UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

Commission File Number 001-31574

AMERIGROUP Corporation

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code:

(757) 490-6900

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

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

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

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

      The aggregate market value of common stock held by non-affiliates at June 30, 2004 was $1,211,398,858.

      The number of shares of common stock, $0.01 par value, outstanding as of March 1, 2005, was 50,858,382.

Document Incorporated by Reference

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

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

TABLE OF CONTENTS

Forward-looking Statements

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

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

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

PART I.

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 believe that we are better qualified and positioned than many of our competitors to meet the unique needs of our target populations because of our focus on providing managed care to these populations, our medical management programs and our community-based education and outreach programs. Unlike many managed care organizations that attempt to serve the general commercial population, as well as Medicare and Medicaid populations, we are focused exclusively on the Medicaid, SCHIP and FamilyCare populations. We do not currently offer Medicare or commercial products. In general, as compared to commercial or Medicare populations, our target population is younger, accesses healthcare in an inefficient manner and has a greater percentage of medical expenses related to obstetrics, diabetes, circulatory and respiratory conditions. We design our programs to address the particular needs of our members, for whom we facilitate access to healthcare benefits pursuant to agreements with the applicable regulatory authority. We combine medical, social and behavioral health services to help our members obtain quality healthcare in an efficient manner. Our success in establishing and maintaining strong relationships with state governments, providers and members has enabled us to obtain new contracts and to establish a leading market position in many of the markets we serve. Providers are hospitals, physicians and ancillary medical programs that provide medical services to our members. Members are said to be “enrolled” with our health plans to receive benefits. Accordingly, our total membership is generally referred to as our enrollment. As of December 31, 2004, we provided an array of products to approximately 936,000 members in the District of Columbia, Illinois, Florida, Maryland, New Jersey and Texas. Effective January 1, 2005, we acquired CarePlus, LLC, which operates as CarePlus Health Plan (CarePlus), in New York City, New York and provides services to members covered by New York State’s Medicaid, Child Health Plus and Family Health Plus programs. CarePlus’ service areas include New York City (Brooklyn, Manhattan, Queens and Staten Island) and Putnam County, New York. With the acquisition of CarePlus, we began providing services to approximately 115,000 additional members.

      We were incorporated in Delaware on December 9, 1994 as AMERICAID Community Care by a team of experienced senior managers led by Jeffrey L. McWaters, our Chairman and Chief Executive Officer. From 1994 through 1995, we were involved primarily in financial planning, recruiting and training personnel, developing products and markets and negotiating contracts with various state governments. During 1996, we began enrolling Medicaid members in our Fort Worth, New Jersey and Chicago plans. In 1997, we obtained a contract and began enrolling members in our Houston plan. In 1999, we began operating in Maryland and the District of Columbia, and obtained a contract and began enrolling members in our Dallas plan. Our operations in Maryland and the District of Columbia are the result of acquiring contract rights from Prudential Healthcare. In 2003, we began operations in Florida as a result of an acquisition of PHP Holdings, Inc. and its subsidiary, Physicians Health Plans, Inc. (PHP). In 2004, we were selected to provide Medicaid benefits in the Travis service area of Texas. In addition, in the District of Columbia, Florida, New Jersey and Texas, we have increased membership through acquisitions of Medicaid contract rights and related assets of other health plans in these service areas. Effective January 1, 2005, we began operations in New York as a result of an acquisition.

Market Opportunity

      Healthcare in the United States has grown from a $27 billion industry in 1960 to a highly regulated market of approximately $1.7 trillion in 2003, an increase of 7.7% from 2002, according to the federal government’s Centers for Medicare & Medicaid Services (CMS).

      CMS projects total U.S. healthcare spending to reach $3.4 trillion in 2013, growing at an average annual rate of 7.3% from 2002 through 2013. In response to the dramatic increases in healthcare-related costs in the late 1960s, Congress enacted the Federal Health Maintenance Organization Act of 1973, a statute designed to

encourage the establishment and expansion of care and cost management. The private sector responded to this legislation by forming health maintenance organizations (HMOs). HMOs were intended to address the needs of employers, insurers, government entities and healthcare providers who sought a cost-effective alternative to traditional indemnity insurance. Since the establishment of HMOs, enrollment has increased more than twelve-fold from 6.0 million in 1976 to nearly 76.1 million in 2002. Over that time, many HMOs have been formed to focus on a specific or specialty population of healthcare such as commercial plans for employees, Medicare, Medicaid, dental care and behavioral healthcare. Additionally, HMOs have been formed in a variety of sizes, from small community-based plans to multi-state organizations.

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

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

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

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

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

      SCHIP, developed in 1997, is a federal/state matching program that provides healthcare coverage to children not otherwise covered by Medicaid or other insurance programs. SCHIP enables a segment of the large uninsured population in the U.S. to receive healthcare benefits. States have the option of administering SCHIP through their Medicaid programs.

      FamilyCare programs have been established in several states including New Jersey and the District of Columbia. The New Jersey FamilyCare Health Coverage Act is a Medicaid expansion program providing healthcare access to an estimated 90,000 previously uninsured or underinsured New Jersey residents in fiscal 2005. New Jersey FamilyCare is a voluntary federal and state-funded health insurance program created to help uninsured families, single adults and couples without dependent children obtain affordable healthcare coverage.

      Nationally, approximately 64% of Medicaid spending is directed toward hospital, physician and other acute care services, and the remaining approximately 36% is for nursing home and other long-term care. In general, inpatient and emergency room utilization tends to be higher within the Medicaid population than among the general population because of the inability to afford access to a primary care physician (PCP), leading to the postponement of treatment until acute care is required.

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

      During fiscal year 2005, the federal government estimates spending of approximately $188 billion on Medicaid with a corresponding state match of approximately $142 billion. Federal government estimates indicate that total Medicaid outlays may reach approximately $192.5 billion for fiscal year 2006, with an additional $5.4 billion spent on SCHIP programs. Key factors driving Medicaid spending include:

      The federal government pays a share of the medical assistance expenditures under each state’s Medicaid program. That share, known as the Federal Medical Assistance Percentage (FMAP), is determined annually by a formula that compares the state’s average per capita income level with the national average per capita income level. Thus, states with higher per capita income levels are reimbursed a smaller share of their costs than states with lower per capita income levels. The FMAP cannot be lower than 50% or higher than 83%. In fiscal 2005, the FMAPs vary from 50% in 12 states and five territories to 77.1% in Mississippi, and 57% overall. In addition, the Balanced Budget Act of 1997 permanently raised the FMAP for the District of Columbia from 50% to 70%. The states’ fiscal 2005 FMAPs for the markets in which we have contracts are:

      The federal government also matches administrative costs, generally about 50%, although higher percentages are paid for certain activities and functions, such as development of automated claims processing systems. Federal payments have no set limits (other than for SCHIP programs), but rather are made on a matching basis. In 2004, Medicaid spending surpassed elementary and secondary education spending in total state spending, rising

to 21.9% of total state spending for Medicaid and 21.5% for elementary and secondary education. In 2003, 43.5% of total federal funds provided to states were spent on Medicaid, the highest category of federal funds provided to states.

      State governments pay the share of Medicaid and SCHIP costs not paid by the federal government. Some states require counties to pay part of the state’s share of Medicaid costs.

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

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

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

      The delivery of episodic healthcare under the traditional Medicaid program limited the ability of the states to provide quality care, implement preventive measures and control healthcare costs. Over the past decade, in response to rising healthcare costs and in an effort to ensure quality healthcare, the federal government has expanded the ability of state Medicaid agencies to explore, and, in some cases, mandate the use of managed care for Medicaid beneficiaries. If Medicaid managed care is not mandatory, individuals entitled to Medicaid may choose either the traditional Medicaid program or a managed care plan, if available. According to information published by CMS, from 1993 to 2002, managed care enrollment among Medicaid beneficiaries increased to more than 57% of all enrollees. All the markets in which we operate, except Illinois, have state-mandated Medicaid managed care programs in place.

The AMERIGROUP Approach

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

      We have been successful in bidding for contracts and implementing new products because of our ability to facilitate access to quality healthcare services in a cost-effective manner. Our education and outreach programs, our disease and medical management programs and our information systems benefit the communities we serve while providing the state governments with predictability of cost. Our education and outreach programs are designed to decrease the use of emergency care services as the primary access to healthcare through the provision of certain programs such as member health education seminars and system-wide 24-hour on-call nurses. Our information systems are designed to measure and track our performance, enabling us to demonstrate the effectiveness of our programs to the government. While we promote ourselves directly in applying for new

contracts or seeking to add new benefit plans, we believe that our ability to obtain additional contracts and expand our service areas within a state results primarily from our demonstration of prior success in facilitating access to quality care, while reducing and managing costs, and our customer-focused approach to working in partnership with state governments. We believe we will also benefit from this experience when bidding for and acquiring contracts in new state markets.

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

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

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

Strategy

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

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

approach reinforces our broad brand-name recognition as a leading managed healthcare company serving people who receive publicly sponsored healthcare benefits, while complying with state-mandated marketing guidelines.

      We may also choose to increase membership by acquiring Medicaid contracts and other related assets from competitors in our existing markets. Since 1996, we have developed markets in Illinois, New Jersey and Texas and acquired additional Medicaid contracts and related assets in the District of Columbia, Florida, Maryland, New Jersey, Texas and New York. We evaluate potential new markets using our established government relationships and our historical experience in managing Medicaid populations. Our management team is experienced in identifying markets for development of new operations, including complementary businesses, identifying and executing acquisitions and integrating these businesses into our existing operations. For example, in January 2005, we began operations in New York as a result of the acquisition of CarePlus resulting in approximately 115,000 additional members in New York City (Brooklyn, Manhattan, Queens and Staten Island) and Putman County.

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

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

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

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

Products

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

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

      AMERICAID, our principal product, is our family-focused Medicaid managed healthcare product designed for the TANF population that consists primarily of low-income children and their mothers. We currently offer our AMERICAID product in all markets we serve. As of December 31, 2004, we had approximately 662,000 AMERICAID members. Effective January 1, 2005, the acquisition of CarePlus added approximately 73,000 AMERICAID members to our enrollment.

      AMERIKIDS is our managed healthcare product for uninsured children not eligible for Medicaid. This product is designed for children in the SCHIP initiative. We began offering AMERIKIDS in Maryland and the District of Columbia when we acquired Prudential’s contract rights and other related assets in 1999. We began offering AMERIKIDS in New Jersey and Texas in 2000 and in Chicago in 2003. We began offering AMERIKIDS in Florida when we acquired PHP’s contract rights and other related assets in 2003. As of December 31, 2004, we had approximately 182,000 AMERIKIDS members. Effective January 1, 2005, the acquisition of CarePlus added approximately 22,000 AMERIKIDS members to our enrollment.

      AMERIPLUS is our managed healthcare product for SSI recipients. This population consists of the low-income aged, blind and disabled. We began offering this product in 1998 and currently offer it in New Jersey, Maryland, Houston, Texas and Florida. We expect our AMERIPLUS membership to grow as more states include SSI benefits in mandatory managed care programs. As of December 31, 2004, we had approximately 79,000 AMERIPLUS members. Included in this number are approximately 1,000 members added through a Florida program called Summit Care. The Summit Care (Long Term Care Diversion) program helps seniors live safely in their homes or assisted living facilities as an alternative to nursing home care.

      AMERIFAM is our FamilyCare managed healthcare product designed for uninsured segments of the population other than SCHIP eligibles. AMERIFAM’s current focus is the families of our SCHIP and Medicaid children. We offer this product in the District of Columbia and New Jersey where the program covers parents of SCHIP and Medicaid children. As of December 31, 2004, we had approximately 13,000 AMERIFAM members. Effective January 1, 2005, the acquisition of CarePlus added approximately 20,000 AMERIFAM members to our enrollment.

      As of December 31, 2004, of our 936,000 members, 99% were enrolled in TANF, SCHIP and FamilyCare programs. The remaining 1% were enrolled in SSI programs. Of these SSI enrollees, approximately 9,000 were members to whom we provided limited administrative services but did not provide health benefits.

Disease and Medical Management Programs

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

Marketing and Educational Programs

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

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

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

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

Community Partners

      We believe community focus and understanding are important to attracting and retaining members. To assist in establishing our community presence in a new market, we seek to establish relationships with prestigious medical centers, children’s hospitals, federally qualified health centers, community based organizations and advocacy groups to offer our products and programs.

Provider Network

      We facilitate access to healthcare services to our members through mutually non-exclusive contracts with PCPs, specialists, hospitals and ancillary providers. Either prior to or concurrent with bidding for new contracts, we establish a provider network in each of our service areas. The following table shows the total number of PCPs, specialists, hospitals and ancillary providers participating in our network as of December 31, 2004:

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

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

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

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

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

Provider Payment Methods

      Fee-for-Service. This is a reimbursement mechanism that pays providers based upon services performed. For the year ended December 31, 2004, approximately 95% of our expenses for direct health benefits were on a

fee-for-service reimbursement basis, including fees paid to third-party vendors for ancillary services such as pharmacy, mental health, dental and vision benefits. The primary fee-for-service arrangements are maximum allowable fee schedule, per diem, case rates, percent of charges or any combination thereof. The following is a description of each of these mechanisms:

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

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

Our Health Plans

      Effective with the January 1, 2005 CarePlus acquisition, we have six active health plan subsidiaries offering healthcare services in the District of Columbia, Florida, Illinois, Maryland, New Jersey, Texas and New York. We expect our relationship with these jurisdictions to continue. Each of our health plans have one or more contracts that expire at various times, as set forth below:

      Our Maryland subsidiary, AMERIGROUP Maryland, Inc., a Managed Care Organization, is also licensed as an HMO in the District of Columbia and became operational there in August 1999. As of December 31, 2004, we had approximately 41,000 members in the District of Columbia. We believe that we have the largest Medicaid membership in the District of Columbia. We offer AMERICAID, AMERIKIDS and AMERIFAM in the District of Columbia. Our contract with the District of Columbia extends through July 31, 2005, with the District’s option to continue contract extensions for two additional one-year terms through July 31, 2007.

      Our Florida subsidiary, AMERIGROUP Florida, Inc., is licensed as an HMO and became operational in January 2003 with the acquisition of PHP. In July 2003, we acquired the Medicaid contract rights and related assets of St. Augustine. Our current service areas include the metropolitan areas of Miami/ Fort Lauderdale, Orlando and Tampa that include 13 counties in Florida. As of December 31, 2004, we had approximately 229,000 members, consisting of approximately 58,000 members in Miami/ Fort Lauderdale, 45,000 members in Orlando and 126,000 members in Tampa. We believe we have the third largest Medicaid membership in the Miami/ Fort Lauderdale market, second largest Medicaid membership in the Orlando market and the largest Medicaid membership in the Tampa market. We offer AMERICAID, AMERIKIDS and AMERIPLUS in each of our Florida markets. Our TANF, SSI and SCHIP contracts expire June 30, 2006 and can be terminated by either party upon 30 days notice. Our Summit Care contract expires June 30, 2005 and we anticipate the new contract to be effective as of July 1, 2005. However, either party can terminate the contract upon 60 days notice. Currently, we are in good standing with the Department of Elder Affairs, the agency with regulatory oversight of the Long Term Care program, and have no reason to believe that the contract will not be renewed. As a result of a successful Florida SCHIP re-bid in 2004, individual county contracts were consolidated into one contract covering eight counties, through September 30, 2005, with the option to continue contract extensions for two additional one-year terms.

      Our Illinois subsidiary, AMERIGROUP Illinois, Inc., is licensed as an HMO and became operational in April 1996. Our current service area includes the counties of Cook and DuPage in the Chicago area. In Chicago, enrollment in a Medicaid managed care plan is voluntary. As of December 31, 2004, we had approximately 37,000 members in Chicago. We believe that we have the second largest Medicaid health plan membership in Cook County. We offer AMERICAID and AMERIKIDS in the Chicago area. Our contract with the State of Illinois, which can be terminated by either party with 90 days written notice, was extended through July 31, 2004, and included an automatic renewal provision for two consecutive one-year terms, thereby extending the contract through July 31, 2006.

      Our Maryland subsidiary, AMERIGROUP Maryland, Inc., a Managed Care Organization, is authorized to operate as a managed care organization (MCO) in Maryland and became operational in June 1999. Our current service areas include 20 of the 24 counties in Maryland. As of December 31, 2004, we had approximately 130,000 members in Maryland. We believe that we have the largest Medicaid membership in Maryland. We offer AMERICAID, AMERIKIDS and AMERIPLUS in Maryland. Our contract with the State of Maryland does not have a set term. We can terminate our contract with Maryland by notifying the State by October 1st of any given year for an effective termination date of January 1st of the following year. The State may waive this timeframe if the circumstances warrant, including but not limited to reduction in rates outside the normal rate setting process or an MCO exit from the program.

      Our New Jersey subsidiary, AMERIGROUP New Jersey, Inc., is licensed as an HMO and became operational in February 1996. Our current service areas include 20 of the 21 counties in New Jersey. As of

December 31, 2004, we had approximately 105,000 members in New Jersey. We believe that we have the third largest Medicaid membership in New Jersey. We offer AMERICAID, AMERIPLUS, AMERIKIDS and AMERIFAM in New Jersey. Our contract with the State of New Jersey expires on June 30, 2005, with the State’s option to extend the contract on an annual basis through an executed contract amendment.

      Effective January 1, 2005, we acquired CarePlus, which is licensed as an HMO in New York. CarePlus’ service areas include New York City, within the boroughs of Brooklyn, Manhattan, Queens and Staten Island, and Putman County. We did not have any membership in New York during 2004. Effective January 1, 2005, through the acquisition of CarePlus, we added approximately 115,000 members, consisting of approximately 50,000 members in Brooklyn, 7,000 members in Manhattan, 52,000 members in Queens, 6,000 members in Staten Island and less than 500 members in Putnam County to whom we offer AMERICAID, AMERIKIDS and AMERIFAM. Our TANF, SSI and FamilyCare contracts with the State expire on September 30, 2005. At the option of the Department of Health, the TANF and SSI contracts may be extended for up to an additional three-year period, and the FamilyCare contract may be extended for an additional one-year period. Our SCHIP contract with the State expires on June 30, 2005. We expect continued extension of this contract at the State’s discretion.

      Our Texas subsidiary, AMERIGROUP Texas, Inc., is licensed as an HMO and became operational in September 1996. Our current service areas include the cities of Austin, Dallas, Fort Worth and Houston and the surrounding counties. As of December 31, 2004, we had approximately 394,000 members in Texas, consisting of approximately 8,000 members in Austin, approximately 98,000 members in Dallas, approximately 129,000 members in Fort Worth and approximately 159,000 members in Houston. We believe that we have the largest Medicaid membership in each of our Fort Worth and Houston markets and the second largest Medicaid membership in our Austin and Dallas markets. We offer AMERICAID in each of our Texas markets, AMERIKIDS in Dallas and Houston and AMERIPLUS in Houston. The Texas Health and Human Services Commission selected AMERIGROUP Texas, Inc. to provide Medicaid benefits to the Travis service area. Effective May 1, 2004, we began providing our services to these Medicaid recipients. Our TANF contract in Fort Worth and the Travis service area, our TANF and SCHIP contracts in Dallas and our TANF, SCHIP and SSI contracts in Houston are set to expire on August 31, 2005. We participated in a re-procurement process of all product contracts and all service areas in mid-year 2004. Although the State has said it will announce contract awards in early 2005 with implementation continuing into 2006, the announcement of the awards may not occur until after the conclusion of the Texas legislative session on May 30, 2005.

Quality Management

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

Management Information Systems

      The ability to capture, process and allow local access to data and to translate it into meaningful information is essential to our ability to operate across a multi-state service area in a cost-effective manner. Our centralized technology platform supports our core processing functions enabled by a common systems strategy. This integrated approach helps to assure that consistent sources of claim, provider and member information are provided across all of our health plans. We use these common systems for billing, claims and encounter processing, utilization management, marketing and sales tracking, financial and management accounting, medical cost trending, reporting, planning and analysis. The platform also supports our internal member and provider service functions, including on-line access to member eligibility verification, PCP membership roster, authorization and claims status.

      In November 2003, we signed a software licensing agreement with The Trizetto Group, Inc. for their Facets Extended Enterprise^tm administrative system (Facets). During 2004, we invested in the implementation and testing of Facets with a staggered conversion to Facets by health plan beginning in 2005 and continuing through 2007. We estimate that our current claims payment system, without Facets, could be at full capacity within the next 16 months. We currently expect that Facets will meet our software needs for a minimum of 10 years and will support our long-term growth strategies.

Competition

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

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

      We compete with other managed care organizations to obtain state contracts, as well as to attract new members and to retain existing members. States generally use either a formal proposal process reviewing many bidders or award individual contracts to qualified applicants that apply for entry to the program. In order to be awarded a state contract, state governments consider many factors, which include providing quality care,

satisfying financial requirements, demonstrating an ability to deliver services, and establishing networks and infrastructure. People who wish to enroll in a managed healthcare plan or to change healthcare plans typically choose a plan based on the service offered, ease of access to services, a specific provider being part of the network and the availability of supplemental benefits.

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

Regulation

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

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

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

      Medicaid was established, as was Medicare, by 1965 amendments to the Social Security Act of 1935. The amendments, known collectively as the Social Security Act of 1965, created a joint federal-state program in which each state:

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

      States are also permitted by the federal government to seek waivers from certain requirements of the Social Security Act of 1965. In the past decade, partly due to advances in the commercial healthcare field, states have been increasingly interested in experimenting with pilot projects and statewide initiatives to control costs and expand coverage and have done so under waivers authorized by the Social Security Act of 1965 and with the

approval of the federal government. The waivers most relevant to us are the Section 1915(b) freedom of choice waivers that enable:

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

      Many states, including Maryland, operate under a Section 1115 demonstration rather than a 1915(b) waiver. This is a more expansive form of waiver that enables the state to have a Medicaid program that is broader than typically permitted under the Social Security Act of 1965. For example, Maryland’s 1115 waiver allows it to include more individuals in its managed care program than typically allowed under Medicaid.

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

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

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

Federal Regulation

      In accordance with the Health Insurance Portability and Accountability Act of 1996 (HIPAA), health plans are required to comply with all HIPAA regulations relating to standards for electronic transactions and code sets, privacy of health information, security of healthcare information, national provider identifiers, and national employer identifiers. AMERIGROUP providers and healthcare clearinghouses were required to comply with HIPAA privacy requirements on or before April 14, 2003, and with HIPAA Transactions and Code Sets (T&CS) requirements by October 16, 2003.

      AMERIGROUP implemented its privacy compliance program by April 14, 2003. AMERIGROUP received a two-year privacy accreditation from the Utilization Review Accreditation Commission (URAC) on November 1, 2003.

      On July 24, 2003, CMS issued guidance regarding compliance with the T&CS regulations in which CMS stated that it would not impose penalties on covered entities that deployed contingencies (in order to ensure the smooth flow of payments) if they have made reasonable and diligent efforts to become compliant and, in the case of health plans, to facilitate the compliance of their trading partners. AMERIGROUP implemented a T&CS contingency plan in March 2003, and has since acted aggressively to complete implementation of the T&CS regulations, subject to compliance by its trading partners and the various state Medicaid programs.

      On February 20, 2003, HHS published its final security regulations. The security rule applies only to protected health information in electronic form, and is specifically concerned with security information systems. A security gap analysis was completed in 2004 and AMERIGROUP expects to be compliant with the security rule by the April 20, 2005 deadline.

      Implementation of the National Provider Identifier (NPI) is required by May 27, 2007. A gap analysis for implementation of the NPI will be started sometime in late 2005.

      Future costs may be incurred in 2005 in implementation of the security and NPI standards, but we do not yet know the extent of such costs.

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

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

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

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

      President Bush, in his 2006 Budget submission to Congress, has proposed $1 billion in grant outreach monies over a two-year period to increase healthcare coverage of children eligible for Medicaid and SCHIP that are not currently enrolled. The President’s 2006 Budget also included funding for expansion of vaccines for children. In addition, the President has proposed demonstration projects entitled “New Freedom Initiatives” to expand access and quality for people with disabilities. Finally, the 2006 Budget includes proposals to continue current law for Transitional Medical Assistance and Medicare Premium Assistance for Medicaid.

      The President’s 2006 Budget also includes a number of proposals to reduce or eliminate “inappropriate” financing mechanisms employed by the states, primarily through use of intergovernmental transfers. These initiatives, together with Medicaid expansion proposals, are estimated to generate $45 billion in net reductions in Medicaid spending over a ten-year period. HHS is also interested in offering states increased flexibility of its Medicaid program for optional populations and services in exchange for more predictable cost growth within the overall Medicaid program. The President’s 2006 Budget contains little detail on this Medicaid Reform proposal, and it is expected that more discussion of the Medicaid Reform proposal will occur throughout the year. It is uncertain whether any of these proposals, or a variation thereof, will be enacted sometime in the future.

      The U.S. Congress has considered several versions of patients’ rights legislation in previous sessions. Though no bill has been introduced in the 109th Congress, it is likely to remain an issue. Legislation could expand our potential exposure to lawsuits and increase our regulatory compliance costs. Depending on the final form of any patients’ rights legislation, such legislation could, among other things, expose us to liability for economic and punitive damages for making determinations that deny benefits or delay beneficiaries’ receipt of benefits as a result of our medical necessity or other coverage determinations. We cannot predict whether patients’ rights legislation will be reconsidered in the future or if enacted, what final form such legislation might take.

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

Customers

      As of December 31, 2004, we served members who received healthcare benefits through our 13 contracts with the regulatory entities in the jurisdictions in which we operate. Five of these contracts, which are with the States of Florida, Maryland, New Jersey and Texas, individually accounted for 10% or more of our revenues for the year ended December 31, 2004, with the largest of these contracts representing approximately 19% of our revenues. Effective January 1, 2005, we began serving members who receive health benefits through an additional four contracts with the regulatory entities in New York.

Employees

      As of December 31, 2004, we had approximately 2,300 employees. Our employees are not represented by a union. We believe our relationships with our employees are good.

Available Information

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

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

      In September 2003, we entered into a 15-year lease for a new 106,000 square-foot building in Virginia Beach, Virginia. The construction of this new location was completed in September 2004. The new facility currently houses our primary call and data centers.

      In 2002, Cleveland A. Tyson, a former employee of AMERIGROUP Illinois, Inc., filed a federal Qui Tam or whistleblower action against our Illinois subsidiary, the United States of America and the State of Illinois, es rel., Cleveland A. Tyson v. AMERIGROUP Illinois, Inc., in the U.S. District Court of the Northern District, Eastern Division, alleging the submission of false claims under the Medicaid program. The United States is not a party to the action. Mr. Tyson’s amended complaint was unsealed and served on AMERIGROUP Illinois, Inc., in June 2003. Mr. Tyson alleges that AMERIGROUP Illinois, Inc. maintained a scheme to discourage or avoid the enrollment of pregnant women and members with special needs. In his suit, Mr. Tyson seeks an unspecified amount of damages and statutory penalties of no less than $5,000 and no more than $11,000 per violation. Mr. Tyson’s complaint does not specify the number of alleged violations. The court denied AMERIGROUP Illinois, Inc.’s motion to dismiss on September 26, 2004. AMERIGROUP Illinois, Inc.’s motion for summary judgment was filed in December 2004. That motion is fully briefed, and is ready for disposition by the court. On February 15, 2005, we received a motion filed by Mr. Tyson on February 10, 2005, seeking permission to amend his complaint and add AMERIGROUP Corporation as a defendant. On February 15, 2005, we also received the motion filed by the State of Illinois on February 10, 2005, seeking court approval to intervene on Mr. Tyson’s behalf. On March 2, 2005, the Court granted the State’s motion to intervene and denied Mr. Tyson’s motion to amend to add AMERIGROUP Corporation as a defendant. On March 3, 2005, AMERIGROUP Illinois, Inc. filed a motion to dismiss for lack of subject matter jurisdiction, based upon a recent opinion of the United States Court of Appeals for the District of Columbia Circuit.

      At this time, discovery is ongoing. Although it is possible that the outcome of this case will not be favorable to us, no range of liability can be estimated. Accordingly, we have not recorded any liability at December 31, 2004. There can be no assurance that the ultimate outcome of this matter will not have a material adverse effect on our consolidated financial position, results of operations, or liquidity.

      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 other legal matters will not have a material adverse effect on our financial position or results of operations.

      None.

Executive Officers of the Company

      Our executive officers, their ages and positions as of February 28, 2005, are as follows*:

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

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

      E. Paul Dunn, Jr. joined us in November 2004 as our Executive Vice President and Chief Financial Officer. From 1998 to November 2004, Mr. Dunn served as Vice President of Finance and Treasurer for IGM Global, Inc. He also served as Chief Financial Officer for GATX Terminals Corporation, a subsidiary of GATX Corporation, which provides distribution assets and financial services. Previously, at GATX, he also held the position of Treasurer. Prior to that, Mr. Dunn served as Assistant Treasurer with the Hertz Corporation. He began his career as a Financial Analyst at W.R. Grace & Company.

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

      * Effective February 11, 2005, Lorenzo Childress, Jr., M.D., resigned from the position of Executive Vice President, Chief Medical Officer but remains on the payroll through April 1, 2005. On an interim basis, his role is being filled by our experienced medical management staff, including the two current corporate executive medical directors.

Corporation and CIGNA Healthplans, Inc. Mr. Baldwin is licensed to practice law in the States of Virginia, Tennessee and Texas.

      Janet M. Brashear joined us in September 2004 as our Executive Vice President, Strategic Planning. From 1999 to 2004, Ms. Brashear provided consulting and executive services to new ventures in the hospitality industry. Previously, she served as Executive Vice President, Strategy for Marriott International, and Senior Vice President, Strategy and Operations for Marriott Lodging. She began her career in sales with Procter and Gamble.

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

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

      John E. Littel joined us in 2001 as head of Government Relations. Mr. Littel has served in a variety of positions in federal and state governments, including as Deputy Secretary of Health and Human Resources for the Commonwealth of Virginia, where he was responsible for the state’s welfare reform and healthcare initiatives, and as Director of Intergovernmental Affairs for the White House Drug Policy Office. Prior to joining AMERIGROUP, he served as counsel and deputy director of the Citizenship Project at the Heritage Foundation and in the current Bush Administration as senior counselor to the Director of the Office of Personnel Management. Mr. Littel is licensed to practice law in the State of Pennsylvania.

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

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

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

      Sherri E. Lee joined us in 1998 as our Chief Financial Officer and Treasurer. In 2001, Ms. Lee resigned her position as Chief Financial Officer, but continues to serve as Senior Vice President and Treasurer. Ms. Lee served as Executive Vice President — Finance of Pharmacy Corporation of America and prior to that, as Senior Vice President and Controller for Beverly Enterprises, Inc. Ms. Lee is a certified public accountant. Ms. Lee has tendered her resignation as Senior Vice President and Treasurer, effective April 1, 2005, and intends to retire.

PART II.

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

      On December 14, 2004, we announced a two-for-one split of our common stock. The stock split was in the form of a one hundred percent stock dividend of one share of common stock for every share of common stock issued and outstanding. The stock dividend was distributed on January 18, 2005, to our shareholders of record on December 31, 2004.

      The following table sets forth the range of high and low sales prices for our common stock (after giving retroactive effect to the two-for-one stock split effective January 18, 2005) for the period indicated.

      On March 1, 2005, the last reported sales price of our common stock was $40.35 per share as reported on the NYSE. As of March 1, 2005, we had 38 shareholders of record.

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

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

Use of Proceeds from Public Offering

      On October 16, 2003, we completed a public offering of 6,325,000 shares of common stock, including an over-allotment issuance of 825,000 shares (after giving retroactive effect to the two-for-one stock split effective January 18, 2005). The shares of common stock sold in the offering were registered under the Securities Act of 1933 on a Registration Statement on Form S-3, Registration Number 333-108831, which was declared effective by the SEC on October 9, 2003, and a Registration Statement on Form S-3, Registration Number 333-109609, filed with the SEC pursuant to Rule 462(b) of the General Rules and Regulations under the Securities Act of 1933 on October 9, 2003. All 6,325,000 shares sold in the public offering were sold at a price of $23.25 per share for an aggregate offering price of $147.1 million. We received proceeds from the offering of approximately $138.8 million, net of approximately $7.4 million of underwriting fees and $0.9 million of expenses. On October 21, 2003, we used $30.0 million of proceeds from the offering to repay the outstanding balance of our credit facility. The balance of approximately $108.8 million was used to partially fund the CarePlus acquisition effective January 1, 2005.

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

      The following selected consolidated financial data should be read in connection with the financial statements and related notes and Management’s Discussion and Analysis of Financial Condition and Results of Operations appearing elsewhere in this Form 10-K. Selected financial data as of and for each of the years in the five-year period ended December 31, 2004 are derived from our consolidated financial statements, which have been audited by KPMG, LLP, independent registered public accounting firm. All share and per share amounts included in the following consolidated financial data have been retroactively adjusted to reflect the two-for-one stock split effective January 18, 2005.

Overview

      We are a multi-state managed healthcare company focused on serving people who receive healthcare benefits through publicly sponsored programs, including Medicaid, SCHIP and FamilyCare. We were founded in December 1994 with the objective of becoming the leading managed care organization in the U.S. focused on serving people who receive these types of benefits. Having concluded our tenth year of operations, we continue to believe that managed healthcare remains the only proven mechanism that significantly reduces medical cost trends and helps our state partners control their costs.

      In 2004, we increased our total revenues by 12.4% over 2003. Total membership increased by 79,000 members, or 9.2%, to 936,000 members as of December 2004. Our 2004 revenue growth came from a number of factors including:

      In 2004, our health benefits ratio (HBR) was 81.0% versus 80.2% in 2003. The HBR increase is driven by a reduction in the favorable prior year development offset by increased leverage of premium revenue. The reduction in favorable prior year development is due to a decrease in claims payment variability related to maturing products and markets.

      Selling, general and administrative expenses (SG&A) were 10.5% of total revenues for the year ended December 31, 2004 compared to 11.5% in 2003. This improvement is a result of a reduction in overall SG&A dollars, excluding the effect of premium tax, and an increased leverage of premium revenue due to favorable rate increases.

      Cash and investments totaled $612.1 million at the end of 2004. A significant portion of this cash is regulated by state capital requirements. However, $271.7 million of our cash and investments was unregulated and held at the parent level. In January 2005, we used $126.8 million of unregulated cash to effect the stock acquisition of CarePlus.

      We expect acquisitions to continue to be an important part of our growth strategy. As of December 31, 2004, over 41% of our current membership has resulted from nine acquisitions and we are currently evaluating potential acquisition opportunities. Effective January 1, 2005, we acquired CarePlus with membership of approximately 115,000 participating in New York State Medicaid, Child Health Plus and Family Health Plus programs. We believe our undrawn credit facility and our cash flows from operating activities position us to continue to take advantage of acquisition opportunities.

      The State of Florida approved our request effective March 1, 2005 for expansion into Polk and Pasco counties for long-term care services.

      We have an exclusive risk-sharing arrangement with Cook Children’s Health Care Network (CCHCN) and Cook Children’s Physician Network (CCPN), which includes Cook Children’s Medical Center (CCMC), that covers an estimated 129,000 AMERICAID members in Fort Worth, Texas. Of these members, approximately 110,000, or 85%, are children under the age of 15 who may utilize services of either CCPN or CCMC. Of this subset, approximately 25,000 are signed up with primary care physicians who are either employees of CCPN or exclusively contracted with CCPN. Unless either party gives the other a written notice of non-renewal six months in advance, the risk-sharing arrangement with CCHCN and CCPN would automatically be extended for a one year period commencing on August 31, 2005. On February 25, 2005, we received a written notice of non-renewal from CCHCN and CCPN; therefore this contract will terminate on August 31, 2005.

      It is our intent to enter into a new contract with CCPN, CCMC and the CCPN physicians individually. However, there is no assurance that our contracting effort will be successful or that the terms of any new contract will be as favorable as the current risk-sharing arrangement. Therefore, our results from operations could be harmed as a result of the expiration of the risk-sharing arrangement and the impact could be material. Additionally, we could lose members if CCPN chooses to associate with another HMO or if CCHCN obtains its own contract with the State of Texas to provide healthcare services to Medicaid recipients.

      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 to expand the current programs. Although the State has said it will announce contract awards in early 2005 with implementation continuing into 2006, the announcement of the awards may not occur until after the conclusion of the Texas legislative session on May 30, 2005. The RFP includes all of the current Texas service areas and products in which we operate. Our response to the RFP included our current Texas service areas and products as well as expansion into new service areas and products. If we lost one or more contracts through the re-procurement process, our operating results could be materially and adversely affected.

      On September 14, 2004, we were informed that we were a successful bidder in a request for proposal from the State of Indiana for expansion of its managed care program in 2005. Because of limited expansion opportunities and provider network restrictions, we evaluated our market entry options and decided not to enter the market at this time.

      In April 2004, the Maryland Legislature enacted a budget for the 2005 fiscal year beginning July 1, 2004 that included a provision to reduce the premium paid to managed care organizations that 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 our premium recoupment to be $846,000. A liability for the recoupment was recorded with a corresponding charge to premium revenue during the year ended December 31, 2004. Additionally, the Legislature directed that the Department of Health and Mental Hygiene complete a study by September 2004 on the relevance of the medical loss ratio threshold as an indicator of quality. The results of this, which were released in October 2004, did not directly address what would happen in the future if a managed care organization reported a medical loss ratio below 84%. As a result, we believe the Maryland Legislature could enact similar legislation in 2005 as part of its fiscal year 2006 budget, requiring premium recoupment. We have recorded a reduction in premium in our financial statements of our best estimate of the outcome of this issue as of the year ended December 31, 2004. It is possible that the Maryland Legislature in 2006, as part of its fiscal year 2007 budget, could enact similar legislation relating to the year ended December 31, 2004. However, at this time we are unable to predict the regulatory, economic or political climate that might exist at that time. Accordingly, we have not recorded any liability for the twelve months ended December 31, 2004. However, if the Maryland Legislature were to enact legislation in April 2006 consistent with the legislation passed in April 2004 and we failed to meet the required quality measures, we could have a recoupment obligation for that period commencing on July 1, 2006 ranging from zero to approximately $757,000 with respect to the premium revenue for the twelve month period ended December 31, 2004.

      In the fourth quarter of 2003, our Florida health plan implemented medical review procedures designed to reduce the incidence of inappropriate authorizations of speech therapy and occupational therapy services. In February of 2004, the health plan was informed by the applicable regulatory agency, Agency for Health Care Administration (AHCA), that the medical review procedures it had implemented were not compliant with the Medicaid contract and the state’s therapy services handbook. We were directed to reprocess and pay all denied

claims and to file a corrective action plan. Our Florida health plan disputed AHCA’s assessment of its medical review procedures. AHCA rejected the health plan’s corrective action plan and we appealed their decision. On January 18, 2005, the Florida health plan reached an agreement with AHCA to settle the issues relating to speech therapy and occupational therapy services. The settlement did not have a material impact on the fourth quarter results of operations.

Discussion of Critical Accounting Policies

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

      We generate revenues primarily from premiums we receive from the states in which we operate to arrange for health benefit services for our members. We generally receive premiums in advance of arranging for services, and recognize premium revenue during the period in which we are obligated to provide services to our members. A fixed premium per member per month is paid to us to arrange for healthcare benefit services for our members pursuant to our contracts in each of our markets. These premium payments are based upon eligibility determined by the state governments with which we have contracted. Errors in this eligibility determination on which we rely can result in positive and negative premium adjustments to the extent this information is adjusted by the state. In all of our states, except Florida, we are eligible to receive supplemental payments for newborn obstetric deliveries. Each state contract is specific as to what is required before payments are generated. Upon delivery of a newborn, each state is notified according to our contract. Revenue is recognized in the period that the delivery occurs and the related services are provided to our member based on our authorization system for these services. Additionally, in some states we receive supplemental payments for certain services such as high cost drugs and early childhood prevention screenings. Any amounts that have not been received from the state by the end of the period are recorded on our balance sheet as premium receivables. We also generate income from investments.

      Our results of operations depend on our ability to effectively manage expenses related to health benefits, as well as our ability to accurately predict costs incurred in recording the amounts in our consolidated financial statements. Expenses related to health benefits have two components: direct medical expenses and medically related administrative costs. Direct medical expenses include fees paid to hospitals, physicians and providers of ancillary medical services, such as pharmacy, laboratory, radiology, dental and vision. Medically related administrative costs include expenses related to services such as health promotion, quality assurance, case management, disease management and 24-hour on-call nurses. Direct medical expenses also include estimates of medical expenses incurred but not yet reported (IBNR). For the year ended December 31, 2004, approximately 95% of our direct medical payments related to fees paid on a fee-for-service basis to our PCPs, specialist physicians and other providers, including fees paid to third-party vendors for ancillary services. The balance related to fees paid on a capitation, or per member, basis. Primary care and specialist physicians not paid on a capitated basis are paid on a maximum allowable fee schedule set forth in the contracts with our providers. We reimburse hospitals on a negotiated per diem, case rate or an agreed upon percent of their standard charges. In Maryland, the state sets the amount reimbursed to hospitals.

      We have used the same methodology for estimating our medical expenses and medical liabilities since our inception, and have refined our assumptions to take into account our maturing claims, product and market experience. As medical utilization patterns and cost trends change from year-to-year, our underlying claims payments reflect the variations in experience. Our estimates are revised based upon actual claims payments using

historical per-member per-month claims cost, including provider settlements, changes in the age and gender of our membership and variations in the severity of medical conditions. These variations are considered in determining our current medical liabilities and adjusted to reflect expected changes in cost or utilization patterns.

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

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

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

      The following table shows the components of the change in medical claims payable for the years ended December 31, 2004, 2003 and 2002 (in thousands):

      In the current year, we experienced a reduction in the favorable prior year development of approximately $22.8 million related to 2003 and prior. In 2003, we experienced an increase in the favorable prior year development of $4.1 million related to 2002 and prior. The current year reduction was primarily the result of more precise claims estimates at December 31, 2003 due to a decrease in claims payment variability related to our maturing products and markets compared to the prior year. Actuarial claims estimates are based upon facts and circumstances at the time we record them. We believe that our claims experience has stabilized as the Company has grown, allowing us to more accurately estimate our medical expense liabilities at each period end. As we add new markets and products, the claims fluctuations may increase, but overall growth in the size of the Company mitigates this volatility on a consolidated basis.

      The Company’s methodology includes adding a factor to compensate for normal claim uncertainty. The more precisely we have been able to predict claims patterns, the lower the required factor for uncertainty as a percentage of our medical liability. Due to the changing mix of members, products and markets, this factor is a necessary component of our medical liabilities. While our prior year development historically has been favorable, there is no guarantee this will continue and the factor for uncertainty mitigates the risk of emerging claims experience that is different from historical patterns. The health benefits expenses incurred during the period related to prior years relate almost entirely to revisions in estimates for the immediately preceding year. The application of our methodology has resulted in reversals of estimated incurred claims related to prior years in each of the years in the three-year period ended December 31, 2004. The resulting impact on operations is a function of the variation of the change in estimate from year-to-year. Included above was the impact on earnings of the change in our factor for uncertainty of a favorable development of $1.5 million in 2004, an unfavorable development of $3.5 million in 2003 and a favorable development of $4.3 million in 2002.

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

      We believe that the amount of claims payable is adequate to cover our ultimate liability for unpaid claims as of December 31, 2004; however, actual claim payments and other items may differ from established estimates. Assuming a hypothetical 1% difference between our December 31, 2004 estimates of claims payable and actual claims payable, net income for the year ended December 31, 2004 would increase or decrease by approximately $1.5 million and diluted earnings per share would increase or decrease by approximately $0.03 per share.

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

      As of December 31, 2004 and 2003, we had goodwill and other intangible assets of $140.4 million and $144.4 million, respectively, net of accumulated amortization. We review our intangible assets with defined lives for impairment whenever events or changes in circumstances indicate we might not recover their carrying value. We assess our goodwill for impairment at least annually. In assessing the recoverability of these assets, we must make assumptions regarding estimated future utility and cash flows and other internal and external factors to determine the fair value of the respective assets. If these estimates or their related assumptions change in the future, we may be required to record impairment charges for these assets.

      On December 16, 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard No. 123 (revised 2004) (SFAS No. 123(R)), Shared-Based Payment, which is a revision of Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (SFAS No. 123). SFAS No. 123(R) supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and SFAS No. 148, Accounting for Stock Based Compensation, and amends FASB Statement of Financial Accounting Standard No. 95, Statement of Cash Flows. Generally, the approach in SFAS No. 123(R) is similar to the approach described in SFAS No. 123. However, SFAS No. 123(R) requires all share-based payments to

employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Proforma disclosure is no longer an alternative.

      SFAS No. 123(R) must be adopted no later than July 1, 2005. Early adoption will be permitted in periods in which financial statements have not yet been issued. We expect to adopt SFAS No. 123(R) on July 1, 2005.

      SFAS No. 123(R) permits public companies to adopt its requirements using one of two methods:

      We are in the process of evaluating these methods.

      As permitted by SFAS No. 123, we currently account for share-based payments to employees using APB Opinion No. 25’s intrinsic value method and, as such, generally recognize no compensation cost for employee stock options. Accordingly, the adoption of the fair value method of SFAS No. 123(R) will have a significant impact on our results of operations, although it will have no impact on our overall financial position. The impact of adoption of SFAS No. 123(R) cannot be predicted at this time because it will depend on levels of share-based payments granted in the future. However, had we adopted SFAS No. 123(R) in prior periods, the impact of the standard would have approximated the impact of SFAS No. 123 as described in the disclosure of proforma net income and earnings per share in Note 2(h) to our consolidated financial statements. SFAS No. 123(R) also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under current literature. This requirement will reduce net operating cash flows and increase net financing cash flows in periods after adoption. While we cannot estimate what those amounts will be in the future (because they depend on, among other things, when employees exercise stock options), the amount of operating cash flows recognized in prior periods for such excess tax deductions were $8.0 million, $4.5 million and $3.8 million in 2004, 2003 and 2002, respectively.

Results of Operations

      The following table sets forth selected operating ratios for the years ended December 31, 2004, 2003 and 2002. All ratios, with the exception of the health benefits ratio, are shown as a percentage of total revenues.

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

      On December 14, 2004, we announced a two-for-one split of our common stock. The stock split was in the form of a one hundred percent stock dividend of one share of common stock for every share of common stock issued and outstanding. The stock dividend was distributed on January 18, 2005, to shareholders of record on December 31, 2004. All share and per share data described herein give retroactive effect to the two-for-one stock split effective January 18, 2005.

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

      Premium revenue for the year ended December 31, 2004 increased $197.9 million, or 12.3%, to $1,813.4 million from $1,615.5 million in 2003. The increase was primarily due to internal growth in membership as well as premium rate increases. Total membership increased 9.2% to 936,000 as of December 31, 2004 from 857,000 as of December 31, 2003.

      Investment income increased $3.6 million to $10.3 million for the year ended December 31, 2004. The increase in investment income is primarily due to increased levels of cash and investments that were a result of having the proceeds from the secondary offering that occurred in October 2003 available for a full year of investing in 2004 and cash generated from operations, as well as increases in market interest rates and a shift in our investment portfolio toward longer term investments with higher yields.

      Expenses relating to health benefits for the year ended December 31, 2004 increased $173.2 million, or 13.4%, to $1,469.1 million from $1,295.9 million for the year ended December 31, 2003. The increase was primarily due to an increase in membership. The HBR for the year ended December 31, 2004 was 81.0% compared to 80.2% in 2003. The increase in HBR is driven by less favorable development than in the prior year due to a combination of more mature claims patterns in existing products and markets offset by increased leverage of premium revenue. This had the effect of increasing the current year HBR even though there was no increase in our core medical run rates. The underlying medical performance continues to be stable with trend patterns consistent with those of the prior year, except for more moderate seasonal respiratory disorders than in the prior year and continued elevated obstetric services.

      SG&A increased $5.0 million to $191.9 million for the year ended December 31, 2004 compared to $186.9 million in 2003. The net increase in SG&A was primarily due to:

      Our SG&A ratio for the year ended December 31, 2004 was 10.5% compared to 11.5% in 2003. This improvement was achieved due to increased leverage of premium revenue from successful rate increases and increased membership levels.

      Interest expense was $0.7 million and $1.9 million for the years ended December 31, 2004 and 2003, respectively. The decrease primarily relates to the repayment of our outstanding balance of our credit facility on October 21, 2003, with a portion of the net proceeds from our October 16, 2003 public offering.

      Income tax expense for 2004 was $55.2 million with an effective tax rate of 39.1% as compared to the $46.6 million for 2003 with an effective tax rate of 40.9%. The decrease in the effective tax rate is primarily attributable to a decrease in expenses that are not deductible for tax purposes, an increase in investments in tax advantaged securities and the resolution of potential tax issues from a prior year.

      Net income for 2004 rose $18.7 million to $86.0 million, or $1.66 per diluted share, compared to $67.3 million, or $1.48 per diluted share in 2003. Diluted earnings per share rose 12.2% as compared to an increase in net income of 27.8% due to the increase in shares outstanding primarily resulting from the issuance of 6,325,000 shares from our October 16, 2003 public offering.

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

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

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

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

      SG&A increased $53.5 million to $186.9 million for the year ended December 31, 2003 compared to $133.4 million in 2002. The increase in SG&A was primarily due to an increase in wages and related expenses for additional staff to support our increased membership, expenses related to implementation of the HIPAA

guidelines, as well as expenses related to market development activities. Our SG&A ratio to revenue was 11.5% for both the years ended December 31, 2003 and 2002.

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

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

      Net income for 2003 rose $20.3 million to $67.3 million, or $1.48 per diluted share, compared to $47.0 million, or $1.10 per diluted share in 2002. Diluted earnings per share rose 34.5% as compared to an increase in net income of 43.2%, due to the increase in shares outstanding primarily resulting from the issuance of 6,325,000 shares from our October 16, 2003 public offering.

Liquidity and Capital Resources

      Our primary sources of liquidity are cash and cash equivalents, short and long-term investments, cash flows from operations and borrowings under our Amended and Restated Credit Agreement (Credit Agreement). As of December 31, 2004, we had cash and cash equivalents of $227.1 million, short and long-term investments of $384.9 million and restricted investments on deposit for licensure of $38.4 million. As of December 31, 2004, there were no borrowings outstanding under our $95.0 million Credit Agreement. Cash and investments totaled $612.1 million at December 31, 2004. A significant portion of this cash and investments is regulated by state capital requirements. However, $271.7 million of our cash and investments were unregulated and held at the parent level.

      On October 16, 2003, we completed a public offering of 6,325,000 shares of common stock at $23.25 per share, including an over-allotment issuance of 825,000 shares. Net proceeds from the offering, after fees and expenses, were approximately $138.8 million. On October 21, 2003, we used $30.0 million of proceeds from the offering to repay the outstanding balance under our revolving credit facility. The balance of approximately $108.8 million was used to partially fund the CarePlus acquisition effective January 1, 2005.

      Cash from operations was $102.1 million for the year ended December 31, 2004 compared to $128.5 million for the year ended December 31, 2003. The decrease in cash from operations is primarily due to the following items:

      Cash flows provided by investing activities was $37.9 million for the year ended December 31, 2004 compared to cash flows used in investing activities of $246.1 million for the year ended December 31, 2003. The increase in cash provided by investing activities was primarily due to a net increase in the proceeds from sales of investments offset by purchases of investments in 2004 compared to 2003. The cash for these additional investments in 2003 was generated from our public offering in October 2003, as well as cash flow from operations. We currently anticipate that our 2005 capital expenditures will be approximately $28.0 million.

      Our investment policies are designed to provide liquidity, preserve capital and maximize total return on invested assets. As of December 31, 2004, our investment portfolio consisted primarily of fixed-income securities. The weighted average maturity is less than six months. We utilize investment vehicles such as commercial paper, municipal bonds, U.S. government backed agencies, auction rate securities and U.S. Treasury instruments. The states in which we operate prescribe the types of instruments in which our subsidiaries may invest their cash. The weighted average taxable equivalent yield on consolidated investments as of December 31, 2004 was approximately 2.24%.

      Cash provided by financing activities was $3.1 million and $98.6 million for the year ended December 31, 2004 and 2003, respectively. The decrease in cash provided by financing activities consisted primarily of net proceeds from our public offering in 2003 of $138.8 million partially offset by $50.0 million in repayments in 2003 of borrowings under our revolving credit facility.

      On October 22, 2003, we entered into a $95.0 million Credit Agreement with a syndicate of banks. The Credit Agreement contains a provision which allows us to obtain, subject to certain conditions, an increase in revolving commitments of up to an additional $30.0 million. The proceeds of the Credit Agreement are available for general corporate purposes, including, without limitation, permitted acquisitions of businesses, assets and technologies. The borrowings under the Credit Agreement will accrue interest at one of the following rates, at our option: Eurodollar plus the applicable margin or an alternate base rate plus the applicable margin. The applicable margin for Eurodollar borrowings is between 2.00% and 2.50% and the applicable margin for alternate base rate borrowings is between 1.00% and 1.50%. The applicable margin will vary depending on our leverage ratio. The Credit Agreement is secured by substantially all of the assets of AMERIGROUP Corporation and its wholly-owned subsidiary, PHP Holdings, Inc., including the stock of their respective wholly-owned managed care subsidiaries. There is a commitment fee on the unused portion of the Credit Agreement that ranges from 0.375% to 0.50%, depending on the leverage ratio. The Credit Agreement terminates on October 22, 2006 and was undrawn as of December 31, 2004.

      Our subsidiaries are required to maintain minimum statutory capital requirements prescribed by various jurisdictions, including the departments of insurance in each of the states in which we operate. As of December 31, 2004, our subsidiaries were in compliance with all minimum statutory capital requirements. We believe that we will continue to be in compliance with these requirements for the next 12 months.

      In January 2005, we used $126.8 million of unregulated cash to effect the stock acquisition of CarePlus. Remaining cash, cash equivalents and short-term investments are sufficient to meet current cash requirements without the need to liquidate securities held earlier than anticipated.

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

      The following table summarizes our material contractual obligations, including both on- and off-balance sheet arrangements, and our commitments at December 31, 2004 (in thousands):

Lease Financing

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

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

Long-term Borrowings

      Credit Agreement. On October 22, 2003, we entered into a $95.0 million Credit Agreement with a syndicate of banks. The Credit Agreement contains a provision which allows us to obtain, subject to certain conditions, an increase in revolving commitments of up to an additional $30.0 million. The proceeds of the Credit Agreement are available for general corporate purposes, including, without limitation, permitted acquisitions of businesses, assets and technologies. The commitment fee on the unused portion of the Credit Agreement ranges from 0.375% to 0.50%, depending on our leverage ratio. The Credit Agreement terminates on October 22, 2006 and was undrawn as of December 31, 2004.

Commitments

      Lease Guarantee. In connection with our acquisition of PHP, we agreed to guarantee a certain lease for office space operated by the former management of PHP. The lease term ends on March 31, 2005.

Regulatory Capital and Dividend Restrictions

      Our operations are conducted through our wholly-owned subsidiaries, which include HMOs and one MCO. HMOs and MCOs are subject to state regulations that, among other things, require the maintenance of minimum levels of statutory capital, as defined by each state, and restrict the timing, payment and amount of dividends and other distributions that may be paid to their stockholders. Additionally, certain state regulatory agencies require individual HMOs to maintain statutory capital levels higher than the state regulations. As of December 31, 2004, we believe our subsidiaries are in compliance with all minimum statutory capital requirements. We believe that we will continue to be in compliance with these requirements at least through the end of 2005.

      As of December 31, 2004, our subsidiaries had aggregate statutory capital and surplus of approximately $132.0 million, compared with the required minimum aggregate statutory capital and surplus requirements of approximately $67.7 million.

      The National Association of Insurance Commissioners (NAIC) has adopted rules which, to the extent that they are implemented by the states, set new minimum net worth requirements for insurance companies, HMOs and other entities bearing risk for healthcare coverage. The requirements take the form of risk-based capital rules.

The change in rules for insurance companies became effective as of December 31, 1998. Illinois, Texas and the District of Columbia adopted various forms of the rules as of December 31, 1999, 2000 and 2003, respectively. Since our Maryland subsidiary is licensed in both the District of Columbia and Maryland, the highest risk-based capital requirement between the two will prevail. New Jersey and Florida have not yet adopted risk-based capital as their net worth requirements. The NAIC’s HMO rules, if adopted by these states in their proposed form, may increase the minimum capital required for our subsidiaries. Effective December 31, 2004, our New Jersey subsidiary is required to maintain a statutory capital level greater than the state regulations.

Inflation

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

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

Off-Balance Sheet Arrangements

      Our off-balance sheet arrangements at December 31, 2004 include future minimum rental commitments of $57.0 million and a lease guarantee of $99,000, both of which are disclosed in Note 11(c) to the consolidated financial statements. We have no investments, loans or any other known contractual arrangements with special-purpose entities, variable interest entities or financial partnerships.

      As of December 31, 2004, we had short-term investments of $176.4 million, long-term investments of $208.6 million and investments on deposit for licensure of $38.4 million. These investments consist of highly liquid investments with maturities between three and 24 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 commercial paper, money market funds, U.S. Treasury securities, cash escrow accounts, asset-backed securities, debt securities of government sponsored entities, municipal bonds and auction rate securities. Our investment policies are subject to revision based upon market conditions and our cash flow and tax strategies, among other factors. We have the ability to hold these investments to maturity, and as a result, we would not expect the value of these investments to decline significantly as a result of a sudden change in market interest rates. As of December 31, 2004, a hypothetical 1% change in interest rates would result in an approximate $3.0 million change in our annual investment income.

RISK FACTORS

Risks related to being a regulated entity

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

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

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

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

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

violations of marketing regulations in Illinois and Florida and for failure to meet timeliness of the payment requirements in New Jersey. In 2004 and 2003, our Florida plan was fined for marketing violations.

      In July 2003, our New Jersey subsidiary received a notice of deficiency for failure to maintain provider network requirements in one New Jersey county as required by our Medicaid contract with New Jersey. We submitted to the State of New Jersey a corrective action plan and a request for a waiver of certain contractual provisions on August 10, 2003. On October 3, 2003, the State of New Jersey denied our request for a waiver, but we have been granted extensions to correct the network deficiency through March 31, 2005. Prior to the expiration of the extension, we will renew our request for a waiver or an additional extension of the time in which to correct the network deficiencies.

      On October 12, 2001, we responded to a Civil Investigative Demand (CID) of the HMO industry by the Office of the Attorney General of the State of Texas relating to processing of provider claims. We understand from the Office of the Attorney General that responses were required from the nine largest HMOs in Texas, of which, at the time, we were the ninth. The other eight are HMOs that primarily provide commercial products. The CID is being conducted in connection with allegations of unfair contracting, delegating and payment practices and violations of the Texas Deceptive Trade Practices — Consumer Protection Act and Article 21.21 of the Texas Insurance Code by HMOs. It is our understanding that we are not currently the target of any investigation by the Office of the Attorney General. We have responded to all of the requests for information. The Office of the Attorney General could request additional information or clarification that could be costly and time consuming for us to produce.

      HIPAA broadened the scope of fraud and abuse laws applicable to healthcare companies. HIPAA created civil penalties for, among other things, billing for medically unnecessary goods or services. HIPAA establishes new enforcement mechanisms to combat fraud and abuse, including a whistle-blower program. Further, HIPAA imposes civil and criminal penalties for failure to comply with the privacy and security standards set forth in the regulation. Despite a press release issued by the Department of Health and Human Services, (HHS) recommending that Congress create a private right of action under HIPAA, no such private cause of action has yet been created, and we do not know when or if such changes may be enacted.

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

      In August 2000, HHS issued a regulation under HIPAA requiring the use of uniform electronic data transmission standards for healthcare claims and payment transactions submitted or received electronically. Although compliance with the new transactions regulation was required by October 16, 2003, CMS issued its guidance on the October 2003 compliance deadline for the HIPAA transactions and code set rules, stating that enforcement by CMS will be on a complaint-driven basis. Since that time, many health organizations have operated under contingency plans pending their full implementation of these regulatory requirements. In February 2003, HHS finalized a regulation to protect the security of electronically maintained or transmitted health-related information. This security regulation requires compliance by April 2005. The next milestone date for us is implementation of the National Provider Identifier (NPI) by May 2007. We expect to be fully compliant by the required dates.

      To the extent that state laws impose stricter privacy standards than the HIPAA privacy regulations or to the extent that a state seeks and receives an exception from HHS regarding certain state laws, such laws will not be preempted. The states’ ability to promulgate stricter rules regarding privacy make compliance with the regulatory landscape more difficult. If we enter new markets with different, more stringent privacy rules, we may incur significant additional costs in complying with these more stringent state rules, or our existing programs and systems may not enable us to comply in all respects with these rules.

      Future costs may be incurred in complying with the security and NPI regulations. We are in the process of developing our compliance plan for the NPI regulations and cannot estimate the cost of compliance at this time.

      Further, compliance with these regulations may require additional changes, beyond those implemented to comply with privacy requirements, to many of the procedures we currently use to conduct our business, which may lead to additional costs that we have not yet identified. We do not know whether, or the extent to which, we will be able to recover our costs of complying with these new regulations from the states. The new regulations and related costs to comply with the new regulations could have a material adverse effect on our business. In addition, failure to comply with the new regulations could also have a material adverse effect on our business.

      On June 14, 2002, CMS published final regulations regarding Medicaid managed care. The final regulations implemented requirements of the Balanced Budget Act of 1997 (BBA) that are intended to give states more flexibility in their administration of Medicaid managed care programs, provide certain new patient protections for Medicaid managed care enrollees, and require states’ rates to meet new actuarial soundness requirements. The effective date for compliance with the regulation was August 13, 2003, with an extension provided to states operating under an 1115 demonstration waiver with a three-year BBA extension. If states fail to comply with the new regulations they could lose their funding from the federal fund matching program. The new regulations have been reflected in amendments in our contracts or new contracts with the Medicaid agencies in our various markets, with the exception of the Maryland market, which currently operates under the 1115 demonstration waiver with the BBA extension. Compliance with these new provisions have required changes to many of the procedures we currently use to conduct our business, which may lead to additional costs that we have not yet identified.

      In addition, the Sarbanes-Oxley Act of 2002, as well as rules subsequently implemented by the SEC and the NYSE, have imposed various requirements on public companies, including requiring changes in corporate governance practices. Our management and other personnel will need to continue to devote a substantial amount of time to these new compliance initiatives. Moreover, these rules and regulations will increase our legal and financial compliance costs and will make some activities more time-consuming and costly.

      The Sarbanes-Oxley Act of 2002 requires, among other things, that we maintain effective internal control over financial reporting. In particular, we must perform system and process evaluation and testing of our internal controls over financial reporting to allow management to report on, and our independent registered public accounting firm to attest to, our internal controls over our financial reporting as required by Section 404 of the Sarbanes-Oxley Act of 2002. Our testing, or the subsequent testing by our independent registered public accounting firm, may reveal deficiencies in our internal controls over financial reporting that are deemed to be material weaknesses. Our compliance with Section 404 will continue to require that we incur substantial accounting expense and expend significant management time and effort. Moreover, if we are not able to continue to comply with the requirements of Section 404 in a timely manner, or if we or our independent registered public accounting firm identifies deficiencies in our internal control over financial reporting that are deemed to be material weaknesses, the market price of our stock could decline and we could be subject to sanctions or investigations by the NYSE, SEC or other regulatory authorities, which would require additional financial and management resources.

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

      An example is state and federal legislation that would enable physicians to collectively bargain with managed healthcare organizations. The legislation, as currently proposed, generally contains an exemption for

public sector managed healthcare organizations. If legislation of this type were passed without this exemption, it would negatively impact our bargaining position with many of our providers and might result in an increase in our cost of providing medical benefits.

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

      As part of President Bush’s 2006 Budget submission to Congress, there are a number of proposals designed to crack down on inappropriate financing mechanisms employed by the states, primarily through use of intergovernmental transfers. These initiatives, together with Medicaid expansion proposals, are estimated to generate $45 billion in net reductions in Medicaid spending over a ten-year period. HHS is also interested in offering states increased flexibility of its Medicaid program for optional populations and services in exchange for more predictable cost growth within the overall Medicaid program. The President’s 2006 Budget contains little detail on this Medicaid Reform proposal, and it is expected that more discussion of the President’s Medicaid Reform proposal will occur throughout the year. It is uncertain whether any of these proposals, or a variation thereof, will be enacted sometime in the future. If the President’s proposals are ultimately adopted and states are required to reduce or change funding mechanisms, our operations and financial performance could be adversely affected.

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

      State governments generally are experiencing budgetary shortfalls. Budget problems in the states in which we operate could result in limited increases or even decreases in the premiums paid to us by the states. If any state in which we operate were to decrease premiums paid to us, or pay us less than the amount necessary to keep pace with our cost trends, it could have a material adverse effect on our profitability.

      As of December 31, 2004, we served members who received healthcare benefits through 13 contracts with the regulatory entities in the jurisdictions in which we operate. Five of these contracts, which are with the States of Florida, Maryland, New Jersey and Texas, individually accounted for 10% or more of our revenues for the year ended December 31, 2004, with the largest of these contracts representing approximately 19% of our revenues. If any of our contracts were not renewed on favorable terms or were terminated for cause or if we were to lose a contract in a re-bidding process, our business would suffer. All our contracts have been extended until at least mid-2005. Termination or non-renewal of any single contract could materially impact our revenues and operating results.

      Some of our contracts are subject to a re-bidding process. For example, we are subject to a re-bidding process in each of our three Texas markets. Our Texas markets are re-bid every six years and the re-bidding process occurred in 2004. Although the State of Texas has said it will announce contract awards in early 2005 with implementation continuing into 2006, the announcement of the awards may not occur until after the

conclusion of the Texas legislative session on May 30, 2005. Until the announcement is made and the legislative review process is complete, we can give no assurance that we will be able to enter into new markets and new products or retain our current business in existing markets. If we lost a contract through the re-bidding process, or if an increased number of competitors were awarded contracts in a specific market, our operating results could be materially and adversely affected.

      Our SCHIP contract covering our three Florida markets expires on September 30, 2005, with the State of Florida having the option to extend the contract for two additional one-year terms. We can give no assurance that the contracts will not be re-bid. If we lost a contract through the re-bidding process, or if an increased number of competitors were awarded contracts in a specific market, our operating results could be materially and adversely affected.

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

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

      Our operations are conducted through our wholly-owned subsidiaries, which include HMOs and one MCO. HMOs and MCOs are subject to state regulations that, among other things, require the maintenance of minimum levels of statutory capital, as defined by each state. Additionally, state regulatory agencies may require, at their discretion, individual HMOs to maintain statutory capital levels higher than the state regulations. If this were to occur to one of our subsidiaries, we may be required to make additional capital contributions to the affected subsidiary. Any additional capital contribution made to one of the affected subsidiaries could have a material adverse effect on our liquidity and our ability to grow.

Risks related to our business

      Most of our revenues are generated by premiums consisting of fixed monthly payments per member. These premiums are fixed by contract, and we are obligated during the contract period to facilitate access to healthcare services as established by the state governments. We have less control over costs related to the provision of healthcare than we do over our selling, general and administrative expenses. Historically, our expenses related to health benefits as a percentage of premium revenue have fluctuated. For example, our expenses related to health benefits were 81.0% of our premium revenue in 2004, and 80.2% of our premium revenue in 2003. If premiums are not increased and expenses related to health benefits rise, our earnings could be impacted negatively. In addition, our actual health benefits costs may exceed our estimated costs. The premiums we receive under our current contracts may therefore be inadequate to cover all claims, which could cause our profits to decline.

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

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

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

      We have an exclusive risk-sharing arrangement with Cook Children’s Health Care Network (CCHCN) and Cook Children’s Physician Network (CCPN), which includes Cook Children’s Medical Center (CCMC), that covers an estimated 129,000 AMERICAID members in Fort Worth, Texas. Of these members, approximately 110,000, or 85%, are children under the age of 15 who may utilize services of either CCPN or CCMC. Of this subset, approximately 25,000 are signed up with primary care physicians who are either employees of CCPN or exclusively contracted with CCPN. Unless either party gives the other a written notice of non-renewal six months in advance, the risk-sharing arrangement with CCHCN and CCPN would automatically be extended for a one-year period commencing on August 31, 2005. On February 25, 2005, we received a written notice of non-renewal from CCHCN and CCPN; therefore this contract will terminate on August 31, 2005.

      It is our intent to enter into a new contract with CCPN, CCMC and the CCPN physicians individually. However, there is no assurance that our contracting effort will be successful or that the terms of any new contract will be as favorable as the current risk-sharing arrangement. Therefore, our results from operations could be harmed as a result of the expiration of the risk-sharing arrangement and the impact could be material. Additionally, we could lose members if CCPN chooses to associate with another HMO or if CCHCN obtains its own contract with the State of Texas to provide healthcare services to Medicaid recipients.

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

      We maintain reinsurance to protect us against severe or catastrophic medical claims, but we can provide no assurance that such reinsurance coverage will be adequate or available to us in the future or that the cost of such reinsurance will not limit our ability to obtain it.

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

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

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

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

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

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

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

services for some period of time without sufficient revenue to cover our ongoing costs or recover start-up costs. The costs associated with starting up the business could have a significant impact on our results of operations.

      We have experienced rapid growth. In 1996, we had $22.9 million of premium revenue. In 2004, we had $1,813.4 million in premium revenue. This increase represents a compound annual growth rate of 72.7%.

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

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

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

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

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

      On October 22, 2003, we entered into a new $95.0 million Credit Agreement with four lenders. The Credit Agreement contains a provision which allows us to obtain, subject to certain conditions, an increase in revolving commitments of up to an additional $30.0 million. Our Credit Agreement is secured by our assets and by the common stock of our direct, wholly-owned subsidiaries. Pursuant to the Credit Agreement, we must meet certain financial covenants at the parent company and consolidated level. As of December 31, 2004, we were in compliance with such covenants. These financial covenants include meeting certain financial ratios, a limit on annual capital expenditures, and a minimum net worth requirement. As of December 31, 2004, the Credit Agreement was undrawn.

      Events beyond our control, such as prevailing economic conditions and changes in the competitive environment, could impair our operating performance, which could affect our ability to comply with the terms of the Credit Agreement. Breaching any of the covenants or restrictions could result in the unavailability of the Credit Agreement or a default under the Credit Agreement. We can provide no assurance that our assets or cash flows will be sufficient to fully repay outstanding borrowings under the Credit Agreement or that we would

be able to restructure such indebtedness on terms favorable to us. If we were unable to repay, refinance or restructure our indebtedness under the Credit Agreement, the lenders could proceed against the collateral securing the indebtedness.

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

      On occasion, our members obtain care from providers that are not in our network and with which we do not have contracts. To the extent that we know of such instances, we attempt to redirect their care to a network provider. We have generally reimbursed non-network providers at the rates paid to comparable network providers or at the applicable rate that the provider could have received under the traditional fee-for-service Medicaid program or at a discount therefrom. In some instances, we pay non-network providers pursuant to the terms of our contracts with the state. However, some non-network providers have requested that we pay them at their highest billing rate, or “full-billed charges.” Full-billed charges are significantly more than the amount the non-network providers could otherwise receive under the traditional fee-for-service Medicaid program.

      To the extent that non-network providers are successful in obtaining payment at rates in excess of the rates that we have historically paid to non-network providers, our profitability could be materially adversely affected.

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

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

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

      Historically, the number of persons eligible to receive Medicaid benefits has increased more rapidly during periods of rising unemployment, corresponding to less favorable general economic conditions. However, during such economic downturns, state budgets could decrease, causing states to attempt to cut healthcare programs, benefits and rates. If this were to happen while our membership was increasing, our results of operations could suffer. Conversely, the number of persons eligible to receive Medicaid benefits may grow more slowly or even decline if economic conditions improve, thereby causing our operating results to suffer. In either case, in the event that the company experiences a change in product mix to less profitable product lines, our profitability could be negatively impacted.

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

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

      In November 2003, we signed a software licensing agreement with The Trizetto Group, Inc. for their Facets Extended Enterprise^tm administrative system (Facets). During 2004, we invested in the implementation and testing of Facets with a staggered conversion to Facets by health plan beginning in 2005 and continuing through 2007. We estimate that our current claims payment system, without Facets, could be at full capacity within the next 16 months. We currently expect that Facets will meet our software needs for an estimated 10 years and will support our long-term growth strategies. However, if we cannot execute a successful system conversion, our operations could be disrupted, which would have a negative impact on our profitability and our ability to grow could be harmed.

      Our information systems and applications require continual maintenance, upgrading and enhancement to meet our operational needs. Moreover, our acquisition activity requires frequent transitions to or from, and the integration of, various information systems. We are continually upgrading and expanding our information systems capabilities. If we experience difficulties with the transition to or from information systems or are unable to properly maintain or expand our information systems, we could suffer, among other things, from operational disruptions, loss of existing members and difficulty in attracting new members, regulatory problems and increases in administrative expenses. For example, we acquired a New York health plan as of January 1, 2005, that uses information systems that are different from those used by the rest of our business. We expect to continue using this system exclusively for our New York plan for a number of months until such time as the New York subsidiary can be successfully integrated onto our systems. Operating that system as a separate information system can be expected to increase our costs in the short term, and there is no assurance that we can effect a seamless transition of the New York plan to a new system. Both the increased operational costs of this system and any difficulties in conversion to a new system could have a negative impact on our profitability.

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

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders

AMERIGROUP Corporation and Subsidiaries:

      We have audited the accompanying consolidated balance sheets of AMERIGROUP Corporation and subsidiaries as of December 31, 2004 and 2003, and the related consolidated income statements and statements of stockholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2004. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

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

      In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of AMERIGROUP Corporation and subsidiaries as of December 31, 2004 and 2003, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2004 in conformity with U.S. generally accepted accounting principles.

      We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of AMERIGROUP Corporation’s internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control — Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 25, 2005 expressed an unqualified opinion on management’s assessment of, and the effective operation of, internal control over financial reporting.

/s/ KPMG, LLP

February 25, 2005

Norfolk, Virginia

AMERIGROUP CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 2004 and 2003

See accompanying notes to consolidated financial statements.

AMERIGROUP CORPORATION AND SUBSIDIARIES

CONSOLIDATED INCOME STATEMENTS

See accompanying notes to consolidated financial statements.

AMERIGROUP CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY