N-CSR 1 scs.txt T. ROWE PRICE SMALL-CAP STOCK FUND Item 1. Report to Shareholders DECEMBER 31, 2004 SMALL-CAP STOCK FUND Annual Report T. ROWE PRICE The views and opinions in this report were current as of December 31, 2004. They are not guarantees of performance or investment results and should not be taken as investment advice. Investment decisions reflect a variety of factors, and the managers reserve the right to change their views about individual stocks, sectors, and the markets at any time. As a result, the views expressed should not be relied upon as a forecast of the fund's future investment intent. The report is certified under the Sarbanes-Oxley Act of 2002, which requires mutual funds and other public companies to affirm that, to the best of their knowledge, the information in their financial reports is fairly and accurately stated in all material respects. 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 in to your account at troweprice.com for more information. T. ROWE PRICE SMALL-CAP STOCK FUND -------------------------------------------------------------------------------- Fellow Shareholders After beginning the year on an upswing, stocks struggled as growth moderated under the weight of rising short-term interest rates and surging energy costs. Stock prices closed the year on a positive note, however, and a strong final two months of the year ensured very attractive returns for small-cap stock investors. For most of 2004, the stock market rewarded companies with earnings, positive cash flow, and sales growth. However, as investors rushed to gain exposure to the market following the November presidential election, speculative stocks--many of them companies without earnings--again led the way, and the stocks of money-losing companies soared 17.8% in the final quarter. Fortunately, investors by and large were more cognizant of risk in 2004, and over the course of the entire year, unprofitable companies underperformed the small-cap Russell 2000 Index. PERFORMANCE COMPARISON -------------------------------------------------------------------------------- Periods Ended 12/31/04 6 Months 12 Months -------------------------------------------------------------------------------- Small-Cap Stock Fund 10.81% 18.77% Small-Cap Stock Fund-Advisor Class 10.69 18.48 Russell 2000 Index 10.83 18.33 Lipper Small-Cap Core Funds Index 9.84 18.37 S&P 500 Stock Index 7.19 10.88 Against this backdrop, our Small-Cap Stock Fund kept pace with the surging indices in the second half of the year, rising 10.81% through December 31, 2004, in line with the unmanaged Russell 2000 Index of small-cap shares, as shown in the table. For the year, the fund returned 18.77%, outperforming both the Lipper Small-Cap Core Index and the unmanaged Russell benchmark. (Returns for Advisor Class shares were slightly lower, reflecting their higher expense ratio.) As we noted at mid-year, the small-cap rally, now more than six years old, appears quite long in the tooth. While it is certainly possible for small-caps to continue to outperform large-caps, we believe investors may wish to be more cautious on the asset class. We'll go into more detail in our outlook section. INVESTMENT REVIEW The strongest-performing sectors over the most recent six months were energy, materials, and financials, which rose 23%, 21%, and 17%, respectively. No Russell sector declined in the second half of 2004. Indeed, the worst returns in the Russell index were in the technology sector, which rose a bit over 1%. GROWTH VS. VALUE -------------------------------------------------------------------------------- Periods Ended 12/31/04 6 Months 12 Months -------------------------------------------------------------------------------- Russell 2000 Growth Index 8.16% 14.31% Russell 2000 Value Index 13.37 22.25 Some of our most significant six-month contributors relative to the Russell benchmark came from the information technology and industrial services sectors, where strong stock selection aided the portfolio. Our holdings in tech rose nearly 6%, substantially outperforming the sector's 1% return. Our top performer in this segment, CACI International, rose nearly 68% over the six months as investors returned to the shares following last spring's developments in Iraq. You may recall from our June report that CACI, which supplies contract interrogators to the military, suffered on concerns about the company's possible role in the Iraq prison-abuse scandal. Both the Army and the company completed an investigation and found no culpability on the part of CACI. As we noted then, no employee of the firm was charged with misconduct. CACI remains a valuable partner to the U.S. military, and we never lost confidence in the firm's management. Other strong performers included Kronos, the time-management software firm, which is experiencing strong revenue growth from the latest release of its productivity enhancing software. Tessera Technologies more than doubled as the firm reached a legal settlement with Samsung to begin receiving royalties on its semiconductor chip packaging solution. Finally, Global Payments, the card processor and funds transfer firm, rose 30% on strong quarterly earnings. We also added value through stock selection in industrials and business services. One of our best-performing holdings here, Ionics, rose 53% as the firm agreed to be acquired by General Electric. Ionics is an excellent fit with GE, which should realize synergies through supplying both power and financing to Ionics' water desalinization projects. Armor Holdings benefited from the continuing conflict in Iraq, as the firm supplies armament kits for both troops and military vehicles. The military's shortcomings were recently highlighted in Secretary of Defense Donald Rumsfeld's Iraq visit, where a trooper told of scrounging scrap metal to armor vehicles. After the resulting furor, Armor Holdings received accelerated vehicle armor contracts. Another solid contributor, Resources Connection, the financial project outsourcing firm, has been a major beneficiary of the Sarbanes-Oxley legislation. Resources Connection has seen great revenue and earnings growth as it helps firms comply with new regulations. Finally, the U.S. freight industry has been on fire. We've benefited from strong fundamentals at our logistics and trucking companies, including logistics firm UTi Worldwide and trucker Knight Transportation. SECTOR DIVERSIFICATION -------------------------------------------------------------------------------- Percent of Percent of Net Assets Net Assets Periods Ended 6/30/04 12/31/04 -------------------------------------------------------------------------------- Information Technology 20.1% 21.2% Financials 16.3 15.8 Industrials and Business Services 16.6 15.2 Health Care 10.4 12.2 Consumer Discretionary 10.3 10.3 Energy 7.4 6.6 Materials 6.4 6.3 Consumer Staples 1.9 1.6 Telecommunication Services 0.8 0.9 Trusts and Mutual Funds 0.6 0.6 Utilities 0.4 0.6 Other and Reserves 8.8 8.7 -------------------------------------------------------------------------------- Total 100.0% 100.0% Historical weightings reflect current industry/sector classifications. Sectors that detracted from performance versus the index included financials, materials, and consumer staples. Financial stocks' strong results were a big surprise last year. Given the near certainty that interest rates would rise, it is typically a solid bet to underweight the sector. While these shares did well during the early 1990s' rising-rate cycle, they advanced from extremely depressed valuations. This certainly is not the case now, nor was it last December. Consequently, our decision to underweight commercial banks, thrifts, real estate investment trusts (REITs), and the mortgage industry hurt our relative performance, costing us about a half-point in returns--hardly a disaster, but still disappointing. We also slightly underperformed in stock selection in the commercial bank segment, as several of our larger holdings lagged the sector's strong returns. In addition, we gave up modest ground in the materials sector as our positions increased 15%, a bit behind the index segment's 21% increase. Here, our typically more conservative holdings appreciated at a slower pace than the more-commodity-oriented steel and basic material holdings represented in the index. For example, Airgas, an industrial gas supply company and one of our larger holdings, rose by 11% on decent fundamentals. While hardly a poor result for the quarter, its returns pale when compared with the 85% increase for iron ore supplier Cleveland-Cliffs, which is held in the index but not in our portfolio. One holding in the sector did decline sharply: Ferro fell when the company delayed its third-quarter reporting due to an accounting issue--now largely resolved--at a small subsidiary. The consumer staples segment was our problem sector in the half. Wild Oats Markets declined 37% as it noted increased price competition in its California markets. Recent new management changes are giving us hope, and we are sticking with the shares. American Italian Pasta also fell more than 23% on weakness in the category. Pasta's Atkins-related woes are well known and have exacerbated an industry-wide capacity problem. We are monitoring this small position closely. Finally, Casey's General Stores was essentially flat as the firm was squeezed by declining margins due to gasoline's rapid price increases. We expect this negative pressure to moderate over time. INVESTMENT STRATEGY In our June letter, we noted our interest in acquiring attractively priced health care firms as this election year wore down. Health care stocks, from big pharmaceuticals on down, can face strong headwinds during election years as these profitable firms are often tempting political targets. While we did not see a repeat of the 1992 election year anti-pharmaceutical rhetoric, the sector did face some choppy sailing as several companies had well-publicized product issues. Fortunately, we were able to find a few attractive investment opportunities. Our largest purchase, ResMed, designs and markets products for sleep apnea, a disorder in which an individual stops breathing repeatedly throughout the night due to a blockage of the airway leading to extremely fragmented sleep. The company is one of just two firms serving this market and has strong market share and high operating margins--about 25%. Estimates are that 90% of this potential market remains undiagnosed, and we believe this can be an attractive growth opportunity for some time. Another interesting health care name we added in 2004 is Martek Biosciences. Martek markets DHA additives as food supplements for infant formula. DHA is an omega-3 fatty acid that has shown efficacy in enhancing brain development. Martek is a critical supplier of this difficult-to-produce product. In our opinion, Martek can be a profitable, and much larger, company as demand for these products grow. We also took advantage of this summer's technology pullback to add two new technology holdings. Silicon Laboratories is a Texas-based semiconductor firm that designs mixed-signal CMOS chips, primarily for the communication sector. The firm has experienced strong share gains in the handset, PC modem, and Voice over Internet Protocol markets. The firm is very profitable, with strong operating margins and a solid record of growth. A temporary inventory disruption with a major customer gave us the opportunity to buy at a great price. The other tech holding, software firm Hyperion Solutions, has a strong position in financial planning and business intelligence software. Business for software firms should be poised to accelerate as firms finish their mandatory spending for Sarbanes-Oxley compliance, and as discretionary spending picks up, we believe Hyperion will benefit. As a further indication of value, Hyperion has $9.00 per share in cash on its balance sheet. Finally, we also initiated a position in Panera Bread. Panera owns and operates franchise bakery cafes across the country. The stock had fallen out of favor due to a challenging sales environment, and we found the valuation compelling given solid long-term growth prospects. We expect an upturn in same-store sales as the company executes on new sales initiatives. We believe underlying business remains quite healthy, unit economics are compelling, and Wall Street sentiment is too negative. The rapid runup in energy stocks led us to keep reducing our exposure to this sector. One of our most successful stocks over the last year or so has been Ultra Petroleum, which has increased approximately 10 times our original investment as the firm found itself sitting on one of the most prolific gas basins in North America. Ultra's position in Wyoming's Pinedale anticline basin has led to huge gains in shareholder value, but with its market value approaching $4 billion, we eliminated the position. Other successful energy investments that we recently eliminated include Smith International and Cooper Cameron. We also have enjoyed great success investing in the transportation industry. The recovering U.S. economy has led to strong fundamentals for transportation and logistics firms. One longtime holding that we were sad to let go was Expeditors International. Expeditors is a freight-forwarding concern that we had held for my entire 12-year tenure as portfolio manager for the fund. We believe Expeditors is a true growth company and would have likely continued to hold the shares if its market cap had not grown outside our universe. Finally, we eliminated our position in Artisan Components, the semiconductor intellectual property (IP) design firm that agreed to be acquired by ARM Holdings, a large-cap European firm, in a stock-for-stock swap. OUTLOOK Wow! 2004 marked the sixth straight year of small-cap stocks' outperformance relative to their larger brethren. While such a long cycle is not without precedent, it is the longest run since the highly profitable 1976 to 1983 cycle. Can it last longer? Sure. But it's clear we are in the late stages of this cycle. As we wrote in our report six months ago, relative valuations no longer look compelling. Interest rates are rising--typically a tough sign for the sector--and the IPO market is back and beginning to look frothy. These are all classic signs of the cycle top. Mega-cap firms now sell for essentially the same valuation level as small-caps--a far cry from the huge premium they traded at when this cycle began. As always, the wild card that could extend the small-cap performance cycle is a surge in relative earnings strength for the small-cap sector. For the last several quarters, we've not seen sufficient acceleration in earnings strength. The declining U.S. dollar has not helped our cause--since most small-caps are domestically oriented, they don't benefit from the increased sales and currency translation gains that aid large-cap multinationals. The dollar seems unlikely to strengthen significantly, and we may not get a sustained strong upsurge in small-cap earnings. On the other hand, it has become gospel that large-caps will outperform in 2005. Nearly every analyst is calling for large-cap growth stocks to outperform, and even some small-cap strategists are expecting the imminent end of the cycle. Given such a consensus, we wouldn't be surprised to see popular wisdom confounded a bit longer. Indeed, we could have written the same thing at the beginning of 2004. What could extend the cycle? Slowing economic growth could cause investors to favor the relatively stronger growth prospects of emerging growth stocks, which in turn could spark the speculative surge typical of a late-stage small-cap rally. Small-cap growth has underperformed small-cap value in most periods since 1999, and they are certainly due for a bounce. Moreover, we could see a rush of merger and acquisition activity, which typically tends to target smaller-cap stocks. We will continue to watch for these signs, but the end of a cycle is not always well telegraphed. We are certainly nearing the end of this rally. Valuations are no longer at a discount, cash flow to the asset class has been strong, and our own fund closed to new investors last February. In light of our six strong years and current valuations, we think shareholders who are overweight the small-cap segment should consider reducing their holdings. We thank you once again for entrusting T. Rowe Price with your investment needs. We remain confident that our balanced mix of growth and value can serve us well over the course of the cycle. Respectfully submitted, Greg A. McCrickard President of the fund and chairman of its Investment Advisory Committee January 20, 2005 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. Risks of Stock Investing As with all stock and bond mutual funds, the fund's share price can fall because of weakness in the stock or bond markets, a particular industry, or specific holdings. The financial markets can decline for many reasons, including adverse political or economic developments, changes in investor psychology, or heavy institutional selling. The prospects for an industry or company may deteriorate because of a variety of factors, including disappointing earnings or changes in the competitive environment. In addition, the investment manager's assessment of companies held in a fund may prove incorrect, resulting in losses or poor performance even in rising markets. Investing in small companies involves greater risk than is customarily associated with larger companies. Stocks of small companies are subject to more abrupt or erratic price movements than larger-company stocks. Small companies often have limited product lines, markets, or financial resources, and their managements may lack depth and experience. Such companies seldom pay significant dividends that could cushion returns in a falling market. Glossary Lipper indexes: Consist of a small number of the largest mutual funds in a particular category as tracked by Lipper Inc. S&P 500 Stock Index: An unmanaged index that tracks the stocks of 500 primarily large-cap U.S. companies. Russell 2000 Index: Consists of the smallest 2,000 companies in the Russell 3000 Index. Performance is reported on a total return basis. Russell 2000 Value Index: Market-weighted total return index that measures the performance of companies within the Russell 2000 Index having lower price/book value ratios and lower forecasted growth rates. Russell 2000 Growth Index: Market-weighted total return index that measures the performance of companies within the Russell 2000 Index having higher price/book value ratios and higher forecasted growth rates. Market capitalization: The total value of a company's publicly traded shares. Price/earnings ratio (P/E): A valuation measure calculated by dividing the price of a stock by its current or projected (forward) earnings per share. This ratio gives investors an idea of how much they are paying for current or future earnings power. Price/sales ratio: A valuation measure calculated by dividing the price of a stock by its current or projected (forward) sales (or revenues) per share. Price/book value ratio: A valuation measure calculated by dividing the price of a stock by a company's book value per share. Book value is the net worth, or liquidating value, of a business and is calculated by subtracting all liabilities, including debt and preferred stocks, from total assets, and dividing by the number of shares of common stock outstanding. T. ROWE PRICE SMALL-CAP STOCK FUND -------------------------------------------------------------------------------- PORTFOLIO HIGHLIGHTS -------------------------------------------------------------------------------- TWENTY-FIVE LARGEST HOLDINGS Percent of Net Assets 12/31/04 -------------------------------------------------------------------------------- Airgas 1.1% National Oilwell 1.1 Armor Holdings 1.0 Kronos 1.0 Grant Prideco 1.0 -------------------------------------------------------------------------------- Harsco 0.9 Sunrise Senior Living 0.9 Minerals Technologies 0.9 Brunswick 0.9 WestAmerica 0.9 -------------------------------------------------------------------------------- Resources Connection 0.9 Ohio Casualty 0.8 Chittenden 0.8 ResMed 0.8 FMC Technologies 0.8 -------------------------------------------------------------------------------- Iron Mountain 0.8 Noble Energy 0.8 A.O. Smith 0.8 Citizens Banking 0.8 Global Payments 0.7 -------------------------------------------------------------------------------- Scholastic 0.7 FactSet Research Systems 0.7 Forest Oil 0.7 Henry Schein 0.7 Ionics 0.7 -------------------------------------------------------------------------------- Total 21.2% 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 12/31/04 Largest Purchases -------------------------------------------------------------------------------- ResMed * Piper Jaffray Accredo Health * Silicon Laboratories * Panera Bread * Global Imaging Systems * United Surgical Partners International Hyperion Solutions * Martek Biosciences * ADTRAN * Largest Sales -------------------------------------------------------------------------------- Ultra Petroleum ** Artisan Components ** UTi Worldwide Brown & Brown Ryder System Steel Dynamics Ruby Tuesday Websense ** Smith International ** Knight Transportation * Position added ** Position eliminated T. ROWE PRICE SMALL-CAP STOCK FUND -------------------------------------------------------------------------------- GROWTH OF $10,000 -------------------------------------------------------------------------------- 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] SMALL-CAP STOCK FUND -------------------------------------------------------------------------------- As of 12/31/04 Russell 2000 Index $29,796 Lipper Small-Cap Core Funds Index $33,901 Small-Cap Stock Fund $38,770 Russell 2000 Lipper Small-Cap Small-Cap Index Core Funds Index Stock Fund 12/94 $10,000 $10,000 $10,000 12/95 12,845 13,074 13,385 12/96 14,964 15,520 16,203 12/97 18,310 18,971 20,871 12/98 17,844 18,281 20,150 12/99 21,637 21,969 23,104 12/00 20,983 23,492 26,915 12/01 21,505 25,166 28,748 12/02 17,100 20,327 24,665 12/03 25,181 28,641 32,643 12/04 29,796 33,901 38,770 Note: Performance for Advisor Class shares will vary due to the differing fee structure. See the returns table on the next page. T. ROWE PRICE SMALL-CAP STOCK FUND -------------------------------------------------------------------------------- AVERAGE ANNUAL COMPOUND TOTAL RETURN -------------------------------------------------------------------------------- This table shows how the fund and its benchmarks would have performed if their actual (or cumulative) returns for the periods shown had been earned at a constant rate. Since Inception Periods Ended 12/31/04 1 Year 5 Years 10 Years Inception Date -------------------------------------------------------------------------------- Small-Cap Stock Fund 18.77% 10.91% 14.51% -- -- Russell 2000 Index 18.33 6.61 11.54 Lipper Small-Cap Core Funds Index 18.37 9.06 12.99 S&P 500 Stock Index 10.88 -2.30 12.07 -------------------------------------------------------------------------------- Small-Cap Stock Fund- Advisor Class 18.48 - - 9.27% 3/31/00 Russell 2000 Index 18.33 - - 5.43 Lipper Small-Cap Core Funds Index 18.37 - - 7.32 S&P 500 Stock Index 10.88 - - -2.88 Current performance may be higher or lower than the quoted past performance, which cannot guarantee future results. Share price, principal value, and return will vary, and you may have a gain or loss when you sell your shares. For the most recent month-end performance information, please visit our Web site (troweprice.com) or contact a T. Rowe Price representative at 1-800-225-5132. Average annual total return figures include changes in principal value, reinvested dividends, and capital gain distributions. Returns do not reflect taxes that the shareholder may pay on fund distributions or the redemption of fund shares. When assessing performance, investors should consider both short- and long-term returns. T. ROWE PRICE SMALL-CAP STOCK FUND -------------------------------------------------------------------------------- FUND EXPENSE EXAMPLE -------------------------------------------------------------------------------- As a mutual fund shareholder, you may incur two types of costs: (1) transaction costs such as redemption fees or sales loads and (2) ongoing costs, including management fees, distribution and service (12b-1) fees, and other fund expenses. The following example is intended to help you understand your ongoing costs (in dollars) of investing in the fund and to compare these costs with the ongoing costs of investing in other mutual funds. The example is based on an investment of $1,000 invested at the beginning of the most recent six-month period and held for the entire period. Please note that the fund has two share classes: The original share class ("investor class") charges no distribution and service (12b-1) fee. Advisor Class shares are offered only through unaffiliated brokers and other financial intermediaries and charge a 0.25% 12b-1 fee. Each share class is presented separately in the table. Actual Expenses The first line of the following table ("Actual") provides information about actual account values and expenses based on the fund's actual returns. You may use the information in this line, together with your account balance, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading "Expenses Paid During Period" to estimate the expenses you paid on your account during this period. Hypothetical Example for Comparison Purposes The information on the second line of the table ("Hypothetical") is based on hypothetical account values and expenses derived from the fund's actual expense ratio and an assumed 5% per year rate of return before expenses (not the fund's actual return). You may compare the ongoing costs of investing in the fund with other funds by contrasting this 5% hypothetical example and the 5% hypothetical examples that appear in the shareholder reports of the other funds. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. Note: T. Rowe Price charges an annual small-account maintenance fee of $10, generally for accounts with less than $2,000 ($500 for UGMA/UTMA). The fee is waived for any investor whose T. Rowe Price mutual fund accounts total $25,000 or more, accounts employing automatic investing, and IRAs and other retirement plan accounts that utilize a prototype plan sponsored by T. Rowe Price (although a separate custodial or administrative fee may apply to such accounts). This fee is not included in the accompanying table. If you are subject to the fee, keep it in mind when you are estimating the ongoing expenses of investing in the fund and when comparing the expenses of this fund with other funds. You should also be aware that the expenses shown in the table highlight only your ongoing costs and do not reflect any transaction costs, such as redemption fees or sales loads. Therefore, the second line of the table is useful in comparing ongoing costs only and will not help you determine the relative total costs of owning different funds. To the extent a fund charges transaction costs, however, the total cost of owning that fund is higher. T. ROWE PRICE SMALL-CAP STOCK FUND -------------------------------------------------------------------------------- Beginning Ending Expenses Paid Account Value Account Value During Period* 7/1/04 12/31/04 7/1/04 to 12/31/04 -------------------------------------------------------------------------------- Investor Class Actual $1,000.00 $1,108.10 $4.93 Hypothetical (assumes 5% return before expenses) 1,000.00 1,020.46 4.72 Advisor Class Actual 1,000.00 1,106.90 6.14 Hypothetical (assumes 5% return before expenses) 1,000.00 1,019.30 5.89 * Expenses are equal to the fund's annualized expense ratio for the six-month period, multiplied by the average account value over the period, multiplied by the number of days in the most recent fiscal half year (184) divided by the days in the year (366) to reflect the half-year period. The annualized expense ratio of the investor class was 0.93%; the Advisor Class was 1.16%. T. ROWE PRICE SMALL-CAP STOCK FUND -------------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS For a share outstanding throughout each period -------------------------------------------------------------------------------- Investor Class Year Ended 12/31/04 12/31/03 12/31/02 12/31/01 12/31/00 NET ASSET VALUE Beginning of period $ 27.98 $ 21.50 $ 25.34 $ 23.87 $ 22.80 Investment activities Net investment income (loss) (0.05) (0.02) 0.01 0.10 0.15 Net realized and unrealized gain (loss) 5.28 6.96 (3.61) 1.52 3.52 Total from investment activities 5.23 6.94 (3.60) 1.62 3.67 Distributions Net investment income - - (0.01) (0.10) (0.14) Net realized gain (1.39) (0.46) (0.23) (0.05) (2.46) Total distributions (1.39) (0.46) (0.24) (0.15) (2.60) NET ASSET VALUE End of period $ 31.82 $ 27.98 $ 21.50 $ 25.34 $ 23.87 ------------------------------------------------ Ratios/Supplemental Data Total return^ 18.77% 32.35% (14.21)% 6.81% 16.49% Ratio of total expenses to average net assets 0.94% 0.96% 0.96% 0.98% 0.94% Ratio of net investment income (loss) to average net assets (0.17)% (0.10)% 0.04% 0.45% 0.63% Portfolio turnover rate 18.3% 16.3% 15.3% 16.5% 32.8% Net assets, end of period (in millions) $ 6,364 $ 4,864 $ 3,298 $ 3,158 $ 2,255 ^ 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 -------------------------------------------------------------------------------- Advisor Class Year 3/31/00 Ended Through 12/31/04 12/31/03 12/31/02 12/31/01 12/31/00 NET ASSET VALUE Beginning of period $ 27.88 $ 21.44 $ 25.32 $ 23.89 $ 24.93 Investment activities Net investment income (loss) (0.10) (0.05) (0.02) 0.04 0.07 Net realized and unrealized gain (loss) 5.23 6.91 (3.63) 1.53 1.53 Total from investment activities 5.13 6.86 (3.65) 1.57 1.60 Distributions Net investment income - - - (0.09) (0.18) Net realized gain (1.33) (0.42) (0.23) (0.05) (2.46) Total distributions (1.33) (0.42) (0.23) (0.14) (2.64) NET ASSET VALUE End of period $ 31.68 $ 27.88 $ 21.44 $ 25.32 $ 23.89 ------------------------------------------------ Ratios/Supplemental Data Total return^ 18.48% 32.06% (14.41)% 6.60% 6.79% Ratio of total expenses to average net assets 1.18% 1.19% 1.19% 1.16% 0.82%! Ratio of net investment income (loss) to average net assets (0.41)% (0.33)% (0.13)% 0.26% 0.85% Portfolio turnover rate 18.3% 16.3% 15.3% 16.5% 32.8%! Net assets, end of period (in thousands) $456,049 $319,096 $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, 2004 PORTFOLIO OF INVESTMENTS (1) Shares/$ Par Value -------------------------------------------------------------------------------- (Cost and value in $ 000s) COMMON STOCKS 91.3% CONSUMER DISCRETIONARY 10.3% Auto Components 0.6% Keystone Automotive * 640,300 14,887 Strattec Security *! 190,600 11,935 TRW Automotive * 591,300 12,240 39,062 Automobiles 0.0% Winnebago 85,200 3,328 3,328 Hotels, Restaurants & Leisure 3.0% Applebee's 707,512 18,714 BJ's Restaurants * 311,300 4,358 CEC Entertainment * 464,000 18,546 Great Wolf Resorts * 324,400 7,247 Panera Bread, Class A * 550,000 22,176 PF Chang's China Bistro * 420,000 23,667 Red Robin Gourmet Burgers * 277,500 14,838 Ruby Tuesday 400,800 10,453 Sonic * 1,317,750 40,191 Texas Roadhouse, Class A * 85,000 2,512 The Cheesecake Factory * 1,296,000 42,081 204,783 Household Durables 0.6% Jarden * 920,000 39,965 39,965 Internet & Catalog Retail 0.4% J. Jill Group * 898,100 13,373 priceline.com * 570,000 13,446 26,819 Leisure Equipment & Products 1.9% Brunswick 1,220,200 60,400 MarineMax * 672,000 19,999 Polaris Industries 340,000 23,127 SCP Pool 775,537 24,739 128,265 Media 1.4% Emmis Communications * 644,300 12,364 Entercom Communications * 458,500 16,456 Getty Images * 186,000 12,806 Scholastic * 1,353,800 50,036 Young Broadcasting, Class A * 430,700 4,548 96,210 Multiline Retail 0.3% Big Lots * 795,000 9,643 Neiman Marcus, Class A 124,300 8,893 18,536 Specialty Retail 2.1% AC Moore Arts & Crafts * 313,800 9,040 AnnTaylor Stores * 2,062,500 44,406 Christopher & Banks 923,950 17,047 Hot Topic * 1,225,000 21,058 Linens 'n Things * 673,900 16,713 Monro Muffler Brake *! 825,000 20,872 Select Comfort * 250,000 4,485 The Finish Line, Class A 450,000 8,235 141,856 Textiles, Apparel, & Luxury Goods 0.0% Culp * 209,900 1,423 Unifi * 481,400 1,844 3,267 Total Consumer Discretionary 702,091 CONSUMER STAPLES 1.6% Food & Staples Retailing 1.3% Casey's General Stores 2,448,000 44,431 Performance Food Group * 1,271,700 34,221 Wild Oats Markets * 881,900 7,770 86,422 Food Products 0.2% ADM Cranberry *!@ 164 53 American Italian Pasta, Class A 374,000 8,696 Makepeace @ 164 1,000 Seneca Foods Class A * 187,600 3,422 Class B * 72,000 1,314 14,485 Personal Products 0.1% Chattem * 243,000 8,043 8,043 Total Consumer Staples 108,950 ENERGY 6.6% Energy Equipment & Services 5.0% Atwood Oceanics * 577,000 30,062 FMC Technologies * 1,749,900 56,347 Grant Prideco * 3,274,350 65,651 Hanover Compressor * 1,625,000 22,961 Hydril * 373,300 16,989 Key Energy Services * 750,600 8,857 Lone Star Technologies * 405,700 13,575 National Oilwell * 2,051,700 72,404 Seacor Holdings * 899,500 48,033 W-H Energy Services * 473,900 10,596 345,475 Oil & Gas 1.6% Bill Barrett * 158,000 5,054 Forest Oil * 1,575,100 49,962 Noble Energy 859,400 52,991 108,007 Total Energy 453,482 FINANCIALS 15.8% Capital Markets 2.0% Affiliated Managers Group * 550,000 37,257 Investors Financial Services 751,000 37,535 National Financial Partners 338,000 13,115 Piper Jaffray *! 992,500 47,590 135,497 Commercial Banks 5.4% Boston Private Financial 575,400 16,209 Chittenden 2,010,187 57,753 Citizens Banking 1,497,500 51,439 Community Bancorp * 55,000 1,683 Glacier Bancorp 505,736 17,215 Pinnacle Financial Partners * 80,700 1,826 Provident Bankshares 952,078 34,627 Sandy Spring Bancorp 594,400 22,783 Signature Bank * 93,000 3,009 Southwest Bancorp of Texas 2,047,000 47,675 Texas Capital Bancshares * 820,100 17,731 Valley National Bancorp 1,446,995 40,009 WestAmerica 1,028,400 59,966 371,925 Insurance 5.4% Aspen Insurance Holdings 1,019,000 24,986 Assured Guaranty 1,910,000 37,570 Bristol West Holdings 1,011,000 20,220 Brown & Brown 280,000 12,194 Harleysville Group 316,200 7,548 Horace Mann Educators ! 1,729,100 32,991 Infinity Property & Casualty 998,900 35,161 Markel * 111,500 40,586 Ohio Casualty * 2,495,700 57,925 PartnerRe 700,000 43,358 Selective Insurance 614,000 27,163 W. R. Berkley 586,000 27,642 367,344 Real Estate 2.7% Arden Realty, REIT 739,200 27,883 EastGroup Properties, REIT 887,600 34,013 Equity Lifestyle Properties, REIT 315,000 11,261 Essex Property Trust, REIT 100,000 8,380 Gables Residential Trust, REIT 792,600 28,367 LaSalle Hotel Properties, REIT 495,400 15,768 Parkway Properties, REIT ! 399,700 20,285 Reckson Associates Realty, REIT 265,900 8,724 Washington SBI, REIT 971,300 32,898 187,579 Thrifts & Mortgage Finance 0.3% Frankfort First 61,400 1,504 Triad Guaranty * 290,000 17,539 19,043 Total Financials 1,081,388 HEALTH CARE 12.2% Biotechnology 3.0% Abgenix * 96,000 993 Alexion Pharmaceutical * 350,000 8,820 Alkermes * 938,700 13,226 Amylin Pharmaceuticals * 440,000 10,278 Anadys Pharmaceuticals * 540,000 4,001 Cephalon * 353,517 17,987 Cubist Pharmaceuticals * 947,200 11,205 CV Therapeutics * 104,300 2,399 Cytogen * 360,000 4,147 Cytokinetics * 100,000 1,025 deCode Genetics * 471,703 3,684 Dynavax Technologies * 366,000 2,928 Exelixis * 845,000 8,028 Martek Biosciences * 350,000 17,920 Memory Pharmaceuticals * 366,000 1,947 Myriad Genetics * 1,000,000 22,510 Neurocrine Biosciences * 437,500 21,569 NPS Pharmaceuticals * 247,400 4,523 ONYX Pharmaceuticals * 500,000 16,195 Rigel Pharmaceuticals * 350,000 8,547 Trimeris * 500,000 7,085 Vertex Pharmaceuticals * 1,400,000 14,798 203,815 Health Care Equipment & Supplies 4.0% Advanced Neuromodulation Systems * 625,000 24,663 Analogic 409,500 18,342 DJ Orthopedics * 773,000 16,558 Edwards Lifesciences * 589,900 24,339 EPIX Pharmaceuticals * 190,000 3,403 Integra LifeSciences * 851,000 31,427 Matthews International, Class A 1,294,600 47,641 NuVasive * 550,000 5,638 ResMed * 1,125,000 57,487 Steris * 1,000,100 23,722 Thoratec * 525,000 5,471 Wilson Greatbatch Technologies * 487,300 10,925 269,616 Health Care Providers & Services 3.9% Accredo Health * 1,200,000 33,264 Henry Schein * 717,300 49,953 LabOne * 350,000 11,214 Lifeline Systems *! 667,200 17,187 LifePoint Hospitals * 125,000 4,353 Sunrise Senior Living *! 1,369,100 63,471 Symbion * 840,774 18,564 United Surgical Partners International * 1,085,000 45,244 WellChoice * 425,000 22,695 265,945 Pharmaceuticals 1.3% Able Laboratories * 325,000 7,394 Atherogenics * 850,000 20,026 Eon Labs * 400,000 10,800 Inspire Pharmaceuticals * 1,120,000 18,782 Medicines Company * 350,000 10,080 Nektar Therapeutics * 175,100 3,544 Noven Pharmaceuticals * 986,300 16,826 Theravance * 129,800 2,324 89,776 Total Health Care 829,152 INDUSTRIALS & BUSINESS SERVICES 15.2% Aerospace & Defense 1.4% Armor Holdings *! 1,502,300 70,638 Mercury Computer Systems * 755,000 22,409 MTC Technologies * 50,200 1,685 94,732 Air Freight & Logistics 1.4% EGL * 1,222,300 36,534 Pacer International * 830,000 17,646 Ryder System 280,000 13,376 UTi Worldwide 417,600 28,405 95,961 Airlines 0.1% Frontier Airlines * 710,000 8,101 Midwest Express Holdings * 555,600 1,617 9,718 Building Products 0.5% Quixote 234,782 4,773 Trex * 540,800 28,360 33,133 Commercial Services & Supplies 5.5% Central Parking 1,486,400 22,519 Consolidated Graphics *! 1,001,900 45,987 Education Management * 279,800 9,236 Electro Rent 564,300 8,030 First Advantage, Class A * 245,800 5,014 G & K Services, Class A 932,700 40,498 Herman Miller 1,640,700 45,333 Intersections * 200,000 3,450 Ionics *! 1,150,000 49,841 KForce * 1,311,200 14,554 Layne Christensen * 50,000 908 LECG * 956,100 17,831 Resources Connection *! 1,083,500 58,845 SOURCECORP * 625,900 11,961 Tetra Tech * 1,589,262 26,604 West Corporation * 371,908 12,314 372,925 Construction & Engineering 0.2% Insituform Technologies * 698,100 15,826 15,826 Electrical Equipment 1.1% A.O. Smith 1,745,700 52,266 American Superconductor * 219,000 3,261 Artesyn Technologies * 1,200,000 13,560 Woodward Governor 89,700 6,424 75,511 Machinery 3.6% Actuant, Class A * 918,260 47,887 Cascade 395,000 15,780 Graco 1,020,000 38,097 Harsco 1,159,600 64,636 IDEX 406,950 16,481 Lindsay Manufacturing ! 1,062,200 27,490 Toro 450,000 36,608 246,979 Road & Rail 1.3% Genesee & Wyoming, Class A * 200,000 5,626 Heartland Express 800,086 17,978 Knight Transportation 1,657,200 41,099 Overnite 585,000 21,785 86,488 Trading Companies & Distributors 0.1% Interline Brands * 509,400 8,960 8,960 Total Industrials & Business Services 1,040,233 INFORMATION TECHNOLOGY 21.2% Communications Equipment 2.2% ADTRAN 900,000 17,226 Belden CDT ! 1,915,000 44,428 Black Box 655,000 31,453 F5 Networks * 425,000 20,706 Ixia * 675,000 11,347 Packeteer * 477,500 6,900 Riverstone Networks * 1,750,000 1,864 Sirf Technology Holdings * 827,000 10,519 Tekelec * 416,700 8,517 152,960 Computers & Peripherals 0.9% Applied Films * 78,800 1,699 Emulex * 1,225,000 20,629 Gateway * 3,628,000 21,804 Synaptics * 494,000 15,107 59,239 Electronic Equipment & Instruments 2.4% Cogent * 212,000 6,996 Digital Theater Systems * 575,000 11,575 Global Imaging Systems * 701,400 27,705 KEMET * 1,845,000 16,513 Littelfuse * 808,701 27,625 Methode Electronics 1,254,700 16,123 Newport * 789,600 11,133 Plexus * 1,898,600 24,701 Technitrol * 300,000 5,460 Woodhead Industries ! 960,300 15,394 163,225 Internet Software & Services 0.5% Digital Insight * 1,095,000 20,148 MatrixOne * 1,603,700 10,504 WebSideStory * 228,200 2,837 33,489 IT Services 3.7% BISYS Group * 1,094,000 17,996 CACI International, Class A * 720,800 49,108 Global Payments 868,000 50,813 Iron Mountain * 1,772,737 54,051 Maximus * 1,058,300 32,934 MPS Group * 2,646,800 32,450 RightNow Technologies * 709,000 11,450 248,802 Semiconductor & Semiconductor Equipment 4.9% AMIS Holdings * 700,000 11,564 Atheros Communications * 364,000 3,731 ATMI * 828,500 18,666 Brooks-Pri Automation * 800,000 13,776 Cabot Microelectronics * 544,000 21,787 Credence Systems * 1,450,000 13,268 Cymer * 525,000 15,508 Cypress Semiconductor * 600,000 7,038 Entegris * 1,441,200 14,340 Exar * 1,163,000 16,503 Lattice Semiconductor * 2,168,800 12,362 Microsemi * 840,000 14,582 MKS Instruments * 1,556,200 28,868 Mykrolis * 1,554,800 22,032 PDF Solutions * 973,800 15,688 PortalPlayer * 43,000 1,061 Power Integrations * 795,000 15,725 Semtech * 1,764,000 38,579 Silicon Laboratories * 700,000 24,717 Tessera Technologies * 708,900 26,378 336,173 Software 6.6% Actuate * 245,500 626 Altiris * 730,000 25,864 Blackbaud * 126,400 1,851 Catapult Communications * 418,600 10,113 Concord Communications * 699,400 7,749 FactSet Research Systems 856,200 50,036 FileNet * 1,546,400 39,835 Hyperion Solutions * 450,000 20,979 Internet Security Systems * 901,400 20,958 Jack Henry & Associates 2,420,100 48,184 Kronos *! 1,325,000 67,747 Magma Design Automation * 510,900 6,417 Mercury Interactive * 279,300 12,722 Motive * 751,000 8,546 NetIQ * 1,371,400 16,745 Open Solutions * 350,000 9,086 Progress Software * 900,000 21,015 Quest Software * 1,279,400 20,407 Red Hat * 856,700 11,437 RSA Security * 1,177,200 23,615 SPSS * 536,400 8,389 Verisity * 340,000 2,788 Verity * 1,250,000 16,400 451,509 Total Information Technology 1,445,397 MATERIALS 6.3% Chemicals 4.4% Airgas 2,875,000 76,216 Arch Chemicals ! 1,198,100 34,481 Ferro 1,785,000 41,394 MacDermid 375,000 13,538 Material Sciences * 691,100 12,433 Minerals Technologies 948,000 63,232 Mosaic * 2,325,000 37,944 Symyx Technologies * 575,000 17,296 296,534 Containers & Packaging 0.3% Chesapeake Corp. 710,000 19,283 Smurfit-Stone Container * 191,100 3,570 22,853 Metals & Mining 1.3% Adrian Steel !@ 13,000 5,291 Coal Creek @ 9,295 2,417 Gibraltar Industries 559,800 13,223 Lihir Gold (AUD) * 7,971,900 7,214 Meridian Gold * 1,700,000 32,249 Steel Dynamics 650,000 24,622 85,016 Paper & Forest Products 0.3% Buckeye Technologies * 1,780,100 23,159 23,159 Total Materials 427,562 TELECOMMUNICATION SERVICES 0.9% Diversified Telecommunication Services 0.0% Arbinet Holdings * 53,000 1,317 1,317 Wireless Telecommunication Services 0.9% Spectrasite * 846,000 48,983 Western Wireless, Class A * 323,000 9,464 58,447 Total Telecommunication Services 59,764 TRUSTS & MUTUAL FUNDS 0.6% Trusts & Mutual Funds 0.6% Ishares Russell 2000 300,000 38,850 Total Trusts & Mutual Funds 38,850 UTILITIES 0.6% Electric Utilities 0.6% Black Hills 400,000 12,272 Cleco 767,200 15,544 El Paso Electric * 726,200 13,754 Total Utilities 41,570 Total Common Stocks (Cost $4,523,206) 6,228,439 SHORT-TERM INVESTMENTS 8.8% Money Market Fund 8.7% T. Rowe Price Reserve Investment Fund, 2.28% #! 595,923,046 595,923 595,923 U.S. Treasury Obligations 0.1% U.S. Treasury Bills, 1.702%, 1/27/05 ++ 6,083,000 6,075 6,075 Total Short-Term Investments (Cost $601,999) 601,998 FUTURES CONTRACTS 0.0% Variation margin receivable (payable) on open futures contracts (2) 93 Total Futures Contracts 93 Total Investments in Securities 100.1% of Net Assets (Cost $5,125,205) $6,830,530 ---------- (1) Denominated in U.S. dollars unless otherwise noted # Seven-day yield * Non-income producing ++ All or a portion of this security is pledged to cover margin requirements on futures contracts at December 31, 2004 @ Valued by the T. Rowe Price Valuation Committee, established by the fund's Board of Directors AUD Australian dollar REIT Real Estate Investment Trust (2) Open Futures Contracts at December 31, 2004 were as follows: ($ 000s) Contract Unrealized Expiration Value Gain (Loss) ---------- -------- ---------- Long, 412 Russell 2000 contracts, $6,083 par of 1.702% U.S. Treasury Bills pledged as initial margin 3/05 $ 134,714 $ 3,079 Net payments (receipts) of variation margin to date (2,986) Variation margin receivable (payable) on open futures contracts $ 93 -------- !Affiliated Companies ($ 000s) 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, or a company which is under common ownership or control. Purchase Sales Investment Value Affiliate Cost Cost Income 12/31/04 12/31/03 -------------------------------------------------------------------------------- Adrian Steel $ - $ - $ 52 $ 5,291 $ 4,056 Arch Chemicals - - 958 34,481 30,743 Armor Holdings - - - 70,638 39,526 Belden CDT - - 192 44,428 40,387 CompX International - 8,303 - - 2,603 Consolidated Graphics 2,803 - - 45,987 29,212 Horace Mann Educators - 9,146 789 32,991 29,883 Ionics - - - 49,841 36,628 Kronos - 7,716 - 67,747 62,386 Lifeline Systems - - - 17,187 12,677 Lindsay Manufacturing - - 223 27,490 26,821 Monro Buffler Brake 18,606 - - 20,872 * New England Business Services - 26,893 401 - 26,875 Parkway Properties, REIT - 6,604 1,429 20,285 24,948 Paxar - 32,558 - - 26,315 Piper Jaffray 49,805 7,093 - 47,590 * Resources Connection 1,518 1,782 - 58,845 * Strattec Security - - - 11,935 11,609 Sunrise Senior Living 25,608 - - 63,471 * Woodhead Industries $ 889 $ - $ 384 $ 15,394 $ 15,423 T. Rowe Price Reserve Investment Fund ** ** 7,156 595,923 457,072 -------------------------------- Totals $ 11,584 $1,230,396 $ 877,164 -------------------------------- * The issuer was not considered an affiliated company at December 31, 2003. ** Realized gain/(loss) and purchase and sale information not shown for cash management funds. !!Restricted Securities Amounts in (000s) The fund may invest in securities that cannot be offered for public resale without first being registered under the Securities Act of 1933 and related rules. The total restricted securities (excluding 144A issues) at period-end amounts to $53 and represents 0.0% of net assets. Acquisition Acquisition Description Date Cost ----------------------------------------------- ------------ ------------ ADM Cranberry 6/30/00 $ 0 Totals $ 0 ---- The fund has registration rights for certain restricted securities held as of December 31, 2004. Any costs related to such registration are borne by the issuer. The accompanying notes are an integral part of these financial statements. T. ROWE PRICE SMALL-CAP STOCK FUND -------------------------------------------------------------------------------- December 31, 2004 STATEMENT OF ASSETS AND LIABILITIES -------------------------------------------------------------------------------- (In thousands except shares and per share amounts) Assets Investments in securities, at value Affiliated companies (cost $1,010,639) $ 1,230,396 Non-affiliated companies (cost $4,114,566) 5,600,134 Total investments in securities 6,830,530 Other assets 30,229 Total assets 6,860,759 Liabilities Total liabilities 40,428 NET ASSETS $ 6,820,331 --------------- Net Assets Consist of: Undistributed net realized gain (loss) $ 47,461 Net unrealized gain (loss) 1,708,311 Paid-in-capital applicable to 214,407,085 shares of $0.50 par value capital stock outstanding; 200,000,000 shares authorized 5,064,559 NET ASSETS $ 6,820,331 --------------- NET ASSET VALUE PER SHARE Investor Class ($6,364,281,207/200,010,154 shares outstanding) $ 31.82 --------------- Advisor Class ($456,049,339/14,396,931 shares outstanding) $ 31.68 --------------- The accompanying notes are an integral part of these financial statements. T. Rowe Price Small-Cap Stock Fund -------------------------------------------------------------------------------- Statement of Operations -------------------------------------------------------------------------------- ($ 000s) Year Ended 12/31/04 Investment Income (Loss) Income Dividend $ 44,467 Interest 69 Total income 44,536 Expenses Investment management 44,236 Shareholder servicing Investor Class 8,509 Advisor Class 521 Rule 12b-1 fees - Advisor Class 956 Prospectus and shareholder reports Investor Class 355 Advisor Class 70 Custody and accounting 275 Registration 111 Legal and audit 27 Directors 13 Miscellaneous 47 Total expenses 55,120 Expenses paid indirectly (9) Net expenses 55,111 Net investment income (loss) (10,575) Realized and Unrealized Gain (Loss) Net realized gain (loss) Affiliated securities 7,853 Non-affiliated securities 249,507 Futures 15,851 Net realized gain (loss) 273,211 Change in net unrealized gain (loss) Securities 774,841 Futures 2,184 Change in net unrealized gain (loss) 777,025 Net realized and unrealized gain (loss) 1,050,236 INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS $ 1,039,661 --------------- The accompanying notes are an integral part of these financial statements. T. ROWE PRICE SMALL-CAP STOCK FUND -------------------------------------------------------------------------------- STATEMENT OF CHANGES IN NET ASSETS -------------------------------------------------------------------------------- ($ 000s) Year Ended 12/31/04 12/31/03 Increase (Decrease) in Net Assets Operations Net investment income (loss) $ (10,575) $ (4,492) Net realized gain (loss) 273,211 159,039 Change in net unrealized gain (loss) 777,025 1,058,509 Increase (decrease) in net assets from operations 1,039,661 1,213,056 Distributions to shareholders Net realized gain Investor Class (265,484) (79,833) Advisor Class (18,285) (4,666) Decrease in net assets from distributions (283,769) (84,499) Capital share transactions * Shares sold Investor Class 1,603,004 1,456,686 Advisor Class 168,970 160,137 Distributions reinvested Investor Class 256,566 75,918 Advisor Class 17,609 4,529 Shares redeemed Investor Class (1,065,975) (1,037,784) Advisor Class (98,977) (44,286) Increase (decrease) in net assets from capital share transactions 881,197 615,200 Net Assets Increase (decrease) during period 1,637,089 1,743,757 Beginning of period 5,183,242 3,439,485 End of period $ 6,820,331 $ 5,183,242 ----------- ----------- (Including undistributed net investment income of $0 at 12/31/04 and $0 at 12/31/03) T. ROWE PRICE SMALL-CAP STOCK FUND -------------------------------------------------------------------------------- Statement of Changes in Net Assets -------------------------------------------------------------------------------- ($ 000s) Year Ended 12/31/04 12/31/03 *Share information Shares sold Investor Class 54,340 60,161 Advisor Class 5,789 6,571 Distributions reinvested Investor Class 8,192 2,799 Advisor Class 565 168 Shares redeemed Investor Class (36,353) (42,561) Advisor Class (3,404) (1,869) Increase (decrease) in shares outstanding 29,129 25,269 The accompanying notes are an integral part of these financial statements. T. ROWE PRICE SMALL-CAP STOCK FUND -------------------------------------------------------------------------------- December 31, 2004 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: the Small-Cap Stock Fund original share class, referred to in this report as the Investor Class, offered since June 1, 1956, and Small-Cap Stock Fund--Advisor Class (Advisor Class), offered since March 31, 2000. Advisor Class shares are sold only through unaffiliated brokers and other unaffiliated financial intermediaries that are compensated by the class for distribution, shareholder servicing, and/or 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 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, for certain markets, the official closing price at the time the valuations are made, except for OTC Bulletin Board securities, which are valued at the mean of the latest bid and asked prices. 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 asked prices for domestic securities and the last quoted sale price for international securities. Debt securities with original maturities of less than one year are valued at amortized cost in local currency, which approximates fair value when combined with accrued interest. Investments in mutual funds are valued at the mutual fund's closing net asset value per share on the day of valuation. Financial futures contracts are valued at closing settlement prices. Other investments, including restricted securities, 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 close of trading on the NYSE. If the fund determines that developments between the close of a foreign market and the close of the NYSE will, in its judgment, materially affect the value of some or all of its portfolio securities, which in turn will affect the fund's share price, the fund will adjust the previous closing prices to reflect the 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. A fund may also fair value securities in other situations, such as when a particular foreign market is closed but the fund is open. In deciding whether to make fair value adjustments, the fund reviews a variety of factors, including developments in foreign markets, the performance of U.S. securities markets, and the performance of instruments trading in U. S. markets that represent foreign securities and baskets of foreign securities. The fund uses outside pricing services to provide it with closing market prices and information used for adjusting those prices. The fund cannot predict how often it will use closing prices and how often it will adjust those prices. As a means of evaluating its fair value process, the fund routinely compares closing market prices, the next day's opening prices in the same markets, and adjusted prices. 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 asked 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. Class Accounting The Advisor Class pays distribution, shareholder servicing, and/or certain administrative expenses in the form of Rule 12b-1 fees, in an amount not exceeding 0.25% of the class's average daily 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. 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 $277,000 for the year ended December 31, 2004. 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, which are reflected as expenses paid indirectly. Investment Transactions, Investment Income, and Distributions Income and expenses are recorded on the accrual basis. Premiums and discounts on debt securities are amortized for financial reporting purposes. 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. Payments ("variation margin") made or received to settle the daily fluctuations in the value of futures contracts are recorded as unrealized gains or losses until the contracts are closed. Unsettled variation margin on futures contracts is included in investments in securities, and unrealized gains and losses on futures contracts are included in the change in net unrealized gain or loss in the accompanying financial statements. Distributions to shareholders are recorded on the ex-dividend date. 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. 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. Restricted Securities The fund may invest in securities that are subject to legal or contractual restrictions on resale. Although certain of these securities may be readily sold, for example, under Rule 144A, others may be illiquid, and their sale may involve substantial delays and additional costs, and prompt sale at an acceptable price may be difficult. Futures Contracts During the year ended December 31, 2004, the fund was a party to futures contracts, which provide for the future sale by one party and purchase by another of a specified amount of a specific financial instrument at an agreed upon price, date, time, and place. Risks arise from possible illiquidity of the futures market and from movements in security values. Other Purchases and sales of portfolio securities, other than short-term securities, aggregated $1,376,591,000 and $974,105,000, respectively, for the year ended December 31, 2004. 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. Distributions during the year ended December 31, 2004 were characterized as follows for tax purposes: Ordinary income $ 46,264,000 Long-term capital gain 237,505,000 Total distributions $ 283,769,000 ------------------ At December 31, 2004, the tax-basis components of net assets were as follows: Unrealized appreciation $ 1,910,832,000 Unrealized depreciation (205,599,000) Net unrealized appreciation (depreciation) 1,705,233,000 Undistributed ordinary income 19,533,000 Undistributed long-term capital gain 31,006,000 Paid-in capital 5,064,559,000 Net assets $ 6,820,331,000 ----------------- Federal income tax regulations require the fund to treat the gain/loss on certain open futures contracts as realized on the last day of the tax year; accordingly, $3,079,000 of unrealized gains reflected in the accompanying financial statements were realized for tax purposes as of December 31, 2004. For the year ended December 31, 2004, 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. Reclassifications between income and gain relate primarily to the offset of the current net operating loss against realized gains. Results of operations and net assets were not affected by these reclassifications. Undistributed net investment income $ 10,575,000 Undistributed net realized gain (18,724,000) Paid-in capital 8,149,000 At December 31, 2004, the cost of investments for federal income tax purposes was $5,128,283,000. 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 average daily net assets to those of the group. At December 31, 2004, the effective annual group fee rate was 0.31%, and investment management fee payable totaled $4,317,000. The Advisor Class is also subject to a contractual expense limitation through April 30, 2006. During the limitation period, the manager is required to waive its management fee and reimburse the class for any expenses, excluding interest, taxes, brokerage commissions, and extraordinary expenses, that would otherwise cause the class's ratio of total expenses to average net assets (expense ratio) to exceed its expense limitation of 1.20%. Through April 30, 2008, the class is required to repay the manager for expenses previously reimbursed and management fees waived to the extent its net assets have grown or expenses have declined sufficiently to allow repayment without causing the class's expense ratio to exceed its expense limitation. For the year ended December 31, 2004, the Advisor Class operated below its expense limitation. 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 Investor Class. For the year ended December 31, 2004, expenses incurred pursuant to these service agreements were $73,000 for Price Associates, $1,655,000 for T. Rowe Price Services, Inc., and $3,216,000 for T. Rowe Price Retirement Plan Services, Inc. At period-end, a total of $435,000 of these expenses was payable. 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, 2004, the fund was charged $179,000 for shareholder servicing costs related to the college savings plans, of which $132,000 was for services provided by Price and $13,000 was payable at period-end. At December 31, 2004, approximately 1.3% of the outstanding shares of the Investor 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 a special servicing agreement, 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 this agreement are reflected as shareholder servicing expense in the accompanying financial statements. For the year ended December 31, 2004, the fund was allocated $508,000 of Retirement Funds' expenses, of which $352,000 related to services provided by Price and $45,000 was payable at period-end. At December 31, 2004, approximately 4.3% of the outstanding shares of the Investor Class were held by the Retirement Funds. 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 and affiliates of the fund. The Reserve Funds are offered as cash management options to mutual funds, trusts, and other accounts managed by Price Associates and/or its affiliates, and are not available for direct purchase by members of the public. The Reserve Funds pay no investment management fees. As of December 31, 2004, T. Rowe Price Group, Inc. and/or its wholly owned subsidiaries owned 123,299 shares of the fund, representing less than 1% of the fund's net assets. T. ROWE PRICE SMALL-CAP STOCK FUND -------------------------------------------------------------------------------- REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM -------------------------------------------------------------------------------- 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, 2004, 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 the auditing standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, 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, 2004 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP Baltimore, Maryland February 11, 2005 T. ROWE PRICE SMALL-CAP STOCK FUND -------------------------------------------------------------------------------- TAX INFORMATION (UNAUDITED) FOR THE TAX YEAR ENDED 12/31/04 -------------------------------------------------------------------------------- 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 $48,196,000 from short-term capital gains, o $243,722,000 from long-term capital gains, subject to the 15% rate gains category. For taxable non-corporate shareholders, $29,842,000 of the fund's income represents qualified dividend income subject to the 15% rate category. For corporate shareholders, $28,591,000 of the fund's income qualifies for the dividends-received deduction. INFORMATION ON PROXY VOTING POLICIES, PROCEDURES, AND RECORDS -------------------------------------------------------------------------------- A description of the policies and procedures used by T. Rowe Price funds and portfolios to determine how to vote proxies relating to portfolio securities is available in each fund's Statement of Additional Information, which you may request by calling 1-800-225-5132 or by accessing the SEC's Web site, www.sec.gov. The description of our proxy voting policies and procedures is also available on our Web site, www.troweprice.com. To access it, click on the words "Company Info" at the top of our homepage for individual investors. Then, in the window that appears, click on the "Proxy Voting Policy" navigation button in the top left corner. Each fund's most recent annual proxy voting record is available on our Web site and through the SEC's Web site. To access it through our Web site, follow the directions above, then click on the words "Proxy Voting Record" at the bottom of the Proxy Voting Policy page. HOW TO OBTAIN QUARTERLY PORTFOLIO HOLDINGS -------------------------------------------------------------------------------- The fund files a complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarters of each fiscal year on Form N-Q. The fund's Form N-Q is available electronically on the SEC's Web site (www.sec.gov); hard copies may be reviewed and copied at the SEC's Public Reference Room, 450 Fifth St. N.W., Washington, DC 20549. For more information on the Public Reference Room, call 1-800-SEC-0330. 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, compliance matters, advisory fees, expenses, and other business affairs, 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 (Year 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 Chief (1945) Executive Officer, The Rouse Company, real estate 2001 developers; Director, Mercantile Bank (4/03 to present) Donald W. Dick, Jr. Principal, EuroCapital Advisors, LLC, an acquisition (1943) and management advisory firm 1992 David K. Fagin Director, Golden Star Resources Ltd., Canyon Resources (1938) Corp. (5/00 to present), and Pacific Rim Rim Mining 1992 Corp. (2/02 to present); Chairman and President, Nye Corp. Karen N. Horn Managing Director and President, Global Private Client (1943) Services, Marsh Inc. (1999-2003); Managing Director 2003 and Head of International Private Banking, Bankers Trust (1996-1999); Director, Eli Lilly and Company and Georgia Pacific (5/04 to present) F. Pierce Linaweaver President, F. Pierce Linaweaver & Associates, Inc., (1934) consulting environmental and civil engineers 2001 John G. Schreiber Owner/President, Centaur Capital Partners, Inc., a real (1946) estate investment company; Partner, Blackstone Real 2001 Estate Advisors, L.P.; Director, AMLI Residential Properties Trust and The Rouse Company, real estate developers * Each independent director oversees 112 T. Rowe Price portfolios and serves until retirement, resignation, or election of a successor. Inside Directors Name (Year 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 Vice President, T. Rowe Price and T. Rowe (1945) Price Group, Inc. 1994 [15] James S. Riepe Director and Vice President, T. Rowe Price; Vice (1943) Chairman of the Board, Director, and Vice 1992 President, T. Rowe Price Group, Inc.; Chairman of [112] 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, Small-Cap Stock Fund * Each inside director serves until retirement, resignation, or election of a successor. Officers Name (Year of Birth) Title and Fund(s) Served Principal Occupation(s) Francisco Alonso (1978) Vice President, T. Rowe Price and Vice President, Small-Cap Stock Fund T. Rowe Price Group, Inc. Preston G. Athey, CFA, CIC (1949) Vice President, T. Rowe Price, T. Rowe Vice President, Small-Cap Stock Fund Price Group, Inc., and T. Rowe Price Trust Company Stephen V. Booth, CPA (1961) 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, CFA (1967) Vice President, T. Rowe Price and Vice President, Small-Cap Stock Fund T. Rowe Price Group, Inc. Joseph A. Carrier (1960) Vice President, T. Rowe Price, T. Rowe Treasurer, Small-Cap Stock Fund Price Group, Inc., T. Rowe Price Investment Services, Inc., and T. Rowe Price Trust Company Unless otherwise noted, officers have been employees of T. Rowe Price or T. Rowe Price International for at least five years. Officers (continued) Name (Year of Birth) Title and Fund(s) Served Principal Occupation(s) Hugh M. Evans III, CFA (1966) Vice President, T. Rowe Price and Vice President, Small-Cap Stock Fund T. Rowe Price Group, Inc. Roger L. Fiery III, CPA (1959) Vice President, T. Rowe Price, T. Rowe Vice President, Small-Cap Stock Fund Price Group, Inc., T. Rowe Price International, Inc., and T. Rowe Price Trust Company John R. Gilner (1961) Chief Compliance Officer and Vice Chief Compliance Officer, President, T. Rowe Price; Vice Small-Cap Stock Fund President,T. Rowe Price Investment Services, Inc., and T. Rowe Price Group, Inc. Gregory S. Golczewski (1966) Vice President, T. Rowe Price and Vice President, Small-Cap Stock Fund T. Rowe Price Trust Company Henry H. Hopkins (1942) Director and Vice President, T. Rowe Vice President, Small-Cap Stock Fund Price Investment Services, Inc., T. Rowe Price Services, Inc., and T. Rowe Price Trust Company; Vice President, T. Rowe Price, T. Rowe Price Group, Inc., T. Rowe Price International, Inc., and T. Rowe Price Retirement Plan Services, Inc. Kris H. Jenner, M.D., D. Phil. (1962) Vice President, T. Rowe Price and Vice President, Small-Cap Stock Fund T. Rowe Price Group, Inc. Patricia B. Lippert (1953) Assistant Vice President, T. Rowe Price Secretary, Small-Cap Stock Fund and T. Rowe Price Investment Services, Inc. Robert J. Marcotte (1962) Vice President, T. Rowe Price and Vice President, Small-Cap Stock Fund T. Rowe Price Group, Inc. Jay S. Markowitz, M.D. (1962) Vice President, T. Rowe Price and Vice President, Small-Cap Stock Fund T. Rowe Price Group, Inc.; formerly Transplant Surgeon and Assistant Professor of Surgery, Johns Hopkins University School of Medicine (to 2001) Gregory A. McCrickard, CFA (1958) Vice President, T. Rowe Price, T. Rowe President, Small-Cap Stock Fund Price Group, Inc., and T. Rowe Price Trust Company Joseph M. Milano, CFA (1972) Vice President, T. Rowe Price and Vice President, Small-Cap Stock Fund T. Rowe Price Group, 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 (Year of Birth) Title and Fund(s) Served Principal Occupation(s) Curt J. Organt (1968) Vice President, T. Rowe Price and Vice President, Small-Cap Stock Fund T. Rowe Price Group, Inc. Charles G. Pepin (1966) Vice President, T. Rowe Price and Vice President, Small-Cap Stock Fund T. Rowe Price Group, Inc. Michael F. Sola, CFA (1969) Vice President, T. Rowe Price and Vice President, Small-Cap Stock Fund T. Rowe Price Group, Inc. J. David Wagner, CFA (1974) Vice President, T. Rowe Price and Vice President, Small-Cap Stock Fund T. Rowe Price Group, Inc. Julie L. Waples (1970) Vice President, T. Rowe Price Vice President, Small-Cap Stock Fund Wenhua Zhang, CPA, CFA (1970) Vice President, T. Rowe Price and Vice President, Small-Cap Stock Fund T. Rowe Price Group, Inc.; formerly 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. Item 2. Code of Ethics. 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: 2004 2003 Audit Fees $16,969 $17,783 Audit-Related Fees 2,322 1,084 Tax Fees 4,602 4,618 All Other Fees - 124 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) Less than 50 percent of the hours expended on the principal accountant's engagement to audit the registrant's financial statements for the most recent fiscal year were attributed to work performed by persons other than the principal accountant's full-time, permanent employees. (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 $903,000 and $821,000, 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. Schedule of Investments. Not applicable. The complete schedule of investments is included in Item 1 of this Form N-CSR. Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies. Not applicable. Item 8. Portfolio Managers of Closed-End Management Investment Companies. Not applicable. Item 9. Purchases of Equity Securities by Closed-End Management Investment Company and Affiliated Purchasers. Not applicable. Item 10. Submission of Matters to a Vote of Security Holders. Not applicable. Item 11. 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 change in the registrant's internal control over financial reporting that occurred during the registrant's second fiscal quarter covered by this report that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. Item 12. Exhibits. (a)(1) The registrant's code of ethics pursuant to Item 2 of Form N-CSR is attached. (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. (3) Written solicitation to repurchase securities issued by closed-end companies: not applicable. (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 Small-Cap Stock Fund, Inc. By /s/ James S. Riepe ----------------------------------- James S. Riepe Principal Executive Officer Date February 18, 2005 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 18, 2005 By /s/ Joseph A. Carrier ----------------------------------- Joseph A. Carrier Principal Financial Officer Date February 18, 2005