N-CSR 1 bcg.txt T. ROWE PRICE BLUE CHIP GROWTH FUND Item 1. Report to Shareholders DECEMBER 31, 2004 BLUE CHIP GROWTH 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 BLUE CHIP GROWTH FUND -------------------------------------------------------------------------------- Fellow Shareholders After a difficult summer correction, equity markets advanced in the second half of 2004. Several events, including the resolution of the presidential election, some moderation in energy prices, and strong corporate earnings bolstered stock prices, especially in the fourth quarter. However, for the past six and 12 months, large-cap growth stocks continued to generate relatively mediocre results. We believe that several factors, including attractive valuations, strong dividend growth, and benefit from the declining dollar, could support improved performance for large-cap growth stocks in 2005. PERFORMANCE COMPARISON -------------------------------------------------------------------------------- Periods Ended 12/31/04 6 Months 12 Months -------------------------------------------------------------------------------- Blue Chip Growth Fund 6.15% 9.25% Blue Chip Growth Fund- Advisor Class 6.12 9.10 Blue Chip Growth Fund-R Class 5.95 8.83 S&P 500 Stock Index 7.19 10.88 Lipper Large-Cap Growth Funds Index 5.16 7.45 Russell 1000 Growth Index 3.47 6.30 The portfolio produced solid returns that outperformed our style-specific Russell 1000 Growth Index and the Lipper peer group of large-cap growth funds for the past six and 12 months. However, results for both periods lagged the S&P 500 Stock Index. Advisor Class and R Class shares performed similarly but trailed the fund's performance because of their differing fee structures. As shown in the average annual returns table on page 12, your portfolio has performed in line with the S&P 500 for the past 5- and 10-year periods and handily outperformed Lipper's average annualized returns for large-cap growth funds. MARKET ENVIRONMENT For the six-month period, small- and mid-cap stocks, especially value shares, continued to outperform large-cap stocks in general, and growth-oriented stocks in particular. Large-cap U.S. stocks fell in the third quarter as the economy moved through a period of softer-than-expected growth and investors grew concerned about an earnings growth slowdown. The economic deceleration was partially attributable to rising oil prices, which neared $50 per barrel at the end of September, higher short-term interest rates, and uncertainty regarding the upcoming presidential election. Large-cap growth stocks were particularly hard hit as the technology and health care stocks corrected significantly. Several concerns were resolved in the fourth quarter: The presidential election was decided without controversy, energy prices retreated from record highs, and consumer confidence, corporate spending, and corporate profits improved. Stocks rallied in response, but several risks remain. Energy prices are volatile, and the continuing war in Iraq and the threat of global terrorism are related concerns. We expect interest rates to increase, but perhaps only modestly. However, the sharp decline in the dollar raises the possibility that rates would need to rise more than anticipated to attract foreign capital. We believe strong corporate profit growth, the related increase in free cash flow at many companies, and slowly improving capital expenditures could more than offset these risks. Free cash flow margin and the level of cash on corporate balance sheets stand at multi-decade highs while capital spending, in our view, is unsustainably low. Dividend growth, which is more prevalent at large-cap growth companies, could also support investment gains. PORTFOLIO REVIEW The portfolio's consumer discretionary holdings (our strongest sector contributor for the past six months), and the retail area in particular, provided several large second-half contributors. Significant overweight positions in Target, Home Depot, and Best Buy produced excellent gains. Target's sales of its underperforming Mervyn's division and its Marshall Fields department store segment proved to be major positives. Home Depot has executed well, but some are concerned that rising interest rates could hurt housing demand and, ultimately, revenue gains. We think the company will do well in most scenarios, and its current valuation compensates for these risks. Although Wal-Mart was disappointing, we think it is reasonably valued and offers good growth prospects. Consequently, we added to our position on price weakness. (Please refer to our portfolio of investments for a complete listing of the fund's holdings and the amount each represents of the portfolio.) The health care sector contains several consistent-growth companies, but performance was mixed; health care services, device manufacturers, and biotechs continued to outperform large pharmaceutical companies. UnitedHealth Group (the portfolio's second-largest holding) and WellPoint, which merged with Anthem in the fourth quarter and is now the nation's largest health insurer, both trended steadily higher over the past six months and have been major outperformers for the portfolio for several years. Amgen, Johnson & Johnson, and to a lesser extent Wyeth were also important contributors. Amgen has required patience and was an inconsistent performer until recently due to concerns over reimbursement for its anemia drug, Aranesp, but it appears well positioned for solid growth. Note: Due to its merger with Anthem, WellPoint is listed as our largest purchase for the past six months in the table on page 10. SECTOR DIVERSIFICATION -------------------------------------------------------------------------------- Periods Ended 6/30/04 12/31/04 -------------------------------------------------------------------------------- Financials 22.0 22.7% Information Technology 22.0 20.7 Consumer Discretionary 15.8 16.3 Health Care 16.5 15.9 Industrials and Business Services 12.1 12.1 Energy 3.8 4.4 Consumer Staples 4.5 4.3 Telecommunications Services 1.7 2.0 Materials 1.2 1.5 Utilities 0.0 0.0 Other and Reserves 0.4 0.1 -------------------------------------------------------------------------------- Total 100% 100% Historical weightings reflect current industry/sector classifications. Manufacturers with durable growth characteristics underperformed some deep cyclicals. However, GE, Tyco International, and Danaher were solid second-half gainers. We like each of these companies because of their first-rate management, extraordinary free cash flow, and disciplined capital allocation processes. We are particularly impressed with GE's improving business prospects in its energy services and aerospace services businesses. Only select technology stocks worked in the second half of 2004. Dell was our top information technology contributor for the period. The company is taking market share in its storage, server, and printer segments and continues to generate superior free cash flow growth. Adobe Systems and Oracle were solid performers in the software industry. We significantly added to Oracle, the portfolio's second-largest purchase for the past six months. Internet-based companies eBay and Google were also strong second-half gainers. Both are positioned to produce strong growth, but their rich valuations cause us some concern--and we have been willing to reduce positions at certain price levels. Despite their overall lackluster third-quarter performance, financial stocks (our second-best contributors for the second half) produced solid fourth-quarter gains. The portfolio's returns relative to the S&P 500 benefited from our overweight in capital markets, especially trust banks and brokers, and solid stock selection. Franklin Resources and Legg Mason continue to gather assets and generate solid earnings and dividend growth. Sallie Mae, Citigroup, American Express, Bank of America, and Northern Trust each have shown improving results in a difficult environment, and investors recognized the strength of their franchises. Various business services and consumer stocks were major positives for the fund. Carnival, the leading cruise ship operator, continued to experience improving demand and pricing, stronger earnings growth, and prodigious free cash flow. Starbucks, which we've also held for several years, also produced solid second-half gains. The list of six-month detractors was dominated by technology and health care companies. Pfizer was our largest loser. As our longtime investors know, we are usually willing to hold a lagging stock if we feel the valuation is compelling and the fundamentals are sound or poised to improve. However, in the past month, three unfavorable developments emerged. The first is an aggressive patent challenge to Lipitor by Ranbaxy (an Indian company), which could have merit. Second, Pfizer's pain reliever, Celebrex, was shown in one study to have unfavorable cardiovascular side effects. Celebrex will probably stay on the market, but prescriptions filled have declined dramatically.We were fortunate to have avoided owning Merck, which declined precipitously after its Vioxx painkiller was removed from the market. Additionally, Lyrica--Pfizer's replacement product for Neurontin--was deemed a controlled substance and has not yet received approval for the treatment of epilepsy. We sold a significant portion of our position believing these factors make achieving Pfizer's growth goals much more difficult. Forest Laboratories turned in disappointing results for the past six months after being a solid performer. The company's Alzheimer's product Namenda experienced a lackluster launch. Perhaps of greater concern, antidepressant Lexapro, its largest-selling drug, faces a patent challenge in May 2005. Normally, patent challenges by generic drugmakers are anticipated and frequently defeated. However, given the importance of the product and concerns about the entire antidepressant category, we reduced our position. We have learned in over a decade of managing the fund that it can pay to sell all (or at least some) of a position if there is a major risk that can be better evaluated later. Among our technology companies, bellwethers such as Cisco Systems, Microsoft, and Intel were poor performers. Analog semiconductor makers Maxim Integrated Products and Analog Devices were also under pressure. We benefited, compared with the average growth fund, by underweighting information technology, particularly semiconductor holdings. However, we are becoming more positive about the sector because valuations are reasonable, balance sheets are strong, and cash generation and dividend growth are improving. Our analysts' view is that an inventory correction will end in early 2005. Important improvements are also taking place at tech companies such as Intel, which could result in a greater focus on return on invested capital and better returns for shareholders. That said, we intend to increase our tech weighting slowly because valuations are reasonable but not compelling, there are other attractive alternatives, and we believe a cautious but opportunistic approach is warranted. Other significant second-half detractors included financial services leaders American International Group (AIG) and Marsh & McLennan, gaming equipment maker International Game Technology, and post-secondary education provider Apollo Group. Despite various regulatory concerns surrounding AIG, the company is well positioned for continued growth and reasonably valued in our view. Marsh & McLennan is a more complex situation where the regulatory actions taken against the company will likely affect profitability (but probably less than many feared). After selling at much higher prices, we recently began adding to our modest position. International Gaming Technology has provided mediocre performance, and we are carefully evaluating our position given a delay in earnings acceleration. Conversely, Apollo was a major long-term winner, and we took some profits prior to and during its fourth-quarter decline. We think this well-managed company should continue to prosper, and we intend to maintain a position. STRATEGY We seek out companies with durable, sustainable earnings and above-average cash flow growth. The free cash flow we prize has become even more valuable now that tax laws are giving dividends more favorable treatment. Additions to existing holdings such as Oracle, Wal-Mart, Ameritrade, State Street, Intel, and Microsoft were significant enough to be included in the 10-largest purchases for the past six months. ChevronTexaco was our largest new purchase in the second half; it has lagged recently, is attractively valued, and generates strong dividend growth. We are not aggressively increasing our energy exposure and trimmed some holdings in the volatile energy services area, but Chevron has solid fundamentals and we have successfully owned it before. We bought Google on the initial public offering and added to it because we think it has a strong business model and should produce solid growth for several years. We reestablished a position in Kohl's after we saw management changes, improvement in merchandising practices, and the addition of several important new product lines including Estee Lauder, and because of our analysts' conviction that it is a compelling growth idea. Elan, also a new position, is one of the few foreign stocks we own; it is based in Ireland, and we own American Depository Receipts or ADRs. The company received FDA approval for Antegren, now called Tysabri, a product that appears to be a significant improvement in the treatment of multiple sclerosis. The company has several other products and compounds in late-stage development, but Tysabri alone could drive sustainable earnings growth. Our largest sale was a reduction in Pfizer for the reasons outlined earlier. We also sharply reduced our holding in Fannie Mae because we favor other ideas in the financial area. Fannie Mae has had to raise significant amounts of capital and will not have audited financial statements for an extended period. Research in Motion, Guidant, 3M, and Symantec were other significant second-half eliminations. Research in Motion, the leading maker of BlackBerry wireless devices, had been an extraordinary performer. Concerns about the validity of the company's patents (as well as its extended valuation) caused us to sell. Guidant is being acquired by Johnson & Johnson, which limits its upside and drove our sale. Symantec had generated good returns over several years, but announced a merger with Veritas Software. Since we also owned Veritas, we elected to eliminate Symantec. OUTLOOK In our last letter, we pointed out that many investors had become pessimistic and that some concerns could recede over time. In fact, energy prices have moderated, the election was decided without a protracted dispute, and consumer confidence and corporate earnings are solid. However, geopolitical risks such as terrorism will be a concern for decades to come, but on balance may be improving. There is a risk of a continued sharp decline in the dollar, but this isn't likely in our view. Finally, there is moderate valuation risk in the market because stocks have rebounded sharply and are somewhat more expensive. Earnings continue to march ahead, however, which could ultimately reduce this risk. We believe high-quality, consistent-growth companies that have lagged are attractive at current prices. Ultimately, there continues to be a solid case for investing in U.S. stocks for the following reasons: 1. Earnings growth remains strong at many high-quality U.S. companies, many of which do not need a robust economic recovery to produce strong profit growth. 2. Valuations have increased as the market has rallied. However, the stocks of many consistent-growth companies moved up only moderately and still remain reasonably valued, particularly because earnings have maintained and enhanced through the downturn. 3. Companies have reduced expenses significantly. Consequently, a pickup in revenue growth could result in strong profit growth. 4. Many of our holdings generate significant free cash flow and free cash flow margins are at multi-decade highs. Shareholder-oriented management teams can use this cash to pay dividends--which now receive more favorable tax treatment--repurchase shares, or make value-added acquisitions. As always, we will strive to enhance returns while managing risk by investing in quality companies with durable, sustainable earnings and cash flow growth. We appreciate your continued confidence in this endeavor. Respectfully submitted, Larry J. Puglia President and chairman of the Investment Advisory Committee January 14, 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 The fund's share price can fall because of weakness in the stock 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. GLOSSARY Dividend yield: The annual dividend of a stock divided by the stock's price. Free cash flow: The excess cash a company is generating from its operations that can be taken out of the business for the benefit of shareholders, such as dividends, share repurchases, investments, and acquisitions. 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/book ratio: A valuation measure that compares a stock's market price to its book value, i.e., the company's net worth divided by the number of outstanding shares. 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. Russell 1000 Growth Index: A market-capitalization weighted index of those firms in the Russell 1000 with higher price-to-book ratios and higher forecasted growth values. S&P 500 Stock Index: An unmanaged index that tracks the stocks of 500 primarily large-cap U.S. companies. T. ROWE PRICE BLUE CHIP GROWTH FUND -------------------------------------------------------------------------------- PORTFOLIO HIGHLIGHTS -------------------------------------------------------------------------------- TWENTY-FIVE LARGEST HOLDINGS Percent of Net Assets 12/31/04 -------------------------------------------------------------------------------- Citigroup 3.5% UnitedHealth Group 3.4 Microsoft 3.1 GE 3.1 Danaher 2.1 -------------------------------------------------------------------------------- American International Group 2.1 Dell 2.0 Tyco International 1.9 WellPoint 1.9 State Street 1.8 -------------------------------------------------------------------------------- Wal-Mart 1.8 Target 1.7 Amgen 1.6 Home Depot 1.6 Cisco Systems 1.5 -------------------------------------------------------------------------------- UPS 1.4 Pfizer 1.4 Carnival 1.4 American Express 1.4 Schlumberger 1.3 -------------------------------------------------------------------------------- Johnson & Johnson 1.3 International Game Technology 1.2 Yahoo! 1.2 eBay 1.2 Best Buy 1.2 -------------------------------------------------------------------------------- Total 46.1% T. ROWE PRICE BLUE CHIP GROWTH FUND -------------------------------------------------------------------------------- PORTFOLIO HIGHLIGHTS -------------------------------------------------------------------------------- MAJOR PORTFOLIO CHANGES Listed in descending order of size 6 Months Ended 12/31/04 Largest Purchases Largest Sales -------------------------------------------------------------------------------- WellPoint * Pfizer Oracle Fannie Mae Wal-Mart Research In Motion *** ChevronTexaco ** EchoStar Communications AmeriTrade Forest Laboratories State Street Coca-Cola Google ** Lexmark International Intel Guidant *** Kohl's ** St. Paul Companies Microsoft 3M *** * Merger ** Position added *** Position eliminated T. ROWE PRICE BLUE CHIP GROWTH 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] BLUE CHIP GROWTH FUND -------------------------------------------------------------------------------- As of 12/31/04 Blue Chip Growth Fund $ 31,129 S&P 500 Stock Index $ 31,258 Lipper Large-Cap Growth Funds Index $ 22,900 S&P 500 Stock Lipper Large-Cap Blue Chip Index Growth Funds Index Growth Fund 12/94 $10,000 $10,000 $10,000 12/95 13,758 13,492 13,790 12/96 16,917 16,266 17,617 12/97 22,561 20,754 22,472 12/98 29,008 28,323 28,953 12/99 35,112 38,185 34,743 12/00 31,915 30,671 33,865 12/01 28,122 23,350 28,983 12/02 21,907 16,786 21,960 12/03 28,190 21,312 28,494 12/04 31,258 22,900 31,129 Note: Performance for Advisor and R Class shares will vary due to their differing fee structures. See returns table on the next page. T. ROWE PRICE BLUE CHIP GROWTH FUND -------------------------------------------------------------------------------- AVERAGE ANNUAL COMPOUND TOTAL RETURN -------------------------------------------------------------------------------- This table shows how the fund and its benchmarks would have performed if their actual (or cumulative) returns for the periods shown had been earned at a constant rate. Since Inception Periods Ended 12/31/04 1 Year 5 Years 10 Years Inception Date -------------------------------------------------------------------------------- Blue Chip Growth Fund 9.25% -2.17% 12.03% - - S&P 500 Stock Index 10.88 -2.30 12.07 - - Lipper Large-Cap Growth Funds Index 7.45 -9.72 8.64 - - Blue Chip Growth Fund- Advisor Class 9.10 - - -3.53% 3/31/00 S&P 500 Stock Index 10.88 - - -2.88 Lipper Large-Cap Growth Funds Index 7.45 - - -11.67 Blue Chip Growth Fund- R Class 8.83 - - 20.24 9/30/02 S&P 500 Stock Index 10.88 - - 21.40 Lipper Large-Cap Growth Funds Index 7.45 - - 16.99 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 BLUE CHIP GROWTH FUND -------------------------------------------------------------------------------- FUND EXPENSE EXAMPLE -------------------------------------------------------------------------------- As a mutual fund shareholder, you may incur two types of costs: (1) transaction costs such as redemption fees or sales loads and (2) ongoing costs, including management fees, distribution and service (12b-1) fees, and other fund expenses. The following example is intended to help you understand your ongoing costs (in dollars) of investing in the fund and to compare these costs with the ongoing costs of investing in other mutual funds. The example is based on an investment of $1,000 invested at the beginning of the most recent six-month period and held for the entire period. Please note that the fund has three share classes: The original share class ("investor class") charges no distribution and service (12b-1) fee; Advisor Class shares are offered only through unaffiliated brokers and other financial intermediaries and charge a 0.25% 12b-1 fee; R Class shares are available to retirement plans serviced by intermediaries and charge a 0.50% 12b-1 fee. Each share class is presented separately in the table. Actual Expenses The first line of the following table ("Actual") provides information about actual account values and expenses based on the fund's actual returns. You may use the information in this line, together with your account balance, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading "Expenses Paid During Period" to estimate the expenses you paid on your account during this period. Hypothetical Example for Comparison Purposes The information on the second line of the table ("Hypothetical") is based on hypothetical account values and expenses derived from the fund's actual expense ratio and an assumed 5% per year rate of return before expenses (not the fund's actual return). You may compare the ongoing costs of investing in the fund with other funds by contrasting this 5% hypothetical example and the 5% hypothetical examples that appear in the shareholder reports of the other funds. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. Note: T. Rowe Price charges an annual small-account maintenance fee of $10, generally for accounts with less than $2,000 ($500 for UGMA/UTMA). The fee is waived for any investor whose T. Rowe Price mutual fund accounts total $25,000 or more, accounts employing automatic investing, and IRAs and other retirement plan accounts that utilize a prototype plan sponsored by T. Rowe Price (although a separate custodial or administrative fee may apply to such accounts). This fee is not included in the accompanying table. If you are subject to the fee, keep it in mind when you are estimating the ongoing expenses of investing in the fund and when comparing the expenses of this fund with other funds. You should also be aware that the expenses shown in the table highlight only your ongoing costs and do not reflect any transaction costs, such as redemption fees or sales loads. Therefore, the second line of the table is useful in comparing ongoing costs only and will not help you determine the relative total costs of owning different funds. To the extent a fund charges transaction costs, however, the total cost of owning that fund is higher. T. ROWE PRICE BLUE CHIP GROWTH FUND -------------------------------------------------------------------------------- Beginning Ending Expenses Paid Account Value Account Value During Period* 7/1/04 12/31/04 7/1/04 to 12/31/04 -------------------------------------------------------------------------------- Investor Class Actual $1,000 $1,061.50 $4.51 Hypothetical (assumes 5% return before expenses) 1,000 1,020.76 4.42 Advisor Class Actual 1,000 1,061.20 5.03 Hypothetical (assumes 5% return before expenses) 1,000 1,020.26 4.93 R Class Actual 1,000 1,059.50 6.73 Hypothetical (assumes 5% return before expenses) 1,000 1,018.60 6.60 *Expenses are equal to the fund's annualized expense ratio for the six-month period, multiplied by the average account value over the period, multiplied by the number of days in the most recent fiscal half year (184) divided by the days in the year (366) to reflect the half-year period. The annualized expense ratio of the investor class was 0.87%, the Advisor Class was 0.97%, and the R Class was 1.30%. T. ROWE PRICE BLUE CHIP GROWTH FUND -------------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS For a share outstanding throughout each period -------------------------------------------------------------------------------- Investor Class Year Ended 12/31/04 12/31/03 12/31/02 12/31/01 12/31/00 NET ASSET VALUE Beginning of period $ 28.45 $ 21.95 $ 28.97 $ 33.85 $ 36.34 Investment activities Net investment income (loss) 0.16 0.02 - (0.02) (0.03) Net realized and unrealized gain (loss) 2.47 6.51 (7.02) (4.86) (0.84) Total from investment activities 2.63 6.53 (7.02) (4.88) (0.87) Distributions Net investment income (0.16) (0.03) - - - Net realized gain - - - - (1.62) Total distributions (0.16) (0.03) - - (1.62) NET ASSET VALUE End of period $ 30.92 $ 28.45 $ 21.95 $ 28.97 $ 33.85 ------------------------------------------------ Ratios/Supplemental Data Total return^ 9.25% 29.75% (24.23)% (14.42)% (2.53)% Ratio of total expenses to average net assets 0.88% 0.95% 0.96% 0.96% 0.91% Ratio of net investment income (loss) to average net assets 0.56% 0.10% 0.00% (0.06)% (0.09)% Portfolio turnover rate 31.9% 32.6% 46.2% 48.3% 50.9% Net assets, end of period (in millions) $ 7,236 $ 6,300 $ 4,482 $ 6,242 $ 7,113 ^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 BLUE CHIP GROWTH FUND -------------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS For a share outstanding throughout each period -------------------------------------------------------------------------------- Advisor Class Year 3/31/00 Ended Through 12/31/04 12/31/03 12/31/02 12/31/01 12/31/00 NET ASSET VALUE Beginning of period $ 28.48 $ 21.97 $ 29.02 $ 33.91 $ 38.63 Investment activities Net investment income (loss) 0.13 0.02 - (0.01) 0.02* Net realized and unrealized gain (loss) 2.46 6.52 (7.04) (4.88) (3.12) Total from investment activities 2.59 6.54 (7.04) (4.89) (3.10) Distributions Net investment income (0.14) (0.03) - - - Net realized gain - - - - (1.62) Tax return of capital - - (0.01) - - Total distributions (0.14) (0.03) (0.01) - (1.62) NET ASSET VALUE End of period $ 30.93 $ 28.48 $ 21.97 $ 29.02 $ 33.91 ------------------------------------------------ Ratios/Supplemental Data Total return^ 9.10% 29.77% (24.26)% (14.42)% (8.15)% Ratio of total expenses to average net assets 0.98% 0.98% 0.99% 0.99% 0.69%! Ratio of net investment income (loss) to average net assets 0.49% 0.07% (0.01)% (0.04)% 0.25%! Portfolio turnover rate 31.9% 32.6% 46.2% 48.3% 50.9%! Net assets, end of period (in thousands) $996,280 $769,970 $538,571 $469,089 $ 2,831 *The amount presented is calculated pursuant to a methodology prescribed by the Securities and Exchange Commission for a share outstanding throughout the period. The per-share amounts for the investment activities of the Advisor Class may be inconsistent with the aggregate amounts presented elsewhere in the financial statements for the fund, due to the partial year of operations for the Advisor Class and the timing of sales and redemptions of shares in relation to fluctuating market values for the investment portfolio. ^Total return reflects the rate that an investor would have earned on an investment in the fund during each period, assuming reinvestment of all distributions. !Annualized The accompanying notes are an integral part of these financial statements. T. ROWE PRICE BLUE CHIP GROWTH FUND -------------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS For a share outstanding throughout each period -------------------------------------------------------------------------------- R Class Year 9/30/02 Ended Through 12/31/04 12/31/03 12/31/02 NET ASSET VALUE Beginning of period $ 28.31 $ 21.93 $ 20.37 Investment activities Net investment income (loss) 0.02 (0.01)* (0.02)* Net realized and unrealized gain (loss) 2.48 6.42 1.58** Total from investment activities 2.50 6.41 1.56 Distributions Net investment income (0.08) (0.03) - NET ASSET VALUE End of period $ 30.73 $ 28.31 $ 21.93 ---------------------------------------- Ratios/Supplemental Data Total return^ 8.83% 29.23%* 7.66%* Ratio of total expenses to average net assets 1.26% 1.35%* 1.35%!* Ratio of net investment income (loss) to average net assets 0.25% (0.25%)* (0.28%)!* Portfolio turnover rate 31.9% 32.6% 46.2%! Net assets, end of period (in thousands) $31,211 $ 1,509 $ 108 * Excludes expenses in excess of a 1.35% contractual expense limitation in effect through 4/30/06. ** The amount presented is calculated pursuant to a methodology prescribed by the Securities and Exchange Commission for a share outstanding throughout the period. This amount is inconsistent with the fund's aggregate gains and losses because of the timing of sales and redemptions of fund shares in relation to fluctuating market values for the investment portfolio. ^ Total return reflects the rate that an investor would have earned on an investment in the fund during each period, assuming reinvestment of all distributions. ! Annualized The accompanying notes are an integral part of these financial statements. T. ROWE PRICE BLUE CHIP GROWTH FUND -------------------------------------------------------------------------------- December 31, 2004 PORTFOLIO OF INVESTMENTS (1) Shares Value -------------------------------------------------------------------------------- (Cost and value in $ 000s) COMMON STOCKS 99.9% CONSUMER DISCRETIONARY 16.3% Automobiles 0.7% Harley-Davidson 890,000 54,068 54,068 Hotels, Restaurants & Leisure 3.7% Carnival 1,960,000 112,955 International Game Technology 2,980,000 102,452 Marriott, Class A 520,000 32,749 McDonald's 830,000 26,610 Starbucks * 460,000 28,686 303,452 Household Durables 0.3% Fortune Brands 310,000 23,926 23,926 Internet & Catalog Retail 1.4% Amazon.com * 340,000 15,058 eBay * 860,000 100,001 115,059 Media 5.4% Clear Channel Communications 610,000 20,429 Comcast, Class A * 1,330,000 43,677 EchoStar Communications, Class A 950,000 31,578 Liberty Media, Class A * 2,200,000 24,156 McGraw-Hill 25,000 2,289 News Corp, Class A * 3,300,000 61,578 Omnicom 220,000 18,550 Scripps, Class A 950,000 45,866 Time Warner * 4,510,000 87,674 Viacom, Class B 2,450,000 89,156 Washington Post, Class B 23,000 22,609 447,562 Multiline Retail 2.0% Kohl's * 575,000 28,273 Target 2,635,000 136,835 165,108 Specialty Retail 2.8% Best Buy 1,670,000 99,232 Home Depot 3,130,000 133,776 233,008 Total Consumer Discretionary 1,342,183 CONSUMER STAPLES 4.3% Beverages 0.9% Coca-Cola 300,000 12,489 PepsiCo 1,180,000 61,596 74,085 Food & Staples Retailing 2.3% CVS 160,000 7,211 Sysco 910,000 34,735 Wal-Mart 2,800,000 147,896 189,842 Household Products 0.4% Procter & Gamble 640,000 35,251 35,251 Personal Products 0.2% Gillette 310,000 13,882 13,882 Tobacco 0.5% Altria Group 665,000 40,632 40,632 Total Consumer Staples 353,692 ENERGY 4.4% Energy Equipment & Services 3.8% Baker Hughes 2,100,000 89,607 BJ Services 700,000 32,578 Schlumberger 1,580,000 105,781 Smith International * 1,300,000 70,733 Transocean * 340,000 14,412 313,111 Oil & Gas 0.6% ChevronTexaco 640,000 33,606 ExxonMobil 130,000 6,664 Murphy Oil 130,000 10,459 50,729 Total Energy 363,840 FINANCIALS 22.7% Capital Markets 9.4% AmeriTrade * 4,000,000 56,880 Bank of New York 1,120,000 37,430 Charles Schwab 2,620,000 31,335 Franklin Resources 1,330,000 92,635 Goldman Sachs 730,000 75,949 Legg Mason 1,090,000 79,853 Mellon Financial 2,100,000 65,331 Merrill Lynch 1,400,000 83,678 Morgan Stanley 640,000 35,533 Northern Trust 1,450,000 70,441 State Street 3,070,000 150,799 779,864 Commercial Banks 2.7% Bank of America 2,000,000 93,980 U.S. Bancorp 1,900,000 59,508 Wells Fargo 1,150,000 71,473 224,961 Consumer Finance 2.4% American Express 2,000,000 112,740 SLM Corporation 1,510,000 80,619 193,359 Diversified Financial Services 3.5% Citigroup 6,000,000 289,080 289,080 Insurance 3.9% American International Group 2,645,000 173,697 Hartford Financial Services 1,150,000 79,706 Marsh & McLennan 1,330,000 43,757 St. Paul Companies 640,000 23,725 320,885 Thrifts & Mortgage Finance 0.8% Fannie Mae 200,000 14,242 Freddie Mac 700,000 51,590 65,832 Total Financials 1,873,981 HEALTH CARE 15.9% Biotechnology 3.3% Amgen * 2,100,000 134,715 Biogen Idec * 700,000 46,627 Genentech * 500,000 27,220 Gilead Sciences * 1,760,000 61,582 270,144 Health Care Equipment & Supplies 2.3% Biomet 445,000 19,309 Boston Scientific * 925,000 32,884 Medtronic 1,750,000 86,922 St. Jude Medical * 440,000 18,449 Stryker 640,000 30,880 188,444 Health Care Providers & Services 5.3% UnitedHealth Group 3,200,000 281,696 WellPoint * 1,375,000 158,125 439,821 Pharmaceuticals 5.0% Abbott Laboratories 680,000 31,722 Elan ADR * 1,180,000 32,155 Eli Lilly 200,000 11,350 Forest Laboratories * 640,000 28,710 Johnson & Johnson 1,630,000 103,375 Pfizer 4,300,000 115,627 Teva Pharmaceutical ADR 1,330,000 39,714 Wyeth 1,300,000 55,367 418,020 Total Health Care 1,316,429 INDUSTRIALS & BUSINESS SERVICES 12.1% Aerospace & Defense 1.6% General Dynamics 300,000 31,380 Honeywell International 1,130,000 40,013 Lockheed Martin 925,000 51,384 Rockwell Collins 170,000 6,705 129,482 Air Freight & Logistics 1.4% UPS, Class B 1,360,000 116,225 116,225 Commercial Services & Supplies 1.3% Apollo Group, Class A * 665,000 53,672 Cendant 1,600,000 37,408 ChoicePoint * 300,000 13,797 104,877 Industrial Conglomerates 5.0% GE 6,950,000 253,675 Tyco International 4,500,000 160,830 414,505 Machinery 2.8% Danaher 3,070,000 176,249 Deere 750,000 55,800 232,049 Total Industrials & Business Services 997,138 INFORMATION TECHNOLOGY 20.7% Communications Equipment 3.2% Cisco Systems * 6,500,000 125,450 Corning * 1,900,000 22,363 Juniper Networks * 1,720,000 46,767 Nokia ADR 790,000 12,379 QUALCOMM 1,460,000 61,904 268,863 Computers & Peripherals 2.6% Dell * 3,950,000 166,453 IBM 235,000 23,167 Lexmark International * 170,000 14,450 QLogic * 200,000 7,346 211,416 Internet Software & Services 2.2% Google, Class A * 200,000 38,620 IAC/InterActiveCorp * 1,360,000 37,563 Yahoo! * 2,710,000 102,113 178,296 IT Services 2.1% Accenture, Class A * 1,000,000 27,000 Affiliated Computer Services, Class A * 790,000 47,550 Automatic Data Processing 550,000 24,393 First Data 950,000 40,413 Fiserv * 860,000 34,563 173,919 Semiconductor & Semiconductor Equipment 4.5% Analog Devices 1,760,000 64,979 Intel 4,030,000 94,262 KLA-Tencor * 280,000 13,042 Maxim Integrated Products 2,140,000 90,715 Microchip Technology 300,000 7,998 Texas Instruments 1,760,000 43,331 Xilinx 2,100,000 62,265 376,592 Software 6.1% Adobe Systems 1,030,000 64,622 Electronic Arts * 25,000 1,542 Intuit * 1,150,000 50,612 Microsoft 9,640,000 257,484 Oracle * 4,060,000 55,703 SAP ADR 1,000,000 44,210 VERITAS Software * 950,000 27,123 501,296 Total Information Technology 1,710,382 MATERIALS 1.5% Chemicals 0.2% Monsanto 100,000 5,555 Potash Corp./Saskatchewan 130,000 10,798 16,353 Metals & Mining 1.3% BHP Billiton (AUD) 3,400,000 40,689 Nucor 1,300,000 68,042 108,731 Total Materials 125,084 TELECOMMUNICATION SERVICES 2.0% Diversified Telecommunication Services 0.3% Telus 820,000 23,698 23,698 Wireless Telecommunication Services 1.7% America Movil ADR, Series L 200,000 10,470 Nextel Communications, Class A * 3,300,000 99,000 Vodafone ADR 1,300,000 35,594 145,064 Total Telecommunication Services 168,762 Total Common Stocks (Cost $6,116,906) 8,251,491 SHORT-TERM INVESTMENTS 0.8% Money Market Fund 0.8% T. Rowe Price Reserve Investment Fund, 2.28% #! 69,489,083 69,489 Total Short-Term Investments (Cost $69,489) 69,489 Total Investments in Securities 100.7% of Net Assets (Cost $6,186,395) $8,320,980 ---------- (1) Denominated in U.S. dollars unless otherwise noted # Seven-day yield * Non-income producing ! Affiliated company - See Note 4 ADR American Depository Receipts AUD Australian dollar The accompanying notes are an integral part of these financial statements. T. ROWE PRICE BLUE CHIP GROWTH 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 $69,489) $ 69,489 Non-affiliated companies (cost $6,116,906) 8,251,491 Total investments in securities 8,320,980 Other assets 31,713 Total assets 8,352,693 Liabilities Total liabilities 89,379 NET ASSETS $ 8,263,314 --------------- Net Assets Consist of: Undistributed net realized gain (loss) $ (1,059,088) Net unrealized gain (loss) 2,134,587 Paid-in-capital applicable to 267,259,944 shares of $0.0001 par value capital stock outstanding; 1,000,000,000 shares authorized 7,187,815 NET ASSETS $ 8,263,314 --------------- NET ASSET VALUE PER SHARE Investor Class ($7,235,823,226/234,034,238 shares outstanding) $ 30.92 --------------- Advisor Class ($996,279,902/32,209,991 shares outstanding) $ 30.93 --------------- R Class ($31,210,839/1,015,715 shares outstanding) $ 30.73 --------------- The accompanying notes are an integral part of these financial statements. T. ROWE PRICE BLUE CHIP GROWTH FUND -------------------------------------------------------------------------------- STATEMENT OF OPERATIONS -------------------------------------------------------------------------------- ($ 000s) Year Ended 12/31/04 Investment Income (Loss) Income Dividend $ 108,013 Securities lending 86 Total income 108,099 Expenses Investment management 46,135 Shareholder servicing Investor Class 16,752 Advisor Class 831 R Class 65 Rule 12b-1 fees Advisor Class 2,050 R Class 73 Prospectus and shareholder reports Investor Class 333 Advisor Class 13 R Class 9 Custody and accounting 317 Registration 109 Legal and audit 38 Directors 16 Miscellaneous 87 Reductions/repayments of fees and expenses Expenses (reimbursed by) repaid to manager 1 Total expenses 66,829 Expenses paid indirectly (2) Net expenses 66,827 Net investment income (loss) 41,272 Realized and Unrealized Gain (Loss) Net realized gain (loss) Securities 110,207 Foreign currency transactions (139) Net realized gain (loss) 110,068 T. ROWE PRICE BLUE CHIP GROWTH FUND -------------------------------------------------------------------------------- STATEMENT OF OPERATIONS -------------------------------------------------------------------------------- ($ 000s) Year Ended 12/31/04 Change in net unrealized gain (loss) Securities 542,909 Other assets and liabilities denominated in foreign currencies 2 Change in net unrealized gain (loss) 542,911 Net realized and unrealized gain (loss) 652,979 INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS $ 694,251 --------------- The accompanying notes are an integral part of these financial statements. T. ROWE PRICE BLUE CHIP GROWTH 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) $ 41,272 $ 5,726 Net realized gain (loss) 110,068 (184,521) Change in net unrealized gain (loss) 542,911 1,761,118 Increase (decrease) in net assets from operations 694,251 1,582,323 Distributions to shareholders Net investment income Investor Class (37,617) (6,682) Advisor Class (4,363) (808) R Class (78) (1) Decrease in net assets from distributions (42,058) (7,491) Capital share transactions * Shares sold Investor Class 1,522,583 1,289,603 Advisor Class 252,576 196,170 R Class 33,064 1,460 Distributions reinvested Investor Class 36,586 6,546 Advisor Class 4,283 799 R Class 78 1 Shares redeemed Investor Class (1,197,047) (883,927) Advisor Class (106,863) (134,017) R Class (5,767) (216) Increase (decrease) in net assets from capital share transactions 539,493 476,419 Net Assets Increase (decrease) during period 1,191,686 2,051,251 Beginning of period 7,071,628 5,020,377 End of period $ 8,263,314 $ 7,071,628 ----------- ----------- (Including undistributed net investment income of $0 at 12/31/04 and $0 at 12/31/03) T. ROWE PRICE BLUE CHIP GROWTH FUND -------------------------------------------------------------------------------- STATEMENT OF CHANGES IN NET ASSETS -------------------------------------------------------------------------------- ($ 000s) Year Ended 12/31/04 12/31/03 *Share information Shares sold Investor Class 52,710 52,766 Advisor Class 8,687 8,044 R Class 1,160 56 Distributions reinvested Investor Class 1,191 238 Advisor Class 139 29 R Class 3 - Shares redeemed Investor Class (41,291) (35,804) Advisor Class (3,656) (5,549) R Class (200) (8) Increase (decrease) in shares outstanding 18,743 19,772 The accompanying notes are an integral part of these financial statements. T. ROWE PRICE BLUE CHIP GROWTH FUND -------------------------------------------------------------------------------- December 31, 2004 NOTES TO FINANCIAL STATEMENTS -------------------------------------------------------------------------------- NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES T. Rowe Price Blue Chip Growth Fund, Inc. (the fund) is registered under the Investment Company Act of 1940 (the 1940 Act) as a diversified, open-end management investment company. The fund seeks to provide long-term capital growth. Income is a secondary objective. The fund has three classes of shares: the Blue Chip Growth Fund original share class, referred to in this report as the Investor Class, offered since June 30, 1993, Blue Chip Growth Fund--Advisor Class (Advisor Class), offered since March 31, 2000, and Blue Chip Growth Fund--R Class (R Class), offered since September 30, 2002. Advisor Class shares are sold only through unaffiliated brokers and other unaffiliated financial intermediaries, and R Class shares are available to retirement plans serviced by intermediaries. The Advisor Class and R Class each operate under separate Board-approved Rule 12b-1 plans, pursuant to which each class compensates financial intermediaries for distribution, shareholder servicing, and/or certain administrative services. Each class has exclusive voting rights on matters related solely to that class, separate voting rights on matters that relate to all classes, and, in all other respects, the same rights and obligations as the other classes. The accompanying financial statements were prepared in accordance with accounting principles generally accepted in the United States of America, which require the use of estimates made by fund management. Valuation 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. Most foreign markets close before the close of trading on the NYSE. If the fund determines that developments between the close of a foreign market and the close of the NYSE will, in its judgment, materially affect the value of some or all of its portfolio securities, which in turn will affect the fund's share price, the fund will adjust the previous closing prices to reflect the fair value of the securities as of the close of the NYSE, as determined in good faith by the T. Rowe Price Valuation Committee, established by the fund's Board of Directors. A fund may also fair value securities in other situations, such as when a particular foreign market is closed but the fund is open. In deciding whether to make fair value adjustments, the fund reviews a variety of factors, including developments in foreign markets, the performance of U.S. securities markets, and the performance of instruments trading in U. S. markets that represent foreign securities and baskets of foreign securities. The fund uses outside pricing services to provide it with closing market prices and information used for adjusting those prices. The fund cannot predict how often it will use closing prices and how often it will adjust those prices. As a means of evaluating its fair value process, the fund routinely compares closing market prices, the next day's opening prices in the same markets, and adjusted prices. Currency Translation Assets, including investments, and liabilities denominated in foreign currencies are translated into U.S. dollar values each day at the prevailing exchange rate, using the mean of the bid and asked prices of such currencies against U.S. dollars as quoted by a major bank. Purchases and sales of securities, income, and expenses are translated into U.S. dollars at the prevailing exchange rate on the date of the transaction. The effect of changes in foreign currency exchange rates on realized and unrealized security gains and losses is reflected as a component of security gains and losses. Class Accounting The Advisor Class and R Class each pay distribution, shareholder servicing, and/or certain administrative expenses in the form of Rule 12b-1 fees, in an amount not exceeding 0.25% and 0.50%, respectively, of the class's average daily net assets. Shareholder servicing, prospectus, and shareholder report expenses incurred by each class are charged directly to the class to which they relate. Expenses common to all classes, investment income, and realized and unrealized gains and losses are allocated to the classes based upon the relative daily net assets of each class. 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 $373,000 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. In-Kind Redemptions In certain circumstances, the fund may distribute portfolio securities rather than cash as payment for a redemption of fund shares (in-kind redemption). For financial reporting purposes, the fund recognizes a gain on in-kind redemptions to the extent the value of the distributed securities on the date of redemption exceeds the cost of those securities. Gains and losses realized on in-kind redemptions ar not recognized for tax purposes, and are reclassified from undistributed realized gain (loss) to paid-in capital. During the year ended December 31, 2004, the fund realized $4,445,000 of net gain on $8,769,000 of in-kind redemptions. 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 by each class on an annual basis. Capital gain distributions, if any, are declared and paid by the fund, typically on an annual basis. During the year ended December 31, 2004, the fund received a one-time special dividend on a security held in its portfolio (Microsoft Corp.). The dividend, which totaled $29,075,000, represents 27% of dividend income reflected in the accompanying financial statements and is not expected to recur. 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. Securities Lending The fund lends its securities to approved brokers to earn additional income. It receives as collateral cash and U.S. government securities valued at 102% to 105% of the value of the securities on loan. Cash collateral is invested in a money market pooled trust managed by the fund's lending agent in accordance with investment guidelines approved by fund management. Collateral is maintained over the life of the loan in an amount not less than the value of loaned securities, as determined at the close of fund business each day; any additional collateral required due to changes in security values is delivered to the fund the next business day. Although risk is mitigated by the collateral, the fund could experience a delay in recovering its securities and a possible loss of income or value if the borrower fails to return the securities. Securities lending revenue recognized by the fund consists of earnings on invested collateral and borrowing fees, net of any rebates to the borrower and compensation to the lending agent. At December 31, 2004, there were no securities on loan. Other Purchases and sales of portfolio securities, other than short-term securities, aggregated $2,898,423,000 and $2,393,386,000, respectively, for the year ended December 31, 2004. NOTE 3 - FEDERAL INCOME TAXES No provision for federal income taxes is required since the fund intends to continue to qualify as a regulated investment company under Subchapter M of the Internal Revenue Code and distribute to shareholders all of its taxable income and gains. Federal income tax regulations differ from generally accepted accounting principles; therefore, distributions determined in accordance with tax regulations may differ significantly in amount or character from net investment income and realized gains for financial reporting purposes. Financial reporting records are adjusted for permanent book/tax differences to reflect tax character. Financial records are not adjusted for temporary differences. Distributions during the year ended December 31, 2004 totaled $42,058,000 and were characterized as ordinary income for tax purposes. At December 31, 2004, the tax-basis components of net assets were as follows: -------------------------------------------------------------------------------- Unrealized appreciation $2,193,589,000 Unrealized depreciation (59,002,000) Net unrealized appreciation (depreciation) 2,134,587,000 Capital loss carryforwards (1,059,088,000) Paid-in capital 7,187,815,000 Net assets $8,263,314,000 -------------- 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 $102,375,000 of capital loss carryforwards. As of December 31, 2004, the fund had $382,759,000 of capital loss carryforwards that expire in 2009, $433,036,000 that expire in 2010, and $243,293,000 that expire in 2011. 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 redemptions in kind and per share rounding of distributions. Results of operations and net assets were not affected by these reclassifications. -------------------------------------------------------------------------------- Undistributed net investment income $ 786,000 Undistributed net realized gain (4,257,000) Paid-in capital 3,471,000 At December 31, 2004, the cost of investments for federal income tax purposes was $6,186,395,000. 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 0.30% of the fund's average daily net assets, and the fund's pro-rata share of a group fee. The group fee is calculated based on the combined net assets of certain mutual funds sponsored by Price Associates (the group) applied to a graduated fee schedule, with rates ranging from 0.48% for the first $1 billion of assets to 0.295% for assets in excess of $120 billion. The fund's portion of the group fee is determined by the ratio of its average daily net assets to those of the group. At December 31, 2004, the effective annual group fee rate was 0.31%, and investment management fee payable totaled $4,248,000. The Advisor Class and R Class are also subject to a contractual expense limitation through the limitation dates indicated in the table below. During the limitation period, the manager is required to waive its management fee and reimburse a class for any expenses, excluding interest, taxes, brokerage commissions, and extraordinary expenses, that would otherwise cause the class's ratio of total expenses to average net assets (expense ratio) to exceed its expense limitation. Through the repayment date, each class is required to repay the manager for expenses previously reimbursed and management fees waived to the extent the class's net assets have grown or expenses have declined sufficiently to allow repayment without causing the class's expense ratio to exceed its expense limitation. -------------------------------------------------------------------------------- Advisor Class R Class Expense Limitation 1.05% 1.35% Limitation Date 4/30/06 4/30/06 Repayment Date 4/30/08 4/30/08 For the year ended December 31, 2004, each class operated below its expense limitation. In addition, the fund has entered into service agreements with Price Associates and two wholly owned subsidiaries of Price Associates (collectively, Price). Price Associates computes the daily share prices and maintains the financial records of the fund. T. Rowe Price Services, Inc., provides shareholder and administrative services in its capacity as the fund's transfer and dividend disbursing agent. T. Rowe Price Retirement Plan Services, Inc., provides subaccounting and recordkeeping services for certain retirement accounts invested in the Investor Class and R Class. For the year ended December 31, 2004, expenses incurred pursuant to these service agreements were $82,000 for Price Associates, $3,987,000 for T. Rowe Price Services, Inc., and $7,954,000 for T. Rowe Price Retirement Plan Services, Inc. At period-end, a total of $1,181,000 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 $501,000 for shareholder servicing costs related to the college savings plans, of which $357,000 was for services provided by Price and $39,000 was payable at period-end. At December 31, 2004, approximately 3.1% of the outstanding shares of the Investor Class were held by college savings plans. The fund is also one of several mutual funds sponsored by Price Associates (underlying Price funds) in which the T. Rowe Price 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 $571,000 of Spectrum Funds' expenses, of which $412,000 related to services provided by Price and $61,000 was payable at period-end. At December 31, 2004, approximately 5.5% of the outstanding shares of the Investor Class 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. During the year ended December 31, 2004, dividend income from the Reserve Funds totaled $286,000, and the value of shares of the Reserve Funds held at December 31, 2004 and December 31, 2003 was $69,489,000 and $1,000, respectively. As of December 31, 2004, T. Rowe Price Group, Inc. and/or its wholly owned subsidiaries owned 50,136 shares of the Investor Class, representing less than 1% of the fund's net assets. NOTE 5 - INTERFUND BORROWING Pursuant to its prospectus, the fund may borrow up to 33 1/3% of its total assets. The fund is party to an interfund borrowing agreement between itself and other T. Rowe Price-sponsored mutual funds, which permits it to borrow or lend cash at rates beneficial to both the borrowing and lending funds. Loans totaling 10% or more of a borrowing fund's total assets are collateralized at 102% of the value of the loan; loans of less than 10% are unsecured. During the year ended December 31, 2004, the fund had outstanding borrowings on 15 days, in the average amount of $13,180,000, and at an average annual rate of 1.47%. T. ROWE PRICE BLUE CHIP GROWTH FUND -------------------------------------------------------------------------------- REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM -------------------------------------------------------------------------------- To the Board of Directors and Shareholders of T. Rowe Price Blue Chip Growth 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 Blue Chip Growth 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 BLUE CHIP GROWTH FUND -------------------------------------------------------------------------------- TAX INFORMATION (UNAUDITED) FOR THE TAX YEAR ENDED 12/31/04 -------------------------------------------------------------------------------- We are providing this information as required by the Internal Revenue Code. The amounts shown may differ from those elsewhere in this report because of differences between tax and financial reporting requirements. For taxable non-corporate shareholders, $42,058,000 of the fund's income and short-term capital gains represents qualified dividend income subject to the 15% rate category. For corporate shareholders, $42,058,000 of the fund's income and short-term capital gains qualified for the dividends-received deduction. INFORMATION ON PROXY VOTING POLICIES, PROCEDURES, AND RECORDS -------------------------------------------------------------------------------- A description of the policies and procedures used by T. Rowe Price funds and portfolios to determine how to vote proxies relating to portfolio securities is available in each fund's Statement of Additional Information, which you may request by calling 1-800-225-5132 or by accessing the SEC's Web site, www.sec.gov. The description of our proxy voting policies and procedures is also available on our Web site, www.troweprice.com. To access it, click on the words "Company Info" at the top of our homepage for individual investors. Then, in the window that appears, click on the "Proxy Voting Policy" navigation button in the top left corner. Each fund's most recent annual proxy voting record is available on our Web site and through the SEC's Web site. To access it through our Web site, follow the directions above, then click on the words "Proxy Voting Record" at the bottom of the Proxy Voting Policy page. HOW TO OBTAIN QUARTERLY PORTFOLIO HOLDINGS -------------------------------------------------------------------------------- The fund files a complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarters of each fiscal year on Form N-Q. The fund's Form N-Q is available electronically on the SEC's Web site (www.sec.gov); hard copies may be reviewed and copied at the SEC's Public Reference Room, 450 Fifth St. N.W., Washington, DC 20549. For more information on the Public Reference Room, call 1-800-SEC-0330. T. ROWE PRICE BLUE CHIP GROWTH 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 1993 David K. Fagin Director, Golden Star Resources Ltd., Canyon (1938) Resources Corp. (5/00 to present), and Pacific 1993 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 James A.C. Kennedy, CFA Director and Vice President, T. Rowe Price and (1953) T. Rowe Price Group, Inc.; Director, T. Rowe 1997 Price Global Investment Services Limited and [43] T. Rowe Price International, Inc. James S. Riepe Director and Vice President, T. Rowe Price; Vice (1943) Chairman of the Board, Director, and Vice 1993 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, Blue Chip Growth 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) Jeffrey W. Arricale, CPA (1971) Vice President, T. Rowe Price and Vice President, Blue Chip Growth Fund T. Rowe Price Group, Inc.; formerly student, The Wharton School, University of Pennsylvania (to 2001); Manager, Assurance, KPMG LLP (to 1999) P. Robert Bartolo, CPA (1972) Vice President, T. Rowe Price; formerly Vice President, Blue Chip Growth Fund intern, T. Rowe Price (to 2001) Stephen V. Booth, CPA (1961) Vice President, T. Rowe Price, T. Rowe Vice President, Blue Chip Growth Fund Price Group, Inc., and T. Rowe Price Trust Company Joseph A. Carrier (1960) Vice President, T. Rowe Price, T. Rowe Treasurer, Blue Chip Growth Fund Price Group, Inc., T. Rowe Price Investment Services, Inc., and T. Rowe Price Trust Company Unless otherwise noted, officers have been employees of T. Rowe Price or T. Rowe Price International for at least five years. D. Kyle Cerminara, CFA (1977) Vice President, T. Rowe Price Vice President, Blue Chip Growth Fund Donald J. Easley, CFA (1971) Vice President, T. Rowe Price and Vice President, Blue Chip Growth Fund T. Rowe Price Group, Inc. Henry M. Ellenbogen (1971) Vice President, T. Rowe Price and Vice President, Blue Chip Growth Fund T. Rowe Price Group, Inc.; formerly Executive Vice President, Business Development, HelloAsia (to 2001); Chief of Staff, U.S. Representative Peter Deutsch (to 1999) Roger L. Fiery III, CPA (1959) Vice President, T. Rowe Price, T. Rowe Vice President, Blue Chip Growth Fund Price Group, Inc., T. Rowe Price International, Inc., and T. Rowe Price Trust Company Robert N. Gensler (1957) Vice President, T. Rowe Price and Vice President, Blue Chip Growth Fund T. Rowe Price Group, Inc. John R. Gilner (1961) Chief Compliance Officer and Vice Chief Compliance Officer, President, T. Rowe Price; Vice Blue Chip Growth 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, Blue Chip Growth Fund T. Rowe Price Trust Company Henry H. Hopkins (1942) Director and Vice President, T. Rowe Vice President, Blue Chip Growth 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. Thomas J. Huber, CFA (1966) Vice President, T. Rowe Price and Vice President, Blue Chip Growth Fund T. Rowe Price Group, Inc. Kris H. Jenner, MD, D. Phil. (1962) Vice President, T. Rowe Price and Vice President, Blue Chip Growth Fund T. Rowe Price Group, Inc. Unless otherwise noted, officers have been employees of T. Rowe Price or T. Rowe Price International for at least five years. Patricia B. Lippert (1953) Assistant Vice President, T. Rowe Price Secretary, Blue Chip Growth Fund and T. Rowe Price Investment Services, Inc. Timothy E. Parker (1974) Vice President, T. Rowe Price and Vice President, Blue Chip Growth 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) Larry J. Puglia, CFA, CPA (1960) Vice President, T. Rowe Price and President, Blue Chip Growth Fund T. Rowe Price Group, Inc. Karen M. Regan (1967) Vice President, T. Rowe Price Vice President, Blue Chip Growth Fund Jeffrey Rottinghaus, CPA (1970) Vice President, T. Rowe Price and Vice President, Blue Chip Growth Fund T. Rowe Price Group, Inc.; formerly student, the Wharton School, University of Pennsylvania (to 2001); Information Technology Consultant, Kelly-Lewey & Associates (to 1999) Robert W. Sharps, CFA, CPA (1971) Vice President, T. Rowe Price and Vice President, Blue Chip Growth Fund T. Rowe Price Group, Inc. Robert W. Smith (1961) Vice President, T. Rowe Price, T. Rowe Vice President, Blue Chip Growth Fund Price Group, Inc., and T. Rowe Price International, Inc. Julie L. Waples (1970) Vice President, T. Rowe Price Vice President, Blue Chip Growth Fund Unless otherwise noted, officers have been employees of T. Rowe Price or T. Rowe Price International for at least five years. Item 2. Code of Ethics. 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 $23,270 $25,034 Audit-Related Fees 3,018 1,499 Tax Fees 6,311 6,502 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 Blue Chip Growth 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