosures of cash flow information:                          |                                                                                       |                                                                                           |                                                              |                                                         |        |         |          |         
|                                                                            | Cash paid for interest                                                                |                                                                                           | $                                                            | 539                                                     |        |         | $        | 1,466    |       
|                                                                            |                                                                                       |                                                                                           |                                                              |                                                         |        |         |          |         
|                                                                            | Cash paid for income taxes                                                            |                                                                                           | $                                                            | 31,568                                                  |        |         | $        | 29,528   |       
|                                                                            |                                                                                       |                                                                                           |                                                              |                                                         |        |         |          |         
|Supplemental disclosure of non-cash investing and
    financing activities: |                                                                                       |                                                                                           |                                                              |                                                         |        |         |          |         
|                                                                            | Property and equipment acquired under capital
    leases                              |                                                                                           | $                                                            |                                                        |        |         | $        | 4,834    |       
|                                                                            |                                                                                       |                                                                                           |                                                              |                                                         |        |         |          |         

On January 1, 2003, we completed our
acquisition of PHP Holdings, Inc. and its subsidiary Physicians
Health Plans, Inc. (PHP). The purchase price was deposited in a
restricted escrow account on December 31, 2002. The
following summarizes the cash paid for this acquisition:

|                                           |                      |   |         |         | 
|------------------------------------------ | -------------------- | - | ------- | ------- | 
|Assets acquired, including cash of $27,483 |                      | $ | 150,731 |        
|Liabilities assumed                        |                      |   | 26,471  |        
|                                           |                      |   |         |        
|                                           | Total purchase price |   | $       | 124,260 | 
|                                           |                      |   |         |        

See accompanying notes to condensed consolidated
financial statements.

5



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##### 



AMERIGROUP CORPORATION AND
SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS

(Dollars in thousands, except for per share
data)


1. The accompanying condensed consolidated
financial statements as of September 30, 2004 and for the
three and nine month periods ended September 30, 2004 and
2003 are unaudited and reflect all adjustments which are, in the
opinion of management, necessary for a fair presentation of the
financial position at September 30, 2004 and operating
results for the interim periods. The December 31, 2003
balance sheet information was derived from the audited
consolidated financial statements as of that date.

The condensed consolidated financial statements
should be read in conjunction with the consolidated financial
statements and notes thereto and managements discussion
and analysis of financial condition and results of operations
for the year ended December 31, 2003 contained in our
Annual Report on Form 10-K filed with the Securities and
Exchange Commission on March 9, 2004. The results of
operations for the three and nine month periods ended
September 30, 2004 are not necessarily indicative of the
results to be expected for the entire year ending
December 31, 2004.

Certain 2003 amounts have been reclassified to
conform to the current period financial statement presentation.

2. Basic net income per common share is
computed by dividing net income by the weighted average number
of shares of common stock outstanding. Diluted net income per
common share is computed by dividing net income by the weighted
average number of shares of common stock outstanding plus other
dilutive potential securities. The following table sets forth
the calculation of basic and diluted net income per share:

|                              |                                                                                               |                     |   |                     |  |      |   |            |  |  |   |            |  |  |   |            | 
|----------------------------- | --------------------------------------------------------------------------------------------- | ------------------- | - | ------------------- |  | ---- | - | ---------- |  |  | - | ---------- |  |  | - | ---------- | 
|                              |                                                                                               |                     |   |                    
|                              |                                                                                               | Three Months        |   | Nine Months        
|                              |                                                                                               | ended September 30, |   | ended September 30,
|                              |                                                                                               |                     |   |                    
|                              |                                                                                               | 2004                |   | 2003                |  | 2004 |   | 2003      
|                              |                                                                                               |                     |   |                     |  |      |   |           
|Basic net income per share:   |                                                                                               |                     |   |                     |  |      |   |            |  |  |   |            |  |  |   |           
|                              | Net income                                                                                    |                     | $ | 24,333              |  |      | $ | 18,185     |  |  | $ | 63,617     |  |  | $ | 49,856     | 
|                              |                                                                                               |                     |   |                     |  |      |   |            |  |  |   |            |  |  |   |           
|                              | Weighted average number of common shares
    outstanding                                      |                     |   | 24,952,531          |  |      |   | 21,041,556 |  |  |   | 24,766,971 |  |  |   | 20,801,852 | 
|                              |                                                                                               |                     |   |                     |  |      |   |            |  |  |   |            |  |  |   |           
|                              | Basic net income per share                                                                    |                     | $ | 0.98                |  |      | $ | 0.86       |  |  | $ | 2.57       |  |  | $ | 2.40       | 
|                              |                                                                                               |                     |   |                     |  |      |   |            |  |  |   |            |  |  |   |           
|Diluted net income per share: |                                                                                               |                     |   |                     |  |      |   |            |  |  |   |            |  |  |   |           
|                              | Net income                                                                                    |                     | $ | 24,333              |  |      | $ | 18,185     |  |  | $ | 63,617     |  |  | $ | 49,856     | 
|                              |                                                                                               |                     |   |                     |  |      |   |            |  |  |   |            |  |  |   |           
|                              | Weighted average number of common shares
    outstanding                                      |                     |   | 24,952,531          |  |      |   | 21,041,556 |  |  |   | 24,766,971 |  |  |   | 20,801,852 | 
|                              | Dilutive effect of stock options (as determined
    by applying the treasury stock method)    |                     |   | 1,025,439           |  |      |   | 1,287,323  |  |  |   | 1,032,667  |  |  |   | 1,154,917  | 
|                              |                                                                                               |                     |   |                     |  |      |   |            |  |  |   |            |  |  |   |           
|                              | Weighted average number of common shares and
    dilutive potential common shares outstanding |                     |   | 25,977,970          |  |      |   | 22,328,879 |  |  |   | 25,799,638 |  |  |   | 21,956,769 | 
|                              |                                                                                               |                     |   |                     |  |      |   |            |  |  |   |            |  |  |   |           
|                              | Diluted net income per share                                                                  |                     | $ | 0.94                |  |      | $ | 0.81       |  |  | $ | 2.47       |  |  | $ | 2.27       | 
|                              |                                                                                               |                     |   |                     |  |      |   |            |  |  |   |            |  |  |   |           

3. As permitted under Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based
Compensation,as amended (SFAS No. 123), we have
chosen to account for stock-based compensation using the
intrinsic value method prescribed in Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees(APB Opinion No. 25), and related interpretations.
Accordingly, compensation cost for stock options is measured as
the excess, if any, of the estimated fair value of our stock at
the date of grant over the amount an employee must pay to
acquire the stock. Statement of Financial Accounting

6



---



##### 



AMERIGROUP CORPORATION AND
SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Standards No. 148, Stock-Based
Compensation(SFAS No. 148), requires that we
illustrate the effect on net income and net income per share if
we had applied the fair value principles included in
SFAS No. 123 for both annual and interim financial
statements.

|                              |                                                                                                                                                     |                     |   |                     |  |      |   |        |  |  |   |        |  |  |   |        | 
|----------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------- | - | ------------------- |  | ---- | - | ------ |  |  | - | ------ |  |  | - | ------ | 
|                              |                                                                                                                                                     |                     |   |                    
|                              |                                                                                                                                                     | Three Months        |   | Nine Months        
|                              |                                                                                                                                                     | ended September 30, |   | ended September 30,
|                              |                                                                                                                                                     |                     |   |                    
|                              |                                                                                                                                                     | 2004                |   | 2003                |  | 2004 |   | 2003  
|                              |                                                                                                                                                     |                     |   |                     |  |      |   |       
|Net income:                   |                                                                                                                                                     |                     |   |                     |  |      |   |        |  |  |   |        |  |  |   |       
|                              | Reported net income                                                                                                                                 |                     | $ | 24,333              |  |      | $ | 18,185 |  |  | $ | 63,617 |  |  | $ | 49,856 | 
|                              | Deduct: Total stock-based employee compensation
    expense determined under fair value based method for all awards,
    net of related tax effects |                     |   | 2,197               |  |      |   | 2,403  |  |  |   | 6,642  |  |  |   | 6,888  | 
|                              |                                                                                                                                                     |                     |   |                     |  |      |   |        |  |  |   |        |  |  |   |       
|                              | Pro forma net income                                                                                                                                |                     | $ | 22,136              |  |      | $ | 15,782 |  |  | $ | 56,975 |  |  | $ | 42,968 | 
|                              |                                                                                                                                                     |                     |   |                     |  |      |   |        |  |  |   |        |  |  |   |       
|Basic net income per share:   |                                                                                                                                                     |                     |   |                     |  |      |   |        |  |  |   |        |  |  |   |       
|                              | Reported basic net income per share                                                                                                                 |                     | $ | 0.98                |  |      | $ | 0.86   |  |  | $ | 2.57   |  |  | $ | 2.40   | 
|                              | Pro forma basic net income per share                                                                                                                |                     |   | 0.89                |  |      |   | 0.75   |  |  |   | 2.30   |  |  |   | 2.07   | 
|Diluted net income per share: |                                                                                                                                                     |                     |   |                     |  |      |   |        |  |  |   |        |  |  |   |       
|                              | Reported diluted net income per share                                                                                                               |                     | $ | 0.94                |  |      | $ | 0.81   |  |  | $ | 2.47   |  |  | $ | 2.27   | 
|                              | Pro forma diluted net income per share                                                                                                              |                     |   | 0.86                |  |      |   | 0.72   |  |  |   | 2.23   |  |  |   | 1.99   | 

As of September 30, 2004, we had 2,469,483
options outstanding with a weighted average exercise price of
$25.85. For the nine months ended September 30, 2004, we
granted 582,038 options with a weighted average exercise price
of $37.43.

The fair value of each 2004 option grant is
estimated on the date of grant using an option pricing model
with the following assumptions: no dividend yield, risk-free
interest rate of 2.80%, 4.08% and 3.53%, expected life of
5.28 years, 6.16 years and 5.89 years and
volatility of 29.65%, 30.62% and 29.49% for the first, second
and third quarters of 2004, respectively.

4. On October 26, 2004, we entered into
a definitive agreement to acquire CarePlus, LLC, which operates
as CarePlus Health Plan (CarePlus) in New York City and provides
services to members covered by New York States Medicaid,
Child Health Plus and Family Health Plus programs.
CarePlus service area includes New York City (Brooklyn,
Manhattan, Queens, and Staten Island) and Putnam County, New
York. Upon the completion of the transaction (the Closing),
CarePlus will provide services to approximately 114,000 members
under the name CarePlus Health Plan. Under the terms of the
agreement, at the Closing, we will pay purchase consideration of
approximately $125,000 in cash, provided that CarePlus has
estimated net worth of at least $20,000. From this net worth,
CarePlus will deposit $2,000 into an escrow account. Additional
purchase consideration may be paid based on specified criteria.
The purchase consideration will be funded through available
unregulated cash. The transaction is subject to regulatory
approvals and other closing conditions and is expected to close
in early 2005.

5. In April 2004, the Maryland Legislature
enacted a budget for its 2005 fiscal year beginning July 1,
2004 that included a provision that would reduce the premium
paid to managed care organizations which did not meet certain
Health Plan Employer Data and Information Set (HEDIS) scores and
whose medical loss ratio was below 84% for the calendar year
ended December 31, 2002. In May 2004, the Maryland
Secretary of Health and Mental Hygiene, in consultation with
Marylands legislative leadership, determined
AMERIGROUPs premium recoupment to be $846. A liability for
the recoupment was recorded with a corresponding charge to
premium revenue during the three months ended June 30,
2004. Additionally, the Legislature directed that the Department
of Health and Mental Hygiene complete a study by
September 2004 on the relevance of the medical loss ratio
threshold as an indicator of quality. The results of this, which
were released in October 2004,

7



---



##### 



AMERIGROUP CORPORATION AND
SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

did not directly address what would happen in the
future if a managed care organization reported a medical loss
ratio below 84%. We believe the Maryland Legislature in 2005 as
part of its fiscal year 2006 budget, could enact similar
legislation requiring premium recoupment related to the year
ended December 31, 2003. Accordingly, we have recorded a
reduction in premium in our financial statements of our best
estimate of the outcome of this issue. It is possible that the
Maryland Legislature in 2006, as part of its fiscal year 2007
budget, could enact similar legislation relating to the year
ended December 31, 2004. However, at this time, we are
unable to predict the regulatory, economic or political climate
that might exist. Accordingly, we have not recorded any
liability for the nine months ended September 30, 2004.
However, if the Maryland Legislature were to enact legislation
in April 2006 consistent with the legislation passed in
April 2004 and we did not meet the required quality
measures, we could have a recoupment obligation for that period
commencing on July 1, 2006 in the range from zero to
approximately $3,000 with respect to the premium revenue for the
nine month period ended September 30, 2004.

6. On July 18, 2002, Texas
Childrens Hospital (TCH) in Houston filed suit in
State District Court against AMERIGROUP Texas, Inc., our Texas
subsidiary, seeking to be paid full-billed charges for all
services rendered to our Texas subsidiarys Medicaid
members since October 1999. On January 17, 2003, the
physicians of Baylor College of Medicine (Baylor), non-network
physicians who provide medical services at TCH, filed suit
against our Texas subsidiary seeking full-billed charges for
services provided since October 1999 to our Texas Medicaid
members. On July 7, 2003, TCH and Baylor added AMERIGROUP
Corporation as an additional defendant to the lawsuits, alleging
that we are directly liable for the obligations of our Texas
subsidiary. On August 25, 2004, we entered into a
settlement arrangement with TCH and Baylor which resulted in a
dismissal with prejudice of the litigation. The settlement did
not have a material impact on the consolidated income statement
in the third quarter because the amount paid in connection with
the settlement had been previously reserved.

In March 2004, we received notice that HHSC had
commenced a review of certain claims payment issues raised by
TCH in early 2002 which were a portion of the claims which were
the subject matter of the above-referenced litigation with TCH
and Baylor. The regulatory issues with HHSC were resolved upon
filing evidence of the settlement of the litigation with TCH and
Baylor.

In June 2002, Capital Health Systems (Capital) in
New Jersey filed an action in the Superior Court of New Jersey
(the Court) against AMERIGROUP New Jersey, Inc., our New Jersey
subsidiary, seeking to be paid full-billed charges for all
services rendered to our New Jersey subsidiarys Medicaid
members from January 1, 2002 through the present. On
September 9, 2004, we entered into a settlement arrangement
with Capital which resulted in a dismissal with prejudice of the
litigation. The settlement did not have a material impact on the
consolidated income statement in the third quarter because the
amount paid in connection with the settlement had been
previously reserved.

7. In the fourth quarter of 2003, our
Florida health plan implemented medical review procedures
designed to reduce the incidence of inappropriate authorizations
of speech and occupational therapy services. In February of
2004, the health plan was informed by the applicable regulatory
agency, Agency for Healthcare Administration (AHCA), that the
medical review procedures it had implemented were not compliant
with the Medicaid Contract and the States therapy services
handbook. We were directed to reprocess and pay all denied
claims and to file a corrective action plan. The health plan
disputed AHCAs assessment of its medical review procedures
and AHCA rejected the health plans corrective action plan.
We have appealed AHCAs decision and this appeal is
pending. There can be no assurance that we will prevail in the
appeal process or that AHCA will not impose material fines or
sanctions. Therefore, we have recorded in our financial
statements our best estimate of an outcome of this issue.

8



---



##### 



AMERIGROUP CORPORATION AND
SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|Item 2. | Managements Discussion and Analysis
    of Financial Condition and Results of Operations

Forward-Looking Statements

This Quarterly Report on Form 10-Q, and
other information we provide from time-to-time, contain certain
forward-looking statements as that term is defined
by Section 27A of the Securities Act of 1933, as amended,
and Section 21E of the Securities Exchange Act of 1934, as
amended. All statements regarding our expected 2004 performance
and future financial position, membership, revenues, operating
cash flows, health benefits expenses, seasonality of health
benefits expenses, selling, general and administrative expenses,
capital expenditures, days in claims payable, income tax rates,
earnings per share, net income growth, results of operations or
cash flows, our continued performance improvements, our ability
to service our debt obligations and refinance our debt
obligations, our ability to finance growth opportunities, our
expectations on the effective date and successful integration of
acquisitions, our ability to respond to changes in government
regulations, and similar statements including, without
limitation, those containing words such as believes,
anticipates, expects, may,
will, should, estimates,
intends, plans, and other similar
expressions are forward-looking statements.

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



| |   |                                                                                                                                                                                                                                                         
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | national, state and local economic conditions,
    including their effect on the rate setting 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 the
    Company;                                                                                                                                                                                          
|
| |  | our ability to attract and retain qualified
    personnel;                                                                                                                                                                                              
|
| |  | our ability to maintain compliance with all
    minimum capital requirements;                                                                                                                                                                           
|
| |  | the availability and terms of capital to fund
    acquisitions and capital improvements;                                                                                                                                                                
|
| |  | the competitive environment in which we operate;                                                                                                                                                                                                        
|
| |  | our ability to maintain and increase membership
    levels; and                                                                                                                                                                                         
|
| |  | demographic changes.                                                                                                                                                                                                                                    

Investors should also refer to our Annual Report
on Form 10-K filed with the Securities and Exchange
Commission on March 9, 2004 for a discussion of risk
factors. Given these risks and uncertainties, we can give no
assurances that any forward-looking statements will, in fact,
transpire and therefore caution investors not to place undue
reliance on them.

9



---



##### 



Overview

We are a multi-state managed healthcare company
focused on serving people who receive healthcare benefits
through publicly sponsored programs, including Medicaid, State
Childrens Health Insurance Program (SCHIP) and
FamilyCare. We were founded in December 1994 with the objective
to become the leading managed care organization in the United
States focused on serving people who receive these types of
benefits. In the midst of our tenth year of operations, we
continue to believe that managed healthcare remains the only
proven mechanism that significantly reduces medical cost trends
and helps our state partners control their costs.

In our third quarter ended September 30,
2004, we increased our total revenues by 14.1% over the same
period in 2003. For the nine months ended September 30,
2004, we increased our total revenues by 11.3% over the same
period in 2003. Total membership increased 68,000, or 7.9%, to
934,000 as of September 30, 2004, from 866,000 as of
September 30, 2003. Year-to-date revenue growth was due to
a number of factors including:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Growth in existing service areas premium
    revenue, which increased 13.8% in the third quarter of 2004
    compared to the third quarter of 2003 and 8.7% in the nine
    months ended September 30, 2004 compared to the nine months
    ended September 30, 2003. Growth in the third quarter of
    2004 is due, in part, to a competitor leaving the market in
    Fort Worth, Texas.                                                          
|
| |  | Rate increases from the states in which we
    operate to cover expense trends, benefit changes and premium
    taxes; and                                                                                                                                                                                                                                                                                                                            
|
| |  | Growth through acquisitions  Effective
    July 1, 2003, we acquired the Medicaid contract rights and
    related assets of St. Augustine Medicaid (St. Augustine), a
    division of AvMed, Inc., which added membership to our existing
    operations in Florida. St. Augustine operated in nine counties
    in the Miami/ Fort Lauderdale, Orlando and Tampa markets
    and served approximately 26,000 members at the time of
    acquisition.

Our health benefits ratio (HBR) was 79.9%
for the three months ended September 30, 2004, compared to
79.8% in the same period of the prior year. For the nine months
ended September 30, 2004, our HBR was 80.7% versus 80.1% in
the same period of the prior year. This year-to-date increase is
due primarily to revenue increases in certain key markets not
keeping up with medical cost increases for the first six months
of the year. In the third quarter, rate increases became
effective in certain key markets, which mitigated the increases
in medical cost per member per month experienced throughout the
year.

Selling, general and administrative expenses
(SG&A) were 11.1% of total revenues for the three months
ended September 30, 2004 compared to 11.3% in the same
period of the prior year. For the nine months ended
September 30, 2004, our SG&A ratio was 10.6% compared
to 11.5% in the same period of the prior year. We continue to
leverage our SG&A, due in part to continued technological
improvements and the effects of successful rate increases. For
the three months ended September 30, 2004, our SG&A
ratio improved primarily due to premium revenue increases.
Year-to-date our SG&A ratio improved due to premium rate
increases and reduced SG&A expenses.

Cash and investments totaled $621.4 million
at September 30, 2004. The majority of this cash was
regulated by state capital requirements. As of
September 30, 2004, $272.9 million of our cash and
investments was unregulated and held at the parent level.

We continue to expect acquisitions and new market
entries to be an important part of our growth strategy. As of
September 30, 2004, 41% of our membership has resulted from
nine acquisitions. On October 26, 2004, we entered into a
definitive agreement to acquire CarePlus, LLC, which operates as
CarePlus Health Plan (CarePlus) in New York City and provides
services to members covered by New York States Medicaid,
Child Health Plus and Family Health Plus programs.
CarePlus service area includes New York City (Brooklyn,
Manhattan, Queens, and Staten Island) and Putnam County, New
York. Upon the completion of the transaction (the Closing),
CarePlus will provide services to approximately 114,000 members
under the name CarePlus Health Plan. Under the terms of the
agreement, at the Closing, we will pay purchase

10



---



##### 



consideration of approximately $125 million
in cash, provided that CarePlus has estimated net worth of at
least $20 million. From this net worth, CarePlus will
deposit $2 million into an escrow account. The transaction
is subject to regulatory approvals and other closing conditions
and is expected to become effective in early 2005. The
acquisition initially is expected, on an annualized basis, to be
accretive to earnings by approximately $0.15 to $0.20 per
share in 2005 and add more than $200 million of revenues.
CarePlus is also seeking permission from the State of New York
to offer managed long-term care programs in New York City and
will do so when regulatory approval is granted.


On July 2, 2004, the State of Texas released
a Request for Proposal (RFP) to re-procure its current Medicaid
managed care programs, as well as expansion of the current
programs. The State has said it will announce contract awards
late in 2004 with implementation in mid-to-late 2005. The RFP
includes all of the current Texas service areas and products in
which we operate. Our response to the RFP included our current
Texas service areas and products as well as expansion into new
service areas and products. If we lost one or more contracts
through the re-procurement process, our operating results could
be materially and adversely affected.

On September 14, 2004, we were informed that
we were a successful bidder in a request for proposal from the
State of Indiana for expansion of its managed care program in
2005. We are currently evaluating our market entry options and
the provider network requirements. In the fourth quarter, we
expect to make a determination as to the feasibility and
viability of a market entry. If we enter the market, the
contract would be effective in first quarter of 2005.

In April 2004, the Maryland Legislature enacted a
budget for its 2005 fiscal year beginning July 1, 2004 that
included a provision that would reduce the premium paid to
managed care organizations which did not meet certain HEDIS
scores and whose medical loss ratio was below 84% for the
calendar year ended December 31, 2002. In May 2004,
the Maryland Secretary of Health and Mental Hygiene, in
consultation with Marylands legislative leadership,
determined AMERIGROUPs premium recoupment to be $846,000.
A liability for the recoupment was recorded with a corresponding
charge to premium revenue during the three months ended
June 30, 2004. Additionally, the Legislature directed that
the Department of Health and Mental Hygiene complete a study by
September 2004 on the relevance of the medical loss ratio
threshold as an indicator of quality. The results of this, which
were released in October 2004, did not directly address
what would happen in the future if a managed care organization
reported a medical loss ratio below 84%. We believe the Maryland
Legislature in 2005 as part of its fiscal year 2006 budget,
could enact similar legislation requiring premium recoupment
related to the year ended December 31, 2003. Accordingly,
we have recorded a reduction in premium in our financial
statements of our best estimate of the outcome of this issue. It
is possible that the Maryland Legislature in 2006, as part of
its fiscal year 2007 budget, could enact similar legislation
relating to the year ended December 31, 2004. However, at
this time we are unable to predict the regulatory, economic or
political climate that might exist at that time. Accordingly, we
have not recorded any liability for the nine months ended
September 30, 2004. However, if the Maryland Legislature
were to enact legislation in April 2006 consistent with the
legislation passed in April 2004 and we did not meet the
required quality measures, we could have a recoupment obligation
for that period commencing on July 1, 2006 in the range
from zero to approximately $3 million with respect to the
premium revenue for the nine month period ended
September 30, 2004.

In the fourth quarter of 2003, our Florida health
plan implemented medical review procedures designed to reduce
the incidence of inappropriate authorizations of speech and
occupational therapy services. In February of 2004, the health
plan was informed by the applicable regulatory agency, AHCA,
that the medical review procedures it had implemented were not
compliant with the Medicaid Contract and the States
therapy services handbook. We were directed to reprocess and pay
all denied claims and to file a corrective action plan. The
health plan disputed AHCAs assessment of its medical
review procedures and accordingly, AHCA rejected the health
plans corrective action plan. We have appealed AHCAs
decision and this appeal is pending. There can be no assurance
that we will prevail in the appeal process or that AHCA will not
impose material fines or sanctions. Therefore, we have recorded
in our financial statements our best estimate of an outcome of
this issue.

11



---



##### 



The following table sets forth the approximate
number of our members we serve in each of the states on the
dates presented.

|                                                                    |  |               |         |      |  |  |         | 
|------------------------------------------------------------------- |  | ------------- | ------- | ---- |  |  | ------- | 
|                                                                    |  |              
|                                                                    |  | September 30,
|                                                                    |  |              
|Market                                                              |  | 2004          |         | 2003
|                                                                    |  |               |         |     
|Texas                                                               |  |               | 384,000 |      |  |  | 346,000 | 
|Florida                                                             |  |               | 242,000 |      |  |  | 224,000 | 
|Maryland                                                            |  |               | 128,000 |      |  |  | 126,000 | 
|New Jersey                                                          |  |               | 105,000 |      |  |  | 102,000 | 
|District of Columbia                                                |  |               | 39,000  |      |  |  | 37,000  | 
|Illinois                                                            |  |               | 36,000  |      |  |  | 31,000  | 
|                                                                    |  |               |         |      |  |  |         | 
|Total                                                               |  |               | 934,000 |      |  |  | 866,000 | 
|                                                                    |  |               |         |      |  |  |         | 
|Percentage growth from September 30, 2003 to
    September 30, 2004 |  |               | 7.9     | %    |  |  |         | 

The following table sets forth the approximate
number of our members in each of our products on the dates
presented.

|                            |  |               |         |      |  |  |         | 
|--------------------------- |  | ------------- | ------- | ---- |  |  | ------- | 
|                            |  |              
|                            |  | September 30,
|                            |  |              
|Product                     |  | 2004          |         | 2003
|                            |  |               |         |     
|AMERICAID (Medicaid  TANF) |  |               | 649,000 |      |  |  | 578,000 | 
|AMERIKIDS (SCHIP)           |  |               | 194,000 |      |  |  | 195,000 | 
|AMERIPLUS (Medicaid  SSI)  |  |               | 78,000  |      |  |  | 73,000  | 
|AMERIFAM (FamilyCare)       |  |               | 13,000  |      |  |  | 20,000  | 
|                            |  |               |         |      |  |  |         | 
|Total                       |  |               | 934,000 |      |  |  | 866,000 | 
|                            |  |               |         |      |  |  |         | 

Results of Operations

The following table sets forth selected operating
ratios. All ratios, with the exception of the HBR, are shown as
a percentage of total revenues. We operate in one business
segment with a single line of business.

|                                             |  |               |       |               |  |      |       |      |  |  |       |   |  |  |       |  
|-------------------------------------------- |  | ------------- | ----- | ------------- |  | ---- | ----- | ---- |  |  | ----- | - |  |  | ----- | -
|                                             |  |               |       |              
|                                             |  | Three Months  |       | Nine Months  
|                                             |  | ended         |       | ended        
|                                             |  | September 30, |       | September 30,
|                                             |  |               |       |              
|                                             |  | 2004          |       | 2003          |  | 2004 |       | 2003
|                                             |  |               |       |               |  |      |       |     
|Premium revenue                              |  |               | 99.4  | %             |  |      | 99.6  | %    |  |  | 99.5  | % |  |  | 99.6  | %
|Investment income                            |  |               | 0.6   |               |  |      | 0.4   |      |  |  | 0.5   |   |  |  | 0.4   |  
|                                             |  |               |       |               |  |      |       |      |  |  |       |   |  |  |       |  
|Total revenues                               |  |               | 100.0 | %             |  |      | 100.0 | %    |  |  | 100.0 | % |  |  | 100.0 | %
|                                             |  |               |       |               |  |      |       |      |  |  |       |   |  |  |       |  
|Health benefits(1)                           |  |               | 79.9  | %             |  |      | 79.8  | %    |  |  | 80.7  | % |  |  | 80.1  | %
|Selling, general and administrative expenses |  |               | 11.1  | %             |  |      | 11.3  | %    |  |  | 10.6  | % |  |  | 11.5  | %
|Income before income taxes                   |  |               | 8.4   | %             |  |      | 7.5   | %    |  |  | 7.9   | % |  |  | 7.1   | %
|Net income                                   |  |               | 5.2   | %             |  |      | 4.4   | %    |  |  | 4.8   | % |  |  | 4.2   | %



---



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

12



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##### 



Three and Nine Month Periods Ended
September 30, 2004 Compared to Three and Nine Month Periods
Ended September 30, 2003

Revenues

Premium revenue for the three months ended
September 30, 2004 increased $56.9 million, or 13.8%,
to $468.2 million from $411.3 million for the three
months ended September 30, 2003. For the nine months ended
September 30, 2004 premium revenue increased
$133.2 million, or 11.2%, to $1,326.4 million from
$1,193.2 million for the nine months ended
September 30, 2003. The increase was due to internal growth
in overall membership, the St. Augustine acquisition and premium
rate increases.

Investment income increased $1.3 million to
$2.8 million for the three months ended September 30,
2004 from $1.5 million for the three months ended
September 30, 2003 and increased $2.1 million to
$7.0 million for the nine months ended September 30,
2004 from $4.9 million for the nine months ended
September 30, 2003. The increase in investment income was
due to an increase in overall levels of cash and investments
partially offset by increased levels of investments in
tax-advantaged securities. Cash and investment levels have
increased primarily due to the proceeds from our October 2003
public offering of common stock.

Health benefits

Expenses relating to health benefits for the
three months ended September 30, 2004 increased
$45.9 million, or 14.0% to $374.1 million from
$328.2 million for the three months ended
September 30, 2003. For the nine months ended
September 30, 2004 expenses relating to health benefits
increased $114.6 million, or 12.0% to $1,070.7 million
from $956.1 million for the nine months ended
September 30, 2003. The increase in health benefits expense
was primarily due to the increase in membership of 68,000
members.

Our HBR was 79.9% for the three months ended
September 30, 2004, compared to 79.8% in the same period of
the prior year. For the nine months ended September 30,
2004, our HBR was 80.7% versus 80.1% in the same period of the
prior year. This increase is due primarily to revenue increases
in certain key markets not keeping up with medical cost
increases for the first six months of the year. In the third
quarter, rate increases became effective in certain key markets,
which mitigated the increases in medical cost per member per
month experienced throughout the year. Underlying medical
expenses continue to reflect patterns consistent with prior
quarters except for an increase in obstetrical deliveries this
quarter, which were driven largely by a change in the mix of
members in Illinois and Texas.

Selling, general and administrative
expenses

Our SG&A to total revenue ratio was 11.1% and
11.3% for the three months ended September 30, 2004 and
2003, respectively and 10.6% and 11.5% for the nine months ended
September 30, 2004 and 2003, respectively. SG&A for the
three months ended September 30, 2004 increased
$5.3 million, or 11.3%, to $52.1 million from
$46.8 million for the three months ended September 30,
2003. The $5.3 million increase was primarily due to
premium taxes that the States of Texas and New Jersey began
assessing in September 2003 and July 2004 respectively, an
increase in contributions to support community programs, focused
on objectives that support our mission offset by a decrease in
purchased services related to strategic initiatives in 2003 for
operational improvements, including expenses related to
implementation of the Health Insurance Portability and
Accountability Act of 1996 (HIPAA).

For the nine months ended September 30,
2004, SG&A increased $3.5 million, or 2.5%, to
$141.3 million in 2004 from $137.8 million for the
nine months ended September 30, 2003. The $3.5 million
increase was primarily due to an increase in premium taxes that
the States of Texas and New Jersey began assessing in September
2003 and July 2004 respectively offset by a decrease in
purchased services related to strategic initiatives in 2003 for
operational improvements including HIPAA implementation expenses.

13



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##### 



Interest expense

Interest expense was $0.2 million and
$0.5 million for the three months ended September 30,
2004 and 2003, respectively, and $0.5 million and
$1.6 million for the nine months ended September 30,
2004 and 2003, respectively. The decrease in both periods
primarily relates to borrowings outstanding on our credit
facility during the nine month period ended September 30,
2003. During the nine months ended September 30, 2004, our
credit facility was undrawn.

Provision for income taxes

Income tax expense for the three months ended
September 30, 2004 was $15.3 million with an effective
tax rate of 38.7% compared to $12.7 million for the three
months ended September 30, 2003 with an effective tax rate
of 41.2%. Income tax expense for the nine months ended
September 30, 2004 was $41.3 million with an effective
tax rate of 39.4% compared to $34.9 million for the same
period of the prior year with an effective tax rate of 41.2%.
The decreases in the effective tax rate for each of the periods
is primarily due to a resolution of potential federal tax issues
from a prior year, a decrease in non-deductible amortization, a
decrease in our blended state income tax rate and an increase in
investments in tax-advantaged securities.

Liquidity and capital
resources

Our primary sources of liquidity are cash and
cash equivalents, short and long-term investments, cash flow
from operations and borrowings under our credit facility. As of
September 30, 2004, we had cash and cash equivalents of
$296.1 million, short and long-term investments of
$287.6 million and restricted investments on deposit for
licensure of $37.7 million. Total cash and investments as
of September 30, 2004 was $621.4 million, a portion of
which is regulated by state regulatory requirements, compared to
$403.5 million as of September 30, 2003 and
$570.4 million as of December 31, 2003. Unregulated
cash and investments as of September 30, 2004 were
approximately $272.9 million.

On October 22, 2003, we entered into a
$95.0 million Amended and Restated Credit Agreement (credit
facility) with a syndicate of banks. The credit facility
contains a provision which allows us to obtain, subject to
certain conditions, an increase in commitments of up to an
additional $30.0 million. The proceeds of the credit
facility are available for general corporate purposes,
including, without limitation, permitted acquisitions of
businesses, assets and technologies. There is a commitment fee
on the unused portion of the credit facility that ranges from
0.375% to 0.50%, depending on our leverage ratio. The credit
facility terminates on October 22, 2006.

On October 26, 2004, we entered into a
definitive agreement to acquire CarePlus, which operates as
CarePlus Health Plan in New York City and provides services to
members covered by New York States Medicaid, Child Health
Plus and Family Health Plus programs. Under the terms of the
agreement, at the Closing, we will pay purchase consideration of
approximately $125 million in cash, provided that CarePlus
has estimated net worth of at least $20 million. From this
net worth, CarePlus will deposit $2 million into an escrow
account. Additional purchase consideration may be paid based on
specified criteria. The purchase consideration will be funded
through available unregulated cash which is included in current
assets. The transaction is subject to regulatory approvals and
other closing conditions and is expected to close in early 2005.

Cash provided by operating activities was
$68.9 million for the nine months ended September 30,
2004, compared to $69.6 million for the nine months ended
September 30, 2003. The decrease in cash from operations of
$0.7 million was primarily due to the following:



| |   |                                                                                                                                                                                              
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | an increase in net income of $13.8 million;                                                                                                                                                  
|
| |  | increases in the changes in accounts payable,
    accrued expenses and other liabilities of $22.8 million due
    to the timing of payments and accrued expenses;                            
|
| |  | a decrease in the change in premium receivables
    of $7.3 million related to an increase in supplemental
    receivables in Texas and the Florida premium increase effective
    July 2004;

14



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##### 





| |   |                                                                                                                                      
| | - | -------------------------------------------------------------------------------------------------------------------------------------
| |  | a decrease in the change of unearned revenue of
    $27.5 million due to the timing of premium
    receipts; and                     
|
| |  | a decrease in the changes in claims payable of
    $7.5 million primarily related to the settlement of accrued
    provider disputes.

For the nine months ended September 30,
2004, cash used in investing activities was $179.2 million
compared to cash provided by investing activities of
$6.0 million for the nine months ended September 30,
2003. The increase in cash used in investing activities
primarily related to the acquisition of long-term investments
and purchases of property, equipment and software. We currently
anticipate total capital expenditures for property, equipment
and software to be approximately $26.0 million to
$28.0 million in 2004.

Our investment policies are designed to preserve
capital, provide liquidity and maximize total return on invested
assets. As of September 30, 2004, our investment portfolio
consisted primarily of fixed-income securities. The weighted
average maturity is slightly under eight months. We utilize
investment vehicles such as municipal bonds, commercial paper,
U.S. government backed agencies, auction-rate securities
and U.S. Treasury instruments. The states in which we
operate prescribe the types of instruments in which our
subsidiaries may invest their cash. The weighted average taxable
equivalent yield on consolidated investments as of
September 30, 2004 was approximately 2.12%.

Cash used in financing activities was
$0.8 million for the nine months ended September 30,
2004 compared to $13.1 million for the nine months ended
September 30, 2003. The decrease primarily related to
repayments made under our credit facility during the nine month
period ended September 30, 2003.

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

Regulatory Capital and Dividend
Restrictions

Our operations are conducted through our wholly
owned subsidiaries, which include Health Maintenance
Organizations, or HMOs, and one managed care organization, or
MCO. HMOs and MCOs are subject to state regulations that, among
other things, may require the maintenance of minimum levels of
statutory capital, as defined by each state, and restrict the
timing, payment and amount of dividends and other distributions
that may be paid to their stockholders. Additionally, state
regulatory agencies may require individual HMOs to maintain
statutory capital levels higher than the state regulations. We
believe our subsidiaries are in compliance with all minimum
statutory capital requirements.



|        |                                                               
|------- | --------------------------------------------------------------
|Item 3. | Quantitative and Qualitative Disclosures
    About Market Risk

As of September 30, 2004 we had short-term
investments of $66.8 million, long-term investments of
$220.8 million and investments on deposit for licensure of
$37.7 million. These investments consist primarily of
investments with maturities between three and twenty-four
months. These investments are subject to interest rate risk and
will decrease in value if market rates increase. Credit risk is
managed by investing in money market funds, U.S. Treasury
securities, asset-backed securities, debt securities of
government sponsored entities, municipal bonds and auction-rate
securities. Our investment policies are subject to revision
based upon market conditions and our cash flow and tax
strategies, among other factors. We have the ability to hold
these investments to maturity, and as a result, we would expect
any decrease in the value of these investments resulting from
any decrease in changes in market interest rates to be
temporary. As of September 30, 2004, a hypothetical 1%
change in interest rates would result in an approximate
$3.3 million change in our annual investment income.



|        |                        
|------- | -----------------------
|Item 4. | Controls and Procedures

(a) Disclosure Controls and Procedures. Our
management, with the participation of our Chief Executive
Officer and Chief Accounting Officer, has evaluated the
effectiveness of our disclosure controls and procedures (as such
term is defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of

15



---



##### 



1934, as amended (the Exchange Act))
as of the end of the period covered by this report. Based on
such evaluation, our Chief Executive Officer and Chief
Accounting Officer have concluded that, as of the end of such
period, our disclosure controls and procedures are effective.


(b) Changes in Internal Controls Over
Financial Reporting. There were no material changes in our
internal controls over financial reporting or in other factors
that could significantly affect these controls during the period
covered by this report. In accordance with Section 404 of
the Sarbanes-Oxley Act of 2002, the Company is evaluating its
internal controls and is in the process of making changes to
improve the effectiveness of its internal control structure.

16



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##### 



PART II. OTHER INFORMATION



|        |                  
|------- | -----------------
|Item 1. | Legal Proceedings

On July 18, 2002, Texas Childrens
Hospital (TCH) in Houston filed suit in State District
Court against AMERIGROUP Texas, Inc., our Texas subsidiary,
seeking to be paid full-billed charges for all services rendered
to our Texas subsidiarys Medicaid members since October
1999. On January 17, 2003, the physicians of Baylor College
of Medicine (Baylor), non-network providers who provide medical
services at TCH, filed suit against our Texas subsidiary seeking
full-billed charges for services provided since October 1999 to
our Texas Medicaid members. On July 7, 2003, TCH and Baylor
added AMERIGROUP Corporation as an additional defendant to the
lawsuits, alleging that we are directly liable for the
obligations of our Texas subsidiary. On August 25, 2004, we
entered into a settlement arrangement with TCH and Baylor which
resulted in a dismissal with prejudice of the litigation. The
settlement did not have a material impact on the consolidated
income statement in the third quarter because the amount paid in
connection with the settlement had been previously reserved.

In March 2004, we received notice from HHSC that
it had commenced a review of certain claims payment issues
raised by TCH in early 2002 relating to services rendered to our
members between October 2000 and December 2001. These claims
were a portion of the claims which were the subject matter of
the above-referenced litigation with TCH and Baylor. The
regulatory issues with HHSC were resolved upon filing evidence
of the settlement of the litigation with TCH and Baylor.

In June 2002, Capital Health Systems, Inc.
(Capital) in New Jersey filed an action against our New Jersey
subsidiary in the Superior Court of New Jersey, Law Division,
Mercer County, seeking to be paid full-billed charges for all
services rendered to our New Jersey subsidiarys Medicaid
members from January 1, 2002 through the present. On
September 9, 2004, we entered into a settlement arrangement
with Capital which resulted in a dismissal with prejudice of the
litigation. The settlement did not have a material impact on the
consolidated income statement in the third quarter because the
amount paid in connection with the settlement had been
previously reserved.

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



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

None



|        |                                    
|------- | -----------------------------------
|Item 3. | Defaults Upon Senior
    Securities

None.



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

None.



|        |                  
|------- | -----------------
|Item 5. | Other Information

None.

17



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##### 





|        |         
|------- | --------
|Item 6. | 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. 333-347410)).                     
|        | 10 | .6.6        |  | 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 September 1, 2004.
|        | 10 | .19.1       |  | Amendment No. 16, dated September 1,
    2004, to the 1999 Contract for Services between the HHS and
    AMERIGROUP Texas, Inc. (Tarrant Service Area
    (No. 529-03-036-P)).                                               
|        | 10 | .20.1       |  | Amendment No. 18, dated September 1,
    2004, to the 1999 Contract for Services between HHS and
    AMERIGROUP Texas, Inc. (Harris Service Area
    (No. 529-03-035-R)).                                                    
|        | 10 | .21.1       |  | Amendment No. 13, dated September 1,
    2004, to the September 1, 2000 Contract for Services
    between the HHS and AMERIGROUP Texas, Inc. (Dallas Service Area
    (No. 529-03-037-M)).                                   
|        | 10 | .22.5       |  | Amendment No. M00014, dated July 7,
    2004, to the District of Columbia Healthy Families Programs,
    Department of Health Medical Assistance Administration, Prepaid,
    Capital Risk Contract (POHC-2002-D-0003).      
|        | 10 | .22.6       |  | Amendment No. M00015, dated July 7,
    2004, to the District of Columbia Healthy Families Programs,
    Department of Health Medical Assistance Administration, Prepaid,
    Capital Risk Contract (POHC-2002-D-0003).      
|        | 10 | .23.2       |  | Amendment No. 12, dated September 1,
    2004, to the September 1, 2002 Contract for Services
    between the HHS and AMERIGROUP Texas, Inc. (Childrens
    Health Insurance Program Agreement (No. 529-00-139-L)).         
|        | 10 | .25         |  | Medicaid Contract between the State of Florida,
    Agency for Health Care Administration and AMERIGROUP of Florida,
    Inc., dated July 1, 2004 Contract No. FA523                                                         
|        | 10 | .25.2       |  | Amendment No. 1, dated August 20, 2004,
    to the June 28, 2002 Medical Contract between the State of
    Florida, Agency for Health Care Administration and AMERIGROUP of
    Florida, Inc.                                
|        | 10 | .28.2       |  | Amendment No. 1, dated October 1, 2004,
    to the July 2, 2002 Medical Services Contract by and
    between Florida Healthy Kids Corporation and AMERIGROUP Florida,
    Inc., dated October 1, 2004 (Pasco and Polk).      
|        | 10 | .42.1       |  | Amendment No. 1, dated September 1,
    2004, to the June 1, 2004 Contract for Services between HHS
    and AMERIGROUP Texas, Inc. (Travis Service Area
    (No. 529-04-296-A)).                                             
|        | 10 | .43.1       |  | Amendments No. 9, dated September 1,
    2004, to the 1999 Contract for Services between the HHS and
    AMERIGROUP Texas, Inc. (Harris County Service Area STAR+Plus
    Contract (No. 65M 1015HPC)).                       
|        | 10 | .44         |  | Merger Agreement by and among CarePlus LLC,
    AMERIGROUP Acquisition Corp., AMERIGROUP Corporation dated
    October 26, 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 on Form 10-Q for the quarter ended
    June 30, 2003, filed on August 11, 2003).                    
|        | 31 | .1          |  | Certification of Chief Executive Officer pursuant
    to Section 302 of Sarbanes-Oxley Act of 2002, dated
    November 5, 2004.                                                                                              
|        | 31 | .2          |  | Certification of Chief Accounting Officer
    pursuant to Section 302 of Sarbanes-Oxley Act of 2002,
    dated November 5, 2004.                                                                                             
|        | 32 |             |  | Certification of Chief Executive Officer and
    Chief Accounting Officer pursuant to Section 906 of
    Sarbanes-Oxley Act of 2002, dated November 5, 2004.                                                                 

18



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##### 



SIGNATURES

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



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

|                       |  |     |  |                                                                                                                
|---------------------- |  | --- |  | ---------------------------------------------------------------------------------------------------------------
|Date: November 5, 2004 |  | By: |  | /s/ JEFFREY L. MCWATERSChairman and Chief
    Executive Officer                                                
|                      
|Date: November 5, 2004 |  | By: |  | /s/ KATHLEEN K. TOTHExecutive Vice President and
    Chief Accounting Officer
    (principal financial officer)

19