Amerigroup Corp – IPO: ‘S-1/A’ on 11/2/01

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Initial Public Offering (IPO):  Pre-Effective Amendment to Registration Statement (General Form)   —   Form S-1
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: S-1/A       Amerigroup Corporation                               132    658K 
 2: EX-23.1     Consent of Kpmg LLP                                    1      4K 
 3: EX-23.2     Consent of Kpmg With Respect to the Medical            1      4K 

S-1/A   —   Amerigroup Corporation
Document Table of Contents

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As filed with the Securities and Exchange Commission on November 2, 2001

                                            Registration Statement No. 333-37410
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------

AMENDMENT NO. 10 TO 

FORM S-1

REGISTRATION STATEMENT
UNDER 
THE SECURITIES ACT OF 1933
------------------------

AMERIGROUP CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

                                                        [Enlarge/Download Table]
                                                                                     
            DELAWARE                         6324                    54-1739323      
(STATE OR OTHER JURISDICTION OF  (PRIMARY STANDARD INDUSTRIAL     (I.R.S. EMPLOYER   
 INCORPORATION OR ORGANIZATION)  CLASSIFICATION CODE NUMBER)   IDENTIFICATION NUMBER)

------------------------

4425 CORPORATION LANE 
VIRGINIA BEACH, VIRGINIA 23462
(757) 490-6900
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) 
------------------------

JEFFREY L. MCWATERS 
PRESIDENT AND CHIEF EXECUTIVE OFFICER 
4425 CORPORATION LANE 
VIRGINIA BEACH, VIRGINIA 23462
(757) 490-6900
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------

COPIES TO:

                                                                [Download Table]
                                                                     
         STACY J. KANTER, ESQ.            WILLIAM J. GRANT, JR., ESQ.
SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP    WILLKIE FARR & GALLAGHER 
           FOUR TIMES SQUARE                   787 SEVENTH AVENUE    
     NEW YORK, NEW YORK 10036-6522          NEW YORK, NEW YORK 10019 
             (212) 735-3000                      (212) 728-8000      

------------------------

     Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.            

     If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 of the Securities Act of     
1933, check the following box.  [ ]                                             

 If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier        
effective registration statement for the same offering.  [ ]                    

  If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act   
registration statement number of the earlier effective registration statement   
for the same offering.  [ ]                                                     

  If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act   
registration statement number of the earlier effective registration statement   
for the same offering.  [ ]                                                     

    If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box.  [ ]                                            

CALCULATION OF REGISTRATION FEE 

--------------------------------------------------------------------------------

                                                        [Enlarge/Download Table]

---------------------------------------------------------------------------------------------------------------------------------
                                                   AMOUNT TO         PROPOSED MAXIMUM     PROPOSED MAXIMUM                       
           TITLE OF EACH CLASS OF                      BE           OFFERING PRICE PER   AGGREGATE OFFERING       AMOUNT OF      
         SECURITIES TO BE REGISTERED               REGISTERED            SHARE(1)             PRICE(1)         REGISTRATION FEE  
---------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                 
Common Stock, par value $0.01................      5,660,000              $19.00          $105,830,000(2)         $27,783(3)     
---------------------------------------------------------------------------------------------------------------------------------

(1)Estimated solely for the purpose of calculating the registration fee pursuant
to Rule 457(a) of the Securities Act of 1933, as amended.                 

(2)Relates to shares of common stock offered in the initial public offering and 
600,000 shares of common stock registered in connection with the Company's
Employee Stock Purchase Plan. The maximum aggregate offering price with   
respect to the shares of common stock for the Employee Stock Purchase Plan
  was calculated using 85% of the high end of the range for the initial public
offering. See "Explanatory Note."                                         

(3)Previously paid.                                                             

------------------------

  THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE AN AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT    
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE        
SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME        
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), 
MAY DETERMINE.                                                                  

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EXPLANATORY NOTE

   This registration statement contains two separate prospectuses. The first
prospectus relates to a public offering of shares of common stock of AMERIGROUP 
Corporation underwritten by the underwriters named in that prospectus. The      
second prospectus relates to AMERIGROUP's Employee Stock Purchase Plan. The sale
of shares under the Employee Stock Purchase Plan will not be underwritten. The  
prospectuses will be identical in all respects, other than the front and back   
cover pages, the section entitled "The Offering," the section entitled "Use of  
Proceeds," the section entitled "Underwriting," which in the employee offering  
will be replaced with a section entitled "Plan of Distribution," "Legal Matters"
and the inclusion in the employee prospectus of a section entitled "Detailed    
Description of the Employee Stock Purchase Plan." The alternate pages for the   
Employee Stock Purchase Plan prospectus appear in this registration statement   
immediately following the complete prospectus for the initial public offering.  

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THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED WITHOUT   
NOTICE. AMERIGROUP MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION         
STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS  
PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES, AND AMERIGROUP IS NOT      
SOLICITING OFFERS TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE  
OF THESE SECURITIES IS NOT PERMITTED.                                           

PROSPECTUS (NOT COMPLETE)                                                       

ISSUED NOVEMBER 2, 2001                                                         

4,400,000 SHARES

[AMERIGROUP CORPORATION LOGO] 
COMMON STOCK

     AMERIGROUP Corporation is offering shares of stock in a firmly underwritten
offering. This is AMERIGROUP's initial public offering, and no public market    
currently exists for AMERIGROUP's shares. AMERIGROUP anticipates that the       
initial public offering price for its shares will be between $17 and $19 per    
share. After the offering, the market price for AMERIGROUP's shares may be      
outside this range.                                                             

We have applied to list our common stock on the Nasdaq National Market
under the symbol "AMGP."                                                        
------------------------- 

 INVESTING IN THE COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 8.                                                   
------------------------- 
 NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A     
CRIMINAL OFFENSE.                                                               

                                                                [Download Table]

                                           PER SHARE   TOTAL  
                                           ---------  --------
                                                              
Offering Price                              $         $       
Discounts and Commissions to Underwriters   $         $       
Offering Proceeds to Company                $         $       

  AMERIGROUP Corporation and Jeffrey L. McWaters, the selling stockholder,
have granted the underwriters the right to purchase up to an additional 660,000 
shares of common stock to cover any over-allotments. AMERIGROUP Corporation will
not receive any of the proceeds from the sale of 75,000 shares by Mr. McWaters. 
The underwriters can exercise this right at any time within thirty days after   
the offering. The underwriters expect to deliver the shares of common stock to  
investors on              , 2001.                                               
------------------------- 
BANC OF AMERICA SECURITIES LLC                                       UBS WARBURG
------------------------- 

CIBC WORLD MARKETS                                                 STEPHENS INC.
               , 2001.

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[LEFT BLANK FOR INSIDE COVER] 

[DESCRIPTION OF COVER ART: COMPANY NAME AND PRODUCT NAMES ACCOMPANIED BY
PHOTOGRAPHS OF CHILDREN AND THE FOLLOWING PHRASE, IN ENGLISH AND SPANISH: CARING
TODAY FOR A HEALTHY TOMORROW.]

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TABLE OF CONTENTS 

                                                                [Download Table]

                                                              PAGE
                                                              ----
                                                                  
Prospectus Summary..........................................    3 
Risk Factors................................................    8 
Forward-Looking Statements..................................   20 
Use of Proceeds.............................................   21 
Dividend Policy.............................................   22 
Capitalization..............................................   23 
Dilution....................................................   24 
Selected Consolidated Financial Data........................   25 
Management's Discussion and Analysis of Financial Condition       
  and Results of Operations.................................   26 
Business....................................................   35 
Management..................................................   53 
Related Party Transactions..................................   64 
Principal and Selling Stockholders..........................   65 
Description of Capital Stock................................   67 
Shares Eligible For Future Sale.............................   70 
Underwriting................................................   72 
Legal Matters...............................................   74 
Experts.....................................................   75 
Where You Can Find More Information.........................   75 
Index to Financial Statements...............................  F-1 

------------------------

You should rely only on the information contained in this prospectus. We have   
not authorized anyone to provide you with different information. We are not     
making an offer to sell these securities in any jurisdiction where the offer or 
sale is not permitted. You should assume that the information appearing in this 
prospectus is accurate as of the date on the front cover of this prospectus     
only. Our business, financial condition, results of operations and prospects may
have changed since that date.                                                   

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PROSPECTUS SUMMARY

This summary highlights the information contained elsewhere in this   
prospectus. You should read the entire prospectus carefully before buying shares
in this offering.                                                               

OUR BUSINESS

   We are a multi-state managed healthcare company focused on serving people
who receive healthcare benefits through state-sponsored programs, including     
Medicaid, Children's Health Insurance Program, or CHIP, and Family Care. CHIP   
programs provide healthcare coverage to children not otherwise covered by       
Medicaid or other insurance programs. Family Care extends coverage to uninsured 
adults and parents of CHIP or Medicaid-eligible children. We believe that we are
better qualified and positioned than our competitors to meet the unique needs of
our target populations because of our single focus on providing managed care to 
these populations, our strong government relationships, 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, CHIP and Family Care populations. We do not 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 and respiratory conditions. We design our programs to   
address the particular needs of our members, and 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 win new contracts and to   
establish a leading market position in many of the markets we serve. We provide 
an array of products to members in Texas, New Jersey, Maryland, the District of 
Columbia and Illinois. As of September 30, 2001, we had approximately 455,000   
members.                                                                        

RECENT DEVELOPMENTS 

Premium revenues for the third quarter of 2001 were $236.6 million, an
increase of 42% as compared to $166.1 million for the third quarter of 2000. Net
income was approximately $9.6 million for the third quarter of 2001, an increase
of 50% as compared to net income of $6.4 million for the third quarter of 2000. 
In addition, our membership as of September 30, 2001 was approximately 455,000, 
a 49% increase over our membership of 306,000 as of September 30, 2000.         

    On October 5, 2001, we entered into a definitive agreement to purchase the
Houston, Texas Medicaid line of business of MethodistCare, Inc. for             
approximately $1.5 million. MethodistCare currently has a Medicaid enrollment of
approximately 18,000 members. We expect the acquisition to have an effective    
date of January 1, 2002.                                                        

OUR OPPORTUNITY 

  Healthcare in the United States has grown from a $27 billion industry in
1960 to a highly-regulated market of approximately $1.2 trillion in 1999,       
according to the federal government's Health Care Financing Administration (now 
called the Centers for Medicare & Medicaid Services). 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. Since the establishment of health maintenance organizations, or     
HMOs, enrollment has increased more than thirteen-fold from 6 million in 1976 to
nearly 79 million in 1998. In 1999, there were over 40 million Medicaid         
recipients, and all but two states had some form of Medicaid managed care       
program. Additionally, many states are implementing other programs, such as CHIP
and Family Care, to serve low-income uninsured populations. 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 know the populations they serve in order to develop an infrastructure,  
targeted networks and programs tailored to the medical and social profiles of   
their members.                                                                  

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We believe the Medicaid managed care market differs from the Medicare 
managed care market in several important ways. For instance, under Medicaid,    
each state administers and funds its own programs, including prescription drug  
benefits, with matching federal funds. Each state establishes its own           
eligibility standards, benefits packages and payment rates. The average age of  
our Medicaid enrollees is 14, resulting in lower catastrophic care risk than for
Medicare enrollees. Of the approximately 40 million Medicaid recipients, there  
are approximately 18 million Medicaid managed care members. Most Medicaid       
managed care members are enrolled in mandatory programs, which reduce the cost  
of attracting and enrolling members. In contrast, Medicare managed care is      
federally administered and funded, does not fund prescription drug benefits and 
does not mandate enrollment in managed care. The average age of Medicare's six  
million managed care enrollees is over 70.                                      

OUR STRATEGY

 Our objective is to become the leading managed care organization in the
United States focused on Medicaid, CHIP and uninsured populations. To achieve   
this objective we intend to:                                                    

- increase our membership in existing markets through acquisitions and
internal growth,                                                  

- expand into new markets for our services through acquisitions and   
development of new operations,                                    

- capitalize on our experience working with state governments,        

- focus on our "medical home" concept to coordinate and administer the
provision of quality, cost-effective healthcare, and              

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

OUR PRODUCTS

    We have developed a range of products through which we offer comprehensive
healthcare services. These products are community-based and seek to address the 
social and economic issues faced by the population we serve. Additionally, we   
seek to establish strategic relationships with prestigious medical centers,     
children's hospitals and federally qualified health centers to assist us in     
implementing our products and medical management programs.                      

  AMERICAID, our principal product, is our family-focused Medicaid managed
healthcare product. This product is designed for the Temporary Assistance to    
Needy Families, or TANF, population that consists primarily of low-income       
children and their mothers. We provide our AMERICAID product to approximately   
289,000 members.                                                                

AMERIKIDS is our managed healthcare product for uninsured children not
eligible for Medicaid. This product is designed for the CHIP initiative. We     
provide our AMERIKIDS product to approximately 104,000 members.                 

AMERIPLUS is our managed healthcare product designed for Supplemental 
Security Income, or SSI, recipients. This population consists of the low-income 
aged, blind or disabled. We provide our AMERIPLUS product to approximately      
42,000 members, 5,000 of whom are provided only administrative services.        

AMERIFAM is our newly developed Family Care managed healthcare product
focused on uninsured adults and parents of CHIP or Medicaid-eligible children.  
We provide our AMERIFAM product to approximately 20,000 members.                

We earn revenue primarily through premiums that are paid to us by the 
states in which we operate. Our expenses include costs related to health        
benefits. Our costs related to health benefits are principally fees paid to     
physicians, hospitals and providers of ancillary medical services, medical      
administration expenses, and include estimates of medical expenses incurred but 
not yet reported. Fees to providers are generally negotiated. However, in some  
states, the amounts reimbursed to hospitals are established by the state.       
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OUR COMPANY 

     We were formed in 1994. Our principal executive offices are located at 4425
Corporation Lane, Virginia Beach, VA 23462, and our telephone number is (757)   
490-6900. The address of our Web site is www.amerigroupcorp.com. The information
on our Web site is not part of this prospectus.                                 

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THE OFFERING

                                                        [Enlarge/Download Table]


                                                                                                   
Common stock offered by AMERIGROUP........ 4,400,000 shares                                        

Over-allotment option:                                                                             
  Offered by AMERIGROUP................... 585,000 shares                                          
  Offered by Jeffrey L. McWaters.......... 75,000 shares                                           

Common stock to be outstanding after this                                                          
  offering................................ 19,182,012 shares                                       

Use of proceeds........................... We intend to use the net proceeds of this offering:     
                                           - approximately $13.3 million to redeem our Series E    
                                           mandatorily redeemable preferred stock,                 
                                           - approximately $4.7 million to repay our term loan     
                                             facility, and                                         
                                           - the balance of approximately $54.8 million for general
                                           corporate purposes, including potential acquisitions.   

Proposed Nasdaq National Market Symbol.... AMGP                                                    

    The number of shares of common stock to be outstanding after this offering
is based on our shares outstanding as of September 30, 2001. This information   
excludes:                                                                       

 - 1,155,088 shares of common stock issuable upon the exercise of vested
      stock options with a weighted average exercise price of $4.34 per share,

 - 965,242 shares of common stock issuable upon the exercise of unvested
       stock options with a weighted average exercise price of $11.39 per share,

   - 25,000 shares of common stock issuable upon the exercise of outstanding
     warrants with a weighted average exercise price of $3.00 per share, and

- shares of common stock reserved for issuance under our stock option 
plans.                                                            

   Except as otherwise indicated, the information in this prospectus assumes
the following:                                                                  

   - the conversion on closing of this offering of all outstanding shares of
 convertible preferred stock into 12,607,887 shares of common stock,

    - the exercise of warrants to purchase 1,125,000 shares of common stock by
   the Series E preferred stockholders at an exercise price of $0.02 per
share,                                                            

- the redemption of each outstanding share of our Series E mandatorily
redeemable preferred stock, and                                   

- no exercise of the underwriters' over-allotment option.             

All share numbers in this prospectus have been adjusted to reflect a one-for-two
reverse stock split of our common stock to be effected just prior to            
consummation of this offering.                                                  

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OUR SUMMARY CONSOLIDATED FINANCIAL DATA 
(Dollars in thousands, except per share data) 

    The following table summarizes financial data for our business. You should
read the summary financial data set forth below together with "Management's     
Discussion and Analysis of Financial Condition and Results of Operations" and   
our financial statements and the notes to those financial statements included   
elsewhere in this prospectus.                                                   

                                                        [Enlarge/Download Table]

                                                                                                          SIX MONTHS ENDED      
                                                         YEAR ENDED DECEMBER 31,                              JUNE 30,          
                                      -------------------------------------------------------------   ------------------------- 
                                        1996        1997        1998         1999          2000          2000          2001     
                                      ---------   ---------   ---------   -----------   -----------   -----------   ----------- 
                                                                                                             (UNAUDITED)        
                                                                                                                                
STATEMENTS OF OPERATIONS DATA:                                                                                                  
Revenues:                                                                                                                       
Premium.............................. $  22,938   $  64,878   $ 186,790   $   392,296   $   646,408   $   305,132   $   394,830 
Investment income....................       856       2,184       3,389         6,404        13,107         5,799         6,105 
Total revenues.......................    23,794      67,062     190,179       398,700       659,515       310,931       400,935 
Expenses:                                                                                                                       
Health benefits......................    21,214      55,340     155,877       334,192       523,566       244,100       314,395 
Selling, general and                                                                                                            
  administrative.....................    13,020      19,920      29,166        52,846        85,114        40,497        52,210 
Income (loss) before income taxes....   (10,877)     (8,850)      3,456         7,216        43,779        23,039        29,595 
Net income (loss)....................   (10,877)     (8,850)      3,456        11,316        26,092        13,608        17,165 
Diluted net income (loss) per                                                                                                   
  share.............................. $  (28.67)  $  (28.29)  $   (5.07)  $      0.66   $      1.55   $      0.81   $      1.03 
Weighted average number of common                                                                                               
  shares and potential dilutive                                                                                                 
  common shares outstanding..........   500,500     515,750     526,651    14,695,324    15,818,175    15,806,316    15,893,421 
OPERATING STATISTICS:                                                                                                           
Health benefits ratio(1).............      92.5%       85.3%       83.5%         85.2%         81.0%         80.0%         79.6%
Selling, general and administrative                                                                                             
  expenses ratio(2)..................      54.7%       29.7%       15.3%         13.3%         12.9%         13.0%         13.0%
Members..............................    33,000      41,000     113,000       268,000       333,000       291,000       411,000 

------------                                                                    
(1) Health benefits ratio is calculated as a percentage of premium revenue.     
(2) Selling, general and administrative expenses ratio is calculated as a       
percentage of total revenues.                                           

                                                                [Download Table]

                                                                  JUNE 30, 2001     
                                                             -----------------------
                                                              ACTUAL     AS ADJUSTED
                                                             --------    -----------
                                                                   (UNAUDITED)      
                                                                                    
BALANCE SHEET DATA:                                                                 
 Cash and cash equivalents and short-term investments....... $205,192     $259,875  
 Total assets...............................................  302,495      356,964  
 Long-term debt (including current portion).................    5,177           --  
 Total liabilities..........................................  202,078      196,901  
 Redeemable preferred stock.................................   81,832           --  
 Stockholders' equity.......................................   18,585      160,063  

The as adjusted data give effect to:                                  

- our receipt of the net proceeds from the sale of 4,400,000 shares of
       common stock offered by us at an assumed initial public offering price of
$18.00 per share (the mid-point of the range),                    

- the use of those proceeds to repay debt and redeem our Series E     
mandatorily redeemable preferred stock after deducting estimated  
    underwriting discounts and commissions and estimated offering expenses
payable by us for the issuance of common stock,                   

  - the conversion on closing of the offering of all outstanding shares of
     convertible preferred stock into 12,607,887 shares of common stock, and

    - the exercise of warrants to purchase 1,125,000 shares of common stock by
   the Series E preferred stockholders at an exercise price of $0.02 per
share.                                                            

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RISK FACTORS

An investment in our common stock involves a high degree of risk. You 
should carefully consider the risks described below before deciding to invest in
shares of our common stock. The trading price of our common stock could decline 
due to any of these risks, in which case you could lose all or part of your     
investment. In assessing these risks, you should also refer to the other        
information in this prospectus, including our financial statements and the      
related notes.                                                                  

RISKS RELATED TO BEING A REGULATED ENTITY 

CHANGES IN GOVERNMENT REGULATIONS DESIGNED TO PROTECT PROVIDERS AND MEMBERS     
RATHER THAN OUR STOCKHOLDERS COULD FORCE US TO CHANGE HOW WE OPERATE AND COULD  
HARM OUR BUSINESS.                                                              

     Our business is extensively regulated by the states in which we operate and
by the federal government. These laws and regulations are generally intended to 
benefit and protect providers and health plan members rather than stockholders. 
Congress is currently considering legislation commonly known as the Patients'   
Bill of Rights. We cannot predict what impact such legislation, if adopted,     
would have on our business. Changes in existing laws and rules, the enactment of
new laws and rules and changing interpretations of these laws and rules could,  
among other things:                                                             

- force us to change how we do business,                              

- restrict revenue and enrollment growth,                             

- increase our healthcare and administrative costs,                   

- impose additional capital requirements, and                         

- increase or change our liability.                                   

IF STATE REGULATORS DO NOT APPROVE PAYMENTS OF DIVIDENDS AND DISTRIBUTIONS BY   
OUR SUBSIDIARIES TO US, IT MAY NEGATIVELY AFFECT OUR BUSINESS STRATEGY.         

We principally operate through our health plan subsidiaries. These    
subsidiaries are subject to regulations that limit the amount of dividends and  
distributions that can be paid to us without prior approval of, or notification 
to, state regulators. If the regulators were to deny our subsidiaries' requests 
to pay dividends to us, the funds available to our company as a whole would be  
limited, which could harm our ability to implement our business strategy.       

REGULATIONS MAY LIMIT THE EXTENT TO WHICH WE CAN INCREASE OUR PROFITS AS A      
PERCENTAGE OF REVENUES.                                                         

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

OUR FAILURE TO COMPLY WITH GOVERNMENT REGULATIONS COULD SUBJECT US TO CIVIL AND 
CRIMINAL PENALTIES AND LIMITATIONS ON OUR PROFITABILITY.                        

    Violation of the laws or regulations governing our operations could result
in the imposition of sanctions, the cancellation of our contracts to provide    
services, or in the extreme case, the suspension or revocation of our licenses. 
For example, in two markets in which we operate, we are required to spend a     
minimum percentage of our premium revenue on medical expenses. In one market, if
we fail to comply with this requirement, we could be required to pay monetary   
damages. Additionally, we could be required to file a                           

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corrective plan of action with the state and we could be subject to further     
fines and additional corrective measures if we did not comply with the          
corrective plan of action. In the other market, our failure to comply could     
affect future rate determinations. These regulations may limit the profits we   
can obtain.                                                                     

    In the past we have been subject to sanctions as a result of violations of
marketing regulations and timeliness of payment requirements. For example, in   
August 2000, our Illinois plan was notified by the Illinois Department of Public
Aid, or IDPA, that its Office of Inspector General had commenced an             
investigation of allegations of misrepresentation and fraud by marketing        
representatives employed by our plan. We developed a corrective action plan to  
identify and correct past marketing improprieties and to reduce the likelihood  
of future violations, which has been approved by IDPA and is being implemented. 
Under our contract with IDPA, sanctions could be imposed, ranging from $5,000 to
$25,000, and/or our right to enroll members could be suspended for some period  
of time, if the allegations are substantiated. We do not know if we will be     
informed as to when the investigation has been completed.                       

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.    

     The State of Maryland recently adopted a statute that requires managed care
organizations, or MCOs, to develop plans to guard against the financial         
insolvency of providers within the MCO's network who accept financial risk from 
the MCO. These insolvency plans must be filed with and approved by the          
Commissioner of Insurance. Our Maryland health plan is engaged in the filing and
approval process, which at this time is not yet complete. In the event a plan is
ultimately disapproved, we could be required to terminate or restructure the    
relationship with the provider or face penalties and sanctions.                 

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

    The Health Insurance Portability and Accountability Act of 1996, or HIPAA,
broadened the scope of fraud and abuse laws applicable to 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, a new      
regulation promulgated pursuant to HIPAA imposes civil and criminal penalties   
for failure to comply with the health records privacy standards set forth in the
regulation. The Department of Health and Human Services', or HHS', press release
related to the new regulation calls on Congress to enact legislation to         
"fortify" penalties and to create a private right of action under HIPAA. The    
preamble to the new privacy regulation indicates that HHS intends to issue an   
enforcement rule related to the Administrative Simplification provisions of     
HIPAA.                                                                          

 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                                                               

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licenses. These penalties or exclusions, were they to occur, would negatively   
impact our ability to operate our business.                                     

COMPLIANCE WITH NEW FEDERAL AND STATE RULES AND REGULATIONS MAY REQUIRE US TO   
MAKE UNANTICIPATED EXPENDITURES.                                                

   In August 2000, HHS issued a new regulation under HIPAA requiring the use
of uniform electronic data transmission standards for healthcare claims and     
payment transactions submitted or received electronically. We are required to   
comply with the new regulation by October 16, 2002, although Texas and New      
Jersey have indicated that they may impose an earlier compliance deadline. Also 
in August 2000, HHS proposed a regulation that would require healthcare         
participants to implement organizational and technical practices to protect the 
security of electronically maintained or transmitted health-related information.
In December 2000, HHS issued a new regulation mandating heightened privacy and  
confidentiality protections under HIPAA which became effective on April 14,     
2001. The Bush administration announced that the regulation may be revised in   
the future. If the regulation is not revised, compliance with it will be        
required by April 2003. However, states may seek exemptions from the            
requirements of the privacy regulation for state laws that impose stricter      
privacy standards with more timely compliance requirements.                     

     In January 2001, the Centers for Medicare & Medicaid Services, or CMS (then
the Health Care Financing Administration), published new federal regulations    
regarding Medicaid managed care. Since then, CMS has delayed the effective date 
of these regulations until August 16, 2002, and, on August 20, 2001, published  
new proposed regulations that would replace the January regulations in their    
entirety. If enacted, the proposed regulations would implement requirements of  
the Balanced Budget Act of 1997 that are intended to give states more           
flexibility in their administration of Medicaid managed care programs, provide  
certain new patient protections for Medicaid managed care enrollees, and require
states' rates to meet new actuarial soundness requirements.                     

 The Bush administration's review of the HIPAA and other newly published
regulations, the states' ability to promulgate stricter rules, and uncertainty  
regarding many aspects of the regulations make compliance with the relatively   
new regulatory landscape difficult. Our existing programs and systems would not 
enable us to comply in all respects with these new regulations, and we are in   
the process of assessing the programs and systems that we will need to implement
in order to comply with the new regulations. In order to comply with the        
regulatory requirements, we may be required to employ additional or different   
programs and systems, the costs of which are unknown to us at this time.        
Further, compliance with these pervasive regulations would require changes to   
many of the procedures we currently use to conduct our business, which may lead 
to additional costs that we have not yet identified. We do not know whether, or 
the extent to which, we will be able to recover our costs of complying with     
these new regulations from the states. The new regulations and the related costs
to comply with the new regulations could have a material adverse effect on our  
business.                                                                       

CHANGES IN HEALTHCARE LAW MAY REDUCE OUR PROFITABILITY.                         

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.              

A recent example is state and federal legislation which 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.                                                               

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

REDUCTIONS IN MEDICAID FUNDING BY THE STATES COULD SUBSTANTIALLY REDUCE OUR     
PROFITABILITY.                                                                  

     Most of our revenues come from state government Medicaid premiums. The base
premium rate paid by each state differs, depending on a combination of various  
factors such as defined upper payment limits, a member's health status, age,    
sex, county or region, benefit mix and member eligibility categories. Future    
levels of Medicaid premium rates may be affected by continued government efforts
to contain medical costs and may further be affected by state and federal       
budgetary constraints. Changes to Medicaid programs could reduce the number of  
persons enrolled or eligible, reduce the amount of reimbursement or payment     
levels, or increase our administrative or 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.                                

IF STATE GOVERNMENTS DO NOT RENEW OUR CONTRACTS WITH THEM, OUR BUSINESS WILL    
SUFFER.                                                                         

   At June 30, 2001, we provided healthcare services to members through nine
contracts with the regulatory entities in the jurisdictions in which we operate,
five of which individually accounted for 10% or more of our revenues for the six
months ended June 30, 2001, with the largest of these contracts representing    
approximately 32% of our revenues. 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 every six years. The first re-bidding in our Texas   
markets is scheduled to occur in 2002. Also, the District of Columbia has put   
its contracts out to bid. We submitted our bid to the District of Columbia on   
December 27, 2000 and entered into contract discussions with the District in    
early March. The District's contract discussions with all plans are ongoing. All
current contracts with the District have been extended through December 31,     
2001. If any of our contracts were not renewed or were terminated for cause or  
if we were to lose a contract in a re-bidding process, our business would       
suffer. Most of our contracts expire in 2002 and have renewal provisions.       
Termination or non-renewal of any one contract could materially impact our      
revenues and operating results.                                                 

IF A STATE FAILS TO RENEW ITS FEDERAL WAIVER APPLICATION FOR MANDATED MEDICAID  
ENROLLMENT INTO MANAGED CARE OR SUCH APPLICATION IS DENIED, OUR MEMBERSHIP IN   
THAT STATE WILL LIKELY DECREASE.                                                

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

OUR INABILITY TO PARTICIPATE IN CHIP PROGRAMS MAY LIMIT OUR GROWTH RATE.        

  CHIP is a relatively new federal initiative designed to provide coverage
for low-income children not otherwise covered by Medicaid or other insurance    
programs. Most states have adopted CHIP programs but are just beginning to      
implement them. The programs vary significantly from state to state and it is   
not clear how they will be implemented. Participation in CHIP programs is an    
important part of our growth strategy. If states do not allow us to participate 
or if we fail to win bids to participate, our growth strategy may be materially 
and adversely affected.                                                         

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RISKS RELATED TO OUR BUSINESS 

RECEIPT OF INADEQUATE PREMIUMS WOULD NEGATIVELY IMPACT OUR REVENUES AND         
PROFITABILITY.                                                                  

    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 provide 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 85.2% of our premium revenue in 1999, and 81.0% of our premium revenue in  
2000. 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 may    
cause our profits to decline.                                                   

   Maryland sets the rates which 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.

OUR INABILITY TO MANAGE MEDICAL COSTS EFFECTIVELY WOULD REDUCE OUR              
PROFITABILITY.                                                                  

Our profitability depends, to a significant degree, on our ability to 
predict and effectively manage medical costs. Changes in 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 providing 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. If our costs for medical services increase, our profits could be        
reduced, or we may not remain profitable.                                       

OUR LIMITED ABILITY TO PREDICT OUR INCURRED MEDICAL EXPENSES ACCURATELY COULD   
NEGATIVELY IMPACT OUR REPORTED RESULTS.                                         

     Our medical expenses include estimates of medical expenses incurred but not
yet reported, or IBNR. We estimate our IBNR medical expenses based on a number  
of factors, including prior claims experience, maturity of markets, complexity  
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 cannot assure you that such reinsurance coverage will be 
adequate or available to us in the future or that the cost of such reinsurance  
will not limit our ability to obtain it.                                        

DIFFICULTIES IN EXECUTING OUR ACQUISITION STRATEGY COULD ADVERSELY AFFECT OUR   
BUSINESS.                                                                       

Historically, the acquisition of Medicaid contract rights and related 
assets of other health plans both in our existing service areas and in new      
markets has accounted for a significant amount of our growth. For example, of   
the $254.1 million increase in our premium revenue from 1999 to 2000,           
approximately $109.0 million was attributable to our acquisition of contract    
rights and related assets from Prudential Health                                
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Care. Although we cannot predict our rate of growth as the result of            
acquisitions with any 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 proposals to acquire additional businesses.
These proposals are at various stages of consideration 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.                                                                            

     Under our credit facility, acquisitions require us to obtain the consent of
our lenders. We may not be able to obtain such consent.                         

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

- additional employees who are not familiar with our operations,      

     - existing provider networks, which may operate on different terms than our
existing networks,                                                

- existing members, who may decide to switch to another healthcare    
provider, and                                                     

- disparate information and recordkeeping systems.                    

Accordingly, we may be unable to successfully identify, consummate and
integrate future acquisitions or operate acquired businesses profitably. We also
may be unable to obtain sufficient additional capital resources for future      
acquisitions. If we are unable to effectively execute our acquisition strategy, 
our future growth will suffer and our results of operations could be harmed.    

FAILURE OF A NEW BUSINESS OF OURS WOULD NEGATIVELY IMPACT OUR RESULTS OF        
OPERATIONS.                                                                     

Start-up costs associated with a new business can be substantial. For 
example, in order to obtain a certificate of authority in most jurisdictions, we
must first establish a provider network, have systems in place and demonstrate  
our ability to be able to obtain a state contract and process claims. If we were
unsuccessful in obtaining the necessary license, winning the bid to provide     
service or attracting members in numbers sufficient to cover our costs, the new 
business would fail. We also could be obligated by the state to continue to     
provide services for some period of time without sufficient revenue to cover our
ongoing costs or recover start-up costs. The loss of the costs associated with  
starting up the business could have a significant impact on our results of      
operations.                                                                     

INEFFECTIVE MANAGEMENT OF OUR GROWTH MAY NEGATIVELY AFFECT OUR RESULTS OF       
OPERATIONS, FINANCIAL CONDITION AND BUSINESS.                                   

We have experienced rapid growth. In 1996, our first full year of     
operations, we had $22.9 million of premium revenue. In 2000, we had $646.4     
million in premium revenue. This increase represents a compound annual growth   
rate of 130.4%.                                                                 

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    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 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. If we are unable to manage growth          
effectively, our business, operating results and financial condition could      
suffer.                                                                         

WE ARE SUBJECT TO COMPETITION WHICH IMPACTS OUR ABILITY TO INCREASE OUR         
PENETRATION OF THE MARKETS THAT WE SERVICE.                                     

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

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

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

RESTRICTIONS AND COVENANTS IN OUR NEW CREDIT FACILITY MAY LIMIT OUR ABILITY TO  
TAKE ACTIONS.                                                                   

    On October 24, 2001, we entered into a commitment letter relating to a $60
million revolving credit facility, which may be increased to $75 million.       
Although we currently expect to enter into the facility by December 31, 2001, we
cannot assure you that we will enter into the facility. We have no current      
intention to draw on the facility. If we enter into the credit facility, we     
expect that the facility documents will contain customary restrictions and      
covenants that may restrict our financial and operating flexibility.            

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

THE LOSS OF THE SERVICES OF OUR PRESIDENT AND CHIEF EXECUTIVE OFFICER WOULD HARM
OUR OPERATIONS.                                                                 

We are highly dependent on the efforts of Mr. Jeffrey McWaters, our   
President, Chief Executive Officer and Chairman. Mr. McWaters, as our founder,  
has been instrumental in developing our mission and forging our relationships   
with our government client-customers and the communities we serve. We cannot    
assure you that we will be able to retain Mr. McWaters or attract a suitable    
replacement or additional personnel if required. We have an employment agreement
with Mr. McWaters that expires in October 2002. Pursuant to this agreement, if  
Mr. McWaters were to voluntarily terminate his employment with us, he would lose
his entitlement to severance benefits. We cannot be sure that the employment    
agreement creates sufficient incentives for Mr. McWaters to continue his        
employment with us. While we believe that we could find a replacement for Mr.   
McWaters if he were to leave, the loss of his services could harm our           
operations.                                                                     

OUR INABILITY TO MAINTAIN SATISFACTORY RELATIONSHIPS WITH OUR PROVIDER NETWORKS 
WOULD HARM OUR PROFITABILITY.                                                   

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 for cause by us based on provider conduct or other
appropriate reasons. The contracts generally may be cancelled 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.                              

WE ARE DEPENDENT ON OUR RELATIONSHIP WITH COOK CHILDREN'S PHYSICIAN NETWORK. ANY
MATERIAL MODIFICATION OR DISCONTINUATION OF THIS RELATIONSHIP COULD HARM OUR    
RESULTS OF OPERATIONS.                                                          

 Cook Children's Physician Network is our exclusive provider network for
pediatric services in Fort Worth, Texas, where we had approximately 47,000      
members as of September 2001. If the terms of our contract with Cook Children's 
were to change significantly or Cook Children's were to terminate its agreement 
with us, our costs to provide healthcare in this area could increase. We could  
lose members if Cook Children's chose to associate with another HMO or if it    
obtained its own contract with the state to provide healthcare services to      
Medicaid recipients.                                                            

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WE ARE UNCERTAIN OF THE EFFECTS THAT THE TERMINATION OF OUR CONTRACT WITH JOHNS 
HOPKINS WILL HAVE ON OUR MEMBERSHIP IN MARYLAND.                                

   Johns Hopkins Medical Services Corporation, or JHMSC, provided healthcare
services to approximately 11,000 of our 118,000 members in Maryland as of       
September 2001. JHMSC and we mutually agreed not to renew our contract and,     
accordingly, JHMSC will continue to provide services to our members until the   
expiration of the contract on December 31, 2001. Until the expiration of the    
contract, JHMSC has the right to notify members to whom it will no longer be    
providing services after December 31, 2001 and offer the names of other managed 
care organizations for whom JHMSC provides services. During their annual        
enrollment period, some of our members may choose to join another managed care  
organization served by JHMSC and accordingly, our membership in Maryland may    
decrease. Members who do not affirmatively choose to enroll in another managed  
care organization during their annual re-enrollment period will remain as our   
members for twelve months from the date of their last annual enrollment period. 
We are unable to predict with any certainty what, if any, effect the termination
of this contract will have on our business.                                     

NEGATIVE PUBLICITY REGARDING THE MANAGED CARE INDUSTRY MAY HARM OUR BUSINESS AND
OPERATING RESULTS.                                                              

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

WE MAY BE SUBJECT TO CLAIMS RELATING TO MEDICAL MALPRACTICE, WHICH COULD CAUSE  
US TO INCUR SIGNIFICANT EXPENSES.                                               

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

In addition, we may be subject to other litigation that may adversely 
affect our business or results of operations. We maintain errors and omissions  
insurance and such other lines of coverage as we believe is reasonable in light 
of our experience to date. However, this insurance may not be sufficient or     
available at a reasonable cost to protect us from liabilities which 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.                                                                       

GROWTH IN THE NUMBER OF MEDICAID ELIGIBLES MAY BE COUNTERCYCLICAL, WHICH COULD  
CAUSE OUR OPERATING RESULTS AND STOCK PRICE TO SUFFER WHEN GENERAL ECONOMIC     
CONDITIONS ARE IMPROVING.                                                       

   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. Conversely, this number may grow 
more slowly or even decline if economic conditions improve. Therefore,          
improvements in general economic conditions may cause our membership levels to  
decrease, thereby causing our operating results to suffer, which could lead to  
decreases in our stock price during periods in which stock prices in general are
increasing.                                                                     

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GROWTH IN THE NUMBER OF MEDICAID ELIGIBLES DURING ECONOMIC DOWNTURNS COULD CAUSE
OUR OPERATING RESULTS AND STOCK PRICES TO SUFFER IF STATE AND FEDERAL BUDGETS   
DECREASE OR DO NOT INCREASE.                                                    

    Less favorable economic conditions may cause our membership to increase as
more people become eligible to receive Medicaid benefits. However, during such  
economic downturns, state and federal 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 and stock price  
could suffer.                                                                   

OUR INABILITY TO INTEGRATE AND MANAGE OUR INFORMATION SYSTEMS EFFECTIVELY COULD 
DISRUPT OUR OPERATIONS.                                                         

Our operations are significantly dependent on effective information   
systems. The information gathered and processed by our information systems      
assists us in, among other things, monitoring utilization and other cost        
factors, processing provider claims and providing data to our regulators. Our   
providers also depend upon our information systems for membership verifications,
claims status and other information. In March 2000, we experienced data         
corruption in our data warehouse, which we use to assist us in building monthly 
medical expense accruals, analyzing costs and generating state reports. We did  
not experience any material misstatements in our financial statements in 2000   
due to the data corruption. If we have similar or additional problems with our  
information systems, including, for example, worms or viruses that are beyond   
our control, our operations and ability to produce timely and accurate reports  
could be adversely impacted.                                                    

 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.                                                                       

RISKS RELATING TO THIS OFFERING 

YOU WILL EXPERIENCE IMMEDIATE AND SIGNIFICANT DILUTION IN THE BOOK VALUE PER    
SHARE.                                                                          

     If you purchase our common stock in this offering, you will incur immediate
dilution, which means that                                                      

   - you will pay a price per share that substantially exceeds the per share
book value of our assets immediately following the offering after 
subtracting our liabilities, and                                  

   - the purchasers in the offering will have contributed 47.4% of the total
  amount to fund us but will own only 23.0% of our outstanding shares.

WE CANNOT GUARANTEE THAT A TRADING MARKET WILL DEVELOP OR BE MAINTAINED FOR OUR 
COMMON STOCK.                                                                   

  Prior to this offering there has not been a public market for our common
stock. We cannot predict the extent to which a trading market will develop or   
how liquid that market might become, or whether it will be maintained. The      
initial public offering price will be determined by negotiation between the     
representatives of the underwriters and us and may not be indicative of prices  
that will prevail in the trading market. If an active trading market fails to   
develop or be maintained, you may be unable to sell the shares of common stock  
purchased in this offering at an acceptable price or at all.                    

VOLATILITY OF OUR STOCK PRICE COULD ADVERSELY AFFECT STOCKHOLDERS.              

  The market price of our common stock is likely to be highly volatile and
could be subject to wide fluctuations in response to factors such as:           

- state and federal budget decreases,                                 

- adverse publicity regarding managed care,                           

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- regulatory or legislative changes,                                  

- government action regarding eligibility for Medicaid and other      
state-sponsored healthcare benefit programs,                      

- changes in state mandatory Medicaid programs, and                   

    - general economic conditions, including inflation and unemployment rates.

    All of these factors are beyond our control and may cause the market price
of our common stock to decrease regardless of our performance.                  

Investors may not be able to resell their shares of our common stock  
following periods of volatility because of the market's adverse reaction to such
volatility. In addition, the stock market in general has been highly volatile   
recently. During this period of market volatility, the stocks of healthcare     
companies have also been highly volatile and have recorded lows well below their
historical highs. We cannot assure you that our stock will trade at the same    
levels as the stock of other healthcare companies or that the market in general 
will sustain its current prices.                                                

WE MAY ALLOCATE THE NET PROCEEDS FROM THIS OFFERING IN WAYS WITH WHICH YOU MAY  
NOT AGREE.                                                                      

    Our business plan is general in nature and is subject to change based upon
changing conditions and opportunities. Our management has significant           
flexibility in applying $54.8 million of the total $72.8 million in net proceeds
we expect to receive in this offering. Because this portion of the net proceeds 
is not required to be allocated to any specific investment or transaction, you  
cannot determine at this time the value or propriety of our application of the  
proceeds, and you and other stockholders may not agree with our decisions. See  
"Use of Proceeds" for a more detailed description of how management intends to  
apply the proceeds from this offering.                                          

THE SALE OR AVAILABILITY FOR SALE OF SUBSTANTIAL AMOUNTS OF OUR COMMON STOCK    
COULD ADVERSELY AFFECT ITS MARKET PRICE.                                        

   In connection with this offering, we, our officers and directors and most
of our stockholders have agreed not to sell or transfer any shares of common    
stock for 180 days after completion of this offering without the underwriters'  
consent. However, the underwriters may release these shares from these          
restrictions at any time. In evaluating whether to grant such a request, the    
underwriters may consider a number of factors with a view toward maintaining an 
orderly market for, and minimizing volatility in the market price of, our common
stock. These factors include, among others, the number of shares involved,      
recent trading volume and prices of the stock, the length of time before the    
lock-up expires and the reasons for, and the timing of, the request. We cannot  
predict what effect, if any, market sales of shares held by any stockholder or  
the availability of these shares for future sale will have on the market price  
of our common stock.                                                            

Based on shares outstanding as of September 30, 2001, a total of      
shares of common stock may be sold in the public market by existing stockholders
180 days after the date of this prospectus, subject to applicable volume and    
other limitations imposed under federal securities laws. Sales of substantial   
amounts of our common stock in the public market after the completion of this   
offering, or the perception that such sales could occur, could adversely affect 
the market price of our common stock and could materially impair our future     
ability to raise capital through offerings of our common stock. See "Shares     
Eligible for Future Sale" for a more detailed description of the restrictions on
selling shares of our common stock after this offering.                         

IT MAY BE DIFFICULT FOR A THIRD PARTY TO ACQUIRE OUR COMPANY, WHICH COULD       
INHIBIT STOCKHOLDERS FROM REALIZING A PREMIUM ON THEIR STOCK PRICE.             

    Delaware corporate law, state laws to which we are subject and our amended
and restated certificate of incorporation and by-laws contain provisions that   
could have the effect of delaying, deferring, or preventing a change in control 
of AMERIGROUP that stockholders may consider favorable or beneficial. These     
provisions                                                                      

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could discourage proxy contests and make it more difficult for you and other    
stockholders to elect directors and take other corporate actions. These         
provisions could also limit the price that investors might be willing to pay in 
the future for shares of our common stock. These provisions include:            

  - a staggered board of directors, so that it would take three successive
annual meetings to replace all directors,                         

- prohibition of stockholder action by written consent,               

- advance notice requirements for the submission by stockholders of   
  nominations for election to the board of directors and for proposing
matters that can be acted upon by stockholders at a meeting, and  

   - supermajority vote requirements in connection with business combination
   transactions and amendments to some of the provisions of our charter.

  In addition, changes of control, generally defined as the acquisition of
10% of our outstanding stock by a person, is often subject to state regulatory  
notification, and in some cases, prior approval.                                

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FORWARD-LOOKING STATEMENTS

    This prospectus contains forward-looking statements that involve risks and
uncertainties. These forward-looking statements are often accompanied by words  
such as "believe," "anticipate," "plan," "expect," "estimate," "intend," "seek,"
"goal," "may," "will," and similar expressions. These statements include,       
without limitation, statements about our market opportunity, our growth         
strategy, competition, expected activities and future acquisitions and          
investments and the adequacy of our available cash resources. These statements  
may be found in the sections of this prospectus entitled "Prospectus Summary,"  
"Risk Factors," "Use of Proceeds," "Management's Discussion and Analysis of     
Financial Condition and Results of Operations" and "Business." Investors are    
cautioned that matters subject to forward-looking statements involve risks and  
uncertainties, including economic, regulatory, competitive and other factors    
that may affect our business. These statements are not guarantees of future     
performance and are subject to risks, uncertainties and assumptions.            

     Actual results may differ from projections or estimates due to a variety of
important factors. Our results of operations and projections of future earnings 
depend in large part on accurately predicting and effectively managing health   
benefits and other operating expenses. A variety of factors, including          
competition, changes in health care practices, changes in federal or state laws 
and regulations or their interpretations, inflation, provider contract changes, 
new technologies, government-imposed surcharges, taxes or assessments, reduction
in provider payments by governmental payors, major epidemics, disasters and     
numerous other factors affecting the delivery and cost of healthcare, such as   
major healthcare providers' inability to maintain their operations, may in the  
future affect our ability to control our medical costs and other operating      
expenses. Governmental action or business conditions could result in premium    
revenues not increasing to offset any increase in medical costs and other       
operating expenses. Once set, premiums are generally fixed for one year periods 
and, accordingly, unanticipated costs during such periods cannot be recovered   
through higher premiums. The expiration, cancellation or suspension of our HMO  
contracts by the federal and state governments would also negatively impact us. 
Due to these factors and risks, no assurance can be given with respect to our   
future premium levels or our ability to control our future medical costs.       

   From time to time, legislative and regulatory proposals have been made at
the federal and state government levels related to the healthcare system,       
including but not limited to limitations on managed care organizations          
(including benefit mandates) and reform of Medicaid. Such legislative and       
regulatory action could have the effect of reducing the premiums paid to us by  
governmental programs or increasing our medical costs. We are unable to predict 
the specific content of any future legislation, action or regulation that may be
enacted or when any such future legislation or regulation will be adopted.      
Therefore, we cannot predict accurately the effect of such future legislation,  
action or regulation on our business.                                           

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USE OF PROCEEDS 

   We estimate that we will receive net proceeds from the sale of the shares
of common stock in this offering of $72.8 million, assuming an initial public   
offering price of $18.00 per share and after deducting estimated underwriting   
discounts and commissions and estimated offering expenses. If the underwriters  
exercise their over-allotment option in full, we estimate that our net proceeds 
will be $82.5 million.                                                          

   The principal purposes of this offering are to obtain additional capital,
to create a public market for our common stock and to facilitate future access  
to public debt and equity markets. As of the date of this prospectus, we have no
specific plans to use the net proceeds from this offering other than as set     
forth below.                                                                    

We intend to use the net proceeds of this offering as follows:        

     - approximately $13.3 million to redeem our Series E mandatorily redeemable
preferred stock,                                                  

- approximately $4.7 million to repay the balance of our term loan    
   facility; as of June 30, 2001, $5.2 million was outstanding under the
facility, and                                                     

- the balance of approximately $54.8 million for general corporate    
purposes, including potential acquisitions.                       

     Our Series E mandatorily redeemable preferred stock is redeemable for $4.20
per share plus accrued but unpaid dividends at the time we complete our initial 
public offering. Otherwise, the Series E mandatorily redeemable preferred stock 
is redeemable on July 28, 2003. Dividends accrue on our Series E mandatorily    
redeemable preferred stock whether or not declared. The proceeds from the       
issuance of the Series E mandatorily redeemable preferred stock were used in    
connection with the acquisition of the New Jersey Medicaid contract rights and  
other related assets from Oxford Health Plans and for general corporate         
purposes.                                                                       

     Our term loan facility that we are repaying with proceeds from the offering
accrues interest at a rate of prime plus 75 basis points per year and matures on
April 30, 2003. We borrowed the funds under this facility in November 1999 to   
obtain a revolving credit facility in addition to a term loan and used the      
borrowed funds to repay a May 1998 bank loan.                                   

   We have pursued a strategy of acquiring Medicaid and CHIP contract rights
and related assets to increase our membership and expand into new service areas.
We intend to continue this strategy, and are actively looking for opportunities 
that will complement our current operations. However, we currently have no      
commitments or agreements with respect to any such transactions. We also expect 
a portion of the proceeds to fund working capital to be used to:                

- increase market penetration within our current service areas,       

- pursue opportunities for the development of new markets,            

- expand services and products available to our members, and          

  - strengthen our capital base by increasing the statutory capital of our
health plan subsidiaries.                                         

   We have not determined the amount of net proceeds to be used specifically
for the foregoing purposes, other than for redemption of our Series E           
mandatorily redeemable preferred stock and repayment of our term loan. Pending  
any such uses, we intend to invest the net proceeds in interest bearing         
securities.                                                                     

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DIVIDEND POLICY 

   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. 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. Also, as long as our credit 
facility is outstanding, we are not able to pay dividends without the consent of
our lenders.                                                                    

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CAPITALIZATION

The following table shows our cash, cash equivalents, short-term      
investments and capitalization as of June 30, 2001:                             

- on an actual basis, and                                             

- on an as adjusted basis to give effect to (1) the conversion of each
     share of our outstanding convertible preferred stock into 0.5 shares of
    common stock upon the completion of this offering, (2) the exercise of
   warrants to purchase 1,125,000 shares of common stock by the Series E
      preferred stockholder at an exercise price of $0.02 per share and (3) to
     reflect the issue and sale of 4,400,000 shares of common stock by us in
     this offering at an assumed initial public offering price of $18.00 per
       share less estimated underwriting discounts and commissions and estimated
    offering expenses payable by us and the use of those proceeds to repay
      debt and redeem our Series E mandatorily redeemable preferred stock. The
     amounts, as adjusted, also reflect $0.4 million of additional accretion
of the Series E preferred stock to the redemption amount.         

     You should read this table in conjunction with the financial statements and
the notes to those statements and the other financial information included in   
this prospectus.                                                                

                                                        [Enlarge/Download Table]

                                                                AS OF JUNE 30, 2001  
                                                              -----------------------
                                                               ACTUAL     AS ADJUSTED
                                                              --------    -----------
                                                                  (IN THOUSANDS)     
                                                              -----------------------
                                                                                     
Cash, cash equivalents and short-term investments...........  $205,192     $259,875  
                                                              ========     ========  
Long-term debt (including current portion)..................  $  5,177     $     --  
                                                              --------     --------  
Redeemable preferred stock:                                                          
  Series E mandatorily redeemable preferred stock, $.01 par                          
     value, 2,000,000 shares authorized and issued and                               
     outstanding, actual; no shares authorized or issued and                         
     outstanding, as adjusted...............................    12,646           --  
  Series A convertible preferred stock, $.01 par value,                              
     8,000,000 shares authorized and issued and outstanding,                         
     actual; no shares authorized or issued and outstanding,                         
     as adjusted............................................    16,099           --  
  Series B convertible preferred stock, $.01 par value,                              
     7,025,000 shares authorized and issued and outstanding,                         
     actual; no shares authorized or issued and outstanding,                         
     as adjusted............................................    26,399           --  
  Series C convertible preferred stock, $.01 par value,                              
     6,480,000 shares authorized and issued and outstanding,                         
     actual; no shares authorized or issued and outstanding,                         
     as adjusted............................................    26,688           --  
                                                              --------     --------  
          Total redeemable preferred stock..................    81,832           --  
                                                              --------     --------  
Stockholders' equity:                                                                
  Series D convertible preferred stock, $.01 par value,                              
     10,000,000 authorized, 3,710,775 shares issued and                              
     outstanding, actual; no shares authorized or issued and                         
     outstanding, as adjusted...............................        37           --  
  Preferred stock, $.01 par value, no shares authorized or                           
     issued and outstanding, actual; 10,000,000 authorized,                          
     no shares issued and outstanding, as adjusted..........        --           --  
  Common stock, $.01 par value, 60,000,000 shares                                    
     authorized, 1,037,299 shares issued and outstanding,                            
     actual; 100,000,000 shares authorized, 19,170,186                               
     shares issued and outstanding, as adjusted.............        19          200  
Additional paid-in capital..................................    20,397      162,215  
Retained deficit............................................      (913)      (1,397) 
Deferred compensation.......................................      (955)        (955) 
                                                              --------     --------  
          Total stockholders' equity........................    18,585      160,063  
                                                              --------     --------  
          Total capitalization..............................  $105,594     $160,063  
                                                              ========     ========  

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DILUTION

 If you invest in our common stock, your interest will be diluted to the
extent of the difference between the public offering price per share of our     
common stock and the pro forma net tangible book value per share of common stock
after this offering.                                                            

 Our pro forma net tangible book value as of June 30, 2001, after giving
effect to the conversion of all of our outstanding preferred stock into shares  
of common stock and the exercise of warrants to purchase 1,125,000 shares of    
common stock by the Series E preferred stockholders, was $70.4 million, or $4.77
per share of common stock. Pro forma net tangible book value per share          
represents the amount of total tangible assets less total liabilities, divided  
by the pro forma number of shares of common stock outstanding. Assuming the sale
by us of shares of common stock in this offering at an assumed initial public   
offering price of $18.00 per share, our pro forma net tangible book value as of 
June 30, 2001 would have been $142.8 million, or $7.45 per share of common      
stock. This represents an immediate increase in pro forma net tangible book     
value of $2.68 per share to our existing stockholders and an immediate dilution 
in pro forma net tangible book value of $10.55 per share to new investors       
purchasing shares in this offering.                                             

    "Dilution per share" represents the difference between the price per share
to be paid by new investors and the pro forma net tangible book value per share 
immediately after this offering. The following table illustrates this dilution  
on a per share basis:                                                           

                                                                [Download Table]
                                                                              
Assumed initial public offering price per share.............           $ 18.00
Pro forma net tangible book value per share as of June 30,                    
  2001......................................................  $4.77           
Increase per share attributable to this offering............   2.68           
                                                              -----           
Pro forma as adjusted net tangible book value per share                       
  after this offering.......................................              7.45
                                                                       -------
Dilution per share to new investors.........................           $ 10.55
                                                                       =======

  The following table summarizes on a pro forma basis as of June 30, 2001,
after giving effect to the conversion of all outstanding shares of convertible  
preferred stock and the exercise of warrants to purchase 1,125,000 shares of    
common stock by the Series E preferred stockholders on the closing of this      
offering, the number of shares of stock purchased from us, the total            
consideration paid to us and the average price per share paid by existing       
stockholders and by new investors, based upon an assumed initial public offering
price of $18.00 per share for shares purchased in this offering, before         
deducting the estimated underwriting discounts and commissions and estimated    
offering expenses:                                                              

                                                        [Enlarge/Download Table]

                                        SHARES PURCHASED      TOTAL CONSIDERATION                
                                      ---------------------   -------------------   AVERAGE PRICE
                                        AMOUNT      PERCENT    AMOUNT     PERCENT     PER SHARE  
                                      ----------    -------   --------    -------   -------------
                                                                                                 
Existing stockholders................ 14,770,186       77.0%  $ 87,829       52.6%     $ 5.95    
New investors........................  4,400,000       23.0     79,200       47.4       18.00    
                                      ----------    -------   --------    -------                
          Total...................... 19,170,186      100.0%  $167,029      100.0%       8.71    
                                      ==========    =======   ========    =======                

 The above discussion and tables assume no exercise of stock options and
warrants, except as described above, after June 30, 2001 and give effect to the 
conversion of all shares of our convertible preferred stock outstanding as of   
that date into common stock and the exercise of warrants to purchase 1,125,000  
shares of common stock by the Series E preferred stockholders upon completion of
this offering. As of June 30, 2001, we had outstanding vested options to        
purchase a total of 1,091,645 shares of common stock at a weighted average      
exercise price of $4.02 per share, outstanding unvested options to purchase     
958,560 shares of common stock at a weighted average exercise price of $10.33   
per share and warrants, except as described above, to purchase a total of 25,000
shares of common stock at a weighted average exercise price of $3.00 per share. 

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SELECTED CONSOLIDATED FINANCIAL DATA

The following selected consolidated financial data should be read in  
connection with, and are qualified by reference to, the financial statements and
related notes and Management's Discussion and Analysis of Financial Condition   
and Results of Operations appearing elsewhere in this prospectus. Selected      
financial data as of and for each of the years in the five-year period ended    
December 31, 2000 are derived from our consolidated financial statements, which 
have been audited by KPMG LLP, independent certified public accountants.        
Selected financial data as of June 30, 2001 and for each of the six months ended
June 30, 2000 and June 30, 2001 have been derived from our unaudited financial  
statements. These unaudited financial statements have been prepared on          
substantially the same basis as the audited financial statements and include    
adjustments, consisting only of normal recurring adjustments, that we consider  
necessary for a fair presentation of the financial position and results of      
operations for these periods. Operating results for the six months ended June   
30, 2000 and June 30, 2001 are not necessarily indicative of the results that   
may be expected for the full year.                                              

                                                        [Enlarge/Download Table]

                                                                                                            SIX MONTHS ENDED     
                                                            YEAR ENDED DECEMBER 31,                             JUNE 30,         
                                           ----------------------------------------------------------   -------------------------
                                             1996       1997     1998(a)      1999(b)        2000          2000          2001    
                                           --------   --------   --------   -----------   -----------   -----------   -----------
                                                               (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)                     
                                                                                                                                 
STATEMENTS OF OPERATIONS DATA:                                                                                                   
Revenues:                                                                                                                        
 Premium.................................  $ 22,938   $ 64,878   $186,790   $   392,296   $   646,408   $   305,132   $   394,830
 Investment income.......................       856      2,184      3,389         6,404        13,107         5,799         6,105
                                           --------   --------   --------   -----------   -----------   -----------   -----------
 Total revenues..........................    23,794     67,062    190,179       398,700       659,515       310,931       400,935
                                           --------   --------   --------   -----------   -----------   -----------   -----------
Expenses:                                                                                                                        
 Health benefits.........................    21,214     55,340    155,877       334,192       523,566       244,100       314,395
 Selling, general and administrative.....    13,020     19,920     29,166        52,846        85,114        40,497        52,210
 Depreciation and amortization...........       437        652      1,197         3,635         6,275         2,895         4,323
 Interest................................        --         --        483           811           781           400           412
                                           --------   --------   --------   -----------   -----------   -----------   -----------
 Total expenses..........................    34,671     75,912    186,723       391,484       615,736       287,892       371,340
                                           --------   --------   --------   -----------   -----------   -----------   -----------
 Income (loss) before income taxes.......   (10,877)    (8,850)     3,456         7,216        43,779        23,039        29,595
 Income tax expense (benefit)............        --         --         --        (4,100)       17,687         9,431        12,430
                                           --------   --------   --------   -----------   -----------   -----------   -----------
 Net income (loss).......................   (10,877)    (8,850)     3,456        11,316        26,092        13,608        17,165
 Accretion of redeemable preferred stock                                                                                         
   dividends.............................     3,472      5,740      6,126         7,284         7,284         3,642         3,642
                                           --------   --------   --------   -----------   -----------   -----------   -----------
 Net income (loss) attributable to common                                                                                        
   shareholders..........................  $(14,349)  $(14,590)  $ (2,670)  $     4,032   $    18,808   $     9,966   $    13,523
                                           ========   ========   ========   ===========   ===========   ===========   ===========
 Basic net income (loss) per share.......  $ (28.67)  $ (28.29)  $  (5.07)  $      7.11   $     23.62   $     14.26   $     13.26
                                           ========   ========   ========   ===========   ===========   ===========   ===========
 Diluted net income (loss) per share.....  $ (28.67)  $ (28.29)  $  (5.07)  $      0.66   $      1.55   $      0.81   $      1.03
                                           ========   ========   ========   ===========   ===========   ===========   ===========
 Weighted average number of shares                                                                                               
   outstanding...........................   500,500    515,750    526,651       567,146       796,409       698,849     1,020,071
                                           ========   ========   ========   ===========   ===========   ===========   ===========
 Weighted average number of shares and                                                                                           
   potential dilutive common shares                                                                                              
   outstanding...........................   500,500    515,750    526,651    14,695,324    15,818,175    15,806,316    15,893,421
                                           ========   ========   ========   ===========   ===========   ===========   ===========

                                                        [Enlarge/Download Table]

                                                                         DECEMBER 31,                         JUNE 30, 
                                                  ----------------------------------------------------------  ---------
                                                    1996        1997       1998(a)      1999(b)       2000      2001   
                                                  --------    --------    ----------    --------    --------  ---------
                                                                          (DOLLARS IN THOUSANDS)                       
                                                                                                                       
BALANCE SHEET DATA:                                                                                                    
  Cash and cash equivalents and short-term                                                                             
    investments.................................. $ 34,064    $ 35,904     $ 86,987     $166,218    $189,325  $205,192 
  Total assets...................................   37,171      40,498      101,369      222,321     268,126   302,495 
  Long-term debt (including current portion).....       --          --       10,000        8,010       6,177     5,177 
  Total liabilities..............................   13,821      25,992       78,551      166,426     185,191   202,078 
  Redeemable preferred stock.....................   43,356      49,096       59,422       70,906      78,190    81,832 
  Stockholders' equity (deficit).................  (20,006)    (34,590)     (36,604)     (15,011)      4,745    18,585 

------------                                                                    
(a) Membership increased from 41,000 at December 31, 1997 to 113,000 at December
  31, 1998 primarily due to the purchase of the New Jersey Medicaid contract
   rights and related assets from Oxford Health Plans (which was accounted for
as a purchase), adding approximately 27,000 members and an increase of  
   40,000 members in Houston due to the commencement of two new contracts with
   the balance of the increase due to internal growth from existing contracts.

(b) Membership increased from 113,000 at December 31, 1998 to 268,000 at        
 December 31, 1999 due to the purchase of the Maryland and the District of
   Columbia Medicaid contract rights and related assets from Prudential Health
Care, adding approximately 91,000 members (which was accounted for as a 
purchase) with the balance of the increase due to internal growth from  
existing contracts.                                                     

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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 The following discussion contains forward-looking statements based upon
current expectations and related to future events and our future financial      
performance that involve risks and uncertainties. Our actual results and timing 
of events could differ materially from those anticipated in these               
forward-looking statements as a result of many factors, including those set     
forth under "Risk Factors," "Forward-Looking Statements," "Business" and        
elsewhere in this prospectus.                                                   

GENERAL                                                                         

  We were founded in December 1994. Our objective is to become the leading
managed care organization in the United States focused on serving people who    
receive healthcare benefits through state-sponsored programs.                   

   - During 1994 and 1995, we were involved primarily in financial planning,
 recruiting and training personnel, developing products and markets,
forming and licensing our subsidiaries to be HMOs and negotiating 
contracts with various state governments.                         

  - During 1996, we began enrolling Medicaid members in our New Jersey and
    Illinois health plans, and won a bid in Texas to enroll members in our
Forth Worth plan.                                                 

- In 1997, we won a bid to enroll members in our Houston plan.        

     - In 1998, we acquired the New Jersey Medicaid line of business from Oxford
   Health Plan (NJ), significantly expanding our presence in that state.

     - In June and August 1999, we began operations in Maryland and the District
     of Columbia, respectively, as a result of our acquisition of Prudential
Health Care's Medicaid contract rights and other related assets.  

- In July 1999, we won a bid to enroll members in our Dallas plan.    

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

                                                        [Enlarge/Download Table]

                                                         DECEMBER                   SEPTEMBER
                                          ---------------------------------------   ---------
MARKET                                     1997      1998       1999       2000       2001   
------                                    ------    -------    -------    -------   ---------
                                                                                             
Fort Worth............................... 24,000     23,000     33,000     40,000     47,000 
Houston..................................  2,000     42,000     40,000     57,000    100,000 
Dallas...................................     --         --     34,000     42,000     59,000 
New Jersey............................... 10,000     38,000     46,000     57,000     80,000 
Maryland.................................     --         --     83,000     95,000    118,000 
District of Columbia.....................     --         --     12,000     13,000     13,000 
Illinois.................................  5,000     10,000     20,000     29,000     38,000 
                                          ------    -------    -------    -------    ------- 
Total.................................... 41,000    113,000    268,000    333,000    455,000 
                                          ======    =======    =======    =======    ======= 
Percentage growth over prior period......    N/A      175.6%     137.2%      24.3%           

    We generate revenues primarily from premiums we receive from the states in
which we operate to provide health benefits to our members. We also generate    
revenues from investments. We generally receive a fixed premium per member per  
month to provide healthcare benefits to our members pursuant to our contracts   
with four states and the District of Columbia. We generally receive premiums in 
advance of providing services, and recognize premium revenue during the period  
in which we are obligated to provide services to our members.                   

Our operating expenses include expenses related to health benefits;   
selling, general and administrative costs; interest; and depreciation and       
amortization. Selling, general and administrative costs include direct and      

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indirect expenses. Direct expenses are those incurred to ensure delivery of     
services to our members. Most of these services are typically replicable        
processes that can be delivered to all of our health plans more efficiently and 
effectively from our Virginia service center. The major centralized functions   
that are considered to generate direct expenses are member and provider         
services, claims processing and enrollment. Staffing in these areas is directly 
related to the number of members we are managing. Direct costs are also incurred
in the field at the local health plan. Indirect expenses are generated by       
corporate governance for strategic direction, quality assurance, medical        
oversight, national branding, product development, mergers and acquisitions,    
legal, regulatory compliance, human resources, information technology, finance  
and network development. These functions are located in Virginia and the costs  
associated with them do not increase directly as membership increases.          

Our results of operations depend on our ability to effectively manage 
expenses related to health benefits and accurately predict costs incurred.      
Expenses related to health benefits have two components: direct medical expenses
and medically related administrative costs. Direct medical expenses include fees
paid to hospitals, physicians and providers of ancillary medical services, such 
as pharmacy, laboratory, radiology, dental and vision. Medically related        
administrative costs include expenses related to services such as health        
promotion, quality assurance, case management, disease management and 24 hour   
on-call nurses. Direct medical expenses also include estimates of medical       
expenses incurred but not yet reported, or IBNR. For the six months ended June  
30, 2001, approximately 82.5% of our direct medical payments related to fees    
paid on a fee-for-service basis to our primary care physicians, specialist      
physicians and ancillary providers. The balance related to fees paid on a       
capitation, or fixed-fee, 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 fixed  
dollar amount per day or an agreed upon percent of their standard charges. In   
Maryland, the state sets the amount reimbursed to hospitals.                    

Monthly, we estimate our IBNR based on a number of factors, including 
authorization data and prior claims experience. Authorization data is           
information captured in the Company's medical management system, which          
identifies services requested by providers or members and approved by medical   
management. The medical cost related to these authorizations is estimated by    
pricing the approved services using contractual or historical amounts adjusted  
for known variables such as historical claims trends. These estimated costs are 
included as a component of IBNR. As part of this review, we also consider the   
costs to process medical claims, and estimates of amounts to cover uncertainties
related to fluctuations in claims payment patterns, membership, products, and   
authorization trends. These estimates are adjusted as more information becomes  
available. We utilize the services of independent actuarial consultants who are 
contracted to review our estimates quarterly. We believe that our process for   
estimating IBNR is adequate. However, there can be no assurance that healthcare 
claim costs will not exceed such estimates.                                     

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RESULTS OF OPERATIONS                                                           

    The following table sets forth selected operating ratios. All ratios, with
the exception of the health benefits ratio, are shown as a percentage of total  
revenues.                                                                       

                                                        [Enlarge/Download Table]

                                                                                SIX MONTHS   
                                                          YEAR ENDED              ENDED      
                                                         DECEMBER 31,            JUNE 30,    
                                                    -----------------------   -------------- 
                                                    1998     1999     2000    2000     2001  
                                                    -----    -----    -----   -----    ----- 
                                                                                             
Premium revenue....................................  98.2%    98.4%    98.0%   98.1%    98.5%
Investment income..................................   1.8      1.6      2.0     1.9      1.5 
                                                    -----    -----    -----   -----    ----- 
Total revenues..................................... 100.0%   100.0%   100.0%  100.0%   100.0%
                                                    =====    =====    =====   =====    ===== 
Health benefits(1).................................  83.5%    85.2%    81.0%   80.0%    79.6%
Selling, general and administrative expenses.......  15.3     13.3     12.9    13.0     13.0 
                                                    -----    -----    -----   -----    ----- 
Income before income taxes.........................   1.8      1.8      6.6     7.4      7.4 
Income tax benefit (expense).......................    --      1.0     (2.6)   (3.0)    (3.1)
                                                    -----    -----    -----   -----    ----- 
Net income.........................................   1.8%     2.8%     4.0%    4.4%     4.3%
                                                    =====    =====    =====   =====    ===== 

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

   SIX MONTHS ENDED JUNE 30, 2001 COMPARED TO SIX MONTHS ENDED JUNE 30, 2000

Revenues                                                              

   Premium revenue for the six months ended June 30, 2001 increased 29.4% to
$394.8 million from $305.1 million for the six months ended June 30, 2000. The  
$89.7 million increase was principally due to internal growth in overall        
membership. Total membership increased 41.2% to 411,000 as of June 30, 2001 from
291,000 as of June 30, 2000.                                                    

    Investment income for the six months ended June 30, 2001 increased 5.3% to
$6.1 million from $5.8 million for the six months ended June 30, 2000. The $0.3 
million increase was due to a 14.2% increase in cash and cash equivalents and   
short-term investments as of June 30, 2001 compared to June 30, 2000 partially  
offset by lower market interest rates. The higher cash levels resulted from     
increases in the amount of premiums received during 2001 versus the timing of   
the payment of the related health benefits.                                     

Health benefits                                                       

     Expenses relating to health benefits for the six months ended June 30, 2001
increased 28.8% to $314.4 million from $244.1 million for the six months ended  
June 30, 2000. The $70.3 million increase was primarily due to the increase in  
membership. The health benefits ratio, as a percentage of premium revenue, for  
the six months ended June 30, 2001 was 79.6% compared to 80.0% for the six      
months ended June 30, 2000. The decrease in the health benefits ratio as        
compared to the first six months of 2000, is primarily the result of a favorable
impact of shifting high cost cases from managed care to fee-for-service in      
Illinois ($2.8 million expense savings related to health benefits) as well as an
increase in revenues resulting from the receipt of a HIV/AIDS supplemental      
payment from the State of Maryland. This favorable impact was substantially     
offset by a normal incidence of respiratory conditions and influenza in the     
first quarter of 2001 as compared to the first quarter of 2000.                 

Selling, general and administrative expenses                          

    Selling, general and administrative expenses for the six months ended June
30, 2001 increased 28.9% to $52.2 million from $40.5 million for the six months 
ended June 30, 2000. The $11.7 million increase was primarily due to an increase
in wages and related expenses for additional staff to support our increased     
membership. Our selling, general and administrative expenses ratio was 13.0% for
both the six months ended June 30, 2001 and the six months ended June 30, 2000. 

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Interest expense                                                      

     Interest expense increased 3% to $412,000 for the six months ended June 30,
2001 from $400,000 for the six months ended June 30, 2000. This $12,000 increase
was due to entering into capital lease obligations in the first six months of   
2001, partially offset by the repayment of long-term debt. Our long-term debt,  
including the current portion, was $5.2 million as of June 30, 2001 compared to 
$7.2 million as of June 30, 2000.                                               

Provision for income taxes                                            

  In the first six months of 2001, we recorded $12.4 million of income tax
expense as a result of an effective 42.0% tax rate. In the first six months of  
2000, we recorded $9.4 million of income tax expense with an effective tax rate 
of 40.9%.                                                                       

   YEAR ENDED DECEMBER 31, 2000 COMPARED TO THE YEAR ENDED DECEMBER 31, 1999

Revenues                                                              

Premium revenue in 2000 increased 64.8% to $646.4 million from $392.3 
million in 1999. The $254.1 million increase was due to a 24.3% increase in     
membership. Membership increased to 333,000 as of December 31, 2000 from 268,000
as of December 31, 1999. The increase in premium revenue in 2000 was due to the 
inclusion for the full year of premium revenues from the acquisition of the     
Medicaid contracts and related assets from Prudential Health Care in June and   
August 1999 ($109.0 million in premium revenue) and the commencement of service 
in Dallas in July 1999 ($48.8 million in premium revenue). The balance of the   
increase was due to internal membership growth.                                 

Investment income increased 104.7% to $13.1 million in 2000 from $6.4 
million in 1999. The $6.7 million increase was due to a 32.2% increase in cash  
and investments as of December 31, 2000 compared to December 31, 1999. The      
higher cash levels resulted from increases in the amount of premiums received   
during 2000 versus the timing of the payment of the related health benefits.    

Health benefits                                                       

   Expenses relating to health benefits increased 56.7% to $523.6 million in
2000 from $334.2 million in 1999. The $189.4 million increase was primarily due 
to the 24.3% increase in membership. The health benefits ratio in 2000 decreased
to 81.0% from 85.2% in 1999. The year ended December 31, 2000 reflects a $1.6   
million decrease in health benefit expenses due to a provider contract amendment
which, among other things, more equitably allocates the risk among the parties. 

     The incidence of respiratory conditions and influenza reported in the first
quarter of 2000 was less than in the first quarter of 1999. This reduction,     
together with the contract amendment described above and other factors,         
contributed to the 4.2% improvement in our health benefits ratio in 2000 from   
1999. We consider the provider contract amendment and the reduced incidence of  
respiratory conditions and influenza to be atypical.                            

Selling, general and administrative expenses                          

 Selling, general and administrative expenses in 2000 increased 61.1% to
$85.1 million from $52.8 million in 1999. The $32.3 million increase was        
primarily due to an increase in wages and related expenses of $17.5 million for 
additional staff, and fees for additional third party contractors of $9.6       
million to support our increased membership. The increase was also due in part  
to an increase in the experience rebate expense to $3.9 million where our       
profits exceeded specified levels in Texas for the contract period commencing   
September 1, 1999. The experience rebate payable is estimated and recorded      
monthly on a contract-to-date basis. However, our selling, general and          
administrative expenses ratio decreased to 12.9% in 2000 from 13.3% for 1999.   
This decrease was a result of spreading indirect expenses over a larger         
membership base.                                                                

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Interest expense                                                      

    Interest expense decreased 3.7% to $781,000 in 2000 from $811,000 in 1999.
This $30,000 decrease was due to the repayment of $1.8 million of our long-term 
debt. Our long-term debt, including the current portion, was $6.2 million as of 
December 31, 2000 compared to $8.0 million as of December 31,1999.              

Provision for income taxes                                            

   In 2000 we recorded $17.7 million of income tax expense as a result of an
effective 40.4% tax rate compared to a tax benefit of $4.1 million in 1999.     

YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998           

Revenues                                                              

Premium revenue in 1999 increased 110.0% to $392.3 million from $186.8
million in 1998. The $205.5 million increase was due to a 137.2% increase in    
membership. Membership increased to 268,000 as of December 31, 1999 from 113,000
as of December 31, 1998. The increase in premium revenue in 1999 was due to the 
acquisition of the Medicaid contracts and related assets from Prudential Health 
Care adding approximately 79,000 members in Maryland on June 1, 1999 ($113.7    
million in premium revenue) and 12,000 members in the District of Columbia on   
August 1, 1999 ($7.9 million in premium revenue). The balance of the increase   
was due to internal growth.                                                     

Investment income increased 89.0% to $6.4 million for 1999 from $3.4  
million in 1998. The $3.0 million increase was due to a 17.1% increase in cash  
and investments as of December 31, 1999 compared to December 31, 1998. The      
higher cash levels resulted from increases in the amount of premiums received   
during 1999 versus the timing of the payment of the related health benefits.    

Health benefits                                                       

   Expenses related to health benefits increased 114.4% to $334.2 million in
1999 from $155.9 million in 1998. The $178.3 million increase was primarily due 
to the 137.2% increase in membership. The health benefits ratio in 1999         
increased to 85.2% from 83.5% for 1998. The higher health benefits ratio in 1999
was due to higher initial health benefit costs related to the Medicaid contracts
and other assets acquired from Prudential Health Care in Maryland and the       
District of Columbia. Excluding the health benefits ratio for Maryland and the  
District of Columbia, our health benefits ratio would have been 77.1% in 1999.  
From the date of acquisition to year end, the health benefits ratio for the     
Maryland business acquired from Prudential Health Care was approximately 103.3%.
When we acquired the Medicaid contracts and other related assets in Maryland and
the District of Columbia, we began implementing initiatives to improve the      
health benefits ratios of those businesses. We have a process for identifying,  
evaluating and implementing initiatives that improve the health benefits ratio  
for new and existing markets. These initiatives include adjusting fee schedules,
implementing medical management and case management activities related to       
hospital utilization, utilization of a specialty contractor for neonatal medical
management of extremely ill newborns, entering into capitated arrangements for  
ancillary services such as dental, substance abuse and vision and improving our 
pharmacy services.                                                              

Selling, general and administrative expenses                          

 Selling, general and administrative expenses in 1999 increased 81.2% to
$52.8 million from $29.2 million in 1998. The $23.6 million increase was        
primarily due to an increase in wages and related expenses for additional staff,
and fees for additional third party contractors to support our increased        
membership. The selling, general and administrative expenses ratio decreased to 
13.3% in 1999 from 15.3% in 1998. This decrease was a result of spreading       
indirect expenses over a larger membership base.                                

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Interest expense                                                      

     Interest expense increased 67.9% to $811,000 in 1999 from $483,000 in 1998.
This $328,000 increase was due to our term loan in the original amount of $10   
million being outstanding for a full year in 1999 as opposed to being           
outstanding for a part of 1998. We borrowed the funds under this facility in May
1998.                                                                           

Provision for income taxes                                            

     Due to increased 1999 net income and sustained net income in 1999 and 1998,
it became apparent that it was more likely than not that the benefits of the net
operating losses would be realized. Therefore, we reversed our valuation        
allowance established against our deferred tax assets, which resulted in an     
income tax benefit of $4.1 million.                                             

SELECTED QUARTERLY OPERATING RESULTS                                            

The following table sets forth unaudited quarterly results of our     
operations for each of the quarters in the year ended December 31, 2000 and for 
the quarters ended March 31 and June 30, 2001. This information has been        
prepared on the same basis as the consolidated financial statements and, in the 
opinion of our management, reflects adjustments, consisting only of normal      
recurring adjustments, necessary for a fair presentation of the information for 
the periods presented. The unaudited quarterly operating results are not        
necessarily indicative of future results of operation. This data should be read 
in conjunction with our consolidated financial statements and related notes     
included in this prospectus.                                                    

                                                        [Enlarge/Download Table]

                                                                      THREE MONTHS ENDED                           
                                            -----------------------------------------------------------------------
                                            MARCH 31, 2000   JUNE 30, 2000   SEPTEMBER 30, 2000   DECEMBER 31, 2000
                                            --------------   -------------   ------------------   -----------------
                                                                  (IN THOUSANDS) (UNAUDITED)                       
                                                                                                                   
Premium revenue............................    $147,654        $157,478           $166,061            $175,215     
Investment income..........................       2,710           3,089              3,640               3,668     
Health benefits............................     118,332         125,768            135,038             144,428     
Selling, general and administrative                                                                                
  expenses.................................      17,088          23,409             22,270              22,347     
Income before income taxes.................      13,383           9,656             10,590              10,150     


                                                  THREE MONTHS ENDED                                               
                                            ------------------------------                                         
                                            MARCH 31, 2001   JUNE 30, 2001                                         
                                            --------------   -------------                                         
                                              (IN THOUSANDS) (UNAUDITED)                                           
                                                                                                                   
Premium revenue............................    $185,685        $209,145                                            
Investment income..........................       3,321           2,784                                            
Health benefits............................     150,692         163,703                                            
Selling, general and administrative                                                                                
  expenses.................................      24,098          28,112                                            
Income before income taxes.................      12,001          17,594                                            

LIQUIDITY AND CAPITAL RESOURCES                                                 

 Since inception, we have principally financed our operations and growth
through private equity offerings and internally generated funds. We generate    
cash from premium revenue derived from Medicaid contracts with the states and   
investment income. Our primary uses of cash include the payment of expenses     
related to health benefits and selling, general and administrative expenses. In 
addition, we may need to raise capital from time to time to fund planned        
geographic and product expansion, for computer system enhancements, for         
necessary regulatory reserves and for acquisitions of healthcare businesses. We 
receive premium revenue in advance of payment of claims for related healthcare  
services.                                                                       

     Our investment policies are designed to provide liquidity, preserve capital
and maximize total return on invested assets. As of December 31, 2000 and June  
30, 2001, our investment portfolio consisted primarily of fixed-income          
securities. The average maturity is under six months. Cash is invested in       
investment vehicles such as municipal bonds, commercial paper, U.S. government  
backed agencies 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 average portfolio yield as of June 30, 2001 was approximately 4.25%.  

 Net cash provided by operations increased from $37.7 million in 1998 to
$95.9 million in 1999 and decreased to $42.1 million in 2000. The growth in 1999
was primarily due to increased membership, improved profitability and the       
receipt of premium revenue in advance of the month of service. The decrease in  
2000 was primarily due to a decrease in premium revenue paid in advance         
partially offset by increased membership and improved profitability. Net cash   
provided by operating activities for the six months ended June 30, 2001 was     
$25.8 million primarily due to an increase in both profitability and claims     
payable.                                                                        

  At June 30, 2001, we had working capital of $47.2 million as compared to
working capital of $23.1 million and $36.7 million at December 31, 1999 and     
2000, respectively. We have been able to generate                               

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cash from operations since 1996 primarily due to improved profitability and the 
receipt of premium revenue in advance of the payment of claims for health       
benefits.                                                                       

  At June 30, 2001, December 31, 1999 and December 31, 2000, cash and cash
equivalents and short term investments, net of bank overdrafts, were $204.1     
million, $164.8 million and $187.8 million, respectively.                       

     On November 9, 1999, we entered into a loan and security agreement with two
banks to obtain a $16.5 million debt facility, consisting of a term loan of $9.0
million and a revolving loan commitment of $7.5 million. We used the funds      
borrowed under the term loan to retire the term loan entered into in May 1998.  
The term loan and revolver are secured by cash and cash equivalents, accounts   
receivable, property and equipment and other assets. The principal on the term  
loan bears interest at a rate equal to the prime rate plus 0.75%. The effective 
interest rate was 7.5% at June 30, 2001. Under the agreement, we must comply    
with financial covenants relating to a fixed charge coverage ratio, consolidated
leverage ratio, debt to capitalization ratio, quick ratio and medical expense   
ratio. As of June 30, 2001, we were in compliance with these covenants. As of   
June 30, 2001, there was $5.2 million outstanding under the term loan portion   
and there were no outstanding borrowings on the revolver portion of the         
facility, of which $7.5 million remains available. We intend to use proceeds    
from the offering to repay the outstanding amount under this facility.          

     On October 24, 2001, we received a commitment from Bank of America, N.A. to
act as the exclusive administrative agent for a $60 million revolving credit    
facility, which may be increased to $75 million, and to lend up to $25 million  
of the facility. Bank of America's commitment is conditioned upon the receipt of
commitments of at least $35 million in the aggregate from two other lenders, and
other customary conditions. The proceeds of the facility will be available for  
general corporate purposes, including, without limitation, permitted            
acquisitions. The facility will accrue interest at one of the following rates,  
at our option: LIBOR plus the applicable margin or an alternate bank rate plus  
the applicable margin. At the time of closing, for a $60 million facility, the  
applicable margin for LIBOR borrowings is expected to be 2.00% and the          
applicable margin for alternate base rate borrowings is expected to be 1.00%.   
After that the applicable margin will vary depending on our leverage ratio. The 
facility will be secured by substantially all of our assets, including the stock
of our subsidiaries. We will pay a fee of 0.50% on the unused portion of the    
credit facility. We expect to enter into the credit facility by December 31,    
2001 and it will be available for three years from the date we enter into it. We
have no current intention to draw on the facility.                              

In July 1998, we issued 1,000,000 shares of our Series E mandatorily  
redeemable preferred stock and warrants to purchase 562,500 shares of our common
stock for an aggregate $5.0 million. On January 20, 1999, we issued an          
additional 1,000,000 shares of Series E mandatorily redeemable preferred stock  
and warrants to purchase an additional 562,500 shares of our common stock for an
additional $5.0 million. We have accrued dividends on the redeemable preferred  
stock but those dividends have not been paid. Any payment of dividends requires 
approval by our lenders. The Series E mandatorily redeemable preferred stock is 
mandatorily redeemable upon consummation of this offering for $13.0 million.    

Net cash flows used in investing activities were $9.9 million in 1998,
$78.2 million in 1999 and $8.4 million in 2000. Net cash used for investing     
activities in 1998 was primarily due to the purchase of the New Jersey Medicaid 
contracts and related assets from Oxford Health Plans (NJ), Inc. in July 1998   
and purchases of property and equipment of $2.5 million. In 1999, net cash used 
for investing activities was primarily the result of net purchases of           
investments of $64.6 million, net purchase of investments on deposit for        
licensure of $7.3 million, $4.6 million for the purchase of property and        
equipment. Net cash used for investing activities in 2000 was primarily due to  
purchases of property and equipment of $5.1 million. For the six months ended   
June 30, 2001, net cash used in investing activities was $31.1 million due      
primarily to the purchases of investments partially offset by proceeds from the 
redemption of held-to-maturity securities. From January 1998 through June 30,   
2001, we invested approximately $19.0 million in property and equipment,        

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including capital leases, to service increasing membership. Our property and    
equipment budget for 2001 is $10.5 million.                                     

    Net cash flows provided by financing activities were $22.1 million in 1998
while net cash flows used in financing activities were $3.0 million in 1999 and 
$1.5 million in 2000. Net cash flows provided by financing activities in 1998   
were primarily due to net term loan proceeds of $9.9 million and $4.9 million   
net proceeds from the issuance of Series E mandatorily redeemable preferred     
stock and warrants. In 1999, net cash flows used in financing activities were   
due to proceeds of $5.0 million from the issuance of additional Series E        
mandatorily redeemable preferred stock and warrants and net proceeds of $8.1    
million on a new term loan offset by principal debt repayments of $10.3 million 
on our May 1998 term loan. Net cash flows used in financing activities in 2000  
consisted primarily of principal debt payments on our term loan of $1.8 million.
Net cash used in financing activities was approximately $1.3 million for the six
months ended June 30, 2001.                                                     

Our subsidiaries are required to maintain minimum capital requirements
prescribed by various jurisdictions, including the departments of insurance in  
each of the states in which we operate. As of June 30, 2001, our subsidiaries   
were in compliance with all minimum capital requirements. Barring any change in 
regulatory requirements, we believe that we will continue to be in compliance   
with these requirements at least through the end of this year.                  

  We believe that internally generated funds will be sufficient to support
continuing operations, capital expenditures and our growth strategy for at least
12 months following this offering.                                              

REGULATORY CAPITAL AND DIVIDEND RESTRICTIONS                                    

   Our operations are conducted through our wholly-owned subsidiaries, which
include HMOs and one managed care organization, or MCO. HMOs and MCOs are       
subject to state regulations that, among other things, may require the          
maintenance of minimum levels of statutory capital, as defined by each state,   
and restrict the timing, payment and amount of dividends and other distributions
that may be paid to their stockholders.                                         

   As of December 31, 2000, our subsidiaries had aggregate statutory capital
and surplus of approximately $39.0 million, compared with the required minimum  
aggregate statutory capital and surplus requirements of approximately $13.2     
million.                                                                        

   The National Association of Insurance Commissioners, or NAIC, has adopted
rules which, to the extent that they are implemented by the states, will set new
minimum capitalization 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. The new HMO rules, which may vary from state 
to state, are currently being considered for adoption. Illinois and Texas       
adopted various forms of the rules as of December 31, 1999. Maryland has        
indicated that it will implement risk-based capital rules for MCOs as of        
December 31, 2001. The NAIC's HMO rules, if adopted by other states in their    
proposed form, may increase the minimum capital required for our subsidiaries.  

RECENT ACCOUNTING PRONOUNCEMENTS                                                

     In July 2001, Statement of Financial Accounting Standards No. 141, Business
Combinations (SFAS No. 141), was issued which requires that the purchase method 
of accounting be used for all business combinations completed after June 30,    
2001. We have adopted SFAS No. 141.                                             

     In July 2001, Statement of Financial Accounting Standards No. 142, Goodwill
and Other Intangible Assets (SFAS No. 142), was issued which requires that      
goodwill and intangible assets with indefinite useful lives no longer be        
amortized, but instead tested annually for impairment. We will adopt SFAS No.   
142 effective January 1, 2002 and management has not yet determined its effect  
on AMERIGROUP'S financial statements. As of June 30, 2001, we had unamortized   
goodwill in the amount of approximately $17.3 million, which will be subject to 
the transition provisions of SFAS Nos. 141 and 142. Amortization expense was    
approximately $2.8 million in 2000.                                             
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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                      

    As of June 30, 2001, we had short-term investments of $79.1 million. These
short-term investments consist of highly liquid investments with maturities     
between three and twelve months. These investments are subject to interest rate 
risk and will decrease in value if market rates increase. We have the ability to
hold these short-term 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. Declines in interest rates over time    
will reduce our investment income.                                              

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.                                

COMPLIANCE COSTS                                                                

 The new federal and state regulations promulgated under HIPAA mandating
uniform standards for electronic transactions and confidentiality requirements  
of patient information are currently unsettled, making certainty of compliance  
impossible at this time. Due to the uncertainty surrounding the regulatory      
requirements, we cannot be sure that the systems and programs that we plan to   
implement will comply adequately with the regulations that are ultimately       
approved. Implementation of additional systems and programs may be required, the
cost of which is unknown to us at this time. Further, compliance with these     
regulations would require changes to many of the procedures we currently use to 
conduct our business, which may lead to additional costs that we have not yet   
identified. We do not know whether, or the extent to which, we will be able to  
recover our costs of complying with these new regulations from the states.      

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BUSINESS

OVERVIEW                                                                        

   We are a multi-state managed healthcare company focused on serving people
who receive healthcare benefits through state-sponsored programs, including     
Medicaid, CHIP and Family Care. 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 single focus on providing managed care to these      
populations, our strong government relationships, 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, CHIP and Family Care populations. We do not 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 and respiratory conditions. We design our programs to      
address the particular needs of our members, for whom we provide Medicaid       
benefits pursuant to an agreement 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 win new contracts and to  
establish a leading market position in many of the markets we serve. Providers  
are hospitals, physicians and ancillary medical programs which 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. We provide an array of products to members in Texas, New     
Jersey, Maryland, the District of Columbia and Illinois. As of September 30,    
2001, we had approximately 455,000 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   
President, Chief Executive Officer and Chairman. During 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, Texas, New Jersey and Illinois HMOs and in 1997, we won a bid to
enroll members in our Houston, Texas plan. In 1998, we acquired the New Jersey  
Medicaid contract rights and other related assets from Oxford Health Plans (NJ),
Inc. In 1999, we began operating in Maryland and the District of Columbia, and  
won a bid to enroll members in our Dallas plan. Our operations in Maryland and  
the District of Columbia are the result of acquiring contract rights from       
Prudential Health Care. The assets purchased consist of Prudential's rights to  
provide managed care services to members in those two jurisdictions and the     
assignment of Prudential's contracts with healthcare providers.                 

MARKET OPPORTUNITY                                                              

EMERGENCE OF MANAGED CARE                                                   

  Healthcare in the United States has grown from a $27 billion industry in
1960 to a highly-regulated market of approximately $1.2 trillion in 1999,       
according to the federal government's Centers for Medicare & Medicaid Services, 
or CMS (formerly the Health Care Financing Administration). CMS projects total  
U.S. healthcare spending will grow by 6.5% annually over the next seven years,  
implying that healthcare expenditures will reach approximately $2.2 trillion by 
2008. 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, or 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 thirteen-fold from
6 million in 1976 to nearly 79 million in 1998. 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,                                                       

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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 know the populations they serve in order to develop an    
infrastructure and programs tailored to the medical and social profiles of their
members.                                                                        

MEDICAID, CHIP AND FAMILY CARE PROGRAMS                                     

     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 participate, is a program administered by the      
federal government and is made available to the aged and disabled. Some of the  
differences between Medicaid and Medicare are set forth below:                  

Medicaid                                                              
- state administered                                                  
- state and matching federal funds                                    
- average age of our members is 14                                    
- 18 million people in managed care                                   
- state funded prescription drug coverage                             
- mandatory managed care in most states                               
Medicare                                                              
- federally operated                                                  
- federal funds only                                                  
- average age of members is over 70                                   
- 6 million people in managed care                                    
- no government funded prescription drug coverage                     
- no mandatory managed care                                           

    Most states determine threshold Medicaid eligibility by reference to other
federal financial assistance programs including:                                

- Temporary Assistance to Needy Families, or TANF, and                

- Supplemental Security Income, or SSI.                               

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

    CHIP is a recently developed federal/state matching program which provides
healthcare coverage to children not otherwise covered by Medicaid or other      
insurance programs. CHIP enables a segment of the large uninsured population in 
the United States to receive healthcare benefits. States have the option of     
administering CHIP through their Medicaid programs. CHIP enrollment reached 3.3 
million in 2000, a 70% increase over 1999 enrollment figures.                   

   Family Care programs have been established in New Jersey and the District
of Columbia. The New Jersey FamilyCare Health Coverage Act is a Medicaid        
expansion program intended to provide healthcare access to an estimated 125,000 
previously uninsured or underinsured New Jersey residents. New Jersey FamilyCare
is a voluntary federal and state funded health insurance program created to help
uninsured families, single adults and couples without dependent children obtain 
affordable health coverage. New Jersey is investing approximately $100 million  
in its Medicaid and FamilyCare programs from tobacco settlement funds. When     
fully implemented, the program is expected to continue to draw on tobacco       
settlement funds.                                                               

  The Family Care program in the District of Columbia provides services to
approximately 75,000 primarily low-income pregnant women, children and adults.  

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   In 1998, according to information published by CMS, Medicaid covered more
than 40 million individuals, as follows:                                        

                                                                [Download Table]

                                                FEDERAL ASSISTANCE
                                                     PROGRAM      
NUMBER                   CATEGORY                   REFERENCE     
------        -------------------------------   ------------------
                                                                  
 20.6 million children (1 in 4 U.S. children)      TANF           
  8.6 million adults, mostly women                 TANF           
  7.2 million disabled                              SSI           
  4.0 million individuals over 64                   SSI           

Nationally, approximately 59% of Medicaid spending is directed toward 
hospital, physician and other acute care services, and the remaining            
approximately 41% 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 leading to the postponement of treatment     
until acute care is required.                                                   

The highest healthcare expenses for the Medicaid population include:  

- obstetrics,                                                         

- respiratory illness,                                                

- diabetes,                                                           

- neonatal care, and                                                  

- HIV/AIDS.                                                           

     In 1999, the federal government spent $102.5 billion on Medicaid and states
spent an additional $78.4 billion. Government estimates indicate that total     
Medicaid outlays may reach $285 billion by fiscal year 2005, with an additional 
$6.0 billion spent on CHIP programs. Key factors driving Medicaid spending      
include:                                                                        

- number of eligible individuals who enroll,                          

- price of medical and long-term care services,                       

- use of covered services,                                            

- state decisions regarding optional services and optional eligibility
groups, and                                                       

- effectiveness of programs to reduce costs of providing benefits,    
including managed care.                                           

    In addition, we expect that spending for CHIP will increase as a result of
funds becoming available to the states from settlements of government litigation
with tobacco companies and the federal government's current initiative to       
decrease the number of uninsured individuals. In the states in which we operate,
Texas and New Jersey have made final determinations to use a portion of the     
funds from tobacco litigation settlements for CHIP programs. In addition, New   
Jersey is allocating a portion of the tobacco litigation settlement funds to the
New Jersey FamilyCare program, which includes parents of Medicaid and CHIP      
children and low income, childless adults. Last year, Maryland used a portion of
the tobacco settlement funds to offset a one-time deficit in its Medicaid       
budget. At this time, we do not expect the other states in which we operate to  
use tobacco settlement funds for CHIP or Medicaid. However, it is too soon to   
know how states will allocate their tobacco settlement dollars in future years. 

MEDICAID FUNDING                                                            

    The federal government pays a share of the medical assistance expenditures
under each state's Medicaid program. That share, known as the Federal Medical   
Assistance Percentage, or FMAP, is determined annually by a formula that        
compares the state's average per capita income level with the national average  
per capita income level. Thus, states with higher per capita income levels are  
reimbursed a smaller share of their costs than states with lower per capita     
income levels. The FMAP cannot be lower than 50% or higher than 83%. In         

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2000, the FMAPs varied from 50% in 10 states to 76.8% in Mississippi, and       
averaged 60.7% overall. In addition, the Balanced Budget Act of 1997 permanently
raised the FMAP for the District of Columbia from 50% to 70%. The FMAPs for the 
markets in which we have contracts for fiscal 2001 are:                         

                                                                [Download Table]

STATE                                                  FMAP 
-----                                                  ---- 
                                                            
New Jersey...........................................  50.0%
Texas................................................  60.6%
Maryland.............................................  50.0%
Illinois.............................................  50.0%
District of Columbia.................................  70.0%

   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 CHIP programs) but rather are made on a      
matching basis. In 1999, 43.6% 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 CHIP costs not paid by the
federal government. Some states require counties to pay part of the state's     
share of Medicaid costs. In 1999, Medicaid was the second largest category of   
state spending, following spending on elementary and secondary education, and   
made up 19.6% of total state spending.                                          

     Federal law establishes general rules governing how states administer their
Medicaid and CHIP 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 state governor and the legislature and Medicaid    
expenditures are monitored during the year against budgeted amounts.            

     About 95% of the Medicaid budget goes to provider payments. States can make
up for budget deficits by reducing provider prices or making administrative     
changes that reduce utilization of services. However, when states cut Medicaid  
HMO payment rates, they may cause HMOs to leave the Medicaid market. Federal law
requires states to offer at least two HMOs in any urban market with mandatory   
HMO enrollment. If Medicaid HMO rate cuts result in only one or no HMOs in an   
urban area, the affected state must also offer the fee-for-service Medicaid     
program, which may encourage states to maintain Medicaid HMO payment rates that 
are satisfactory to the HMOs.                                                   

MEDICAID MANAGED CARE                                                       

   Historically, the traditional Medicaid programs made payments directly to
providers after delivery of care. Under this approach, recipients received care 
from disparate sources, as opposed to being cared for in a systematic way. As a 
result, care for routine needs was often accessed through emergency rooms or not
at all. The delivery of episodic healthcare under the traditional Medicaid      
program limited the ability of the states to provide quality care, implement    
preventive measures and control healthcare costs. Federal Medicaid spending grew
at an average annual rate of 19.6% between 1988 and 1993, prior to the          
widespread use of managed care for Medicaid benefits.                           

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 1998, managed care enrollment among Medicaid     
beneficiaries increased more than three-fold. All of the markets in which we    
operate, except Illinois, have a state-mandated Medicaid managed care program in
place.                                                                          

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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           
state-sponsored programs. We do not offer Medicare or commercial products. Our  
success in establishing and maintaining strong relationships with state         
governments, providers, and members has enabled us to win 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 three constituent      
groups.                                                                         

STATE GOVERNMENTS                                                           

    We have been successful in bidding for contracts because of our ability to
provide quality healthcare services in a cost-effective manner. Our information 
systems, our education and outreach programs and our disease and medical        
management programs 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 programs like member health education       
seminars and system-wide 24-hour on-call nurses. Our information systems are    
designed to measure and track our performance enabling us to demonstrate the    
effectiveness of our programs to the government. While we promote ourselves     
directly in bidding for new contracts or seeking to add new benefit plans, such 
as CHIP programs, we believe that our ability to win additional contracts and   
expand our service areas within a state results primarily from our demonstrating
prior success in providing quality care while reducing and managing costs and   
our customer-focused approach to working with state governments. We believe we  
will also benefit from this experience when bidding for and acquiring contracts 
in new state markets.                                                           

PROVIDERS                                                                   

    In each of the communities where we operate, we have established extensive
provider networks and have been successful in continuing to establish new       
provider relationships. We have accomplished this by working closely with       
physicians to help them operate efficiently by providing financial, statistical 
and utilization information, physician and patient educational programs and     
disease and medical management programs, as well as 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 the overall quality of    
care delivered to our 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 also instrumental in helping us attract new members and     
retain existing members.                                                        

MEMBERS                                                                     

In both signing up new and retaining existing members, we focus on our
understanding of the unique needs of the Medicaid and CHIP populations. Many of 
our employees, including the sales force and outreach staff, are a part of the  
communities we serve. In addition, we have developed a system that provides our 
members with easy access to appropriate care. We supplement this care with      
community-based education and outreach programs designed to improve the         
well-being of our members. We often provide the programs in our members' homes, 
churches and community centers. 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. Upon entering a new market,
we use these programs and other advertising to create brand awareness. As our   
presence in a market matures, these programs, and other value added services,   
help us build and maintain membership levels.                                   

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STRATEGY                                                                        

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

Increase our membership in existing markets through acquisitions and  
internal growth.  We intend to increase our membership in existing markets      
through development and implementation of community-specific products, alliances
with key providers, sales and marketing efforts and acquisitions. We provide a  
broad continuum of healthcare supported by numerous services such as neo-natal  
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 service      
delivery systems 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 accessability to, and an understanding
of, the needs of the member. In our voluntary market we have a sales force to   
recruit potential members who are currently in the traditional 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 state-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.                                                               

Expand into new markets for our services through acquisitions and     
development of new operations. Since 1996, we have developed markets in Texas,  
New Jersey and Illinois and acquired businesses in New Jersey, Maryland and the 
District of Columbia. We intend to 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. Furthermore, our information technology systems and        
processes are designed to be scalable and replicable, which will enable us to   
access the critical information needed to effectively manage a new market. In   
February 2001, we provided to the New York State Department of Health a letter  
of intent to apply for establishment of a plan in New York. We intend to submit 
this application in November 2001. We expect that it will take between 12 and 18
months to obtain the necessary approvals to begin operating a New York plan.    

Capitalize on our experience working 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. We are, and intend to continue to be,
an active and leading participant in the formulation and development of new     
policies and programs for state-sponsored healthcare benefits. This also enables
us to competitively bid to expand our service areas and to implement new        
products. We collaborated with the State of Texas to obtain supplemental        
payments for those women who enroll during their third trimester of pregnancy   
and remain members through childbirth.                                          

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 primary care physician, 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                                                                               

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number of programs and procedures to address high frequency, chronic or         
high-cost conditions, such as pregnancy, respiratory conditions, diabetes 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:                                                                        

- primary and specialty physician care,                                         

- inpatient and outpatient hospital care,                                       

- emergency and urgent care,                                                    

- prenatal care,                                                                

- laboratory and x-ray services,                                                

- home health and durable medical equipment,                                    

- behavioral health services and substance abuse,                               

- long-term and nursing home care,                                              

- 24-hour on-call nurses,                                                       

- vision care and exam allowances,                                              

- dental care,                                                                  

- prescriptions and limited over the counter drugs,                             

- assistance with obtaining transportation for office or health education       
visits,                                                                     

- memberships in the Boys' and Girls' Clubs, and                                

- welcome calls and health status calls to coordinate care.                     

Our products, which we may offer under different names in different   
markets, focus on specific populations within the Medicaid, Family Care and CHIP
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. Historically, most of our members used   
the AMERICAID product. We currently offer our AMERICAID product in all markets  
we serve.                                                                       

AMERIKIDS is our managed healthcare product for uninsured children not
eligible for Medicaid. This product is designed for children in the recently    
developed CHIP initiative. As states fully implement their CHIP program, we     
expect use of this product to increase. We began offering AMERIKIDS in Maryland 
and Washington, D.C. when we acquired Prudential's contract rights and other    
related assets in those areas in 1999. We also recently began offering AMERIKIDS
in New Jersey and Texas.                                                        

AMERIPLUS is our managed healthcare product for Supplemental Security 
Income, or 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 and Houston. We expect our AMERIPLUS membership to   
grow as more states include SSI benefits in mandatory managed care programs.    

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 AMERIFAM is our newly developed Family Care managed health care product
designed for uninsured segments of the population other than CHIP eligibles.    
AMERIFAM's current focus is the families of our CHIP and Medicaid children. We  
offer this product in the District of Columbia and New Jersey where the program 
covers parents of CHIP and Medicaid children.                                   

  As of September 30, 2001, of our 455,000 members, 90.8% were enrolled in
TANF, CHIP and Family Care programs. The remaining 9.2% were enrolled in SSI    
programs. Of these SSI enrollees, 11.9% 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        
high-risk pregnancy, respiratory conditions, congestive heart failure, sickle   
cell disease and HIV. These programs focus on preventing acute occurrences      
associated with chronic conditions by identifying at risk members, monitoring   
their conditions and pro-actively managing their care. We also employ tools such
as 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 these programs in members' homes,       
churches and community centers. The programs we have developed are specifically 
designed to increase awareness of various diseases, conditions and methods of   
prevention in a manner that supports the providers, while meeting the unique    
needs of our members. For example, we conduct health promotion events in        
physicians' offices that target respiratory conditions, immunization and other  
health issues. Direct provider marketing is supported by traditional marketing  
venues such as direct mail, telemarketing, and 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 who actively     
support and educate prospective and existing members and community              
organizations. Through programs such as Safe Kids and our sponsorship of the    
National Theatre for Children's production of 2Smart 2Smoke, we promote a       
healthy lifestyle, safety and good nutrition to our youngest 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 helps enhance community   
support for our products and improve service to members. We regularly           
participate in local events and festivals and organize community health fairs to
promote healthy lifestyle practices. In several markets, we also provide free   
memberships to the local Boys' and Girls' Clubs. 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 and federally qualified health centers to offer our        
products and programs. We have strategic relationships with Cook Children's     
Health Care System in Fort Worth, Texas and Memorial Hermann Healthcare System  
in Houston, Texas granting us the right to actively market their names and logos
in advertising of our Medicaid products. A Cook Children's affiliate, the Cook  
Children's Physician Network, is our exclusive provider of pediatric healthcare 
services to members age 15 and under in this service delivery area.             

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PROVIDER NETWORK                                                                

We provide healthcare services to our members through mutually        
non-exclusive contracts with primary care physicians, specialists, ancillary    
providers and hospitals. Either prior to or concurrently with bidding for new   
contracts, we establish a provider network in each of our service areas. The    
following table shows the total approximate number of primary care physicians,  
specialists and hospitals participating in our network for June 2001:           

                                                        [Enlarge/Download Table]

                                                      SERVICE AREAS                          
                             ----------------------------------------------------------------
                                                       MID-ATLANTIC                          
                             TEXAS    NEW JERSEY    (MARYLAND AND D.C.)    ILLINOIS    TOTAL 
                             -----    ----------    -------------------    --------    ------
                                                                                             
Primary care physicians..... 1,200      1,700              1,500             400        4,800
Specialists................. 4,900      4,200              6,400             400       15,900
Hospitals...................    70         70                 40              20          200
Ancillary providers......... 1,400      1,000              1,200             400        4,000

The primary care physician, or PCP, is a critical component in care   
delivery, and also in the management of costs and the attraction and retention  
of new members. PCPs include family and general practitioners, pediatricians,   
internal medicine physicians and OB/GYNs. These physicians provide preventive   
and routine healthcare services and are responsible for making referrals to     
specialists, hospitals and other providers. Healthcare services provided        
directly by primary care physicians 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
primary care physicians. 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 primary care physicians and specialists   
usually are for one- to two-year periods and automatically renew for successive 
one year terms subject to termination for cause by us if necessary based on     
provider conduct or other appropriate reasons. The contracts generally can be   
cancelled by either party upon 90 to 120 days prior written notice.             

    Our contracts with hospitals are usually for a one- to two-year period and
automatically renew for successive one-year periods. Generally, our hospital    
contracts may be terminated by either party without cause with 90 to 150 days   
prior written notice. Pursuant to the contract, the hospital is paid for all    
pre-authorized medically necessary inpatient and outpatient services and all    
covered emergency and medical screening services provided to members. With the  
exception of emergency services, most inpatient hospital services require       
advance approval from the member's primary care physician and our medical       
department. We require hospitals 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 vendor 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 which pays providers
based upon services performed. For the six months ended June 30, 2001, 82.5% of 
our payments for direct health benefits were on a fee-for-services reimbursement
basis. The primary fee-for-service arrangements are maximum allowable fee       

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schedule, per diem, percent of charges or any combination thereof. The following
is a description of each of these mechanisms:                                   

   Maximum Allowable Fee Schedule. Providers are paid the lesser of billed
   charges or a specified fixed payment for a covered service. The maximum
  allowable fee schedule is developed using, among other indicators, the
state fee-for-service Medicaid program fee schedule, Medicare fee   
     schedules, medical costs trends and market conditions. Adjustments to the
     fee schedules are not mandated in the provider contracts, but adjusted at
our discretion, using the above indicators.                         

     Per Diem and Case Rates. Hospital facility costs are typically reimbursed
    at negotiated per diem or case rates, which vary by level of care within
    the hospital setting. Lower rates are paid for lower intensity services,
   such as a low birth weight newborn baby who stays in the hospital a few
 days longer than the mother, compared to higher rates for a neo-natal
intensive care unit stay for a baby born with severe developmental  
disabilities.                                                       

     Percent of Charges. We contract with providers to pay them an agreed-upon
     percent of their standard charges for covered services. This is typically
done where hospitals are reimbursed under the state fee-for-service 
Medicaid program on a percent of charges basis.                     

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

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

OUR HEALTH PLANS                                                                

We have four health plan subsidiaries offering healthcare services in 
Texas, New Jersey, Maryland, the District of Columbia and Illinois. We have     
never been denied a contract renewal from the jurisdictions in which we do      
business and 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:                                                      

                                                                [Download Table]

MARKET                             PRODUCT               TERM END DATE   
------                             -------             ------------------
                                                                         
Texas                    TANF, SSI                     August 31, 2002   
                         CHIP                          April 30, 2003    
New Jersey               TANF, SSI, CHIP, Family Care  June 30, 2002     
Maryland(a)              TANF, SSI, CHIP               ------            
District of Columbia(b)  TANF, CHIP, Family Care       December 31, 2001 
Illinois                 TANF                          March 31, 2002    

------------                                                                    
(a) Our Maryland contract does not have a set term. It can be terminated by     
either party upon 60 days notice.                                       
(b) The expiration date was extended in connection with the current re-bid      
process and may be extended again.                                      

TEXAS                                                                       

  Our Texas health plan, AMERIGROUP Texas, Inc., is licensed as an HMO and
became operational in September 1996. Our current service areas include the     
cities of Fort Worth, Dallas and Houston and the surrounding counties. For      
September 2001, we had approximately 206,000 members in Texas, consisting of    

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approximately 47,000 members in Fort Worth, approximately 100,000 members in    
Houston and approximately 59,000 members in Dallas. Effective August 1, 2001, we
acquired the Medicaid line of business of Humana Health Plan of Texas in the    
Houston area. We have the largest Medicaid membership in each of our Fort Worth,
Dallas and Houston markets. We offer AMERICAID in each of our Texas markets and 
AMERIPLUS in Houston. In May 2000, we began offering AMERIKIDS in Dallas and    
Houston. Our contracts in Dallas, Fort Worth and Houston expire on August 31,   
2002.                                                                           

NEW JERSEY                                                                  

    Our New Jersey health plan, AMERIGROUP New Jersey, Inc., is licensed as an
HMO and became operational in February 1996. Our current service areas include  
18 of the 21 counties in New Jersey. For September 2001, we had approximately   
80,000 members in New Jersey. We have the third largest Medicaid membership in  
New Jersey. We offer AMERICAID, AMERIPLUS, AMERIKIDS and AMERIFAM in New Jersey.
Our contract with New Jersey expires on June 30, 2002.                          

MARYLAND                                                                    

AMERIGROUP Maryland, Inc. is authorized to operate as a managed care  
organization in Maryland and became operational in June 1999. Our current       
service areas include Baltimore City and surrounding counties as a result of our
acquisition of Prudential Health Care Medicaid contracts and related assets,    
effective June 1, 1999. For September 2001, we had approximately 118,000 members
in Maryland. Effective May 1, 2001, the state of Maryland transitioned to us    
approximately 17,000 additional members from another Medicaid MCO in            
receivership. We have the largest Medicaid membership in our Maryland markets.  
We offer AMERICAID, AMERIPLUS and AMERIKIDS in Maryland. Our contract in        
Maryland does not have a set term. It can be terminated by either party upon 60 
days prior notice.                                                              

DISTRICT OF COLUMBIA                                                        

 AMERIGROUP Maryland, Inc. is also licensed as an HMO in the District of
Columbia and became operational there in August 1999 as a result of our         
acquisition of Prudential's Medicaid line of business. For September 2001, we   
had approximately 13,000 members in the District of Columbia. We have the third 
largest Medicaid membership in the District of Columbia. We offer AMERICAID,    
AMERIKIDS and AMERIFAM in the District of Columbia. In the fall of 2000, the    
District issued a Request For Proposals for a new contract. We submitted our bid
on December 27, 2000. The District is currently reviewing the contract bid      
submissions and during this process has extended our contract to December 31,   
2001.                                                                           

ILLINOIS                                                                    

 Our Illinois health plan, AMERIGROUP Illinois, Inc. (formerly AMERICAID
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 Illinois, enrollment in a Medicaid managed care plan is voluntary. For 
September 2001, we had approximately 38,000 members in Illinois. We have the    
largest Medicaid health plan membership in Cook County. We offer AMERICAID in   
the Chicago area. Our contract in Illinois expires on April 1, 2002 but will    
automatically be extended for an additional year unless terminated on 90 days   
written notice prior to the end of the term.                                    

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 provided by our health plans meet the       
professional standards of care established by the industry and the medical      
community. These procedures include:                                            

- Analysis of healthcare utilization data.  To avoid duplication of   
       services or medications, in conjunction with the primary care physicians,
       healthcare utilization data is analyzed and, through comparative provider
      data and periodic meetings with physicians, we identify areas in which a
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  physician's utilization rate differs significantly from the rates of
       other physicians. On the basis of this analysis, we suggest opportunities
 for improvement and following up with the primary care physician to
monitor utilization.                                              

- Medical care satisfaction studies.  We evaluate the quality and     
      appropriateness of care provided to our health plan members by reviewing
healthcare utilization data and responses to member and physician 
questionnaires and grievances.                                    

     - Clinical care oversight.  Each of our health plans has a medical advisory
 committee comprised of physician representatives and chaired by the
     plan's medical director. This committee reviews credentialing, approves
    clinical protocols and practice guidelines and evaluates new physician
   group candidates. Based on regular reviews, the medical directors who
   head these committees develop recommendations for improvements in the
delivery of medical care.                                         

   - Quality improvement plan.  A quality improvement plan is implemented in
each of our health plans and is governed by a quality management  
committee. The quality management committee is comprised of senior
    management at our health plans, who review and evaluate the quality of
    our health services and are responsible for the development of quality
   improvement plans spanning both clinical quality and customer service
       quality. These plans are developed from provider and membership feedback,
     satisfaction surveys and results of action plans. Our corporate quality
   improvement council oversees and meets regularly with our health plan
      quality management committees to help ensure that we have a coordinated,
   quality-focused approach relating to our members, providers and state
governments.                                                      

MANAGEMENT INFORMATION SYSTEMS                                                  

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

    In March 2000, we experienced data corruption in our data warehouse, which
we use to assist us in estimating monthly medical expense accruals, analyzing   
costs and generating state reports. The data corruption caused us to rely on our
alternative methodology to estimate our IBNR. However, the data corruption did  
not adversely impact our ability to pay claims or otherwise provide services to 
our members or providers. We did not experience any material misstatements in   
our financial statements due to the data corruption. We engaged consultants to  
examine the problem and assist us in establishing processes and controls        
intended to more rapidly detect similar problems in the future and improve      
operations relating to these systems. We believe that we have been able to      
reconstruct the data warehouse. We have implemented most of the processes and   
controls recommended.                                                           

COMPETITION                                                                     

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

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

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- Commercial HMOs -- National and regional commercial managed care    
  organizations that have Medicaid and Medicare members in addition to
members in private commercial plans.                              

- Medicaid HMOs -- Managed care organizations that focus solely on    
providing healthcare services to Medicaid recipients.             

    We will continue to face varying levels of competition as we expand in our
existing service areas or enter new markets. In those of our markets in which   
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 have two competitors in Fort Worth, seven competitors in Houston and two
competitors in Dallas. In each of our Fort Worth, Dallas and Houston markets, we
have the largest Medicaid membership. We have four competitors and the third    
largest Medicaid membership in New Jersey. We have five competitors and the     
largest Medicaid membership in Maryland. We have four competitors and the third 
largest Medicaid membership in the District of Columbia. We have four           
competitors and the largest Medicaid health plan membership in Cook County,     
Illinois.                                                                       

  We compete with other managed care organizations for state contracts, as
well as to attract new members and 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 win a bid for or 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 quality 
of care and 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 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 also may occur     
periodically.                                                                   

HMOS AND MANAGED CARE ORGANIZATIONS                                   

  Our four health plan subsidiaries are authorized to operate as an HMO in
each of Texas, New Jersey, the District of Columbia and Illinois, and as a      
managed care organization, or 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 requirements for loans or the                                    
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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                                                              

Medicaid was established under the U.S. Social Security Act. It is    
state-operated and implemented. Each state:                                     

- establishes its own eligibility standards,                          

- determines the type, amount, duration and scope of services,        

- sets the rate of payment for services, and                          

- administers its own program.                                        

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

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

- mandating Medicaid enrollment into managed care,                    

- the utilization of a central broker for enrollment into plans,      

- the use of cost savings to provide additional services, and         

- limiting the number of providers for additional services.           

    Waivers are approved for two-year periods and can be renewed on an ongoing
basis if the state applies. A 1915(b) waiver cannot negatively impact           
beneficiary access or quality of care and must be cost-effective. Managed care  
initiatives may be state-wide and required for all classes of Medicaid eligible 
recipients, or can 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 more broad than typically  
permitted under the Social Security Act. For example, Maryland's 1115 waiver    
allows it to include more individuals in its managed care program than typically
allowed under Medicaid.                                                         

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

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

- eligibility, enrollment and disenrollment processes,                

- covered services,                                                   

- eligible providers,                                                 

- subcontractors,                                                     

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- record-keeping and record retention,                                

- periodic financial and informational reporting,                     

- quality assurance,                                                  

- marketing,                                                          

- financial standards,                                                

- timeliness of claims' payment,                                      

- health education and wellness and prevention programs,              

- safeguarding of member information,                                 

- fraud and abuse detection and reporting,                            

- grievance procedures, and                                           

- organization and administrative systems.                            

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

FEDERAL REGULATION                                                              

HIPAA                                                                 

In 1996, Congress enacted the Health Insurance Portability and        
Accountability Act of 1996, or HIPAA. The Act is designed to improve the        
portability and continuity of health insurance coverage and simplify the        
administration of health insurance. One of the main requirements of HIPAA is the
implementation of security standards for the procedures and privacy of          
individually identifiable health information.                                   

     In August 2000, the Department of Health and Human Services, or HHS, issued
new standards for submitting electronic claims and other administrative         
healthcare transactions. The new standards were designed to streamline the      
processing of claims, reduce the volume of paperwork and provide better service.
The administrative and financial healthcare transactions covered include:       

- health claims and equivalent encounter information,                 

- enrollment and disenrollment in a health plan,                      

- eligibility for a health plan,                                      

- healthcare payment and remittance advice,                           

- health plan premium payments,                                       

- healthcare claim status, and                                        

- referral certification and authorization.                           

  In general, healthcare organizations will be required to comply with the
new standards by October 2002. The regulation's requirements apply only when a  
transaction is transmitted using "electronic media." Because "electronic media" 
is defined broadly to include "transmissions that are physically moved from one 
location to another using magnetic tape, disk or compact disk media," many      
communications will be considered electronically transmitted. In addition,      
health plans will be required to have the capacity to accept                    

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and send all standard transactions in a standardized electronic format. The     
regulation sets forth other rules that apply specifically to health plans as    
follows:                                                                        

  - a plan may not delay processing of a standard transaction (that is, it
       must complete transactions using the new standards at least as quickly as
it had prior to implementation of the new standards),             

- there should be "no degradation in the transmission of, receipt of, 
       processing of, and response to" a standard transaction as compared to the
handling of a non-standard transaction,                           

    - if a plan uses a healthcare clearinghouse to process a standard request,
     the other party to the transaction may not be charged more or otherwise
disadvantaged as a result of using the clearinghouse,             

- a plan may not reject a standard transaction on the grounds that it 
contains data that is not needed or used by the plan,             

- a plan may not adversely affect (or attempt to adversely affect) the
     other party to a transaction for requesting a standard transaction, and

   - if a plan coordinates benefits with another plan, then upon receiving a
   standard transaction, it must store the coordination of benefits data
required to forward the transaction to the other plan.            

  One of our early concerns regarding how this regulation directly affects
the manner in which we conduct business is the inconsistency between the        
regulation's requirements and the widespread use of non-standard, non-national  
codes (generally referred to as "local codes") in healthcare transactions. The  
use of local codes is particularly prevalent in Medicaid transactions. We cannot
be sure that this will be resolved before the regulation's implementation date. 
In order to prepare for our compliance with the regulatory requirements we have 
prepared a "gap analysis" that consists of:                                     

- an inventory of existing applications that either produce or process
transactions that are within the scope of the regulation,         

     - identification of the data elements currently used by these applications,

    - a comparison of these legacy data elements to the standard data elements
     for the same transaction and an analysis of the differences between the
two, and                                                          

 - a determination of the impact of the gaps and differences identified.

As a result of this study, we have developed a remediation plan to eliminate the
gaps and differences, which we are currently implementing.                      

On December 28, 2000, HHS published a regulation setting forth new    
standards for protecting the privacy of personal health records. The regulation 
became effective on April 14, 2001 and compliance will be required by April     
2003. The new regulation is designed to protect medical records and other       
personal health information kept and used by health care providers, hospitals,  
health plans and health insurers, and health care clearinghouses. The new       
standards:                                                                      

- limit the routine and non-routine non-consensual use and release of 
private health information,                                       

    - give patients new rights to access their medical records and to know who
else has accessed them,                                           

     - limit most disclosure of health information to the minimum needed for the
intended purpose,                                                 

- establish procedures to ensure the protection of private health     
information,                                                      

- establish new criminal and civil sanctions for improper use or      
disclosure, and                                                   

- establish new requirements for access to records by researchers and 
others.                                                           

  The preemption provisions of the regulation provide that the federal law
will preempt a contrary state law. However, a state (or any person) may submit a
request to the Secretary of HHS that a provision of state                       

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law be excepted from the preemption rules. The Secretary may grant an exception 
if one or more of a number of conditions are met, including:                    

- the state law is necessary to prevent fraud and abuse related to the
provision of and payment for health care,                         

   - the state law will ensure appropriate state regulation of insurance and
health plans,                                                     

    - the state law is necessary to state reporting on health care delivery or
costs, or                                                         

- the state law related to the privacy of health information is more  
stringent than the federal law.                                   

The fact that either state or federal rules may supersede the other   
depending on the nature of the particular requirement will require              
interpretations for which there is likely to be little precedent. We are in the 
process of assessing the impact that this new regulation will have on us, but   
given the complexity of the regulation, and the likelihood that it will be      
subject to changing, and perhaps conflicting, interpretation, assessing our     
ability to comply with the requirements by March 2003 will be difficult.        
Further, we have not yet determined what our compliance costs will be and can   
have no assurance that we will be able to recover these costs from the states.  

NEW MEDICAID MANAGED CARE REGULATIONS                                 

  On January 19, 2001, HHS issued new Medicaid managed care regulations to
implement certain provisions of the Balanced Budget Act of 1997, or BBA. These  
provisions would 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. CMS delayed the rule's effective date three times. The most      
recent of these delays set the effective date of the final rule to August 16,   
2002.                                                                           

     On August 20, 2001, however, CMS proposed a new Medicaid managed care rule.
The proposed rule sets forth regulations that would replace those set forth in  
the January 19, 2001 final rule. Because both rules implement the statutory BBA 
provisions, the proposed rule is similar in many respects to the final rule.    

The proposed rule would implement BBA provisions intended to (1) 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; (2) establish protections for members in areas    
such as quality assurance, grievance rights and coverage of emergency services; 
and (3) 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 would also establish        
requirements intended to ensure that state Medicaid managed care capitation     
rates are actuarially sound. According to HHS, this requirement would eliminate 
the generally outdated regulatory ceiling on what states may pay managed care   
plans, a particularly important provision as more state Medicaid programs       
include people with chronic illnesses and disabilities in managed care.         

   CMS will accept comments on the proposed rule until October 19, 2001, and
the Secretary of HHS has indicated an intent to finalize the regulations by     
early 2002. Although some of the states in which we operate have already        
implemented requirements similar to those provided for in the proposed rule,    
because the rule has not been finalized, we cannot predict what requirements it 
will ultimately entail, nor when such requirements will become effective.       
Changes to the regulations affecting our business, including these proposed     
regulations, could increase our healthcare costs and administrative expenses,   
reduce our reimbursement rates, and otherwise adversely affect our business,    
results of operations, and financial condition.                                 

PATIENTS' RIGHTS LEGISLATION                                          

   The United States Senate and House of Representatives passed two versions
of patients' rights legislation in May and August 2001, respectively. Both      
versions include provisions that specifically apply protections to participants 
in federal healthcare programs, including Medicaid beneficiaries. Either version
of this legislation                                                             
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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. According to published reports, Congress may  
convene a conference committee shortly to attempt to resolve differences between
the Senate and House bills, including such matters as the amount of allowable   
damages, whether cases would be governed by federal or state law, and whether   
such actions could be brought in federal or state courts. We cannot predict     
whether patients' rights legislation will be enacted into law or, if enacted,   
what final form such legislation might take.                                    

OTHER FRAUD AND ABUSE LAWS                                            

   Investigating and prosecuting 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.                                      

PROPERTIES                                                                      

   We do not own any real property. We lease office space in Virginia Beach,
Virginia, where our headquarters are located, as well as 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.                                                                       

EMPLOYEES                                                                       

  As of June 30, 2001, we had approximately 1,200 employees. Our employees
are not represented by a union. We believe our relationships with our employees 
are good.                                                                       

LEGAL PROCEEDINGS                                                               

In the normal course of our business, we may be a party to legal      
proceedings. However, we are not currently a party to any material legal        
proceedings nor, to our knowledge, is any material legal proceeding threatened  
against us.                                                                     

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MANAGEMENT

 Our executive officers, key employees and directors, and their ages and
positions as of November 15, 2001, are as follows:                              

                                                        [Enlarge/Download Table]

NAME                                       AGE                      POSITION                     
----                                       ---                      --------                     
                                                                                                 
Jeffrey L. McWaters....................... 45   President, Chief Executive Officer and Chairman  
                                                of the Board of Directors                        
Scott M. Tabakin.......................... 43   Senior Vice President and Chief Financial Officer
Lorenzo Childress, Jr., M.D. ............. 55   Senior Vice President and Chief Medical Officer  
Theodore M. Wille, Jr. ................... 53   Senior Vice President and Chief Operating Officer
Sherri E. Lee............................. 50   Senior Vice President and Treasurer              
Stanley F. Baldwin........................ 53   Senior Vice President, General Counsel and       
                                                Secretary                                        
James E. Hargroves........................ 58   Senior Vice President, Corporate Development     
Carolyn D. McPherson...................... 53   Senior Vice President, Planning and Business     
                                                Development                                      
Herman Wright............................. 47   Senior Vice President and Chief Marketing Officer
Catherine S. Callahan..................... 43   Senior Vice President, Administrative Services   
Kathleen K. Toth.......................... 40   Senior Vice President and Chief Accounting       
                                                Officer                                          
Scott S. Pickens.......................... 47   Senior Vice President and Chief Information      
                                                Officer                                          
Nancy L. Grden............................ 50   Senior Vice President, Planning and Development  
John E. Littel............................ 37   Vice President for Government Relations          
C. Sage Givens............................ 45   Director                                         
Charles W. Newhall, III................... 56   Director                                         
William J. McBride........................ 56   Director                                         
Carlos A. Ferrer.......................... 47   Director                                         

 JEFFREY L. MCWATERS has been our President, Chief Executive Officer and
Chairman of the Board of Directors 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 has served 
as a director of America Service Group Inc. since 1999. Mr. McWaters is a member
of the Board of Visitors of the College of William and Mary and a director of   
the American Association of Health Plans.                                       

    SCOTT M. TABAKIN joined us as our Chief Financial Officer on May 15, 2001.
Prior to joining us, Mr. Tabakin was Executive Vice President and Chief         
Financial Officer of Beverly Enterprises, Inc. from 1996 to 2001. Mr. Tabakin   
served in various other senior officer positions at Beverly Enterprises from    
1992 to 1996. Mr. Tabakin is a certified public accountant.                     

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

THEODORE M. WILLE, JR. has served as our Chief Operating Officer since
1996. Mr. Wille served as Chief Operating Officer for the managed care division 
of Sentara Health System, a private managed care facility in Virginia, from 1991
until 1994 and President of Optima Health Plan from 1988 to 1996.               

SHERRI E. LEE joined us in 1998 as our Chief Financial Officer and    
Treasurer. Effective May 15, 2001, Ms. Lee resigned her position as Chief       
Financial Officer, but continues to serve as Treasurer. Prior to joining us, Ms.
Lee was an adjunct instructor with Front Range Community College in Colorado    
from 1995 to 1998. Ms. Lee served as Executive Vice President - Finance of      
Pharmacy Corporation of America from 1991 to 1995. Prior to that, Ms. Lee was   
Senior Vice President and Controller for Beverly Enterprises, Inc. Ms. Lee is a 
certified public accountant.                                                    

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  STANLEY F. BALDWIN has served as our General Counsel and Secretary since
1997. From 1994 to 1997, Mr. Baldwin was a Managing Director for Covington Group
L.C., a private company that provided legal, management and other consulting    
services to indemnity insurance, managed care and healthcare provider clients.  
Prior to that, Mr. Baldwin held senior officer and General Counsel positions    
with EPIC Healthcare Group, Inc., EQUICOR-Equitable HCA Corporation and CIGNA   
Healthplans, Inc. Mr. Baldwin is a member of the Bar of Tennessee and the Bar of
Texas.                                                                          

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

CAROLYN D. MCPHERSON has served as our head of Planning and Business  
Development since 1996. Prior to joining us, from 1994 to 1996, Ms. McPherson   
was the Assistant Vice President and HMO Product Manager for Aetna Health Plans 
in Connecticut, a publicly traded company with a national health plan membership
of over 1.3 million. Ms. McPherson has resigned effective as of November 9,     
2001.                                                                           

    HERMAN WRIGHT is our Chief Marketing Officer. Prior to joining us in 1998,
Mr. Wright served as the Vice President, Sales and Marketing for United         
Healthcare, Central Region, from 1995 to 1998.                                  

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

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

   SCOTT S. PICKENS is our Chief Information Officer. Prior to joining us in
June 2000, he served as Corporate Chief Information Officer of Health Answers,  
Inc. from April 1999 to June 2000, and as Chief Operating Officer for Consortium
Health Plans from January 1995 to April 1999.                                   

     NANCY L. GRDEN joined us as our head of Planning and Development in October
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 as our Vice President for Government Relations on
August 27, 2001. 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 initiative. Mr. Littel is a member of the Bar of Pennsylvania.   

    C. SAGE GIVENS has been one of our directors since our formation. She is a
founder and Managing General Partner of Acacia Venture Partners, a private      
venture capital fund. From 1983 to 1995, Ms. Givens was a General Partner of    
First Century Partners, also a private venture capital fund. Ms. Givens managed 
this fund's healthcare investments. Ms. Givens also serves on the board of      
directors of HEALTHSOUTH Corporation, and several privately held healthcare     
companies.                                                                      

    CHARLES W. NEWHALL, III has been one of our directors since our formation.
Mr. Newhall is a General Partner and founder of New Enterprise Associates       
Limited Partnerships, Baltimore, Maryland, where he has been engaged in the     
venture capital business since 1978. Mr. Newhall is also a director of          
CaremarkRx, Inc. and HEALTHSOUTH Corporation.                                   

  WILLIAM J. MCBRIDE has been one of our directors since 1995. Mr. McBride
has been retired since 1995. Prior to that, Mr. McBride was President, Chief    
Operating Officer and a director of Value Health, Inc. and                      

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President and Chief Executive Officer of CIGNA Healthplans, Inc. Mr. McBride    
also serves on the board of directors of a number of privately held companies.  

    CARLOS A. FERRER has been one of our directors since 1996. Mr. Ferrer is a
General Partner of Ferrer Freeman Thompson & Co., LLC, a private equity firm    
founded in 1995 that manages funds dedicated to investing in the healthcare     
industry.                                                                       

  KAY COLES JAMES resigned from our board of directors on July 26, 2001 in
order to accept the position of Director of the Office of Personnel Management  
for the Federal Government, reporting directly to President George W. Bush. Ms. 
James had been one of our directors since 1999. Our board of directors intends  
to fill the vacancy created by Ms. James' resignation after identifying a       
suitable candidate.                                                             

BOARD COMMITTEES                                                                

  We have established an audit committee and a compensation committee. The
audit committee reviews our internal accounting procedures and reports to the   
board of directors with respect to other auditing and accounting matters,       
including the selection of our independent auditors, the scope of annual audits,
fees to be paid to our independent auditors and the performance of our          
independent auditors. The audit committee consists of Carlos A. Ferrer, Charles 
W. Newhall, III and William J. McBride (Chairperson). The compensation committee
reviews and recommends to the board of directors the salaries, benefits and     
stock option grants for all employees, consultants, directors and other         
individuals compensated by us. The compensation committee also administers our  
stock option and other employee benefit plans. The compensation committee       
consists of C. Sage Givens (Chairperson), Charles W. Newhall, III and William J.
McBride.                                                                        

CLASSES OF DIRECTORS                                                            

     We have approved a provision in our certificate of incorporation which will
divide our board of directors into three classes, denominated as Class I, Class 
II and Class III. Members of each class will hold office for staggered          
three-year terms. At each of our annual meetings of stockholders following the  
initial public offering, the successors to the directors whose terms expire at  
that meeting will be elected to serve until the third annual meeting after their
election or until their successor has been elected and qualified. Ms. Givens and
Mr. Newhall will serve as Class I directors, whose terms expire at the first    
annual meeting of stockholders held following the initial public offering.      
Messrs. Ferrer and McBride will serve as Class II directors whose terms expire  
at the second annual meeting of stockholders held following the initial public  
offering. Mr. McWaters will serve as a Class III director whose term expires at 
the third annual meeting of stockholders held following the initial public      
offering. With respect to each class, directors' terms will be subject to the   
election and qualification of their successors, or their earlier death,         
resignation or removal. These provisions, when taken in conjunction with other  
provisions of our amended and restated certificate of incorporation authorizing 
the board of directors to fill vacant directorships, may delay a stockholder    
from removing incumbent directors and simultaneously gaining control of the     
board of directors by filling the vacancies with its own nominees.              

AGREEMENTS WITH EMPLOYEES                                                       

Jeffrey L. McWaters.  We employ Mr. McWaters as our President, Chief  
Executive Officer and Chairman pursuant to an amended and restated employment   
agreement dated October 2, 2000. The agreement has an initial term of three     
years, commencing on October 28, 1999, and continues from year to year          
thereafter, unless earlier terminated as provided in the agreement. Pursuant to 
the agreement, as long as Mr. McWaters is employed with us, our board of        
directors agrees to nominate Mr. McWaters as a director and chairman of the     
board. The agreement relates primarily to termination provisions and provides   
the following:                                                                  

  - Mr. McWaters may terminate his employment on 30 days written notice to
      us, and if termination is at his option, he is not entitled to severance
benefits.                                                         

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   - We may terminate Mr. McWaters for cause upon 30 days written notice, in
   which event Mr. McWaters would not be entitled to severance benefits.

    - We may terminate Mr. McWaters without cause upon 30 days written notice,
in which case Mr. McWaters would be entitled to (1) 24 months' of 
      severance payments based on his then current base salary, (2) a lump sum
    payment equal to two times the average annual bonus paid to him in the
immediately preceding three years and (3) medical and other health
insurance benefits for 24 months.                                 

   - Upon a change of control, if Mr. McWaters' employment is not continued,
       he would be entitled to be paid an amount equal to (1) two times his then
    current gross annual base salary plus (2) two times the average annual
    bonus paid to him in the immediately preceding three years, reduced as
     necessary to avoid characterization as a "parachute payment" within the
meaning of the Internal Revenue Code of 1986.                     

Change of control for these purposes includes (1) the acquisition by a
person or group of 20% of the voting power of our outstanding securities, (2) a 
change in the majority of our directors, (3) stockholder approval of a merger or
other business combination where our outstanding stock immediately prior to such
transaction does not continue to represent more than 50% of the surviving       
entity, or (4) any other event that our board determines to affect the control  
of our company.                                                                 

The agreement further provides for:                                   

- a base annual salary of $425,000, plus a discretionary bonus,       

- a non-compete clause that provides that, for 24 months following    
   termination, Mr. McWaters may not (1) engage in any business activity
related to Medicaid managed health care in the markets in which we
     operate or (2) solicit, interfere with, influence or endeavor to entice
  any employee, customer or any independent contractor of ours, or any
    organization that is considered a prospect of ours by virtue of having
established contact for the purpose of doing business, and        

    - indemnification of Mr. McWaters in his capacity as a director or officer
of the company.                                                   

    Lorenzo Childress, Jr., M.D.  We employ Dr. Childress as our Chief Medical
Officer pursuant to a letter agreement dated March 17, 1995. The letter         
agreement established Dr. Childress' initial salary, option bonus opportunity,  
initial grant of options and reimbursement of relocation expenses. In addition, 
we agreed to provide to Dr. Childress three months base salary as severance     
payment in the event we were to terminate his employment without cause.         

COMPENSATION OF DIRECTORS                                                       

We pay each non-employee director an annual retainer of $10,000 and a 
$2,500 fee for each regularly scheduled Board meeting attended in person. We pay
the Chairman of the Audit Committee an additional annual retainer of $4,000.    

    In June 2000, we granted fully-vested options to purchase 12,500 shares of
common stock at an exercise price of $15.00 per share under our 1994 Stock Plan 
to each of our four non-employee directors.                                     

  In February 2001, we granted to William J. McBride an option to purchase
12,500 shares of common stock, which vest over two years, at an exercise price  
of $15.00 per share under our 2000 Equity Incentive Plan.                       

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION                     

    No member of our compensation committee serves as a member of the board of
directors or compensation committee of any entity that has one or more executive
officers serving as a member of our board of directors or compensation          
committee.                                                                      

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EXECUTIVE COMPENSATION                                                          

    The following summary compensation table sets forth information concerning
compensation earned in 2000, 1999 and 1998 by individuals who served as our     
chief executive officer during 2000 and the remaining four most highly          
compensated executive officers as of December 31, 2000.                         

SUMMARY COMPENSATION TABLE

                                                        [Enlarge/Download Table]

                                                      ANNUAL COMPENSATION                     
                                                --------------------------------              
                                                                    OTHER ANNUAL   ALL OTHER  
NAME AND                                        SALARY     BONUS    COMPENSATION  COMPENSATION
PRINCIPAL POSITION                        YEAR    ($)       ($)         ($)           ($)     
------------------                        ----  -------   -------   ------------  ------------
                                                                                              
Jeffrey L. McWaters,....................  2000  411,061   850,000          --           --    
  President and Chief Executive Officer   1999  321,234   200,000       2,937(1)     1,800    
                                          1998  298,431   225,000      56,741(1)        --    

Theodore M. Wille, Jr.,.................  2000  267,886   210,000          --           --    
  Senior Vice President and               1999  245,692   100,000       1,174(1)        --    
  Chief Operating Officer                 1998  231,577    60,000          --           --    

Lorenzo Childress, Jr., M.D.,...........  2000  268,271   210,000          --           --    
  Senior Vice President and               1999  245,773   100,000       1,062(1)        --    
  Chief Medical Officer                   1998  228,619    50,000          --           --    

Sherri E. Lee,..........................  2000  268,271   235,000          --           --    
  Senior Vice President,                  1999  250,000   100,000     166,683(2)        --    
  Chief Financial Officer* and Treasurer  1998  183,274    25,000      16,091(3)        --    

Stanley F. Baldwin,.....................  2000  226,293   185,000          --           --    
  Senior Vice President,                  1999  211,554    65,000       1,084(1)        --    
  General Counsel and Secretary           1998  192,115    34,625     103,682(4)        --    

------------                                                                    
*  Ms. Lee resigned from her position as Chief Financial Officer effective May
15, 2001.                                                               
(1) Compensation for the payment of taxes.                                      
(2) Compensation of $87,711 for relocation and $78,972 for payment of taxes.    
(3) Compensation of $8,657 for relocation and $7,434 for payment of taxes.      
(4) Compensation of $55,781 for relocation and $47,901 for payment of taxes.    

    The following table sets forth information concerning individual grants of
stock options made during 2000 to the executive officers named on the Summary   
Compensation Table.                                                             

OPTION GRANTS IN LAST FISCAL YEAR 

                                                        [Enlarge/Download Table]

                                                   INDIVIDUAL GRANTS                           POTENTIAL REALIZABLE  
                            ----------------------------------------------------------------     VALUE AT ASSUMED    
                                NUMBER OF         PERCENT OF TOTAL                             ANNUAL RATES OF STOCK 
                                SECURITIES       OPTIONS GRANTED TO   EXERCISE                PRICE APPRECIATION FOR 
                            UNDERLYING OPTIONS      EMPLOYEES IN        PRICE     EXPIRATION      OPTION TERM(1)     
NAME                             GRANTED            FISCAL YEAR       ($/SHARE)      DATE       5%($)        10%($)  
----                        ------------------   ------------------   ---------   ----------  ----------   ----------
                                                                                                                     
Jeffrey L. McWaters........      100,000               17.9%            15.00      7/10/10      943,342    2,390,614 
Theodore M. Wille, Jr. ....       30,000                5.4%             8.60       2/9/10      475,003      909,184 
Lorenzo Childress, Jr.,                                                                                              
  M.D. ....................       25,000                4.5%             8.60       2/9/10      395,835      757,653 
Sherri E. Lee..............       25,000                4.5%             8.60       2/9/10      395,835      757,653 
Stanley F. Baldwin.........       10,000                1.8%             8.60       2/9/10      158,334      303,061 

------------                                                                    
(1) Calculated based on the fair market value of $15.00 per share determined by 
   our compensation committee in connection with the granting of 2000 year-end
options.                                                                

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     The following table sets forth information concerning the exercise of stock
options during 2000 by the executive officers named in the Summary Compensation 
Table. Value was calculated using the fair market value of $15.00 per share     
determined by our compensation committee in connection with the granting of 2000
year-end options.                                                               

AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR 
AND FISCAL YEAR-END OPTION VALUES 

                                                        [Enlarge/Download Table]

                                                                NUMBER OF SECURITIES                               
                                                               UNDERLYING UNEXERCISED       VALUE OF UNEXERCISED   
                              NUMBER OF SHARES                       OPTIONS AT           IN-THE-MONEY OPTIONS AT  
                                ACQUIRED ON        VALUE          FISCAL YEAR-END            FISCAL YEAR-END($)    
NAME                              EXERCISE      REALIZED($)  EXERCISABLE/ UNEXERCISABLE  EXERCISABLE/ UNEXERCISABLE
----                          ----------------  -----------  --------------------------  --------------------------
                                                                                                                   
Jeffrey L. McWaters..........          --              --              243,708/106,250            3,509,394/75,000 
Theodore M. Wille, Jr........      35,500         482,800                93,125/63,875           1,179,900/719,300 
Lorenzo Childress, Jr.,                                                                                            
  M.D........................      50,000         740,000                51,623/35,876             651,247/344,743 
Sherri E. Lee................          --              --                77,500/72,500             969,000/851,000 
Stanley F. Baldwin...........      10,250         135,000                10,000/33,250             108,400/390,600 

STOCK PLANS                                                                     

1994 STOCK PLAN                                                                 

     In December 1994, we adopted, and our stockholders approved, our 1994 Stock
Plan.                                                                           

GENERAL.  We have reserved for issuance under the plan a maximum of   
2,249,500 shares of common stock. If an award granted under the plan expires or 
is terminated, the shares of common stock underlying the award will be available
for issuance under our 2000 Equity Incentive Plan.                              

TYPES OF AWARDS.  The following awards may be granted under the plan, 

    - stock options, including incentive stock options and non-qualified stock
options,                                                          

- stock bonuses, and                                                  

- the opportunity to make direct purchases of stock.                  

  ADMINISTRATION.  The plan is administered by the compensation committee,
although it may be administered by either our full board of directors or any    
other committee designated by the board. The committee may, subject to the      
provisions of the plan, determine the persons to whom awards will be granted,   
the type of award to be granted, the number of shares to be made subject to     
awards, the exercise price and other terms and conditions of the awards, and    
interpret the plan and prescribe, amend and rescind rules and regulations       
relating to the plan.                                                           

ELIGIBILITY.  Awards may be granted under the plan to our employees,  
directors and consultants or any of our affiliates, as selected by the          
compensation committee.                                                         

  TERMS AND CONDITIONS OF OPTIONS.  Stock options may be either "incentive
stock options," as that term is defined in Section 422 of the Internal Revenue  
Code, or non-qualified stock options. The exercise price of a stock option      
granted under the plan is determined by the compensation committee at the time  
the option is granted, but the exercise price of an incentive stock option may  
not be less than the market value per share of common stock on the date of      
grant. Stock options are exercisable at the times and upon the conditions that  
the compensation committee may determine, as reflected in the applicable option 
agreement. The exercise period may not extend beyond ten years from the date of 
grant. The compensation committee generally has the authority to accelerate the 
time at which an option is exercisable.                                         

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     The option exercise price must be paid in full at the time of exercise, and
is payable by any one of the following methods or a combination thereof:        

 - in cash or cash equivalents or, at the discretion of the compensation
committee, by                                                     

 - the surrender of previously acquired shares of common stock, provided
such shares have been held for at least six months,               

- the delivery of the optionee's personal recourse note with interest 
payable at the applicable federal rate or greater, or             

- a "broker cashless exercise" procedure.                             

   STOCK BONUSES.  The plan provides that the compensation committee, in its
discretion, may award shares of common stock to plan participants.              

   PURCHASE OPPORTUNITY.  The plan provides that the compensation committee,
in its discretion, may authorize plan participants to purchase shares of common 
stock.                                                                          

    DIRECTOR AWARDS.  The compensation committee, in its discretion, may grant
awards under the plan to directors (both employee and nonemployee directors).   
The terms of the awards granted to directors are to be generally consistent with
the terms of awards granted to other participants under the plan.               

     TERMINATION OF EMPLOYMENT.  Except with respect to incentive stock options,
the plan does not specify the effect of the termination of a participant's      
employment or service on the exercisability of any award under the plan. The    
effect of a termination of employment or service is instead specified in the    
award agreement, as determined by the compensation committee in its discretion. 
With respect to incentive stock options, unless otherwise specified in the award
agreement, if the participant's employment terminates other than because of     
death or disability, all options that are exercisable at the time of termination
may be exercised by the participant for 90 days after the date of termination of
employment, and if the participant's employment terminates as a result of death 
or disability, all options that are exercisable at the time of death or         
disability may be exercised by the participant (or his or her estate,           
beneficiaries, or personal representative, as applicable) for 180 days following
the termination of employment. However, in no case may an award be exercised    
after it expires in accordance with its terms.                                  

  AMENDMENT AND TERMINATION OF PLAN.  The board of directors may modify or
terminate the plan or any portion of the plan at any time, except that          
shareholder approval is required for any amendment that would increase the total
number of shares reserved for issuance under the plan, materially increase the  
plan benefits available to participants, materially modify the plan eligibility 
requirements, extend the plan's expiration date, or otherwise as required to    
comply with applicable law. No awards may be granted under the plan after the   
day prior to the tenth anniversary of its adoption date.                        

Since the amount of benefits to be received by any participant is     
determined by the compensation committee, the amount of future benefits         
allocated to any employee or group of employees in any particular year is not   
determinable.                                                                   

2000 EQUITY INCENTIVE PLAN                                                      

 On July 10, 2000, we adopted, and as of July 17, 2000, our stockholders
approved, a new equity incentive plan, the 2000 Equity Incentive Plan, with the 
following terms. The purpose of the plan is to promote our long-term growth and 
profitability by providing key people with incentives to improve stockholder    
value.                                                                          

GENERAL.  We have reserved for issuance under the plan a maximum of   
2,064,000 shares of common stock. In addition, shares remaining available for   
issuance under the 1994 Stock Plan will be available for issuance under the 2000
Equity Incentive Plan. If an award granted under the plan expires or is         
terminated, the shares of common stock underlying the award will again be       
available under the plan. No individual may be granted awards under the plan in 
any year covering more than 1,000,000 shares.                                   

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TYPES OF AWARDS.  The following awards may be granted under the plan: 

    - stock options, including incentive stock options and non-qualified stock
options,                                                          

- restricted stock,                                                   

- phantom stock,                                                      

- stock bonuses, and                                                  

- other stock-based awards.                                           

  ADMINISTRATION.  The plan will be administered by the board of directors
upon the advice of the compensation committee, although it may be administered  
by any committee designated by the board.                                       

     The administrator may, subject to the provisions of the plan, determine the
persons to whom awards will be granted, the type of award to be granted, the    
number of shares to be made subject to awards, the exercise price and other     
terms and conditions of the awards, and interpret the plan and prescribe, amend 
and rescind rules and regulations relating to the plan. The administrator may   
delegate to any of our senior management the authority to make grants of awards 
to our employees who are not our executive officers or directors.               

ELIGIBILITY.  Awards may be granted under the plan to our employees,  
directors, and consultants, as selected by the administrator.                   

  TERMS AND CONDITIONS OF OPTIONS.  Stock options may be either "incentive
stock options," as that term is defined in Section 422 of the Internal Revenue  
Code, or non-qualified stock options. The exercise price of a stock option      
granted under the plan is determined by the administrator at the time the option
is granted, but the exercise price of an incentive stock option may not be less 
than the market value per share of common stock on the date of grant. Stock     
options are exercisable at the times and upon the conditions that the           
administrator may determine, as reflected in the applicable option agreement.   
Generally, the administrator will determine the exercise period, which may not  
exceed ten years from the date of grant.                                        

     The option exercise price must be paid in full at the time of exercise, and
is payable by any one of the following methods or a combination thereof:        

- in cash or cash equivalents,                                        

 - the surrender of previously acquired shares of common stock that have
       been held by the participant for at least six months prior to the date of
surrender,                                                        

 - authorization for us to withhold a number of shares otherwise payable
pursuant to the exercise of an option, or                         

- through a "broker cashless exercise" procedure approved by us.      

     The administrator may, in its sole discretion, authorize AMERIGROUP to make
or guarantee loans to a participant to assist the participant in exercising     
options.                                                                        

   At the time of grant of an option, the administrator may provide that the
participant may elect to exercise all or any part of the option before it       
becomes vested and exercisable. If the participant elects to exercise all or    
part of a non-vested option, the participant will be issued shares of restricted
stock which will vest in accordance with the vesting schedule set forth in the  
original option agreement.                                                      

 OUTSIDE DIRECTOR OPTIONS.  Non-employee directors who own less than one
percent of the voting power in our company, or outside directors, will be       
eligible for automatic grants of non-qualified options under the plan. Each such
outside director, as of the closing of this offering, will be granted an option 
to purchase such number of shares of common stock as is determined by the       
administrator in its discretion. Following this offering, each outside director 
will be granted upon his or her first election or appointment to the board of   
directors, an option to purchase such number of shares of common stock as is    
determined by the administrator in its discretion. In addition, immediately     
following each annual meeting of stockholders after the initial public offering,
each outside director (other than an outside director who is first elected at   
that                                                                            

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annual meeting) will be granted an option to purchase such number of shares of  
common stock as is determined by the administrator in its discretion. The       
exercise price of each option granted under the outside director plan will equal
the market value of the common stock on the date of grant and will become       
exercisable as is determined by the administrator in its discretion. Each option
granted to an outside director will expire on the tenth anniversary of the date 
of grant of such option. The other terms of the options granted to outside      
directors will be consistent with the terms of non-qualified options granted to 
employees.                                                                      

  RESTRICTED STOCK.  The plan provides for awards of common stock that are
subject to restrictions on transferability and others imposed by the            
administrator. Except as provided for under the award agreement relating to the 
restricted stock, a participant granted restricted stock will have all of the   
rights of a stockholder.                                                        

   PHANTOM STOCK.  The plan provides for awards of phantom stock which, upon
vesting, entitle the participant to receive an amount in cash or common stock   
equal to the fair market value of the number of shares awarded. Vesting of all  
or a portion of a phantom stock award may be subject to various conditions      
established by the administrator.                                               

    STOCK BONUSES; OTHER AWARDS.  The plan provides that the administrator, in
its discretion, may award shares of common stock to employees. In addition, the 
administrator may grant other awards valued in whole or in part, by reference   
to, or otherwise based on, common stock.                                        

   CHANGE IN CONTROL.  The administrator in its discretion may provide that,
in the event of a change in control (whether alone or in combination with other 
events), the vesting and exercisability restrictions on any outstanding award   
that is not yet fully vested and exercisable will lapse in part or in full.     

TERMINATION OF EMPLOYMENT.  Unless otherwise determined by the        
administrator, the termination of a participant's employment or service will    
immediately cancel any unvested portion of awards granted under the plan. At the
time of grant, the administrator in its discretion may provide that, if a       
participant's employment or service terminates other than because of cause,     
death or disability, all options that are exercisable at the time of termination
may be exercised by the participant for no longer than 90 days after the date of
termination (or such other period as it determines). If a participant's         
employment or service terminates for cause, all options held by the participant 
will immediately terminate. The administrator may provide that, if a            
participant's employment or service terminates as a result of death, all options
that are exercisable at the time of death may be exercised by the participant's 
heirs or distributees for a period of six months (or such other period as it    
determines). The administrator may provide that, if a participant's employment  
or service terminates because of disability, all options that are exercisable at
the time of termination may be exercised for a period of six months (or such    
other period as it determines). In no case may an option be exercised in        
accordance with its terms after it expires.                                     

AMENDMENT, TERMINATION OF PLAN.  The board of directors may modify or 
terminate the plan or any portion of the plan at any time, except that an       
amendment that requires stockholder approval in order for the plan to continue  
to comply with any law, regulation or stock exchange requirement will not be    
effective unless approved by the requisite vote of our stockholders. No options 
may be granted under the plan after the day prior to the tenth anniversary of   
its adoption date.                                                              

Since the amount of benefits to be received by any employee plan      
participant or any of our affiliates is determined by the administrator, the    
amount of future benefits allocated to any employee or group of employees in any
particular year is not determinable.                                            

EMPLOYEE STOCK PURCHASE PLAN                                                    

On February 15, 2001, we adopted, and as of February 15, 2001, our    
stockholders approved, an Employee Stock Purchase Plan, effective upon this     
offering, with the following terms. The purpose of the plan is to encourage the 
purchase by our employees of shares of our common stock to better align their   
interests with those of stockholders.                                           

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   GENERAL.  The employee stock purchase plan is intended to comply with the
requirements of Section 423 of the Internal Revenue Code, and to assure the     
participants of the tax advantages provided thereby. The employee stock purchase
plan will be administered by a committee established by the board of directors. 
The committee may make such rules and regulations and establish such procedures 
for the administration of the employee stock purchase plan as it deems          
appropriate.                                                                    

     SHARES AVAILABLE.  The committee has authorized for issuance under the plan
a total of 600,000 shares of common stock, subject to adjustment by the         
committee in the event of a recapitalization, stock split, stock dividend or    
similar corporate transaction.                                                  

ELIGIBILITY.  Subject to certain procedural requirements, all of our  
employees who have at least 90 days of service, work more than 20 hours per week
and customarily work more than 5 months per year will be eligible to participate
in the employee stock purchase plan, except for employees who own five percent  
or more of our common stock and any of our subsidiaries.                        

STOCK PURCHASES.  Each eligible employee will be permitted to purchase
shares of the common stock through regular payroll deductions in an amount equal
to between 2% and 10% of the employee's compensation for each payroll period.   
The fair market value of common stock which may be purchased under this or any  
other plan of ours intended to comply with Section 423 of the Internal Revenue  
Code may not exceed $25,000 per employee during any calendar year.              

 The employee stock purchase plan will provide for offering periods that
will be 6 months long. Offering periods generally will run from January 1 to    
June 30 and from July 1 to December 31. The first offering period will commence 
on the first trading day on or after the initial public offering and end on the 
next December 31 or June 30 that is at least six months after the offering.     

During each offering period, participating employees will be able to  
purchase shares of common stock with payroll deductions at a purchase price     
equal to 85% of the fair market value at either the beginning or end of each    
offering period, whichever price is lower. The first offering period is expected
to coincide with this offering. Therefore, during the first offering period,    
employees will be able to purchase shares of common stock at a purchase price   
equal to 85% of the lower of the initial public offering price and the fair     
market value at the end of the first offering period.                           

    The rights granted to a participant under the employee stock purchase plan
are not transferable otherwise than by will or the laws of descent and          
distribution, and are exercisable, during the participant's lifetime, only by   
the participant.                                                                

  AMENDMENT, TERMINATION OF PLAN.  The plan and all offering periods under
the plan will automatically terminate on the tenth anniversary of this offering.
The board of directors may from time to time amend or terminate the employee    
stock purchase plan; provided that no such amendment or termination may         
adversely affect the rights of any participant without the consent of such      
participant and, to the extent required by Section 423 of the Internal Revenue  
Code or any other law, regulation or stock exchange rule, no such amendment will
be effective without the approval of stockholders entitled to vote thereon.     
Additionally, the committee may make such amendments as it deems necessary to   
comply with applicable laws, rules and regulations.                             

Since the amount of benefits to be received by each participant in the
employee stock purchase plan is determined by his or her elections and the      
extent to which offerings are made available by the committee, the amount of    
future benefits to be allocated to any employee or group of employees under the 
plan in any particular year is not determinable.                                

2000 CASH INCENTIVE PLAN                                                        

 On June 30, 2000, we adopted, and as of July 17, 2000, our stockholders
approved, a Cash Incentive Plan with the following terms. The purpose of the    
plan is to promote our long-term growth and profitability by providing          
management personnel with incentives to improve stockholder value.              

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 The plan will be administered by the compensation committee, which will
have the authority to determine the plan's participants, as well as the terms   
and conditions of incentive awards. The payment of bonuses under the plan will  
be based upon the achievement of certain performance goals set by the           
compensation committee, which may include any, all or none of the following:    

- income before income taxes or net income,                           

- earnings or book value per share,                                   

- sales or revenue,                                                   

- operating expenses,                                                 

- increases in the market price of common stock,                      

- implementation or completion of critical projects or processes,     

- comparison of actual performance during a performance period against
budget for such period,                                           

- growth of revenue,                                                  

- operating profit,                                                   

- return on equity, assets, capital or investments,                   

- reductions in expenses, or                                          

   - to the extent permitted by Section 162(m) of the Internal Revenue Code,
     such offer criteria may be established by stockholders or the committee
before the commencement of the performance period.                

The committee will specify with respect to a performance period (which may run  
from one to three years in the committee's discretion) the performance goals    
applicable to each award, the minimum, target and maximum levels applicable to  
each performance goal, and the amounts payable upon attainment of thresholds    
within such range. Minimum bonuses will be based on achievement of 80% of the   
performance goals and maximum bonuses will be based on achievement of 120% of   
the performance goals. A bonus will be paid only if the participant is employed 
by us on the day the bonus is to be paid. In no event will payment to an        
employee covered under Section 162(m) of the Internal Revenue Code exceed the   
lesser of $1,500,000 multiplied by the number of years in the performance period
or 120% of the employee's base salary during the performance period.            

LIMITATION OF LIABILITY OF DIRECTORS AND INDEMNIFICATION OF DIRECTORS AND       
OFFICERS                                                                        

    As permitted by the Delaware General Corporation Law, or DGCL, our amended
and restated certificate of incorporation provides that our directors shall not 
be liable to us or our stockholders for monetary damages for breach of fiduciary
duty as a director to the fullest extent permitted by the DGCL as it now exists 
or as it may be amended. As of the date of this prospectus, the DGCL permits    
limitations of liability for a director's breach of fiduciary duty other than   
liability (1) for any breach of the director's duty of loyalty to us or our     
stockholders, (2) for acts or omissions not in good faith or which involve      
intentional misconduct or a knowing violation of law, (3) under Section 174 of  
the DGCL, or (4) for any transaction from which the director derived an improper
personal benefit. In addition, our bylaws provide that we shall indemnify all of
our directors, officers, employees and agents for acts performed on our behalf  
in such capacity.                                                               

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RELATED PARTY TRANSACTIONS

INDEMNIFICATION AGREEMENT                                                       

We have entered into an indemnification agreement with each of our    
directors and officers. The indemnification agreement provides that the director
or officer will be indemnified to the fullest extent not prohibited by law for  
claims arising in such person's capacity as a director or officer no later than 
30 days after written demand to us. The agreement further provides that in the  
event of a change of control, we would seek legal advice from a special         
independent counsel selected by the officer or director and approved by us, who 
has not performed services for either party for 5 years, to determine the extent
to which the officer or director would be entitled to an indemnity under        
applicable law. Also, in the event of a change of control or a potential change 
of control we would, at the officer's or director's request, establish a trust  
in an amount equal to all reasonable expenses anticipated in connection with    
investigating, preparing for and defending any claim. We believe that these     
agreements are necessary to attract and retain skilled management with          
experience relevant to our industry.                                            

INVESTOR RIGHTS AGREEMENT                                                       

    Jeffrey L. McWaters and the holders of our convertible preferred stock and
Series E mandatorily redeemable preferred stock are parties to a Second Restated
Investor Rights Agreement, dated July 28, 1998. Pursuant to this Agreement, upon
the expiration of the six months following the closing of this offering, the    
holders of at least 40% of the common stock issued on conversion of our Series  
A, B, and C preferred stock and exercise of warrants issued to our Series E     
mandatorily redeemable preferred stockholders may require us on up to three     
occasions to use our best efforts to file a registration statement covering the 
public sale of part of that common stock having an aggregate offering price of  
more than $5 million. We have the right to delay any registration by up to 90   
days.                                                                           

 These holders also have piggy-back registration rights to include their
shares in any registration statement we file on our own behalf (other than for  
employee benefit plans and business acquisitions or corporate restructurings) or
on behalf of other stockholders.                                                

   In addition, these holders have the right to request us to register their
securities on a short-form S-3 registration statement on up to three occasions. 

Silicon Valley Bank, which owns warrants to purchase 25,000 shares of 
common stock, has piggy-back registration rights until the first anniversary of 
this offering and Prudential Insurance Company of America, which currently owns 
3,710,775 shares of our Series D convertible preferred stock, convertible into  
1,855,387 shares of common stock upon completion of this offering, has          
piggy-back registration rights until the fifth anniversary of this offering.    

EMPLOYEE LOANS                                                                  

   In 1997 we loaned $75,000 to Jeffrey L. McWaters. In 1998, we forgave the
loan, reclassified it as a bonus, and grossed-up his salary by approximately    
$57,000 for taxes related to this income.                                       

PURCHASE OF SHARES FROM FORMER DIRECTOR                                         

   On July 26, 2001, Kay Coles James resigned from our board of directors on
July 26, 2001 in order to accept the position of Director of the Office of      
Personnel Management for the Federal Government. In connection with her         
resignation, Ms. James exercised her options to purchase 12,502 shares for $8.60
per share. Pursuant to her non-qualified stock option agreement, we purchased   
12,502 shares from Ms. James for an aggregate of $187,530, or $15.00 per share. 

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PRINCIPAL AND SELLING STOCKHOLDERS

The following table sets forth information regarding the beneficial   
ownership of our common stock as of September 30, 2001 by:                      

     - each person, entity or group known by us to own beneficially more than 5%
of our outstanding common stock,                                  

- each of our named executive officers and directors, and             

- all of our executive officers and directors as a group.             

  In addition, up to 75,000 shares of the common stock owned by Jeffrey L.
McWaters may be sold as part of the underwriters' over-allotment option. No     
other stockholder is selling common stock as part of the offering.              

Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. These rules generally attribute beneficial  
ownership of securities to persons who possess sole or shared voting power or   
investment power with respect to those securities and include shares of common  
stock issuable upon the exercise of stock options or warrants that are          
immediately exercisable or exercisable within 60 days. Unless otherwise         
indicated, the persons or entities identified in this table have sole voting and
investment power with respect to all shares shown as beneficially owned by them,
subject to applicable community property laws.                                  

Percentage ownership calculations are based on 14,782,012 shares      
outstanding as of September 30, 2001, which includes (1) shares of common stock 
that will be issued on the conversion of outstanding shares of convertible      
preferred stock on completion of this offering and (2) prior to the offering,   
2,000,000 shares of Series E mandatorily redeemable preferred stock, based on   
each share being entitled to common share equivalent voting rights on a 1 to    
0.5625 basis. The Series E mandatorily redeemable preferred stock will be       
redeemed upon completion of the offering. Each holder of the Series E           
mandatorily preferred stock owns warrants to purchase common stock. Each warrant
may be exercised for 0.5625 shares of common stock. However, the holder may only
exercise the warrants if the same number of shares of Series E mandatorily      
redeemable preferred stock are redeemed. Therefore, we have not included the    
shares underlying these warrants in the following table in shares beneficially  
owned prior to the offering. However, we have accelerated the exercise date for 
these warrants to prior to the closing of this offering. Therefore, we have     
assumed these warrants will be exercised and have included them in the percent  
owned after the offering.                                                       

To the extent that any shares are exercised on exercise of options,   
warrants or other rights to acquire shares of our capital stock that are        
presently outstanding or granted in the future, there will be further dilution  
to new public investors. The following table does not reflect the exercise of   
the over-allotment option.                                                      

                                                        [Enlarge/Download Table]

                                                           SHARES BENEFICIALLY                 
                                                                  OWNED                        
                                                            PRIOR TO OFFERING                  
                                                          ---------------------  PERCENT OWNED 
NAME                                                        NUMBER      PERCENT  AFTER OFFERING
----                                                      ----------    -------  --------------
                                                                                               
C. Sage Givens(1)........................................  2,641,884     17.9         13.8     
Carlos A. Ferrer(2)......................................  2,476,410     16.7         12.9     
Charles W. Newhall, III(3)...............................  2,095,888     14.2         10.9     
Prudential Insurance Company of America(4)...............  1,855,387     12.6          9.7     
Sutter Entities(5).......................................  1,357,929      9.2          7.1     
Accel Entities(6)........................................  1,280,066      8.7          6.7     
Nassau Entities(7).......................................  1,095,273      7.4          5.7     
Jeffrey L. McWaters(8)(9)................................    791,208      5.2          4.1     
Theodore M. Wille, Jr.(8)(10)............................    164,375      1.1        *         
Lorenzo Childress, Jr., M.D.(8)(11)......................    119,874      *          *         

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                                                           SHARES BENEFICIALLY                 
                                                                  OWNED                        
                                                            PRIOR TO OFFERING                  
                                                          ---------------------  PERCENT OWNED 
NAME                                                        NUMBER      PERCENT  AFTER OFFERING
----                                                      ----------    -------  --------------
                                                                                               
Sherri E. Lee(8)(12).....................................    107,375      *          *         
Stanley F. Baldwin(8)(13)................................     60,250      *          *         
William J. McBride(14)...................................     56,000      *          *         
All executive officers and directors as a group (18                                            
  persons)...............................................  8,776,893     56.0      43.7        

------------                                                                    
* Represents less than 1% of outstanding shares of common stock.                

(1) Represents securities owned by Acacia Venture Partners, L.P. and          
Southpointe Venture Partners, L.P. Ms. Givens is a general partner of 
   Acacia which is general partner of Southpointe Venture Partners, L.P. and
shares investment and voting power with respect to the securities     
beneficially owned by these funds. Ms. Givens' address is c/o Acacia  
  Venture Partners, 101 California Street, #3160, San Francisco, CA 94111.
   Includes options to purchase 12,500 shares of common stock granted to Ms.
Givens.                                                               

(2) Represents securities owned by FFT Partners I, L.P. and Executive Partners
   I, L.P. Mr. Ferrer is a general partner of Ferrer Freeman Thompson & Co.,
  LLC, and shares investment and voting power in respect to the securities
beneficially owned by these funds. Includes options to purchase 12,500
   shares of common stock granted to Mr. Ferrer. Mr. Ferrer's address is c/o
Ferrer Freeman Thompson & Co., LLC, 10 Glenville Street, Greenwich, CT
06831.                                                                

(3) Represents securities owned by NEA Ventures L.P. and NEA Partners VI,     
 Limited Partnership. Mr. Newhall is a general partner of New Enterprise
    Associates Limited Partnerships, and shares investment and voting power in
respect to the securities beneficially owned by these funds. Includes 
   options to purchase 12,500 shares of common stock granted to Mr. Newhall.
Mr. Newhall's address is c/o New Enterprise Associates, 1119 St. Paul 
Street, Baltimore, MD 21202.                                          

(4) The address for Prudential Insurance Company of America is One Gateway    
Center, 11th Floor, Newark, NJ 07102.                                 

(5) Represents securities owned by Sutter Hill Ventures, a California Limited 
  Partnership, managing directors and a director of the general partner of
   Sutter Hill, retirement trusts of some of such managing directors, family
partnerships associated with such managing directors, Sutter Hill     
  Entrepreneurs Fund (AI), L.P., Sutter Hill Entrepreneurs Fund (QP), L.P.
and other entities associated with Sutter Hill. The general partner of
     Sutter Hill Ventures, Sutter Hill Ventures LLC, is also the general partner
   of the Sutter Hill Entrepreneurs Funds. Each individual managing director
   of the general partner disclaims beneficial interest in the stock held by
    other individuals and by Sutter Hill except to their pecuniary interest in
    the partnership. Messrs. David L. Anderson, G. Leonard Baker, Jr., William
H. Younger, Jr., Tench Coxe and Gregory P. Sands may be deemed to have
  investment and voting power with respect to all or some of these shares.
   The address for the Sutter Entities is c/o Sutter Hill Ventures, 755 Page
Mill Road, Suite A-200, Palo Alto, CA 94163.                          

(6) Represents securities owned by Accel IV L.P., Accel Investors 95 L.P.,    
   Accel Keiretsu L.P., and Ellmore C. Patterson Partners. Messrs. Arthur C.
Patterson, James R. Swartz, James W. Breyer, Eugene D. Hill, Paul H.  
   Klingenstein, Luke B. Evnin, and G. Carter Sednaoui may be deemed to have
  investment and voting power with respect to all or some of these shares.
     However, each individual disclaims beneficial interest in the stock held by
other individuals. The address for the Accel Entities is c/o Accel    
Partners, 428 University Avenue, Palo Alto, CA 94301.                 

(7) Represents securities owned by Nassau Capital and NAS Partners I. The     
voting and investment with respect to these securities is under common
control. Messrs. Randall Hack and John Quigley may be deemed to have  
  investment and voting power with respect to all or some of these shares.
     However, each individual disclaims beneficial interest in the stock held by
other individuals. The address for the Nassau Entities is c/o Nassau  
  Capital Partners LP, 22 Chambers Street, 2nd Floor, Princeton, NJ 08542.

 (8) The address for this person is c/o AMERIGROUP Corporation, 4425 Corporation
Lane, Suite 300, Virginia Beach, VA 23462.                            

(9) Includes options to purchase 291,208 shares of common stock. Mr. McWaters 
 has agreed to sell up to 75,000 shares of common stock in the event the
  underwriters exercise their over-allotment option. If the over-allotment
option is exercised in full, Mr. McWater's percentage ownership will  
decrease to 3.6%.                                                     

(10) Includes options to purchase 128,875 shares of common stock.               

(11) Includes options to purchase 69,874 shares of common stock.                

(12) Includes options only.                                                     

(13) Includes options to purchase 21,000 shares of common stock.                

(14) Includes options only. Mr. McBride's address is 150 Golf House Road,       
Haverford, PA 19041.                                                  

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DESCRIPTION OF CAPITAL STOCK

On the completion of this offering, we will be authorized to issue    
100,000,000 shares of common stock and 10,000,000 shares of preferred stock.    
Shares of each class have a par value of $0.01 per share. The following         
description summarizes information about our capital stock. You can obtain more 
comprehensive information about our capital stock by consulting our amended and 
restated bylaws and certificate of incorporation, as well as the Delaware       
General Corporation Law.                                                        

COMMON STOCK                                                                    

As of September 30, 2001, there were 1,049,125 shares of common stock 
outstanding, which were held of record by approximately 51 stockholders. An     
additional 13,732,887 shares of common stock will be issued to approximately 40 
stockholders at the time this offering closes as the result of mandatory        
conversion of our outstanding convertible preferred stock and exercise of our   
Series E warrants.                                                              

Each share of our common stock entitles the holder to one vote on all 
matters submitted to a vote of stockholders, including the election of          
directors. Subject to any preference rights of holders of preferred stock, the  
holders of common stock are entitled to receive dividends, if any, declared from
time to time by the directors out of legally available funds. In the event of   
our liquidation, dissolution or winding up, the holders of common stock are     
entitled to share ratably in all assets remaining after the payment of          
liabilities, subject to any rights of holders of preferred stock to prior       
distribution.                                                                   

The common stock has no preemptive or conversion rights or other      
subscription rights. There are no redemption or sinking fund provisions         
applicable to the common stock. All outstanding shares of common stock are fully
paid and nonassessable and the shares of common stock to be issued on completion
of this offering will be fully paid and nonassessable.                          

PREFERRED STOCK                                                                 

The board of directors has the authority, without action by the       
stockholders, to designate and issue preferred stock and to designate the       
rights, preferences and privileges of each series of preferred stock, which may 
be greater than the rights attached to the common stock. It is not possible to  
state the actual effect of the issuance of any shares of preferred stock on the 
rights of holders of common stock until the board of directors determines the   
specific rights attached to that preferred stock. The effects of issuing        
preferred stock could include one or more of the following:                     

- restricting dividends on the common stock,                          

- diluting the voting power of the common stock,                      

- impairing the liquidation rights of the common stock, or            

- delaying or preventing a change of control of AMERIGROUP.           

There are currently 27,215,775 shares of preferred stock outstanding, 
comprised of:                                                                   

     - 8,000,000 shares designated as Series A convertible preferred stock (with
  one common share equivalent voting right for every two shares held),

     - 7,025,000 shares designated as Series B convertible preferred stock (with
  one common share equivalent voting right for every two shares held),

     - 6,480,000 shares designated as Series C convertible preferred stock (with
  one common share equivalent voting right for every two shares held),

     - 3,710,775 shares designated as Series D convertible preferred stock (with
      one common share equivalent voting right for every two shares held), and

    - 2,000,000 shares designated as Series E mandatorily redeemable preferred
stock (with 1 to 0.5625 common share equivalent voting rights).   

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   On June 30, 2001, the preferred stock was held of record by approximately
40 holders. Each share of convertible preferred stock will automatically convert
into one-half share of common stock at the time we close this offering. The     
Series E mandatorily redeemable preferred stock will be redeemed at the time we 
close this offering. Following this, there will be no preferred stock           
outstanding, and we have no current plans to issue any shares of preferred      
stock.                                                                          

WARRANTS                                                                        

  In connection with our July 1998 financing, we sold to the purchasers of
our Series E mandatorily redeemable preferred stock warrants to purchase an     
aggregate of 1,125,000 shares of common stock at an exercise price of $.02 per  
share, subject to adjustment. These warrants may be exercised at any time but   
only as to 0.5625 shares of common stock for every one share of Series E        
mandatorily redeemable preferred stock redeemed. We have exercised our right to 
accelerate the exercise date for these warrants to immediately prior to the     
closing of this offering. If all the holders of these warrants exercise them on 
or prior to the closing of this offering, there will be an additional 1,125,000 
shares of common stock outstanding. These warrants are subject to customary     
anti-dilution protections and expire on July 28, 2005.                          

    In May 1998, we issued a warrant to purchase 25,000 shares of common stock
that currently has an effective exercise price of $3.00 per share. This warrant 
is exercisable at any time. This warrant is also subject to customary           
anti-dilution protections and expires on May 15, 2003.                          

ANTI-TAKEOVER EFFECTS OF CERTAIN PROVISIONS OF DELAWARE LAW AND AMERIGROUP'S    
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION AND BY-LAWS                   

  Some provisions of our amended and restated certificate of incorporation
and amended and restated by-laws, each of which will become effective upon      
closing of this offering, may be deemed to have an anti-takeover effect and may 
delay or prevent a tender offer or takeover attempt that a stockholder might    
consider in its best interest, including those attempts that might result in a  
premium over the market price for the shares held by stockholders.              

CLASSIFIED BOARD OF DIRECTORS                                               

Our board of directors will be divided into three classes of directors
serving staggered three-year terms. As a result, approximately one-third of the 
board of directors will be elected each year. These provisions, when coupled    
with the provision of our amended and restated certificate of incorporation     
authorizing the board of directors to fill vacant directorships or increase the 
size of the board of directors, may deter a stockholder from removing incumbent 
directors and simultaneously gaining control of the board of directors by       
filling the vacancies created by such removal with its own nominees.            

CUMULATIVE VOTING                                                           

   Our amended and restated certificate of incorporation will expressly deny
stockholders the right to cumulative voting in the election of directors.       

STOCKHOLDER ACTION; SPECIAL MEETING OF STOCKHOLDERS                         

  Our amended and restated certificate of incorporation will eliminate the
ability of stockholders to act by written consent. It will further provide that 
special meetings of our stockholders may be called only by the chairman of our  
board of directors, our president or a majority of our directors.               

ADVANCE NOTICE REQUIREMENTS FOR STOCKHOLDER PROPOSALS AND DIRECTORS NOMINATIONS 

    Our amended and restated by-laws will provide that stockholders seeking to
bring business before an annual meeting of stockholders, or to nominate         
candidates for election as directors at an annual meeting of stockholders, must 
provide timely notice in writing. To be timely, a stockholder's notice must be  
delivered to or mailed and received at our principal executive offices not less 
than 90 days prior to the anniversary date of                                   

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the immediately preceding annual meeting of stockholders. However, in the event 
that the annual meeting is called for a date that is not within 30 days before  
or after such anniversary date, notice by the stockholder in order to be timely 
must be received not later than the close of business on the 10th day following 
the date on which notice of the date of the annual meeting was mailed to        
stockholders or made public, whichever first occurs. Our amended and restated   
by-laws will also specify requirements as to the form and content of a          
stockholder's notice. These provisions may preclude stockholders from bringing  
matters before an annual meeting of stockholders or from making nominations for 
directors at an annual meeting of stockholders.                                 

AUTHORIZED BUT UNISSUED SHARES                                                  

     Our authorized but unissued shares of common stock and preferred stock will
be available for future issuance without stockholder approval. These additional 
shares may be utilized for a variety of corporate purposes, including future    
public offerings to raise additional capital, corporate acquisitions and        
employee benefit plans. The existence of authorized but unissued shares of      
common stock and preferred stock could render more difficult or discourage an   
attempt to obtain control of AMERIGROUP by means of a proxy contest, tender     
offer, merger or otherwise.                                                     

AMENDMENTS; SUPERMAJORITY VOTE REQUIREMENTS                                     

The Delaware General Corporation Law provides generally that the      
affirmative vote of a majority of the shares entitled to vote on any matter is  
required to amend a corporation's certificate of incorporation or by-laws,      
unless either a corporation's certificate of incorporation or bylaws require a  
greater percentage. Our amended and restated certificate of incorporation will  
impose supermajority vote requirements in connection with business combination  
transactions and the amendment of provisions of our amended and restated        
certificate of incorporation and amended and restated by-laws, including those  
provisions relating to the classified board of directors, action by written     
consent and the ability of stockholders to call special meetings.               

TRANSFER AGENT REGISTRAR                                                        

 The transfer agent and registrar for our common stock is American Stock
Transfer & Trust Company.                                                       

LISTING                                                                         

We have applied to list our common stock on the Nasdaq National Market
under the symbol "AMGP."                                                        

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SHARES ELIGIBLE FOR FUTURE SALE 

Prior to this offering, there has been no public market for our common
stock, and we cannot predict the effect, if any, that market sales of shares or 
the availability of any shares for sale will have on the market price of the    
common stock prevailing from time to time. Sales of substantial amounts of      
common stock (including shares issued on the exercise of outstanding options and
warrants), or the perception that such sales could occur, could adversely affect
the market price of our common stock (including shares issued on the exercise of
outstanding options and warrants) and our ability to raise capital through a    
future sale of our securities.                                                  

    Upon completion of this offering, we will have 19,182,012 shares of common
stock outstanding (or 19,842,012 shares if the underwriters' over-allotment     
option is exercised in full), assuming no exercise of outstanding options. The  
4,400,000 shares (or 5,060,000 shares if the underwriters' over-allotment option
is exercised in full) of common stock sold in this offering will be freely      
tradable without further restriction or further registration under the          
Securities Act, except for shares purchased by an affiliate (as this term is    
defined in the Securities Act) of ours, which will be subject to the limitations
of Rule 144 under the Securities Act. Subject to certain contractual            
limitations, holders of restricted shares will be entitled to sell these shares 
in the public securities market without registration if they qualify for an     
exemption from registration under Rule 144 or any other applicable exemption    
under the Securities Act.                                                       

SALES OF RESTRICTED SHARES AND SHARES HELD BY OUR AFFILIATES                    

In general, under Rule 144 under the Securities Act, beginning 90 days
after the date of this prospectus, a person (or persons whose shares are        
aggregated) who has beneficially owned restricted securities within the meaning 
of Rule 144 for at least one year, and including the holding period of any prior
owner except an affiliate, would be entitled to sell within any three-month     
period a number of shares that does not exceed the greater of one percent of the
then outstanding shares of our common stock or the average weekly trading volume
of our common stock on the Nasdaq National Market during the four calendar weeks
preceding such sale. Sales under Rule 144 are also subject to certain manner of 
sale provisions, notice requirements and the availability of current public     
information about our company. Any person (or persons whose shares are          
aggregated) who is not deemed to have been our affiliate at any time during the 
three months preceding a sale, and who has beneficially owned shares for at     
least two years (including any period of ownership of preceding non-affiliated  
holders), would be entitled to sell such shares under Rule 144(k) without regard
to the volume limitations, manner of sale provisions, public information        
requirements or notice requirements. Therefore, unless otherwise restricted,    
"144(k)" shares may be sold immediately on completion of this offering. An      
"affiliate" is a person that directly, or indirectly through one or more        
intermediaries, controls, or is controlled by, or is under common control with, 
an issuer.                                                                      

OPTIONS                                                                         

After the date of this prospectus, we intend to file one or more      
registration statements on Form S-8 under the Securities Act to register shares 
of common stock subject to outstanding stock options or reserved for issuance   
under our equity compensation plans.                                            

 Subject to certain conditions, Rule 701 under the Securities Act may be
relied upon with respect to the resale of securities originally purchased from  
us by our employees, directors, officers, consultants or advisors prior to the  
closing of this offering, under written compensatory benefit plans or written   
contracts relating to the compensation of these persons. This also applies to   
stock options we granted prior to this offering, along with the shares acquired 
upon exercise of those options after the closing of this offering. Unless       
subject to lock-up agreements or other contractual restrictions, these shares   
may be sold, beginning 90 days after the date of this prospectus, by persons    
other than affiliates subject only to the manner of sale provisions of Rule 144 
and by affiliates under Rule 144 without compliance with the one year minimum   
holding period requirement.                                                     

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LOCK-UP                                                                         

  We, our directors, executive officers, most of our existing stockholders
and selected option holders have entered into lock-up agreements pursuant to    
which we and such holders of stock and options have agreed not to sell, directly
or indirectly, any shares of common stock without the prior written consent of  
Banc of America Securities LLC and UBS Warburg LLC for a period of 180 days from
the date of this prospectus.                                                    

Shares eligible for future sale in the public market based on shares  
outstanding at the time we close this offering is as follows:                   

                                                                [Download Table]

NUMBER OF SHARES                                 DATE                           
----------------                                 ----                           
                                                                                
4,400,000 (or up to  After the date of this prospectus. Freely tradable shares  
5,060,000 if the     sold in this offering.                                     
underwriters' over-                                                             
allotment option is                                                             
exercised in full)                                                              
                     After the date of this prospectus or 90 days after the date
                     of this prospectus. Shares not locked up and eligible for  
                     resale under Rule 144 or 701.                              
                     180 days after the date of this prospectus when the lock-up
                     expires. Shares eligible for resale under Rule 144, Rule   
                     144(k) or Rule 701.                                        
1,125,000            Various dates as these shares qualify for an exemption from
                     registration under Rule 144 or 701.                        

REGISTRATION RIGHTS                                                             

     We have granted registration rights to the holders of most of our currently
outstanding capital stock. Beginning six months after the date of this offering,
some of these stockholders can require us to file registration statements that  
permit them to re-sell their shares. For more information, see "Related Party   
Transactions -- Investor Rights Agreement."                                     

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UNDERWRITING

 We are offering the shares of common stock described in this prospectus
through a number of underwriters. Banc of America Securities LLC and UBS Warburg
LLC are acting as joint book-running managers of the offering and together with 
CIBC World Markets Corp. and Stephens Inc. are acting as representatives of the 
underwriters. We have entered into a firm commitment underwriting agreement with
the representatives. Subject to the terms and conditions of the underwriting    
agreement, we have agreed to sell to the underwriters, and each underwriter has 
agreed to purchase, at the public offering price less the underwriting discounts
and commissions set forth on the cover page of this prospectus, the number of   
shares of common stock listed next to its name in the following table:          

                                                                [Download Table]

UNDERWRITER                                                   NUMBER OF SHARES
-----------                                                   ----------------
                                                                              
Banc of America Securities LLC..............................                  
UBS Warburg LLC.............................................                  
CIBC World Markets Corp.....................................                  
Stephens Inc................................................                  

                                                                 ---------    
          Total.............................................     4,400,000    
                                                                 =========    

 The underwriters initially will offer shares to the public at the price
specified on the cover page of this prospectus. The underwriters may allow to   
some dealers a concession of not more than $     per share. The underwriters    
also may allow, and any dealers may reallow, a concession of not more than      
$     per share to some other dealers. If all the shares are not sold at the    
initial public offering price, the underwriters may change the offering price   
and other selling terms. The common stock is offered subject to a number of     
conditions, including:                                                          

- receipt and acceptance of our common stock by the underwriters, and 

- the right to reject orders in whole or in part.                     

   The underwriters have an option to buy up to 660,000 additional shares of
common stock from us and Jeffrey L. McWaters, our President, Chief Executive    
Officer and Chairman of our board of directors, of which up to 75,000 shares    
would be sold by Mr. McWaters, to cover sales of shares by the underwriters     
which exceed the number of shares specified in the table above at the public    
offering price less the underwriting discounts and commissions set forth on the 
cover page of this prospectus. The underwriters have 30 days from the date of   
this prospectus to exercise this option. If the underwriters exercise this      
option, they will each be obligated, subject to certain conditions, to purchase 
additional shares approximately in proportion to the amounts specified in the   
table above. If any additional shares of common stock are purchased, the        
underwriters will offer the additional shares on the same terms as those on     
which the shares are being offered.                                             

 The underwriting fee is equal to the public offering price per share of
common stock less the amount paid by the underwriters to us per share of common 
stock. The underwriting fee is currently expected to be    % of the initial     
public offering price. The following table shows the per share and total        
underwriting                                                                    

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discounts and commissions to be paid to the underwriters assuming both no       
exercise and full exercise of the underwriters' option to purchase additional   
shares.                                                                         

                                                        [Enlarge/Download Table]

                                                                  PAID BY AMERIGROUP     
                                                             ----------------------------
                                                             NO EXERCISE    FULL EXERCISE
                                                             -----------    -------------
                                                                                         
Per Share...................................................      $               $      
Total.......................................................      $               $      

                                                        [Enlarge/Download Table]

                                                                 PAID BY MR. MCWATERS    
                                                             ----------------------------
                                                             NO EXERCISE    FULL EXERCISE
                                                             -----------    -------------
                                                                                         
Per Share...................................................     --               $      
Total.......................................................     --               $      

In addition, we estimate that our share of the total expenses of this 
offering, excluding underwriting discounts and commissions, will be             
approximately $       .                                                         

     We and our directors, executive officers, most of our existing stockholders
and selected option holders have entered into lock-up agreements with the       
underwriters pursuant to which we and such holders of stock and options have    
agreed not to sell, directly or indirectly, any shares of common stock without  
the prior written consent of Banc of America Securities LLC and UBS Warburg LLC 
for a period of 180 days from the date of this prospectus. This consent may be  
given at any time without public notice. We have entered into a similar         
agreement with the representatives of the underwriters, except that we may grant
options and sell shares pursuant to our stock plans without such consent. There 
are no agreements between the representatives and any of our stockholders or    
affiliates releasing them from these lock-up agreements prior to the expiration 
of the 180-day period.                                                          

We expect our common stock to be approved for quotation on the Nasdaq 
National Market under the symbol "AMGP."                                        

We will indemnify the underwriters against some specified types of    
liabilities, including liabilities under the Securities Act. If we are unable to
provide this indemnification, we will contribute to payments the underwriters   
may be required to make in respect of those liabilities.                        

  In connection with this offering, the underwriters may purchase and sell
shares of common stock in the open market. These transactions may include:      

- short sales,                                                        

- stabilizing transactions, and                                       

- purchases to cover positions created by short sales.                

 Short sales involve the sale by the underwriters of a greater number of
shares than they are required to purchase in this offering. Stabilizing         
transactions consist of bids or purchases made for the purpose of preventing or 
retarding a decline in the market price of the common stock while this offering 
is in progress.                                                                 

The underwriters may also impose a penalty bid. This means that if the
representatives purchase shares in the open market in stabilizing transactions  
or to cover short sales, the representatives can require the underwriters that  
sold those shares as part of this offering to repay the underwriting discount   
received by them.                                                               

The underwriters may engage in activities that stabilize, maintain or 
otherwise affect the price of the common stock, including:                      

- over-allotment,                                                     

- stabilization,                                                      

- syndicate covering transactions, and                                

- imposition of penalty bids.                                         
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As a result of these activities, the price of the common stock may be 
higher than the price that otherwise might exist in the open market. If the     
underwriters commence these activities, they may discontinue them at any time.  
The underwriters may carry out these transactions on the Nasdaq National Market,
in the over-the-counter-market or otherwise.                                    

  The underwriters do not expect sales to discretionary accounts to exceed
five percent of the total number of shares of common stock offered by this      
prospectus.                                                                     

Prior to this offering, there has been no public market for our common
stock. The initial public offering price has been negotiated between us and the 
representatives of the underwriters. Among the factors considered in these      
negotiations were:                                                              

    - the history of, and prospects for, our company and the industry in which
we compete,                                                       

- the past and present financial performance of our company,          

- an assessment of our management,                                    

- the present state of our development,                               

- the prospects for our future earnings,                              

- the prevailing market conditions of the applicable United States    
securities market at the time of this offering,                   

- market valuations of publicly traded companies that we and the      
 representatives of the underwriters believe to be comparable to our
company, and                                                      

- other factors deemed relevant.                                      

     The estimated initial public offering price range set forth on the cover of
this preliminary prospectus is subject to change as a result of market          
conditions and other factors.                                                   

   On October 24, 2001, we received a commitment from Bank of America, N.A.,
to lend up to $25 million of a $60 million revolving credit facility, which may 
be increased to $75 million. Bank of America, N.A.'s commitment is conditioned  
upon, among other things, additional commitments. We are currently in           
negotiations with UBS Warburg and CIBC World Markets, or their affiliates, to   
also act as lenders under this credit facility.                                 

    The underwriters, at our request, have reserved for sale to our employees,
family members of employees, business associates and other third parties at the 
initial public offering price up to five percent of the shares being offered by 
this prospectus. The sale of shares to our employees and affiliates will be made
by Banc of America Securities LLC. We do not know if our employees or affiliates
will choose to purchase all or any portion of these reserved shares, but any    
purchases they do make will reduce the number of shares available to the general
public. Reserved shares purchased by our employees and affiliates will not be   
subject to a lock-up except as may be required by the Conduct Rules of the      
National Association of Securities Dealers. These rules require that some       
purchasers of reserved shares be subject to three-month lock-ups if they are    
affiliated with or associated with NASD members or if they or members of their  
immediate families hold senior positions at financial institutions. If all of   
these reserved shares are not purchased, the underwriters will offer the        
remainder to the general public on the same terms as the other shares offered by
this prospectus.                                                                

LEGAL MATTERS 

    The validity of the common stock offered by this prospectus will be passed
upon for us by Skadden, Arps, Slate, Meagher & Flom LLP, New York, New York.    
Certain legal matters in connection with the offering will be passed upon for   
the underwriters by Willkie Farr & Gallagher, New York, New York.               

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EXPERTS 

The financial statements and schedule of AMERIGROUP Corporation as of 
December 31, 1999 and 2000 and for each of the years in the three year period   
ended December 31, 2000 have been included herein and in the registration       
statement in reliance upon the report of KPMG LLP, independent certified public 
accountants, appearing elsewhere herein, and upon the authority of said firm as 
experts in accounting and auditing.                                             

The statements of revenues and expenses of contracts acquired of the  
Medicaid business of Oxford Health Plans (NJ), Inc. for the six months ended    
June 30, 1998 and for the year ended December 31, 1997, have been included      
herein and in the registration statement in reliance upon the report of KPMG    
LLP, independent certified public accountants, appearing elsewhere herein, and  
upon the authority of said firm as experts in accounting and auditing.          

WHERE YOU CAN FIND MORE INFORMATION 

    This prospectus constitutes a part of a registration statement on Form S-1
(together with all amendments, supplements, schedules and exhibits to the       
registration statement, referred to as the registration statement) which we have
filed with the Commission under the Securities Act, with respect to the common  
stock offered in this prospectus. This prospectus does not contain all the      
information which is in the registration statement. Certain parts of the        
registration statement are omitted as allowed by the rules and regulations of   
the Commission. We refer you to the registration statement for further          
information about our company and the securities offered in this prospectus.    
Statements contained in this prospectus concerning the provisions of documents  
filed as exhibits are not necessarily complete, and reference is made to the    
copy so filed, each such statement being qualified in all respects by such      
reference. You can inspect and copy the registration statement and the reports  
and other information we file with the Commission at Room 1024, Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549. You can obtain information on   
the operation of the public reference room by calling the Commission at         
1-800-SEC-0330. The same information will be available for inspection and       
copying at the regional offices of the Commission located at 233 Broadway, New  
York, New York 10279 and at Citicorp Center, 500 West Madison Street, Suite     
1400, Chicago, Illinois 60661. You can also obtain copies of this material from 
the public reference room of the Commission at 450 Fifth Street, N.W.,          
Washington, D.C. 20549, at prescribed rates. The Commission also maintains a Web
site which provides on-line access to reports, proxy and information statements 
and other information regarding registrants that file electronically with the   
Commission at the address http://www.sec.gov.                                   

Upon the effectiveness of the registration statement, we will become  
subject to the information requirements of the Exchange Act. We will then file  
reports, proxy statements and other information under the Exchange Act with the 
Commission. You can inspect and copy these reports and other information of our 
company at the locations set forth above or download these reports from the     
Commission's Web site.                                                          

We have applied to have our common stock approved for quotation on the
Nasdaq National Market.                                                         

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INDEX TO FINANCIAL STATEMENTS 

                                                                [Download Table]

                                                              PAGE
                                                              ----
                                                                  
AMERIGROUP CORPORATION AND SUBSIDIARIES                           
Independent Auditors' Report................................   F-2
Consolidated Balance Sheets as of December 31, 1999 and 2000      
  and June 30, 2001 (unaudited).............................   F-3
Consolidated Statements of Operations for the years ended         
  December 31, 1998, 1999 and 2000 and the six months ended       
  June 30, 2000 and 2001 (unaudited)........................   F-4
Consolidated Statements of Stockholder's Equity (Deficit)         
  for the years ended December 31, 1998, 1999 and 2000 and        
  the six months ended June 30, 2000 and 2001 (unaudited)...   F-6
Consolidated Statements of Cash Flows for the years ended         
  December 31, 1998, 1999 and 2000 and the six months ended       
  June 30, 2000 and 2001 (unaudited)........................   F-7
Notes to Consolidated Financial Statements..................   F-8

OXFORD HEALTH PLANS (NJ) INC, AS PARTITIONED FOR SALE TO          
  AMERIGROUP CORPORATION                                          
Independent Auditors' Report................................  F-25
Statements of Revenues and Expenses of the Contracts              
  Acquired for the six months ended June 30, 1998 and for         
  the year ended December 31, 1997..........................  F-26
Notes to Statements of Revenues and Expenses of the               
  Contracts Acquired........................................  F-27

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INDEPENDENT AUDITORS' REPORT

The Board of Directors                                                          
AMERIGROUP Corporation and Subsidiaries:                                        

    We have audited the accompanying consolidated balance sheets of AMERIGROUP
Corporation and subsidiaries as of December 31, 1999 and 2000, and the related  
consolidated statements of operations, stockholders' equity (deficit) and cash  
flows for each of the years in the three-year period ended December 31, 2000.   
These consolidated financial statements are the responsibility of the Company's 
management. Our responsibility is to express an opinion on these consolidated   
financial statements based on our audits.                                       

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

 In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of AMERIGROUP  
Corporation and subsidiaries as of December 31, 1999 and 2000, and the results  
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 2000 in conformity with accounting principles         
generally accepted in the United States of America.                             

March 1, 2001                                                                   
Norfolk, Virginia                                                               

/s/ KPMG LLP                                                                    

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AMERIGROUP CORPORATION AND SUBSIDIARIES 

CONSOLIDATED BALANCE SHEETS 
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE DATA) 

                                                        [Enlarge/Download Table]

                                                                 DECEMBER 31,                     PRO FORMA 
                                                              -------------------    JUNE 30,     JUNE 30,  
                                                                1999       2000        2001         2001    
                                                              --------   --------   -----------  -----------
                                                                                                 (UNAUDITED)
                      ASSETS (NOTE 7)                                               (UNAUDITED)   (NOTE 14) 
                                                                                                            
Current assets:                                                                                             
 Cash and cash equivalents..................................  $100,379   $132,662    $126,108               
 Short-term investments (note 3)............................    65,839     56,663      79,084               
 Premium receivables........................................     7,246     15,722      26,900               
 Deferred income taxes (note 6).............................     4,943      4,575       5,004               
 Prepaid expenses and other current assets..................     3,503      7,162       5,581               
                                                              --------   --------    --------               
       Total current assets.................................   181,910    216,784     242,677               
Property and equipment, net (note 4)........................     6,909     10,064      14,337               
Software, net of accumulated amortization of $812, $1,775                                                   
 and $3,409 at December 31, 1999 and 2000 and June 30, 2001,                                                
 respectively...............................................     1,532      9,139       8,157               
Goodwill, net of accumulated amortization of $2,048, $4,896                                                 
 and $5,385 at December 31, 1999 and 2000 and June 30, 2001,                                                
 respectively (note 5)......................................    20,615     17,767      17,278               
Investments on deposit for licensure (note 3)...............     8,992     12,864      18,581               
Deferred income taxes and other long-term assets............     2,363      1,508       1,465               
                                                              --------   --------    --------               
                                                              $222,321   $268,126    $302,495               
                                                              ========   ========    ========               
LIABILITIES, REDEEMABLE PREFERRED STOCK                                                                     
 AND STOCKHOLDERS' EQUITY (DEFICIT)                                                                         
Current liabilities:                                                                                        
 Claims payable.............................................  $114,372   $150,462    $162,588               
 Accounts payable...........................................     1,767      5,281       2,700               
 Accrued expenses and other current liabilities.............    12,867     22,294      28,175               
 Unearned revenue...........................................    27,960         --          --               
 Current portion of long-term debt (note 7).................     1,833      2,000       2,000               
                                                              --------   --------    --------               
       Total current liabilities............................   158,799    180,037     195,463               
Long-term debt (note 7).....................................     6,177      4,177       3,177               
Deferred income taxes and other long-term liabilities.......     1,450        977       3,438               
                                                              --------   --------    --------               
       Total liabilities....................................   166,426    185,191     202,078               
                                                              --------   --------    --------               
Redeemable preferred stock (note 8):                                                                        
   Series E mandatorily redeemable preferred stock, $0.01                                                   
     par value. Authorized 2,000,000 shares; issued and                                                     
     outstanding 2,000,000 shares historical and pro                                                        
     forma..................................................    10,330     11,874      12,646     $ 12,646  
   Series A convertible preferred stock, $.01 par value.                                                    
     Authorized 8,000,000 shares; issued and outstanding                                                    
     8,000,000 shares historical and no shares pro forma....    14,194     15,464      16,099           --  
   Series B convertible preferred stock, $.01 par value.                                                    
     Authorized 7,025,000 shares; issued and outstanding                                                    
     7,025,000 shares historical and no shares pro forma....    23,173     25,324      26,399           --  
   Series C convertible preferred stock, $.01 par value.                                                    
     Authorized 6,480,000 shares; issued and outstanding                                                    
     6,480,000 shares historical and no shares pro forma....    23,209     25,528      26,688           --  
                                                              --------   --------    --------     --------  
       Total redeemable preferred stock.....................    70,906     78,190      81,832       12,646  
                                                              --------   --------    --------     --------  
Stockholders' equity (deficit) (notes 8, 9 and 13):                                                         
   Series D convertible preferred stock, $0.01 par value.                                                   
     Authorized 10,000,000 shares; issued and outstanding                                                   
     3,710,775 shares historical and no shares pro forma....        37         37          37           --  
 Common stock, $.01 par value. Authorized 60,000,000 shares                                                 
   historical and 100,000,000 pro forma; issued and                                                         
   outstanding 640,632, 907,782 and 1,037,299 at December                                                   
   31, 1999, 2000, and June 30, 2001 historical,                                                            
   respectively, and 13,645,186 shares pro forma............        11         16          19          145  
Additional paid-in capital..................................    18,185     20,263      20,397       89,494  
Accumulated deficit.........................................   (33,244)   (14,436)       (913)        (913) 
Deferred compensation (note 9)..............................        --     (1,135)       (955)        (955) 
                                                              --------   --------    --------     --------  
       Total stockholders' equity (deficit).................   (15,011)     4,745      18,585     $ 87,771  
                                                                                                  ========  
Commitments and contingencies (note 12)                                                                     
                                                              --------   --------    --------               
                                                              $222,321   $268,126    $302,495               
                                                              ========   ========    ========               

See accompanying notes to consolidated financial statements.
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AMERIGROUP CORPORATION AND SUBSIDIARIES 

CONSOLIDATED STATEMENTS OF OPERATIONS 
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE DATA) 

                                                        [Enlarge/Download Table]

                                                    YEARS ENDED DECEMBER 31,         SIX MONTHS ENDED JUNE 30, 
                                              ------------------------------------   ------------------------- 
                                                1998        1999          2000          2000          2001     
                                              --------   -----------   -----------   -----------   ----------- 
                                                                                            (UNAUDITED)        
                                                                                                               
Revenues:                                                                                                      
  Premium.................................... $186,790   $   392,296   $   646,408   $   305,132   $   394,830 
  Investment income..........................    3,389         6,404        13,107         5,799         6,105 
                                              --------   -----------   -----------   -----------   ----------- 
    Total revenues...........................  190,179       398,700       659,515       310,931       400,935 
                                              --------   -----------   -----------   -----------   ----------- 
Expenses:                                                                                                      
  Health benefits............................  155,877       334,192       523,566       244,100       314,395 
  Selling, general and administrative........   29,166        52,846        85,114        40,497        52,210 
  Depreciation and amortization..............    1,197         3,635         6,275         2,895         4,323 
  Interest...................................      483           811           781           400           412 
                                              --------   -----------   -----------   -----------   ----------- 
    Total expenses...........................  186,723       391,484       615,736       287,892       371,340 
                                              --------   -----------   -----------   -----------   ----------- 
Income before income taxes...................    3,456         7,216        43,779        23,039        29,595 
  Income tax benefit (expense) (note 6)......       --         4,100       (17,687)       (9,431)      (12,430)
                                              --------   -----------   -----------   -----------   ----------- 
Net income...................................    3,456        11,316        26,092        13,608        17,165 
  Accretion of redeemable preferred stock                                                                      
    dividends (note 8).......................   (6,126)       (7,284)       (7,284)       (3,642)       (3,642)
                                              --------   -----------   -----------   -----------   ----------- 
Net income (loss) attributable to common                                                                       
  stockholders............................... $ (2,670)  $     4,032   $    18,808   $     9,966   $    13,523 
                                              ========   ===========   ===========   ===========   =========== 
Net income (loss) per share (note 10):                                                                         
  Basic net income (loss) per share.......... $  (5.07)  $      7.11   $     23.62   $     14.26   $     13.26 
                                              ========   ===========   ===========   ===========   =========== 
  Weighted average number of common shares                                                                     
    outstanding..............................  526,651       567,146       796,409       698,849     1,020,071 
                                              ========   ===========   ===========   ===========   =========== 
  Diluted net income (loss) per share........ $  (5.07)  $      0.66   $      1.55   $      0.81   $      1.03 
                                              ========   ===========   ===========   ===========   =========== 
  Weighted average number of common shares                                                                     
    and potential dilutive common shares                                                                       
    outstanding..............................  526,651    14,695,324    15,818,175    15,806,316    15,893,421 
                                              ========   ===========   ===========   ===========   =========== 

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AMERIGROUP CORPORATION AND SUBSIDIARIES 

CONSOLIDATED STATEMENTS OF OPERATIONS -- (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE DATA) 

                                                        [Enlarge/Download Table]

                                                                  YEAR        SIX MONTHS 
                                                                 ENDED          ENDED    
                                                              DECEMBER 31,     JUNE 30,  
                                                                  2000           2001    
                                                              ------------   ------------
                                                                      (UNAUDITED)        
                                                                                         
Pro forma net income per common share information (note 14):                             
  Net income attributable to common stockholders............  $    18,808    $    13,523 
  Pro forma adjustment to eliminate Series A, B and C                                    
     preferred dividends....................................        5,740          2,870 
                                                              -----------    ----------- 
          Pro forma net income..............................  $    24,548    $    16,393 
                                                              ===========    =========== 
  Basic pro forma net income per share......................  $      1.83    $      1.20 
                                                              ===========    =========== 
  Pro forma weighted average number of common shares                                     
     outstanding............................................   13,404,296     13,627,958 
                                                              ===========    =========== 
  Diluted pro forma net income per share....................  $      1.55    $      1.03 
                                                              ===========    =========== 
  Pro forma weighted average number of common shares and                                 
     potential dilutive common shares outstanding...........   15,818,175     15,893,421 
                                                              ===========    =========== 

See accompanying notes to consolidated financial statements.
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AMERIGROUP CORPORATION AND SUBSIDIARIES 

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) 
(DOLLARS IN THOUSANDS)

                                                        [Enlarge/Download Table]

                                                                         SERIES D CONVERTIBLE                         
                                                       COMMON STOCK        PREFERRED STOCK     ADDITIONAL             
                                                    ------------------   --------------------   PAID-IN    ACCUMULATED
                                                     SHARES     AMOUNT     SHARES     AMOUNT    CAPITAL      DEFICIT  
                                                    ---------   ------   ----------   -------  ----------  -----------
                                                                                                                      
Balances at December 31,1997......................    520,974    $10            --      $--     $     6     $(34,606) 
Warrants issued in conjunction with Series E                                                                          
  mandatorily redeemable preferred stock (note                                                                        
  8)..............................................         --     --            --       --         650           --  
Common stock issued upon exercise of stock                                                                            
  options.........................................      8,162     --            --       --           6           --  
Accreted dividends on redeemable preferred                                                                            
  stock...........................................         --     --            --       --          --       (6,126) 
Net income........................................         --     --            --       --          --        3,456  
                                                    ---------    ---     ---------      ---     -------     --------  
Balances at December 31,1998......................    529,136     10            --       --         662      (37,276) 
Warrants issued in conjunction with Series E                                                                          
  mandatorily redeemable preferred stock (note                                                                        
  8)..............................................         --     --            --       --         800           --  
Common stock issued upon exercise of stock                                                                            
  options.........................................    111,496      1            --       --          99           --  
Series D convertible preferred stock issued in                                                                        
  conjunction with acquisition (notes 5 and 8)....         --     --     3,710,775       37      16,624           --  
Accreted dividends on redeemable preferred                                                                            
  stock...........................................         --     --            --       --          --       (7,284) 
Net income........................................         --     --            --       --          --       11,316  
                                                    ---------    ---     ---------      ---     -------     --------  
Balances at December 31,1999......................    640,632     11     3,710,775       37      18,185      (33,244) 
Common stock issued upon exercise of stock                                                                            
  options.........................................    267,150      5            --       --         245           --  
Accreted dividends on redeemable preferred                                                                            
  stock...........................................         --     --            --       --          --       (7,284) 
Issuance of common stock options at below market                                                                      
  value (note 9)..................................         --     --            --       --       1,833           --  
Amortization of deferred compensation (note 9)....         --     --            --       --          --           --  
Net income........................................         --     --            --       --          --       26,092  
                                                    ---------    ---     ---------      ---     -------     --------  
Balances at December 31, 2000.....................    907,782     16     3,710,775       37      20,263      (14,436) 
Common stock issued upon exercise of stock options                                                                    
  (unaudited).....................................    129,517      3            --       --         134           --  
Accreted dividends on redeemable preferred stock                                                                      
  (unaudited).....................................         --     --            --       --          --       (3,642) 
Amortization of deferred compensation (unaudited)                                                                     
  (note 9)........................................         --     --            --       --          --           --  
Net income (unaudited)............................         --     --            --       --          --       17,165  
                                                    ---------    ---     ---------      ---     -------     --------  
Balances at June 30, 2001 (unaudited).............  1,037,299    $19     3,710,775      $37     $20,397     $   (913) 
                                                    =========    ===     =========      ===     =======     ========  



                                                                        TOTAL                                         
                                                      DEFERRED      STOCKHOLDERS'                                     
                                                    COMPENSATION   EQUITY (DEFICIT)                                   
                                                    ------------   ----------------                                   
                                                                                                                      
Balances at December 31,1997......................    $    --          $(34,590)                                      
Warrants issued in conjunction with Series E                                                                          
  mandatorily redeemable preferred stock (note                                                                        
  8)..............................................         --               650                                       
Common stock issued upon exercise of stock                                                                            
  options.........................................         --                 6                                       
Accreted dividends on redeemable preferred                                                                            
  stock...........................................         --            (6,126)                                      
Net income........................................         --             3,456                                       
                                                      -------          --------                                       
Balances at December 31,1998......................         --           (36,604)                                      
Warrants issued in conjunction with Series E                                                                          
  mandatorily redeemable preferred stock (note                                                                        
  8)..............................................         --               800                                       
Common stock issued upon exercise of stock                                                                            
  options.........................................         --               100                                       
Series D convertible preferred stock issued in                                                                        
  conjunction with acquisition (notes 5 and 8)....         --            16,661                                       
Accreted dividends on redeemable preferred                                                                            
  stock...........................................         --            (7,284)                                      
Net income........................................         --            11,316                                       
                                                      -------          --------                                       
Balances at December 31,1999......................         --           (15,011)                                      
Common stock issued upon exercise of stock                                                                            
  options.........................................         --               250                                       
Accreted dividends on redeemable preferred                                                                            
  stock...........................................         --            (7,284)                                      
Issuance of common stock options at below market                                                                      
  value (note 9)..................................     (1,833)               --                                       
Amortization of deferred compensation (note 9)....        698               698                                       
Net income........................................         --            26,092                                       
                                                      -------          --------                                       
Balances at December 31, 2000.....................     (1,135)            4,745                                       
Common stock issued upon exercise of stock options                                                                    
  (unaudited).....................................         --               137                                       
Accreted dividends on redeemable preferred stock                                                                      
  (unaudited).....................................         --            (3,642)                                      
Amortization of deferred compensation (unaudited)                                                                     
  (note 9)........................................        180               180                                       
Net income (unaudited)............................         --            17,165                                       
                                                      -------          --------                                       
Balances at June 30, 2001 (unaudited).............    $  (955)         $ 18,585                                       
                                                      =======          ========                                       

See accompanying notes to consolidated financial statements.
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AMERIGROUP CORPORATION AND SUBSIDIARIES 

CONSOLIDATED STATEMENTS OF CASH FLOWS 
(DOLLARS IN THOUSANDS)

                                                        [Enlarge/Download Table]

                                                                                                SIX MONTHS ENDED   
                                                                YEARS ENDED DECEMBER 31,            JUNE 30,       
                                                             -------------------------------   ------------------- 
                                                              1998       1999        2000        2000       2001   
                                                             -------   ---------   ---------   --------   -------- 
                                                                                                   (UNAUDITED)     
                                                                                                                   
Cash flows from operating activities:                                                                              
  Net income................................................ $ 3,456   $  11,316   $  26,092   $ 13,608   $ 17,165 
  Adjustments to reconcile net income to net cash provided                                                         
    by operating activities:                                                                                       
    Depreciation and amortization...........................   1,197       3,635       6,275      2,895      4,323 
    Deferred tax expense (benefit)..........................      --      (5,294)      1,204      1,686       (425)
    Amortization of deferred compensation...................      --          --         698        480        180 
    Changes in assets and liabilities increasing                                                                   
      (decreasing) cash flows from operations:                                                                     
      Premium receivables...................................      --      (7,246)     (8,476)    (1,218)   (11,178)
      Prepaid expenses and other current assets.............  (1,924)       (953)     (3,659)    (5,001)     1,581 
      Deferred income taxes and other assets................     (82)     (1,588)        415        (41)        13 
      Claims payable........................................  33,748      59,978      36,090     20,672     12,126 
      Accounts payable and accrued expenses and other                                                              
        current liabilities.................................   1,439       6,619      12,817     10,697      3,731 
      Unearned revenue......................................    (184)     27,960     (27,960)   (27,960)        -- 
      Deferred income taxes and other long-term                                                                    
        liabilities.........................................      --       1,450      (1,390)        --     (1,714)
                                                             -------   ---------   ---------   --------   -------- 
        Net cash provided by operating activities...........  37,650      95,877      42,106     15,818     25,802 
                                                             -------   ---------   ---------   --------   -------- 
Cash flows from investing activities:                                                                              
  Proceeds from redemption of held-to-maturity securities...   4,100      73,422     226,555     84,195     57,675 
  Purchase of held-to-maturity investments..................  (5,355)   (138,008)   (217,379)  (127,669)   (80,096)
  Purchase of property and equipment........................  (2,462)     (4,647)     (5,098)    (2,267)    (2,161)
  Purchase of software......................................    (343)     (1,176)     (8,570)    (4,371)      (763)
  Proceeds from sale of investments on deposit for                                                                 
    licensure...............................................     937       1,677       8,502      7,613     15,009 
  Purchase of investments on deposit for licensure..........  (1,250)     (9,002)    (12,374)   (11,229)   (20,726)
  Purchase of contract rights and related assets............  (5,501)       (500)         --         --         -- 
                                                             -------   ---------   ---------   --------   -------- 
        Net cash used in investing activities...............  (9,874)    (78,234)     (8,364)   (53,728)   (31,062)
                                                             -------   ---------   ---------   --------   -------- 
Cash flows from financing activities:                                                                              
  Proceeds from issuance of debt, net of issuance costs.....   9,884       8,137          --         --         -- 
  Change in bank overdrafts.................................   7,313      (5,900)        124      8,552       (431)
  Payment of debt...........................................      --     (10,333)     (1,833)      (833)    (1,000)
  Proceeds from exercise of common stock options............       5         100         250        103        137 
  Proceeds from issuance of Series E mandatorily redeemable                                                        
    preferred stock and related warrants, net of issuance                                                          
    costs...................................................   4,850       5,000          --         --         -- 
                                                             -------   ---------   ---------   --------   -------- 
        Net cash provided by (used in) financing                                                                   
          activities........................................  22,052      (2,996)     (1,459)     7,822     (1,294)
                                                             -------   ---------   ---------   --------   -------- 
Net increase (decrease) in cash and cash equivalents........  49,828      14,647      32,283    (30,088)    (6,554)
Cash and cash equivalents at beginning of period............  35,904      85,732     100,379    100,379    132,662 
                                                             -------   ---------   ---------   --------   -------- 
Cash and cash equivalents at end of period.................. $85,732   $ 100,379   $ 132,662   $ 70,291   $126,108 
                                                             =======   =========   =========   ========   ======== 

In 1999, AMERIGROUP Corporation issued 3,710,775 shares of Series D convertible 
preferred stock, valued at $16,661, to The Prudential Insurance Company of      
America (Prudential) in exchange for certain assets of Prudential's Medicaid    
line of business in the District of Columbia and the State of Maryland (note 5).

See accompanying notes to consolidated financial statements.
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AMERIGROUP CORPORATION AND SUBSIDIARIES 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1999 AND 2000
(DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE DATA) 

(1) CORPORATE ORGANIZATION AND PRINCIPLES OF CONSOLIDATION                      

(a) Corporate Organization                                                  

     AMERIGROUP Corporation (the Company), a Delaware corporation, was organized
to create a community-focused managed care company with an emphasis on providing
healthcare services to people eligible to receive Medicaid and Children's Health
Insurance Program benefits.                                                     

During 1995, the Company incorporated wholly-owned subsidiaries in New
Jersey, Illinois and Texas to develop, own and operate health maintenance       
organizations (HMOs) in those states. During 1996, the Company began enrolling  
Medicaid members in HMOs: AMERIGROUP New Jersey, Inc. (formerly known as        
AMERICAID New Jersey, Inc.), AMERIGROUP Illinois, Inc. (formerly AMERICAID      
Illinois, Inc.) and AMERIGROUP Texas, Inc. (formerly known as AMERICAID Texas,  
Inc.). During 1999, the Company incorporated a wholly-owned subsidiary in       
Delaware, AMERIGROUP Maryland, Inc., a Managed Care Organization, to develop,   
own and operate a managed care organization (MCO) in Maryland and an HMO in the 
District of Columbia. This subsidiary purchased certain contracts and related   
assets from The Prudential Insurance Company of America and the Prudential      
Health Care Plan, Inc. (Prudential) relating to its Medicaid lines of business  
in the State of Maryland and the District of Columbia during 1999 (note 5).     

(b) Principles of Consolidation                                             

   The consolidated financial statements include the financial statements of
AMERIGROUP Corporation and its four wholly-owned subsidiaries: AMERIGROUP New   
Jersey, Inc., AMERIGROUP Illinois, Inc., AMERIGROUP Texas, Inc. and AMERIGROUP  
Maryland, Inc., a Managed Care Organization. All significant intercompany       
balances and transactions have been eliminated in consolidation.                

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES                    

(a) Cash Equivalents                                                        

     The Company considers all highly liquid temporary investments with original
maturities of three months or less to be cash equivalents. The Company has cash 
equivalents of $89,311 and $120,305 at December 31, 1999 and 2000, respectively,
which consist of money market funds, U.S. Treasury securities, certificates of  
deposit, asset-backed securities and debt securities of government sponsored    
entities.                                                                       

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

     Short-term investments and investments on deposit for licensure at December
31, 1999 and 2000 consist of money market funds, U.S. Treasury securities,      
certificates of deposit, asset-backed securities and debt securities of         
government sponsored entities. The Company considers all investments with       
maturities greater than three months but less than twelve months to be          
short-term investments. The Company classifies its debt and equity securities in
one of three categories: trading, available-for-sale or held-to-maturity.       
Trading securities are bought and held principally for the purpose of selling   
them in the near term. Held-to-maturity securities are those securities in which
the Company has the ability and intent to hold the security until maturity. All 
other securities not included in trading or held-to-maturity are classified as  
available-for-sale. At December 31, 1999 and 2000, all of the Company's         
securities are classified as held-to-maturity.                                  

  Held-to-maturity securities are recorded at amortized cost, adjusted for
the amortization or accretion of premiums or discounts. A decline in the market 
value of any held-to-maturity security below cost that is deemed other than     
temporary results in a reduction in carrying amount to fair value. The          
impairment is charged to earnings and a new cost basis for the security is      
established. Premiums and discounts are                                         

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 

amortized or accreted over the life of the related held-to-maturity security as 
an adjustment to yield using the effective-interest method. Dividend and        
interest income is recognized when earned.                                      

(c) Property and Equipment                                                  

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

                                                                [Download Table]
                                                                       
Leasehold improvements................................  length of lease
Furniture and fixtures................................        5-7 years
Equipment.............................................        3-5 years

(d) Software                                                                

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

(e) Goodwill                                                                

    Goodwill, which represents the excess of aggregate purchase price over the
estimated fair value of net assets acquired, is amortized on a straight-line    
basis over 18 months to 20 years, the expected periods to be benefited. The     
Company assesses the recoverability of goodwill by determining whether the      
amortization of the goodwill balance over its remaining life can be recovered   
through undiscounted future operating cash flows of the acquired operation. The 
amount of goodwill impairment, if any, is measured based on projected discounted
future operating cash flows using a discount rate reflecting the Company's      
average cost of funds. The assessment of the recoverability of goodwill will be 
impacted if estimated future operating cash flows are not achieved. No          
impairment of goodwill was recorded in 1998, 1999 or 2000.                      

(f) Other Assets                                                            

Other assets include deposits, restricted cash (see note 3) and debt  
issuance costs which are being amortized over the term of the outstanding debt. 

(g) Income Taxes                                                            

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

(h) Stock-Based Compensation                                                

 As permitted under Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation (SFAS No. 123), the Company has chosen  
to account for stock-based compensation using the intrinsic value method        
prescribed in Accounting Principles Board Opinion No. 25, Accounting for Stock  
Issued to Employees (APB Opinion No. 25), and related interpretations.          
Accordingly, compensation cost for                                              

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 

stock options is measured as the excess, if any, of the estimated fair value of 
the Company's stock at the date of grant over the amount an employee must pay to
acquire the stock.                                                              

(i) Premium Revenue                                                         

The Company records premium revenue based on membership and premium   
information from each state. Premiums are due monthly and are recognized as     
revenue during the period in which the Company is obligated to provide service  
to members. Unearned revenue at December 31, 1999 consists of premiums paid in  
advance by the States of Maryland and Texas.                                    

(j) Experience Rebate Payable                                               

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

(k) Claims Payable                                                          

     Accrued medical expenses for inpatient, outpatient surgery, emergency room,
specialist, pharmacy and ancillary medical claims include amounts billed and not
paid and an estimate of cost incurred for unbilled services provided. These     
liabilities are principally based on historical payment patterns using actuarial
techniques. In addition, claims processing costs are accrued based on an        
estimate of the costs necessary to process unpaid claims. Claims payable are    
reviewed and adjusted periodically and, as adjustments are made, differences are
included in current operations. Claims payable also includes estimates of       
amounts due to or from contracted providers under risk-sharing arrangements. The
arrangements are based upon quality measures as well as medical results.        
Estimates relating to risk-sharing arrangements are calculated as a percentage, 
typically 25% to 50%, of the differences between actual results and specified   
targets of medical expense as well as a sharing of profits in excess of the     
targeted medical and administrative expenses, typically 7% to 10% of total      
premiums covered under the contract.                                            

(l) Stop-loss Coverage                                                      

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

(m) Impairment of Long-Lived Assets                                         

    The Company reviews long-lived assets and certain identifiable intangibles
for impairment whenever events or changes in circumstances indicate that the    
carrying amount of an asset may not be recoverable. Recoverability of assets to 
be held and used is measured by a comparison of the carrying amount of an asset 
to future undiscounted net cash flows expected to be generated by the asset. If 
such assets are considered to be impaired, the impairment to be recognized is   
measured by the amount by which the carrying amount of the assets exceed the    
fair value of the assets, determined based upon discounted future cash flows or 
if available, other readily determinable evidence of fair value. Assets to be   
disposed of are reported at the lower of the carrying amount or fair value less 
costs to sell. No impairment of long-lived assets was recorded in 1998, 1999 or 
2000.                                                                           

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 

(n) Net Income (Loss) Per Share                                             

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

On June 30, 2000, the Company's Board of Directors and the Company's  
stockholders approved a one-for-two reverse stock split of the Company's common 
stock contingent upon the successful completion of an initial public offering of
the Company's common stock (note 13). All agreements concerning stock options   
and warrants to purchase common stock provide for adjustments in the number of  
options or warrants and the related exercise price in the event of the          
declaration of a reverse stock split. All references to number of shares, except
shares authorized, to common stock per share information, except par value per  
share and to stock options and warrants to purchase common stock in the         
consolidated financial statements have been restated to reflect the stock split 
on a retroactive basis.                                                         

(o) Use of Estimates                                                        

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

(p) Risks and Uncertainties                                                 

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

(q) Recent Accounting Pronouncements                                        

     In July 2001, Statement of Financial Accounting Standards No. 141, Business
Combinations (SFAS No. 141), was issued which requires that the purchase method 
of accounting be used for all business combinations completed after June 30,    
2001. The Company has adopted SFAS No. 141.                                     

     In July 2001, Statement of Financial Accounting Standards No. 142, Goodwill
and Other Intangible Assets (SFAS No. 142), was issued which requires that      
goodwill and intangible assets with indefinite useful lives no longer be        
amortized, but instead tested annually for impairment. The Company will adopt   
SFAS No. 142 effective January 1, 2002 and management has not yet determined its
effect on the Company's financial statements. As of June 30, 2001, the Company  
had unamortized goodwill in the amount of $17,278 (unaudited), which will be    
subject to the transition provisions of SFAS Nos. 141 and 142. Amortization     
expense was $2,848 in 2000.                                                     

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 

(3) RESTRICTED CASH, SHORT-TERM INVESTMENTS AND INVESTMENTS ON DEPOSIT FOR      
LICENSURE                                                                       

   As a condition of the Company's Loan and Security Agreement (note 7), the
Company is required to maintain cash in an account maintained with the lender   
equal to at least 25% of the total debt outstanding under the agreement. The    
restricted cash on deposit is subject to a lien in favor of the lender. At      
December 31, 1999 and 2000, respectively, the Company maintained $2,100 and     
$1,553 in an account with the lender's Agent. Of this amount, $556 and $509 was 
included in other current assets and $1,544 and $1,044 was included in other    
long-term assets in the accompanying 1999 and 2000 Consolidated Balance Sheets, 
respectively. The short-term and long-term portions are determined based on the 
related debt balances to which the restriction is related.                      

The amortized cost, gross unrealized holding gains, gross unrealized  
holding losses and fair value for held-to-maturity short-term investments are as
follows at December 31, 1999 and 2000:                                          

                                                        [Enlarge/Download Table]

                                                        GROSS       GROSS               
                                                      UNREALIZED  UNREALIZED            
                                           AMORTIZED   HOLDING     HOLDING              
                                             COST       GAINS       LOSSES    FAIR VALUE
                                           ---------  ----------  ----------  ----------
                                                                                        
1999:                                                                                   
  Money market funds.....................   $21,101      $33         $--       $21,134  
  U.S. Treasury securities...............     1,140       --          --         1,140  
  Certificate of deposit.................        99       --           4            95  
  Debt securities of government sponsored                                               
     entities............................    43,499       --           4        43,495  
                                            -------      ---         ---       -------  
     Total...............................   $65,839      $33         $ 8       $65,864  
                                            =======      ===         ===       =======  
2000:                                                                                   
  Money market funds.....................   $ 4,434      $--         $23       $ 4,411  
  U.S. Treasury securities...............       290        2          --           292  
  Asset-backed securities................     4,700       --          18         4,682  
  Debt securities of government sponsored                                               
     entities............................    47,239       --          18        47,221  
                                            -------      ---         ---       -------  
     Total...............................   $56,663      $ 2         $59       $56,606  
                                            =======      ===         ===       =======  

   As a condition for licensure by various state governments to operate HMOs
or MCOs, the Company is required to maintain certain funds on deposit with or   
under the control of the various departments of                                 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 

insurance. Accordingly, at December 31, 1999 and 2000, the amortized cost, gross
unrealized holding gains, gross unrealized holding losses and fair value for    
these held-to-maturity securities are summarized as follows:                    

                                                        [Enlarge/Download Table]

                                                       GROSS       GROSS               
                                                     UNREALIZED  UNREALIZED            
                                          AMORTIZED   HOLDING     HOLDING              
                                            COST       GAINS       LOSSES    FAIR VALUE
                                          ---------  ----------  ----------  ----------
                                                                                       
1999:                                                                                  
  U.S. Treasury securities, matures                                                    
     within one year.....................  $ 3,823      $--         $26       $ 3,797  
  Federal Home Loan Bank discount notes,                                               
     mature within one year..............    4,477       88          --         4,565  
  Escrow account.........................      692       --          --           692  
                                           -------      ---         ---       -------  
     Total...............................  $ 8,992      $88         $26       $ 9,054  
                                           =======      ===         ===       =======  
2000:                                                                                  
  U.S. Treasury securities, matures                                                    
     within one year.....................  $ 7,954      $10         $--       $ 7,964  
  Federal Home Loan Bank discount notes,                                               
     mature within one year..............    4,218       --           1         4,217  
  Escrow account.........................      692       --          --           692  
                                           -------      ---         ---       -------  
     Total...............................  $12,864      $10         $ 1       $12,873  
                                           =======      ===         ===       =======  

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

(4) PROPERTY AND EQUIPMENT, NET                                                 

    Property and equipment, net at December 31, 1999 and 2000 is summarized as
follows:                                                                        

                                                                [Download Table]

                                                              1999      2000   
                                                             -------   ------- 
                                                                               
Leasehold improvements...................................... $ 1,501   $ 3,224 
Furniture and fixtures......................................   2,354     3,779 
Equipment...................................................   5,997     8,381 
                                                             -------   ------- 
                                                               9,852    15,384 
Less accumulated depreciation and amortization..............  (2,943)   (5,320)
                                                             -------   ------- 
                                                             $ 6,909   $10,064 
                                                             =======   ======= 

(5) CONTRACTS PURCHASED                                                         

(a) Prudential                                                              

   Effective June 1, 1999, the Company purchased certain assets and provider
contracts of Prudential's Medicaid line of business in Maryland. Additionally,  
effective August 1, 1999, the Company purchased certain assets and provider     
contracts of Prudential's Medicaid line of business in the District of Columbia.
The assets purchased consist of Prudential's rights to provide managed care     
services to its Maryland and District of Columbia HMO members and the assignment
of Prudential's contracts with healthcare providers. The Company utilized the   
purchase method of accounting. For consideration of these assets received, the  
Company issued 3,710,775 shares of Series D two-to-one (giving effect to the    
reverse stock split -- note 13a)                                                

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 

convertible preferred stock at a fair value of $16,661. The Company recorded    
goodwill of $17,161 based on the fair value of the assets received and the      
transaction costs of $500 related to the acquisition. Prudential's provider     
contracts were assigned to the Company for approximately one year, during which 
time the Company actively recontracted with the providers. Although acquiring   
the Prudential provider contracts was necessary to meet certain Maryland and    
District of Columbia network requirements, the Company kept the Prudential      
provider contracts for a limited period, therefore, no value was assigned to the
acquired provider contracts. The goodwill is amortized on a straight-line basis 
over 20 years, except for $3,021 of goodwill related to a component of the      
Medicaid line of business in Maryland which is amortized over 18 months. This   
component relates to members served by a major provider under a renewable       
contract with an initial term of 18 months. The contract was extended and       
expires December 31, 2001.                                                      

(b) Oxford                                                                  

  Effective July 1, 1998, the Company purchased certain assets and assumed
certain provider contracts of Oxford New Jersey's (Oxford's) Medicaid line of   
business. The assets purchased consisted of Oxford's rights to provide managed  
care services to its Medicaid members and assignment of its contracts with      
healthcare providers. The Company utilized the purchase method of accounting.   
The Company paid $5,501 in cash including transaction costs, resulting in       
goodwill of the same amount. Oxford's provider contracts were assigned to the   
Company for a maximum of one year, during which time the Company actively       
recontracted with the providers. The Company already operated as an HMO in New  
Jersey, and in some cases its existing provider contracts had rates more        
favorable to the Company than those of Oxford. Although acquiring the Oxford    
provider contracts was necessary to meet certain state network requirements, the
Company kept the Oxford provider contracts in place for a maximum of one year,  
and therefore no value was assigned to the acquired provider contracts. The     
goodwill is amortized on a straight-line basis over 20 years, the expected      
period to be benefited.                                                         

(c) Pro Forma Results of Operations                                         

The following unaudited pro forma summary information presents the    
consolidated income statement information as if both of the aforementioned      
transactions had been consummated on January 1, 1998, and do not purport to be  
indicative of what would have occurred had the acquisitions been made at that   
date or of the results which may occur in the future. Full year results for both
of the aforementioned transactions are included in the accompanying 2000        
Consolidated Statement of Operations.                                           

                                                        [Enlarge/Download Table]

                                                             YEARS ENDED DECEMBER 31,
                                                             ------------------------
                                                                1998          1999   
                                                             ----------    ----------
                                                                                     
Premium revenue.............................................  $435,764      $479,545 
                                                              ========      ======== 
Net income (loss)...........................................  $ (2,907)     $  7,008 
                                                              ========      ======== 
Diluted net income (loss) per share.........................  $ (17.16)     $   0.36 
                                                              ========      ======== 

  The unaudited pro forma summary information reflects adjustments made to
the Company's historical statements by including the applicable results of      
operations of Prudential's Medicaid lines of business in Maryland and the       
District of Columbia and of Oxford's Medicaid line of business in New Jersey    
prior to their respective acquisitions.                                         

   Amortization of goodwill associated with these acquisitions that has been
included in the determination of pro forma net income (loss) and diluted net    
income (loss) per share for each of the years ended December 31, 1998 and 1999  
was $2,991. In accordance with SFAS No. 142, goodwill will no longer be         
amortized effective January 1, 2002.                                            

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 

(6) INCOME TAXES                                                                

  Income tax expense (benefit) for the years ended December 31, 1998, 1999
and 2000 and the six months ended June 30, 2001 (unaudited) consists of the     
following:                                                                      

                                                        [Enlarge/Download Table]

                                                        CURRENT BENEFIT                      
                                                               OF                            
                                                       NET OPERATING LOSS                    
                                              CURRENT    CARRYFORWARDS     DEFERRED   TOTAL  
                                              -------  ------------------  --------  ------- 
                                                                                             
Year ended December 31, 1998:                                                                
  U.S. federal............................... $ 1,043       $(1,043)       $    --   $    -- 
  State and local............................     161          (161)            --        -- 
                                              -------       -------        -------   ------- 
                                              $ 1,204       $(1,204)       $    --   $    -- 
                                              =======       =======        =======   ======= 
Year ended December 31, 1999:                                                                
  U.S. federal............................... $ 5,972       $(4,939)       $(4,584)  $(3,551)
  State and local............................     925          (764)          (710)     (549)
                                              -------       -------        -------   ------- 
                                              $ 6,897       $(5,703)       $(5,294)  $(4,100)
                                              =======       =======        =======   ======= 
Year ended December 31, 2000:                                                                
  U.S. federal............................... $13,843       $    --        $ 1,012   $14,855 
  State and local............................   2,640            --            192     2,832 
                                              -------       -------        -------   ------- 
                                              $16,483       $    --        $ 1,204   $17,687 
                                              =======       =======        =======   ======= 
Six months ended June 30, 2001 (unaudited):                                                  
  U.S. federal............................... $11,155       $    --        $  (369)  $10,786 
  State and local............................   1,700            --            (56)    1,644 
                                              -------       -------        -------   ------- 
                                              $12,855       $    --        $  (425)  $12,430 
                                              =======       =======        =======   ======= 

    There was no income tax expense or benefit for the year ended December 31,
1998. Income tax expense (benefit) was ($4,100) and $17,687 for the years ended 
December 31, 1999 and 2000, respectively and $12,430 for the six months ended   
June 30, 2001 (unaudited). These amounts differed from the amounts computed by  
applying the U.S. federal income tax rate to income before income taxes as a    
result of the following:                                                        

                                                        [Enlarge/Download Table]

                                                                                SIX MONTHS  
                                                  YEARS ENDED DECEMBER 31,        ENDED     
                                                 --------------------------      JUNE 30,   
                                                  1998     1999      2000          2001     
                                                 ------   -------   -------   --------------
                                                                               (UNAUDITED)  
                                                                                            
U.S. federal income tax rate...................      34%       34%       35%          35%   
Computed "expected" tax expense................  $1,175   $ 2,453   $15,323      $10,358    
Increase (reduction) in income taxes resulting                                              
  from:                                                                                     
  Change in the beginning of the year balance                                               
     of the valuation allowance for deferred                                                
     tax assets allocated to federal income tax                                             
     expense...................................  (1,228)   (6,764)       --           --    
  State and local income taxes, net of federal                                              
     income tax effect.........................      --      (362)    1,841        1,069    
  Effect of nondeductible expenses and other,                                               
     net.......................................      53       573       523        1,003    
                                                 ------   -------   -------      -------    
          Total income tax expense (benefit)...  $   --   $(4,100)  $17,687      $12,430    
                                                 ======   =======   =======      =======    

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 

The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
1999 and 2000 and June 30, 2001 are presented below:                            

                                                        [Enlarge/Download Table]

                                                               DECEMBER 31,                 
                                                             -----------------    JUNE 30,  
                                                              1999      2000        2001    
                                                             ------    -------   -----------
                                                                                 (UNAUDITED)
                                                                                            
Deferred tax assets:                                                                        
  Estimated claims incurred but not reported, deductible as                                 
    paid for tax purposes..................................  $1,284    $ 2,365     $ 1,878  
  Vacation and bonus accruals, deductible as paid for tax                                   
    purposes...............................................     453        513         637  
  Contractual allowances, deductible as written off for tax                                 
    purposes...............................................     551        298         683  
  Other accruals, deductible as paid for tax purposes......   1,110      1,457       1,863  
  Goodwill, due to timing differences in book and tax                                       
    amortization...........................................     280        846         726  
  Organizational costs, due to timing differences in book                                   
    and tax amortization...................................     249         --          --  
  Unearned revenue, included in income as received for tax                                  
    purposes...............................................   2,086         --          --  
                                                             ------    -------     -------  
    Total deferred tax assets..............................   6,013      5,479       5,787  
Deferred tax liabilities:                                                                   
  Property and equipment, due to timing differences in book                                 
    and tax depreciation...................................    (345)      (924)       (982) 
  Other....................................................    (374)      (465)       (290) 
                                                             ------    -------     -------  
    Total deferred tax liabilities.........................    (719)    (1,389)     (1,272) 
                                                             ------    -------     -------  
    Net deferred tax assets and liabilities................  $5,294    $ 4,090     $ 4,515  
                                                             ======    =======     =======  

     A valuation allowance is provided when it is more likely than not that some
portion of the deferred tax asset will not be realized. As of December 31, 1998,
due to historic losses and the uncertainty of future income, the Company had    
recorded a valuation allowance to defer recognition of the income tax benefit   
until it was deemed more likely than not the benefit would be realized. During  
1999, the Company removed the valuation allowance as it considered that the     
benefits of the deferred tax assets would more than likely be realized. The     
changes in the valuation allowance for deferred tax assets during 1998 and 1999,
respectively, were decreases of $1,342 and $7,368 and were reflected as         
decreases to deferred income tax expense.                                       

  Income taxes payable were $287 at December 31, 1999 and were included in
accrued expenses. Prepaid income taxes were $3,171 at December 31, 2000. Income 
taxes payable were $1,695 at June 30, 2001 (unaudited) and were included in     
accrued expenses.                                                               

     Cash paid for income taxes for the years ended December 31, 1998, 1999, and
2000, were $157, $751, and $19,941, respectively. Cash paid for income taxes for
the six months ended June 30, 2000 and 2001 (unaudited) were $7,275 and $7,989, 
respectively.                                                                   

(7) LONG-TERM DEBT                                                              

    During 1998, the Company entered into a Loan and Security Agreement with a
bank to obtain debt financing of $10,000. At December 31, 1998, a total of      
$10,000 was outstanding, of which $1,833 was current. As part of the Loan and   
Security Agreement, the Company issued warrants at fair value to the bank to    
purchase 25,000 shares of common stock. The exercise price of the warrants was  
equal to the fair value of the common stock on the date of grant. Because the   
fair value of the warrants was immaterial, no original issue discount was       
recorded. These warrants are currently exercisable at a price per share of $3.00
and expire May 15, 2003. During 1999, the Company repaid this long-term debt    
financing in its entirety.                                                      

   Concurrent with the repayment of the original long-term debt during 1999,
the Company entered into a second Loan and Security Agreement with two banks to 
obtain debt financing of $16,500, consisting of a                               

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 

term loan of $9,000 and a revolver commitment of $7,500. The term loan and      
revolver are secured by the assets of AMERIGROUP Corporation and by the common  
stock of its wholly-owned subsidiaries. The principal on the term loan bears    
interest at a rate equal to the prime rate plus 0.75%, which was 10.25% at      
December 31, 2000. Interest on the term loan is payable monthly on the first day
of the month. Principal of $167 is paid on the term loan each month beginning   
December 1, 1999 through April 1, 2003. The remaining principal balance is due  
April 30, 2003.                                                                 

Debt maturities are as follows:                                       

                                                                [Download Table]
                                                                    
2001........................................................  $2,000
2002........................................................   2,000
2003........................................................   2,177
                                                              ------
                                                              $6,177
                                                              ======

At December 31, 2000, no amounts were outstanding under the revolver  
commitment. The revolver commitment bears interest at a rate equal to the Prime 
Rate plus 0.75%, which was 10.25% at December 31, 2000. The Company also pays a 
rate of 0.5% as a commitment fee on the unused portion of the revolver          
commitment. Interest on the revolver commitment is payable monthly on the first 
day of the month. Any principal balance on the revolver loan is due April 30,   
2003.                                                                           

    Cash paid for interest expense for the years ended December 31, 1998, 1999
and 2000, was $417, $878 and $722, respectively. Cash paid for interest expense 
for the six months ended June 30, 2000 and 2001 (unaudited) were $334 and $433, 
respectively.                                                                   

    Pursuant to the Loan and Security Agreement, the Company must meet certain
financial covenants. At December 31, 2000, the Company is in compliance with    
such covenants. These financial covenants include meeting certain financial     
ratios, a limit on annual capital expenditures, a minimum net worth requirement 
and a restricted cash requirement.                                              

(8) REDEEMABLE PREFERRED STOCK                                                  

Redeemable preferred stock is summarized as follows:                  

                                                        [Enlarge/Download Table]

                                            SERIES E             SERIES A             SERIES B             SERIES C      
                                       -------------------  -------------------  -------------------  -------------------
                                        SHARES     AMOUNT    SHARES     AMOUNT    SHARES     AMOUNT    SHARES     AMOUNT 
                                       ---------   -------  ---------   -------  ---------   -------  ---------   -------
                                                                                                                         
Balances at                                                                                                              
  December 31, 1997...................        --   $   --   8,000,000   $11,654  7,025,000   $18,871  6,480,000   $18,571
Issuance of Series E mandatorily                                                                                         
  redeemable preferred stock.......... 1,000,000    4,200          --       --          --       --          --        --
Accreted dividends....................        --      386          --    1,270          --    2,151          --     2,319
                                       ---------   -------  ---------   -------  ---------   -------  ---------   -------
Balances at                                                                                                              
  December 31, 1998................... 1,000,000    4,586   8,000,000   12,924   7,025,000   21,022   6,480,000    20,890
Issuance of Series E mandatorily                                                                                         
  redeemable preferred stock.......... 1,000,000    4,200          --       --          --       --          --        --
Accreted dividends....................        --    1,544          --    1,270          --    2,151          --     2,319
                                       ---------   -------  ---------   -------  ---------   -------  ---------   -------
Balances at                                                                                                              
  December 31, 1999................... 2,000,000   10,330   8,000,000   14,194   7,025,000   23,173   6,480,000    23,209
Accreted dividends....................        --    1,544          --    1,270          --    2,151          --     2,319
                                       ---------   -------  ---------   -------  ---------   -------  ---------   -------
Balances at                                                                                                              
  December 31, 2000................... 2,000,000   11,874   8,000,000   15,464   7,025,000   25,324   6,480,000    25,528
Accreted dividends (unaudited)........        --      772          --      635          --    1,075          --     1,160
                                       ---------   -------  ---------   -------  ---------   -------  ---------   -------
Balances at                                                                                                              
  June 30, 2001 (unaudited)........... 2,000,000   $12,646  8,000,000   $16,099  7,025,000   $26,399  6,480,000   $26,688
                                       =========   =======  =========   =======  =========   =======  =========   =======

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 

Series E                                                                    

During July 1998, the Company issued 1,000,000 units of its Series E  
Mandatorily Redeemable Preferred Stock and Warrants (Series E) at a price of    
$5.00 per unit (the first tranche). During January 1999, the Company issued an  
additional 1,000,000 units of the Series E at a price of $5.00 per unit (the    
second tranche). Each unit includes a share of Series E preferred stock and an  
unattached warrant to purchase 0.5625 shares of common stock at a price of $0.02
per share. Of the gross proceeds of $5.00, $0.80 has been allocated to the      
warrants issued based on fair value. The fair value of the warrants sold was    
determined by the Company's Board of Directors and was consistent with the      
exercise price of the stock options of the Company at the time of issuance. The 
warrants are exercisable at any time and expire on July 28, 2005 for the first  
tranche and January 28, 2006 for the second tranche. The remaining amount of    
$4.20 is attributable to Series E stock. The redeemable preferred stock is      
recorded at its original fair value of $4.20 per share, plus accreted dividends.
In accordance with the terms of the Series E mandatorily redeemable preferred   
stock, dividends per share accrue as follows:                                   

                                                                [Download Table]

                                                  FIRST TRANCHE  SECOND TRANCHE
                                                  -------------  --------------
                                                                               
September 30, 1998...............................     $2.05          $  --     
December 31, 1998................................        --             --     
March 31, 1999...................................        --           2.05     
June 30, 1999....................................        --             --     
September 30, 1999...............................        --             --     
December 31, 1999................................        --             --     
March 31, 2000...................................        --             --     
June 30, 2000....................................        --             --     
September 30, 2000...............................        --             --     
December 31, 2000................................      0.10             --     
March 31, 2001...................................      0.15             --     
June 30, 2001....................................      0.16           0.10     
September 30, 2001...............................      0.16           0.15     
December 31, 2001................................      0.16           0.16     
March 31, 2002...................................      0.17           0.16     
June 30, 2002....................................      0.17           0.16     
September 30, 2002...............................      0.18           0.17     
December 31, 2002................................      0.18           0.17     
March 31, 2003...................................      0.19           0.18     
June 30, 2003....................................      0.19           0.18     
September 30, 2003...............................        --           0.19     
December 31, 2003................................        --           0.19     

The total of these dividends is charged to retained earnings on the   
interest method over the five-year period each tranche is outstanding.          

    The Series E stock is mandatorily redeemable upon the sale of the Company,
an initial public offering, at the option of the Company or at July 28, 2003 for
the first tranche and January 28, 2004 for the second tranche. If not redeemed  
prior to the mandatory redemption dates, the mandatory redemption requirements  
for Series E stock are $8,060 for each of the years ended December 31, 2003 and 
2004.                                                                           

     The Series E cumulative dividends are payable upon redemption, liquidation,
dissolution or winding up of the Company. The Series E redemption value has     
liquidation preference over common stock and all other series of preferred      
stock. Series E stockholders have the right to vote with holders of Series A, B,
C and D                                                                         

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 

preferred stock and the holders of the common stock on all matters coming before
the Company's stockholders and is entitled to cast a number of votes as if each 
share of Series E were 0.5625 shares of common stock.                           

  The holders of the majority of the Series E shares, voting as a separate
class, shall be necessary to alter the specific terms, rights and privileges of 
the Series E preferred stock.                                                   

Series A, B and C                                                           

     The Series A, B and C preferred stock are convertible to common shares on a
two-for-one basis (giving effect to the reverse stock split - note 13a), at the 
option of the preferred stockholder and have one common share equivalent voting 
right for every two shares held. The Series A, B and C preferred stock carry a  
noncumulative 10% dividend payable upon approval by the Board of Directors.     
These dividends, if declared but not paid, have liquidation preferences over    
common stock with Series C dividends having preference over Series A and B      
dividends. Series A, B, C and E have liquidation preferences over Series D.     
Series D has liquidation preferences over common stock.                         

Also, beginning December 23, 2003, the Series A, B and C preferred    
stockholders have the right to redeem each year a portion of their preferred    
stock plus an amount per share equal to the original issue price plus an amount 
equal to 10% of the original issue price compounded annually from the date of   
the original sale to redemption. The preferred stock is fully redeemable by     
December 23, 2005. The Company accretes dividends on Series A, B and C using the
interest method and adds the accrued dividends to the applicable redeemable     
preferred stock issue balance.                                                  

The holders of a majority of the Series C shares, voting as a separate
class, shall be necessary to alter the specific terms, rights and privileges of 
the Series C preferred stock.                                                   

   The holders of a majority of Series A, B, C and E shares, voting together
as a separate class, are necessary to approve any amendment to the Certificate  
of Incorporation or bylaws that adversely affects or limits any of their rights.

(9) STOCK OPTION PLAN                                                           

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

In July 2000, the Company adopted the 2000 Equity Incentive Plan (2000
Plan), which provides for the granting of either stock options, restricted      
stock, phantom stock and stock bonuses to employees, directors and consultants. 
The Company has reserved for issuance a maximum of 2,064,000 shares of common   
stock under the 2000 Plan. In addition, shares remaining available for issuance 
under the 1994 Plan will be available for issuance under the 2000 Plan,         
resulting in a total of 4,313,500 shares available for grant under the 2000     
Plan. Under both plans, an option's maximum term is ten years. Twenty percent of
the options vest upon grant date or at an employee's hiring anniversary date,   
whichever is later, and five percent at the end of each three-month period      
thereafter.                                                                     

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 

    A summary of both stock plans at December 31, 1998, 1999, and 2000 and the
changes during the years then ended follows:                                    

                                                        [Enlarge/Download Table]

                                            1998                   1999                   2000         
                                    ---------------------  ---------------------  ---------------------
                                                WEIGHTED-              WEIGHTED-              WEIGHTED-
                                                 AVERAGE                AVERAGE                AVERAGE 
                                                EXERCISE               EXERCISE               EXERCISE 
                                     SHARES       PRICE     SHARES       PRICE     SHARES       PRICE  
                                    ---------   ---------  ---------   ---------  ---------   ---------
                                                                                                       
Outstanding at beginning of year... 1,305,842     $0.84    1,382,253     $0.88    1,567,543    $ 1.53  
Granted............................   271,250      1.40      389,595      3.65      563,407     11.56  
Exercised..........................     8,162      0.72      111,496      0.89      267,150      0.94  
Forfeited..........................   186,677      1.34       92,809      1.53       87,771      5.44  
                                    ---------              ---------              ---------            
Outstanding at end of year......... 1,382,253     $0.88    1,567,543     $1.53    1,776,029    $ 4.61  
                                    =========     =====    =========     =====    =========    ======  

 The following table summarizes information related to the stock options
outstanding at December 31, 2000:                                               

                                                        [Enlarge/Download Table]

                                                                              WEIGHTED-  
                                                                               AVERAGE   
                                                                              REMAINING  
                                                     OPTIONS      OPTIONS    CONTRACTUAL 
EXERCISE PRICE                                     OUTSTANDING  EXERCISABLE  LIFE (YEARS)
--------------                                     -----------  -----------  ------------
                                                                                         
$0.20.............................................    103,375      103,375       4.10    
$0.40.............................................    377,385      369,210       4.86    
$1.40.............................................    442,502      248,984       6.77    
$3.00.............................................    284,503      126,032       7.63    
$8.60.............................................    302,264       95,750       9.05    
$11.70............................................      4,000           --       9.36    
$12.00............................................     14,000           --       9.83    
$15.00............................................    248,000       62,500       9.51    
                                                    ---------    ---------               
                                                    1,776,029    1,005,851       7.15    
                                                    =========    =========       ====    

   At December 31, 2000, the number of options exercisable was 1,005,851 and
the weighted-average exercise price of those options was $2.64.                 

    On February 15, 2001, the Company granted an additional 347,439 options at
an exercise price of $15.00.                                                    

The Company applies APB Opinion No. 25 and related interpretations in 
accounting for its stock plans. Accordingly, compensation cost related to stock 
options issued to employees would be recorded on the date of grant only if the  
current market price of the underlying stock exceeded the exercise price. During
2000, the Company recorded deferred charges of $1,833, representing the         
difference between the exercise price and the deemed fair value of the Company's
common stock for the options granted in 2000. The deferred compensation will be 
amortized to expense over the period the options vest, generally four to five   
years. The Company recognized $698 in non-cash compensation expense related to  
the amortization of deferred compensation during 2000. Had compensation cost for
the Company's stock-based compensation plans been determined consistent with    
SFAS No. 123, the Company's net income would have been decreased to $3,400,     
$11,219 and $25,745 in 1998, 1999 and 2000, respectively. Diluted net income    
(loss) per share would have been $(5.18), $0.66 and $1.54 in 1998, 1999 and     
2000, respectively.                                                             

     The fair value of each option grant is estimated on the date of grant using
an option pricing model with the following assumptions: no dividend yield and no
expected volatility for all years, risk-free interest rate of                   

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 

6.7%, 6.7% and 5.1% and expected life of seven, seven and three and one-half    
years for 1998, 1999 and 2000, respectively.                                    

(10) EARNINGS PER SHARE                                                         

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

                                                        [Enlarge/Download Table]

                                                                                                       SIX MONTHS ENDED      
                                                                YEARS ENDED DECEMBER 31,                   JUNE 30,          
                                                        ----------------------------------------  ---------------------------
                                                          1998          1999            2000         2000            2001    
                                                        --------     -----------     -----------  -----------     -----------
                                                                                                          (UNAUDITED)        
                                                                                                                             
Basic net income (loss) per share:                                                                                           
  Net income (loss) attributable to common                                                                                   
    stockholders....................................... $ (2,670)    $     4,032     $    18,808  $     9,966     $    13,523
                                                        ========     ===========     ===========  ===========     ===========
  Weighted average number of common shares                                                                                   
    outstanding........................................  526,651         567,146         796,409      698,849       1,020,071
    Basic net income (loss) per share.................. $  (5.07)    $      7.11     $     23.62  $     14.26     $     13.26
                                                        ========     ===========     ===========  ===========     ===========
Diluted net income (loss) per share:                                                                                         
  Net income (loss) attributable to common                                                                                   
    stockholders....................................... $ (2,670)    $     4,032     $    18,808  $     9,966     $    13,523
  Plus: Accretion of convertible preferred stock                                                                             
    dividends assuming conversion......................       --           5,740           5,740        2,870           2,870
                                                        --------     -----------     -----------  -----------     -----------
  Diluted net income (loss) attributable to common                                                                           
    stockholders....................................... $ (2,670)    $     9,772     $    24,548  $    12,836     $    16,393
                                                        ========     ===========     ===========  ===========     ===========
  Weighted average number of common shares                                                                                   
    outstanding........................................  526,651         567,146         796,409      698,849       1,020,071
  Dilutive effect of stock options and warrants (as                                                                          
    determined by applying the treasury stock method)                                                                        
    and convertible preferred stock....................       --      14,128,178      15,021,766   15,107,467      14,873,350
                                                        --------     -----------     -----------  -----------     -----------
  Weighted average number of common shares and                                                                               
    potential dilutive common shares outstanding.......  526,651      14,695,324      15,818,175   15,806,316      15,893,421
                                                        ========     ===========     ===========  ===========     ===========
    Diluted net income (loss) per share................ $  (5.07)    $      0.66     $      1.55  $      0.81     $      1.03
                                                        ========     ===========     ===========  ===========     ===========

(11) FAIR VALUE OF FINANCIAL INSTRUMENTS                                        

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

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

Long-term debt: The carrying amounts approximate fair value since the 
interest rate on long-term debt varies with the prime rate.                     

(12) COMMITMENTS                                                                

(a) Minimum Reserve Requirements                                            

    Regulations governing the Company's managed care operations in New Jersey,
Texas, Illinois, Maryland and the District of Columbia require the applicable   
subsidiary to meet certain minimum net worth requirements. Each subsidiary was  
in compliance with their requirements at December 31, 2000.                     

(b) Stop-loss Coverage                                                      

    Each of the Company's subsidiaries carries stop-loss coverage for hospital
medical expense through an independent carrier. The policies limit stop-loss    
coverage to certain maximum lifetime indemnity amounts per                      

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 

insured member, subject to certain deductibles and certain loss percentages.    
This stop-loss coverage does not relieve any of the Company's subsidiaries of   
their primary obligation to the plan members.                                   

(c) General Liability and Malpractice                                       

 The Company maintains a general liability policy through an independent
carrier subject to annual coverage limits and a separate claims-incurred        
umbrella policy through an independent carrier subject to annual coverage limits
for amounts exceeding the general liability limits.                             

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

(d) Operating Lease Agreements                                              

The Company leases office space and certain office equipment under    
operating leases which expire at various dates through 2005. Future minimum     
payments by year and in the aggregate under all noncancelable operating leases  
consist of the following approximate amounts at December 31, 2000:              

                                                                [Download Table]

                                                                OPERATING
                                                                 LEASES  
                                                                ---------
                                                                         
2001........................................................     $2,637  
2002........................................................      2,237  
2003........................................................      1,857  
2004........................................................        996  
2005........................................................         56  
                                                                 ------  
                                                                 $7,783  
                                                                 ======  

Total rent expense for all office space and office equipment under    
noncancelable operating leases was approximately $1,130, $1,900 and $2,077 in   
1998, 1999 and 2000, respectively, and is included in selling, general and      
administrative expenses in the accompanying Consolidated Statements of          
Operations.                                                                     

(e) Deferred Compensation Savings Plan                                      

The Company's employees have the option to participate in a deferred  
compensation plan sponsored by the Company. All full-time and most part-time    
employees of AMERIGROUP Corporation and subsidiaries may elect to participate in
this plan. This plan is exempt from income taxes under Section 401(k) of the    
Internal Revenue Code. Participants may contribute a certain percentage of their
compensation subject to maximum federal and plan limits. The Company may elect  
to match a certain percentage of each employee's contributions up to specified  
limits. There were no matching contributions made for the years ended December  
31, 1998 and 1999. For the year ended December 31, 2000, the matching           
contribution under the plan in total was $135.                                  

(13) STOCKHOLDERS' EQUITY                                                       

(a) Authorization for Initial Public Offering and Reverse Stock Split       

  On May 10, 2000, the Board of Directors authorized the Company to file a
Registration Statement with the U.S. Securities and Exchange Commission for an  
initial public offering of its common stock. Additionally, on June 30, 2000, the
Board of Directors and the Company's stockholders approved a one-for-two reverse
stock split of the Company's common stock contingent upon the successful        
completion of an initial public offering. The Company intends to file the       
necessary documents with the State of Delaware. The                             
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 

Board of Directors also approved amendments to the Company's Articles of        
Incorporation increasing the authorized number of shares of common stock to     
100,000,000 and authorizing 10,000,000 shares of preferred stock to be issued   
contingent upon the successful completion of an initial public offering. The    
Board of Directors also authorized the Company to exercise its right to         
accelerate the exercise date of the warrants to purchase 1,125,000 shares of    
common stock by the Series E preferred stockholders to immediately prior to the 
closing of the planned initial public offering.                                 

(b) Series D Convertible Preferred Stock                                    

  During 1999, the Company issued 3,710,775 shares of Series D convertible
preferred stock as consideration for purchasing the contracts and certain other 
assets of Prudential's Medicaid line of business in the state of Maryland and   
the District of Columbia (note 5). The Series D preferred stock is convertible  
to common shares on a two-for-one basis, subject to adjustment for stock splits,
at the option of the preferred stockholder and has one common share equivalent  
voting right for every two shares held. The Series D convertible preferred stock
does not carry a stated dividend.                                               

(c) Employee Stock Purchase Plan                                            

On February 15, 2001, the Board of Directors approved and the Company 
adopted an Employee Stock Purchase Plan, under which employees who have at least
six months of service, work more than twenty hours per week and who are not     
"highly compensated employees" within the meaning of Section 414(q) of the      
Internal Revenue Code are eligible to participate, except for employees who own 
five percent or more of the common stock of the Company and any subsidiary of   
the Company. The Company has reserved for issuance 600,000 shares of common     
stock under the Employee Stock Purchase Plan.                                   

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 

(14) COMMON STOCK PRO FORMA INFORMATION (UNAUDITED)                             

     The unaudited June 30, 2001 pro forma consolidated stockholders' equity and
pro forma net income per common share information for the year ended December   
31, 2000 and the six months ended June 30, 2001 give effect to the conversion of
all of our outstanding convertible preferred stock into 12,607,887 shares of    
common stock upon the completion of the proposed offering described in note 13. 
For purposes of the unaudited pro forma stockholders' equity the transactions   
have been assumed to have occurred on June 30, 2001. For purposes of the        
unaudited pro forma net income per common share information, the transactions   
were assumed to have occurred as of January 1, 2000. The unaudited pro forma    
information presented does not purport to represent the financial position or   
net income per common share of the Company if such transactions had occurred on 
such dates or to project the Company's financial position or net income per     
common share as of any future date or for any future period.                    

The table below provides supporting calculations for the unaudited pro
forma net income per common share.                                              

                                                        [Enlarge/Download Table]

                                                      YEAR ENDED    SIX MONTHS ENDED 
                                                     DECEMBER 31,       JUNE 30,     
                                                         2000             2001       
                                                     ------------  ------------------
                                                                                     
Computation of pro forma weighted average number of                                  
  common shares outstanding:                                                         
  Historical........................................     796,409        1,020,071    
  Common shares issued on conversion of convertible                                  
    preferred stock.................................  12,607,887       12,607,887    
                                                     -----------      -----------    
                                                      13,404,296       13,627,958    
                                                     ===========      ===========    
Computation of pro forma weighted average number of                                  
  common shares and potentially dilutive common                                      
  shares outstanding:                                                                
  Historical........................................  15,818,175       15,893,421    
  Common shares issued on conversion of convertible                                  
    preferred stock.................................  12,607,887       12,607,887    
  Elimination of effect of convertible preferred                                     
    shares and warrants in historical amount........ (12,607,887)     (12,607,887)   
                                                     -----------      -----------    
                                                      15,818,175       15,893,421    
                                                     ===========      ===========    

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INDEPENDENT AUDITORS' REPORT

The Board of Directors                                                          
Oxford Health Plans (NJ), Inc.                                                  

The Board of Directors                                                          
AMERICAID New Jersey, Inc:                                                      

 We have audited the accompanying statements of revenues and expenses of
contracts acquired of the Medicaid business of Oxford Health Plans (NJ), Inc.   
(the Company) for the six months ended June 30, 1998, and the year ended        
December 31, 1997. These financial statements are the responsibility of the     
Company's management. Our responsibility is to express an opinion on these      
financial statements based on our audits.                                       

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

The accompanying statements of revenues and expenses were prepared to 
present the revenues and expenses of contracts acquired of the Medicaid Business
of Oxford Health Plans (NJ), Inc. pursuant to the purchase agreement between    
Oxford Health Plans (NJ), Inc. and AMERICAID New Jersey, Inc., a wholly owned   
subsidiary of AMERIGROUP Corporation.                                           

In our opinion, the statements of revenues and expenses of contracts  
acquired referred to above present fairly, in all material respects, the results
of operations of the Medicaid Business of Oxford Health Plans (NJ), Inc. for the
six months ended June 30, 1998, and the year ended December 31, 1997, pursuant  
to the purchase agreement referred to in note 1, in conformity with generally   
accepted accounting principles.                                                 

November 16, 1998                                                               
Norfolk, Virginia                                                               

/s/ KPMG LLP                                                                    

  F-25

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MEDICAID BUSINESS OF OXFORD HEALTH PLANS (NJ), INC. 

STATEMENTS OF REVENUES AND EXPENSES OF CONTRACTS ACQUIRED 
FOR THE SIX MONTHS ENDED JUNE 30, 1998, AND THE YEAR ENDED DECEMBER 31, 1997

                                                        [Enlarge/Download Table]

                                                                1998          1997     
                                                             -----------   ----------- 
                                                                                       
Premium revenues............................................ $34,068,852   $82,857,422 
                                                             -----------   ----------- 
Expenses:                                                                              
  Medical expenses, net:                                                               
     Inpatient hospital.....................................  11,863,228    29,234,788 
     Physician services.....................................  12,571,746    27,825,067 
     Pharmacy...............................................   3,502,771     8,461,476 
     Other medical services.................................   5,271,426    10,583,125 
                                                             -----------   ----------- 
       Total medical expenses, net..........................  33,209,171    76,104,456 
                                                             -----------   ----------- 
  Management fees (note 3)..................................   3,767,696    14,948,081 
                                                             -----------   ----------- 
       Total expenses.......................................  36,976,867    91,052,537 
                                                             -----------   ----------- 
       Loss before income taxes.............................  (2,908,015)   (8,195,115)
Income tax benefit (note 4).................................  (1,017,805)   (2,899,863)
                                                             -----------   ----------- 
       Net loss............................................. $(1,890,210)  $(5,295,252)
                                                             ===========   =========== 

See accompanying notes to statements of revenues and expenses of contracts
acquired. 
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MEDICAID BUSINESS OF OXFORD HEALTH PLANS (NJ), INC. 

NOTES TO STATEMENTS OF REVENUES AND EXPENSES
OF CONTRACTS ACQUIRED 
FOR THE SIX MONTHS ENDED JUNE 30, 1998, AND THE YEAR ENDED DECEMBER 31, 1997

(1) ORGANIZATION AND PRINCIPLES OF CONSOLIDATION                                

(a) Organization                                                            

    Oxford New Jersey Medicaid (the Business) operated as a division of Oxford
Health Plan (NJ), Inc. (Oxford-NJ), serving the Medicaid population in New      
Jersey. Oxford-NJ is a wholly owned subsidiary of Oxford Health Plans, Inc.     
(Oxford), a Delaware Corporation. The Business has been granted authority to    
operate as a New Jersey health maintenance organization (HMO) by the Department 
of Health of the State of New Jersey. The Business is a federally qualified     
competitive medical plan.                                                       

Effective July 1, 1998, AMERICAID New Jersey, Inc., a wholly owned    
subsidiary of AMERIGROUP Corporation, purchased certain assets of the Business  
pursuant to an asset purchase agreement. The assets purchased consisted of the  
contracts of the Business with members of the HMO, the contracts of the Business
with healthcare providers, and the State of New Jersey Medicaid contract of the 
Business. AMERICAID New Jersey, Inc. did not purchase any tangible assets nor   
did it assume any liabilities of the Business, therefore, no balance sheets are 
presented in these special purpose financial statements.                        

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES                    

(a) Income Taxes                                                            

 The Business's operating results were included in Oxford's consolidated
federal income tax return. In accordance with the tax sharing arrangement with  
Oxford, Oxford-NJ calculates its federal income tax as though it filed a        
separate federal return. The Business's operating results were included in      
Oxford-NJ's state income tax return.                                            

(b) Premium Revenues                                                        

     Premiums are due monthly and are recognized as revenue during the period in
which the Business is obligated to provide services to members, and are net of  
amounts established for termination of members.                                 

(c) Stop-Loss Coverage                                                      

Stop-loss premiums, net of recoveries, are included in other medical  
expenses in the accompanying statements of revenues and expenses.               

(d) Management Fee                                                          

    The Business is charged a management fee by Oxford for all administrative,
selling, general, and financial advisory services performed on its behalf. This 
fee includes charges for lease expenses incurred by Oxford-NJ on behalf of the  
Business. The allocation method used to calculate management fees for the       
Business was consistent with the method used by Oxford for all of these types of
intercompany allocations. The method used reasonably estimates all costs related
to the contract rights and other assets sold to AMERICAID New Jersey, Inc.      

(e) Medical Expenses                                                        

    The Business contracts with various healthcare providers for the provision
of certain medical care services to its members and generally compensates these 
providers on a fee-for-services basis.                                          

Medical expenses are estimated by management based on evaluations of  
providers' claims submitted and provisions for incurred but not reported (IBNR) 
claims. Oxford-NJ estimates the amount of the provision for IBNR using standard 
actuarial methodologies based upon historical data including the average        
interval between the date services are rendered and the date claims are paid,   
expected medical cost inflation, seasonality patterns and increases or decreases
in membership. The estimates for submitted claims and IBNR claims are made on an
accrual basis and adjusted in future periods as required.                       

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MEDICAID BUSINESS OF OXFORD HEALTH PLANS (NJ), INC. 

NOTES TO STATEMENTS OF REVENUES AND EXPENSES
OF CONTRACTS ACQUIRED -- (CONTINUED)

(f) Use of Estimates                                                        

   Management of the Business has made a number of estimates and assumptions
relating to these financial statements in conformity with generally accepted    
accounting principles. Actual results could differ from those estimates.        

(3) TRANSACTIONS WITH RELATED PARTIES                                           

    Certain members of the Board of Directors of Oxford-NJ are also members of
the Boards of Directors of Oxford, Oxford Health Plans (NY) Inc., and its       
wholly-owned subsidiary Oxford Health Insurance, Inc. (Oxford-NY); Oxford Health
Plans (CT) Inc. (Oxford-CT); Oxford Health Plans (NH), Inc. (Oxford-NH); Oxford 
Health Plans (PA), Inc. (Oxford-PA); Oxford Health Plan (FL), Inc. (Oxford-FL); 
and Oxford Health Plans (IL), Inc. (Oxford-IL). Oxford-NJ, Oxford-NY, Oxford-CT,
Oxford-NH, Oxford-PA, Oxford-FL, and Oxford-IL are all wholly-owned subsidiaries
of Oxford.                                                                      

     In consideration for services provided during the six months ended June 30,
1998 and for the year ended December 31, 1997, the Business paid management fees
to Oxford calculated as a percentage of the Business's gross margin (premium    
revenues less total medical expenses, net) but not less than a minimum amount   
calculated as 9 percent of the Business's premium revenues. These calculations  
are performed on a quarterly basis.                                             

(4) INCOME TAXES                                                                

     Income tax expense (benefit) for the six months ended June 30, 1998 and the
year ended December 31, 1997 differs from the amounts computed by applying the  
U.S. federal income tax rate of 34 percent to income (loss) before income taxes 
primarily due to state income taxes.                                            

(5) STOP-LOSS COVERAGE                                                          

  Oxford-NJ maintains stop-loss coverage with a major insurance company to
limit its medical expense exposure. The policy held by Oxford-NJ covers the     
Business. Under the terms of this agreement the insurance company will reimburse
Oxford-NJ for 50 percent to 90 percent of the cost of each member's annual      
medical services, excluding prescription drugs, in excess of a $150,000         
deductible, up to a lifetime limitation of $2,000,000 per member. Stop-loss     
premiums charged to other medical expenses in the accompanying financial        
statements amounted to $8,912 during the first six months of 1998 and $16,412 in
1997. There were no reinsurance recoveries during any of these periods.         

(6) CONCENTRATION OF CREDIT RISK                                                

    All of the Business's premium revenue is earned from the Medicaid contract
with the State of New Jersey. Since all revenue is earned from this single      
contract, significant concentration of credit risk exists.                      

(7) CONTINGENCIES                                                               

Oxford is a defendant in a large number of purported securities class 
action lawsuits and shareholder derivative lawsuits which have been filed after 
the substantial decline in the price of Oxford's common stock on October 27,    
1997. The costs of defending such lawsuits and management's time commitments in 
defending such lawsuits and their financial disposition may adversely affect    
Oxford's results of operations and financial condition. Although the outcome of 
these actions cannot be predicted at this time, Oxford believes that the        
defendants have substantial defenses to the claims asserted in the complaints   
and intends to defend the actions vigorously. Oxford's HMO and insurance        
subsidiaries, including Oxford-NJ, are not defendants in these lawsuits. Oxford,
including its subsidiaries, is also the subject of examinations, investigations 
and                                                                             
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MEDICAID BUSINESS OF OXFORD HEALTH PLANS (NJ), INC. 

NOTES TO STATEMENTS OF REVENUES AND EXPENSES
OF CONTRACTS ACQUIRED -- (CONTINUED)

inquiries by several governmental agencies, including various insurance         
departments and state departments of health, the New York State Attorney        
General, the Federal Health Care Financing Administration and the Securities and
Exchange Commission.                                                            

Oxford-NJ is involved in other legal actions in the normal course of  
business, some of which seek monetary damages, including claims for punitive    
damages which are not covered by insurance. Oxford-NJ believes any ultimate     
liability associated with these contingencies would not have a material adverse 
effect on Oxford-NJ's financial position or results of operations.              

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--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

4,400,000 Shares

[AMERIGROUP CORPORATION LOGO] 

------------------------

Prospectus

            , 2001

------------------------- 

JOINT BOOK-RUNNING MANAGERS 

BANC OF AMERICA SECURITIES LLC                                       UBS WARBURG

------------------------- 

CIBC WORLD MARKETS                                                 STEPHENS INC.

UNTIL           , 2001, ALL DEALERS THAT BUY, SELL OR TRADE THE COMMON
STOCK MAY BE REQUIRED TO DELIVER A PROSPECTUS, REGARDLESS OF WHETHER THEY ARE   
PARTICIPATING IN THE OFFERING. THIS IS IN ADDITION TO THE DEALERS' OBLIGATION TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR      
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.                                             

--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

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THE FOLLOWING PAGES ARE ALTERNATE PAGES FOR THE EMPLOYEE STOCK PURCHASE PLAN
PROSPECTUS. 

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THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED WITHOUT   
NOTICE. AMERIGROUP MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION         
STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS  
PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND AMERIGROUP IS NOT       
SOLICITING OFFERS TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE  
OF THESE SECURITIES IS NOT PERMITTED.                                           

[ALTERNATE PAGE]
PROSPECTUS (NOT COMPLETE)                                                       

ISSUED NOVEMBER 2, 2001                                                         

[AMERIGROUP CORPORATION LOGO]                                                   

600,000 SHARES                                                                  

COMMON STOCK                                                                    

We are registering 600,000 shares of our common stock for issuance to our       
employees under our Employee Stock Purchase Plan. The shares under the plan will
be issued at a price equal to 85% of the lower of our initial public offering   
price and the market price of our common stock at the end of the initial        
offering period if purchased in the initial offering period under our Employee  
Stock Purchase Plan. Otherwise, the shares under the plan will be issued at a   
price equal to 85% of the lower of the market prices of our common stock on the 
first and last trading days of the applicable offering period. We anticipate    
that the initial public offering price will be between $17 and $19 per share.   

We have applied to list our common stock on the Nasdaq National Market under the
symbol "AMGP."                                                                  

INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON   
PAGE 8.                                                                         

NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES         
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED OR     
PASSED UPON THE ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO  
THE CONTRARY IS A CRIMINAL OFFENSE.                                             

                                                                [Download Table]

           PRICE TO  PROCEEDS TO
           EMPLOYEE  AMERIGROUP 
                                
Per Share  $         $          
Total      $         $          

The price to employee in the above table was calculated assuming that the shares
under the plan are issued at a price equal to 85% of the initial public offering
price. Salary deductions to pay for shares under the Employee Stock Purchase    
Plan will not be made until we complete our initial public offering.            

               , 2001.

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TABLE OF CONTENTS 

                                                                [Download Table]

                                                              PAGE
                                                              ----
                                                                  
Prospectus Summary..........................................    3 
Risk Factors................................................    7 
Forward-Looking Statements..................................   18 
Use of Proceeds.............................................   19 
Dividend Policy.............................................   20 
Capitalization..............................................   21 
Dilution....................................................   22 
Selected Consolidated Financial Data........................   23 
Management's Discussion and Analysis of Financial Condition       
  and Results of Operations.................................   24 
Business....................................................   32 
Management..................................................   50 
Related Party Transactions..................................   61 
Principal and Selling Stockholders..........................   62 
Description of Capital Stock................................   64 
Shares Eligible For Future Sale.............................   67 
Plan of Distribution........................................   69 
Legal Matters...............................................   70 
Experts.....................................................   70 
Where You Can Find More Information.........................   70 
Detailed Description of the Employer Stock Purchase Plan....   71 
Index to Financial Statements...............................  F-1 

------------------------

You should rely only on the information contained in this prospectus. We have   
not authorized anyone to provide you with different information. We are not     
making an offer to sell these securities in any jurisdiction where the offer or 
sale is not permitted. You should assume that the information appearing in this 
prospectus is accurate as of the date on the front cover of this prospectus     
only. Our business, financial condition, results of operations and prospects may
have changed since that date.                                                   

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[ALTERNATE PAGE]

EMPLOYEE STOCK PURCHASE PLAN SHARES 

                                                        [Enlarge/Download Table]


                                                                                                
Common stock available under the Employee                                                       
  Stock Purchase Plan..................... 600,000 shares                                       

Common stock to be outstanding after                                                            
  completion of our initial public                                                              
  offering................................ 19,182,012 shares                                    

Use of proceeds........................... We intend to use the net proceeds from issuing shares
                                           under the Employee Stock Purchase Plan for general   
                                           corporate purposes, including potential acquisitions.

Proposed Nasdaq National Market Symbol.... AMGP                                                 

  The number of shares of common stock to be outstanding after the initial
public offering is based on our shares outstanding as of September 30, 2001 and 
the sale of 4,400,000 shares of common stock in the initial public offering. We 
have not included the shares offered in the employee offering, because we are   
unsure as to how many of, and when, these shares may be purchased. In addition, 
this information excludes:                                                      

 - 1,155,088 shares of common stock issuable upon the exercise of vested
      stock options with a weighted average exercise price of $4.34 per share,

 - 965,242 shares of common stock issuable upon the exercise of unvested
       stock options with a weighted average exercise price of $11.39 per share,

   - 25,000 shares of common stock issuable upon the exercise of outstanding
     warrants with a weighted average exercise price of $3.00 per share, and

- shares of common stock reserved for issuance under our stock option 
plans.                                                            

   Except as otherwise indicated, the information in this prospectus assumes
the following:                                                                  

   - the conversion on closing of this offering of each outstanding share of
 convertible preferred stock into 12,607,887 shares of common stock,

    - the exercise of warrants to purchase 1,125,000 shares of common stock by
the Series E preferred stockholders,                              

- the redemption of each outstanding share of our Series E mandatorily
redeemable preferred stock; and                                   

- no exercise of the underwriters' over-allotment option to purchase  
      585,000 shares of common stock from us and 75,000 shares of common stock
      from Jeffrey L. McWaters in connection with our initial public offering.

All share numbers in this prospectus have been adjusted to reflect a one-for-two
reverse stock split of our common stock to be effected just prior to            
consummation of this offering.                                                  

References in this prospectus to this "offering" are to our initial public      
offering.                                                                       

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[ALTERNATE PAGE]

USE OF PROCEEDS 

   We estimate that we will receive net proceeds from the sale of the shares
of common stock in our initial public offering of $72.8 million, assuming an    
initial public offering price of $18.00 per share and after deducting estimated 
underwriting discounts and commissions and estimated offering expenses. If the  
underwriters exercise their over-allotment option in full, we estimate that our 
net proceeds will be $82.5 million.                                             

We intend to use the net proceeds of the initial public offering as   
follows:                                                                        

     - approximately $13.3 million to redeem our Series E mandatorily redeemable
preferred stock,                                                  

- approximately $4.7 million to repay the balance of our term loan    
   facility; as of June 30, 2001, $5.2 million was outstanding under the
facility, and                                                     

- the balance of approximately $54.8 million for general corporate    
purposes, including potential acquisitions.                       

    Employees that purchase shares under the Employee Stock Purchase Plan will
make payments through salary deductions. We intend to use the net proceeds from 
issuing shares under the Employee Stock Purchase Plan for general corporate     
purposes, including potential acquisitions.                                     

     Our Series E mandatorily redeemable preferred stock is redeemable for $4.20
per share plus accrued but unpaid dividends at the time we complete our initial 
public offering. Otherwise, the Series E mandatorily redeemable preferred stock 
is redeemable on July 28, 2003. Dividends accrue on our Series E mandatorily    
redeemable preferred stock whether or not declared. The proceeds from the       
issuance of the Series E mandatorily redeemable preferred stock were used in    
connection with the acquisition of the New Jersey Medicaid contract rights and  
other related assets from Oxford Health Plans and for general corporate         
purposes.                                                                       

     Our term loan facility that we are repaying with proceeds from the offering
accrues interest at a rate of prime plus 75 basis points per year and matures on
April 30, 2003. We borrowed the funds under this facility in November 1999 to   
obtain a revolving credit facility in addition to a term loan and used the      
borrowed funds to repay a May 1998 bank loan.                                   

   We have pursued a strategy of acquiring Medicaid and CHIP contract rights
and related assets to increase our membership and expand into new service areas.
We intend to continue this strategy, and are actively looking for opportunities 
that will complement our current operations. However, we currently have no      
commitments or agreements with respect to any such transactions. We also expect 
a portion of the proceeds to fund working capital to be used to:                

- increase market penetration within our current service areas,       

- pursue opportunities for the development of new markets,            

- expand services and products available to our members, and          

  - strengthen our capital base by increasing the statutory capital of our
health plan subsidiaries.                                         

   We have not determined the amount of net proceeds to be used specifically
for the foregoing purposes, other than for redemption of our Series E           
mandatorily redeemable preferred stock and repayment of our term loan. Pending  
any such uses, we intend to invest the net proceeds in interest bearing         
securities.                                                                     

  20

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[ALTERNATE PAGE]

PLAN OF DISTRIBUTION

We are registering 600,000 shares of common stock for issuance to our 
employees under our Employee Stock Purchase Plan. The shares under the plan will
be issued at a price equal to 85% of the lower of our initial public offering   
price and the market price of our common stock at the end of the initial        
offering period under our Employee Stock Purchase Plan. Otherwise, the shares   
under the plan will be issued at a price equal to 85% of the lower of the market
prices of our common stock on the first and last trading days of the applicable 
offering period. Salary deductions to pay for shares under the Employee Stock   
Purchase Plan will not be made until completion of our initial public offering, 
as more fully described under "Detailed Description of the Employee Stock       
Purchase Plan." Since we will issue shares under the Employee Stock Purchase    
Plan directly to employees and not through underwriters, no underwriting        
discount will be paid to underwriters.                                          

   Each of our officers and directors, most of our stockholders and selected
holders of options to purchase our stock have agreed not to offer, sell,        
contract to sell or otherwise dispose of, or enter into any transaction that is 
designed to, or could be expected to, result in the disposition of any shares of
our common stock or other securities convertible into or exchangeable or        
exercisable for shares of our common stock or derivatives of our common stock   
owned by these persons prior to this offering or common stock issuable upon     
exercise of options held by these persons for a period of 180 days after the    
effective date of the registration statement related to our initial public      
offering, subject to limited exceptions, without the prior written consent of   
Banc of America Securities LLC and UBS Warburg LLC. This consent may be given at
any time without public notice. We have entered into a similar agreement with   
the representatives of the underwriters for our initial public offering, except 
that we may grant options and sell shares pursuant to our stock plans without   
such consent. There are no agreements between the representatives and any of our
stockholders or affiliates releasing them from these lock-up agreements prior to
the expiration of the 180-day period.                                           

At our request, the underwriters for our initial public offering have 
reserved for sale, at the initial public offering price, up to 220,000 shares   
for our employees, family members of employees, business associates and other   
third parties. The number of shares of our common stock available for sale to   
the general public will be reduced to the extent these reserved shares are      
purchased. Reserved shares purchased by our employees and affiliates will not be
subject to a lock-up except as may be required by the Conduct Rules of the      
National Association of Securities Dealers. These rules require that some       
purchasers of reserved shares be subject to three-month lock-ups if they are    
affiliated with or associated with NASD members or if they or members of their  
immediate families hold senior positions at financial institutions. Any reserved
shares that are not purchased by these persons will be offered by the           
underwriters to the general public on the same basis as the other shares in our 
initial public offering.                                                        

PRICING OF THE INITIAL PUBLIC OFFERING                                          

Prior to this offering, there has been no public market for our common
stock. The initial public offering price has been negotiated between us and the 
representatives of the underwriters. Among the factors considered in these      
negotiations were:                                                              

    - the history of, and prospects for, our company and the industry in which
we compete;                                                       

- the past and present financial performance of our company,          

- an assessment of our management,                                    

- the present state of our development,                               

- the prospects for our future earnings,                              

- the prevailing market conditions of the applicable United States    
securities market at the time of this offering,                   

- market valuations of publicly traded companies that we and the      
 representatives of the underwriters believe to be comparable to our
company, and                                                      

- other factors deemed relevant.                                      
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[ALTERNATE PAGE]

     The estimated initial public offering price range set forth on the cover of
this preliminary prospectus is subject to change as a result of market          
conditions and other factors.                                                   

LEGAL MATTERS 

    The validity of the common stock offered by this prospectus will be passed
upon for us by Skadden, Arps, Slate, Meagher & Flom LLP, New York, New York.    

EXPERTS 

The financial statements and schedule of AMERIGROUP Corporation as of 
December 31, 1999 and 2000 and for each of the years in the three year period   
ended December 31, 2000 have been included herein and in the registration       
statement in reliance upon the report of KPMG LLP, independent certified public 
accountants, appearing elsewhere herein, and upon the authority of said firm as 
experts in accounting and auditing.                                             

The statements of revenues and expenses of contracts acquired of the  
Medicaid business of Oxford Health Plans (NJ), Inc. for the six months ended    
June 30, 1998 and for the year ended December 31, 1997, have been included      
herein and in the registration statement in reliance upon the report of KPMG    
LLP, independent certified public accountants, appearing elsewhere herein, and  
upon the authority of said firm as experts in accounting and auditing.          

WHERE YOU CAN FIND MORE INFORMATION 

    This prospectus constitutes a part of a registration statement on Form S-1
(together with all amendments, supplements, schedules and exhibits to the       
registration statement, referred to as the registration statement) which we have
filed with the Commission under the Securities Act, with respect to the common  
stock offered in this prospectus. This prospectus does not contain all the      
information which is in the registration statement. Certain parts of the        
registration statement are omitted as allowed by the rules and regulations of   
the Commission. We refer you to the registration statement for further          
information about our company and the securities offered in this prospectus.    
Statements contained in this prospectus concerning the provisions of documents  
filed as exhibits are not necessarily complete, and reference is made to the    
copy so filed, each such statement being qualified in all respects by such      
reference. You can inspect and copy the registration statement and the reports  
and other information we file with the Commission at Room 1024, Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549. You can obtain information on   
the operation of the public reference room by calling the Commission at         
1-800-SEC-0330. The same information will be available for inspection and       
copying at the regional offices of the Commission located at 233 Broadway, New  
York, New York 10279 and at Citicorp Center, 500 West Madison Street, Suite     
1400, Chicago, Illinois 60661. You can also obtain copies of this material from 
the public reference room of the Commission at 450 Fifth Street, N.W.,          
Washington, D.C. 20549, at prescribed rates. The Commission also maintains a Web
site which provides on-line access to reports, proxy and information statements 
and other information regarding registrants that file electronically with the   
Commission at the address http://www.sec.gov.                                   

Upon the effectiveness of the registration statement, we will become  
subject to the information requirements of the Exchange Act. We will then file  
reports, proxy statements and other information under the Exchange Act with the 
Commission. You can inspect and copy these reports and other information of our 
company at the locations set forth above or download these reports from the     
Commission's Web site.                                                          

We have applied to have our common stock approved for quotation on the
Nasdaq National Market.                                                         

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DETAILED DESCRIPTION OF THE 
EMPLOYEE STOCK PURCHASE PLAN

ISSUER, DURATION AND PARTICIPATING EMPLOYEES                                    

     AMERIGROUP Corporation is the issuer of the securities made available under
the plan, which are 600,000 shares of our common stock. Our principal executive 
offices are at 4425 Corporation Lane, Virginia Beach, VA 23462. The plan will   
become effective at the time of the initial underwritten public offering of our 
common stock and will terminate on the tenth anniversary of that public         
offering, unless earlier terminated by us. Our eligible employees and eligible  
employees of our designated subsidiaries may participate in the plan (see       
"Eligibility," below).                                                          

THE PLAN                                                                        

   The purpose of the plan is to provide our eligible employees and eligible
employees of our designated subsidiaries with an opportunity to purchase our    
common stock through accumulated payroll deductions.                            

The summary of the plan contained in this prospectus is subject in its
entirety to the actual terms of the plan. A copy of the plan is on file with the
Secretary of AMERIGROUP Corporation.                                            

     The plan is not subject to any provisions of the Employee Retirement Income
Security Act of 1974 nor is the plan a qualified plan within the meaning of     
Section 401(a) of the Internal Revenue Code.                                    

PLAN ADMINISTRATION                                                             

  The plan will be administered by the compensation committee or any other
committee of members of the board appointed by our board of directors to        
administer the plan. The committee may select administrator(s) to whom its      
duties and responsibilities under the plan may be delegated. The committee will 
have full power and authority, subject to the provisions of the plan, to        
promulgate such rules and regulations as it deems necessary for the proper      
administration of the plan, to interpret the provisions and supervise the       
administration of the plan, and to take all action in connection therewith or in
relation thereto as it deems necessary or advisable. No member of the committee 
will be personally liable for any action, determination, or interpretation made 
in good faith with respect to the plan, and all members of the committee will be
fully indemnified by AMERIGROUP Corporation with respect to any such action,    
determination or interpretation. All decisions, determinations and              
interpretations of the committee will be final and binding on all persons,      
including AMERIGROUP Corporation, the participant (or any person claiming any   
rights under the plan from or through any participant) and any of our           
shareholders. You can get additional information about the plan and its         
administrators by calling or writing Catherine S. Callahan at our offices in    
Virginia Beach.                                                                 

SECURITIES SUBJECT TO THE PLAN                                                  

    A maximum of 600,000 shares of our common stock may be purchased under the
plan. Shares of common stock reserved for the plan will be either authorized and
unissued shares or shares which have been reacquired by AMERIGROUP Corporation. 
If the total number of shares that would otherwise be subject to purchase at the
beginning of an offering period exceeds the number of shares then available     
under the plan, the committee will make a pro rata allocation of the shares     
remaining available. In such event, the committee will give written notice to   
each participant of the reduction in available shares and will reduce the rate  
of payroll deductions as necessary.                                             

In the event the committee determines that any recapitalization, stock
split, dividend or other distribution, merger, spin-off, share exchange or other
similar corporate transaction or event affects the common stock such that an    
adjustment is appropriate in order to prevent dilution or enlargement of the    
rights of participants under the plan, the maximum number and kind of shares    
reserved for issuance or with respect to which awards may be granted under the  
plan will be adjusted to reflect such event, and the committee will make the    
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adjustments as it deems appropriate and equitable in the number, kind and price 
of shares covered by outstanding awards and in any other matters which relate to
awards and which are affected by the changes in the common stock referred to    
above. In the event of a change in control AMERIGROUP Corporation, the then     
current offering period will terminate immediately prior to the consummation of 
the transaction, unless otherwise provided by the committee.                    

OFFERING PERIOD; PURCHASE PERIOD                                                

   The plan will be implemented by a series of consecutive offering periods.
The first offering period will commence on the date of the initial underwritten 
public offering of our common stock and end June 30, 2002. Unless otherwise     
determined by the committee, each subsequent offering period will have a        
duration of six months, commencing on or about each January 1 and July 1. An    
"exercise date," the date on which shares will be purchased using a             
participant's payroll deductions, will occur at the end of each offering period.
The committee will have the power to change the duration and/or the frequency of
offering periods with respect to future offerings. In no event will any offering
period continue for more than 27 months.                                        

ELIGIBILITY                                                                     

    All of our employees, as well as employees of our designated subsidiaries,
who have at least 90 days of service, whose customary service is for at least 20
hours per week, and whose customary employment is for more than 5 months per    
year will be eligible to participate in the plan. However, employees who own    
five percent or more of our stock or any subsidiary of ours will not be eligible
to participate.                                                                 

ENROLLMENT                                                                      

 Each eligible employee is entitled to participate in the first offering
period after the employee first becomes eligible to participate. To enroll in   
the plan, an eligible employee must execute and deliver to us an agreement      
authorizing us to make payroll deductions. The agreement must be delivered prior
to the beginning of the applicable offering period in which the employee wishes 
to participate. In the case of the first offering period, that agreement will   
not be effective until the registration statement of which this prospectus forms
a part, becomes effective. A participant will be automatically enrolled in      
subsequent offering periods unless notice is given to the contrary prior to the 
beginning of the offering period.                                               

PAYROLL DEDUCTIONS                                                              

An eligible employee may authorize a payroll deduction of any whole   
percentage from 2 percent to 10 percent of his or her compensation each pay     
period; provided, however, that no more than $25,000 worth of shares (determined
at the commencement of the offering period) may be purchased in any one-year    
period. For this purpose, "compensation" is the fixed salary, wages,            
commissions, overtime pay and bonuses paid to a participant by us or any of our 
subsidiaries.                                                                   

  A participant may increase or decrease his or her payroll deduction with
respect to an offering period by filing a new subscription agreement authorizing
a change in payroll deductions. The committee may limit the number of times that
such an increase or decrease may be authorized during an offering period. All   
payroll deductions made by a participant will be credited to the participant's  
account under the plan.                                                         

PURCHASE OF STOCK                                                               

     Unless a participant withdraws from the plan, the participant's election to
purchase shares will be exercised automatically on the exercise date of the     
applicable offering period and the maximum number of shares will be purchased   
for the participant at the applicable purchase price with the accumulated       
payroll deductions in the participant's account.                                

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PRICE OF STOCK                                                                  

 The purchase price per share of the common stock under the plan will be
equal to 85% of the fair market value of a share of common stock on the offering
date or on the exercise date, whichever is lower.                               

STOCK CERTIFICATES; SALE OF PURCHASED STOCK                                     

    Each participant's ownership of shares of common stock purchased under the
plan will be reflected in an account (see "Accounts; Reports," below).          
Accordingly, unless a participant elects otherwise, the participant will not    
receive a certificate representing the shares purchased by the participant.     
Unless the committee determines otherwise, withdrawals of shares may be         
requested by a participant only once each calendar year, unless there is a      
change in control, in which case a participant may also request a withdrawal of 
shares within 60 days of the change in control.                                 

BENEFICIARY DESIGNATION                                                         

A participant may file, on forms supplied by us and delivered to us, a
written designation of a beneficiary who is to receive any shares and cash      
remaining in such participant's account under the plan in the event of the      
participant's death. A designation may be changed by the participant at any time
by written notice. If no such beneficiary is living at the time of a            
participant's death, we will deliver the shares and/or cash to the executor or  
administrator of the estate of the participant, or if no such executor or       
administrator has been appointed (to our knowledge), we may, in our discretion, 
deliver the shares and/or cash to the spouse or to any one or more dependents or
relatives of the participant, or if no spouse, dependent or relative is known to
us, then to such other person we may designate.                                 

ACCOUNTS; REPORTS                                                               

  Individual accounts will be maintained for each participant in the plan.
Statements of account will be given to participants promptly following each     
offering period. These statements will set forth the amount of payroll          
deductions, the per share purchase price, the number of shares purchased and the
remaining cash balance, if any.                                                 

WITHDRAWAL; TERMINATION OF EMPLOYMENT                                           

A participant may withdraw all, but not less than all, the payroll    
deductions credited to his or her account that have not been used to purchase   
shares of common stock at any time by giving written notice to us. All payroll  
deductions credited to the account will be paid to the participant promptly     
after receipt of the participant's notice of withdrawal. In the event of such a 
withdrawal, the participant's eligibility to participate in the plan for the    
offering period in which the withdrawal occurs will be automatically terminated 
and no further payroll deductions under the plan will be made for the           
participant during such offering period. A participant's withdrawal during an   
offering period will not have any effect upon such participant's eligibility to 
participate in a succeeding offering period.                                    

Upon termination of a participant's employment with us or a designated
subsidiary during an offering period for any reason, including voluntary        
termination, retirement or death, the payroll deductions credited to the        
participant's account that have not been used to purchase shares of common stock
will be returned to the participant or, in the case of such participant's death,
to the person or persons entitled thereto. The participant's eligibility to     
participate in the plan will be automatically terminated.                       

TRANSFERABILITY                                                                 

Neither payroll deductions credited to a participant's account nor any
rights to purchase or to receive shares under the plan may be assigned,         
transferred, pledged or otherwise disposed of by the participant of in          
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any way, other than by will or the laws of descent and distribution. Any such   
attempt at assignment, transfer, pledge or other disposition will be without    
effect, except that we may treat such act as an election to withdraw funds.     

AMENDMENT; TERMINATION                                                          

     Our board of directors may at any time and for any reason amend, suspend or
discontinue the plan. No amendment may be effective unless it receives the      
requisite approval of the stockholders of the company if such stockholder       
approval of such amendment is required to comply with Rule 16b-3 under the      
Securities Exchange Act of 1934, Section 423 of the Internal Revenue Code or to 
comply with any other applicable law, regulation, stock exchange or other       
applicable securities market system rule.                                       

RESTRICTIONS ON RESALE                                                          

    This prospectus does not cover sales or other dispositions of common stock
received under the plan by any person who may be deemed to be an affiliated     
person. Such sales or other dispositions may be made in compliance with the     
registration requirements of the federal securities laws or the requirements of 
Rule 144 promulgated thereunder, without being subject to the holding period    
requirement of such Rule, or may be made pursuant to another exemption from such
registration. There will be no such restrictions upon sales or other            
dispositions of common stock by recipients who are not affiliated persons. An   
affiliated person, for purposes of the federal securities laws, generally means 
a senior officer, director or other person who is deemed to control the company.

CERTAIN FEDERAL INCOME TAX EFFECTS                                              

   THE FOLLOWING DISCUSSION IS A SUMMARY OF THE PRINCIPAL FEDERAL INCOME TAX
CONSEQUENCES UNDER CURRENT FEDERAL INCOME TAX LAWS RELATING TO THE PLAN. THIS   
SUMMARY IS NOT INTENDED TO BE EXHAUSTIVE AND, AMONG OTHER THINGS, DOES NOT      
DESCRIBE STATE, LOCAL OR FOREIGN INCOME AND OTHER TAX CONSEQUENCES.             

    The plan is intended to qualify as an "employee stock purchase plan" under
Section 423 of the Internal Revenue Code. Certain federal income tax            
consequences to participants from such status under present law are described   
below.                                                                          

     Neither the grant of an option under the plan nor the purchase of shares of
common stock upon exercise of such option will result in an employee's          
realization of taxable income, thus permitting employees to acquire common stock
under the plan without immediate tax consequences. An employee who does not     
dispose of shares of common stock purchased under the plan until at least two   
years after the date of grant of such employee's option and one year after the  
date of exercise will also receive capital gain treatment for any appreciation  
in the value of the shares over the lower of (1) the fair market value of such  
shares at the time the option is granted or (2) the fair market value of such   
shares at the time the option is exercised. Capital gain treatment is not,      
however, available for the discount at which the shares of common stock are     
initially purchased under the plan, and an employee who meets the holding       
requirements is required to include as ordinary income at the time of his death 
or disposition of the shares the lesser of (1) the excess of the fair market    
value of the shares over the option price at the time of grant or (2) the excess
of the fair market value of the shares over the amount such employee paid for   
the shares. If an employee sells shares of common stock under such circumstances
for less than the employee paid for the shares, there is no ordinary income and 
such employee will realize a capital loss of the difference. Any ordinary income
realized by the employee will increase the basis of the employee's shares of    
common stock for purposes of determining the amount of any gain or loss realized
upon the subsequent disposition of the shares.                                  

   With limited exceptions, an employee who fails to retain shares of common
stock purchased under the plan until at least two years after the date the      
option with respect to the shares is granted and one year after                 
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the date the option is exercised is considered to have made a "disqualifying    
disposition" and forfeits the special tax treatment extended under Section 423  
of the Internal Revenue Code. In that case, generally, the employee realizes    
ordinary income at the time of the disposition equal to the excess of the fair  
market value of the shares of common stock at the time of purchase over the     
price paid for the shares. The fair market value is the employee's basis in the 
shares for determining any additional gain or loss upon the disposition. In     
determining whether that gain or loss is long-term or short-term, the holding   
period is calculated from the date of purchase.                                 

We are entitled to a deduction equal to the amount of ordinary income 
realized by an employee who makes a disqualifying disposition. Otherwise, we are
not entitled to any deduction on account of the grant or exercise of options    
granted under the plan or the subsequent sale by employees of shares of common  
stock purchased pursuant to the plan.                                           

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--------------------------------------------------------------------------------
--------------------------------------------------------------------------------

600,000 SHARES
COMMON STOCK

[AMERIGROUP CORPORATION LOGO] 

------------------------

PROSPECTUS

            , 2001

------------------------- 

--------------------------------------------------------------------------------
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PART II 

ITEM 13.  OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.                          

 The following table indicates the expenses to be incurred in connection
with the offering described in this Registration Statement, other than          
underwriting discounts and commissions, all of which will be paid by the        
Company. All amounts are estimates, other than the registration fee and the NASD
fee.                                                                            

                                                                [Download Table]
                                                                      
Registration fee............................................  $ 27,783
NASD fee....................................................    10,722
Nasdaq National Market application and listing fee..........    94,000
Accounting fees and expenses................................   200,000
Legal fees and expenses.....................................   275,000
Printing and engraving......................................   200,000
Transfer Agent fees and expenses............................    10,000
Blue sky fees and expenses..................................     5,000
Miscellaneous expenses......................................    80,250
                                                              --------
          Total.............................................  $902,755
                                                              ========

These amounts do not include expenses incurred in connection with a   
proposed offering of our common stock in August 2000 that was not consummated.  

ITEM 14.  INDEMNIFICATION OF DIRECTORS AND OFFICERS.                            

 Section 102 of the Delaware General Corporation Law ("DGCL") as amended
allows a corporation to eliminate or limit the personal liability of a director 
of a corporation to the corporation or its stockholders for monetary damages for
breach of fiduciary duty as a director, except where the director breached his  
duty of loyalty, failed to act in good faith, engaged in intentional misconduct 
or knowingly violated a law, authorized the payment of a dividend or approved a 
stock repurchase in violation of Delaware corporate law or obtained an improper 
personal benefit.                                                               

     Section 145 of the DGCL provides, among other things, that we may indemnify
any person who was or is a party or is threatened to be made a party to any     
threatened, pending or completed action, suit or proceeding (other than an      
action by or in the right of AMERIGROUP) by reason of the fact that the person  
is or was a director, officer, agent or employee of AMERIGROUP or is or was     
serving at our request as a director, officer, agent, or employee of another    
corporation, partnership, joint venture, trust or other enterprise, against     
expenses, (including attorneys' fees), judgments, fines and amounts paid in     
settlement actually and reasonably incurred by the person in connection with    
such action, suit or proceeding. The power to indemnify applies (a) if such     
person is successful on the merits or otherwise in defense of any action, suit  
or proceeding, or (b) if such person acted in good faith and in a manner which  
the person reasonably believed to be in the best interest, or not opposed to the
best interest, of AMERIGROUP, and with respect to any criminal action or        
proceeding, had no reasonable cause to believe such conduct was unlawful. The   
power to indemnify applies to actions brought by or in the right of AMERIGROUP  
as well but only to the extent of defense expenses (including attorneys' fees   
but excluding amounts paid in settlement) actually and reasonably incurred and  
not to any satisfaction of judgment or settlement of the claim itself, and with 
the further limitation that in such actions no indemnification shall be made in 
the event of any adjudication of negligence or misconduct in the performance of 
his duties to AMERIGROUP, unless the court believes that in light of all the    
circumstances indemnification should apply.                                     

    Section 174 of the DGCL provides, among other things, that a director, who
willfully or negligently approves of an unlawful payment of dividends or an     
unlawful stock purchase or redemption, may be held liable for such actions. A   
director who was either absent when the unlawful actions were approved or       
dissented at the time, may avoid liability by causing his or her dissent to such
actions to be entered in the                                                    

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books containing the minutes of the meetings of the board of directors at the   
time such action occurred or immediately after such absent director receives    
notice of the unlawful acts.                                                    

    Our Amended and Restated Certificate of Incorporation includes a provision
that eliminates the personal liability of its directors for monetary damages for
breach of fiduciary duty as a director, except for liability:                   

 - for any breach of the director's duty of loyalty to AMERIGROUP or its
stockholders;                                                     

- for acts or omissions not in good faith or that involve intentional 
misconduct or a knowing violation of law;                         

- under section 174 of the Delaware General Corporation Law regarding 
unlawful dividends and stock purchases; or                        

    - for any transaction from which the director derived an improper personal
benefit.                                                          

These provisions are permitted under Delaware law.                    

Our Amended and Restated Bylaws provide that:                         

- we must indemnify our directors and officers to the fullest extent  
permitted by Delaware law;                                        

   - we may indemnify our other employees and agents to the same extent that
       we indemnified our officers and directors, unless otherwise determined by
our Board of Directors; and                                       

 - we must advance expenses, as incurred, to our directors and executive
  officers in connection with a legal proceeding to the fullest extent
permitted by Delaware law.                                        

The indemnification provisions contained in our Amended and Restated  
Certificate of Incorporation and Amended and Restated By-laws are not exclusive 
of any other rights to which a person may be entitled by law, agreement, vote of
stockholders or disinterested directors or otherwise. In addition, we maintain  
insurance on behalf of our directors and executive officers insuring them       
against any liability asserted against them in their capacities as directors or 
officers or arising out of such status.                                         

ITEM 15.  RECENT SALES OF UNREGISTERED SECURITIES.                              

 In the past three years, AMERIGROUP Corporation has issued and sold the
following securities:                                                           

   - 2,000,000 shares of Series E Redeemable Preferred Stock and warrants to
purchase 1,125,000 shares of common stock to 25 investors of the  
 registrant consisting of 3 natural persons, 4 trusts and 18 venture
    capital entities, in two tranches, the first of which was in July 1998
      and the second of which was in January 1999 for a total consideration of
$10 million, in reliance on Regulation D under the Securities Act.

- warrants to purchase 25,000 shares of common stock to Silicon Valley
       Bank, a large institution, in connection with securing a $10 million Loan
    and Security Agreement in May 1998, in reliance on Section 4(2) of the
Securities Act, as a transaction not involving a public offering. 

     - 4,500,000 shares of Series D Convertible Preferred Stock issued in escrow
in connection with the purchase by AMERIGROUP of the businesses of
  Prudential Health Care in 1999; in connection with this transaction,
pursuant to the acquisition agreement 3,710,775 shares of Series D
   Convertible Preferred Stock were released from the escrow in May 2000
(these shares of Series D Convertible Preferred Stock convert into
   1,855,387 shares of common stock), in reliance on Section 4(2) of the
Securities Act, as a transaction not involving a public offering. 

     - options to purchase 271,250 shares of common stock issued to employees in
1998; options to purchase 389,595 shares of common stock issued to
       employees in 1999; and options to purchase 563,407 shares of common stock
    issued to employees in 2000; and options to purchase 579,941 shares of
 common stock issued to employees in 2001. All of these options were
    granted under AMERIGROUP's 1994 Stock Plan, except options to purchase
   707,191 shares of common stock granted under AMERIGROUP's 2000 Equity
Incentive Plan, and were issued in reliance on Rule 701 under the 
Securities Act.                                                   

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ITEM 16.  EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.                           

a. Exhibits                                                           

                                                                [Download Table]

EXHIBIT                                                                
NUMBER                             DESCRIPTION                         
-------                            -----------                         
                                                                       
 1.0       Form of Underwriting Agreement.+                            
 3.1       Form of Amended and Restated Certificate of Incorporation of
           the Company.+                                               
 3.2       Form of By-Laws of the Company.+                            
 3.3       Form of share certificate for common stock.+                
 3.4       AMERIGROUP Corporation Second Restated Investor Rights      
           Agreement, dated July 28, 1998.+                            
 3.5       Silicon Valley Registration Rights Agreement, entered into  
           as of May 15, 1998.+                                        
 3.6       Stock Restriction and Registration Rights Agreement, between
           AMERIGROUP Corporation and Prudential Health Care Plan,     
           Inc.+                                                       
 3.7       Form of warrant issued in connection with the sale of Series
           E Redeemable Preferred Stock.+                              
 3.8       Common Stock Purchase Warrant Issued to Silicon Valley Bank,
           dated May 15, 1998.+                                        
 5.1       Opinion of Skadden, Arps, Slate, Meagher & Flom LLP, related
           to the shares of common stock being sold in the initial     
           public offering.+                                           
 5.2       Opinion of Skadden, Arps, Slate, Meagher & Flom LLP, related
           to the shares of common stock being offered under the       
           Company's Employee Stock Purchase Plan.+                    
10.1       1999 Contract for Services between the Texas Department of  
           Health ("TDH") and HMO (Harris Service Area), dated August  
           9, 1999.+                                                   
10.2       1999 Contract For Services between the TDH and HMO (Tarrant 
           Service Area), dated August 9, 1999.+                       
10.3       1999 Contract for Services between TDH and HMO (Harris      
           County Service Area, STAR+PLUS Contract).+                  
10.4       2000 Contract For Services between TDH and HMO (Dallas      
           Service Area) (replaces prior exhibit 10.4).+               
10.5       Children's Health Insurance Program Agreement for the       
           Provision of Health Care Services between the Texas         
           Department of Health and Human Services Commission and      
           AMERICAID Texas, Inc., d/b/a Amerikids, dated January 19,   
           2000, as amended (replaces prior exhibit 10.5).+            
10.6       Contract between State of New Jersey, Department of Human   
           Services, Division of Medical Assistance and Health Services
           and [Americaid New Jersey, Inc.], Contractor (replaces prior
           exhibit 10.6).+                                             
10.7       State of Illinois, Department of Public Aid Contract for    
           Furnishing Health Services by a Health Maintenance          
           Organization, dated April 1, 2000.+                         
10.8       Managed Care Organization HealthChoice Provider Agreement,  
           dated as of January 1, 2000.+                               
10.9       District of Columbia Medicaid Managed Care Program,         
           Department of Health, Prepaid, Capital Risk Contract.+      
10.10      1994 Stock Plan.+                                           
10.11      Form of 2000 Equity Incentive Plan.+                        
10.12      Form of Employee Stock Purchase Plan.+                      
10.13      Form of 2000 Cash Incentive Plan.+                          
10.14      Second Amended and Restated Employment Agreement of Jeffrey 
           L. McWaters, dated October 2, 2000 (replaces prior exhibit  
           10.14).+                                                    
10.15      Employment Agreement of Lorenzo Childress, Jr., M.D.+       
10.16      Form of Officer and Director Indemnification Agreement.+    

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                                                                [Download Table]

EXHIBIT                                                                
NUMBER                             DESCRIPTION                         
-------                            -----------                         
                                                                       
10.17      CCPN and HMO Medicaid Agreement By and Between Americaid    
           Texas Inc., d/b/a Americaid Community Care, and Cook        
           Children's Physician Network, A Texas 5.01 Non-profit       
           Corporation, dated as of October 9, 1997, as amended.+      
10.18      Third Medical Assistance Medical Services Agreement between 
           Prudential Health Care Plan, Inc. and Johns Hopkins Medical 
           Services Corporation, dated August 2, 1996, assigned to the 
           Company pursuant to the Amendment and Assignment of Third   
           Medical Assistance Medical Service Agreement, as of April   
           30, 1999.+                                                  
10.19      Loan and Security Agreement, between AMERIGROUP Corporation,
           as borrower, and the Financial Institutions Party Thereto   
           From Time to Time, as Lender and Fleet Capital Corporation, 
           as Agent, dated November 9, 1999.+                          
10.20      Amendment, dated September 1, 2001, to the 1999 Contract for
           Services between TDH and HMO (Harris County Service Area,   
           STAR+PLUS Contract).+                                       
21.1       List of Subsidiaries.+                                      
23.1       Consent of KPMG LLP with respect to the financial statements
           of the registrant.                                          
23.2       Consent of KPMG LLP with respect to the Medicaid Business of
           Oxford Health Plans (N.J.), Inc.                            
23.3       Consent of Skadden, Arps, Slate, Meagher & Flom LLP         
           (contained in Exhibits 5.1 and 5.2).+                       
24.1       Power of Attorney (included on signature page of the        
           Registration Statement).+                                   
27         Financial Data Schedule.+                                   

------------                                                                    
+ Previously filed.                                                             

b. Financial Statement Schedule                                       

Independent Auditors' Report and Schedule of Valuation and Qualifying 
Accounts                                                                        

ITEM 17.  UNDERTAKINGS.                                                         

     The undersigned registrant hereby undertakes to provide to the underwriters
at the closing certificates in such denominations and registered in such names  
as required by the underwriters to permit prompt delivery to each purchaser.    

     Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers, and controlling persons of the 
registrant pursuant to the provisions described in Item 14, or otherwise, the   
registrant has been informed that in the opinion of the Securities and Exchange 
Commission such indemnification is against public policy as expressed in the    
Securities Act and is therefore unenforceable. In the event that a claim for    
indemnification by the registrant against such liabilities (other than the      
payment by the registrant of expenses incurred or paid by a director, officer,  
or controlling person of the registrant in the successful defense of any action,
suit, or proceeding) is asserted by such director, officer, or controlling      
person in connection with the securities being registered, the registrant will, 
unless in the opinion of its counsel the matter has been settled by controlling 
precedent, submit to a court of appropriate jurisdiction the question whether   
such indemnification by it is against public policy as expressed in the         
Securities Act and will be governed by the final adjudication of such issue.    

The undersigned registrant hereby undertake that:                     

          (1) For purposes of determining any liability under the Securities Act
    of 1933, the information omitted from the form of prospectus filed as part
    of this registration statement in reliance upon Rule 430A and contained in
     a form of prospectus filed by the registrant pursuant to Rule 424(b) (1) or
    (4) or 497 (h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.      

         (2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of    
   prospectus shall be deemed to be a new registration statement relating to
     the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.    

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SIGNATURES

    Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this amendment to the registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Virginia   
Beach, Commonwealth of Virginia, on November 2, 2001.                           

                          AMERIGROUP CORPORATION

                            By: /s/ KATHLEEN K. TOTH

                                            ------------------------------------

                                  Name: Kathleen K. Toth

                                           Title: Chief Accounting Officer

   Each person whose signature appears below hereby constitutes and appoints
Stanley F. Baldwin and Scott M. Tabakin, and each of them, his true and lawful  
attorneys-in-fact and agents with full power of substitution and resubstitution,
for him and in his name, place, and stead, in any and all capacities, to sign   
any and all (1) amendments (including post-effective amendments) and additions  
to this Registration Statement and (2) Registration Statements, and any and all 
amendments thereto (including post-effective amendments), relating to the       
offering contemplated pursuant to Rule 462(b) under the Securities Act of 1933, 
and to file the same, with all exhibits thereto, and other documents in         
connection therewith, with the Securities and Exchange Commission, and hereby   
grants to such attorneys-in-fact and agents full power and authority to do and  
perform each and every act and thing requisite and necessary to be done, as     
fully to all intents and purposes as he or she might or could do in person,     
hereby ratifying and confirming all that said attorneys-in-fact and agents or   
his substitute or substitutes may lawfully do or cause to be done by virtue     
hereof.                                                                         

Pursuant to the requirements of the Securities Act of 1933, this      
registration statement has been signed by the following persons in the          
capacities and on the dates indicated.                                          

                                                        [Enlarge/Download Table]

                                                    TITLE                   DATE     
                                                    -----                   ----     
                                                                                     
*                                         Chairman, Chief Executive  November 2, 2001
----------------------------------------  Officer and President                      
Jeffrey L. McWaters                                                                  

*                                         Chief Financial Officer    November 2, 2001
----------------------------------------                                             
Scott M. Tabakin                                                                     

*                                         Chief Accounting Officer   November 2, 2001
----------------------------------------                                             
Kathleen K. Toth                                                                     

*                                         Director                   November 2, 2001
----------------------------------------                                             
C. Sage Givens                                                                       

*                                         Director                   November 2, 2001
----------------------------------------                                             
William J. McBride                                                                   

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                                                                [Download Table]

                                                    TITLE          DATE     
                                                    -----          ----     

                                                                            
*                                         Director          November 2, 2001
----------------------------------------                                    
Carlos A. Ferrer                                                            

*                                         Director          November 2, 2001
----------------------------------------                                    
Charles W. Newhall III                                                      

By: /s/ STANLEY F. BALDWIN                Attorney-in-Fact  November 2, 2001
    ------------------------------------                                    
    Stanley F. Baldwin                                                      

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INDEPENDENT AUDITORS' REPORT

The Board of Directors                                                          
AMERIGROUP Corporation                                                          

     Under date of March 1, 2001, we reported on the consolidated balance sheets
of AMERIGROUP Corporation and subsidiaries as of December 31, 1999 and 2000, and
the related consolidated statements of operations, stockholders' equity         
(deficit) and cash flows for each of the years in the three-year period ended   
December 31, 2000, which are included in the prospectus. In connection with our 
audits of the aforementioned consolidated financial statements, we also audited 
the related consolidated financial statement schedule, Schedule II -- Schedule  
of Valuation and Qualifying Accounts, in the registration statement. This       
financial statement schedule is the responsibility of the Company's management. 
Our responsibility is to express an opinion on the financial statement schedule 
based on our audits.                                                            

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

  /s/ KPMG LLP

March 1, 2001                                                                   
Norfolk, Virginia                                                               

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                                                                     SCHEDULE II

AMERIGROUP CORPORATION

SCHEDULE OF VALUATION AND QUALIFYING ACCOUNTS 

                                                        [Enlarge/Download Table]

                                                        ADDITIONS --  DEDUCTIONS --             
                                              BALANCE     AMOUNTS        AMOUNTS                
                                             BEGINNING   CHARGED TO    CREDITED TO     BALANCE  
                                              OF YEAR     EXPENSE        EXPENSE     END OF YEAR
                                             ---------  ------------  -------------  -----------
                                                                                                
Valuation Allowance on Deferred Tax Assets                                                      
Year Ended December 31, 1998................  $8,710       $   --        $(1,342)      $7,368   
Year Ended December 31, 1999................   7,368           --         (7,368)          --   
Year Ended December 31, 2000................      --           --             --           --   

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EXHIBIT INDEX 

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EXHIBIT                                                               
NUMBER                            DESCRIPTION                         
-------                           -----------                         
                                                                      
 1.0      Form of Underwriting Agreement.+                            
 3.1      Form of Amended and Restated Certificate of Incorporation of
          the Company.+                                               
 3.2      Form of By-Laws of the Company.+                            
 3.3      Form of share certificate for common stock.+                
 3.4      AMERIGROUP Corporation Second Restated Investor Rights      
          Agreement, dated July 28, 1998.+                            
 3.5      Silicon Valley Registration Rights Agreement, entered into  
          as of May 15, 1998.+                                        
 3.6      Stock Restriction and Registration Rights Agreement, between
          AMERIGROUP Corporation and Prudential Health Care Plan,     
          Inc.+                                                       
 3.7      Form of warrant issued in connection with the sale of Series
          E Redeemable Preferred Stock.+                              
 3.8      Common Stock Purchase Warrant Issued to Silicon Valley Bank,
          dated May 15, 1998.+                                        
 5.1      Opinion of Skadden, Arps, Slate, Meagher & Flom LLP, related
          to the shares of common stock being sold in the initial     
          public offering.+                                           
 5.2      Opinion of Skadden, Arps, Slate, Meagher & Flom LLP related 
          to the shares of common stock being offered under the       
          Company's Employee Stock Purchase Plan.+                    
10.1      1999 Contract for Services between the Texas Department of  
          Health ("TDH") and HMO (Harris Service Area), dated August  
          9, 1999.+                                                   
10.2      1999 Contract For Services between the TDH and HMO (Tarrant 
          Service Area), dated August 9, 1999.+                       
10.3      1999 Contract for Services between TDH and HMO (Harris      
          County Service Area, STAR+PLUS Contract).+                  
10.4      2000 Contract For Services between TDH and HMO (Dallas      
          Service Area) (replaces prior exhibit 10.4).+               
10.5      Children's Health Insurance Program Agreement for the       
          Provision of Health Care Services between the Texas         
          Department of Health and Human Services Commission and      
          AMERICAID Texas, Inc., d/b/a Amerikids, dated January 19,   
          2000, as amended (replaces prior exhibit 10.5).+            
10.6      Contract between State of New Jersey, Department of Human   
          Services, Division of Medical Assistance and Health Services
          and [Americaid New Jersey, Inc.], Contractor (replaces prior
          exhibit 10.6).+                                             
10.7      State of Illinois, Department of Public Aid Contract for    
          Furnishing Health Services by a Health Maintenance          
          Organization, dated April 1, 2000.+                         
10.8      Managed Care Organization HealthChoice Provider Agreement,  
          date as of January 1, 2000.+                                
10.9      District of Columbia Medicaid Managed Care Program,         
          Department of Health, Prepaid, Capital Risk Contract.+      
10.10     1994 Stock Plan.+                                           
10.11     Form of 2000 Equity Incentive Plan.+                        
10.12     Form of Employee Stock Purchase Plan.+                      
10.13     Form of 2000 Cash Incentive Plan.+                          
10.14     Second Amended and Restated Employment Agreement of Jeffrey 
          L. McWaters, dated October 2, 2000 (replaces prior exhibit  
          10.14).+                                                    
10.15     Employment Agreement of Lorenzo Childress, Jr., M.D.+       
10.16     Form of Officer and Director Indemnification Agreement.+    

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EXHIBIT                                                               
NUMBER                            DESCRIPTION                         
-------                           -----------                         
                                                                      
10.17     CCPN and HMO Medicaid Agreement By and Between Americaid    
          Texas Inc., d/b/a Americaid Community Care, and Cook        
          Children's Physician Network, A Texas 5.01 Non-profit       
          Corporation, dated as of October 9, 1997, as amended.+      
10.18     Third Medical Assistance Medical Services Agreement between 
          Prudential Health Care Plan, Inc. and Johns Hopkins Medical 
          Services Corporation, dated August 2, 1996, assigned to the 
          Company pursuant to the Amendment and Assignment of Third   
          Medical Assistance Medical Service Agreement as of April 30,
          1999.+                                                      
10.19     Loan and Security Agreement, between AMERIGROUP Corporation,
          as borrower, and The Financial Institutions Party Thereto   
          From Time to Time, as Lender and Fleet Capital Corporation, 
          as Agent, dated November 9, 1999.+                          
10.20     Amendment, dated September 1, 2001, to the 1999 Contract for
          Services between TDH and HMO (Harris County Service Area,   
          STAR+PLUS Contract).+                                       
21.1      List of Subsidiaries.+                                      
23.1      Consent of KPMG LLP with respect to the financial statements
          of the registrant.                                          
23.2      Consent of KPMG LLP with respect to the Medicaid Business of
          Oxford Health Plans (N.J.), Inc.                            
23.3      Consent of Skadden, Arps, Slate, Meagher & Flom LLP         
          (contained in Exhibits 5.1 and 5.2).+                       
24.1      Power of Attorney (included on signature page of the        
          Registration Statement).+                                   
27        Financial Data Schedule.+                                   

------------                                                                    
+ Previously filed.                                                             

Dates Referenced Herein   and   Documents Incorporated by Reference

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