N-CSR 1 eif.txt T. ROWE PRICE EQUITY INCOME FUND Item 1. Report to Shareholders T. Rowe Price Equity Income Fund -------------------------------------------------------------------------------- Certified Financials T. ROWE PRICE EQUITY INCOME FUND -------------------------------------------------------------------------------- Certified Financials (Unaudited) FINANCIAL HIGHLIGHTS For a share outstanding throughout each period -------------------------------------------------------------------------------- Equity Income shares 6 Months Year Ended Ended 6/30/03 12/31/02 12/31/01 12/31/00 12/31/99 12/31/98 NET ASSET VALUE Beginning of period $ 19.79 $ 23.65 $ 24.67 $ 24.81 $ 26.32 $ 26.07 Investment activities Net investment income (loss) 0.17 0.38 0.37 0.50 0.54 0.61 Net realized and unrealized gain (loss) 1.75 (3.43) (0.02)** 2.51 0.45 1.74 Total from investment activities 1.92 (3.05) 0.35 3.01 0.99 2.35 Distributions Net investment income (0.17) (0.36) (0.36) (0.51) (0.53) (0.61) Net realized gain (0.02) (0.45) (1.01) (2.64) (1.97) (1.49) Total distributions (0.19) (0.81) (1.37) (3.15) (2.50) (2.10) NET ASSET VALUE End of period $ 21.52 $ 19.79 $ 23.65 $ 24.67 $ 24.81 $ 26.32 --------------------------------------------------------- Ratios/Supplemental Data Total return^ 9.78% (13.04)% 1.64% 13.12% 3.82% 9.23% Ratio of total expenses to average net assets 0.80%+ 0.79% 0.80% 0.78% 0.77% 0.77% Ratio of net investment income (loss) to average net assets 1.73%+ 1.72% 1.53% 2.01% 1.95% 2.26% Portfolio turnover rate 6.80%+ 15.2% 17.3% 21.9% 21.8% 22.6% Net assets, end of period (in millions) $ 10,227 $ 8,954 $ 10,128 $ 10,187 $ 12,321 $ 13,495 ^ 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 amount presented is calculated pursuant to a methodology prescribed by the Securities and Exchange Commission for a share outstanding throughout the period. This amount is inconsistent with the fund's aggregate gains and losses because of the timing of sales and redemptions of fund shares in relation to fluctuating market values for the investment portfolio. + Annualized The accompanying notes are an integral part of these financial statements. T. ROWE PRICE EQUITY INCOME FUND -------------------------------------------------------------------------------- Certified Financials (Unaudited) FINANCIAL HIGHLIGHTS For a share outstanding throughout each period -------------------------------------------------------------------------------- Equity Income-Advisor Class shares 6 Months Year 3/31/00 Ended Ended Through 6/30/03 12/31/02 12/31/01 12/31/00 NET ASSET VALUE Beginning of period $ 19.75 $ 23.63 $ 24.68 $ 23.24 Investment activities Net investment income (loss) 0.16 0.37 0.34 0.36 Net realized and unrealized gain (loss) 1.75 (3.45) (0.02) 3.41 Total from investment activities 1.91 (3.08) 0.32 3.77 Distributions Net investment income (0.15) (0.35) (0.36) (0.40) Net realized gain (0.02) (0.45) (1.01) (1.93) Total distributions (0.17) (0.80) (1.37) (2.33) NET ASSET VALUE End of period $ 21.49 $ 19.75 $ 23.63 $ 24.68 ------------------------------------------------ Ratios/Supplemental Data Total return^ 9.73% (13.18)% 1.51% 16.62% Ratio of total expenses to average net assets 0.93%+ 0.94% 0.90% 0.60%+ Ratio of net investment income (loss) to average net assets 1.60%+ 1.72% 1.44% 2.09%+ Portfolio turnover rate 6.80%+ 15.2% 17.3% 21.9%+ Net assets, end of period (in thousands) $1,166,059 $878,375 $307,957 $ 851 ^ 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 EQUITY INCOME FUND -------------------------------------------------------------------------------- Certified Financials (Unaudited) FINANCIAL HIGHLIGHTS For a share outstanding throughout each period -------------------------------------------------------------------------------- Equity Income-R Class shares 6 Months 9/30/02 Ended Through 6/30/03 12/31/02 NET ASSET VALUE Beginning of period $ 19.78 $ 18.54 Investment activities Net investment income (loss) 0.14 0.09** Net realized and unrealized gain (loss) 1.74 1.61** Total from investment activities 1.88 1.70 Distributions Net investment income (0.13) (0.11) Net realized gain (0.02) (0.35) Total distributions (0.15) (0.46) NET ASSET VALUE End of period $ 21.51 $ 19.78 --------------------------- Ratios/Supplemental Data Total return^ 9.56% 9.15% Ratio of total expenses to average net assets 1.18%+ 1.08%+ Ratio of net investment income (loss) to average net assets 1.37%+ 3.22%+ Portfolio turnover rate 6.80%+ 15.2%+ Net assets, end of period (in thousands) $ 14,208 $ 5,759 ** The amount presented is calculated pursuant to a methodology prescribed by the Securities and Exchange Commission for a share outstanding throughout the period. The amount may be inconsistent with aggregate income, gains and losses reported elsewhere in the financial statements because of the timing of the fund share transactions in relation to shareholder distributions and fluctuating market values for the investment portfolio. ^ 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 EQUITY INCOME FUND -------------------------------------------------------------------------------- Certified Financials (Unaudited) June 30, 2003 PORTFOLIO OF INVESTMENTS Shares Value -------------------------------------------------------------------------------- In thousands COMMON STOCKS 94.7% CONSUMER DISCRETIONARY 16.1% AUTOMOBILES 0.3% Ford Motor 3,500,000 $ 38,465 38,465 DISTRIBUTORS 0.6% Genuine Parts 2,300,000 73,623 73,623 HOTELS, RESTAURANTS & LEISURE 2.8% Hilton 5,520,000 70,601 McDonald's 6,500,000 143,390 Starwood Hotels & Resorts Worldwide, REIT 3,750,000 107,212 321,203 HOUSEHOLD DURABLES 1.7% Black & Decker 1,000,000 43,450 Fortune Brands 2,000,000 104,400 Stanley Works 1,741,000 48,052 195,902 LEISURE EQUIPMENT & PRODUCTS 1.6% Eastman Kodak 3,250,000 88,887 Hasbro 5,000,000 87,450 176,337 MEDIA 6.6% AOL Time Warner * 10,500,000 168,945 Comcast, Class A * 3,750,000 113,175 Disney 6,987,100 137,995 Dow Jones 3,000,000 129,090 Knight-Ridder 1,750,000 120,628 New York Times, Class A 1,000,000 45,500 Reader's Digest, Class A 3,000,000 40,440 755,773 MULTILINE RETAIL 0.7% J.C. Penney 800,000 13,480 May Department Stores 2,900,000 64,554 78,034 SPECIALTY RETAIL 1.8% Home Depot 4,250,000 $ 140,760 Toys "R" Us * 5,000,000 60,600 201,360 Total Consumer Discretionary 1,840,697 CONSUMER STAPLES 6.8% BEVERAGES 0.7% Brown-Forman, Class B 1,000,000 78,620 78,620 FOOD PRODUCTS 2.4% Campbell Soup 4,000,000 98,000 General Mills 1,750,000 82,967 Hershey Foods 350,000 24,381 Kellogg 1,000,000 34,370 McCormick 1,100,000 29,920 269,638 HOUSEHOLD PRODUCTS 1.5% Clorox 1,700,000 72,505 Kimberly-Clark 2,000,000 104,280 176,785 PERSONAL PRODUCTS 0.7% Gillette 2,500,000 79,650 79,650 TOBACCO 1.5% Altria Group 1,750,000 79,520 UST 2,600,000 91,078 170,598 Total Consumer Staples 775,291 ENERGY 9.6% ENERGY EQUIPMENT & SERVICES 0.9% Baker Hughes 1,100,000 36,927 Schlumberger 1,500,000 71,355 108,282 OIL & GAS 8.7% Amerada Hess 2,250,000 $ 110,655 BP ADR 3,000,000 126,060 ChevronTexaco 3,000,000 216,600 Exxon Mobil 6,750,000 242,393 Marathon Oil 2,000,000 52,700 Royal Dutch Petroleum ADS 3,200,000 149,184 Unocal 3,170,000 90,947 988,539 Total Energy 1,096,821 FINANCIALS 17.9% CAPITAL MARKETS 2.5% J.P. Morgan Chase 3,300,000 112,794 Mellon Financial 4,000,000 111,000 Northern Trust 1,500,600 62,710 286,504 COMMERCIAL BANKS 5.8% Bank of America 1,490,000 117,755 Bank One 4,250,000 158,015 FleetBoston Financial 4,750,000 141,122 Mercantile Bankshares 2,000,000 78,760 National City 1,920,000 62,803 Wells Fargo 1,400,000 70,560 Wilmington Trust, Series A 1,000,000 29,350 658,365 CONSUMER FINANCE 1.2% American Express 3,200,000 133,792 133,792 DIVERSIFIED FINANCIAL SERVICES 1.2% Citigroup 2,240,000 95,872 Moody's 900,000 47,439 143,311 INSURANCE 5.7% American International Group 1,070,658 $ 59,079 Aon 1,600,000 38,528 Chubb 1,600,000 96,000 John Hancock Financial Services 1,328,592 40,828 Lincoln National 2,730,188 97,277 Prudential Financial 1,000,000 33,650 SAFECO 3,400,000 119,952 St. Paul Companies 2,200,000 80,322 UnumProvident 6,233,300 83,588 649,224 REAL ESTATE 0.7% Simon Property Group, REIT 2,000,000 78,060 78,060 THRIFTS & MORTGAGE FINANCE 0.8% Fannie Mae 1,400,000 94,416 94,416 Total Financials 2,043,672 HEALTH CARE 9.4% HEALTH CARE EQUIPMENT & SUPPLIES 1.3% Baxter International 3,500,000 91,000 Becton, Dickinson 1,500,000 58,275 149,275 HEALTH CARE PROVIDERS & SERVICES 0.8% CIGNA 1,900,000 89,186 89,186 PHARMACEUTICALS 7.3% Abbott Laboratories 1,600,000 70,016 Bristol-Myers Squibb 7,350,000 199,553 Merck 4,750,000 287,612 Schering-Plough 6,250,000 116,250 Wyeth 3,500,000 159,425 832,856 Total Health Care 1,071,317 INDUSTRIALS & BUSINESS SERVICES 14.4% AEROSPACE & DEFENSE 4.1% Boeing 1,800,000 $ 61,776 Honeywell International 7,250,000 194,663 Lockheed Martin 1,050,000 49,949 Raytheon 1,817,700 59,693 Rockwell Collins 4,228,400 104,145 470,226 COMMERCIAL SERVICES & SUPPLIES 1.8% Dun & Bradstreet * 1,250,000 51,375 R.R. Donnelley 1,800,000 47,052 Waste Management 4,560,000 109,850 208,277 ELECTRICAL EQUIPMENT 3.0% Cooper Industries 3,600,000 148,680 Emerson Electric 1,100,000 56,210 Hubbell, Class B 1,968,000 65,141 Rockwell Automation 2,800,000 66,752 336,783 INDUSTRIAL CONGLOMERATES 2.1% GE 7,000,000 200,760 Tyco International 2,200,000 41,756 242,516 MACHINERY 1.4% Eaton 700,000 55,027 Pall 4,600,000 103,500 158,527 ROAD & RAIL 2.0% Norfolk Southern 4,200,000 80,640 Union Pacific 2,500,000 145,050 225,690 Total Industrials & Business Services 1,642,019 INFORMATION TECHNOLOGY 4.3% COMMUNICATIONS EQUIPMENT 1.3% Cisco Systems * 3,000,000 $ 50,070 Lucent Technologies * 11,250,000 22,838 Motorola 8,000,000 75,440 148,348 COMPUTER & PERIPHERALS 1.3% Hewlett-Packard 6,920,625 147,409 147,409 OFFICE ELECTRONICS 0.2% Xerox * 2,100,000 22,239 22,239 SEMICONDUCTOR & SEMICONDUCTOR EQUIPMENT 0.6% Agere Systems Class A * 6,770,310 15,775 Class B * 2,447,207 5,628 Texas Instruments 2,850,000 50,160 71,563 SOFTWARE 0.9% Microsoft 3,750,000 96,038 96,038 Total Information Technology 485,597 MATERIALS 5.2% CHEMICALS 3.5% Dow Chemical 3,500,000 108,360 DuPont 3,000,000 124,920 Great Lakes Chemical+ 2,700,000 55,080 Hercules * 4,641,400 45,950 International Flavors & Fragrances 2,250,000 71,842 406,152 METALS & MINING 0.2% Alcoa 800,000 20,400 20,400 PAPER & FOREST PRODUCTS 1.5% International Paper 4,000,000 $ 142,920 MeadWestvaco 1,100,000 27,170 170,090 Total Materials 596,642 TELECOMMUNICATION SERVICES 6.3% DIVERSIFIED TELECOMMUNICATION SERVICES 6.3% Alltel 2,250,000 108,495 AT&T 4,000,000 77,000 Qwest Communications International * 20,000,000 95,600 SBC Communications 5,000,000 127,750 Sprint 6,000,000 86,400 Verizon Communications 5,750,000 226,838 Total Telecommunication Services 722,083 UTILITIES 4.7% ELECTRIC UTILITIES 2.7% Constellation Energy Group 3,500,000 120,050 FirstEnergy 1,700,000 65,365 PPL 791,504 34,035 TXU 4,114,500 92,370 311,820 GAS UTILITIES 0.8% NiSource 4,750,000 90,250 90,250 MULTI-UTILITIES & UNREGULATED POWER 1.2% Duke Energy 4,750,000 94,763 El Paso Energy 4,500,000 36,360 131,123 Total Utilities 533,193 Total Common Stocks (Cost $10,136,779) 10,807,332 CONVERTIBLE PREFERRED STOCKS 0.8% Ford Motor Company Capital Trust II, 6.50% 574,000 $ 24,940 Lucent Technologies, 8.00% 66,228 67,530 Total Convertible Preferred Stocks (Cost $84,242) 92,470 SHORT-TERM INVESTMENTS 4.2% Money Market Funds 4.2% T. Rowe Price Reserve Investment Fund, 1.16% #+ 477,763,988 477,764 Total Short-Term Investments (Cost $477,764) 477,764 TOTAL INVESTMENTS IN SECURITIES 99.7% of Net Assets (Cost $10,698,785) $ 11,377,566 Other Assets Less Liabilities 29,791 NET ASSETS $ 11,407,357 ------------ # Seven-day yield * Non-income producing + Affiliated company - See Note 2. ADR American Depository Receipts ADS American Depository Shares REIT Real Estate Investment Trust The accompanying notes are an integral part of these financial statements. T. ROWE PRICE EQUITY INCOME FUND -------------------------------------------------------------------------------- Certified Financials (Unaudited) June 30, 2003 STATEMENT OF ASSETS AND LIABILITIES -------------------------------------------------------------------------------- In thousands Assets Investments in securities, at value Affiliated companies (cost $591,493) $ 532,844 Other companies (cost $ 10,107,292) 10,844,722 Total investments in securities 11,377,566 Other assets 51,029 Total assets 11,428,595 Liabilities Total liabilities 21,238 NET ASSETS $11,407,357 ----------- Net Assets Consist of: Undistributed net investment income (loss) $ 6,044 Undistributed net realized gain (loss) 90,845 Net unrealized gain (loss) 678,781 Paid-in-capital applicable to 530,233,799 shares of no par value capital stock outstanding; unlimited shares authorized 10,631,687 NET ASSETS $11,407,357 ----------- NET ASSET VALUE PER SHARE Equity Income shares ($10,227,090,286/475,300,075 shares outstanding) $ 21.52 Equity Income-Advisor Class shares ($1,166,058,620/54,273,091 shares outstanding) $ 21.49 Equity Income-R Class shares ($14,208,028/660,633 shares outstanding) $ 21.51 The accompanying notes are an integral part of these financial statements. T. ROWE PRICE EQUITY INCOME FUND -------------------------------------------------------------------------------- Certified Financials (Unaudited) June 30, 2003 STATEMENT OF OPERATIONS -------------------------------------------------------------------------------- In thousands 6 Months Ended 6/30/03 Investment Income (Loss) Income Dividend $ 125,139 Income distributions from mutual funds 2,266 Total income 127,405 Expenses Investment management 28,766 Shareholder servicing Equity Income shares 10,201 Equity Income-Advisor Class shares 437 Equity Income-R Class shares 6 Distribution Equity Income-Advisor Class shares 1,151 Equity Income-R Class shares 31 Prospectus and shareholder reports Equity Income shares 192 Equity Income-Advisor Class shares 48 Custody and accounting 170 Registration 77 Trustees 27 Legal and audit 20 Total expenses 41,126 Expenses paid indirectly (97) Net expenses 41,029 Net investment income (loss) 86,376 Realized and Unrealized Gain (Loss) Net realized gain (loss) on securities 91,372 Change in net unrealized gain (loss) on securities 813,093 Net realized and unrealized gain (loss) 904,465 INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS $ 990,841 ---------- The accompanying notes are an integral part of these financial statements. T. ROWE PRICE EQUITY INCOME FUND -------------------------------------------------------------------------------- Certified Financials (Unaudited) STATEMENT OF CHANGES IN NET ASSETS -------------------------------------------------------------------------------- In thousands 6 Months Year Ended Ended 6/30/03 12/31/02 Increase (Decrease) in Net Assets Operations Net investment income (loss) $ 86,376 $ 175,910 Net realized gain (loss) 91,372 207,302 Change in net unrealized gain (loss) 813,093 (1,840,249) Increase (decrease) in net assets from operations 990,841 (1,457,037) Distributions to shareholders Net investment income Equity Income shares (79,452) (159,289) Equity Income-Advisor Class shares (7,402) (10,398) Equity Income-R Class shares (84) (12) Net realized gain Equity Income shares (9,240) (199,037) Equity Income-Advisor Class shares (928) (16,452) Equity Income-R Class shares (13) (40) Decrease in net assets from distributions (97,119) (385,228) Capital share transactions * Shares sold Equity Income shares 1,001,705 1,866,678 Equity Income-Advisor Class shares 415,235 914,477 Equity Income-R Class shares 9,094 5,925 Distributions reinvested Equity Income shares 84,147 342,908 Equity Income-Advisor Class shares 8,280 26,707 Equity Income-R Class shares 97 52 Shares redeemed Equity Income shares (622,977) (1,650,176) Equity Income-Advisor Class shares (218,158) (262,683) Equity Income-R Class shares (1,610) (123) Increase (decrease) in net assets from capital share transactions 675,813 1,243,765 Net Assets Increase (decrease) during period 1,569,535 (598,500) Beginning of period 9,837,822 10,436,322 End of period $11,407,357 $ 9,837,822 ----------- ----------- *Share information Shares sold Equity Income shares 50,438 84,263 Equity Income-Advisor Class shares 20,500 43,125 Equity Income-R Class shares 447 294 Distributions reinvested Equity Income shares 4,213 16,415 Equity Income-Advisor Class shares 411 1,309 Equity Income-R Class shares 5 3 Shares redeemed Equity Income shares (31,672) (76,535) Equity Income-Advisor Class shares (11,101) (13,002) Equity Income-R Class shares (82) (6) Increase (decrease) in shares outstanding 33,159 55,866 The accompanying notes are an integral part of these financial statements. T. ROWE PRICE EQUITY INCOME FUND -------------------------------------------------------------------------------- Certified Financials (Unaudited) June 30, 2003 NOTES TO FINANCIAL STATEMENTS NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES T. Rowe Price Equity Income Fund (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 substantial dividend income as well as long-term growth of capital through investments in the common stocks of established companies. The fund has three classes of shares: Equity Income Fund (Equity Income class), offered since October 31, 1985, Equity Income Fund-Advisor Class (Advisor Class), offered since March 31, 2000, and Equity Income Fund-R Class (R Class), offered since September 30, 2002. Advisor Class shares are offered only through brokers and other financial intermediaries, and R Class shares are only available to small retirement plans serviced by intermediaries. The Advisor Class and R Class each operate under separate Board-approved Rule 12b-1 plans, pursuant to which each class compensates financial intermediaries for distribution and certain administrative services. Each class has exclusive voting rights on matters related solely to that class, separate voting rights on matters that relate to all classes, and, in all other respects, the same rights and obligations as the other classes. 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 Investments are valued at the close of the New York Stock Exchange (NYSE), normally 4 p.m. ET, each day that the NYSE is open for business. Equity securities listed or regularly traded on a securities exchange or in the over-the-counter market are valued at the last quoted sale price, or official closing price for certain markets, at the time the valuations are made. A security that is listed or traded on more than one exchange is valued at the quotation on the exchange determined to be the primary market for such security. Listed securities not traded on a particular day are valued at the mean of the latest bid and ask prices for domestic securities and the last quoted sale price for international securities. Investments in mutual funds are valued at the closing net asset value per share of the mutual fund on the day of valuation. Other investments and those for which the above valuation procedures are inappropriate or are deemed not to reflect fair value are stated at fair value as determined in good faith by or under the supervision of the officers of the fund, as authorized by the Board of Trustees. Class Accounting The Advisor Class and R Class each pay distribution and administrative expenses in the form of Rule 12b-1 fees, in an amount not exceeding 0.25% and 0.50%, respectively, 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 all 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 a quarterly 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 $96,000 and $1,000, respectively, for the six months ended June 30, 2003. 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 5% or more of the outstanding voting securities. At June 30, 2003, the value of affiliated companies totaled $532,844,000, representing 4.7% of the value of the fund's investments in securities. For the six months then ended, $486,000 (0.4%) of dividend income, and $2,266,000 (100.0%) of interest income reflected in the accompanying financial statements resulted from transactions with affiliated companies. Other Purchases and sales of portfolio securities, other than short-term securities, aggregated $780,689,000 and $334,954,000, respectively, for the six months ended June 30, 2003. NOTE 3 - FEDERAL INCOME TAXES No provision for federal income taxes is required since the fund intends to continue to qualify as a regulated investment company 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 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. The amount and character of tax-basis distributions and composition of net assets are finalized at fiscal year-end; accordingly, tax-basis balances have not been determined as of June 30, 2003. At June 30, 2003, the cost of investments for federal income tax purposes was $10,698,785,000. Net unrealized gain aggregated $678,781,000 at period-end, of which $2,095,201,000 related to appreciated investments and $1,416,420,000 related to depreciated investments. 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 0.25% 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 June 30, 2003, the effective annual group fee rate was 0.32%, and investment management fee payable totaled $5,338,000. Through December 31, 2003 for the Advisor Class and through April 30, 2004 for the R Class, the manager is required to bear any expenses, excluding interest, taxes, brokerage commissions, and extraordinary expenses that would cause the class's ratio of total expenses to average net assets (expense ratio) to exceed 1.00% and 1.30%, respectively. Thereafter, through December 31, 2005 for the Advisor Class and through April 30, 2006 for the R Class, each 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 expense ratio to exceed 1.00% and 1.30%, respectively. This agreement had no impact on the fund's total expenses during the six months ended June 30, 2003 and, at that date, no amounts were subject to future reimbursement by the fund. 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 Equity Income class and R Class. Expenses incurred pursuant to these service agreements totaled $7,188,000 for the six months ended June 30, 2003, of which $1,559,000 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. At June 30, 2003, approximately 0.001% of the outstanding shares of the Equity Income 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 Spectrum Funds (Spectrum Funds) may invest. The Spectrum 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 Spectrum 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 Spectrum Funds. Expenses allocated under these agreements are reflected as shareholder servicing expense in the accompanying financial statements. For the six months ended June 30, 2003 the Equity Income class was allocated $1,029,000 of Spectrum Funds' expenses, of which $454,000 related to services provided by Price and $421,000 was payable at period-end. At June 30, 2003, approximately 7.1% of the outstanding shares of the Equity Income class were held by the Spectrum 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, trusts, and other accounts managed by Price Associates and/or its affiliates, and are not available to the public. The Reserve Funds pay no investment management fees. Distributions from the Reserve Funds to the fund for the six months ended June 30, 2003, totaled $2,266,000. Item 2. Code of Ethics. Not required at this time. Item 3. Audit Committee Financial Expert. Not required at this time. Item 4. Principal Accountant Fees and Services. Not required at this time. Item 5. Audit Committee of Listed Registrants. Not required at this time. Item 6. [Reserved] Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies. Not applicable. Item 8. [Reserved] Item 9. Controls and Procedures (a) The registrant's principal executive officer and principal financial officer have evaluated the registrant's disclosure controls and procedures within 90 days of this filing and have concluded that the registrant's disclosure controls and procedures were effective, as of that date, in ensuring that information required to be disclosed by the registrant in this Form N-CSR was recorded, processed, summarized, and reported timely. (b) The registrant's principal executive officer and principal financial officer are aware of no changes in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal half-year that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. Item 10. Exhibits. (a)(1) Not required at this time. (a)(2) Separate certifications by the registrant's principal executive officer and principal financial officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 and required by Rule 30a-2(a) under the Investment Company Act of 1940, are attached. (b) A certification by the registrant's principal executive officer and principal financial officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and required by Rule 30a-2(b) under the Investment Company Act of 1940, is attached. 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 Equity Income Fund By /s/ James S. Riepe James S. Riepe Principal Executive Officer Date August 13, 2003 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 August 13, 2003 By /s/ Joseph A. Carrier Joseph A. Carrier Principal Financial Officer Date August 12, 2003