N-CSR 1 hsf.txt T. ROWE PRICE HEALTH SCIENCES FUND Item 1. Report to Shareholders T. Rowe Price Health Sciences Fund -------------------------------------------------------------------------------- December 31, 2003 Certified Annual Report This report is certified under the Sarbanes-Oxley Act of 2002, which requires that public companies, including mutual funds, affirm that the information provided in their annual and semiannual shareholder reports fully and fairly represents their financial position. T. Rowe Price Health Sciences Fund -------------------------------------------------------------------------------- Certified Annual Report Performance Comparison -------------------------------------------------------------------------------- This chart shows the value of a hypothetical $10,000 investment in the fund over the past 10 fiscal year periods or since inception (for funds lacking 10-year records). The result is compared with benchmarks, which may include a broad-based market index and a peer group average or index. Market indexes do not include expenses, which are deducted from fund returns as well as mutual fund averages and indexes. [Graphic Omitted] HEALTH SCIENCES FUND -------------------------------------------------------------------------------- As of 12/31/03 Health Sciences Fund $28,436 S&P 500 Stock Index $20,491 S&P 500 Health Sciences Stock Index Fund 12/95 $10,000 $10,000 12/96 12,296 12,675 12/97 16,399 15,136 12/98 21,085 18,522 12/99 25,522 19,999 12/00 23,198 30,437 12/01 20,441 28,621 12/02 15,923 20,682 12/03 20,491 28,436 Average Annual Compound Total Return -------------------------------------------------------------------------------- Since Inception Periods Ended 12/31/03 1 Year 5 Years 12/29/95 -------------------------------------------------------------------------------- Health Sciences Fund 37.49% 8.95% 13.94% S&P 500 Stock Index 28.68 -0.57 9.37 Lipper Health/Biotechnology Funds Index 30.53 6.46 11.24* * Benchmark since-inception data are for the time period 12/31/95-12/31/03. Returns do not reflect taxes that the shareholder may pay on fund distributions or the redemption of fund shares. Past performance cannot guarantee future results. T. Rowe Price Health Sciences Fund -------------------------------------------------------------------------------- Certified Annual Report Dear Shareholder, We are pleased to report that the Health Sciences Fund generated solid returns in 2003. As you can see in the table on the preceding page, we strongly outperformed the peer group, the Lipper Health/Biotechnology Funds Index, and the benchmark, the S&P 500 Index, over the 12-month period. Sector allocation and stock selection decisions were the largest factors in our outperformance relative to the benchmark and the peer group. As you know, the fund's objective is long-term growth of capital by investing at least 80% of its net assets in common stocks of companies engaged in the research, development, production, or distribution of products or services related to health care, medicine, and the life sciences. The fund can invest in companies of any size. [Graphic Omitted] Major Index Returns -------------------------------------------------------------------------------- Period Ended 12/31/03 12-Month Return S&P 500 Stock Index 29% S&P MidCap 400 Index 36% Russell 2000 Index 47% Nasdaq Composite 50% The major index returns chart shows how various domestic market indexes performed in 2003. As you can see, the small-cap Russell 2000 Index and the Nasdaq Composite, which is heavily weighted with technology stocks, produced strong returns over the 12-month period. Large- and mid-cap stocks, as measured by the S&P 500 Index and the S&P MidCap 400 Index, respectively, generated less robust performance. The industry diversification table shows how our allocation among the primary industries in the health care sector changed over the last year. As shown in the table, our exposure to companies in the products and devices and life sciences industries increased, while our allocations to biotechnology, services, and pharmaceuticals decreased. Top 5 Industries Percent of Net Assets 12/31/02 12/31/03 -------------------------------------------------------------------------------- Biotechnology 41.6% 40.1% Services 24.1 22.7 Pharmaceuticals 26.2 22.4 Products and Devices 6.5 10.4 Life Sciences 1.5 3.9 The Best and Worst Contributors table shows the five best and worst contributors to the fund's performance in 2003. Our largest contributors to fund performance included three biotech holdings--Gilead Sciences, Genentech, and ImClone Systems. Trimeris, Vertex Pharmaceuticals, and Biovail, were our three biggest detractors. Best and Worst Contributors 12 Months Ended 12/31/03 Best Contributors -------------------------------------------------------------------------------- Gilead Sciences UnitedHealth Group Omnicare Genentech ImClone Systems Worst Contributors -------------------------------------------------------------------------------- Trimeris Vertex Pharmaceuticals Biovail Able Laboratories * Control Delivery System * Position added Finally, I'm sure you are aware that mutual fund companies have recently come under scrutiny for their trading policies. The investigations have led to allegations that executives of several mutual fund companies permitted or engaged in improper mutual fund trading. In addition, certain intermediaries that process fund transactions are alleged to have assisted some investors in executing improper mutual fund trades. I want T. Rowe Price shareholders to know that we emphatically condemn the abuses that have been revealed or alleged against other firms in our industry. Our firm has not entered and will not enter into any agreements with any investors or intermediaries that authorize after-hours trading or excessive short-term trading in any of our funds. T. Rowe Price investors can be assured that our firm unequivocally opposes illegal or inappropriate trading of any nature and has policies and procedures in place designed to protect the best interests of our long-term shareholders. No T. Rowe Price executives or portfolio managers or investment personnel of the T. Rowe Price mutual funds have engaged in any inappropriate trading of T. Rowe Price mutual funds. You may find out more about our trading policies and the steps we take to protect your interests by visiting our Web site (troweprice.com). These policies are also spelled out in your fund's prospectus. Thank you for your continued support. Respectfully submitted, James S. Riepe Chairman January 20, 2004 T. Rowe Price Health Sciences Fund -------------------------------------------------------------------------------- Certified Annual Report Financial Highlights For a share outstanding throughout each period -------------------------------------------------------------------------------- Year Ended 12/31/03 12/31/02 12/31/01 12/31/00 12/31/99 NET ASSET VALUE Beginning of period $ 14.51 $ 20.08 $ 21.70 $ 15.93 $ 16.01 Investment activities Net investment income (loss) (0.11) (0.11) (0.11) (0.03) (0.04) Net realized and unrealized gain (loss) 5.55 (5.46) (1.20) 8.28 1.22 Total from investment activities 5.44 (5.57) (1.31) 8.25 1.18 Distributions Net realized gain - - (0.31) (2.48) (1.26) NET ASSET VALUE End of period $ 19.95 $ 14.51 $ 20.08 $ 21.70 $ 15.93 ----------------------------------------------------- Ratios/Supplemental Data Total return^ 37.49% (27.74)% (5.97)% 52.19% 7.97% Ratio of total expenses to average net assets 1.00% 1.04% 1.02% 0.98% 1.11% Ratio of net investment income (loss) to average net assets (0.64)% (0.64)% (0.60)% (0.22)% (0.25)% Portfolio turnover rate 44.8% 62.7% 74.6% 110.6% 81.9% Net assets, end of period (in thousands) $1,027,367 $677,956 $ 960,787 $ 971,867 $ 302,510 ^ Total return reflects the rate that an investor would have earned on an investment in the fund during each period, assuming reinvestment of all distributions. The accompanying notes are an integral part of these financial statements. T. Rowe Price Health Sciences Fund -------------------------------------------------------------------------------- Certified Annual Report December 31, 2003 Portfolio of Investments (ss.) Shares Value -------------------------------------------------------------------------------- ($ 000s) COMMON STOCKS AND WARRANTS 98.8% BIOTECHNOLOGY 39.3% Other Biotechnology 6.8% Alexion Pharmaceutical * 180,000 3,064 Amylin Pharmaceuticals *^ 200,000 4,444 BioCryst Pharmaceuticals * 444,200 3,029 BioMarin Pharmaceutical * 75,000 583 Cubist Pharmaceuticals * 688,700 8,375 deCODE GENETICS * 425,000 3,481 Diversa * 300,000 2,775 Esperion Therapeutics * 50,000 1,730 Exelixis * 780,000 5,522 Insmed, Warrants, 5/31/05 *!!@ 250,048 0 Inspire Phamaceuticals * 100,000 1,416 Ligand Pharmaceuticals, Class B * 150,000 2,204 Ligand Pharmaceuticals *!!@ 50,000 661 MGI Pharma * 200,000 8,230 Myriad Genetics * 125,000 1,607 Nektar Therapeutics * 375,000 5,104 NeoRx * 190,000 790 ONYX Pharmaceuticals * 275,000 7,763 Regeneron Pharmaceuticals * 165,000 2,427 Serologicals * 50,000 930 Tularik * 125,000 2,019 Vircuron Pharmaceuticals * 28,000 522 ViroPharma * 200,000 556 XOMA * 400,000 2,640 69,872 Major- Biotechnology 32.5% Abgenix * 650,000 8,099 Actelion (CHF) * 25,000 2,697 Alkermes * 1,150,000 15,525 Amgen *^ 750,000 46,350 Biogen Idec *^ 525,000 19,309 Cephalon * 725,000 35,097 CV Therapeutics *^ 200,000 2,932 Genentech *^ 240,000 22,457 Gilead Sciences *^ 875,000 50,872 Human Genome Sciences * 375,000 4,969 ICOS * 75,000 3,096 Imclone Systems *^ 530,000 21,020 Martek Biosciences *^ 75,000 4,873 Medicines Company * 550,000 16,203 MedImmune *^ 450,000 11,430 Millennium Pharmaceuticals *^ 250,000 4,668 Neurocrine Biosciences *^ 350,000 19,089 NPS Pharmaceuticals *^ 376,200 11,564 OSI Pharmaceuticals * 250,000 8,053 Protein Design Labs * 380,000 6,802 Seattle Genetic, Warrants, 12/31/11 *!!@ 50,000 52 Transkaryotic Therapies * 300,000 4,683 Trimeris *^ 500,000 10,490 Vertex Pharmaceuticals *^ 350,000 3,581 333,911 Total Biotechnology 403,783 LIFE SCIENCES 3.7% Life Sciences 3.7% Fisher Scientific * 175,000 7,240 Invitrogen * 260,000 18,200 Symyx Technologies * 450,000 9,247 Waters Corporation * 100,000 3,316 Total Life Sciences 38,003 PHARMACEUTICALS 22.0% Major- Pharmaceutical 22.0% Abbott Laboratories 250,000 11,650 Able Laboratories * 325,000 5,873 Alcon ^ 60,000 3,632 Allergan ^ 75,000 5,761 AstraZeneca ADR 50,000 2,419 Barr Laboratories * 87,600 6,741 Biovail *^ 75,000 1,612 Eli Lilly ^ 225,000 15,824 Forest Laboratories *^ 350,000 21,630 GlaxoSmithKline ADR 50,000 2,331 Indevus Pharmaceuticals * 275,000 1,620 IVAX * 375,000 8,955 Johnson & Johnson ^ 250,000 12,915 Merck 50,000 2,310 Novartis ADR 25,000 1,147 Noven Pharmaceuticals * 300,000 4,563 Novo Nordisk, Series B (DKK) 25,000 1,017 Novo Nordisk ADR 2,700 111 Pfizer ^ 1,200,000 42,396 Roche Holding (Participation certificates) (CHF) 28,000 2,823 Salix Pharmaceuticals * 125,000 2,834 Sanofi-Synthelabo (EUR) 125,000 9,402 Schering-Plough 265,000 4,608 Teva Pharmaceutical ADR 280,000 15,879 Valeant Pharmaceuticals International 300,000 7,545 Wyeth ^ 600,000 25,470 Yamanouchi Pharmaceutical (JPY) 165,000 5,128 Total Pharmaceuticals 226,196 PRODUCTS & DEVICES 10.3% Implants 10.3% Advanced Neuromodulation Systems * 130,000 5,977 Angiotech Pharmaceuticals * 50,000 2,300 Aspect Medical Systems * 425,000 4,849 Biomet 50,000 1,821 BioSphere Medical * 550,000 2,195 Boston Scientific *^ 650,000 23,894 C. R. Bard 140,000 11,375 Encore Medical * 280,000 2,282 EPIX Medical * 250,000 4,070 Fischer Imaging *! 590,000 2,626 Guidant 45,000 2,709 Integra LifeServices Holdings * 75,000 2,147 Medtronic 150,000 7,291 Regeneration Technologies * 200,000 2,192 St. Jude Medical *^ 150,000 9,202 STAAR * 375,000 4,223 Stryker 100,000 8,501 Synthes-Stratec (CHF) * 2,400 2,374 Wilson Greatbatch Technologies * 39,000 1,649 Zimmer Holdings * 65,000 4,576 Total Products & Devices 106,253 SERVICES 22.7% Distribution 5.9% Advance PCS * 120,000 6,319 AmerisourceBergen ^ 115,000 6,457 Cardinal Health ^ 125,000 7,645 Caremark RX * 150,000 3,800 Henry Schein * 100,000 6,758 NeighborCare * 100,000 1,975 Omnicare ^ 675,000 27,263 60,217 Information 0.2% WebMD * 250,000 2,248 2,248 Other Services 2.2% LabOne * 73,300 2,380 Laboratory Corporation of America * 375,000 13,856 Manor Care 50,000 1,729 Quest Diagnostics * 65,000 4,752 22,717 Payors 11.7% Anthem * 710,000 53,250 UnitedHealth Group 1,025,000 59,635 WellPoint Health Networks * 75,000 7,274 120,159 Providers 2.7% Community Health System * 150,700 4,006 HCA ^ 250,000 10,740 Triad Hospitals *^ 250,000 8,317 Universal Health Services, Class B ^ 85,000 4,566 27,629 Total Services 232,970 Total Miscellaneous Common Stocks 0.8% 8,195 Total Common Stocks and Warrants (Cost $816,868) 1,015,400 CONVERTIBLE PREFERRED STOCKS 0.4% Control Delivery Systems, 8.00% *!!@ 37,216 1,000 Seattle Genetics, Series A *!!@ 40,000 2,917 Total Miscellaneous Convertible Preferred Stocks !! 45 337 Total Convertible Preferred Stocks (Cost $3,450) 4,254 PREFERRED STOCKS 0.2% Theravance, Series D1 *!!@ 264,454 2,380 Total Preferred Stocks (Cost $2,380) 2,380 OPTIONS PURCHASED 0.0% Repligen, Call, 1/17/2004 @ $5.00 * 50,000 41 Total Options Purchased (Cost $28) 41 OPTIONS WRITTEN (1.2%) Adolor, Put, 4/17/2004 @ $17.50 * (50,000) (45) Alcon, Call, 5/22/2004 @ $60.00 * (60,000) (234) Allergan, Call, 4/17/2004 @ $85.00 * (25,000) (21) Amerisourcebergen, Call, 2/21/2004 @ $60.00 * (75,000) (80) Amgen Call 1/17/2004 @ $65.00 * (50,000) (10) 4/17/2004 @ $65.00 * (100,000) (170) Put, 4/17/2004 @ $65.00 * (40,000) (192) Amylin Pharmaceuticals Call 4/17/2004 @ $30.00 * (150,000) (53) 7/17/2004 @ $30.00 * (50,000) (40) Angiotech Pharmaceuticals, Put, 3/20/2004 @ $50.00 * (35,000) (208) Anthem Put 1/17/2005 @ $80.00 * (25,000) (257) 3/20/2004 @ $75.00 * (40,000) (115) Barr Laboratories, Put, 5/22/2004 @ $70.00 * (30,000) (80) Biogen Idec, Call, 4/17/2004 @ $40.00 * (125,000) (172) Biovail, Call, 1/17/2004 @ $20.00 * (50,000) (89) Boston Scientific, Call, 5/22/2004 @ $37.50 * (150,000) (341) C. R. Bard Put 4/17/2004 @ $70.00 * (25,000) (14) 4/17/2004 @ $75.00 * (25,000) (34) 7/17/2004 @ $85.00 * (25,000) (170) Cardinal Health Call 3/20/2004 @ $65.00 * (100,000) (123) 6/19/2004 @ $65.00 * (25,000) (59) Caremark Rx, Put, 6/19/2004 @ $25.00 * (25,000) (53) Cephalon, Put, 1/17/2004 @ $45.00 * (25,000) (8) Chiron, Put, 4/17/2004 @ $50.00 * (50,000) (58) Cv Therapeutics Call 4/17/2004 @ $20.00 * (50,000) (25) 7/17/2004 @ $17.50 * (100,000) (178) Eli Lilly Call 4/17/2004 @ $75.00 * (50,000) (91) 4/17/2004 @$ 70.00 * (50,000) (205) Put, 4/17/2004 @ $60.00 * (25,000) (25) Forest Laboratories Call, 5/22/2004 @ $70.00 * (50,000) (79) Put, 5/22/2004 @ $60.00 * (50,000) (185) Genentech Call, 1/17/2004 @ $95.00 * (50,000) (89) Put, 1/17/2004 @ $95.00 * (30,000) (100) Gilead Sciences Call 1/17/2004 @ $60.00 * (19,100) (16) 2/21/2004 @ $60.00 * (250,000) (544) 5/22/2004 @ $70.00 * (75,000) (107) Put 2/21/2004 @ $50.00 * (10,000) (6) 2/21/2004 @ $55.00 * (50,000) (82) Guidant, Put, 4/17/2004 @ $55.00 * (35,000) (49) HCA Call, 5/22/2004 @ $45.00 * (100,000) (143) Put, 5/22/2004 @ $45.00 * (50,000) (172) ICOS, Put, 4/17/2004 @ $50.00 * (70,000) (675) Imclone Systems Call, 1/17/2004 @ $50.00 * (75,000) (15) Put 1/17/2004 @ $40.00 * (25,000) (50) 1/17/2004 @ $45.00 * (25,000) (145) 2/21/2004 @ $40.00 * (35,000) (149) 2/21/2004 @ $45.00 * (50,000) (375) 5/15/2004 @ $45.00 * (25,000) (234) InterMune Put 4/17/2004 @ $20.00 * (25,000) (29) 4/17/2004 @ $25.00 * (25,000) (87) Invitrogen Put 5/22/2004 @ $65.00 * (25,000) (108) 5/22/2004 @ $70.00 * (30,000) (190) 8/21/2004 @ $70.00 * (40,000) (324) IVAX, Put, 6/19/2004 @ $25.00 * (50,000) (144) Johnson & Johnson, Call, 7/14/2004 @ $55.00 * (200,000) (250) Laboratory Corporation of America, Put, 5/22/2004 @ $35.00 * (12,500) (19) Martek Biosciences Call, 3/20/2004 @ $65.00 * (25,000) (121) Put, 6/19/2004 @ $60.00 * (60,000) (270) MedImmune Call 3/20/2004 @ $27.50 * (50,000) (54) 3/20/2004 @ $30.00 * (65,000) (32) 6/19/2004 @ $27.50 * (75,000) (137) 6/19/2004 @ $30.00 * (185,000) (203) 6/19/2004 @ $32.50 * (75,000) (49) Merck Put 1/17/2004 @ $55.00 * (10,000) (47) 1/17/2004 @ $60.00 * (12,400) (120) 1/22/2005 @ $50.00 * (100,000) (690) MGI Pharma Put 1/17/2004 @ $45.00 * (30,000) (126) 7/17/2004 @ $45.00 * (15,000) (112) Millennium Pharmaceuticals, Call, 5/22/2004 @ $20.00 * (100,000) (145) Molecular Devices, Put, 1/17/2004 @ $22.50 * (45,000) (153) Neurocrine Biosciences Call 2/21/2004 @ $55.00 * (50,000) (102) 5/22/2004 @ $60.00 * (75,000) (152) NPS Pharmaceuticals, Call, 2/21/2004 @ $35.00 * (150,000) (90) Omnicare, Call, 3/20/2004 @ $40.00 * (50,000) (110) Pfizer Call, 6/19/2004 @ $37.50 * (150,000) (128) Put 3/20/2004 @ $32.50 * (50,000) (21) 6/19/2004 @ $32.50 * (100,000) (85) 6/19/2004 @ $37.50 * (75,000) (245) Protein Design Labs, Put, 2/21/2004 @ $12.50 * (50,000) (8) Quest Diagnostics, Put, 5/22/2004 @ $80.00 * (25,000) (210) St. Jude Medical Call, 4/17/2004 @ $60.00 * (25,000) (110) Put, 4/17/2004 @ $60.00 * (25,000) (73) Triad Hospitals, Call, 2/21/2004 @ $35.00 * (50,000) (41) Trimeris Call 1/17/2004 @ $30.00 * (5,400) 0 4/17/2004 @ $30.00 * (275,000) (83) Universal Health Services Call 4/17/2004 @ $50.00 * (50,000) (263) 7/17/2004 @ $50.00 * (25,000) (161) Put, 7/17/2004 @ $55.00 * (25,000) (117) Valeant Pharmaceuticals International, Put, 6/19/2004 @ $25.00 * (50,000) (121) Vertex Pharmaceuticals, Call, 4/17/2004 @ $10.00 * (50,000) (65) Wilson Greatbatch Technologies, Put, 5/22/2004 @ $45.00 * (20,000) (88) Wyeth Call, 4/17/2004 @ $45.00 * (100,000) (117) Put 4/17/2004 @ $35.00 * (25,000) (10) 4/17/2004 @ $40.00 * (50,000) (68) Total Options Written (Cost $(16,641)) (12,243) SHORT-TERM INVESTMENTS 1.5% Money Market Funds 1.5% T. Rowe Price Reserve Investment Fund, 1.13% # 15,350,495 15,351 Total Short-Term Investments (Cost $15,351) 15,351 Total Investments in Securities 99.7% of Net Assets (Cost $821,436) $1,025,183 ---------- (ss.) Denominated in U.S. dollar unless otherwise noted # Seven-day yield * Non-income producing ^ All or a portion of this security is pledged to cover written call options at December 31, 2003 ! Affiliated company--See Note 2. !! Security contains restrictions as to public resale pursuant to the Securities Act of 1933 and related rules, total of such securities at period-end amounts to $7,347,000 and represents 0.7% of net assets @ Security valued by the Fund's Board of Directors ADR American Depository Receipts CHF Swiss franc DKK Danish krone EUR Euro JPY Japanese yen The accompanying notes are an integral part of these financial statements. T. Rowe Price Health Sciences Fund -------------------------------------------------------------------------------- Certified Annual Report December 31, 2003 Statement of Assets and Liabilities -------------------------------------------------------------------------------- ($ 000s) Assets Investments in securities, at value Affiliated companies (cost $6,894) $ 2,626 Other companies (cost $814,542) 1,022,557 Total investments in securities 1,025,183 Other assets 8,908 Total assets 1,034,091 Liabilities Total liabilities 6,724 NET ASSETS $ 1,027,367 ------------ Net Assets Consist of: Undistributed net realized gain (loss) $ (87,196) Net unrealized gain (loss) 203,748 Paid-in-capital applicable to 51,497,159 shares of $0.0001 par value capital stock outstanding; 1,000,000,000 shares authorized 910,815 NET ASSETS $ 1,027,367 ------------ NET ASSET VALUE PER SHARE $ 19.95 ------------ The accompanying notes are an integral part of these financial statements. T. Rowe Price Health Sciences Fund -------------------------------------------------------------------------------- Certified Annual Report Statement of Operations -------------------------------------------------------------------------------- ($ 000s) Year Ended 12/31/03 Investment Income (Loss) Dividend income $ 3,103 Expenses Investment management 5,681 Shareholder servicing 2,386 Custody and accounting 203 Prospectus and shareholder reports 182 Registration 51 Legal and audit 17 Directors 10 Miscellaneous 11 Total expenses 8,541 Net investment income (loss) (5,438) Realized and Unrealized Gain (Loss) Net realized gain (loss) Securities (5,119) Written options 8,283 Foreign currency transactions (45) Net realized gain (loss) 3,119 Change in net unrealized gain (loss) Securities 261,962 Written options 4,775 Change in net unrealized gain (loss) 266,737 Net realized and unrealized gain (loss) 269,856 INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS $ 264,418 ------------ The accompanying notes are an integral part of these financial statements. T. Rowe Price Health Sciences Fund -------------------------------------------------------------------------------- Certified Annual Report Statement of Changes in Net Assets -------------------------------------------------------------------------------- ($ 000s) Year Ended 12/31/03 12/31/02 Increase (Decrease) in Net Assets Operations Net investment income $ (5,438) $ (5,066) Net realized gain (loss) 3,119 (79,012) Change in net unrealized gain or loss 266,737 (189,723) Increase (decrease) in net assets from operations 264,418 (273,801) Capital share transactions * Shares sold 238,878 222,520 Shares redeemed (153,885) (231,550) Increase (decrease) in net assets from capital share transactions 84,993 (9,030) Net Assets Increase (decrease) during period 349,411 (282,831) Beginning of period 677,956 960,787 End of period $ 1,027,367 $ 677,956 ----------- ---------- *Share information Shares sold 13,705 13,063 Shares redeemed (8,931) (14,185) Increase (decrease) in shares outstanding 4,774 (1,122) The accompanying notes are an integral part of these financial statements. T. Rowe Price Health Sciences Fund -------------------------------------------------------------------------------- Certified Annual Report Notes to Financial Statements NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES T. Rowe Price Health Sciences Fund, Inc. (the fund) is registered under the Investment Company Act of 1940 (the 1940 Act) as a diversified, open-end management investment company and commenced operations on December 29, 1995. The fund seeks long-term capital appreciation. The accompanying financial statements were prepared in accordance with accounting principles generally accepted in the United States of America, which require the use of estimates made by fund management. Valuation The fund values its investments and computes its net asset value per share at the close of the New York Stock Exchange (NYSE), normally 4 p.m. ET, each day that the NYSE is open for business. Equity securities listed or regularly traded on a securities exchange or in the over-the-counter market are valued at the last quoted sale price, or official closing price for certain markets, at the time the valuations are made. A security that is listed or traded on more than one exchange is valued at the quotation on the exchange determined to be the primary market for such security. Listed securities not traded on a particular day are valued at the mean of the latest bid and ask prices for domestic securities and the last quoted sale price for international securities. Investments in mutual funds are valued at the mutual fund's closing net asset value per share on the day of valuation. Purchased and written options are valued at the mean of the closing bid and ask prices. Other investments and those for which the above valuation procedures are inappropriate or are deemed not to reflect fair value are stated at fair value as determined in good faith by the T. Rowe Price Valuation Committee, established by the fund's Board of Directors. Most foreign markets close before the NYSE. Normally, developments that could affect the values of securities that occur between the close of a foreign market and the close of the NYSE will not be reflected in security valuations used by the fund to compute its share price. However, if developments are so significant that they will, in the judgment of the fund, clearly and materially affect security values, such valuations may be adjusted to reflect the estimated fair value of the securities as of the close of the NYSE, as determined in good faith by the T. Rowe Price Valuation Committee, established by the fund's Board of Directors. Currency Translation Assets, including investments, and liabilities denominated in foreign currencies are translated into U.S. dollar values each day at the prevailing exchange rate, using the mean of the bid and ask prices of such currencies against U.S. dollars as quoted by a major bank. Purchases and sales of securities, income, and expenses are translated into U.S. dollars at the prevailing exchange rate on the date of the transaction. The effect of changes in foreign currency exchange rates on realized and unrealized security gains and losses is reflected as a component of security gains and losses. Rebates and Credits Subject to best execution, the fund may direct certain security trades to brokers who have agreed to rebate a portion of the related brokerage commission to the fund in cash. Commission rebates are included in realized gain on securities in the accompanying financial statements and totaled $80,000 for the year ended December 31, 2003. Additionally, the fund earns credits on temporarily uninvested cash balances at the custodian that reduce the fund's custody charges. Custody expense in the accompanying financial statements is presented before reduction for credits. Investment Transactions, Investment Income, and Distributions Income and expenses are recorded on the accrual basis. Dividends received from mutual fund investments are reflected as dividend income; capital gain distributions are reflected as realized gain/loss. Dividend income and capital gain distributions are recorded on the ex-dividend date. Investment transactions are accounted for on the trade date. Realized gains and losses are reported on the identified cost basis. Distributions to Shareholders are recorded on the ex-dividend date. Income distributions are declared and paid on an annual basis. Capital gain distributions, if any, are typically declared and paid on an annual basis. Other In the normal course of business, the fund enters into contracts that provide general indemnifications. The fund's maximum exposure under these arrangements is dependent on claims that may be made against the fund in the future and, therefore, cannot be estimated; however, based on experience, the risk of material loss from such claims is considered remote. NOTE 2 - INVESTMENT TRANSACTIONS Consistent with its investment objective, the fund engages in the following practices to manage exposure to certain risks or enhance performance. The investment objective, policies, program, and risk factors of the fund are described more fully in the fund's prospectus and Statement of Additional Information. Options Call and put options give the holder the right to purchase or sell, respectively, a security at a specified price on a certain date. Risks arise from possible illiquidity of the options market and from movements in security values. Options are reflected in the accompanying Portfolio of Investments at market value. Transactions in options written and related premiums received during the year ended December 31, 2003, were as follows: -------------------------------------------------------------------------------- Number of Contracts Premiums Outstanding at beginning of period 30,000 $ 5,108,000 Written 241,000 58,756,000 Exercised (1,000) (659,000) Expired (26,000) (3,467,000) Closed (189,000) (43,097,000) Outstanding at end of period 55,000 $ 16,641,000 ------ -------------- Affiliated Companies The fund may invest in certain securities that are considered affiliated companies. As defined by the 1940 Act, an affiliated company is one in which the fund owns 5% or more of the outstanding voting securities. At December 31, 2003, the value of affiliated companies totaled $2,626,000, representing 0.3% of the value of the fund's investments in securities. Other Purchases and sales of portfolio securities, other than short-term securities, aggregated $464,439,000 and $376,298,000, respectively, for the year ended December 31, 2003. NOTE 3 - FEDERAL INCOME TAXES No provision for federal income taxes is required since the fund intends to continue to qualify as a regulated investment company under Subchapter M of the Internal Revenue Code and distribute to shareholders all of its taxable income and gains. Federal income tax regulations differ from generally accepted accounting principles; therefore, distributions determined in accordance with tax regulations may differ significantly in amount or character from net investment income and realized gains for financial reporting purposes. Financial reporting records are adjusted for permanent book/tax differences to reflect tax character. Financial records are not adjusted for temporary differences. There were no distributions in the year ended December 31, 2003. At December 31, 2003, the tax-basis components of net assets were as follows: -------------------------------------------------------------------------------- Unrealized appreciation $ 271,798,000 Unrealized depreciation (68,873,000) Net unrealized appreciation (depreciation) 202,925,000 Capital loss carryforwards (86,373,000) Paid-in capital 910,815,000 Net assets $ 1,027,367,000 ---------------- Federal income tax regulations require the fund to defer recognition of capital losses realized on certain covered option transactions; accordingly, $822,000 of realized losses reflected in the accompanying financial statements have not been recognized for tax purposes as of December 31, 2003. The fund intends to retain realized gains to the extent of available capital loss carryforwards for federal income tax purposes. As of December 31, 2003, the fund had $9,998,000 of capital loss carryforwards that expire in 2009, $65,226,000 that expire in 2010, and $11,149,000 that expire in 2011. For the year ended December 31, 2003, the fund recorded the following permanent reclassifications to reflect tax character. Reclassifications to paid-in capital relate primarily to the current net operating loss. Results of operations and net assets were not affected by these reclassifications. -------------------------------------------------------------------------------- Undistributed net investment income $ 5,438,000 Undistributed net realized gain 48,000 Paid-in capital (5,486,000) At December 31, 2003, the cost of investments for federal income tax purposes was $822,259,000. NOTE 4 - RELATED PARTY TRANSACTIONS The fund is managed by T. Rowe Price Associates, Inc. (the manager or Price Associates), a wholly owned subsidiary of T. Rowe Price Group, Inc. The investment management agreement between the fund and the manager provides for an annual investment management fee, which is computed daily and paid monthly. The fee consists of an individual fund fee, equal to 0.35% of the fund's average daily net assets, and the fund's pro-rata share of a group fee. The group fee is calculated based on the combined net assets of certain mutual funds sponsored by Price Associates (the group) applied to a graduated fee schedule, with rates ranging from 0.48% for the first $1 billion of assets to 0.295% for assets in excess of $120 billion. The fund's portion of the group fee is determined by the ratio of its average daily net assets to those of the group. At December 31, 2003, the effective annual group fee rate was 0.32%, and investment management fee payable totaled $567,000. In addition, the fund has entered into service agreements with Price Associates and two wholly owned subsidiaries of Price Associates (collectively, Price). Price Associates computes the daily share price and maintains the financial records of the fund. T. Rowe Price Services, Inc., provides shareholder and administrative services in its capacity as the fund's transfer and dividend disbursing agent. T. Rowe Price Retirement Plan Services, Inc., provides subaccounting and recordkeeping services for certain retirement accounts invested in the fund. Expenses incurred pursuant to these service agreements totaled $1,653,000 for the year ended December 31, 2003, of which $195,000 was payable at period-end. Additionally, the fund is one of several mutual funds in which certain college savings plans managed by Price Associates may invest. As approved by the fund's Board of Directors, shareholder servicing costs associated with each college savings plan are borne by the fund in proportion to the average daily value of its shares owned by the college savings plan. For the year ended December 31, 2003, the fund was charged $29,000 for shareholder servicing costs related to the college savings plans, of which $22,000 was for services provided by Price and $0 was payable at period-end. At December 31, 2003, approximately 0.8% of the outstanding shares of the fund were held by college savings plans. The fund may invest in the T. Rowe Price Reserve Investment Fund and the T. Rowe Price Government Reserve Investment Fund (collectively, the Reserve Funds), open-end management investment companies managed by Price Associates. The Reserve Funds are offered as cash management options only to mutual funds, trusts, and other accounts managed by Price Associates and/or its affiliates, and are not available to the public. The Reserve Funds pay no investment management fees. During the year ended December 31, 2003, dividend income from the Reserve Funds totaled $228,000. T. Rowe Price Health Sciences Fund -------------------------------------------------------------------------------- Certified Annual Report Report of Independent Auditors -------------------------------------------------------------------------------- To the Board of Directors and Shareholders of T. Rowe Price Health Sciences Fund, Inc. In our opinion, the accompanying statement of assets and liabilities, including the portfolio of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of T. Rowe Price Health Sciences Fund, Inc. (the "Fund") at December 31, 2003, and the results of its operations, the changes in its net assets and the financial highlights for each of the fiscal periods presented, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States of America, which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 2003 by correspondence with custodians and brokers, provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP Baltimore, Maryland January 26, 2004 T. Rowe Price Health Sciences Fund -------------------------------------------------------------------------------- Certified Annual Report Information on Proxy Voting -------------------------------------------------------------------------------- A description of the policies and procedures that the T. Rowe Price Health Sciences Fund uses to determine how to vote proxies relating to portfolio securities is available, without charge, upon request by calling 1-800-225-5132. It also appears in the fund's Statement of Additional Information (Form 485B), which can be found on the SEC's Web site, www.sec.gov. T. Rowe Price Health Sciences Fund -------------------------------------------------------------------------------- Certified Annual Report About the Fund's Directors and Officers Your fund is governed by a Board of Directors that meets regularly to review investments, performance, expenses, and other business matters, and is responsible for protecting the interests of shareholders. The majority of the fund's directors are independent of T. Rowe Price Associates, Inc. (T. Rowe Price); "inside" directors are officers of T. Rowe Price. The Board of Directors elects the fund's officers, who are listed in the final table. The business address of each director and officer is 100 East Pratt Street, Baltimore, MD 21202. The Statement of Additional Information includes additional information about the fund directors and is available without charge by calling a T. Rowe Price representative at 1-800-225-5132. Independent Directors Name (Date of Birth) Principal Occupation(s) During Past 5 Years Year Elected * and Directorships of Other Public Companies Anthony W. Deering Director, Chairman of the Board, President, and (1/28/45) Chief Executive Officer, The Rouse Company, 2001 real estate developers; Director, Mercantile Bank (4/03 to present) Donald W. Dick, Jr. Principal, EuroCapital Advisors, LLC, an (1/27/43) acquisition and management advisory firm 1995 David K. Fagin Director, Golden Star Resources Ltd., Canyon (4/9/38) Resources Corp. (5/00 to present), and 1995 Pacific Rim Mining Corp. (2/02 to present); Chairman and President, Nye Corp. Karen N. Horn Managing Director and President, Global Private (9/21/43) Client Services, Marsh Inc.; Managing Director 2003 and Head of International Private Banking, Bankers Trust; Director, Eli Lilly and Company F. Pierce Linaweaver President, F. Pierce Linaweaver & Associates, (8/22/34) Inc., consulting environmental and civil engineers 2001 John G. Schreiber Owner/President, Centaur Capital Partners, Inc., (10/21/46) a real estate investment company; Senior Advisor 2001 and Partner, Blackstone Real Estate Advisors, L.P.; Director, AMLI Residential Properties Trust, Host Marriott Corp., and The Rouse Company Hubert D. Vos ** Owner/President, Stonington Capital Corp., (8/2/33) a private investment company 1995 Paul M. Wythes ** Founding Partner, Sutter Hill Ventures, a (6/23/33) venture capital limited partnership, 1995 providing equity capital to young high-technology companies throughout the United States; Director, Teltone Corp. * Each independent director oversees 107 T. Rowe Price portfolios and serves until retirement, resignation, or election of a successor. ** Retired from Board of Directors effective December 31, 2003. Inside Directors Name (Date of Birth) Year Elected * [Number of T. Rowe Price Principal Occupation(s) During Past 5 Years Portfolios Overseen] and Directorships of Other Public Companies John H. Laporte, CFA Director and Vice President, T. Rowe Price (7/26/45) Group, Inc.; Vice President, T. Rowe 1995 Price; Vice President, Health Sciences Fund [15] James S. Riepe Director and Vice President, T. Rowe Price; Vice (6/25/43) Chairman of the Board, Director, and Vice 1995 President, T. Rowe Price Group, Inc.; Chairman [107] of the Board and Director, T. Rowe Price Global Asset Management Limited, T. Rowe Price Global Investment Services Limited, T. Rowe Price Investment Services, Inc., T. Rowe Price Retirement Plan Services, Inc., and T. Rowe Price Services, Inc.; Chairman of the Board, Director, President, and Trust Officer, T. Rowe Price Trust Company; Director, T. Rowe Price International, Inc.; Chairman of the Board, Health Sciences Fund M. David Testa, CFA, CIC Chief Investment Officer, Director, and Vice (4/22/44) President, T. Rowe Price; Vice Chairman of the 1995 Board, Chief Investment Officer, Director, and [107] Vice President, T. Rowe Price Group, Inc.; Chairman of the Board and Director, T. Rowe Price International, Inc.; Director, T. Rowe Price Global Asset Management Limited and T. Rowe Price Global Investment Services Limited; Director and Vice President, T. Rowe Price Trust Company * Each inside director serves until retirement, resignation, or election of a successor. Officers Name (Date of Birth) Title and Fund(s) Served Principal Occupation(s) Laurie M. Bertner (10/8/77) Vice President, T. Rowe Price; formerly Vice President, Health Sciences Fund student, Emory University, Atlanta (to 2000); Financial Analyst, Legacy Asset Management (to 2000) Stephen V. Booth (6/21/61) Vice President, T. Rowe Price, T. Rowe Vice President, Health Sciences Fund Price Group, Inc., and T. Rowe Price Trust Company Joseph A. Carrier (12/30/60) Vice President, T. Rowe Price, T. Rowe Treasurer, Health Sciences Fund Price Group, Inc., and T. Rowe Price Investment Services, Inc. Unless otherwise noted, officers have been employees of T. Rowe Price or T. Rowe Price International for at least five years. Officers (continued) Name (Date of Birth) Title and Fund(s) Served Principal Occupation(s) Roger L. Fiery III, CPA (2/10/59) Vice President, T. Rowe Price, T. Rowe Vice President, Health Sciences Fund Price Group, Inc., T. Rowe Price International, Inc., and T. Rowe Price Trust Company Henry H. Hopkins (12/23/42) Director and Vice President, T. Rowe Vice President, Health Sciences Fund Price Group, Inc., T. Rowe Price Investment Services, Inc., T. Rowe Price Services, Inc., and T. Rowe Price Trust Company; Vice President, T. Rowe Price, T. Rowe Price International, Inc., and T. Rowe Price Retirement Plan Services, Inc. Kris H. Jenner, MD, D. Phil. (2/5/62) Vice President, T. Rowe Price and President, Health Sciences Fund T. Rowe Price Group, Inc. Susan J. Klein (4/18/50) Vice President, T. Rowe Price Vice President, Health Sciences Fund Christopher R. Leonard, CFA (1/11/73) Vice President, T. Rowe Price and Vice President, Health Sciences Fund T. Rowe Price Group, Inc. Patricia B. Lippert (1/12/53) Assistant Vice President, T. Rowe Secretary, Health Sciences Fund Price and T. Rowe Price Investment Services, Inc. Jay S. Markowitz, MD (12/19/62) Vice President, T. Rowe Price; formerly Vice President, Health Sciences Fund Transplant Surgeon and Assistant Professor of Surgery, Johns Hopkins University School of Medicine (to 2001) Charles G. Pepin (4/23/66) Vice President, T. Rowe Price and Vice President, Health Sciences Fund T. Rowe Price Group, Inc. John Carl A. Sherman (9/3/72) Vice President, T. Rowe Price Group, Vice President, Health Sciences Fund Inc., and T. Rowe Price International, Inc. Julie L. Waples (5/12/70) Vice President, T. Rowe Price Vice President, Health Sciences Fund Unless otherwise noted, officers have been employees of T. Rowe Price or T. Rowe Price International for at least five years. Item 2. Code of Ethics. As of the end of the period covered by this report, the registrant has adopted a code of ethics, as defined in Item 2 of Form N-CSR, applicable to its principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. A copy of this code of ethics is filed as an exhibit to this Form N-CSR. No substantive amendments were approved or waivers were granted to this code of ethics during the period covered by this report. Item 3. Audit Committee Financial Expert. The registrant's Board of Directors/Trustees has determined that Mr. David K. Fagin qualifies as an audit committee financial expert, as defined in Item 3 of Form N-CSR. Mr. Fagin is considered independent for purposes of Item 3 of Form N-CSR. Item 4. Principal Accountant Fees and Services. (a) - (d) Aggregate fees billed to the registrant for the last two fiscal years for professional services rendered by the registrant's principal accountant were as follows: 2003 2002 Audit Fees $9,653 $9,378 Audit-Related Fees 548 -- Tax Fees 2,507 2,271 All Other Fees 124 155 Audit fees include amounts related to the audit of the registrant's annual financial statements and services normally provided by the accountant in connection with statutory and regulatory filings. Audit-related fees include amounts reasonably related to the performance of the audit of the registrant's financial statements, specifically the issuance of a report on internal controls. Tax fees include amounts related to tax compliance, tax planning, and tax advice. Other fees include the registrant's pro-rata share of amounts for agreed-upon procedures in conjunction with service contract approvals by the registrant's Board of Directors/Trustees. (e)(1) The registrant's audit committee has adopted a policy whereby audit and non-audit services performed by the registrant's principal accountant for the registrant, its investment adviser, and any entity controlling, controlled by, or under common control with the investment adviser that provides ongoing services to the registrant require pre-approval in advance at regularly scheduled audit committee meetings. If such a service is required between regularly scheduled audit committee meetings, pre-approval may be authorized by one audit committee member with ratification at the next scheduled audit committee meeting. Waiver of pre-approval for audit or non-audit services requiring fees of a de minimis amount is not permitted. (2) No services included in (b) - (d) above were approved pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X. (f) Not applicable. (g) The aggregate fees billed for the most recent fiscal year and the preceding fiscal year by the registrant's principal accountant for non-audit services rendered to the registrant, its investment adviser, and any entity controlling, controlled by, or under common control with the investment adviser that provides ongoing services to the registrant were $719,000 and $671,000, respectively, and were less than the aggregate fees billed for those same periods by the registrant's principal accountant for audit services rendered to the T. Rowe Price Funds. (h) All non-audit services rendered in (g) above were pre-approved by the registrant's audit committee. Accordingly, these services were considered by the registrant's audit committee in maintaining the principal accountant's independence. Item 5. Audit Committee of Listed Registrants. Not applicable. Item 6. [Reserved] Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies. Not applicable. Item 8. Purchases of Equity Securities by Closed-End Management Investment Company and Affiliated Purchasers. Not applicable. Item 9. Controls and Procedures. (a) The registrant's principal executive officer and principal financial officer have evaluated the registrant's disclosure controls and procedures within 90 days of this filing and have concluded that the registrant's disclosure controls and procedures were effective, as of that date, in ensuring that information required to be disclosed by the registrant in this Form N-CSR was recorded, processed, summarized, and reported timely. (b) The registrant's principal executive officer and principal financial officer are aware of no changes in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal half-year that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. Item 10. Exhibits. (a)(1) The registrant's code of ethics pursuant to Item 2 of Form N-CSR is attached. (a)(2) Separate certifications by the registrant's principal executive officer and principal financial officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 and required by Rule 30a-2(a) under the Investment Company Act of 1940, are attached. (b) A certification by the registrant's principal executive officer and principal financial officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and required by Rule 30a-2(b) under the Investment Company Act of 1940, is attached. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. T. Rowe Price Health Sciences Fund, Inc. By /s/ James S. Riepe James S. Riepe Principal Executive Officer Date February 13, 2004 Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. By /s/ James S. Riepe James S. Riepe Principal Executive Officer Date February 13, 2004 By /s/ Joseph A. Carrier Joseph A. Carrier Principal Financial Officer Date February 13, 2004