-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Bpsx+/91E46ky/wcsRZhdq8P7U+uXP/hTd9/4EwAEIegs++QT37irYluRONnzyaI +aCf2/gv3RA9PPnxq4ARRA== 0000080248-05-000004.txt : 20050302 0000080248-05-000004.hdr.sgml : 20050302 20050302143816 ACCESSION NUMBER: 0000080248-05-000004 CONFORMED SUBMISSION TYPE: N-CSR PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20041231 FILED AS OF DATE: 20050302 DATE AS OF CHANGE: 20050302 EFFECTIVENESS DATE: 20050302 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PRICE T ROWE NEW HORIZONS FUND INC CENTRAL INDEX KEY: 0000080248 IRS NUMBER: 520791372 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: N-CSR SEC ACT: 1940 Act SEC FILE NUMBER: 811-00958 FILM NUMBER: 05653755 BUSINESS ADDRESS: STREET 1: 100 E PRATT ST CITY: BALTIMORE STATE: MD ZIP: 21202 BUSINESS PHONE: 4105472000 N-CSR 1 nhf.txt NEW HORIZONS FUND Item 1. Report to Shareholders DECEMBER 31, 2004 NEW HORIZONS 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 NEW HORIZONS FUND - -------------------------------------------------------------------------------- Fellow Shareholders A strong fourth quarter helped small-cap stocks and your fund provide robust returns in 2004, surpassing the broad market as measured by the Standard & Poor's 500 Stock Index. Small-cap stocks outpaced large-caps for the sixth straight year. Despite concerns over interest rates, inflation, the election, and conflict in the Middle East, investors ultimately chose to focus on solid progress in the economy and corporate earnings in driving stock prices higher. PERFORMANCE COMPARISON - -------------------------------------------------------------------------------- Periods Ended 12/31/04 6 Months 12 Months - -------------------------------------------------------------------------------- New Horizons Fund 9.84% 17.90% Russell 2000 Growth Index 8.16 14.31 Russell 2000 Index 10.83 18.33 Lipper Small-Cap Growth Funds Index 7.12 10.79 S&P 500 Stock Index 7.19 10.88 Your fund's gain of 9.84% for the six-month period was modestly lower than the broad Russell 2000 Index but exceeded the narrower Russell 2000 Growth Index benchmark and the Lipper index of small-cap growth funds, as shown in the table. For the year, your fund's 17.90% return also surpassed all indexes in the table except the Russell 2000. These results reflected continued market leadership by value-oriented stocks that are included in the Russell 2000 but are not part of your fund's investment mandate. In the final quarter, however, growth stocks edged value as technology and consumer shares were better performers. Over longer time periods, your fund has also performed well versus the indexes and its peer funds. As the table on page 11 shows, the fund's 13.23% annualized return for 10 years ended December 31 surpassed the relevant indexes as well as its Lipper peer group, and its returns of 4.26% and 17.90% for the five- and one-year periods, respectively, outpaced all but the Russell 2000. MARKET ENVIRONMENT After a lull in June, economic growth resumed during the second half at a more moderate pace but one that was healthy and above average. Job growth was positive but continued to lag the overall economy as productivity gains dampened new hiring. Consumer spending, however, remained at the high levels typical of the early stages of an economic recovery and was the engine powering overall growth. Business capital spending is starting to improve and usually revives in the later stages of the recovery. Corporate profits were exceptional in the second half and for the entire year on higher productivity and lower cost structures. As capital spending picks up, especially technology spending (the largest component), corporate profits should receive a second wind. Solid profits helped companies shore up their balance sheets, which bodes well for capital investment down the road. We were pleased to see renewed IPO activity in recent months featuring a large number of offerings of high-quality companies. The biggest surprise in the financial markets in 2004 was the stability of interest rates, especially given strong economic growth, a weak dollar, and federal deficits. Short-term rates rose modestly (especially in the second half), as the Federal Reserve kept its promise to raise rates at a measured pace. Long-term rates were largely unchanged and remained historically low, continuing to benefit financial and homebuilding companies, in particular. Despite much good news, numerous concerns weighed on investors' minds including geopolitical uncertainty, especially in Iraq; trade and budget deficits; and inflation fears stirred by rising commodity prices but largely contained by productivity gains and the change in Fed policy. Nevertheless, investors were able to look past these negatives to the economy's positive performance. Taking a closer look at the stock market, we have to conclude that small-cap stocks are in the later stages of outperformance versus large-caps, since 2004 was the sixth consecutive year of small-cap predominance and previous cycles have averaged about five years. Performance in the second half bounced back and forth, as small-caps underperformed in the third quarter but surged in the fourth to finish ahead of large-caps in both the six-month and one-year periods. SMALL-CAP VS. LARGE-CAP STOCK RETURNS - -------------------------------------------------------------------------------- 12/31/90- 12/31/93- 6/30/99- 12/31/93 6/30/99 12/31/04 - -------------------------------------------------------------------------------- Russell 2000 Index 105.58% 91.45% 52.79% S&P 500 Stock Index 54.56 230.31 -4.12 Small-cap valuations relative to large-caps are no longer at their usual discounts. Within small-caps, growth stocks edged value stocks in the fourth quarter, but value stocks maintained a significant advantage in the second half and for the full year--as they have over the last five years. Given this performance disparity, valuations of small-cap growth stocks relative to value stocks are very attractive compared with historical averages. In the early days of an economic recovery, small-cap growth stocks typically lead the stock market, but this has not happened in the current economic cycle. As a result, small-cap growth remains an appealing area of the market. SMALL-CAP STOCK RETURNS - -------------------------------------------------------------------------------- Periods Ended 12/31/04 6 Months 12 Months - -------------------------------------------------------------------------------- Russell 2000 Index 10.83% 18.33% Russell 2000 Growth Index 8.16 14.31 Russell 2000 Value Index 13.37 22.25 While small-caps may be near the end of their cycle, these cycles often have ended with significant outperformance and high valuation premiums relative to large companies. Currently, however, relative valuations of small-caps are in line with previous cycle peaks, or slightly lower, by most measures. Regardless of when the small-cap cycle ends, we expect the absolute performance of small-cap stocks to remain solid as they participate in overall stock market gains. PORTFOLIO REVIEW In a market led by value stocks, the best returns came from the energy, materials, and financial sectors, which seldom feature growth companies. In contrast, the technology and consumer sectors, which are often fertile areas for growth stocks, performed more modestly. Among our best contributors in the second half were consumer discretionary stocks, industrials and business services, and financials, while results were mixed in health care and technology--although the tech sector led the fund and the market in the fourth-quarter market turnaround. (See the Portfolio Highlights table following this letter.) The consumer discretionary sector included two of our top five contributors for the past six months, homebuilders Toll Brothers and Ryland Group, as home sales have been surprisingly strong due to low mortgage rates. Other key contributors were restaurant holdings (PF Chang's China Bistro and Rare Hospitality) and our media names (Catalina Marketing and XM Satellite Radio). The fund also benefited from companies leveraged to the improving economy in the industrials and business services area: machinery stocks Actuant (the fifth-best contributor) and Oshkosh Truck, as well as services stocks Resources Connection, Waste Connections, and Mobile Mini. (Please see the Portfolio of Investments for a complete listing of the fund's holdings and the amount each represents in the portfolio.) Though it is typically challenging to find financial companies that meet our growth expectations, recent additions in this area plus existing holdings were large contributors to performance in the second half, reflecting strength in the financial markets. Examples include asset managers Affiliated Managers and Legg Mason along with trust bank Investors Financial Services. Returns also benefited from gains in consumer finance holdings First Marblehead and Advance America (an initial public offering that we purchased in December) as well as niche bank UCBH. Performance from our technology stocks was mixed, with both strength and weakness in our software, IT services, and semiconductor holdings. Software companies McAfee, Kronos, Macromedia, and Activision contributed, while Red Hat and Magma Design detracted from performance. McAfee is a leader in the computer security industry, one of the fastest growing segments in the software market. Investors shied away from stable-growth IT services holdings at the end of the year, though RightNow Technologies and Global Payments aided results. Certegy and Skillsoft were weak following earnings disappointments. Within semiconductors, Tessera Technologies and Volterra Semiconductor boosted returns, while long-time positions in Analog Devices, Maxim, and Integrated Circuit were a drag on results. In the health care sector, health care services and biotechnology holdings hampered performance. Service provider Omnicare was the worst performer in the fund for the six months and the year, and positions in VCA Antech and Accredo also detracted. Omnicare, the largest provider of pharmaceuticals for nursing home patients, declined sharply during the third quarter as constraints on government reimbursement and competition from smaller firms hurt its pricing power. Although pricing concerns remain, the company possesses one of the most seasoned management teams in the industry and should be able to leverage its scale advantages over its competitors despite the difficult government reimbursement climate. Problems with biotech products were reflected in weak results for Onyx Pharmaceuticals, NPS Pharmaceuticals, and Neurocrine Biosciences. Among other sectors, notable contributors included telecommunications stock NII Holdings and dialysis provider Davita. Wireless telecommunications services holdings have been outstanding performers for the fund, and holdings such as NII Holdings, Nextel Partners, and Western Wireless are benefiting from strong subscriber growth. While we continue to expect good operational performance from the sector, we pared back our relatively large weighting. On the negative side, notable detractors included Multimedia Games, for-profit educator Apollo Group, and retailer Ann Taylor Stores. Apollo Group is the fund's largest holding and one of our most dynamic investments. The stock was weak, along with most education stocks, on regulatory concerns regarding incentive-based compensation for enrollment counselors. The situation has since been resolved, and Apollo's sophisticated recruiting effort remains a competitive advantage. Enrollment growth is strong in the for-profit education industry, which we continue to view as an attractive investment area. As you can see in the table, changes in sector weightings were modest in the second half and the year as a whole, and the sectors composing the top four remained the same. Most changes in the percentages reflected market fluctuations rather than major purchases or sales. SECTOR DIVERSIFICATION - -------------------------------------------------------------------------------- 12/31/03 6/30/04 12/31/04 - -------------------------------------------------------------------------------- Information Technology 21.0% 21.5% 22.1% Consumer Discretionary 22.4 20.1 20.4 Health Care 22.1 21.1 19.9 Industrials and Business Services 16.5 17.8 17.8 Financials 7.1 8.2 9.2 Energy 5.5 5.2 5.3 Telecommunication Services 3.0 4.2 3.8 Materials 1.0 1.2 1.4 Consumer Staples 0.9 0.3 - Utilities - - - Other and Reserves 0.5 0.4 0.1 - -------------------------------------------------------------------------------- Total 100.0% 100.0% 100.0% Historical weightings reflect current industry/sector classifications. Based on Net Assets During the second half, we added to our technology holdings in Internet-related companies as well as in software and semiconductors. We also took advantage of specific opportunities in financials, including CapitalSource, Advance America, and Infinity Property and Casualty. Some of our largest investments were in gaming equipment maker WMS Industries, Internet stock Sina, video gamer Activision, biotech Martek Biosciences, and retailer Pantry. Sales spanned several sectors. In the consumer discretionary area we sold radio stocks Westwood One and Radio One and restaurants CEC Entertainment and Ruby Tuesday. We continued to trim holdings in energy equipment and services that had performed well, and we also pared positions in health care services and equipment. The largest sales were Western Wireless, CEC Entertainment, Ruby Tuesday, Catalina Marketing, and Hewitt Associates (a larger-cap stock received in the Exult acquisition, which likewise was sold). OUTLOOK After a long run for small-cap stocks, we think a shift in market leadership toward large-caps is likely. Large-cap earnings growth has been surprisingly strong, due in part to continued weakness in the U.S. dollar, which benefits the earnings of export and multinational companies. The relative earnings strength of small-cap companies will determine whether [Graphic Omitted] NEW HORIZONS FUND P/E RATIO - -------------------------------------------------------------------------------- Dec-69 28.6 25 17.7 20.4 Dec-70 22.2 29.7 28 27.7 Dec-71 28.6 33.5 33.5 29.7 Dec-72 29.2 22.6 17.9 21.7 Dec-73 16.8 15.7 12.5 8.7 Dec-74 8.7 13.7 15.3 11.7 Dec-75 11.5 12.4 10.7 10.1 Dec-76 10.4 9 8.7 8.6 Dec-77 8.8 8.6 9.5 10.7 Dec-78 8.9 9.6 9 9.8 Dec-79 10.7 9.3 10.4 14.2 Dec-80 16.5 15.7 14.9 11.3 Dec-81 11.5 10.4 10.8 13.1 Dec-82 16.8 19.4 21.5 19.3 Dec-83 17.3 14.4 13.9 13.5 Dec-84 12.4 14.5 15 14 Dec-85 16.1 17.3 17.5 14.6 Dec-86 14.5 18.3 17.9 18.2 Dec-87 12.5 13.9 14.7 12.8 Dec-88 12.5 13 13.8 14.5 Dec-89 14.3 13.4 15 12 Dec-90 13.6 18.3 17.1 17.8 Dec-91 19.8 19.4 16.8 17 Dec-92 19.8 19 19.7 20.9 Dec-93 21.5 20 18.2 18.9 Dec-94 18.2 18.9 20.4 22.8 Dec-95 23.6 24.1 26.2 26.6 Dec-96 26.3 21.4 23.1 27.2 Dec-97 23.6 24.7 24.4 20.6 Dec-98 23.5 20.7 24.4 25.1 Dec-99 28.3 31.9 32.4 32.6 Dec-00 31.1 26.8 31.7 27.9 Dec-01 34.5 33.5 27 21 Dec-02 22.4 21.8 24.8 25 Dec-03 28.1 28.2 25.1 24 Dec-04 26 [Graphic Omitted] NEW HORIZONS FUND P/E RELATIVE TO THE S&P 500 P/E - -------------------------------------------------------------------------------- 12/69 1.57 1.43 1.27 1.28 12/70 1.31 1.62 1.63 1.63 12/71 1.8 1.99 2.11 1.97 12/72 1.9 1.67 1.46 1.67 12/73 1.47 1.39 1.19 1.13 12/74 1.04 1.25 1.29 1.16 12/75 1.17 1.14 1.03 1.04 12/76 1.07 0.94 1.02 1.05 12/77 1.11 1.18 1.22 1.29 12/78 1.17 1.28 1.18 1.2 12/79 1.32 1.37 1.28 1.63 12/80 1.88 1.89 1.94 1.66 12/81 1.53 1.53 1.54 1.7 12/82 1.89 2.11 2.17 2.05 12/83 1.86 1.6 1.62 1.52 12/84 1.35 1.42 1.35 1.27 12/85 1.3 1.26 1.15 1.05 12/86 1.02 1.1 1.13 1.14 12/87 1.01 1.09 1.2 1.12 12/88 1.14 1.12 1.12 1.08 12/89 1.01 0.99 1.05 0.96 12/90 1.01 1.2 1.17 1.15 12/91 1.19 1.23 1.06 1.06 12/92 1.2 1.14 1.2 1.25 12/93 1.34 1.32 1.26 1.29 12/94 1.37 1.32 1.34 1.44 12/95 1.49 1.48 1.58 1.58 12/96 1.5 1.2 1.2 1.3 12/97 1.2 1.1 1 1 12/98 0.9 0.8 0.9 1 12/99 1 1.2 1.3 1.4 12/00 1.4 1.3 1.4 1.3 12/01 1.5 1.5 1.4 1.3 12/02 1.3 1.4 1.4 1.4 12/03 1.6 1.6 1.5 1.48 12/04 1.5 Note: The fund's P/E ratio is an average, unweighted number based on 12-month forward earnings per share as estimated by the fund's investment manager at each quarter-end. they can continue to outperform their large-cap brethren. Value stocks also have enjoyed a long leadership run, but we expect investors to focus once again on companies with prospects for above-average earnings growth. This should be favorable for small-cap growth stocks, which have lagged within the small-cap universe. The New Horizons Fund P/E ratio (using 12-month forward earnings estimates) relative to that of the S&P 500 Stock Index rose slightly during 2004 to 1.50--near its highest level in the past 20 years. Therefore, it is hard to make a case that small-cap stocks look cheap relative to larger companies. However, small growth companies are more attractively valued than their small value peers, in our view, and we hope they will show better relative performance going forward. If the market extends its gains, as we believe it will, small-cap growth stocks and your fund should continue to generate solid returns. Respectfully submitted, John H. Laporte President of the fund and chairman of its Investment Advisory Committee January 24, 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, each fund's share price can fall because of weakness in the stock or bond markets, a particular industry, or specific holdings. Stock 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: Fund benchmarks that consist of a small number (10 to 30) of the largest mutual funds in a particular category as tracked by Lipper Inc. Price/earnings ratio (P/E): A valuation measure calculated by dividing the price of a stock by its current or projected earnings per share. This ratio gives investors an idea of how much they are paying for current or future earnings power. 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, representing approximately 7% of the Russell 3000's total market capitalization. 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. T. ROWE PRICE NEW HORIZONS FUND - -------------------------------------------------------------------------------- PORTFOLIO HIGHLIGHTS - -------------------------------------------------------------------------------- TWENTY-FIVE LARGEST HOLDINGS Percent of Net Assets 12/31/04 - -------------------------------------------------------------------------------- Apollo Group 4.6% Henry Schein 2.5 Toll Brothers 2.2 Davita 2.0 NII Holdings 1.8 - -------------------------------------------------------------------------------- Omnicare 1.8 Oshkosh Truck 1.4 O'Reilly Automotive 1.4 Laureate 1.3 Coventry Health Care 1.2 - -------------------------------------------------------------------------------- Actuant 1.1 Tuesday Morning 1.1 Station Casinos 1.1 Roper Industries 1.1 School Specialty 1.0 - -------------------------------------------------------------------------------- Ryland Group 1.0 PF Chang's China Bistro 1.0 Nextel Partners 1.0 UCBH Holdings 1.0 Kronos 0.9 - -------------------------------------------------------------------------------- Corporate Executive Board 0.9 Radian 0.9 Panera Bread 0.9 WMS Industries 0.9 Neurocrine Biosciences 0.9 - -------------------------------------------------------------------------------- Total 35.0% Note: Table excludes investments in the T. Rowe Price Reserve Investment Fund. T. ROWE PRICE NEW HORIZONS FUND - -------------------------------------------------------------------------------- PORTFOLIO HIGHLIGHTS - -------------------------------------------------------------------------------- CONTRIBUTIONS TO THE CHANGE IN NET ASSET VALUE PER SHARE 6 Months Ending 12/31/04 Best Contributors Worst Contributors - -------------------------------------------------------------------------------- Toll Brothers 24(cents) Omnicare -12(cents) NII Holdings 15 Multimedia Games 11 Davita 12 Apollo Group 7 Ryland Group 9 AnnTaylor Stores 6 Actuant 8 Red Hat 5 Catalina Marketing 8 Analog Devices 4 PF Chang's China Bistro 8 Maxim Integrated Products 4 F5 Networks 7 Integrated Circuit Systems 3 McAfee 7 SkillSoft 3 Henry Schein 7 ONYX Pharmaceuticals ** 3 - -------------------------------------------------------------------------------- Total 105(cents) Total -58(cents) 12 Months Ended 12/31/04 Best Contributors Worst Contributors - -------------------------------------------------------------------------------- Toll Brothers 26(cents) Omnicare -8(cents) NII Holdings 25 NPS Pharmaceuticals 7 Davita 21 Entercom Communications 6 Apollo Group 15 SkillSoft 5 Station Casinos 14 Multimedia Games 5 Laureate 13 Exult ** 4 Oshkosh Truck 10 Cox Radio 4 Actuant 10 Intersil Holding 4 University of Wilson Greatbatch Phoenix Online 9 Technologies 4 McAfee 9 Magma Design Automation 4 - -------------------------------------------------------------------------------- Total 152(cents) Total -51(cents) ** Position eliminated T. ROWE PRICE NEW HORIZONS 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] NEW HORIZONS FUND - -------------------------------------------------------------------------------- As of 12/31/04 New Horizons Fund $ 34,643 Russell 2000 Growth Index $ 19,888 Lipper Small-Cap Growth Funds Index $ 26,805 New Horizons Russell 2000 Lipper Small-Cap Fund Growth Index Growth Funds Index 12/94 $ 10,000 $ 10,000 $ 10,000 12/95 15,544 13,104 13,650 12/96 18,192 14,580 15,977 12/97 19,970 16,468 17,771 12/98 21,218 16,670 17,942 12/99 28,118 23,854 28,917 12/00 27,595 18,503 26,531 12/01 26,811 16,796 23,090 12/02 19,679 11,713 16,712 12/03 29,382 17,399 24,194 12/04 34,643 19,888 26,805 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. Periods Ended 12/31/04 1 Year 5 Years 10 Years - -------------------------------------------------------------------------------- New Horizons Fund 17.90% 4.26% 13.23% Russell 2000 Growth Index 14.31 -3.57 7.12 Russell 2000 Index 18.33 6.61 11.54 Lipper Small-Cap Growth Funds Index 10.79 -1.51 10.36 S&P 500 Stock Index 10.88 -2.30 12.07 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 NEW HORIZONS 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. Actual Expenses The first line of the following table ("Actual") provides information about actual account values and actual expenses. 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 New Horizons Fund - -------------------------------------------------------------------------------- Beginning Ending Expenses Paid Account Value Account Value During Period* 7/1/04 12/31/04 7/1/04 to 12/31/04 - -------------------------------------------------------------------------------- Actual $1,000.00 $1,098.40 $4.54 Hypothetical (assumes 5% return before expenses) 1,000.00 1,020.81 4.37 *Expenses are equal to the fund's annualized expense ratio for the six-month period (0.86%), 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. T. ROWE PRICE NEW HORIZONS FUND - -------------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS For a share outstanding throughout each period - -------------------------------------------------------------------------------- Year Ended 12/31/04 12/31/03 12/31/02 12/31/01 12/31/00 NET ASSET VALUE Beginning of period $ 24.80 $ 16.61 $ 22.63 $ 23.89 $ 27.53 Investment activities Net investment income (loss) (0.18) (0.15) (0.17) (0.17) (0.13) Net realized and unrealized gain (loss) 4.62 8.34 (5.85) (0.53) (0.37) Total from investment activities 4.44 8.19 (6.02) (0.70) (0.50) Distributions Net realized gain - - - (0.56) (3.14) NET ASSET VALUE End of period $ 29.24 $ 24.80 $ 16.61 $ 22.63 $ 23.89 ------------------------------------------------ Ratios/Supplemental Data Total return^ 17.90% 49.31% (26.60)% (2.84)% (1.86)% Ratio of total expenses to average net assets 0.87% 0.91% 0.92% 0.91% 0.88% Ratio of net investment income (loss) to average net assets (0.67)% (0.75)% (0.81)% (0.77)% (0.51)% Portfolio turnover rate 25.4% 28.6% 23.7% 27.4% 47.2% Net assets, end of period (in millions) $ 5,741 $ 4,955 $ 3,359 $ 5,583 $ 6,122 ^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 NEW HORIZONS FUND - -------------------------------------------------------------------------------- December 31, 2004 PORTFOLIO OF INVESTMENTS (1) Shares Value - -------------------------------------------------------------------------------- (Cost and value in $ 000s) COMMON STOCKS & WARRANTS 99.8% CONSUMER DISCRETIONARY 20.3% Hotels, Restaurants & Leisure 5.8% Great Wolf Resorts * 281,500 6,289 Multimedia Games *! 2,250,000 35,460 Panera Bread, Class A * 1,250,000 50,400 PF Chang's China Bistro * 1,000,000 56,350 Rare Hospitality International * 1,125,000 35,843 Sonic * 1,000,000 30,500 Station Casinos 1,175,000 64,249 Texas Roadhouse, Class A * 77,000 2,275 WMS Industries * 1,500,000 50,310 331,676 Household Durables 3.7% Ryland Group 1,000,000 57,540 Toll Brothers * 1,800,000 123,498 WCI Communities * 240,000 7,056 Yankee Candle Company * 700,000 23,226 211,320 Internet & Catalog Retail 0.2% priceline.com * 500,000 11,795 11,795 Media 3.9% ADVO 1,125,000 40,106 Catalina Marketing 1,100,000 32,593 Cox Radio, Class A * 1,000,000 16,480 Entercom Communications * 1,000,000 35,890 Radio One, Class D * 1,900,000 30,628 Regent Communications * 1,750,000 9,275 Spanish Broadcasting, Class A *! 2,500,000 26,400 TiVo * 800,000 4,696 XM Satellite Radio Holdings, Class A * 850,000 31,977 228,045 Multiline Retail 1.1% Tuesday Morning *! 2,100,000 64,323 64,323 Specialty Retail 5.6% AC Moore Arts & Crafts *! 1,000,000 28,810 AnnTaylor Stores * 1,500,000 32,295 Christopher & Banks ! 2,000,000 36,900 Hot Topic * 750,000 12,892 Linens 'n Things * 600,000 14,880 O'Reilly Automotive * 1,800,000 81,090 Pantry * 700,000 21,063 Petco * 1,200,000 47,376 Select Comfort * 250,000 4,485 The Finish Line, Class A ! 2,200,000 40,260 320,051 Total Consumer Discretionary 1,167,210 ENERGY 5.3% Energy Equipment & Services 4.5% BJ Services 300,000 13,962 Cooper Cameron * 250,000 13,453 FMC Technologies * 1,500,000 48,300 Grant Prideco * 1,500,000 30,075 Helmerich & Payne 800,000 27,232 Hydril * 531,000 24,166 Key Energy Services * 1,500,000 17,700 National Oilwell * 750,000 26,467 Smith International * 200,000 10,882 Tidewater 500,000 17,805 Varco International * 400,000 11,660 W-H Energy Services * 784,000 17,530 259,232 Oil & Gas 0.8% Bill Barrett * 136,000 4,351 Cimarex Energy * 550,000 20,845 Encore Acquisition * 620,000 21,644 46,840 Total Energy 306,072 FINANCIALS 9.2% Capital Markets 3.0% Affiliated Managers Group * 531,000 35,970 Greenhill 250,000 7,175 Investors Financial Services 900,000 44,982 Legg Mason 525,000 38,461 National Financial Partners 550,000 21,340 Waddell & Reed Financial, Class A 950,000 22,696 170,624 Commercial Banks 1.6% Boston Private Financial 350,000 9,860 Signature Bank * 83,400 2,699 Silicon Valley Bancshares * 266,000 11,922 Texas Capital Bancshares * 600,000 12,972 UCBH Holdings 1,200,000 54,984 92,437 Consumer Finance 1.0% Advance America Cash Advance Centers * 918,000 21,022 First Marblehead * 450,000 25,313 Moneygram International 400,000 8,456 54,791 Diversified Financial Services 0.8% CapitalSource * 1,800,000 46,206 46,206 Insurance 1.7% Direct General 700,000 22,470 Hilb Rogal and Hobbs 209,600 7,596 Hub International 400,000 7,364 Infinity Property & Casualty 900,000 31,680 MaxRe Capital 750,000 15,997 Scottish Annuity & Life 500,000 12,950 98,057 Thrifts & Mortgage Finance 1.1% Delta Financial 1,000,000 10,300 Radian 1,000,000 53,240 63,540 Total Financials 525,655 HEALTH CARE 19.9% Biotechnology 7.1% Abgenix * 950,000 9,823 Acadia Pharmaceuticals * 700,000 4,739 Alexion Pharmaceutical * 764,000 19,253 Alkermes * 1,700,000 23,953 Amylin Pharmaceuticals * 575,000 13,432 BioCryst Pharmaceuticals * 300,000 1,734 Cephalon * 699,500 35,591 Cubist Pharmaceuticals * 1,000,000 11,830 Cytogen * 400,000 4,608 Cytokinetics * 150,000 1,538 deCode Genetics * 1,600,000 12,496 Diversa * 1,400,000 12,236 Dynavax Technologies * 400,000 3,200 Encysive Pharmaceuticals * 400,000 3,972 EXACT Sciences * 400,000 1,528 Exelixis * 1,350,000 12,825 Eyetech Pharmaceuticals * 300,000 13,650 Human Genome Sciences * 800,000 9,616 Idenix Pharmaceuticals * 375,000 6,431 Incyte Genomics * 275,000 2,747 Keryx Biopharmaceuticals *! 275,000 3,182 Kosan Biosciences * 350,000 2,426 Lexicon Genetics * 1,000,000 7,755 Martek Biosciences * 350,000 17,920 Memory Pharmaceuticals * 500,000 2,659 Momenta Pharmaceuticals * 800,000 5,648 Myogen *! 715,000 5,770 Myogen, Warrants, 9/29/09 *+(euro)! 113,000 31 Myriad Genetics * 1,000,000 22,510 Neurocrine Biosciences * 1,000,000 49,300 NPS Pharmaceuticals * 1,200,000 21,936 Protein Design Labs * 175,000 3,615 Rigel Pharmaceuticals * 400,000 9,768 Senomyx * 1,000,000 8,280 Serologicals * 250,000 5,530 Transkaryotic Therapies * 350,000 8,886 Trimeris * 625,000 8,856 Vertex Pharmaceuticals * 675,000 7,135 Vicuron Pharmaceuticals * 425,000 7,399 ViroPharma * 509,000 1,654 XOMA * 425,000 1,101 406,563 Health Care Equipment & Supplies 1.1% Advanced Neuromodulation Systems * 150,000 5,919 Analogic 120,000 5,375 Conor Medsystems * 125,000 1,731 CTI Molecular Imaging * 250,000 3,548 Endologix *! 682,500 4,661 EPIX Pharmaceuticals * 450,000 8,059 Integra LifeSciences * 544,100 20,094 Regeneration Technologies * 200,000 2,096 Symmetry Medical * 75,000 1,579 Wilson Greatbatch Technologies * 400,000 8,968 62,030 Health Care Providers & Services 9.8% Advisory Board * 500,000 18,440 Community Health System * 1,000,000 27,880 Coventry Health Care * 1,275,000 67,677 Davita * 2,850,000 112,661 HealthStream *! 2,405,000 6,445 Henry Schein * 2,100,000 146,244 LabOne * 300,000 9,612 Omnicare 3,000,000 103,860 Symbion * 451,828 9,976 United Surgical Partners International * 350,000 14,595 VCA Antech * 1,600,000 31,360 WellChoice * 300,000 16,020 564,770 Pharmaceuticals 1.9% Able Laboratories * 700,000 15,925 Atherogenics * 850,000 20,026 Inspire Pharmaceuticals * 1,200,000 20,124 Medicines Company * 1,000,000 28,800 Nektar Therapeutics * 300,000 6,072 Noven Pharmaceuticals * 375,000 6,398 Taro Pharmaceuticals * 210,000 7,146 Theravance * 57,800 1,035 Theravance (IPO restricted shares) *+(euro) 65,000 1,047 Theravance (restricted shares), Series D1 *+(euro) 331,183 5,335 111,908 Total Health Care 1,145,271 INDUSTRIALS & BUSINESS SERVICES 17.8% Aerospace & Defense 1.9% Armor Holdings * 775,000 36,440 HEICO, Class A 412,600 7,134 Mercury Computer Systems * 500,000 14,840 MTC Technologies * 200,000 6,714 Triumph Group * 594,100 23,467 United Defense Industries * 435,000 20,554 109,149 Air Freight & Logistics 0.2% EGL * 300,000 8,967 8,967 Commercial Services & Supplies 11.5% Apollo Group, Class A * 3,265,270 263,540 Bright Horizons Family Solutions * 270,915 17,544 Charles River Associates * 45,700 2,137 Corporate Executive Board 798,800 53,472 Education Management * 1,400,000 46,214 First Advantage, Class A * 283,700 5,787 Huron Consulting Group * 110,000 2,442 Intersections * 550,000 9,488 Laureate * 1,650,000 72,749 LECG * 400,000 7,460 Mobile Mini ! 1,100,000 36,344 Resources Connection * 498,000 27,046 School Specialty *! 1,500,000 57,840 Tetra Tech * 900,000 15,066 Waste Connections * 1,350,100 46,241 663,370 Industrial Conglomerates 1.1% Roper Industries 1,000,000 60,770 60,770 Machinery 2.6% Actuant, Class A *! 1,265,000 65,970 Oshkosh Truck 1,200,000 82,056 148,026 Trading Companies & Distributors 0.5% Interline Brands * 425,000 7,476 MSC Industrial Direct, Class A 650,000 23,387 30,863 Total Industrials & Business Services 1,021,145 INFORMATION TECHNOLOGY 22.1% Communications Equipment 1.1% ADTRAN 800,000 15,312 F5 Networks * 350,000 17,052 Harmonic * 800,000 6,672 Packeteer * 800,000 11,560 Tekelec * 500,000 10,220 60,816 Computers & Peripherals 0.5% Emulex * 1,550,000 26,102 26,102 Electronic Equipment & Instruments 1.0% Cogent * 150,000 4,950 Daktronics * 100,000 2,489 Digital Theater Systems * 516,900 10,405 Molex 100,000 3,000 National Instruments 500,000 13,625 Newport * 475,000 6,698 Orbotech * 44,300 938 Trimble Navigation * 550,000 18,172 60,277 Internet Software & Services 1.8% Autobytel * 1,500,000 9,060 CNET Networks * 1,350,000 15,160 Digital Insight * 1,350,000 24,840 HouseValues * 600,000 9,012 MatrixOne * 1,250,000 8,187 Sina * 850,000 27,251 Sonicwall * 300,000 1,896 The Knot *! 1,350,000 6,818 WebSideStory * 200,000 2,486 104,710 IT Services 2.5% BISYS Group * 1,300,000 21,385 Certegy 1,250,000 44,412 Global Payments 500,000 29,270 Maximus * 350,000 10,892 META Group ! 386,100 3,784 Paychex 100,000 3,408 RightNow Technologies * 368,800 5,956 SkillSoft ADR * 3,500,000 19,775 SRA International, Class A * 100,000 6,420 145,302 Semiconductor & Semiconductor Equipment 5.9% Advanced Energy Industries * 800,000 7,304 Altera * 600,000 12,420 AMIS Holdings * 1,424,075 23,526 Analog Devices 750,000 27,690 Atheros Communications * 500,000 5,125 ATMI * 1,084,300 24,429 Cabot Microelectronics * 300,000 12,015 Cognex 250,000 6,975 Credence Systems * 1,000,000 9,150 Cymer * 250,000 7,385 Cypress Semiconductor * 550,000 6,452 Integrated Circuit Systems * 1,200,000 25,104 Intersil Holding, Class A 1,100,000 18,414 Intevac * 720,000 5,443 Lattice Semiconductor * 1,200,000 6,840 Linear Technology 200,000 7,752 Maxim Integrated Products 750,000 31,792 Micrel * 725,000 7,990 Microsemi * 550,000 9,548 MKS Instruments * 600,000 11,130 PDF Solutions * 426,700 6,874 PMC-Sierra * 700,000 7,875 PortalPlayer * 40,000 987 Semtech * 850,000 18,589 Tessera Technologies * 400,000 14,884 Volterra Semiconductor * 283,123 6,273 Xilinx 500,000 14,825 336,791 Software 9.3% Activision * 1,156,100 23,330 Actuate * 100,000 255 Agile Software *! 3,000,000 24,510 Altiris * 675,000 23,915 Blackbaud * 59,703 874 Business Objects ADR * 350,000 8,869 Cadence Design Systems * 500,000 6,905 Concord Communications * 675,000 7,479 Convera *! 1,500,000 6,990 FactSet Research Systems 500,000 29,220 FileNet * 1,025,000 26,404 Informatica * 3,350,000 27,202 Internet Security Systems * 200,000 4,650 Jack Henry & Associates 1,625,000 32,354 Kronos * 1,050,000 53,686 Macromedia * 1,150,000 35,788 Magma Design Automation * 1,400,000 17,584 McAfee * 1,000,000 28,930 Mercury Interactive * 650,000 29,607 Motive * 754,700 8,588 Nassda * 1,000,000 6,900 NetIQ * 2,100,000 25,641 Open Solutions * 323,600 8,401 Phase Forward * 500,000 4,085 Quest Software * 800,000 12,760 Red Hat * 1,450,000 19,358 RSA Security * 725,000 14,544 Salesforce.com * 500,000 8,470 TALX Corporation 550,000 14,185 THQ * 50,000 1,147 Verisity * 175,000 1,435 Verity * 1,450,000 19,024 533,090 Total Information Technology 1,267,088 MATERIALS 1.4% Chemicals 0.7% Airgas 400,000 10,604 Symyx Technologies * 1,000,000 30,080 40,684 Metals & Mining 0.7% Steel Dynamics 1,000,000 37,880 37,880 Total Materials 78,564 TELECOMMUNICATION SERVICES 3.8% Diversified Telecommunication Services 0.0% Arbinet Holdings * 45,000 1,118 Callwave * 95,400 1,473 2,591 Wireless Telecommunication Services 3.8% Crown Castle International * 1,000,000 16,640 Nextel Partners, Class A * 2,850,000 55,689 NII Holdings, Class B * 2,225,000 105,577 Western Wireless, Class A * 650,000 19,045 Wireless Facilities * 2,000,000 18,880 215,831 Total Telecommunication Services 218,422 Total Miscellaneous Common Stocks (s.) 0.0% 2,161 Total Common Stocks & Warrants (Cost $3,418,405) 5,731,588 CONVERTIBLE PREFERRED STOCKS 0.0% HEALTH CARE 0.0% Health Care Equipment & Supplies 0.0% Control Delivery Systems, Series A *+(euro) 74,432 1,000 Total Convertible Preferred Stocks (Cost $4,000) 1,000 SHORT-TERM INVESTMENTS 1.6% Money Market Fund 1.6% T. Rowe Price Reserve Investment Fund, 2.28% #! 89,845,376 89,845 Total Short-Term Investments (Cost $89,845) 89,845 Total Investments in Securities 101.4% of Net Assets (Cost $3,512,250) $5,822,433 ---------- (1) Denominated in U.S. dollars unless otherwise noted # Seven-day yield * Non-income producing (s.) The identity of certain securities has been concealed to protect the fund while it completes a purchase or selling program for the securities. (euro) Valued by the T. Rowe Price Valuation Committee, established by the fund's Board of Directors ADR American Depository Receipts - -------------------------------------------------------------------------------- !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 - -------------------------------------------------------------------------------- AC Moore Arts & Crafts $ 3,197 $ - $ - $28,810 $ * Actuant 4,767 627 - 65,970 43,440 Agile Software 27,311 - - 24,510 - Christopher & Banks - - 320 36,900 39,060 Convera - - - 6,990 4,842 Duane Reade - 57,650 - - 35,532 Endologix 3,477 - - 4,661 - Health Stream - - - 6,445 6,253 Keryx Biopharmaceuticals 2,750 - - 3,182 - META Group - 10,228 - 3,784 6,300 Mobile Mini - - - 36,344 21,692 Multimedia Games 11,430 2,820 - 35,460 35,963 Myogen 5,436 - - 5,770 - Myogen, Warrants 9/29/09 14 - - 31 - School Specialty - - - 57,840 51,015 Spanish Broadcasting 5,130 - - 26,400 21,000 The Finish Line 8,491 1,499 114 40,260 * The Knot - - - 6,818 4,921 Tuesday Morning - 7,117 - 64,323 75,625 Ultimate Electronics - 17,453 - - 6,104 T. Rowe Price Reserve Investment Fund, 2.28% ** ** 578 89,845 12,340 Totals $ 1,012 $544,343 $364,087 ----------------------------- * The issuer was not considered an affiliated company at December 31, 2003. ** Purchase and sale information not shown for cash management funds. - -------------------------------------------------------------------------------- +Restricted Securities ($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 $7,413 and represents 0.1% of net assets. Acquisition Acquisition Description Date Cost - ------------------------------------------ ----------- ----------- Control Delivery Systems, Series A 8/9/00 $ 4,000 Myogen, Warrants, 9/29/09 2/29/04 14 Theravance (IPO restricted shares) 10/6/04 1,040 Theravance (restricted shares), Series D1 10/6/04 4,620 Totals $ 9,674 ------------ 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 NEW HORIZONS 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 $401,947) $ 544,343 Non-affiliated companies (cost $3,110,303) 5,278,090 Total investments in securities 5,822,433 Other assets 21,179 Total assets 5,843,612 Liabilities Total liabilities 102,694 NET ASSETS $ 5,740,918 --------------- Net Assets Consist of: Undistributed net realized gain (loss) $ (48,977) Net unrealized gain (loss) 2,310,183 Paid-in-capital applicable to 196,360,144 shares of $1.00 par value capital stock outstanding; 300,000,000 shares authorized 3,479,712 NET ASSETS $ 5,740,918 --------------- NET ASSET VALUE PER SHARE $ 29.24 --------------- The accompanying notes are an integral part of these financial statements. T. ROWE PRICE NEW HORIZONS FUND - -------------------------------------------------------------------------------- STATEMENT OF OPERATIONS - -------------------------------------------------------------------------------- ($ 000s) Year Ended 12/31/04 Investment Income (Loss) Dividend income $ 10,375 Expenses Investment management 34,850 Shareholder servicing 10,081 Custody and accounting 275 Prospectus and shareholder reports 148 Legal and audit 100 Registration 66 Directors 12 Miscellaneous 45 Total expenses 45,577 Expenses paid indirectly (6) Net expenses 45,571 Net investment income (loss) (35,196) Realized and Unrealized Gain (Loss) Net realized gain (loss) Affiliated securities (35,794) Non-affiliated securities 242,340 Net realized gain (loss) 206,546 Change in net unrealized gain (loss) on securities 706,297 Net realized and unrealized gain (loss) 912,843 INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS $ 877,647 --------------- The accompanying notes are an integral part of these financial statements. T. ROWE PRICE NEW HORIZONS 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) $ (35,196) $ (30,379) Net realized gain (loss) 206,546 115,336 Change in net unrealized gain (loss) 706,297 1,545,443 Increase (decrease) in net assets from operations 877,647 1,630,400 Capital share transactions * Shares sold 924,288 794,501 Shares redeemed (1,016,093) (829,181) Increase (decrease) in net assets from capital share transactions (91,805) (34,680) Net Assets Increase (decrease) during period 785,842 1,595,720 Beginning of period 4,955,076 3,359,356 End of period $ 5,740,918 $ 4,955,076 ----------- ----------- (Including undistributed net investment income of $0 at 12/31/04 and $0 at 12/31/03) *Share information Shares sold 35,289 38,617 Shares redeemed (38,713) (41,135) Increase (decrease) in shares outstanding (3,424) (2,518) The accompanying notes are an integral part of these financial statements. T. ROWE PRICE NEW HORIZONS FUND - -------------------------------------------------------------------------------- December 31, 2004 NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES T. Rowe Price New Horizons 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 commenced operations on June 3, 1960. The fund seeks long-term capital growth by investing primarily in common stocks of small, rapidly growing companies. 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. Investments in mutual funds are valued at the mutual fund's closing net asset value per share on the day of valuation. 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. 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 $249,000 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. Dividends received from mutual fund investments are reflected as dividend income; capital gain distributions are reflected as realized gain/loss. Dividend income and capital gain distributions are recorded on the ex-dividend date. Investment transactions are accounted for on the trade date. Realized gains and losses are reported on the identified cost basis. Distributions to shareholders are recorded on the ex-dividend date. Income distributions are declared and paid on an annual basis. Capital gain distributions, if any, are 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. Other Purchases and sales of portfolio securities, other than short-term securities, aggregated $1,328,086,000 and $1,431,053,000, 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. There were no distributions in the year ended December 31, 2004. At December 31, 2004, the tax-basis components of net assets were as follows: - -------------------------------------------------------------------------------- Unrealized appreciation $ 2,598,060,000 Unrealized depreciation (316,514,000) Net unrealized appreciation (depreciation) 2,281,546,000 Capital loss carryforwards (20,340,000) Paid-in capital 3,479,712,000 Net assets $ 5,740,918,000 ---------------- Pursuant to federal income tax regulations applicable to investment companies, the fund has elected to treat net capital losses realized between November 1 and December 31 of each year as occurring on the first day of the following tax year. Consequently, $28,637,000 of realized losses reflected in the accompanying financial statements will not be recognized for tax purposes until 2005. The fund intends to retain realized gains to the extent of available capital loss carryforwards for federal income tax purposes. During the year ended December 31, 2004, the fund utilized $228,067,000 of capital loss carryforwards. As of December 31, 2004, the fund had $20,340,000 of capital loss carryforwards that expire in 2010. 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 the current net operating loss. Results of operations and net assets were not affected by these reclassifications. - -------------------------------------------------------------------------------- Undistributed net investment income $ 35,196,000 Paid-in capital (35,196,000) At December 31, 2004, the cost of investments for federal income tax purposes was $3,540,887,000. NOTE 4 - RELATED PARTY TRANSACTIONS The fund is managed by T. Rowe Price Associates, Inc. (the manager or Price Associates), a wholly owned subsidiary of T. Rowe Price Group, Inc. The investment management agreement between the fund and the manager provides for an annual investment management fee, which is computed daily and paid monthly. The fee consists of an individual fund fee, equal to 0.35% of the fund's average daily net assets, and the fund's pro-rata share of a group fee. The group fee is calculated based on the combined net assets of certain mutual funds sponsored by Price Associates (the group) applied to a graduated fee schedule, with rates ranging from 0.48% for the first $1 billion of assets to 0.295% for assets in excess of $120 billion. The fund's portion of the group fee is determined by the ratio of its average daily net assets to those of the group. At December 31, 2004, the effective annual group fee rate was 0.31%, and investment management fee payable totaled $3,201,000. In addition, the fund has entered into service agreements with Price Associates and two wholly owned subsidiaries of Price Associates (collectively, Price). Price Associates computes the daily share price and maintains the financial records of the fund. T. Rowe Price Services, Inc., provides shareholder and administrative services in its capacity as the fund's transfer and dividend disbursing agent. T. Rowe Price Retirement Plan Services, Inc., provides subaccounting and recordkeeping services for certain retirement accounts invested in the fund. For the year ended December 31, 2004, expenses incurred pursuant to these service agreements were $84,000 for Price Associates, $1,774,000 for T. Rowe Price Services, Inc., and $5,513,000 for T. Rowe Price Retirement Plan Services, Inc. At period-end, a total of $620,000 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 $28,000 for shareholder servicing costs related to the college savings plans, of which $20,000 was for services provided by Price and less than $1,000 was payable at period-end. At December 31, 2004, approximately 1.1% of the outstanding shares of the fund 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 a special servicing agreement, 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 this agreement are reflected as shareholder servicing expense in the accompanying financial statements. For the year ended December 31, 2004, the fund was allocated $744,000 of Spectrum Funds' expenses, of which $537,000 related to services provided by Price and $38,000 was payable at period-end. At December 31, 2004, approximately 6.9% of the outstanding shares of the fund were held by the Spectrum 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 188,747 shares of the fund, representing less than 1% of the fund's net assets. T. ROWE PRICE NEW HORIZONS FUND - -------------------------------------------------------------------------------- REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM - -------------------------------------------------------------------------------- To the Board of Directors and Shareholders of T. Rowe Price New Horizons 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 New Horizons 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, provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP Baltimore, Maryland February 11, 2005 T. ROWE PRICE NEW HORIZONS FUND - -------------------------------------------------------------------------------- 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 NEW HORIZONS 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 Year Elected * and Directorships of Other Public Companies Anthony W. Deering Director, Chairman of the Board, President, and (1945) Chief Executive Officer, The Rouse Company, real 2001 estate developers; Director, Mercantile Bank (4/03 to present) Donald W. Dick, Jr. Principal, EuroCapital Advisors, LLC, an (1943) acquisition and management advisory firm 1994 David K. Fagin Director, Golden Star Resources Ltd., Canyon (1938) Resources Corp. (5/00 to present), and Pacific 1988 Rim Mining Corp. (2/02 to present); Chairman and President, Nye Corp. Karen N. Horn Managing Director and President, Global Private (1943) Client Services, Marsh Inc. (1999-2003); Managing 2003 Director 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, (1934) Inc., consulting environmental and civil engineers 2001 John G. Schreiber Owner/President, Centaur Capital Partners, Inc., a (1946) real estate investment company; Partner, 2001 Blackstone Real 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 Price (1945) Group, Inc.; President, New Horizons Fund 1988 [15] James S. Riepe Director and Vice President, T. Rowe Price; Vice (1943) Chairman of the Board, Director, and Vice 1983 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, New Horizons 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) Kennard W. Allen (1977) Vice President, T. Rowe Price; formerly Vice President, New Horizons Fund Equity Research Intern, Tonge Investment Advisors (to 2000); student, Colby College (to 2000) Francisco Alonso (1978) Vice President, T. Rowe Price and Vice President, New Horizons Fund T. Rowe Price Group, Inc. P. Robert Bartolo, CPA (1972) Vice President, T. Rowe Price; formerly Vice President, New Horizons Fund intern, T. Rowe Price (to 2001) Brian W.H. Berghuis, CFA (1958) Vice President, T. Rowe Price and Vice President, New Horizons Fund T. Rowe Price Group, Inc. Christopher A. Berrier (1977) Vice President, T. Rowe Price Vice President, New Horizons Fund Unless otherwise noted, officers have been employees of T. Rowe Price or T. Rowe Price International for at least five years. Stephen V. Booth, CPA (1961) Vice President, T. Rowe Price, T. Rowe Vice President, New Horizons Fund Price Group, Inc., and T. Rowe Price Trust Company Brace C. Brooks, CFA (1967) Vice President, T. Rowe Price and Vice President, New Horizons Fund T. Rowe Price Group, Inc. Christopher W. Carlson (1967) Vice President, T. Rowe Price and Vice President, New Horizons Fund T. Rowe Price Group, Inc. Joseph A. Carrier (1960) Vice President, T. Rowe Price, T. Rowe Treasurer, New Horizons Fund Price Group, Inc., T. Rowe Price Investment Services, Inc., and T. Rowe Price Trust Company Hugh M. Evans III, CFA (1966) Vice President, T. Rowe Price and Vice President, New Horizons Fund T. Rowe Price Group, Inc. Joseph B. Fath, CPA (1971) Vice President, T. Rowe Price; formerly Vice President, New Horizons Fund intern, T. Rowe Price (to 2001); Chief Financial Officer and cofounder, Broadform, Inc. (to 2000) Roger L. Fiery III, CPA (1959) Vice President, T. Rowe Price, T. Rowe Vice President, New Horizons 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 New Horizons 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, New Horizons Fund T. Rowe Price Trust Company Francies W. Hawks (1944) Assistant Vice President, T. Rowe Price Assistant Vice President, New Horizons Fund Henry H. Hopkins (1942) Director and Vice President, T. Rowe Vice President, New Horizons 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. Unless otherwise noted, officers have been employees of T. Rowe Price or T. Rowe Price International for at least five years. Kris H. Jenner, M.D., D. Phil. (1962) Vice President, T. Rowe Price and Vice President, New Horizons Fund T. Rowe Price Group, Inc. Patricia B. Lippert (1953) Assistant Vice President, T. Rowe Price Secretary, New Horizons Fund and T. Rowe Price Investment Services, Inc. Jay S. Markowitz, M.D. (1962) Vice President, T. Rowe Price and Vice President, New Horizons Fund T. Rowe Price Group, Inc.; formerly Transplant Surgeon and Assistant Professor of Surgery, Johns Hopkins University School of Medicine (to 2001) Timothy E. Parker (1974) Vice President, T. Rowe Price and Vice President, New Horizons Fund T. Rowe Price Group, Inc.; formerly student, Darden Graduate School, University of Virginia (to 2001); Financial Analyst, Robert W. Baird & Co., Inc. (to 1999) Charles G. Pepin (1966) Vice President, T. Rowe Price and Vice President, New Horizons Fund T. Rowe Price Group, Inc. Jeffrey Rottinghaus, CPA (1970) Vice President, T. Rowe Price and Vice President, New Horizons Fund T. Rowe Price Group, Inc.; formerly student, the Wharton School, University of Pennsylvania (to 2001); Information Technology Consultant, Kelly-Lewey & Associates (to 1999) Michael F. Sola, CFA (1969) Vice President, T. Rowe Price and Vice President, New Horizons Fund T. Rowe Price Group, Inc. John F. Wakeman (1962) Vice President, T. Rowe Price and Vice President, New Horizons Fund T. Rowe Price Group, Inc. Julie L. Waples (1970) Vice President, T. Rowe Price Vice President, New Horizons Fund R. Candler Young (1971) Vice President, T. Rowe Price and Vice President, New Horizons Fund T. Rowe Price Group, Inc. Wenhua Zhang, CFA, CPA (1970) Vice President, T. Rowe Price and Vice President, New Horizons Fund T. Rowe Price Group, Inc.; formerly student, the Wharton School, University of Pennsylvania (to 2001); Associate, Swiss Reinsurance Company (to 1999) 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 $12,790 $14,823 Audit-Related Fees 1,801 912 Tax Fees 3,468 3,850 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 New Horizons 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 EX-99.CERT 2 ex-99cert.txt 302 CERTIFICATIONS Item 12(a)(2). CERTIFICATIONS I, James S. Riepe, certify that: 1. I have reviewed this report on Form N-CSR of T. Rowe Price New Horizons Fund; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in rule 30a-3(c) under the Investment Company Act of 1940) and internal control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the second fiscal quarter of the period covered by this report that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: February 18, 2005 /s/ James S. Riepe --------------------------- James S. Riepe Principal Executive Officer CERTIFICATIONS I, Joseph A. Carrier, certify that: 1. I have reviewed this report on Form N-CSR of T. Rowe Price New Horizons Fund; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in rule 30a-3(c) under the Investment Company Act of 1940) and internal control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the second fiscal quarter of the period covered by this report that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: February 18, 2005 /s/ Joseph A. Carrier --------------------------- Joseph A. Carrier Principal Financial Officer EX-99.CODE ETH 3 ex-99_codeeth.txt CODE OF ETHICS Code of Ethics for Principal Executive and Senior Financial Officers of The Price Funds under the Sarbanes-Oxley Act of 2002 I. General Statement. This Code of Ethics (the "Price Funds S-O Code") has been designed to bring the Price Funds into compliance with the applicable requirements of the Sarbanes-Oxley Act of 2002 (the "Act") rules promulgated by The Securities and Exchange Commission thereunder ("Regulations"). The Price Funds S-O Code applies solely to the Principal Executive Officer, Principal Financial Officer, Principal Accounting Officer or Controller of, or persons performing similar functions for, a Price Fund (whether such persons are employed by a Price Fund or third party) ("Covered Officers"). The "Price Funds" shall include each mutual fund that is managed, sponsored and distributed by affiliates of T. Rowe Price Group, Inc. ("Group"). The investment managers to the Price Funds will be referred to as the "Price Fund Advisers." A list of Covered Officers is attached as Exhibit A. The Price Fund Advisers have, along with their parent, T. Rowe Price Group, Inc. ("Group") also maintained a comprehensive Code of Ethics and Conduct (the "Group Code") since 1972, which applies to all officers, directors and employees of the Price Funds, Group and its affiliates. As mandated by the Act, Group has adopted a Code (the "Group S-O Code"), similar to the Price Funds S-O Code, which applies solely to its principal executive and senior financial officers. The Group S-O Code and the Price Funds S-O Code will be referred to collectively as the "S-O Codes". The Price Funds S-O Code has been adopted by the Price Funds in accordance with the Act and Regulations thereunder and will be administered in conformity with the disclosure requirements of Item 2 of Form N-CSR. The S-O Codes are attachments to the Group Code. In many respects the S-O Codes are supplementary to the Group Code, but the Group Code is administered separately from the S-O Codes, as the S-O Codes are from each other. II. Purpose of the Price Funds S-O Code. The purpose of the Price Funds S-O Code, as mandated by the Act and the Regulations, is to establish standards that are reasonably designed to deter wrongdoing and to promote: Ethical Conduct. Honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships. Disclosure. Full, fair, accurate, timely and understandable disclosure in reports and documents that the Price Funds file with, or submit to, the SEC and in other public communications made by the Price Funds. Compliance. Compliance with applicable governmental laws, rules and regulations. Reporting of Violations. The prompt internal reporting of violations of the Price Funds S-O Code to an appropriate person or persons identified in the Price Funds S-O Code. Accountability. Accountability for adherence to the Price Funds S-O Code. III. Covered Officers Should Handle Ethically Actual and Apparent Conflicts of Interest. Overview. Each Covered Officer owes a duty to the Price Funds to adhere to a high standard of honesty and business ethics and should be sensitive to situations that may give rise to actual as well as apparent conflicts of interest. A "conflict of interest" occurs when a Covered Officer's private interest interferes with the interests of, or his or her service to, the Price Funds. For example, a conflict of interest would arise if a Covered Officer, or a member of his or her family, receives improper personal benefits as a result of his or her position with a Price Fund. Certain conflicts of interest covered by the Price Funds S-O Code arise out of the relationships between Covered Officers and the Price Funds and may already be subject to provisions regulating conflicts of interest in the Investment Company Act of 1940 ("Investment Company Act"), the Investment Advisers Act of 1940 ("Investment Advisers Act") and the Group Code. For example, Covered Officers may not individually engage in certain transactions (such as the purchase or sale of securities or other property) with a Price Fund because of their status as "affiliated persons" of a Price Fund. The compliance programs and procedures of the Price Funds and Price Fund Advisers are designed to prevent, or identify and correct, violations of these provisions. Although typically not presenting an opportunity for improper personal benefit, conflicts arise from, or as a result of, the contractual relationship between a Price Fund and its Price Fund Adviser (and its affiliates) of which the Covered Officers may also be officers or employees. As a result, the Price Funds S-O Code recognizes that the Covered Officers will, in the normal course of their duties (whether formally for the Price Funds or for the Price Fund Advisers, or for both), be involved in establishing policies and implementing decisions which will have different effects on these entities. The participation of the Covered Officers in such activities is inherent in the contractual relationship between each Price Fund and its respective Price Fund Adviser. Such participation is also consistent with the performance by the Covered Officers of their duties as officers of the Price Funds and, if consistent with the provisions of the Investment Company Act and the Investment Advisers Act, it will be deemed to have been handled ethically. Other conflicts of interest are covered by the Price Funds S-O Code, even if these conflicts of interest are not addressed by or subject to provisions in the Investment Company Act and the Investment Advisers Act. Whenever a Covered Officer is confronted with a conflict of interest situation where he or she is uncertain as to the appropriate action to be taken, he or she should discuss the matter with the Chairperson of Group's Ethics Committee or another member of the Committee. Handling of Specific Types of Conflicts. Each Covered Officer (and close family members) must not: Entertainment. Accept entertainment from any company with which any Price Fund or any Price Fund Adviser has current or prospective business dealings, including portfolio companies, unless such entertainment is in full compliance with the policy on entertainment as set forth in the Group Code. Gifts. Accept any gifts, except as permitted by the Group Code. Improper Personal Influence. Use his or her personal influence or personal relationships improperly to influence investment decisions, brokerage allocations or financial reporting by the Price Funds to the detriment of any one or more of the Price Funds. Taking Action at the Expense of a Price Fund. Cause a Price Fund to take action, or fail to take action, for the personal benefit of the Covered Officer rather than for the benefit of one or more of the Price Funds. Misuse of Price Funds' Transaction Information. Use knowledge of portfolio transactions made or contemplated for a Price Fund or any other clients of the Price Fund Advisers to trade personally or cause others to trade in order to take advantage of or avoid the market impact of such portfolio transactions. Outside Business Activities. Engage in any outside business activity that detracts from a Covered Officer's ability to devote appropriate time and attention to his or her responsibilities to a Price Fund. Service Providers. Excluding Group and its affiliates, have any ownership interest in, or any consulting or employment relationship with, any of the Price Funds' service providers, except that an ownership interest in public companies is permitted Receipt of Payments. Have a direct or indirect financial interest in commissions, transaction charges, spreads or other payments paid by a Price Fund for effecting portfolio transactions or for selling or redeeming shares other than an interest (such as compensation or equity ownership) arising from the Covered Officer's employment by Group or any of its affiliates. Service as a Director or Trustee. Serve as a director, trustee or officer of any public or private company or a non-profit organization that issues securities eligible for purchase by any of the Price Funds, unless approval is obtained as required by the Group Code. IV. Covered Officers' Specific Obligations and Accountabilities. A. Disclosure Requirements and Controls. Each Covered Officer must familiarize himself or herself with the disclosure requirements (Form N-1A registration statement, proxy (Schedule 14A), shareholder reports, Forms N-SAR, N-CSR, etc.) applicable to the Price Funds and the disclosure controls and procedures of the Price Fund and the Price Fund Advisers. B. Compliance with Applicable Law. It is the responsibility of each Covered Officer to promote compliance with all laws, rules and regulations applicable to the Price Funds and the Price Fund Advisers. Each Covered Officer should, to the extent appropriate within his or her area of responsibility, consult with other officers and employees of the Price Funds and the Price Fund Advisers and take other appropriate steps with the goal of promoting full, fair, accurate, timely and understandable disclosure in the reports and documents the Price Funds file with, or submit to, the SEC, and in other public communications made by the Price Funds. C. Fair Disclosure. Each Covered Officer must not knowingly misrepresent, or cause others to misrepresent, facts about a Price Fund to others, whether within or outside the Price organization, including to the Price Fund's directors and auditors, and to governmental regulators and self-regulatory organizations. D. Initial and Annual Affirmations. Each Covered Officer must: 1. Upon adoption of the Price Funds S-O Code (or thereafter, as applicable, upon becoming a Covered Officer), affirm in writing that he or she has received, read, and understands the Price Funds S-O Code. 2. Annually affirm that he or she has complied with the requirements of the Price Funds S-O Code. E. Reporting of Material Violations of the Price Funds S-O Code. If a Covered Officer becomes aware of any material violation of the Price Funds S-O Code or laws and governmental rules and regulations applicable to the operations of the Price Funds, he or she must promptly report the violation ("Report") to the Chief Legal Counsel of the Price Funds ("CLC"). Failure to report a material violation will be considered itself a violation of the Price Funds S-O Code. The CLC is identified in the attached Exhibit B. It is the Price Funds policy that no retaliation or other adverse action will be taken against any Covered Officer or other employee of a Price Fund, a Price Fund Adviser or their affiliates based upon any lawful actions of the Covered Officer or employee with respect to a Report made in good faith. F. Annual Disclosures. Each Covered Officer must report, at least annually, all affiliations or other relationships as called for in the "Annual Questionnaire for Executive Officers and/or Employee Directors/Trustees of Group and the Price Funds." V. Administration of the Price Funds S-O Code. The Ethics Committee is responsible for administering the Price Funds S-O Code and applying its provisions to specific situations in which questions are presented. A. Waivers and Interpretations. The Chairperson of the Ethics Committee has the authority to interpret the Price Funds S-O Code in any particular situation and to grant waivers where justified, subject to the approval of the Joint Audit Committee of the Price Funds. All material interpretations concerning Covered Officers will be reported to the Joint Audit Committee of the Price Funds at its next meeting. Waivers, including implicit waivers, to Covered Officers will be publicly disclosed as required in the Instructions to N-CSR. Pursuant to the definition in the Regulations, an implicit waiver means a Price Fund's failure to take action within a reasonable period of time regarding a material departure from a provision of the Price Funds S-O Code that has been made known to an "executive officer" (as defined in Rule 3b-7 under the Securities Exchange Act of 1934) of a Price Fund. An executive officer of a Price Fund includes its president and any vice-president in charge of a principal business unit, division or function. B. Violations/Investigations. The following procedures will be followed in investigating and enforcing the Price Funds S-O Code: 1. The CLC will take or cause to be taken appropriate action to investigate any potential or actual violation reported to him or her. 2. The CLC, after consultation if deemed appropriate with Outside Counsel to the Price Funds, will make a recommendation to the appropriate Price Funds Board regarding the action to be taken with regard to each material violation. Such action could include any of the following: a letter of censure or suspension, a fine, a suspension of trading privileges or termination of officership or employment. In addition, the violator may be required to surrender any profit realized (or loss avoided) from any activity that is in violation of the Price Funds S-O Code. VI. Amendments to the Price Funds S-O Code. Except as to the contents of Exhibit A and Exhibit B, the Price Funds S-O Code may not be materially amended except in written form, which is specifically approved or ratified by a majority vote of each Price Fund Board, including a majority of the independent directors on each Board. VII. Confidentiality. All reports and records prepared or maintained pursuant to the Price Funds S-O Code will be considered confidential and shall be maintained and protected accordingly. Except as otherwise required by law, the Price Funds S-O Code or as necessary in connection with regulations under the Price Funds S-O Code, such matters shall not be disclosed to anyone other than the directors of the appropriate Price Fund Board, Outside Counsel to the Price Funds, members of the Ethics Committee and the CLC and authorized persons on his or her staff. Approved: October 2003 Exhibit A Persons Covered by the Price Funds S-O Code of Ethics James S. Riepe, Chairman and Chief Executive Officer Joseph A. Carrier, Treasurer and Chief Financial Officer Exhibit B Chief Legal Counsel to the Price Funds Henry H. Hopkins EX-99.906 4 ex-99_906cert.txt 906 CERTIFICATIONS Item 12(b). CERTIFICATION UNDER SECTION 906 OF SARBANES-OXLEY ACT OF 2002 Name of Issuer: T. Rowe Price New Horizons Fund In connection with the Report on Form N-CSR for the above named issuer, the undersigned hereby certifies, to the best of his knowledge, that: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Issuer. Date: February 18, 2005 /s/ James S. Riepe --------------------------- James S. Riepe Principal Executive Officer Date: February 18, 2005 /s/ Joseph A. Carrier --------------------------- Joseph A. Carrier Principal Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----