N-30D 1 arscs.txt T. ROWE PRICE SMALL-CAP STOCK FUND 12/31/02 Annual Report Small-Cap Stock Fund December 31, 2002 LOGO: T. Rowe Price(registered trademark) (registered trademark) REPORT HIGHLIGHTS -------------------------------------------------------------------------------- Small-Cap Stock Fund o Stocks fell sharply in the second half of 2002, including the formerly strong small-cap value segment. However, small-caps managed to outperform large-caps for a fourth consecutive year. o The Small-Cap Stock Fund returned -11.66% during the six months ended December 31, and -14.21% for the year. Both results were superior to the Russell 2000 Index and the Lipper peer group index. o We added the most value with stock selection in the consumer discretionary, energy, materials, and health care sectors, while we lost value in the utilities sector, primarily due to our relative lack of exposure. o We believe the seeds of an economic rebound have been sown, and a stronger recovery will boost small-caps, and emerging growth stocks in particular. REPORTS ON THE WEB Sign up for our E-mail Program, and you can begin to receive updated fund reports and prospectuses online rather than through the mail. Log on to your account at www.troweprice.com for more information. Fellow Shareholders Perhaps the best that can be said for 2002 is that it's over. Small-caps began the year with the wind at their backs and continued to post positive returns-as they had in the two prior years-through April, buoyed by strength in value stocks. However, by midyear the bear market was taking no prisoners, and nearly all stocks large and small fell prey, especially during the violent sell-offs of July and October. The market subsequently bounced sharply, but the Russell 2000 returned -20.48% for the year. Still, small-caps managed to outperform for the fourth straight year, as the S&P 500 Index returned -22.10%. Performance Comparison -------------------------------------------------------------------------------- Periods Ended 12/31/02 6 Months 12 Months -------------------------------------------------------------------------------- Small-Cap Stock Fund -11.66% -14.21% Small-Cap Stock Fund Advisor Class -11.77 -14.41 Russell 2000 Index -16.56 -20.48 Lipper Small-Cap Core Funds Index -14.61 -19.23 S&P 500 Index -10.30 -22.10 How did we fare in these challenging times? The Small-Cap Stock Fund returned -11.66% during the past six months, bringing our return for 2002 to -14.21%. While we are pleased that we once again outperformed the Russell 2000 Index and the Lipper peer group index in both periods, as shown in the table, we take no pleasure in double-digit negative returns. However, a longer-term perspective is important, and over the five years ended December 31, 2002, the Small-Cap Stock Fund gained a cumulative 18.18% compared with 7.15% for the Lipper peer group average, -6.61% for the Russell 2000, and -2.90% for the S&P 500. Historically, the fund's durable blend of growth and value stocks has served to cushion its decline in down markets. This held true again in 2002. However, the fund also kept pace with the strong fourth-quarter advance. That is a testament to the flexibility of the blend strategy and our gradual shift away from more defensive stocks that had performed well toward emerging growth and cyclical stocks that would benefit from an eventual rebound in the economy and markets. During the last three months of the year, the fund gained 7.15% compared with 6.16% for the Russell 2000 and 5.79% for the Lipper Small-Cap Core Funds Index. INVESTMENT REVIEW The best-performing sectors in the Russell 2000 during the last six months were utilities (-8%) and financials (-9%), the only two sectors to avoid double-digit declines. Though telecommunication services (-20%) and information technology (-19%) fell sharply, the worst-performing sectors were consumer discretionary (-24%) and materials (-22%). We added the most value with the strong performance of our holdings in the consumer discretionary, energy, materials, and health care sectors. The largest detractor was the utilities sector, primarily due to group underweighting. The fund's consumer discretionary holdings declined less during the second half than the index sector, -14% versus -24%, respectively. Most of the credit for this relative strength belongs to audio systems maker Harman International, our top holding, which rose 21% in the period thanks to high-octane results in its automotive business. As broadband comes to the dashboard, Harman has the key technology to fully integrate its sophisticated multimedia electronics with dashboard audio systems. Fueled by big wins with luxury manufacturers, including BMW, Mercedes, and Porsche, Harman's auto business surged 48% in the September quarter. Given Harman's significant appreciation and its large weighting within the portfolio, we took profits during the period. Other major contributors in consumer discretionary included Getty Images, which surged 69%. Getty is the world's leading provider of stock images, photographs, and film footage, and has seen reaccelerating sales growth and positive operating leverage. Major customers include advertising and design firms. You may have seen photographs from its huge library in the pages of Time magazine or on MSNBC.com. Getty has a low-cost, Internet-driven distribution model. Another of our top-five holdings, pool equipment distributor SCP Pool, also aided performance in the sector as it rose 5% on strong results. The company's recent acquisition of Fort Wayne Pools should help drive growth in the coming year. The strong relative performance of our energy positions, combined with the fact that the fund has nearly double the energy weighting of the Russell 2000, benefited fund performance. Our holdings slipped modestly (-2%) during the period versus the index sector (-13%). Natural gas prices above $5 per thousand cubic feet, spurred by declining domestic production and concern about the potential disruption of oil supplies from Iraq and Venezuela, aided XTO Energy, a top-five holding that rose 20%. We continue to believe energy stocks offer an attractive hedge in these uncertain times, and over the longer term, the fundamentals of North American natural gas demand appear strong. Stock selection in the materials sector was also positive, as our holdings fell 10% versus the 22% drop of the Russell 2000's materials constituents. Consumer lawn-and-garden leader Scotts rose 8% as earnings grew strongly and the company cancelled a potentially dilutive secondary offering. Sector Diversification -------------------------------------------------------------------------------- Consumer 15% Energy and Utilities 8 Industrials and Business Services 20 Financial 17 Health Care 8 Information Technology 16 Materials 7 Reserves 9 In addition to underweighting the relatively strong utilities sector, results versus the index were hurt by the weak performance of Cleco, our largest and virtually only utility holding. At year-end, your portfolio had less than 1% of net assets in the sector, partly because we felt the time was right to move to less defensive groups. Utilities make up 4% of the benchmark. Cleco, a diversified utility holding company based in central Louisiana, fell 34% in the period. The company has an independent power subsidiary that sold power under contract to various power marketing companies, some of which are in financial distress as a result of the sector's implosion. Fortunately, we anticipated this issue and dramatically decreased our Cleco holdings in 2001 and early 2002, limiting the impact on the portfolio. Other major detractors were scattered across a variety of sectors. Supermarket chain Great Atlantic & Pacific Tea Company's turnaround attempt has been complicated by a brutal price war, and results have been disappointing. The stock's 57% plunge hurt relative results in consumer staples. A 51% decline in shares of passive electronic components maker Kemet hindered performance in the technology sector. KEMET suffered from a price war in capacitors, which are 60% of its business, along with high raw materials costs. Noven Pharmaceuticals, a drug delivery company specializing in transdermal patches for uses such as hormone replacement, fell 64% during the period as a well-publicized study called into question the advisability of estrogen treatment for post-menopausal women. Noven detracted from our otherwise strong stock selection in health care. It's worth noting, however, that Noven's patch system was not part of the study. After a midyear dip, sales for the patch recently eclipsed peak levels reached before the study's release. Security and law enforcement products and services firm Armor Holdings, which is doing a strong business in products such as riot gear and armor-plating for U.S. military Humvees, reported poor results in its troubled security consulting business, which it now plans to sell. The shares fell 46%, weighing on performance in the industrials and business services sector. INVESTMENT STRATEGY The long bear market for technology stocks continued in the second half of 2002 as investors appear to have despaired of ever again witnessing a demand-based recovery in the sector. As a result, many small-cap technology stocks reached ever-more attractive valuation levels. We took advantage of the opportunity to purchase well-positioned technology stocks at reasonable prices. Indeed, nearly a third of our purchases in the second half were technology stocks. Though we may have to wait for a catalyst, a rebound in technology capital spending may be closer than the market expects. New technology investment began falling off sharply three years ago-which is about the average life cycle for technology products due to obsolescence. Our largest technology purchase in the second half was Semtech, a $1 billion market cap integrated circuit firm that looks like a long-term winner in the space. Semtech designs chips used in PCs, wireless handsets, communications equipment, and industrial products. The shares declined as the company issued a disappointing outlook, giving us a chance to purchase the shares at a price/earnings ratio below Semtech's 25% long-term expected growth rate. The company is highly profitable, with a 25% operating profit margin, and has a sterling balance sheet. Another new technology position was Websense, a $515 million market cap developer of software that enables businesses to monitor, report, and manage their employees' use of the Internet. Websense is a market leader in one of the few areas where IT spending has held up, and is capable of 30% annual earnings growth in the years ahead. We also find the industrials group appealing. The economic recovery may be poised to gather strength and non-technology capital spending could also rebound, even if only to levels necessary for maintenance and upkeep. Two new positions that could benefit are Graco and Lindsay Manufacturing. Graco is a high-quality niche manufacturer of pumps and fluid-handling equipment with a $1.4 billion market cap. The company's pumps control and dispense fluids used in painting, coating, high-pressure cleaning, and vehicle lubrication. Graco has a 20% operating profit margin, a 25% return on assets, and a greater than 40% return on equity, yet was recently trading at 17 times forward estimates. Lindsay Manufacturing is a solid, conservatively managed irrigation-equipment company, which should see an increase in orders as a result of two related developments: last year's drought and higher corn prices. The crippling drought reinforced the value of irrigation, which not only improves crop yields but also makes financing easier for farmers. Partly because of the drought and partly due to continued growth in global demand, corn inventories recently hit levels last seen during the mid-1970s, sparking a significant rise in corn prices. Significant sales One of our largest sales was specialty consumer products company Chattem. The shares rose 30% during the period on strong earnings gains and solid investor interest following the success of its recent acquisition of the Selsun Blue dandruff shampoo brand. Management has successfully reinvigorated the business, but following the stock's sharp runup, we significantly reduced our position as the valuation looked full. In addition, the company twice filed to make a secondary offering, though the plan was canceled both times. We felt that if management was willing to sell shares at recent levels, so were we. We eliminated our position in Urban Outfitters, the highly successful retailer of apparel and home fashions. The company enjoyed strong success in 2002 due to the popularity of the peasant look, and the shares doubled. However, fashion is a fickle business, and we chose to cash out while Urban Outfitters was on top of the current trend, rather than potentially behind the next one. Ivex Packaging was also eliminated after the company agreed to be acquired by aluminum giant Alcoa. The deal marked a continuation of a significant consolidation trend in the packaging sector. We chose to reinvest a portion of the proceeds from Ivex into the recent initial public offering (remember those?) of Constar International. Constar is a manufacturer of polyethylene containers that was recently sold by Crown Cork & Seal. The shares were attractively priced at less than four times earnings before interest, taxes, depreciation, and amortization. OUTLOOK The challenges we face as investors are well known. While the market is undoubtedly fragile and vulnerable, investors may be well advised to recall that new bull markets tend to start by climbing the proverbial "wall of worry." Growth vs. Value -------------------------------------------------------------------------------- Periods Ended 12/31/02 6 Months 12 Months -------------------------------------------------------------------------------- Russell 2000 Growth Index -15.63% -30.26% Russell 2000 Value Index -17.42 -11.43 Weighing against geopolitical concerns and currently soft economic conditions are accommodative monetary policy, the prospect of new and substantial fiscal stimulus out of Washington (possibly including the elimination of the tax on dividends for investors), and an economy that we see as primed for recovery. The seeds of a rebound have been sown. Inventories remain at very low levels, and the inevitable inventory restocking will in itself boost the economy to an extent. As discussed above, we feel that capital spending is likely to recover, at least modestly, because it has been artificially low for nearly three years. The recent improvement in corporate profits, combined with strong productivity growth, provides businesses the means and the incentive to invest in new equipment. Inventory rebuilding and a modest upturn in capital spending should support a gradually strengthening economy in 2003. Investors may recall that the recovery of 1991-92 was similarly tepid. And George W. Bush surely recalls that anemic growth helped doom his father's reelection chances. As candidate Bill Clinton's top political adviser cracked at the time, "It's the economy, stupid." Without question, if events in the Middle East or North Korea spin out of control, or if another large-scale terror attack deals a blow to our economy, we may be forced to eat our bullish words. However, we choose to be optimistic. The market as we write is likely discounting a war in Iraq with at least some hard fighting along with some regional complications, as well as continued threats on the Korean peninsula. Yet if the Iraq conflict is resolved quickly and on favorable terms, and if some accommodation is reached with North Korea, markets could stage a significant relief rally, and improved business and consumer confidence could afford the economy an opportunity to flex its muscles. We believe small-cap shares would benefit handsomely from this scenario. The current small-cap cycle was born April 9, 1999, at the height of the Internet frenzy. It has run nearly four years. Several previous cycles have lasted five to seven years. The current cycle appears to fall short not only in terms of duration but also in terms of magnitude. Our good friend Steven DeSanctis, the small-cap strategist at Prudential Securities, notes the typical small-cap cycle has generated annual excess returns of 13.3% per year. Contrast this with the current cycle's 10.8% annual excess return as of year-end. In addition, nearly all small-cap cycles occur in an environment of strongly positive absolute returns. In the early '90s, the Russell 2000 more than doubled in just over three years. Yet over the current cycle through year-end, the Russell 2000 Index has been essentially flat. Therefore, we feel the small-cap cycle has room to run. Moreover, the sector still looks attractive on a valuation basis. On measures such as price-to-sales and price-to-book value relative to large-caps, small-caps remain favorably priced. Indeed, they have only just recently surpassed their 1990 sector lows. Valuation alone, however, will not spur the next leg of the small-cap outperformance cycle. For that, we need a stronger U.S. economic recovery, which would likely bring with it stronger relative earnings growth for small-caps, which tend to be more sensitive to the domestic economy than large-caps. After three years of massive small-cap value outperformancethe widest advantage for small-cap value on recordwe believe emerging growth stocks will lead the next market advance. Reversion to the mean should eventually work in favor of small-cap growth. In addition, emerging growth stocks typically outperform coming off a market bottom. We may very well have seen that bottom in October. Certainly, in the July to October period there were many signs of a classic bear market bottom, including widespread capitulation among equity investors, many of whom flocked to real estate or bonds as alternatives. Bull markets are born in conditions such as these. The last time stocks fell four years in a row was during the Great Depression-and we simply don't believe times are that bad today. With the right fiscal, monetary, and trade policies, and reasonable progress in the war on terrorism, there is no reason things have to get that bad in the future. In sum, we are optimistic about 2003. We would like to wish you a happy and successful new year, and to thank you for allowing us to serve your investment needs. Respectfully submitted, Greg A. McCrickard President of the fund and chairman of its Investment Advisory Committee January 17, 2003 The committee chairman has day-to-day responsibility for managing the portfolio and works with committee members in developing and executing the fund's investment program. T. Rowe Price Small-Cap Stock Fund -------------------------------------------------------------------------------- Portfolio Highlights -------------------------------------------------------------------------------- TWENTY-FIVE LARGEST HOLDINGS Percent of Net Assets 12/31/02 -------------------------------------------------------------------------------- Harman International 2.0% Iron Mountain 1.6 XTO Energy 1.4 SCP Pool 1.3 Chittenden 1.3 -------------------------------------------------------------------------------- Scotts 1.2 A.O. Smith 1.2 Minerals Technologies 1.2 WestAmerica 1.2 PartnerRe 1.2 -------------------------------------------------------------------------------- W. R. Berkley 1.1 Kronos 1.1 Matthews International 1.1 Harsco 1.1 Airgas 1.0 -------------------------------------------------------------------------------- Seacor Smit 1.0 Henry Schein 1.0 Valley National Bancorp 1.0 Horace Mann Educators 1.0 Paxar 0.9 -------------------------------------------------------------------------------- Casey's General Stores 0.9 Brown and Brown 0.9 Noble Energy 0.9 Citizens Banking 0.9 Maximus 0.9 -------------------------------------------------------------------------------- Total 28.4% Note: Table excludes investments in the T. Rowe Price Reserve Investment Fund. T. Rowe Price Small-Cap Stock Fund -------------------------------------------------------------------------------- Portfolio Highlights -------------------------------------------------------------------------------- MAJOR PORTFOLIO CHANGES Listed in descending order of size 6 Months Ended 12/31/02 Ten Largest Purchases -------------------------------------------------------------------------------- Semtech* Graco* Lindsay Manufacturing* National Oilwell Websense* Ohio Casualty Scholastic IMC Global Alloy Online Consolidated Graphics* Ten Largest Sales -------------------------------------------------------------------------------- Harman International Chattem O'Charley's Urban Outfitters** Ivex Packaging** Copart** C.H. Robinson Worldwide** Cleco Woodward Governor JP Realty** * Position added ** Position eliminated T. Rowe Price Small-Cap Stock Fund -------------------------------------------------------------------------------- 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. LINE GRAPH: SMALL-CAP STOCK FUND Russell Lipper 2000 Small-Cap Core Small-Cap Index Funds Index Stock Fund -------------------------------------------------------------------------------- 12/31/92 10000 10000 10000 12/31/93 11888 11314 11840 12/31/94 11671 11332 11850 12/31/95 14992 14816 15861 12/31/96 17464 17588 19200 12/31/97 21370 21498 24732 12/31/98 20826 20716 23878 12/31/99 25253 24896 27379 12/31/00 24490 26622 31894 12/31/01 25099 28519 34067 12/31/02 19958 23034 29228 Note: Performance for the Advisor Class will vary due to the differing fee structure. See returns table below. Average Annual Compound Total Return -------------------------------------------------------------------------------- This table shows how the fund would have performed each year if its actual (or cumulative) returns for the periods shown had been earned at a constant rate. Periods Ended Since Inception 12/31/02 1 Year 3 Years 5 Years 10 Years Inception Date -------------------------------------------------------------------------------- Small-Cap Stock Fund -14.21% 2.20% 3.40% 11.32% -- -- Small-Cap Stock Fund Advisor Class -14.41 -- -- -- -0.94% 3/31/00 Investment return and principal value represent past performance and will vary. Shares may be worth more or less at redemption than at original purchase. Returns do not reflect taxes that the shareholder may pay on fund distributions or the redemption of fund shares. T. Rowe Price Small-Cap Stock Fund -------------------------------------------------------------------------------- Financial Highlights For a share outstanding throughout each period -------------------------------------------------------------------------------- Small-Cap Stock shares Year Ended 12/31/02 12/31/01 12/31/00 12/31/99 12/31/98 NET ASSET VALUE Beginning of period $ 25.34 $ 23.87 $ 22.80 $ 20.79 $ 22.20 Investment activities Net investment income (loss) 0.01 0.10 0.15 0.09 0.08 Net realized and unrealized gain (loss) (3.61) 1.52 3.52 2.89 (0.89) Total from investment activities (3.60) 1.62 3.67 2.98 (0.81) Distributions Net investment income (0.01) (0.10) (0.14) (0.08) (0.10) Net realized gain (0.23) (0.05) (2.46) (0.89) (0.50) Total distributions (0.24) (0.15) (2.60) (0.97) (0.60) NET ASSET VALUE End of period $ 21.50 $ 25.34 $ 23.87 $ 22.80 $ 20.79 -------------------------------------------------------------------------------- Ratios/Supplemental Data Total return^ (14.21)% 6.81% 16.49% 14.66% (3.46)% Ratio of total expenses to average net assets 0.96% 0.98% 0.94% 0.96% 1.01% Ratio of net investment income (loss) to average net assets 0.04% 0.45% 0.63% 0.47% 0.46% Portfolio turnover rate 15.3% 16.5% 32.8% 42.3% 25.9% Net assets, end of period (in millions) $ 3,298 $ 3,158 $ 2,255 $ 1,740 $ 1,153 ^ 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 Small-Cap Stock Fund -------------------------------------------------------------------------------- Financial Highlights For a share outstanding throughout each period -------------------------------------------------------------------------------- Small-Cap StockAdvisor Class shares Year 3/31/00 Ended Through 12/31/02 12/31/01 12/31/00 NET ASSET VALUE Beginning of period $ 25.32 $ 23.89 $ 24.93 Investment activities Net investment income (loss) (0.02) 0.04 0.07 Net realized and unrealized gain (loss) (3.63) 1.53 1.53 Total from investment activities (3.65) 1.57 1.60 Distributions Net investment income -- (0.09) (0.18) Net realized gain (0.23) (0.05) (2.46) Total distributions (0.23) (0.14) (2.64) NET ASSET VALUE End of period $ 21.44 $ 25.32 $ 23.89 -------------------------------------------------------------------------------- Ratios/Supplemental Data Total return^ (14.41)% 6.60% 6.79% Ratio of total expenses to average net assets 1.19% 1.16% 0.82%! Ratio of net investment income (loss) to average net assets (0.13)% 0.26% 0.85%! Portfolio turnover rate 15.3% 16.5% 32.8%! Net assets, end of period (in thousands) $ 141,005 $ 38,632 $ 7,479 ^ 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. ! Annualized The accompanying notes are an integral part of these financial statements. T. Rowe Price Small-Cap Stock Fund -------------------------------------------------------------------------------- December 31, 2002 Portfolio of Investments Shares Value -------------------------------------------------------------------------------- In thousands Common Stocks 90.8% CONSUMER DISCRETIONARY 12.6% Auto Components 0.6% Keystone Automotive * 640,300 $ 9,617 Strattec Security *! 190,600 9,138 18,755 Hotels, Restaurants & Leisure 2.4% Applebee's 471,675 10,939 BUCA * 714,400 5,944 CEC Entertainment * 376,000 11,543 O'Charley's * 637,500 13,088 Red Robin Gourmet Burgers * 170,000 2,166 Ruby Tuesday 1,211,400 20,945 Sonic * 878,500 18,000 82,625 Household Durables 3.1% Harman International 1,128,900 67,169 Matthews International, Class A ! 1,689,700 37,733 104,902 Internet & Catalog Retail 0.4% Alloy Online * 1,355,000 14,837 14,837 Leisure Equipment & Products 1.9% Brunswick 950,200 18,871 SCP Pool *! 1,578,550 46,094 64,965 Media 2.0% Emmis Broadcasting, Class A * 644,300 13,421 Entercom Communications * 230,500 10,815 Getty Images * 182,000 5,560 Scholastic * 559,800 20,125 Sinclair Broadcast Group, Class A * 1,230,700 14,313 Young Broadcasting, Class A * 430,700 5,672 69,906 Multiline Retail 0.8% Neiman Marcus, Class A * 806,000 24,494 Stein Mart * 519,100 3,167 27,661 Specialty Retail 0.8% Christopher & Banks * 449,300 $ 9,323 Linens 'n Things * 673,900 15,230 Ultimate Electronics * 337,800 3,429 27,982 Textiles, Apparel, & Luxury Goods 0.6% Culp * 209,900 1,784 Dan River, Class A * 962,400 2,646 Stride Rite 1,711,800 12,274 Unifi * 908,400 4,769 21,473 Total Consumer Discretionary 433,106 CONSUMER STAPLES 2.6% Food & Drug Retailing 1.7% Casey's General Stores ! 2,648,000 32,332 Great Atlantic & Pacific Tea Company * 1,330,000 10,720 Performance Food Group * 62,100 2,109 Seneca Foods Class A * 187,600 2,770 Class B * 72,000 1,170 Wild Oats Markets * 875,700 9,037 58,138 Food Products 0.6% ADM Cranberry *+@ 164 4 American Italian Pasta, Class A * 274,000 9,859 International Multifoods * 535,900 11,356 Makepeace *@ 164 914 22,133 Personal Products 0.3% Chattem * 243,000 4,994 Playtex Products * 592,000 5,849 10,843 Total Consumer Staples 91,114 ENERGY 7.2% Energy Equipment & Services 4.1% Atwood Oceanics * 562,000 $ 16,916 Cooper Cameron * 103,300 5,147 FMC Technologies * 1,374,200 28,075 Grant Prideco * 131,450 1,530 Hydril * 318,300 7,502 Key Energy Services * 668,100 5,993 Lone Star Technologies * 305,700 4,552 National Oilwell * 926,700 20,239 Seacor Smit * 789,500 35,133 Smith International * 260,200 8,488 W-H Energy Services * 473,900 6,914 140,489 Oil & Gas 3.1% Forest Oil * 775,100 21,431 Noble Energy 834,400 31,332 Ultra Petroleum * 588,500 5,826 XTO Energy 2,013,275 49,728 108,317 Total Energy 248,806 FINANCIALS 17.4% Banks 6.3% Boston Private Financial 176,000 3,495 Chittenden ! 1,758,150 44,798 Citizens Banking 1,256,600 31,139 Frankfort First ! 67,500 1,171 Glacier Bancorp 485,990 11,455 ITLA Capital * 42,000 1,396 Provident Bankshares 952,078 22,003 Southwest Bancorp * 858,500 24,733 Valley National Bancorp 1,312,468 34,610 WestAmerica 1,000,000 40,180 214,980 Insurance 6.9% Brown and Brown 995,000 $ 32,158 Harleysville Group 448,600 11,857 Horace Mann Educators ! 2,139,100 32,793 Markel * 111,500 22,913 Ohio Casualty * 2,060,800 26,687 PartnerRe 770,600 39,933 Selective Insurance 870,000 21,907 Triad Guaranty * 290,000 10,689 W. R. Berkley 969,000 38,382 237,319 Real Estate 4.2% Arden Realty, REIT 739,200 16,373 EastGroup Properties, REIT ! 887,600 22,634 Essex Property Trust, REIT 100,000 5,085 Gables Residential Trust, REIT 792,600 19,760 Glenborough Realty Trust, REIT 775,000 13,811 LaSalle Hotel Properties, REIT 495,400 6,936 Manufactured Home Communities, REIT 315,000 9,333 Parkway Properties, REIT ! 599,700 21,037 Reckson Associates Realty, Class B, REIT 265,900 5,956 Washington, REIT 971,300 24,768 145,693 Total Financials 597,992 HEALTH CARE 7.7% Biotechnology 2.4% Abgenix * 96,000 708 Alexion Pharmaceutical * 100,000 1,412 Alkermes * 938,700 5,886 Cephalon * 353,517 17,205 Cubist Pharmaceuticals * 109,500 901 CV Therapeutics * 104,300 1,900 deCODE GENETICS * 300,000 555 Deltagen * 260,700 125 Exelixis * 428,700 3,430 Incyte Genomics * 171,800 783 Neurocrine Biosciences * 280,100 $ 12,789 NPS Pharmaceuticals * 289,000 7,274 OSI Pharmaceuticals * 124,200 2,037 Regeneron Pharmaceuticals * 119,700 2,216 Triangle Pharmaceuticals * 684,800 4,068 Trimeris * 270,000 11,634 Tularik * 415,000 3,096 Versicor * 271,200 2,926 Vertex Pharmaceuticals * 149,620 2,372 ViroPharma * 163,200 238 81,555 Health Care Equipment & Supplies 1.5% Edwards Lifesciences * 589,900 15,025 EPIX Medical * 190,000 1,374 Inhale Therapeutic Systems * 350,100 2,829 Sola * 97,500 1,267 Steris * 715,100 17,341 Wilson Greatbatch Technologies * 470,700 13,744 51,580 Health Care Providers & Services 3.3% AmeriPath * 818,300 17,593 AMN Healthcare Services * 32,100 543 Cross Country * 190,800 2,662 Henry Schein * 777,200 34,974 Hooper Holmes 1,650,000 10,131 Lifeline Systems *! 333,600 7,483 Maximus *! 1,158,300 30,232 Orthodontic Centers of America * 49,400 539 Renal Care Group * 303,650 9,607 113,764 Pharmaceuticals 0.5% Eon Labs * 200,000 3,782 Guilford Pharmaceuticals * 52,100 207 Medicines Company * 350,000 5,607 Noven Pharmaceuticals * 1,011,600 9,337 18,933 Total Health Care 265,832 INDUSTRIALS & BUSINESS SERVICES 19.9% Aerospace & Defense 0.6% Armor Holdings *! 1,502,300 $ 20,687 20,687 Air Freight & Logistics 2.3% Expeditors International of Washington 603,600 19,708 Forward Air * 669,005 12,985 Pacer International * 830,000 11,039 Ryder System 720,000 16,157 UTi Worldwide 787,600 20,674 80,563 Airlines 0.2% Frontier Airlines * 710,000 4,800 Midwest Express Holdings * 555,600 2,972 7,772 Building Products 0.5% Simpson Manufacturing * 464,800 15,292 15,292 Commercial Services & Supplies 8.9% BISYS Group * 744,000 11,830 Central Parking 1,486,400 28,034 CompX International ! 406,700 3,404 Consolidated Graphics * 350,000 7,787 Electro Rent * 564,300 6,840 G&K Services, Class A 663,700 23,496 Global Payments * 795,000 25,448 Herman Miller 1,345,100 24,750 Ionics * 175,000 3,990 Iron Mountain * 1,641,825 54,197 Layne Christensen * 343,700 2,818 New England Business Service ! 911,000 22,228 Resources Connection * 1,037,500 24,080 SOURCECORP * 625,900 11,635 Spherion * 1,039,300 6,963 Tetra Tech * 1,614,262 19,694 United Stationers * 823,400 23,715 Waterlink * 445,400 37 West Corporation * 371,908 6,174 307,120 Construction & Engineering 0.4% Insituform Technologies, Class A * 698,100 $ 11,902 11,902 Electrical Equipment 3.1% A.O. Smith 1,520,700 41,074 American Superconductor * 219,000 659 Belden ! 1,915,000 29,146 Global Power Equipment Group * 19,800 98 Paxar *! 2,205,000 32,524 PECO II * 260,200 166 Woodward Governor 93,900 4,085 107,752 Machinery 3.4% Actuant Corporation, Class A * 469,080 21,789 Cuno * 548,400 18,163 Graco 440,000 12,606 Harsco 1,159,600 36,980 IDEX 221,300 7,236 Joy Global * 291,900 3,287 Lindsay Manufacturing 525,000 11,235 Reliance Steel & Aluminum 253,100 5,274 116,570 Marine 0.0% International Shipholding * 135,062 824 824 Road & Rail 0.2% Heartland Express * 233,391 5,347 5,347 Trading Companies & Distributors 0.3% MSC Industrial Direct, Class A * 421,400 7,480 Watsco 183,200 3,001 10,481 Total Industrials & Business Services 684,310 INFORMATION TECHNOLOGY 16.0% Communications Equipment 1.3% Black Box 650,000 29,120 Emulex * 325,000 6,029 Packeteer * 527,500 $ 3,619 Riverstone Networks * 1,750,000 3,710 Stratos Lightwave * 42,143 185 Tekelec * 331,700 3,466 46,129 Computer Peripherals 0.1% Synaptics * 361,800 2,749 2,749 Electronic Equipment & Instruments 3.8% Analogic 389,500 19,587 Artesyn Technologies * 1,034,200 3,971 KEMET * 1,845,000 16,125 Littelfuse * 1,070,600 18,050 LSI Industries 651,400 9,022 Methode Electronics, Class A 1,254,700 13,764 Newport * 519,600 6,526 Plexus * 1,898,600 16,670 Technitrol 954,500 15,406 Woodhead Industries ! 912,600 10,313 129,434 Internet Software & Services 1.2% Digital Impact * 407,600 774 Internet Security Systems * 937,600 17,186 Keynote Systems * 148,000 1,143 MatrixOne * 1,603,700 6,896 Netegrity * 900,000 2,928 Register.com * 184,900 832 Stellent * 390,600 1,734 Webex Communications * 125,000 1,875 Websense * 425,000 9,078 42,446 IT Consulting & Services 1.6% CACl International, Class A * 749,000 26,694 ManTech, Class A * 353,900 6,749 MPS Group * 2,446,800 13,555 Renaissance Learning * 422,200 7,980 54,978 Semiconductor Equipment & Products 3.3% Applied Micro Circuits * 23,700 $ 88 ATMI * 1,050,000 19,446 Cabot Microelectronics * 324,000 15,293 Entegris * 1,441,200 14,844 Exar * 1,118,000 13,863 Lattice Semiconductor * 168,800 1,480 MKS Instruments * 1,300,700 21,371 Mykrolis * 1,404,800 10,255 Semtech * 1,500,000 16,380 113,020 Software 4.7% Actuate * 545,500 965 Concord Communications * 206,300 1,855 Factset Research Systems 791,200 22,367 FileNet * 350,000 4,270 Jack Henry & Associates 2,270,100 27,332 Kronos *! 1,030,000 38,100 Magma Design Automation * 162,100 1,553 Mercury Interactive * 279,300 8,281 Midway Games * 1,721,000 7,177 NetIQ * 216,400 2,673 Progress Software * 1,070,000 13,856 Quest Software * 409,400 4,221 Sonicwall * 340,200 1,235 SPSS * 536,400 7,504 Verisity Ltd. * 208,600 3,976 Verity * 850,000 11,382 Wind River Systems * 1,010,900 4,145 160,892 Total Information Technology 549,648 MATERIALS 6.7% Chemicals 5.5% Airgas * 2,067,800 35,670 Arch Chemicals ! 1,198,100 21,865 Ferro 530,000 12,948 IMC Global 2,325,000 $ 24,808 MacDermid 165,000 3,770 Material Sciences * 691,100 8,943 Minerals Technologies 948,000 40,906 Scotts, Class A * 842,000 41,292 190,202 Containers & Packaging 0.2% Constar International * 275,000 3,231 Smurfit-Stone Container * 191,100 2,941 6,172 Metals & Mining 0.7% Adrian Steel !@ 13,000 3,133 Coal Creek @ 9,295 1,562 Gibraltar Steel 228,500 4,351 Lihir Gold (AUD) * 7,971,900 6,460 Newmont Mining 138,856 4,031 NN 349,100 3,487 23,024 Paper & Forest Products 0.3% Buckeye Technologies * 1,530,100 9,410 Potlatch 50,500 1,206 10,616 Total Materials 230,014 TELECOMMUNICATION SERVICES 0.1% Wireless Telecommunication Services 0.1% Western Wireless, Class A * 340,000 1,802 Total Telecommunication Services 1,802 UTILITIES 0.6% Electric Utilities 0.6% Cleco 1,082,200 $ 15,151 Unisource Energy 344,500 5,956 Total Utilities 21,107 Total Common Stocks (Cost $3,250,954) 3,123,731 Short-Term Investments 9.3% Money Market Funds 9.3% T. Rowe Price Reserve Investment Fund, 1.53% #! 320,515,360 320,515 Total Short-Term Investments (Cost $320,515) 320,515 Total Investments in Securities 100.1% of Net Assets (Cost $3,571,469) 3,444,246 Other Assets Less Liabilities (4,761) NET ASSETS $ 3,439,485 --------------- # Seven-day yield * Non-income producing ! Affiliated company, as defined by the Investment Company Act of 1940, as a result of the fund's ownership of at least 5% of the company's outstanding voting securities. + Security contains restrictions as to public resale pursuant to the Securities Act of 1933 and related rulestotal of such securities at period-end amounts to $4 and represents 0.0% of net assets @ Security valued by the Fund's Board of Directors AUD Australian dollar REIT Real Estate Investment Trust T. Rowe Price Small-Cap Stock Fund -------------------------------------------------------------------------------- Statement of Assets and Liabilities -------------------------------------------------------------------------------- In thousands Assets Investments in securities, at value Affiliated companies (cost $796,266) $ 787,357 Other companies (cost $ 2,775,203) 2,656,889 Total investments in securities 3,444,246 Other assets 20,744 Total assets 3,464,990 Liabilities Total liabilities 25,505 NET ASSETS $3,439,485 ---------- Net Assets Consist of: Undistributed net realized gain (loss) $ 11,025 Net unrealized gain (loss) (127,223) Paid-in-capital applicable to 160,009,066 shares of $0.50 par value capital stock outstanding; 200,000,000 shares of the Corporation authorized 3,555,683 NET ASSETS $3,439,485 ---------- NET ASSET VALUE PER SHARE Small-Cap Stock shares ($3,298,480/153,431,661 shares outstanding) $ 21.50 ---------- Small-Cap StockAdvisor Class shares ($141,005/6,577,405 shares outstanding) $ 21.44 ---------- The accompanying notes are an integral part of these financial statements. T. Rowe Price Small-Cap Stock Fund -------------------------------------------------------------------------------- Statement of Operations In thousands Year Ended 12/31/02 Investment Income (Loss) Income Dividend (including $8,573 from affiliated companies) $ 28,974 Interest (including $5,929 from affiliated companies) 5,929 Total income 34,903 Expenses Investment management 26,755 Shareholder servicing Small-Cap Stock shares 5,687 Small-Cap StockAdvisor Class shares 114 Prospectus and shareholder reports Small-Cap Stock shares 290 Small-Cap StockAdvisor Class shares 24 Custody and accounting 245 Distribution Small-Cap StockAdvisor Class shares 223 Registration 191 Proxy and annual meeting 72 Legal and audit 23 Directors 23 Miscellaneous 23 Total expenses 33,670 Expenses paid indirectly (147) Net expenses 33,523 Net investment income (loss) 1,380 Realized and Unrealized Gain (Loss) Net realized gain (loss) on securities (including $12,602 from affiliated companies) 53,832 Change in net unrealized gain (loss) on securities (including $8,908 from affiliated companies) (629,247) Net realized and unrealized gain (loss) (575,415) INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS $ (574,035) ---------- The accompanying notes are an integral part of these financial statements. T. Rowe Price Small-Cap Stock Fund -------------------------------------------------------------------------------- Statement of Changes in Net Assets -------------------------------------------------------------------------------- In thousands Year Ended 12/31/02 12/31/01 Increase (Decrease) in Net Assets Operations Net investment income (loss) $ 1,380 $ 11,794 Net realized gain (loss) 53,832 14,725 Change in net unrealized gain (loss) (629,247) 188,684 Increase (decrease) in net assets from operations (574,035) 215,203 Distributions to shareholders Net investment income Small-Cap Stock shares (1,509) (12,048) Small-Cap Stock-Advisor Class shares (120) Net realized gain Small-Cap Stock shares (34,853) (6,014) Small-Cap Stock-Advisor Class shares (1,476) (67) Decrease in net assets from distributions (37,838) (18,249) Capital share transactions * Shares sold Small-Cap Stock shares 1,667,944 1,287,637 Small-Cap StockAdvisor Class shares 155,003 36,319 Distributions reinvested Small-Cap Stock shares 34,611 17,051 Small Cap Stock-Advisor Class shares 1,379 184 Shares redeemed Small-Cap Stock shares (964,861) (596,594) Small-Cap Stock-Advisor Class shares (39,553) (7,578) Increase (decrease) in net assets from capital share transactions 854,523 737,019 Net Assets Increase (decrease) during period 242,650 933,973 Beginning of period 3,196,835 2,262,862 End of period $ 3,439,485 $ 3,196,835 -------------------------------------------------------------------------------- *Share information Shares sold Small-Cap Stock shares 69,031 54,909 Small-Cap Stock-Advisor Class shares 6,686 1,533 Distributions reinvested Small-Cap Stock shares 1,612 701 Small-Cap Stock-Advisor Class shares 64 7 Shares redeemed Small-Cap Stock shares (41,840) (25,459) Small-Cap Stock-Advisor Class shares (1,699) (327) Increase (decrease) in shares outstanding 33,854 31,364 The accompanying notes are an integral part of these financial statements. T. Rowe Price Small-Cap Stock Fund -------------------------------------------------------------------------------- December 31, 2002 Notes to Financial Statements -------------------------------------------------------------------------------- NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES T. Rowe Price Small-Cap Stock Fund, Inc. (the fund) is registered under the Investment Company Act of 1940 (the 1940 Act) as a diversified, open-end management investment company. The fund seeks to provide long-term capital growth by investing primarily in stocks of small companies. The fund has two classes of shares: Small-Cap Stock, offered since June 1, 1956, and Small-Cap StockAdvisor Class (Advisor Class), which was first offered on March 31, 2000. Advisor Class shares are sold only through brokers and other financial intermediaries that are compensated by the class for distribution and certain administrative services under a Board-approved Rule 12b-1 plan. Each class has exclusive voting rights on matters related solely to that class, separate voting rights on matters that relate to both classes, and, in all other respects, the same rights and obligations as the other class. 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 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. Other equity securities are valued at a price within the limits of the latest bid and ask prices deemed by the Board of Directors, or by persons delegated by the Board, best to reflect fair value. Investments in mutual funds are valued at the closing net asset value per share of the mutual fund on the day of valuation. Assets and liabilities 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 or under the supervision of the officers of the fund, as authorized by the Board of Directors. Currency Translation Assets 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 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 dates of such transactions. The effect of changes in foreign exchange rates on realized and unrealized security gains and losses is reflected as a component of such gains and losses. Class Accounting The Advisor Class pays distribution and administrative expenses in the form of Rule 12b-1 fees, in an amount not exceeding 0.25% of the class's average net assets. Shareholder servicing, prospectus, and shareholder report expenses incurred by each class are charged directly to the class to which they relate. Expenses common to both classes, investment income, and realized and unrealized gains and losses are allocated to the classes based upon the relative daily net assets of each class. Income distributions are declared and paid by each class on an annual basis. Capital gain distributions, if any, are declared and paid by the fund, typically on an annual basis. Expenses Paid Indirectly Certain security trades are directed to brokers who have agreed to rebate a portion of the related commission to the fund to pay fund expenses. Additionally, credits earned on temporarily uninvested cash balances at the custodian are used to reduce the fund's custody charges. Total expenses in the accompanying statement of operations are presented before reduction for rebates and credits, which totaled $143,000 and $4,000, respectively, for the year ended December 31, 2002. Other Income and expenses are recorded on the accrual basis. Investment transactions are accounted for on the trade date. Realized gains and losses are reported on the identified cost basis. Dividend income and distributions to shareholders are recorded by the fund on the ex-dividend date. 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. 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 at least 5% or more of the outstanding voting securities. At December 31, 2002, the value of affiliated companies included in the fund's investments in securities totaled $787,357,000 (22.9%). For the year then ended, $8,573,000 (29.6%) of dividend income, $5,929,000 (100.0%) of interest income, and $12,602,000 (23.4%) of net realized gain reflected on the accompanying Statement of Operations resulted from transactions with affiliated companies. Other Purchases and sales of portfolio securities, other than short-term securities, aggregated $1,280,142,000 and $487,868,000, respectively, for the year ended December 31, 2002. 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 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. Temporary differences are not adjusted. Distributions during the year ended December 31, 2002 were characterized as follows for tax purposes: -------------------------------------------------------------------------------- Ordinary income $ 6,248,000 Long-term capital gain 31,590,000 Total distributions $37,838,000 ----------- At December 31, 2002, the tax-basis components of net assets were as follows: -------------------------------------------------------------------------------- Unrealized appreciation $ 435,125,000 Unrealized depreciation (562,348,000) Net unrealized appreciation (depreciation) (127,223,000) Undistributed ordinary income 287,000 Undistributed long-term capital gain 10,738,000 Paid-in capital 3,555,683,000 Net assets $3,439,485,000 -------------- For the year ended December 31, 2002, the fund recorded the following permanent reclassifications to reflect tax character. Reclassifications to paid-in capital relate primarily to a tax practice that treats a portion of the proceeds from each redemption of capital shares as a distribution of taxable net investment income and/or realized capital gain. Results of operations and net assets were not affected by these reclassifications. -------------------------------------------------------------------------------- Undistributed net investment income $ 129,000 Undistributed net realized gain (10,393,000) Paid-in capital 10,264,000 At December 31, 2002, the cost of investments for federal income tax purposes was substantially the same as for financial reporting and totaled $3,571,469,000. 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 0.45% 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 net assets to those of the group. At December 31, 2002, the effective annual group fee rate was 0.32%, and investment management fee payable totaled $2,275,000. The manager has agreed to bear any expenses through December 31, 2003, which would cause the Advisor Class's ratio of total expenses to average net assets to exceed 1.20%. Thereafter, through December 31, 2005, the Advisor Class is required to reimburse the manager for these expenses, provided that its average net assets have grown or expenses have declined sufficiently to allow reimbursement without causing its ratio of total expenses to average net assets to exceed 1.20%. 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 prices 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 Small-Cap Stock share class. Expenses incurred pursuant to these service agreements totaled $3,843,000 for the year ended December 31, 2002, of which $381,000 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, 2002, the Small-Cap Stock class was charged $107,000 for shareholder servicing costs related to the college savings plans, of which $92,000 was for services provided by Price and $12,000 was payable at period-end. At December 31, 2002, approximately 0.7% of the outstanding shares of the Small-Cap Stock class were held by college savings plans. The fund is also one of several mutual funds sponsored by Price Associates (underlying Price funds) in which the T. Rowe Price Retirement Funds (Retirement Funds) may invest. The Retirement Funds do not invest in the underlying Price funds for the purpose of exercising management or control. Pursuant to special servicing agreements, expenses associated with the operation of the Retirement Funds are borne by each underlying Price fund to the extent of estimated savings to it and in proportion to the average daily value of its shares owned by the Retirement Funds. Expenses allocated under these agreements are reflected as shareholder servicing expense in the accompanying financial statements. For the year ended December 31, 2002, the Small-Cap Stock class was allocated $18,000 of Retirement Funds' expenses, of which $3,000 related to services provided by Price and $3,000 was payable at period-end. At December 31, 2002, approximately 0.02% of the outstanding shares of the Small-Cap Stock class were held by the Retirement Funds. The fund may invest in the T. Rowe Price Reserve Investment Fund and 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 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. Distributions from the Reserve Funds to the fund for the year ended December 31, 2002, totaled $5,929,000 and are reflected as interest income in the accompanying Statement of Operations. T. Rowe Price Small-Cap Stock Fund -------------------------------------------------------------------------------- Report of Independent Accountants -------------------------------------------------------------------------------- To the Board of Directors and Shareholders of T. Rowe Price Small-Cap Stock 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 Small-Cap Stock Fund, Inc. (the "Fund") at December 31, 2002, 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, 2002 by correspondence with custodians, provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP Baltimore, Maryland January 21, 2003 T. Rowe Price Small-Cap Stock Fund -------------------------------------------------------------------------------- Tax Information (Unaudited) for the Tax Year Ended 12/31/02 -------------------------------------------------------------------------------- We are providing this information as required by the Internal Revenue Code. The amounts shown may differ from those elsewhere in this report because of differences between tax and financial reporting requirements. The fund's distributions to shareholders included: o $5,390,000 from short-term capital gains, o $41,332,000 from long-term capital gains, subject to the 20% rate gains category. For corporate shareholders, $5,225,000 of the fund's distributed income and short-term capital gains qualified for the dividends-received deduction. T. Rowe Price Small-Cap Stock Fund -------------------------------------------------------------------------------- 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. Independent Directors Name (Date of Birth) Principal Occupation(s) During Past 5 Years and Year Elected* Directorships of Other Public Companies -------------------------------------------------------------------------------- Anthony W. Deering Director, Chairman of the Board, President, and (1/28/45) Chief Executive Officer, The Rouse Company, real 2001 estate developers Donald W. Dick, Jr. Principal, EuroCapital Advisors, LLC, an (1/27/43) acquisition and management advisory firm 1992 David K. Fagin Director, Dayton Mining Corp. (6/98 to present), (4/9/38) Golden Star Resources Ltd., and Canyon Resources 1992 Corp. (5/00 to present); Chairman and President, Nye Corp. F. Pierce Linaweaver President, F. Pierce Linaweaver & Associates, (8/22/34) Inc., consulting environmental and civil 2001 engineers Hanne M. Merriman Retail Business Consultant; Director, Ann Taylor (11/16/41) Stores Corp., Ameren Corp., Finlay Enterprises, 1994 Inc., The Rouse Company, and US Airways Group, Inc. 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., a (8/2/33) private investment company 1992 Paul M. Wythes Founding Partner, Sutter Hill Ventures, a (6/23/33) venture capital limited partnership, providing 1992 equity capital to young high-technology companies throughout the United States; Director, Teltone Corp. -------------------------------------------------------------------------------- *Each independent director oversees 105 T. Rowe Price portfolios and serves until the election of a successor. T. Rowe Price Small-Cap Stock Fund -------------------------------------------------------------------------------- Inside Directors Name (Date of Birth) Year Elected* [Number of T. Rowe Price Principal Occupation(s) During Past 5 Years and Portfolios Overseen] Directorships of Other Public Companies -------------------------------------------------------------------------------- John H. Laporte Director and Vice President, T. Rowe Price (7/26/45) Group, Inc.; Vice President, T. Rowe Price 1994 [15] James S. Riepe Director and Vice President, T. Rowe Price; Vice (6/25/43) Chairman of the Board, Director, and Vice 1992 President, T. Rowe Price Group, Inc.; Chairman [105] of the Board and Director, T. Rowe Price Global Asset Management 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., and T. Rowe Price Global Investment Services Limited; Chairman of the Board, Small-Cap Stock Fund M. David Testa Chief Investment Officer, Director, and Vice (4/22/44) 1997 President, T. Rowe Price; Vice Chairman of the [105] Board, Chief Investment Officer, Director, and Vice President, T. Rowe Price Group, Inc.; Director, T. Rowe Price Global Asset Management Limited, T. Rowe Price Global Investment Services Limited, and T. Rowe Price International, Inc.; Director and Vice President, T. Rowe Price Trust Company -------------------------------------------------------------------------------- *Each inside director serves until the election of a successor. Officers Name (Date of Birth) Title and Fund(s) Served Principal Occupation(s) -------------------------------------------------------------------------------- Preston G. Athey (7/17/49) Vice President, T. Rowe Price, T. Rowe Vice President, Small-Cap Stock Fund Price Group, Inc., and, T. Rowe Price Trust Company Brace C. Brooks (1/10/67) Vice President, T. Rowe Price and Vice President, Small-Cap Stock Fund T. Rowe Price Group, Inc. Joseph A. Carrier (12/30/60) Vice President, T. Rowe Price, T. Rowe Treasurer, Small-Cap Stock Fund Price Group, Inc., and T. Rowe Price Investment Services, Inc. Hugh M. Evans III (5/17/66) Vice President, T. Rowe Price and Vice President, Small-Cap Stock Fund T. Rowe Price Group, Inc. Henry H. Hopkins (12/23/42) Director and Vice President, T. Rowe Vice President, Small-Cap Stock 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 (2/5/62) Vice President, T. Rowe Price and Vice President, Small-Cap Stock Fund T. Rowe Price Group, Inc. Patricia B. Lippert (1/12/53) Assistant Vice President, T. Rowe Price Secretary, Small-Cap Stock Fund and T. Rowe Price Investment Services, Inc. Gregory A. McCrickard (10/19/58) Vice President, T. Rowe Price, T. Rowe President, Small-Cap Stock Fund Price Group, Inc., and T. Rowe Price Trust Company David S. Middleton (1/18/56) Vice President, T. Rowe Price, T. Rowe Controller, Small-Cap Stock Fund Price Group, Inc., and T. Rowe Price Trust Company Joseph M. Milano (9/14/72) Vice President, T. Rowe Price and Vice President, Small-Cap Stock Fund T. Rowe Price Group, Inc. Curt J. Organt (1/5/68) Vice President, Small-Cap Stock Fund Vice President, T. Rowe Price Charles G. Pepin (4/23/66) Vice President, T. Rowe Price and Vice President, Small-Cap Stock Fund T. Rowe Price Group, Inc. Michael F. Sola (7/21/69) Vice President, T. Rowe Price and Vice President, Small-Cap Stock Fund T. Rowe Price Group, Inc. J. David Wagner (2/25/74) Vice President, Small-Cap Stock Fund Vice President, T. Rowe Price Wenhua Zhang (3/14/70) Employee, T. Rowe Price; formerly Swiss Vice President, Small-Cap Stock Fund Reinsurance Company (to 1999); Student, The Wharton School, University of Pennsylvania (to 2001) -------------------------------------------------------------------------------- Unless otherwise noted, officers have been employees of T. Rowe Price or T. Rowe Price International for at least five years. T. Rowe Price Investment Services and Information -------------------------------------------------------------------------------- Investment Services and Information KNOWLEDGEABLE SERVICE REPRESENTATIVES By Phone 1-800-225-5132. Available Monday through Friday from 7 a.m. until midnight ET and weekends from 8:30 a.m. until 5 p.m. ET. In Person. Available in T. Rowe Price Investor Centers. Please call a service representative at 1-800-225-5132 or visit the Web at www.troweprice.com/investorcenter to locate a center near you. ACCOUNT SERVICES Automated 24-Hour Services Including Tele*Access(registered trademark) and Account Access through the T. Rowe Price Web site on the Internet. Address: www.troweprice.com. Automatic Investing. From your bank account or paycheck. Automatic Withdrawal. Scheduled, automatic redemptions. IRA Rebalancing. Ensuring that your accounts reflect your desired asset allocation. BROKERAGE SERVICES * Individual Investments. Stocks, bonds, options, precious metals, and other securities at a savings over full-service commission rates. INVESTMENT INFORMATION Consolidated Statement. Overview of all of your accounts. Shareholder Reports. Manager reviews of their strategies and results. T. Rowe Price Report. Quarterly investment newsletter. Performance Update. Quarterly review of all T. Rowe Price fund results. Insights. Educational reports on investment strategies and markets. Investment Guides. Asset Mix Worksheet, Diversifying Overseas: A Guide to International Investing, Retirement Planning Kit, Retirement Readiness Guide, and Tax Considerations Guide. * T. Rowe Price Brokerage is a division of T. Rowe Price Investment Services, Inc., Member NASD/SIPC. T. Rowe Price Web Services -------------------------------------------------------------------------------- www.troweprice.com ACCOUNT INFORMATION Account Access allows you to access, in a secure environment, all of your T. Rowe Price mutual fund, brokerage, variable annuity, and workplace retirement accounts with a single login. AccountMinder is a personal page, with one password, that gives you access to all your online financial information and other records from the secure T. Rowe Price Account Access site. FINANCIAL TOOLS AND CALCULATORS College Investment Calculator. This interactive tool allows you to estimate simultaneously the college costs for as many as five children. Morningstar(registered trademark) Portfolio Tracker(servicemark). See how your investments are performing at any time. After you enter ticker symbols for your stocks and mutual funds, Portfolio Tracker provides information on prices, market value, and any applicable Morningstar ratings. Investment Strategy Planner. This planning tool can help you develop and implement an asset allocation strategy that's appropriate for you. Retirement Income Calculator. This free calculator simulates 500 potential market scenarios to estimate the probability of maintaining an income strategy throughout retirement. INVESTMENT TRACKING AND INFORMATION My TRP e-Updates. This free e-mail service offers timely market reports, important information about investing, and the latest updates on the T. Rowe Price funds and services. Morningstar(registered trademark) Portfolio Watchlist(servicemark). Like the Portfolio Tracker, the Watchlist allows you to see how your investments are performing. After entering your ticker symbols, the Watchlist automatically provides you with prices, price changes in dollars and percentages, target highs and lows, and target volume. Morningstar(registered trademark) Portfolio X-Ray(servicemark). This comprehensive tool goes below the surface to give you an in-depth examination of all your investments. It analyzes your portfolio by asset allocation, stock sector, fees and expenses, stock statistics, world regions, and top holdings. T. Rowe Price College Planning -------------------------------------------------------------------------------- College Planning With the costs of college steadily increasing, it's critical to plan early for this financial event. Our educational investment vehicles and information can help you lay the foundation for the future of your loved ones. For more information or to request a kit, call us at 1-800-638-5660, or visit our Web site at www.troweprice.com. T. Rowe Price College Savings Plan. This national "529" plan is sponsored by the Education Trust of Alaska and designed to help families prepare for college education costs. The Plan, which is open to any U.S. resident, allows participants to invest up to a maximum account balance of $250,000 for a person's education. With systematic investing, you can invest as little as $50 per month. In addition, assets grow tax-deferred and are free of federal income taxes when used for qualified educational expenses. We also offer two additional college savings plans, including the Maryland College Investment Plan and the University of Alaska College Savings Plan, both of which offer federal tax-deferred growth and benefits for state residents. Education Savings Accounts (formerly Education IRAs). This education investment account allows individuals to invest a total of $2,000 per year per beneficiary to pay for educational costs at eligible schools including elementary, secondary, and post-secondary institutions. Withdrawals from Education Savings Accounts are tax-free if the proceeds are used for qualifying educational expenses. College Investment Calculator. This Web-based application helps you to determine simultaneously the college costs for as many as five children. The calculator is also connected with a database that lets you select specific schools with actual costs of tuition and room and board. College Planning Basics. This Insights report offers a college cost worksheet and describes the options available to individuals planning for college. T. Rowe Price offers unique retirement resources that can help you meet a broad variety of planning challenges. Our retirement tools are suitable for individuals, the self-employed, small businesses, corporations, and nonprofit organizations. We also provide recordkeeping, communications, and investment management services. For more information, call us at 1-800-IRA-5000, or visit our Web site at www.troweprice.com. T. Rowe Price Planning Tools and Services -------------------------------------------------------------------------------- T. Rowe Price Retirement Services PLANNING TOOLS AND SERVICES T. Rowe Price(registered trademark) Retirement Income Manager* helps retirees or those within two years of retirement determine how much income they can draw down in retirement. The program uses extensive statistical analysis and the input of a T. Rowe Price Advisory Counselor to suggest an income plan that best meets your objectives. Retirement Income Calculator. This free calculator, incorporating the analytic approach of the T. Rowe Price Retirement Income Manager program, simulates 500 potential market scenarios to estimate the probability of maintaining an income strategy throughout retirement. Rollover Investment Service* offers asset allocation and fund selection advice to those planning a 401(k) rollover from a previous employer after changing jobs or retiring. IRA Rebalancing Service. T. Rowe Price will rebalance your IRA at the end of every quarter by exchanging shares between mutual fund accounts. This ensures that your accounts retain your desired asset allocation. Quality Information. Thousands of investors have made their personal choices with the help of our Retirement Readiness Guide, Retirement Planning Kit, IRA Insights, and Retirement Planning Worksheet. INVESTMENT VEHICLES Individual Retirement Accounts (IRAs) No-Load Variable Annuities Small Business Retirement Plans T. Rowe Price Retirement Services * Services of T. Rowe Price Advisory Services, Inc., a federally registered investment adviser. There are costs associated with these services. T. Rowe Price Mutual Funds -------------------------------------------------------------------------------- STOCK FUNDS Domestic Blue Chip Growth* Capital Appreciation Capital Opportunity Developing Technologies Diversified Small-Cap Growth Dividend Growth Equity Income* Equity Index 500 Extended Equity Market Index Financial Services Growth & Income Growth Stock* Health Sciences Media & Telecommunications Mid-Cap Growth* Mid-Cap Value* New America Growth New Era New Horizons Real Estate Science & Technology* Small-Cap Stock* Small-Cap Value*! Spectrum Growth Tax-Efficient Growth Tax-Efficient Multi-Cap Growth Total Equity Market Index Value* BLENDED ASSET FUNDS Balanced Personal Strategy Balanced Personal Strategy Growth Personal Strategy Income Retirement 2010 BLENDED ASSET FUNDS (continued) Retirement 2020 Retirement 2030 Retirement 2040 Retirement Income Tax-Efficient Balanced BOND FUNDS Domestic Taxable Corporate Income GNMA High Yield* Inflation Protected Bond New Income* Short-Term Bond Spectrum Income Summit GNMA U.S. Bond Index U.S. Treasury Intermediate U.S. Treasury Long-Term Domestic Tax-Free California Tax-Free Bond Florida Intermediate Tax-Free Georgia Tax-Free Bond Maryland Short-Term Tax-Free Bond Maryland Tax-Free Bond New Jersey Tax-Free Bond New York Tax-Free Bond Summit Municipal Income Summit Municipal Intermediate Tax-Free High Yield Tax-Free Income* Tax-Free Intermediate Bond Tax-Free Short-Intermediate Virginia Tax-Free Bond MONEY MARKET FUNDS!! Taxable Prime Reserve Summit Cash Reserves U.S. Treasury Money Tax-Free California Tax-Free Money Maryland Tax-Free Money New York Tax-Free Money Summit Municipal Money Market Tax-Exempt Money INTERNATIONAL/GLOBAL FUNDS Stock Emerging Europe & Mediterranean Emerging Markets Stock European Stock Global Stock Global Technology International Discovery! International Equity Index International Growth & Income* International Stock* Japan Latin America New Asia Spectrum International Bond Emerging Markets Bond International Bond* For more information about T. Rowe Price funds or services, please contact us directly at 1-800-225-5132. * T. Rowe Price Advisor Class available for these funds. The T. Rowe Price Advisor Class is offered only through financial intermediaries. For more information about T. Rowe Price Advisor Class funds, contact your financial professional or T. Rowe Price at 1-877-804-2315. ! Closed to new investors. !! Investments in the funds are not insured or guaranteed by the FDIC or any other government agency. Although the funds seek to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the funds. Please call for a prospectus, which contains complete information, including risks, fees, and expenses. Read it carefully before investing. LOGO: T. Rowe Price Invest With Confidence (registered trademark) T. Rowe Price Investment Services, Inc. 100 East Pratt Street Baltimore, MD 21202 29349 F65-050 12/31/02