<PAGE>
- --------------------------------------------------------------------------------
T. Rowe Price
- --------------------------------------------------------------------------------
Semiannual Report
Real Estate Fund
- --------------------------------------------------------------------------------
June 30, 1999
- --------------------------------------------------------------------------------
REPORT HIGHLIGHTS
================================================================================
REAL ESTATE FUND
- -------------------------
* Real estate stocks and the fund joined the stock market rally in the first
half after a weak 1998.
* Your fund posted an attractive return for the past six months that was
ahead of both benchmarks; performance for the year was negative but in line
with the competition.
* As domestic GDP growth continued strong into 1999, sentiment toward the
sectors we invest in improved considerably.
* We initiated new positions in solid companies whose stock prices had fallen
to attractive levels.
* We believe the high dividend yields and earnings prospects of our holdings
bode well for shareholders in the second half of the year.
================================================================================
FELLOW SHAREHOLDERS
================================================================================
Stocks posted strong gains during the six months ended June 30, 1999, and
real estate stocks and your fund joined the rally after languishing in 1998. As
fears of deflation subsided and global economies showed signs of renewed growth,
investors shifted from the small group of large-capitalization growth stocks
that had previously led the way to cyclical and natural resources companies,
including those in the real estate sector.
<PAGE>
================================================================================
PERFORMANCE COMPARISON
----------------------
Periods Ended 6/30/99 6 Months 12 Months
Real Estate Fund 7.34% -6.69%
Wilshire Real Estate
Securities Index 6.78 -6.88
Lipper Real Estate
Funds Average 6.64 -5.55
================================================================================
During the past six months, your fund produced a strong return that
surpassed both the Wilshire Real Estate Securities Index and the Lipper Real
Estate Funds Average. The 12-month return was negative, due to weak results last
year, but it was roughly in line with both benchmarks shown in the table above.
We cannot point to a single catalyst that led to the turnaround in investor
sentiment. Investors did react favorably to news of some real estate investment
trusts (REITs) being acquired at premiums to their market prices and to reports
that famed investor Warren Buffet took a stake in a couple of companies in the
sector. In addition, many investors finally recognized the fundamental values
attached to the stocks of real estate-related companies, which continued to
report good earnings growth. Also, with fears of accelerating inflation
surfacing during the period, investors searching for higher income were
attracted to the relatively high dividends offered by our stocks. As mentioned
in an earlier report, cash rents have continued to grow, and because of real
estate companies' unique structure they channel much of their income to
investors in the form of dividends, which we in turn pass along to you as
distributions.
<PAGE>
================================================================================
DIVIDEND DISTRIBUTION
================================================================================
On June 25, 1999, your Board of Directors declared a $0.10 per share
distribution to shareholders of record on that date. This brought the full year
total to $0.16. You should have already received your check or statement
reflecting this activity.
================================================================================
MARKET ENVIRONMENT
================================================================================
Real estate stocks were hurt last year by fears of decelerating earnings
growth and slowing demand in the face of increased building activity. However,
with GDP growing at a torrid pace through the first half of the year and demand
remaining strong, sentiment toward stocks in our sectors changed significantly.
The U.S. economy showed particular strength in the area of consumer spending,
which has been reinforced by the wealth effect of high participation in the
long-lived bull market in stocks and, to a lesser extent, in real estate. The
Federal Reserve, concerned that robust growth could lead to higher inflation,
preemptively raised the federal funds rate a quarter-point at the end of June.
============================================================
<PAGE>
INFORMATION ON YEAR-END DISTRIBUTIONS
-------------------------------------
To help you with tax planning, we try to give you
a good idea of the per-share income and capital
gain amounts our funds may distribute near
year-end. In late October, we will provide
estimates of these amounts, which will be paid on
December 16, 1999, to shareholders of record on
December 14. These preliminary numbers will be
included in The Price Report mailing to
shareholders in late October and will also be
available on our Web siteNwww.troweprice.com. We
hope that these preliminary numbers will be useful
to you in approximating the income and capital
gains taxes you may pay on distributions to
taxable accounts. If your fund distributed any
capital gains earlier in 1999, you can find the
amounts on your statements and should include them
in your tax planning calculations. Please keep in
mind that the numbers are not final and are likely
to be revised before the December 14 declaration
and record date. As the fall progresses, you may
want to check our Web site for revisions. If you
would like information on tax matters relating to
mutual funds, please visit our Web site to
download our Insights report, Tax Information for
Mutual Fund Investors, or call 1-800-225-5132 to
request a copy.
============================================================
At present, policymakers seem content with the notion that high
productivity gains in the workforce, due in large measure to the application of
technology, are holding down inflation. Furthermore, the labor force still seems
more interested in job security than in wage increases, despite low
unemployment. This attitude can partly be attributed to continuing corporate
downsizing and the availability of cheap labor overseas. These conflicting
forces suggest that the Fed will not step on the monetary brake too heavily in
its effort to combat inflation, since by doing so it runs the risk of derailing
the robust economy. The Fed is fully aware that recovery in the rest of the
world remains fragile and dependent upon U.S. policy. A cautious Fed that is
unlikely to overreact in its fight against inflation prompts us to remain
optimistic about the prospects for our holdings.
<PAGE>
================================================================================
PORTFOLIO REVIEW
================================================================================
INDUSTRY DIVERSIFICATION
------------------------
Percent of Net Assets
12/31/98 6/30/99
-------- -------
Apartment/Residential 17% 18%
Diversified 16 17
Office 15 14
Office and Industrial 10 10
Shopping Center 9 8
Lodging and Leisure 6 7
Industrial 7 6
Regional Mall 5 5
Reserves 3 4
Manufactured Housing 4 4
Services 3 3
Other Real Estate 3 2
Self-Storage 2 2
Total 100% 100%
================================================================================
We are increasingly pleased with the caliber of the stocks in the
portfolio. In our view, the core of the fund comprises some of the finest names
in real estate, and careful pruning and selective additions enable us to
fine-tune the composition of fund holdings. We are particularly sensitive to
stock valuations and the prices we pay when we initiate or add to positions.
Recent uncertainty surrounding our industries has allowed us to add premium
names at nonpremium prices.
<PAGE>
By way of explanation, the net asset value or NAV of a real estate company
is the estimated value that might be received if the underlying properties were
to be sold, either as a portfolio or through individual sales. Ideally, we
prefer to purchase securities at a discount to NAV and receive, in effect, a
discount on the value of the investment. It is important to note that the
quality of our holdings often means our stocks tend to trade at higher multiples
than their peers. However, higher multiples do not automatically translate into
higher premiums when one considers the quality, safety, and potential of our
investments.
===============================
We find ourselves in a
particularly opportune
period in which real estate
investments have been
trading below NAV.
===============================
We find ourselves in a particularly opportune period in which real estate
investments have been trading below NAV. During the first half, we added
positions that we feel offer a unique exposure to select opportunities. SMITH
CHARLES RESIDENTIAL REALTY has established itself as an experienced and skilled
developer of high-rise residential apartments. The company, which built its
reputation in the Washington, D.C. area, has branched out beyond this region and
now offers exciting projects in new cities. We also admire the capital
discipline and acumen of CENTERPOINT PROPERTIES, another new holding.
Centerpoint concentrates on the largest industrial market of Chicago. While some
operators focus on growth in size, Centerpoint prides itself on its focus on
growth in per share profitability. In addition, uncharacteristically low
snowfall in the west last winter created a buying opportunity in VAIL RESORTS.
Poor ski conditions affected the company's properties at Vail, Breckenridge,
Keystone, and Beaver Creek. We are confident investors will focus once again on
the shares when more typical winter conditions return to Colorado.
<PAGE>
One further note about the prices of stocks we hold: we EXPECT our
investments to eventually trade at premiums to NAV because of their growth
potential. The premium should reflect the intangible value that superior real
estate managers bring to investors beyond the value of the properties alone. In
the long run, it is not the NAV that dictates the return so much as the
increased value added above the NAV.
================================================================================
OUTLOOK
================================================================================
We continue to believe that the capital constraint imposed by the weak
market for real estate stocks in 1998 has led to healthier prospects for the
sector. In addition to limiting the introduction of additional securities into
the market, this situation forced real estate companies to be more aware of the
scarcity and value of their capital. Many firms in our industries are well
positioned to thrive in a disciplined environment that demands intense scrutiny
and prioritization of investment opportunities. Meanwhile, we continue to
believe that concern about high stock valuations is good news for investors in
our holdings, which have attractive valuations relative to the overall market.
We are optimistic about the earnings growth potential of our investments through
the remainder of 1999, and we see the possibility of continuing increases in
dividend payments.
Respectfully submitted,
/s/
David M. Lee
Chairman of the Investment Advisory Committee
July 23, 1999
================================================================================
<PAGE>
T. Rowe Price Real Estate Fund
- ------------------------------
PORTFOLIO HIGHLIGHTS
--------------------
TWENTY-FIVE LARGEST HOLDINGS
----------------------------
Percent of
Net Assets
6/30/99
- --------------------------------------------------------------------------------
Starwood Hotels & Resorts 4.0%
- --------------------------------------------------------------------------------
Equity Office Properties 3.7
- --------------------------------------------------------------------------------
Trizec Hahn 3.1
- --------------------------------------------------------------------------------
Simon Property Group 3.1
- --------------------------------------------------------------------------------
Crescent Real Estate Equities 3.0
- --------------------------------------------------------------------------------
Vornado Realty Trust 2.9
- --------------------------------------------------------------------------------
Archstone Communities Trust 2.9
- --------------------------------------------------------------------------------
Kilroy Realty 2.8
- --------------------------------------------------------------------------------
Reckson Associates Realty 2.8
- --------------------------------------------------------------------------------
ProLogis Trust 2.7
- --------------------------------------------------------------------------------
Spieker Properties 2.5
- --------------------------------------------------------------------------------
Camden Property Trust 2.5
- --------------------------------------------------------------------------------
Arden Realty 2.5
- --------------------------------------------------------------------------------
JPRealty 2.4
- --------------------------------------------------------------------------------
Apartment Investment & Management 2.3
- --------------------------------------------------------------------------------
Avalonbay Communities 2.3
- --------------------------------------------------------------------------------
Kimco Realty 2.3
- --------------------------------------------------------------------------------
CarrAmerica Realty 2.3
- --------------------------------------------------------------------------------
Cousins Properties 2.2
- --------------------------------------------------------------------------------
Security Capital U.S. Realty 2.2
- --------------------------------------------------------------------------------
Gables Residential Trust 2.2
- --------------------------------------------------------------------------------
<PAGE>
Catellus Development 2.1
- --------------------------------------------------------------------------------
Post Properties 2.1
- --------------------------------------------------------------------------------
Public Storage 2.1
- --------------------------------------------------------------------------------
Mack-Cali Realty 2.1
- --------------------------------------------------------------------------------
Total 65.1%
Note: Table excludes reserves.
================================================================================
T. Rowe Price Real Estate Fund
- ------------------------------
PORTFOLIO HIGHLIGHTS
--------------------
MAJOR PORTFOLIO CHANGES
-----------------------
(Listed in descending order of size)
6 Months Ended 6/30/99
TEN LARGEST PURCHASES TEN LARGEST SALES
- --------------------- -----------------
Canary Wharf Finance * Canary Wharf Finance **
Cornerstone Properties * Koger Equity **
Smith Charles Residential Realty * Weeks
Vail Resorts * Starwood Hotels & Resorts
Trizec Hahn Prime Retail **
Centerpoint Properties * Homestead Village **
Simon Property Group St. Joe **
LaSalle Partners Security Capital Group
Catellus Development CarrAmerica Realty
Vornado Realty Trust Kilroy Realty
* Position added
** Position eliminated
================================================================================
T. Rowe Price Real Estate Fund
- ------------------------------
PERFORMANCE COMPARISON
----------------------
This chart shows the value of a hypothetical $10,000 investment in the fund
over the past 10 fiscal year periods or since inception (for funds lacking
10-year records). The result is compared with a broad-based average or index. An
index return does not reflect expenses, which have been deducted from the fund's
return.
[Real Estate Fund SEC chart shown here]
<PAGE>
AVERAGE ANNUAL COMPOUND TOTAL RETURN
------------------------------------
This table shows how the fund would have performed each year if its actual
(or cumulative) returns for the periods shown had been earned at a constant
rate.
Since Inception
Periods Ended 6/30/99 1 Year Inception Date
- --------------------- ------ --------- ----
Real Estate Fund -6.69% -0.88% 10/31/97
Investment return and principal value represent past performance and will
vary. Shares may be worth more or less at redemption than at original purchase.
================================================================================
T. Rowe Price Real Estate Fund
- ------------------------------ Unaudited
For a share outstanding throughout each period
FINANCIAL HIGHLIGHTS
--------------------
6 Months Year 10/31/97
Ended Ended Through
6/30/99 12/31/98 12/31/97
NET ASSET VALUE
Beginning of period $ 8.68 $ 10.69 $ 10.00
- -------------------------------------------------------------------------------
Investment activities
Net investment income 0.19* 0.38* 0.08*
Net realized and unrealized
gain (loss) 0.44 (1.97) 0.70
- -------------------------------------------------------------------------------
Total from investment activities 0.63 (1.59) 0.78
- -------------------------------------------------------------------------------
Distributions
Net investment income (0.16) (0.40) (0.09)
Return of capital - (0.04) -
- -------------------------------------------------------------------------------
Total distributions (0.16) (0.44) (0.09)
- -------------------------------------------------------------------------------
Redemption fees
added to paid-in-capital - 0.02 -
- -------------------------------------------------------------------------------
NET ASSET VALUE
End of period $ 9.15 $ 8.68 $ 10.69
Ratios/Supplemental=Data=======================================================
Total return** 7.34%* (14.86)%* 7.82%*
- -------------------------------------------------------------------------------
Ratio of total expenses to
average net assets 1.00%*+ 1.00%* 1.00%*+
- -------------------------------------------------------------------------------
Ratio of net investment
income to average net assets 4.37%*+ 4.07%* 6.07%*+
- -------------------------------------------------------------------------------
<PAGE>
Portfolio turnover rate 34.6%+ 56.8% 8.4%
- -------------------------------------------------------------------------------
Net assets, end of period
(in thousands) $ 29,099 $ 27,599 $ 7,259
- -------------------------------------------------------------------------------
** 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 and payment of no redemption or account fees.
* Excludes expenses in excess of a 1.00% voluntary expense limitation in
effect through 12/31/99.
+ Annualized
The accompanying notes are an integral part of these financial statements.
================================================================================
T. Rowe Price Real Estate Fund
- ------------------------------
Unaudited June 30, 1999
STATEMENT OF NET ASSETS
-----------------------
Shares Value
In thousands
COMMON STOCKS 96.3%
REAL=ESTATE==92.9%=============================================================
Apartment/Residential 17.9%
Apartment Investment & Management, REIT 15,600 $ 667
- -------------------------------------------------------------------------------
Archstone Communities Trust, REIT 38,500 845
- -------------------------------------------------------------------------------
Avalonbay Communities, REIT 18,000 666
- -------------------------------------------------------------------------------
Camden Property Trust, REIT 26,000 721
- -------------------------------------------------------------------------------
Equity Residential Properties Trust, REIT 12,500 563
- -------------------------------------------------------------------------------
Gables Residential Trust, REIT 26,000 627
- -------------------------------------------------------------------------------
Post Properties, REIT 15,000 615
- -------------------------------------------------------------------------------
Smith Charles Residential Realty 15,000 509
- -------------------------------------------------------------------------------
5,213
- -------------------------------------------------------------------------------
Diversified 17.1%
AMB Property 23,000 541
- -------------------------------------------------------------------------------
Colonial Properties Trust, REIT 18,000 509
- -------------------------------------------------------------------------------
Cousins Properties, REIT 19,200 649
- -------------------------------------------------------------------------------
Crescent Real Estate Equities, REIT 37,000 879
- -------------------------------------------------------------------------------
Security Cap U.S. Realty (Class A) * 33,800 642
- -------------------------------------------------------------------------------
Trizec Hahn 44,000 896
- -------------------------------------------------------------------------------
<PAGE>
Vornado Realty Trust, REIT 24,000 847
- -------------------------------------------------------------------------------
4,963
- -------------------------------------------------------------------------------
Industrial 6.4%
Centerpoint Properties Trust, REIT 7,000 256
- -------------------------------------------------------------------------------
EastGroup Properties, REIT 22,000 442
- -------------------------------------------------------------------------------
ProLogis Trust, REIT 39,000 790
- -------------------------------------------------------------------------------
Weeks, REIT 12,500 381
- -------------------------------------------------------------------------------
1,869
- -------------------------------------------------------------------------------
Lodging & Leisure 6.4%
Patriot American Hospitality, REIT 50,000 228
- -------------------------------------------------------------------------------
Starwood Hotels & Resorts, REIT 38,500 1,177
- -------------------------------------------------------------------------------
Vail Resorts * 26,000 455
- -------------------------------------------------------------------------------
1,860
- -------------------------------------------------------------------------------
Manufactured Housing 3.7%
Manufactured Home Communities, REIT 23,000 598
- -------------------------------------------------------------------------------
Sun Communities, REIT 13,000 461
- -------------------------------------------------------------------------------
1,059
- -------------------------------------------------------------------------------
Office 14.0%
Arden Realty, REIT 29,000 $ 714
- -------------------------------------------------------------------------------
Boston Properties, REIT 14,000 502
- -------------------------------------------------------------------------------
CarrAmerica Realty, REIT 26,200 655
- -------------------------------------------------------------------------------
Cornerstone Properties, REIT 32,000 508
- -------------------------------------------------------------------------------
Equity Office Properties, REIT 42,500 1,089
- -------------------------------------------------------------------------------
Mack-Cali Realty, REIT 19,500 604
- -------------------------------------------------------------------------------
4,072
- -------------------------------------------------------------------------------
Office & Industrial 10.1%
Duke Realty Investments, REIT 25,000 564
- -------------------------------------------------------------------------------
Kilroy Realty, REIT 34,000 829
- -------------------------------------------------------------------------------
Reckson Associates Realty, REIT * 34,900 820
- -------------------------------------------------------------------------------
<PAGE>
Spieker Properties, REIT 18,600 723
- -------------------------------------------------------------------------------
2,936
- -------------------------------------------------------------------------------
Other Real Estate 2.1%
Catellus Development * 40,000 620
- -------------------------------------------------------------------------------
620
- -------------------------------------------------------------------------------
Regional Mall 4.7%
CBL & Associates Properties, REIT 18,500 488
- -------------------------------------------------------------------------------
Simon Property Group, REIT 35,000 888
- -------------------------------------------------------------------------------
1,376
- -------------------------------------------------------------------------------
Self Storage 2.1%
Public Storage, REIT 21,600 605
- -------------------------------------------------------------------------------
605
- -------------------------------------------------------------------------------
Shopping Center 8.4%
Developers Diversified Realty, REIT 29,000 482
- -------------------------------------------------------------------------------
Federal Realty Investment Trust, REIT 26,000 597
- -------------------------------------------------------------------------------
JP Realty, REIT 33,900 697
- -------------------------------------------------------------------------------
Kimco Realty, REIT 17,000 665
- -------------------------------------------------------------------------------
2,441
- -------------------------------------------------------------------------------
Total Real Estate 27,014
- -------------------------------------------------------------------------------
SERVICES==2.5%=================================================================
Services 2.5%
LaSalle Partners * 15,000 447
- -------------------------------------------------------------------------------
Security Capital Group (Class B) * 20,000 292
- -------------------------------------------------------------------------------
Total Services 739
- -------------------------------------------------------------------------------
Total Miscellaneous Common Stocks 0.9% 263
Total Common Stocks (Cost $30,743) 28,016
SHORT-TERM=INVESTMENTS==3.6%===================================================
Money Market Funds 3.6%
Reserve Investment Fund, 5.05% # 1,063,188 $ 1,063
Total Short-Term Investments (Cost $1,063) 1,063
<PAGE>
=Total=Investments=in=Securities===============================================
99.9% of Net Assets (Cost $31,806) $ 29,079
Other Assets Less Liabilities 20
NET ASSETS $ 29,099
Net Assets Consist of:
Accumulated net investment income - net of distributions $ 96
Accumulated net realized gain/loss - net of distributions (2,310)
Net unrealized gain (loss) (2,727)
Paid-in-capital applicable to 3,181,179 shares of $0.0001 par
value capital stock outstanding; 1,000,000,000 shares authorized 34,040
- -------------------------------------------------------------------------------
NET ASSETS $ 29,099
NET ASSET VALUE PER SHARE $ 9.15
# Seven-day yield
* Non-income producing
REIT Real Estate Investment Trust
The accompanying notes are an integral part of these financial statements.
================================================================================
T. Rowe Price Real Estate Fund
- ------------------------------ Unaudited
STATEMENT OF OPERATIONS
-----------------------
In thousands
6 Months
Ended
6/30/99
==Investment=Income============================================================
Income
Dividend $ 703
Interest 22
- -------------------------------------------------------------------------------
Total income 725
- -------------------------------------------------------------------------------
Expenses
Shareholder servicing 68
Custody and accounting 43
Prospectus and shareholder reports 23
Registration 14
Legal and audit 6
Directors 3
Miscellaneous 2
Reimbursed by manager (24)
- -------------------------------------------------------------------------------
Total expenses 135
- -------------------------------------------------------------------------------
Net investment income 590
- -------------------------------------------------------------------------------
<PAGE>
==Realized=and=Unrealized=Gain=(Loss)==========================================
Net realized gain (loss) on securities (1,564)
Change in net unrealized gain or loss on securities 2,804
- -------------------------------------------------------------------------------
Net realized and unrealized gain (loss) 1,240
- -------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET
ASSETS FROM OPERATIONS $ 1,830
The accompanying notes are an integral part of these financial statements.
================================================================================
T. Rowe Price Real Estate Fund
- ------------------------------ Unaudited
STATEMENT OF CHANGES IN NET ASSETS
---------------------------------- In thousands
6 Months Year
Ended Ended
6/30/99 12/31/98
Increase=(Decrease)=in=Net=Assets=============================================
Operations
Net investment income $ 590 $ 1,236
Net realized gain (loss) (1,564) (746)
Change in net unrealized gain or loss 2,804 (5,829)
- ------------------------------------------------------------------------------
Increase (decrease) in net assets from operations 1,830 (5,339)
- ------------------------------------------------------------------------------
Distributions to shareholders
Net investment income (494) (1,306)
Tax return of capital - (136)
- ------------------------------------------------------------------------------
Decrease in net assets from distributions (494) (1,442)
- ------------------------------------------------------------------------------
Capital share transactions*
Shares sold 7,278 43,879
Distributions reinvested 455 1,345
Shares redeemed (7,576) (18,163)
Redemption fees received 7 60
- ------------------------------------------------------------------------------
Increase (decrease) in net assets from capital
share transactions 164 27,121
Net=Assets====================================================================
Increase (decrease) during period 1,500 20,340
Beginning of period 27,599 7,259
==============================================================================
End of period $ 29,099 $ 27,599
==============================================================================
*Share information
Shares sold 819 4,242
Distributions reinvested 52 146
Shares redeemed (871) (1,886)
- ------------------------------------------------------------------------------
Increase (decrease) in shares outstanding - 2,502
The accompanying notes are an integral part of these financial statements.
================================================================================
<PAGE>
T. Rowe Price Real Estate Fund
- ------------------------------
Unaudited June 30, 1999
NOTES TO FINANCIAL STATEMENTS
- -----------------------------
================================================================================
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
================================================================================
T. Rowe Price Real Estate Fund, Inc. (the fund) is registered under the
Investment Company Act of 1940 as a diversified, open-end management investment
company and commenced operations on October 31, 1996.
The accompanying financial statements are prepared in accordance with
generally accepted accounting principles for the investment company industry;
these principles may require the use of estimates by fund management.
Valuation Equity securities listed or regularly traded on a securities
exchange are valued at the last quoted sales price on the day the valuations are
made. A security which 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 and securities
regularly traded in the over-the-counter market are valued at the mean of the
latest bid and asked prices. Other equity securities are valued at a price
within the limits of the latest bid and asked prices deemed by the Board of
Directors, or by persons delegated by the Board, best to reflect fair value.
Investments in mutual funds are valued at the closing net asset value per
share of the mutual fund on the day of valuation.
Assets and liabilities for which the above valuation procedures are
inappropriate or are deemed not to reflect fair value are stated at fair value
as determined in good faith by or under the supervision of the officers of the
fund, as authorized by the Board of Directors.
Other Income and expenses are recorded on the accrual basis. Investment
transactions are accounted for on the trade date. Realized gains and losses are
reported on the identified cost basis. Dividend income and distributions to
shareholders are recorded by the fund on the ex-dividend date. Income and
capital gain distributions are determined in accordance with federal income tax
regulations and may differ from those determined in accordance with generally
accepted accounting principles. Credits earned on daily, uninvested cash
balances at the custodian are used to reduce the fund's custody charges.
================================================================================
NOTE 2 - INVESTMENT TRANSACTIONS
================================================================================
Purchases and sales of portfolio securities, other than short-term
securities, aggregated $4,574,000 and $4,723,000, respectively, for the six
months ended June 30, 1999.
<PAGE>
================================================================================
NOTE 3 - FEDERAL INCOME TAXES
================================================================================
No provision for federal income taxes is required since the fund intends to
continue to qualify as a regulated investment company and distribute all of its
taxable income. As of December 31, 1998, the fund had capital loss carryforwards
for federal income tax purposes of $224,000, all of which expires in 2006. The
fund intends to retain gains realized in future periods that may be offset by
available capital loss carryforwards.
At June 30, 1999, the cost of investments for federal income tax purposes
was substantially the same as for financial reporting and totaled $31,806,000.
Net unrealized loss aggregated $2,727,000 at period-end, of which $543,000
related to appreciated investments and $3,270,000 to depreciated investments.
================================================================================
NOTE 4 - RELATED PARTY TRANSACTIONS
================================================================================
The investment management agreement between the fund and the manager
provides for an annual investment management fee. The fee is computed daily and
paid monthly, and consists of an individual fund fee equal to 0.30% of average
daily net assets and a group fee. The group fee is based on the combined assets
of certain mutual funds sponsored by the manager or Price Associates (the
group). The group fee rate ranges from 0.48% for the first $1 billion of assets
to 0.30% for assets in excess of $80 billion. At June 30, 1999, and for the six
months then ended, the effective annual group fee rate was 0.32%. The fund pays
a pro-rata share of the group fee based on the ratio of its net assets to those
of the group.
Under the terms of the investment management agreement, the manager is
required to bear any expenses through December 31, 1999, which would cause the
fund's ratio of total expenses to average net assets to exceed 1.00%.
Thereafter, through December 31, 2001, the fund is required to reimburse the
manager for these expenses, provided that average net assets have grown or
expenses have declined sufficiently to allow reimbursement without causing the
fund's ratio of total expenses to average net assets to exceed 1.00%. Pursuant
to this agreement, $84,000 of management fees were not accrued by the fund for
the six months ended June 30, 1999, and $24,000 of other expenses were borne by
the manager. Additionally, $285,000 of unaccrued 1997-1998 fees and expenses
remain subject to reimbursement through December 31, 2001.
In addition, the fund has entered into agreements with the manager and two
wholly owned subsidiaries of the manager, pursuant to which the fund receives
certain other services. The manager computes the daily share price and maintains
the financial records of the fund. T. Rowe Price Services, Inc. is the fund's
transfer and dividend disbursing agent and provides shareholder and
administrative services to the fund. T. Rowe Price Retirement Plan Services,
Inc. provides subaccounting and recordkeeping services for certain retirement
accounts invested in the fund. The fund incurred expenses pursuant to these
related party agreements totaling approximately $89,000 for the six months ended
June 30, 1999, of which $20,000 was payable at period-end.
<PAGE>
The fund may invest in the Reserve Investment Fund and Government Reserve
Investment Fund (collectively, the Reserve Funds), open-end management
investment companies managed by T. Rowe Price Associates, Inc. The Reserve Funds
are offered as cash management options only to mutual funds and other accounts
managed by T. Rowe Price and its affiliates and are not available to the public.
The Reserve Funds pay no investment management fees. Distributions from the
Reserve Funds to the fund for the six months ended June 30, 1999, totaled
$22,000 and are reflected as interest income in the accompanying Statement of
Operations.
================================================================================
FOR YIELD, PRICE, LAST
TRANSACTION, CURRENT BALANCE,
OR TO CONDUCT TRANSACTIONS, 24
HOURS, 7 DAYS A WEEK, CALL
TELE*ACCESS [REGISTRATION
MARK:] 1-800-638-2587 toll
free
FOR ASSISTANCE WITH YOUR
EXISTING FUND ACCOUNT, CALL:
Shareholder Service Center
1-800-225-5132 toll free
410-625-6500 Baltimore area
TO OPEN A BROKERAGE ACCOUNT OR
OBTAIN INFORMATION, CALL:
1-800-638-5660 toll free
<PAGE>
INTERNET ADDRESS:
www.troweprice.com
T. Rowe Price Associates 100
East Pratt Street Baltimore,
Maryland 21202 This report is
authorized for distribution
only to shareholders and to
others who have received a
copy of the prospectus
appropriate to the fund or
funds covered in this report.
INVESTOR CENTERS:
101 East Lombard St.
Baltimore, MD 21202
T. Rowe Price
Financial Center
10090 Red Run Blvd.
Owings Mills, MD 21117
Farragut Square
900 17th Street, N.W.
Washington, D.C. 20006
4200 West Cypress St.
10th Floor
Tampa, FL 33607
4410 ArrowsWest Drive
Colorado Springs, CO 80907
Warner Center
21800 Oxnard Street, Suite 270
Woodland Hills, CA 91367
T. Rowe Price Investment Services, Inc., Distributor. F12-051 6/30/99
