##### Table of Contents









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 June 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 August 2, 2004, there were
24,880,522 shares outstanding of AMERIGROUPs common
stock, par value $.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 June 30, 2004 and
    December 31, 2003                           |  |  | 3  | 
|                              |  | Condensed Consolidated
    Income Statements for the three and six month periods ended
    June 30, 2004 and 2003 |  |  | 4  | 
|                              |  | Condensed Consolidated
    Statements of Cash Flows for the six month periods ended
    June 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                                                    |  |  | 14 | 
|Item 4.                       |  | Controls and Procedures                                                                                           |  |  | 15 | 
|PART II. OTHER INFORMATION   
|Item 1.                       |  | Legal Proceedings                                                                                                 |  |  | 16 | 
|Item 2.                       |  | Changes in Securities, Use
    of Proceeds and Issuer Purchases of Equity Securities                              |  |  | 17 | 
|Item 3.                       |  | Defaults Upon Senior
    Securities                                                                               |  |  | 17 | 
|Item 4.                       |  | Submission of Matters to a
    Vote of Security Holders                                                           |  |  | 17 | 
|Item 5.                       |  | Other Information                                                                                                 |  |  | 18 | 
|Item 6.                       |  | Exhibits and Reports on
    Form 8-K                                                                              |  |  | 19 | 
|EX-10.6.5                    
|EX-10.7.7                    
|EX-10.17.7                   
|EX-10.22.2                   
|EX-10.22.3                   
|EX-10.43                     
|EX-31.1                      
|EX-31.2                      
|EX-32                        



2



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##### Table of Contents



PART I. FINANCIAL INFORMATION




Item 1.     Financial
Statements

AMERIGROUP CORPORATION AND
SUBSIDIARIES



CONDENSED CONSOLIDATED BALANCE
SHEETS


(Dollars in thousands, except for per share
data)


|                                                                          |                                                                                                                                                                                |                            |         |              |         |   |         |         |         | 
|------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | -------------------------- | ------- | ------------ | ------- | - | ------- | ------- | ------- | 
|                                                                          |                                                                                                                                                                                | June 30,                   |         | December 31,
|                                                                          |                                                                                                                                                                                | 2004                       |         | 2003        
|                                                                          |                                                                                                                                                                                |                            |         |             
|ASSETS                                                                   
|Current assets:                                                           |                                                                                                                                                                                |                            |         |              |         |   |         |        
|                                                                          | Cash and cash equivalents                                                                                                                                                      |                            | $       | 296,332      |         |   | $       | 407,220 |        
|                                                                          | Short-term investments                                                                                                                                                         |                            |         | 53,265       |         |   |         | 8,750   |        
|                                                                          | Premium receivables                                                                                                                                                            |                            |         | 37,819       |         |   |         | 38,259  |        
|                                                                          | Deferred income taxes                                                                                                                                                          |                            |         | 8,232        |         |   |         | 10,164  |        
|                                                                          | Prepaid expenses and other current assets                                                                                                                                      |                            |         | 15,538       |         |   |         | 15,995  |        
|                                                                          |                                                                                                                                                                                |                            |         |              |         |   |         |        
|                                                                          |                                                                                                                                                                                | Total current assets       |         |              | 411,186 |   |         |         | 480,388 | 
|Property and equipment, net                                               |                                                                                                                                                                                |                            | 33,422  |              |         |   | 31,734  |        
|Software, net                                                             |                                                                                                                                                                                |                            | 9,789   |              |         |   | 10,424  |        
|Goodwill and other intangible assets, net                                 |                                                                                                                                                                                |                            | 142,251 |              |         |   | 144,398 |        
|Long-term investments                                                     |                                                                                                                                                                                |                            | 190,333 |              |         |   | 119,133 |        
|Investments on deposit for licensure                                      |                                                                                                                                                                                |                            | 37,466  |              |         |   | 35,346  |        
|Other long-term assets                                                    |                                                                                                                                                                                |                            | 5,256   |              |         |   | 4,598   |        
|                                                                          |                                                                                                                                                                                |                            |         |              |         |   |         |        
|                                                                          |                                                                                                                                                                                | $                          | 829,703 |              |         | $ | 826,021 |        
|                                                                          |                                                                                                                                                                                |                            |         |              |         |   |         |        
|LIABILITIES AND STOCKHOLDERS
    EQUITY                                 
|Current liabilities:                                                      |                                                                                                                                                                                |                            |         |              |         |   |         |        
|                                                                          | Claims payable                                                                                                                                                                 |                            | $       | 232,918      |         |   | $       | 239,532 |        
|                                                                          | Unearned revenue                                                                                                                                                               |                            |         | 28,818       |         |   |         | 54,324  |        
|                                                                          | Accounts payable                                                                                                                                                               |                            |         | 4,207        |         |   |         | 5,523   |        
|                                                                          | Accrued expenses, capital leases and other
    current liabilities                                                                                                             |                            |         | 43,117       |         |   |         | 53,431  |        
|                                                                          |                                                                                                                                                                                |                            |         |              |         |   |         |        
|                                                                          |                                                                                                                                                                                | Total current liabilities  |         |              | 309,060 |   |         |         | 352,810 | 
|Deferred income taxes, capital leases and other
    long-term liabilities |                                                                                                                                                                                |                            | 9,665   |              |         |   | 11,497  |        
|                                                                          |                                                                                                                                                                                |                            |         |              |         |   |         |        
|                                                                          |                                                                                                                                                                                | Total liabilities          |         |              | 318,725 |   |         |         | 364,307 | 
|                                                                          |                                                                                                                                                                                |                            |         |              |         |   |         |        
|Stockholders equity:                                                     |                                                                                                                                                                                |                            |         |              |         |   |         |        
|                                                                          | Common stock, $.01 par value. Authorized
    100,000,000 shares; issued and outstanding 24,872,569 and
    24,444,622 at June 30, 2004 and
    December 31, 2003, respectively |                            |         | 249          |         |   |         | 244     |        
|                                                                          | Additional paid-in capital                                                                                                                                                     |                            |         | 341,669      |         |   |         | 331,751 |        
|                                                                          | Retained earnings                                                                                                                                                              |                            |         | 169,060      |         |   |         | 129,776 |        
|                                                                          | Deferred compensation                                                                                                                                                          |                            |         |             |         |   |         | (57     | )      
|                                                                          |                                                                                                                                                                                |                            |         |              |         |   |         |        
|                                                                          |                                                                                                                                                                                | Total stockholders equity |         |              | 510,978 |   |         |         | 461,714 | 
|                                                                          |                                                                                                                                                                                |                            |         |              |         |   |         |        
|                                                                          |                                                                                                                                                                                | $                          | 829,703 |              |         | $ | 826,021 |        
|                                                                          |                                                                                                                                                                                |                            |         |              |         |   |         |        

See accompanying notes to condensed consolidated
financial statements.

3



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##### Table of Contents



AMERIGROUP CORPORATION AND
SUBSIDIARIES



CONDENSED CONSOLIDATED INCOME
STATEMENTS


(Unaudited, dollars in thousands, except for
per share data)


|                      |                                                                                               |                             |        |                           |         |      |        |            |         |  |        |            |         |  |        |            |         | 
|--------------------- | --------------------------------------------------------------------------------------------- | --------------------------- | ------ | ------------------------- | ------- | ---- | ------ | ---------- | ------- |  | ------ | ---------- | ------- |  | ------ | ---------- | ------- | 
|                      |                                                                                               |                             |        |                          
|                      |                                                                                               | Three months ended June 30, |        | Six months ended June 30,
|                      |                                                                                               |                             |        |                          
|                      |                                                                                               | 2004                        |        | 2003                      |         | 2004 |        | 2003      
|                      |                                                                                               |                             |        |                           |         |      |        |           
|Revenues:             |                                                                                               |                             |        |                           |         |      |        |            |         |  |        |            |         |  |        |           
|                      | Premium                                                                                       |                             | $      | 435,918                   |         |      | $      | 392,331    |         |  | $      | 858,253    |         |  | $      | 781,893    |        
|                      | Investment income                                                                             |                             |        | 2,217                     |         |      |        | 1,693      |         |  |        | 4,177      |         |  |        | 3,381      |        
|                      |                                                                                               |                             |        |                           |         |      |        |            |         |  |        |            |         |  |        |           
|                      |                                                                                               | Total revenues              |        |                           | 438,135 |      |        |            | 394,024 |  |        |            | 862,430 |  |        |            | 785,274 | 
|                      |                                                                                               |                             |        |                           |         |      |        |            |         |  |        |            |         |  |        |           
|Expenses:             |                                                                                               |                             |        |                           |         |      |        |            |         |  |        |            |         |  |        |           
|                      | Health benefits                                                                               |                             |        | 354,415                   |         |      |        | 310,536    |         |  |        | 696,662    |         |  |        | 627,834    |        
|                      | Selling, general and administrative                                                           |                             |        | 43,728                    |         |      |        | 46,945     |         |  |        | 89,215     |         |  |        | 91,015     |        
|                      | Depreciation and amortization                                                                 |                             |        | 5,266                     |         |      |        | 5,732      |         |  |        | 10,890     |         |  |        | 11,494     |        
|                      | Interest                                                                                      |                             |        | 194                       |         |      |        | 546        |         |  |        | 375        |         |  |        | 1,096      |        
|                      |                                                                                               |                             |        |                           |         |      |        |            |         |  |        |            |         |  |        |           
|                      |                                                                                               | Total expenses              |        |                           | 403,603 |      |        |            | 363,759 |  |        |            | 797,142 |  |        |            | 731,439 | 
|                      |                                                                                               |                             |        |                           |         |      |        |            |         |  |        |            |         |  |        |           
|                      |                                                                                               | Income before income taxes  |        |                           | 34,532  |      |        |            | 30,265  |  |        |            | 65,288  |  |        |            | 53,835  | 
|Income tax expense    |                                                                                               |                             | 13,686 |                           |         |      | 12,288 |            |         |  | 26,004 |            |         |  | 22,164 |           
|                      |                                                                                               |                             |        |                           |         |      |        |            |         |  |        |            |         |  |        |           
|                      |                                                                                               | Net income                  |        | $                         | 20,846  |      |        | $          | 17,977  |  |        | $          | 39,284  |  |        | $          | 31,671  | 
|                      |                                                                                               |                             |        |                           |         |      |        |            |         |  |        |            |         |  |        |           
|Net income per share: |                                                                                               |                             |        |                           |         |      |        |            |         |  |        |            |         |  |        |           
|                      | Basic net income per share                                                                    |                             | $      | 0.84                      |         |      | $      | 0.87       |         |  | $      | 1.59       |         |  | $      | 1.53       |        
|                      |                                                                                               |                             |        |                           |         |      |        |            |         |  |        |            |         |  |        |           
|                      | Weighted average number of common shares
    outstanding                                      |                             |        | 24,800,412                |         |      |        | 20,764,458 |         |  |        | 24,681,413 |         |  |        | 20,689,531 |        
|                      |                                                                                               |                             |        |                           |         |      |        |            |         |  |        |            |         |  |        |           
|                      | Diluted net income per share                                                                  |                             | $      | 0.81                      |         |      | $      | 0.82       |         |  | $      | 1.53       |         |  | $      | 1.45       |        
|                      |                                                                                               |                             |        |                           |         |      |        |            |         |  |        |            |         |  |        |           
|                      | Weighted average number of common shares and
    dilutive potential common shares outstanding |                             |        | 25,791,480                |         |      |        | 21,909,649 |         |  |        | 25,710,472 |         |  |        | 21,770,714 |        
|                      |                                                                                               |                             |        |                           |         |      |        |            |         |  |        |            |         |  |        |           

See accompanying notes to condensed consolidated
financial statements.

4



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##### Table of Contents



AMERIGROUP CORPORATION AND
SUBSIDIARIES



CONDENSED CONSOLIDATED STATEMENTS OF CASH
FLOWS


(Unaudited, dollars in thousands)


|                                                                            |                                                                                       |                                                                                           |                                                              |                                                         |        |         |          |          |        |         |        |  
|--------------------------------------------------------------------------- | ------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------- | ------------------------------------------------------------ | ------------------------------------------------------- | ------ | ------- | -------- | -------- | ------ | ------- | ------ | -
|                                                                            |                                                                                       |                                                                                          
|                                                                            |                                                                                       | Six months                                                                               
|                                                                            |                                                                                       | ended June 30,                                                                           
|                                                                            |                                                                                       |                                                                                          
|                                                                            |                                                                                       | 2004                                                                                      |                                                              | 2003                                                   
|                                                                            |                                                                                       |                                                                                           |                                                              |                                                        
|Cash flows from operating activities:                                       |                                                                                       |                                                                                           |                                                              |                                                         |        |         |          |         
|                                                                            | Net income                                                                            |                                                                                           | $                                                            | 39,284                                                  |        |         | $        | 31,671   |       
|                                                                            | Adjustments to reconcile net income to net cash
    provided by operating activities: |                                                                                           |                                                              |                                                         |        |         |          |          |       
|                                                                            |                                                                                       | Depreciation and amortization                                                             |                                                              |                                                         | 10,890 |         |          |          | 11,494 |        
|                                                                            |                                                                                       | Loss on disposal or abandonment of property,
    equipment and software                   |                                                              |                                                         | 945    |         |          |          |       |        
|                                                                            |                                                                                       | Deferred tax expense                                                                      |                                                              |                                                         | 1,103  |         |          |          | 1,231  |        
|                                                                            |                                                                                       | Amortization of deferred compensation                                                     |                                                              |                                                         | 57     |         |          |          | 180    |        
|                                                                            |                                                                                       | Tax benefit related to exercise of stock options                                          |                                                              |                                                         | 3,385  |         |          |          | 925    |        
|                                                                            |                                                                                       | Changes in assets and liabilities increasing
    (decreasing) cash flows from operations: |                                                              |                                                         |        |         |          |          |        |        
|                                                                            |                                                                                       |                                                                                           | Premium receivables                                          |                                                         |        | 440     |          |          |        | 1,889   |       
|                                                                            |                                                                                       |                                                                                           | Prepaid expenses and other current assets                    |                                                         |        | 457     |          |          |        | (939    | )     
|                                                                            |                                                                                       |                                                                                           | Other assets                                                 |                                                         |        | (974    | )        |          |        | (918    | )     
|                                                                            |                                                                                       |                                                                                           | Claims payable                                               |                                                         |        | (6,614  | )        |          |        | 3,707   |       
|                                                                            |                                                                                       |                                                                                           | Accounts payable, accrued expenses and other
    liabilities |                                                         |        | (5,469  | )        |          |        | (11,769 | )     
|                                                                            |                                                                                       |                                                                                           | Unearned revenue                                             |                                                         |        | (25,506 | )        |          |        | (23,449 | )     
|                                                                            |                                                                                       |                                                                                           | Other long-term liabilities                                  |                                                         |        | 787     |          |          |        | 1,130   |       
|                                                                            |                                                                                       |                                                                                           |                                                              |                                                         |        |         |          |         
|                                                                            |                                                                                       |                                                                                           |                                                              | Net cash provided by operating activities               |        |         | 18,785   |          |        |         | 15,152 |  
|                                                                            |                                                                                       |                                                                                           |                                                              |                                                         |        |         |          |         
|Cash flows from investing activities:                                       |                                                                                       |                                                                                           |                                                              |                                                         |        |         |          |         
|                                                                            | Proceeds from redemption of held-to-maturity
    investments                          |                                                                                           |                                                              | 101,634                                                 |        |         |          | 131,167  |       
|                                                                            | Purchase of held-to-maturity investments                                              |                                                                                           |                                                              | (217,349                                                | )      |         |          | (122,091 | )     
|                                                                            | Purchase of property, equipment and software                                          |                                                                                           |                                                              | (10,473                                                 | )      |         |          | (6,406   | )     
|                                                                            | Proceeds from redemption of investments on
    deposit for licensure                  |                                                                                           |                                                              | 35,225                                                  |        |         |          | 6,670    |       
|                                                                            | Purchase of investments on deposit for licensure                                      |                                                                                           |                                                              | (37,345                                                 | )      |         |          | (10,624  | )     
|                                                                            | Purchase of contract rights and related assets,
    net of adjustments                |                                                                                           |                                                              | 48                                                      |        |         |          | (8,209   | )     
|                                                                            | Cash acquired through stock acquisition                                               |                                                                                           |                                                              |                                                        |        |         |          | 27,483   |       
|                                                                            |                                                                                       |                                                                                           |                                                              |                                                         |        |         |          |         
|                                                                            |                                                                                       |                                                                                           |                                                              | Net cash (used in) provided by investing
    activities |        |         | (128,260 | )        |        |         | 17,990 |  
|                                                                            |                                                                                       |                                                                                           |                                                              |                                                         |        |         |          |         
|Cash flows from financing activities:                                       |                                                                                       |                                                                                           |                                                              |                                                         |        |         |          |         
|                                                                            | Net (decrease) increase in bank overdrafts                                            |                                                                                           |                                                              | (5,315                                                  | )      |         |          | 1,383    |       
|                                                                            | Repayments of borrowings under credit facility                                        |                                                                                           |                                                              |                                                        |        |         |          | (11,000  | )     
|                                                                            | Payment of capital lease obligations                                                  |                                                                                           |                                                              | (2,636                                                  | )      |         |          | (1,942   | )     
|                                                                            | Proceeds from exercise of common stock options                                        |                                                                                           |                                                              | 6,538                                                   |        |         |          | 2,776    |       
|                                                                            |                                                                                       |                                                                                           |                                                              |                                                         |        |         |          |         
|                                                                            |                                                                                       |                                                                                           |                                                              | Net cash used in financing activities                   |        |         | (1,413   | )        |        |         | (8,783 | )
|                                                                            |                                                                                       |                                                                                           |                                                              |                                                         |        |         |          |         
|Net (decrease) increase in cash and cash
    equivalents                    |                                                                                       |                                                                                           | (110,888                                                     | )                                                       |        |         | 24,359   |         
|Cash and cash equivalents at beginning of period                            |                                                                                       |                                                                                           | 407,220                                                      |                                                         |        |         | 207,996  |         
|                                                                            |                                                                                       |                                                                                           |                                                              |                                                         |        |         |          |         
|Cash and cash equivalents at end of period                                  |                                                                                       | $                                                                                         | 296,332                                                      |                                                         |        | $       | 232,355  |         
|                                                                            |                                                                                       |                                                                                           |                                                              |                                                         |        |         |          |         
|Supplemental disclosures of cash flow information:                          |                                                                                       |                                                                                           |                                                              |                                                         |        |         |          |         
|                                                                            | Cash paid for interest                                                                |                                                                                           | $                                                            | 285                                                     |        |         | $        | 1,103    |       
|                                                                            |                                                                                       |                                                                                           |                                                              |                                                         |        |         |          |         
|                                                                            | Cash paid for income taxes                                                            |                                                                                           | $                                                            | 21,334                                                  |        |         | $        | 22,557   |       
|                                                                            |                                                                                       |                                                                                           |                                                              |                                                         |        |         |          |         
|Supplemental disclosure of non-cash investing and
    financing activities: |                                                                                       |                                                                                           |                                                              |                                                         |        |         |          |         
|                                                                            | Property and equipment acquired under capital
    leases                              |                                                                                           | $                                                            |                                                        |        |         | $        | 1,527    |       
|                                                                            |                                                                                       |                                                                                           |                                                              |                                                         |        |         |          |         

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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##### Table of Contents



AMERIGROUP CORPORATION AND
SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS

(Unaudited, dollars in thousands, except per
share data)


1. The accompanying condensed consolidated
financial statements as of June 30, 2004 and for the
three and six month periods ended June 30, 2004 and
2003 are unaudited and reflect all adjustments (consisting only
of normal recurring adjustments) which are, in the opinion of
management, necessary for a fair presentation of the financial
position at June 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 six month periods ended
June 30, 2004 are not necessarily indicative of the
results to be expected for the entire fiscal 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 ended June 30, |   | Six months ended June 30,
|                              |                                                                                               |                             |   |                          
|                              |                                                                                               | 2004                        |   | 2003                      |  | 2004 |   | 2003      
|                              |                                                                                               |                             |   |                           |  |      |   |           
|Basic net income per share:   |                                                                                               |                             |   |                           |  |      |   |            |  |  |   |            |  |  |   |           
|                              | Net income                                                                                    |                             | $ | 20,846                    |  |      | $ | 17,977     |  |  | $ | 39,284     |  |  | $ | 31,671     | 
|                              |                                                                                               |                             |   |                           |  |      |   |            |  |  |   |            |  |  |   |           
|                              | Weighted average number of common shares
    outstanding                                      |                             |   | 24,800,412                |  |      |   | 20,764,458 |  |  |   | 24,681,413 |  |  |   | 20,689,531 | 
|                              |                                                                                               |                             |   |                           |  |      |   |            |  |  |   |            |  |  |   |           
|                              | Basic net income per share                                                                    |                             | $ | 0.84                      |  |      | $ | 0.87       |  |  | $ | 1.59       |  |  | $ | 1.53       | 
|                              |                                                                                               |                             |   |                           |  |      |   |            |  |  |   |            |  |  |   |           
|Diluted net income per share: |                                                                                               |                             |   |                           |  |      |   |            |  |  |   |            |  |  |   |           
|                              | Net income                                                                                    |                             | $ | 20,846                    |  |      | $ | 17,977     |  |  | $ | 39,284     |  |  | $ | 31,671     | 
|                              |                                                                                               |                             |   |                           |  |      |   |            |  |  |   |            |  |  |   |           
|                              | Weighted average number of common shares
    outstanding                                      |                             |   | 24,800,412                |  |      |   | 20,764,458 |  |  |   | 24,681,413 |  |  |   | 20,689,531 | 
|                              | Dilutive effect of stock options (as determined
    by applying the treasury stock method)    |                             |   | 991,068                   |  |      |   | 1,145,191  |  |  |   | 1,029,059  |  |  |   | 1,081,183  | 
|                              |                                                                                               |                             |   |                           |  |      |   |            |  |  |   |            |  |  |   |           
|                              | Weighted average number of common shares and
    dilutive potential common shares outstanding |                             |   | 25,791,480                |  |      |   | 21,909,649 |  |  |   | 25,710,472 |  |  |   | 21,770,714 | 
|                              |                                                                                               |                             |   |                           |  |      |   |            |  |  |   |            |  |  |   |           
|                              | Diluted net income per share                                                                  |                             | $ | 0.81                      |  |      | $ | 0.82       |  |  | $ | 1.53       |  |  | $ | 1.45       | 
|                              |                                                                                               |                             |   |                           |  |      |   |            |  |  |   |            |  |  |   |           

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

6



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##### Table of Contents



AMERIGROUP CORPORATION AND
SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

grant over the amount an employee must pay to
acquire the stock. Statement of Financial Accounting 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 ended |   | Six months ended
|                              |                                                                                                                                                     | June 30,           |   | June 30,        
|                              |                                                                                                                                                     |                    |   |                 
|                              |                                                                                                                                                     | 2004               |   | 2003             |  | 2004 |   | 2003  
|                              |                                                                                                                                                     |                    |   |                  |  |      |   |       
|Net income:                   |                                                                                                                                                     |                    |   |                  |  |      |   |        |  |  |   |        |  |  |   |       
|                              | Reported net income                                                                                                                                 |                    | $ | 20,846           |  |      | $ | 17,977 |  |  | $ | 39,284 |  |  | $ | 31,671 | 
|                              | Deduct: Total stock-based employee compensation
    expense determined under fair value based method for all awards,
    net of related tax effects |                    |   | 2,304            |  |      |   | 2,455  |  |  |   | 4,408  |  |  |   | 4,484  | 
|                              |                                                                                                                                                     |                    |   |                  |  |      |   |        |  |  |   |        |  |  |   |       
|                              | Pro forma net income                                                                                                                                |                    | $ | 18,542           |  |      | $ | 15,522 |  |  | $ | 34,876 |  |  | $ | 27,187 | 
|                              |                                                                                                                                                     |                    |   |                  |  |      |   |        |  |  |   |        |  |  |   |       
|Basic net income per share:   |                                                                                                                                                     |                    |   |                  |  |      |   |        |  |  |   |        |  |  |   |       
|                              | Reported basic net income per share                                                                                                                 |                    | $ | 0.84             |  |      | $ | 0.87   |  |  | $ | 1.59   |  |  | $ | 1.53   | 
|                              | Pro forma basic net income per share                                                                                                                |                    |   | 0.75             |  |      |   | 0.75   |  |  |   | 1.41   |  |  |   | 1.31   | 
|Diluted net income per share: |                                                                                                                                                     |                    |   |                  |  |      |   |        |  |  |   |        |  |  |   |       
|                              | Reported diluted net income per share                                                                                                               |                    | $ | 0.81             |  |      | $ | 0.82   |  |  | $ | 1.53   |  |  | $ | 1.45   | 
|                              | Pro forma diluted net income per share                                                                                                              |                    |   | 0.73             |  |      |   | 0.72   |  |  |   | 1.37   |  |  |   | 1.26   | 

As of June 30, 2004, we had 2,632,317
options outstanding with a weighted average exercise price of
$25.12. For the six months ended June 30, 2004, we
granted 558,438 options with a weighted average exercise price
of $37.22.

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% and 4.08%, expected life of
5.28 years and 6.16 years and volatility of 29.65% and
30.62% for the first and second quarters of 2004, respectively.

4. In April 2004, the Maryland Legislature
enacted a budget for the 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
before income tax effects. A liability for the recoupment was
recorded with a corresponding charge to premium revenue during
the three months ended June 30, 2004.

5. On July 18, 2002, Texas
Childrens Hospital (TCH) in Houston filed suit in
State District Court against AMERIGROUP Texas, Inc., our Texas
subsidiary, seeking to be paid full-billed charges for all
services rendered to our Texas subsidiarys Medicaid
members since October 1999. Our Texas subsidiary does not have a
contract with TCH to provide services to its Medicaid members.
When TCH provides services to our members, it does so as a
non-network provider. On January 17, 2003, the
physicians of Baylor College of Medicine (Baylor), non-network
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. The trial court ruled in
November 2003 to abate the lawsuit pending TCHs exhaustion
of its administrative remedies with the Texas Health and Human
Services Commission (HHSC). TCH and Baylor requested an early
review of

7



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##### Table of Contents



AMERIGROUP CORPORATION AND
SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

the Courts decision by the Court of
Appeals, which was denied. To our knowledge, TCH has not
initiated an administrative complaint in accordance with the
courts order. No trial date has been set.

In March 2004, we received notice that HHSC had
commenced a review of certain claims payment issues raised by
TCH in early 2002 which are a portion of the claims that are the
subject matter of the lawsuit. On June 7, 2004, HHSC
issued its findings stating that our Texas subsidiary had not
demonstrated that its out-of-network reimbursement methodology
for these claims was reasonable and customary. HHSC required our
Texas subsidiary to file a corrective action plan and to pay TCH
approximately $385 in interest on these claims. On
June 14, 2004, our Texas subsidiary filed a corrective
action plan in which it agreed to pay TCH the required interest
payment and to reimburse TCH for this portion of the claims an
additional $837, which is the difference between the amount
previously paid and the amount that TCH would have received if
the claims had been paid using the out-of-network rate
methodology affirmatively approved by HHSC on
December 11, 2002 for the period after
January 1, 2003.

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.
Capital contends that our New Jersey subsidiary has not had a
contract with Capital to provide services to its Medicaid
members since December 31, 2001. Nevertheless, from
January 1, 2002 through August 31, 2002, our
New Jersey subsidiary continued to reimburse Capital under our
prior contract with them that Capital alleges was terminated on
December 31, 2001; since September 1, 2002
through the present, our New Jersey subsidiary has paid Capital
as an out-of-network, or non-contracted, provider. Capital
asserts that our New Jersey subsidiary agreed to pay full-billed
charges upon the expiration of prior contract. The Court ruled
in favor of Capital on August 8, 2003, and determined
that our New Jersey subsidiary entered into an implied contract
with Capital as of December 31, 2001, which extended
through April 30, 2002, to pay Capital its full-billed
charges. Capital filed a Motion of Summary Judgment on issue of
damages for the period January 1, 2002 through
April 30, 2002, seeking $3,400 that represents
Capitals calculation of the difference between what our
New Jersey subsidiary actually paid Capital and Capitals
full-billed charges. We are opposing the motion on the grounds
that, despite the Courts findings of the implied contract,
many of the claims for which Capital seeks full-billed charges
were for non-covered services and/or for services at levels
higher than our New Jersey subsidiarys member required. No
trial date on damages is currently scheduled.

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

8



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##### Table of Contents






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



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##### Table of Contents



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 while improving
quality.

In our second quarter ended
June 30, 2004, we increased our total revenues by
11.2% over the same period in 2003. For the six months ended
June 30, 2004, we increased our total revenues by 9.8%
over the same period in 2003. Total membership increased 83,000,
or 10.1%, to 902,000 as of June 30, 2004, from 819,000
as of June 30, 2003. Year-to-date revenue growth was
due to a number of factors including:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Growth in existing service areas premium
    revenue increased 8.6% for the second quarter of 2004 compared
    to the second quarter of 2003 and increased 7.2% for the six
    months ended June 30, 2004 compared to the six months
    ended June 30, 2003.                                                                                                                                                                                      
|
| |  | 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 operates 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 81.3% for the
three months ended June 30, 2004, compared to 79.2% in the
same period of the prior year. For the six months ended
June 30, 2004, our HBR increased to 81.2% from 80.3%
in the same period of the prior year. Both periods reflect per
member per month increases in inpatient hospital, emergency
room, outpatient observation and professional services partially
offset by decreases in ancillary and other expenses. In certain
key markets, the growth of these medical costs exceeded the
corresponding growth in premium revenue for the same respective
periods resulting in an increase in the HBR.

Selling, general and administrative expenses
(SG&A) were 10.0% of total revenues for the three months
ended June 30, 2004 compared to 11.9% in the same
period of the prior year. For the six months ended
June 30, 2004, our SG&A ratio was 10.3% compared
to 11.6% 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. In
both periods, our SG&A ratio has improved due to reduced
SG&A expenses and premium revenue increases.

Cash and investments totaled $577.4 million
at June 30, 2004. The majority of this cash was
regulated by state capital requirements. As of
June 30, 2004, $242.3 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. Almost
43% of our membership has resulted from nine acquisitions and we
are currently evaluating potential acquisition opportunities.
Effective June 1, 2004, we began coordinating Medicaid
managed care benefits in the Travis County, Texas service area.

In April 2004, the Maryland Legislature enacted a
budget for the 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
before

10



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##### Table of Contents



income tax effects. A liability for the
recoupment was recorded with a corresponding charge to premium
revenue during the three months ended June 30, 2004.


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. We are currently assessing all geographic
and product opportunities as we are preparing our response to
the RFP. If we lost a contract through the re-procurement
process, our operating results could be materially and adversely
affected.

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

|                                                          |  |          |         |      |  |  |         | 
|--------------------------------------------------------- |  | -------- | ------- | ---- |  |  | ------- | 
|                                                          |  |         
|                                                          |  | June 30,
|                                                          |  |         
|Market                                                    |  | 2004     |         | 2003
|                                                          |  |          |         |     
|Texas                                                     |  |          | 356,000 |      |  |  | 321,000 | 
|Florida                                                   |  |          | 240,000 |      |  |  | 199,000 | 
|Maryland                                                  |  |          | 127,000 |      |  |  | 127,000 | 
|New Jersey                                                |  |          | 106,000 |      |  |  | 104,000 | 
|District of Columbia                                      |  |          | 38,000  |      |  |  | 37,000  | 
|Illinois                                                  |  |          | 35,000  |      |  |  | 31,000  | 
|                                                          |  |          |         |      |  |  |         | 
|Total                                                     |  |          | 902,000 |      |  |  | 819,000 | 
|                                                          |  |          |         |      |  |  |         | 
|Percentage growth from June 30, 2003 to
    June 30, 2004 |  |          | 10.1    | %    |  |  |         | 

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

|                            |  |          |         |      |  |  |         | 
|--------------------------- |  | -------- | ------- | ---- |  |  | ------- | 
|                            |  |         
|                            |  | June 30,
|                            |  |         
|Product                     |  | 2004     |         | 2003
|                            |  |          |         |     
|AMERICAID (Medicaid  TANF) |  |          | 616,000 |      |  |  | 535,000 | 
|AMERIKIDS (SCHIP)           |  |          | 195,000 |      |  |  | 195,000 | 
|AMERIPLUS (Medicaid  SSI)  |  |          | 76,000  |      |  |  | 68,000  | 
|AMERIFAM (FamilyCare)       |  |          | 15,000  |      |  |  | 21,000  | 
|                            |  |          |         |      |  |  |         | 
|Total                       |  |          | 902,000 |      |  |  | 819,000 | 
|                            |  |          |         |      |  |  |         | 

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   |       | Six months    
|                                             |  | ended June 30, |       | ended June 30,
|                                             |  |                |       |               
|                                             |  | 2004           |       | 2003           |  | 2004 |       | 2003
|                                             |  |                |       |                |  |      |       |     
|Premium revenue                              |  |                | 99.5  | %              |  |      | 99.6  | %    |  |  | 99.5  | % |  |  | 99.6  | %
|Investment income                            |  |                | 0.5   |                |  |      | 0.4   |      |  |  | 0.5   |   |  |  | 0.4   |  
|                                             |  |                |       |                |  |      |       |      |  |  |       |   |  |  |       |  
|Total revenues                               |  |                | 100.0 | %              |  |      | 100.0 | %    |  |  | 100.0 | % |  |  | 100.0 | %
|                                             |  |                |       |                |  |      |       |      |  |  |       |   |  |  |       |  
|Health benefits (1)                          |  |                | 81.3  | %              |  |      | 79.2  | %    |  |  | 81.2  | % |  |  | 80.3  | %
|Selling, general and administrative expenses |  |                | 10.0  | %              |  |      | 11.9  | %    |  |  | 10.3  | % |  |  | 11.6  | %
|Income before income taxes                   |  |                | 7.9   | %              |  |      | 7.7   | %    |  |  | 7.6   | % |  |  | 6.9   | %
|Net income                                   |  |                | 4.8   | %              |  |      | 4.6   | %    |  |  | 4.6   | % |  |  | 4.0   | %



---



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

11



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##### Table of Contents



Three and Six Month Periods Ended
June 30, 2004 Compared to Three and Six Month Periods
Ended June 30, 2003

Revenues

Premium revenue for the three months ended
June 30, 2004 increased $43.6 million, or 11.1%,
to $435.9 million from $392.3 million for the three
months ended June 30, 2003. For the six months ended
June 30, 2004 premium revenue increased
$76.4 million, or 9.8%, to $858.3 million from
$781.9 million for the six months ended
June 30, 2003. The increase was due to internal growth
in overall membership, the St. Augustine acquisition and
premium rate increases.

Investment income increased $0.5 million to
$2.2 million for the three months ended
June 30, 2004 from $1.7 million for the three
months ended June 30, 2003 and increased
$0.8 million to $4.2 million for the six months ended
June 30, 2004 from $3.4 million for the six
months ended June 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 and the continued decline in market
interest rates. 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 June 30, 2004 increased
$43.9 million, or 14.1% to $354.4 million from
$310.5 million for the three months ended
June 30, 2003. For the six months ended
June 30, 2004 expenses relating to health benefits
increased $68.9 million, or 11.0% to $696.7 million
from $627.8 million for the six months ended
June 30, 2003. The increase in health benefits expense
was primarily due to the increase in membership of 83,000
members. Our HBR was 81.3% for the second quarter versus 79.2%
in the second quarter of the prior year. For the six months
ended June 30, 2004, the HBR increased to 81.2% from
80.3% for the six months ended June 30, 2003.

In 2004, both periods reflect rising inpatient
per member per month expenses due to an increase in cost per day
offset by a drop in utilization. The level of obstetrical
services remained very consistent for both comparative periods.
Emergency room utilization and cost per unit continued to rise,
offset somewhat by other outpatient expenses. Physician
utilization increased while cost per unit remained fairly flat.
Offsetting these increases in costs were per member per month
reductions in ancillary and other expenses due in part to the
implementation of a national contract for certain ancillary
services and the completion of our initiative to insource
behavioral health services effective January 2004. In certain
key markets, the growth of these medical costs exceeded the
corresponding growth in premium revenue for the same respective
periods resulting in an increase in the HBR. Additionally, the
Maryland premium adjustment in the second quarter of 2004
resulted in an increase in the 2004 HBR for both comparative
periods.

Selling, general and administrative
expenses

Our SG&A to total revenue ratio was 10.0% and
11.9% for the three months ended June 30, 2004 and
2003, respectively and 10.3% and 11.6% for the six months ended
June 30, 2004 and 2003, respectively. SG&A for the
three months ended June 30, 2004 decreased
$3.2 million, or 6.8%, to $43.7 million from
$46.9 million for the three months ended
June 30, 2003. The $3.2 million decrease was
primarily due to the following:



| |   |                                                                                                                                                                                                                             
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Decreases in purchased services related to
    strategic initiatives in 2003 for operational improvements
    including the Health Insurance Portability and Accountability
    Act of 1996 (HIPAA) implementation expenses;
|
| |  | Decreases in salaries and benefits due to
    staffing efficiencies;                                                                                                                                                        
|
| |  | A decrease related to finalizing state
    contractual assessments;                                                                                                                                                         
|
| |  | A decrease due to favorable contract changes
    related to our Texas experience rebate calculation;                                                                                                                        

12



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| |   |                                                                                                       
| | - | ------------------------------------------------------------------------------------------------------
| |  | An increase due to premium taxes that the State
    of Texas began assessing in September of 2003; and
|
| |  | Other decreases as a result of cost management
    initiatives.                                       

For the six months ended June 30, 2004,
SG&A decreased $1.8 million, or 2.0%, to
$89.2 million in 2004 from $91.0 million for the six
months ended June 30, 2003. The $1.8 million
decrease was primarily due to the following:



| |   |                                                                                                                                                       
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Decreases in purchased services related to
    strategic initiatives in 2003 for operational improvements
    including HIPAA implementation expenses;
|
| |  | A decrease due to favorable contract changes
    related to our Texas experience rebate calculation;                                                  
|
| |  | An increase due to premium taxes that the State
    of Texas began assessing in September of 2003; and                                                
|
| |  | Other decreases as a result of cost management
    initiatives.                                                                                       

Interest expense

Interest expense was $0.2 million and
$0.5 million for the three months ended
June 30, 2004 and 2003, respectively and
$0.4 million and $1.1 million for the six months ended
June 30, 2004 and 2003, respectively. The decrease for
each period primarily relates to borrowings outstanding during
the six month period ended June 30, 2003 on our credit
facility used to partially finance the PHP acquisition. We used
a portion of the net proceeds from our October 2003 public
offering of common stock to repay the $30.0 million balance
outstanding under our credit facility. During the six months
ended June 30, 2004, our credit facility was undrawn.

Provision for income taxes

Income tax expense for the three months ended
June 30, 2004 was $13.7 million with an effective
tax rate of 39.6% compared to $12.3 million for the three
months ended June 30, 2003 with an effective tax rate
of 40.6%. Income tax expense for the six months ended
June 30, 2004 was $26.0 million with an effective
tax rate of 39.8% compared to $22.2 million for the same
period of the prior year with an effective tax rate of 41.2%.
The decrease in the effective tax rate for each period is
primarily due to decreases in the amount of non-deductible
amortization (approximately 50% of the decrease), changes in our
blended state income tax rate (approximately 20% of the
decrease) and increased investments in tax-advantaged securities
(approximately 19% of the decrease).

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
June 30, 2004, we had cash and cash equivalents of
$296.3 million, short and long-term investments of
$243.6 million and restricted investments on deposit for
licensure of $37.5 million. Total cash and investments as
of June 30, 2004 was $577.4 million, a portion of
which is regulated by state regulatory requirements, compared to
$356.0 million as of June 30, 2003 and
$570.4 million as of December 31, 2003.
Unregulated cash and investments as of June 30, 2004
were approximately $242.3 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.

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##### Table of Contents



Cash provided by operating activities was
$18.8 million for the six months ended
June 30, 2004, compared to $15.2 million for the
six months ended June 30, 2003. The increase in cash
from operations of $3.6 million was primarily due to the
following:



| |   |                                                                                                                                                                         
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | an increase in net income of $7.6 million;                                                                                                                              
|
| |  | increases in the changes in accounts payable,
    accrued expenses and other liabilities of $6.3 million due
    to the timing of payments and accrued expenses; and    
|
| |  | decreases in the changes in claims payables of
    $10.3 million resulting from efficiencies in the claims
    payment process that allows for claims to be paid faster.

For the six months ended June 30, 2004,
cash used in investing activities was $128.3 million
compared to cash provided by investing activities of
$18.0 million for the six months ended
June 30, 2003. The increase in cash used in investing
activities primarily related to the shifting of cash and cash
equivalents into long-term investments and purchases of
property, equipment and software. We currently anticipate total
capital expenditures for property, equipment and software to be
approximately $28.0 million to $32.0 million in 2004.

Our investment policies are designed to preserve
capital, provide liquidity and maximize total return on invested
assets. As of June 30, 2004, our investment portfolio
consisted primarily of fixed-income securities. The weighted
average maturity is slightly over 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 June 30, 2004 was
approximately 1.83%.

Cash used in financing activities was
$1.4 million for the six months ended
June 30, 2004 compared to $8.8 million for the
six months ended June 30, 2003. The decrease primarily
related to repayments made under our credit facility during the
six month period ended June 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 June 30, 2004 we had short-term
investments of $53.3 million, long-term investments of
$190.3 million and investments on deposit for licensure of
$37.5 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 June 30, 2004, a hypothetical 1%
change in interest rates would result in an approximate
$2.8 million change in our annual investment income.

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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 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.

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##### Table of Contents



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. Our
Texas subsidiary does not have a contract with TCH to provide
services to its Medicaid members. When TCH provides services to
our members, it does so as a non-network provider. On
January 17, 2003, the physicians of Baylor College of
Medicine (Baylor), non-network providers who physicians medical
services at TCH, filed suit against our Texas subsidiary seeking
full-billed charges for services provided since October 1999 to
our Texas Medicaid members. On July 7, 2003, TCH and
Baylor added AMERIGROUP Corporation as an additional defendant
to the lawsuits, alleging that we are directly liable for the
obligations of our Texas subsidiary.

Our Texas subsidiarys contracts with the
State of Texas provide a methodology for compensating
non-network providers for services provided to our Medicaid
members and the State of Texas has approved our Texas
subsidiarys current non-network provider payment
methodology. TCH and Baylor each assert that they are not a
party to the contract our Texas subsidiary has with the State of
Texas and, therefore, they are not obligated to accept the
payments determined in accordance with our State contract. If we
are required to pay full-billed charges to TCH and Baylor at the
conclusion of litigation and all appeals, it could have a
material adverse effect on us.

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

On November 10, 2003, the Court granted
our Motion to Abate the claims of TCH and Baylor and further
ordered that there be no further discovery or other action by
the parties on these claims until TCH and Baylor have completed
the administrative process with HHSC. TCH and Baylor requested
an early review of the Courts decision by the Court of
Appeals in a Writ of Mandamus action. The Court denied the
mandamus request. To our knowledge, TCH has not initiated an
administrative complaint in accordance with the Courts
order. No trial date has been set.

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 are
a portion of the claims that are the subject matter of the
lawsuit. On June 2, 2004, HHSC issued its findings
stating that our Texas subsidiary had not demonstrated that its
out-of-network reimbursement methodology for these claims was
reasonable and customary. HHSC required it to file a corrective
action plan and to pay TCH approximately $385,000 in interest on
these claims. On June 14, 2004, our Texas subsidiary
filed a corrective action plan in which it agreed to pay TCH the
required interest payment and to reimburse TCH for this portion
of the claims an additional $837,324, which is the difference
between the amount previously paid and the amount that TCH would
have received if the claims had been paid using the
out-of-network rate methodology affirmatively approved by HHSC
on December 11, 2002 for the period after
January 1, 2003.

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.
Capital contends that our New Jersey subsidiary has not had a
contract with Capital to provide services to its Medicaid
members since December 31, 2001. Nevertheless, from
January 1, 2002 through August 31, 2002, our
New Jersey subsidiary continued to reimburse Capital under our
prior contract with them Capital alleges was that terminated on
December 31, 2001; since September 1, 2002
through the present, our New Jersey subsidiary has paid Capital
as an out-of-network, or non-contracted, provider. Capital
asserts that our New Jersey subsidiary agreed to pay full-billed
charges upon the expiration of our prior contract. The Court
ruled in favor of Capital on August 8, 2003, and
determined that

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##### Table of Contents



our New Jersey subsidiary entered into an implied
contract with Capital as of December 31, 2001, which
extended through April 30, 2002, to pay Capital its
full-billed charges. Capital filed a Motion for Summary Judgment
on issue of damages for the period January 1, 2002
through April 30, 2002, seeking $3.4 million that
represents Capitals calculation of the difference between
what our New Jersey subsidiary actually paid Capital and
Capitals full-billed charges. We are opposing the motion
on the grounds that, despite the Courts findings of the
implied contract, many of the claims for which Capital seeks
full-billed charges were for non-covered services and/or for
services at levels higher than our New Jersey subsidiarys
members required. No trial date on damages is currently
scheduled.


We disagree with the Courts ruling
regarding the implied contract and believe that we have provided
payment to Capital in an appropriate manner. Once a
determination of damages is made, we intend to appeal the
ruling. Our payments to Capital in its role as an
out-of-network, or non-contracted, provider are based upon our
understanding of the usual and customary reimbursement practices
in New Jersey. Effective July 1, 2003,
New Jersey mandated that payments to out-of-network
facilities for emergency services be limited to the States
Medicaid fee-for-service rates. If we are required to pay
full-billed charges to Capital at the conclusion of all appeals
for the entire period from January 1, 2002 through the
present, it could have a material adverse effect on us.

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




Item 2.     Changes
in Securities, Use of Proceeds and Issuer Purchases of Equity
Securities

On October 16, 2003, we completed a
public offering of 3,162,500 shares of common stock,
including an over-allotment issuance of 412,500 shares. The
shares of common stock sold in the offering were registered
under the Securities Act of 1933, as amended, on a Registration
Statement on Form S-3, Registration Number 333-108531,
which was declared effective by the Securities and Exchange
Commission on October 9, 2003 and Registration
Statement on Form S-3, Registration Number 333-109609,
filed with the Securities and Exchange Commission pursuant to
Rule 462(b) of the General Rules and Regulations under the
Securities Act of 1933, as amended, on
October 9, 2003. All 3,162,500 shares sold in the
public offering were sold at a price of $46.50 per share. We
received proceeds from the offering of approximately
$139.0 million, net of approximately $7.4 million of
underwriting fees and $0.7 million of expenses. On
October 21, 2003, we used $30.0 million of
proceeds from the offering to repay the outstanding balance of
our credit facility. The balance of approximately
$109.0 million will be used for general corporate purposes,
including acquisitions of businesses, assets and technologies.

Banc of America Securities LLC, Credit Suisse
First Boston LLC, CIBC World Markets Corp. and Stephens Inc.
acted as representatives of the underwriters for the public
offering.




Item 3.     Defaults
Upon Senior Securities

None.




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

We held our annual meeting of stockholders on
May 12, 2004. At the meeting, Jeffrey L. McWaters
and Uwe E. Reinhardt, Ph.D. were re-elected as directors.
The vote with respect to each nominee is set forth below:

|              |  |                 |            |                      |  |  |         | 
|------------- |  | --------------- | ---------- | -------------------- |  |  | ------- | 
|              |  | Total Votes For |            | Total Votes Withheld
|              |  | Each Director   |            | From Each Director  
|              |  |                 |            |                     
|Mr. McWaters  |  |                 | 22,792,920 |                      |  |  | 274,313 | 
|Dr. Reinhardt |  |                 | 22,176,727 |                      |  |  | 890,506 | 

Additional directors of the Company whose terms
of office continued after the meeting are Thomas E. Capps,
Jeffrey B. Child, Carlos A. Ferrer, William J.
McBride and Richard D. Shirk.

17



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##### Table of Contents



Our stockholders ratified our appointment of KPMG
LLP to serve as our independent auditors for the 2004 fiscal
year. The appointment was approved by a vote of 22,210,459 for,
843,439 shares against and 13,334 shares abstaining.




Item 5.     Other
Information

None.

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Item 6.     Exhibits
and Reports on Form 8-K

a. 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)).                
|        | 10.6.5  |             |  | 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 July 1, 2004.
|        | 10.7.7  |             |  | Amendment No. 1, dated
    March 15, 2004, to the State of Illinois Department of
    Public Aid Contract for Furnishing Health Services by a Health
    Maintenance Organization.                                      
|        | 10.17.7 |             |  | Amendment No. 1 to the Amended Restated
    Credit Agreement dated October 22, 2003, among
    AMERIGROUP Corporation, the Guarantors and the Lenders, named
    therein, dated June 7, 2004.                           
|        | 10.22.2 |             |  | Amendment 13, dated May 17, 2004,
    to the District of Columbia Healthy Families Programs,
    Department of Health Medical Assistance Administration, Prepaid,
    Capital Risk Contract.                            
|        | 10.22.3 |             |  | Amendment 14, dated
    August 1, 2004, to the District of Columbia Healthy
    Families Programs, Department of Health Medical Assistance
    Administration, Prepaid, Capital Risk Contract.                          
|        | 10.43   |             |  | Amendments 6 and 8 to Contract for Services
    between the Texas Department of Human Services and AMERIGROUP
    Texas, Inc. (Harris County Service Area STAR+Plus Contract),
    dated May 1, 2004.                   
|        | 31.1    |             |  | Certification of Chief Executive Officer pursuant
    to Section 302 of Sarbanes-Oxley Act of 2002, dated
    August 4, 2004.                                                                                           
|        | 31.2    |             |  | Certification of Chief Accounting Officer
    pursuant to Section 302 of Sarbanes-Oxley Act of 2002,
    dated August 4, 2004.                                                                                          
|        | 32      |             |  | Certification of Chief Executive Officer and
    Chief Accounting Officer pursuant to Section 906 of
    Sarbanes-Oxley Act of 2002, dated August 4, 2004.                                                              

Reports on Form 8-K

We furnished a report on Form 8-K on
July 28, 2004, announcing our earnings for the three
and six months ended June 30, 2004.

We furnished a report on Form 8-K on
April 29, 2004, announcing our earnings for the three
months ended March 31, 2004.

We filed a report on Form 8-K on
April 8, 2004, announcing Thomas E. Capps was
elected to AMERIGROUPs Board of Directors on
April 5, 2004.

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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: August 4, 2004 |  | By: /s/ JEFFREY L. MCWATERS                                                                
|                     |  |                                                                                            
|                     |  | Chairman and Chief
    Executive Officer                                                   
|                    
|Date: August 4, 2004 |  | By: /s/ KATHLEEN K. TOTH                                                                   
|                     |  |                                                                                            
|                     |  | Executive Vice President and
    Chief Accounting Officer
    (principal financial officer)

20