Equity Income Portfolio

Transcription

1 June 30, 2007 Semiannual Report Equity Income Portfolio This report is authorized for distribution only to those who have received a copy of the portfolio s prospectus. T. Rowe Price Investment Services, Inc., Distributor.

2 Table of Contents Highlights Manager s Letter Performance and Expenses Financial Highlights Portfolio of Investments The views and opinions in this report were current as of June 30, 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, 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.

3 Manager s Letter T. Rowe Price Equity Income Portfolio Dear Investor The first half of 2007 proved to be reasonably rewarding for shareholders of the Equity Income Portfolio. It was not an exciting period, just a period of good solid performance, albeit with most of the returns generated in the second quarter. Equity returns, for the most part, belied the stories appearing in various media outlets. With a continuous barrage of reports about Iraq, resurgent inflation, higher interest rates, rising energy prices, continued concern over the housing market, and hedge funds suffering substantial losses from subprime mortgage investments, the news was not conducive to inspired investor confidence. Against this backdrop, however, equity prices advanced at a reasonable pace. Performance Comparison Periods Ended 6/30/07 6 Months 12 Months Equity Income Portfolio 8.07% 22.38% Equity Income Portfolio II S&P 500 Stock Index Lipper Variable Annuity Underlying Equity Income Funds Average As shown in the Performance Comparison table, for the six-month period ended June 30, 2007, the Equity Income Portfolio returned 8.07%, comfortably ahead of both the S&P 500 Stock Index and the Lipper Variable Annuity Underlying Equity Income Funds Average. For the 12-month period, the portfolio s return of 22.38% again surpassed both the broad market and the Lipper universe of similar funds. (Performance for the Portfolio-II was lower due to its higher expense ratios.) Dividend Distribution On June 26, the portfolio s Board of Directors declared a second-quarter income dividend of $0.11 per share, bringing the total dividend income distributions in the first half of 2007 to $0.20. The second-quarter payment was paid on June 28 to shareholders of record as of June 26. On March 28, the fund declared a long-term capital gain distribution of $0.23 per share and a shortterm distribution of $0.02. Portfolio Review Sector Diversification Percent of Net Assets 12/31/06 6/30/07 Financials 17.3% 17.1% Consumer Discretionary Industrials and Business Services Energy Consumer Staples Health Care Information Technology Telecommunication Services Materials Utilities Other and Reserves Total 100.0% 100.0% Historical weightings reflect current industry/sector classifications. In the first half, our best-performing investments were in the energy, industrial cyclical, and telecommunications sectors. Rising oil prices boosted portfolio holdings Schlumberger and Royal Dutch Shell. Materials companies such as Alcoa and Vulcan Materials also performed well during the period. Industrial cyclicals, Highlights The equity market was strong during the first half of the year despite the ongoing war in Iraq, resurgent inflation, higher interest rates, rising energy prices, continued concern over the housing market, and problems in the subprime mortgage market. The fund s performance for both the 6- and 12-month periods ended June 30, 2007, exceeded those of its primary benchmarks. In the first half, our best-performing investments were in the energy, industrial cyclical, and telecommunications sectors. We would not be surprised to see a consolidation in stock prices over the near term, but we remain encouraged by the relatively healthy global economy and the wide range of appealing investment opportunities in today s market. 1

4 including Honeywell International and Cooper Industries, were positive contributors, as were telecommunications company AT&T and others in the group. We benefited from AstraZeneca s purchase of MedImmune, and we were fortunate to have a position in Dow Jones as Rupert Murdoch s News Corp. proposed a takeover at a very attractive price. (Please refer to our portfolio of investments for a complete listing of fund holdings and the amount each represents in the portfolio.) If there was a common theme to companies whose performance was disappointing, it was their connection to the housing sector. Whether a homebuilder (D.R. Horton), a supplier (Masco, Fortune Brands, USG), or a lender (Fannie Mae), continued weakness in the residential real estate sector was one of the big stories of early Several of our financial and utilities stocks were relatively weak as long-term interest rates rose late in the period. Every now and then we feel it is helpful to provide a brief refresher course on our investment approach. Our strategy is to invest primarily in larger-capitalization, undervalued companies with attractive dividend yields, reasonable price/earnings ratios, and the potential for capital appreciation. We are interested in companies that have reasonable prospects for good dividend growth, and this focus on attractive dividend yields and the potential for dividend growth has been a hallmark of our approach since the fund s inception in In many cases, our portfolio companies return capital to investors, not only through dividends but also through stock buyback programs. For example, in 2006 GE paid dividends to investors totaling approximately $10.4 billion. In addition, the company repurchased about $8.5 billion worth of its own stock. In total, GE returned almost $19 billion to its shareholders last year. This year, we expect both dividends and stock repurchases to exceed last year s levels. These are the hallmarks of a financially strong, shareholder-oriented company. The vast majority of our portfolio holdings pay dividends, although there are a handful of exceptions involving turnaround situations. Our policy is to analyze each company to determine whether we can benefit from the market s propensity for overreacting in the short run to both good and bad news. There is a contrarian element in our approach, and we are believers in the historical reversion to the mean (i.e., a return to long-term norms) in terms of both investor sentiment and market valuations. In reflecting on our investment approach, a review of the Major Portfolio Changes table is illustrative. Among our largest purchases, both Yahoo! and Procter & Gamble (P&G) are companies whose stock prices have struggled over the last year or so. Yahoo! is a less-traditional investment for the fund than P&G, but we believe both purchases represent investments in strong companies where pessimistic assessments of their prospects are somewhat unjustified. Several of the companies we sold, such as Tyco International, Morgan Stanley, and Eaton, had outperformed to the point where we felt much of the so-called easy money had been made. In the wake of takeover proposals, we also sold our investment in MedImmune and a portion of our Tribune holding. We like to remind shareholders that, when we sell a stock, it is almost always because of its valuation rather than a comment on the quality of the company. Financial Profile Equity Income S&P 500 As of 6/30/07 Portfolio Stock Index Average Company Yield 2.3% 1.8% Price/Book Ratio 3.1X 3.3X Price/Earnings Ratio (Based on next 12 months estimated earnings) 15.1X 15.2X Historical Beta (Based on monthly returns for five years) Outlook Sources: Bloomberg and IBES. Forecasts are in no way indicative of future investment returns. Most financial market developments in the first half of the year were positive, and stocks provided healthy returns in virtually all markets. The most noticeable stress on the system has been in the residential real estate sector, with continued weakness in new housing activity and widespread concern over the subprime mortgage market. Corporate earnings growth was generally better than we would have guessed six months ago, and the large number of merger and acquisition deals, private-equity transactions, and the high level of stock purchase activity provided strong support for the equity market. 2

5 Given the market s strong advance, particularly over the last few months, we would not be surprised to see some consolidation over the near term. Nonetheless, we are encouraged by the relatively healthy global economy and the wide range of appealing investment opportunities present in today s market. We believe that quality companies are currently selling at attractive prices, and our objective is to identify stocks with good valuations, reasonable upside potential, and relatively limited risk. As always, we appreciate your continued confidence and support. Respectfully submitted, Brian C. Rogers President of the fund and chairman of its Investment Advisory Committee July 20, 2007 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 Investing in the Fund Value investors seek to invest in companies whose stock prices are low in relation to their real worth or future prospects. By identifying companies whose stocks are currently out of favor or misunderstood, value investors hope to realize significant appreciation as other investors recognize the stock s intrinsic value and the price rises accordingly. The value approach carries the risk that the market will not recognize a security s intrinsic value for a long time, or that a stock judged to be undervalued may actually be appropriately priced. Glossary Lipper index: An index of mutual fund performance returns for specified periods in defined categories as tracked by Lipper Inc. Price/earnings ratio: Calculated by dividing a stock s market value per share by the company s earnings per share for the past 12 months or by expected earnings for the coming year. S&P 500 Stock Index: A market cap-weighted index of 500 widely held stocks often used as a proxy for the overall stock market. Performance is reported on a total return basis. Supplement to Prospectus Dated May 1, 2007 Erratum Effective May 1, 2007, the fund s operating policy that sets forth the percentage of the fund s total bond assets that may be invested in noninvestment-grade securities is hereby corrected to remove the word bond and refer to total assets instead. 3

6 T. Rowe Price Equity Income Portfolio Portfolio Highlights Twenty-Five Largest Holdings Percent of Net Assets 6/30/07 GE 3.1% JPMorgan Chase 2.3 Chevron 2.1 ExxonMobil 2.0 AT&T 2.0 Microsoft 1.6 Royal Dutch Shell 1.6 Merck 1.5 International Paper 1.5 3M 1.5 Marsh & McLennan 1.4 Eli Lilly 1.3 Time Warner 1.2 American International Group 1.2 Hess 1.2 Pfizer 1.1 Colgate-Palmolive 1.1 Mellon Financial 1.1 Union Pacific 1.1 Anheuser-Busch 1.1 Citigroup 1.1 Johnson & Johnson 1.0 Wyeth 1.0 Coca-Cola 1.0 U.S. Bancorp 1.0 Total 36.1% Note: Table excludes investments in the T. Rowe Price Reserve Investment Fund. 4

7 T. Rowe Price Equity Income Portfolio Portfolio Highlights Major Portfolio Changes Six Months Ended 6/30/07 Listed in descending order of size LARGEST PURCHASES Amgen* Yahoo!* Gannett Procter & Gamble* Kraft Foods* U.S. Bancorp 3M Progressive Corporation* BJ Services* Statoil ASA* LARGEST SALES Morgan Stanley** Tyco International** IBM MedImmune** Tribune Honeywell International Eaton** Cisco Systems** Pall Schering-Plough** 12 Months Ended 6/30/07 LARGEST PURCHASES 3M* U.S. Bancorp* Amgen* Gannett* Masco* Yahoo!* Bed Bath & Beyond* Illinois Tool Works* Citigroup Procter & Gamble* LARGEST SALES Morgan Stanley** Comcast** Cisco Systems** IBM Tyco International** MedImmune** Bank of America** Tribune Honeywell International Deere** * Position added ** Position eliminated 5

8 Performance and Expenses T. Rowe Price Equity Income Portfolio 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. Equity Income Portfolio $30,000 26,000 22,000 18,000 14,000 10,000 6/97 6/98 Equity Income Portfolio S&P 500 Stock Index Lipper Variable Annuity Underlying Equity Income Funds Average 6/99 6/00 6/01 6/02 6/03 6/04 As of 6/30/07 $24,386 $19,906 $22,254 6/05 Note: Performance for II Class shares will vary due to the differing fee structure. See return table below. Average Annual Compound Total Return 6/06 6/07 Since Inception Periods Ended 6/30/07 1 Year 5 Years 10 Years 4/30/02 Equity Income Portfolio 22.38% 11.68% 9.32% Equity Income Portfolio II % 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 This table shows how the portfolio would have performed each year if its actual (or cumulative) returns for the periods shown had been earned at a constant rate. Average annual total return figures include changes in principal value, reinvested dividends, and capital gain distributions. Total returns do not include charges imposed by your insurance company s separate account. If these were included, performance would have been lower. When assessing performance, investors should consider both short- and long-term returns. 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. Shares of the fund are currently offered only through certain insurance companies as an investment medium for both variable annuity contracts and variable life insurance policies. Please note that the fund has two classes of shares: the original share class and II Class. II Class shares are sold through financial intermediaries, which are compensated for distribution, shareholder servicing, and/or certain administrative services under a Board-approved Rule 12b-1 plan. Actual Expenses The first line of the following table ( Actual ) provides information about actual account values and actual expenses. You may use the information in this line, together with your account balance, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading Expenses Paid During Period to estimate the expenses you paid on your account during this period. Hypothetical Example for Comparison Purposes The information on the second line of the table ( Hypothetical ) is based on hypothetical account values and expenses derived from the fund s actual expense ratio and an assumed 5% per year rate of return before expenses (not the fund s actual return). You may compare the ongoing costs of investing in the fund with other funds by contrasting this 5% hypothetical example and the 5% hypothetical examples that appear in the shareholder reports of the other funds. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. 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. 6

9 T. Rowe Price Equity Income Portfolio T. Rowe Price Equity Income Portfolio Expenses Beginning Ending Paid During Account Account Period* Value Value 1/1/07 to 1/1/07 6/30/07 6/30/07 Equity Income Portfolio Actual $1, $1, $4.39 Hypothetical (assumes 5% return before expenses) 1, , Equity Income Portfolio II Actual 1, , Hypothetical (assumes 5% return before expenses) 1, , * Expenses are equal to the fund s annualized expense ratio for the sixmonth period, multiplied by the average account value over the period, multiplied by the number of days in the most recent fiscal half year (181) divided by the days in the year (365) to reflect the half-year period. The annualized expense ratio of the Equity Income Portfolio was 0.85%; the Equity Income Portfolio II was 1.10%. 7

10 Financial Highlights T. Rowe Price Equity Income Portfolio (Unaudited) Equity Income Class For a share outstanding throughout each period 6 Months Ended 6/30/07 Year Ended 12/31/06 12/31/05 12/31/04 12/31/03 12/31/02 NET ASSET VALUE Beginning of period $ $ $ $ $ $ Investment activities Net investment income Net realized and unrealized gain (loss) (2.79) Total from investment activities (2.50) Distributions Net investment income (0.20) (0.37) (0.35) (0.33) (0.30) (0.29) Net realized gain (0.25) (0.67) (1.07) (0.49) (0.02) Total distributions (0.45) (1.04) (1.42) (0.82) (0.30) (0.31) NET ASSET VALUE End of period $ $ $ $ $ $ Ratios/Supplemental Data Total return^ 8.07% 18.97% 3.92% 14.92% 25.50% (13.12)% Ratio of total expenses to average net assets 0.85% 0.85% 0.85% 0.85% 0.85% 0.85% Ratio of net investment income to average net assets 1.58% 1.60% 1.57% 1.57%+ 1.73% 1.66% Portfolio turnover rate 21.8% 22.2% 17.3% 17.1% 12.7% 17.1% Net assets, end of period (in millions) $ 1,461 $ 1,410 $ 1,434 $ 1,316 $ 1,051 $ 753 Per share amounts calculated using average shares outstanding method. ^ 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 + Includes the effect of a one-time special dividend (0.12% of average net assets) that is not expected to recur. The accompanying notes are an integral part of these financial statements. 8

11 Financial Highlights T. Rowe Price Equity Income Portfolio (Unaudited) Equity Income-II Class For a share outstanding throughout each period 6 Months Ended 6/30/07 Year Ended 12/31/06 12/31/05 12/31/04 12/31/03 4/30/02 Through 12/31/02 NET ASSET VALUE Beginning of period $ $ $ $ $ $ Investment activities Net investment income Net realized and unrealized gain (loss) (3.08) Total from investment activities (2.87) Distributions Net investment income (0.17) (0.31) (0.30) (0.28) (0.26) (0.21) Net realized gain (0.25) (0.67) (1.07) (0.49) Total distributions (0.42) (0.98) (1.37) (0.77) (0.26) (0.21) NET ASSET VALUE End of period $ $ $ $ $ $ Ratios/Supplemental Data Total return^ 7.96% 18.65% 3.69% 14.62% 25.17% (14.79)% Ratio of total expenses to average net assets 1.10% 1.10% 1.10% 1.10% 1.10% 1.10% Ratio of net investment income to average net assets 1.33% 1.37% 1.34% 1.40%+ 1.54% 2.15% Portfolio turnover rate 21.8% 22.2% 17.3% 17.1% 12.7% 17.1% Net assets, end of period (in thousands) $ 711,352 $ 587,926 $ 353,245 $ 176,049 $ 56,676 $ 672 Per share amounts calculated using average shares outstanding method. ^ 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 + Includes the effect of a one-time special dividend (0.16% of average net assets) that is not expected to recur. The accompanying notes are an integral part of these financial statements. 9

12 Portfolio of Investments T. Rowe Price Equity Income Portfolio June 30, 2007 (Unaudited) (Cost and value in $ 000s) Shares/$ Par Value (Cost and value in $ 000s) Shares/$ Par Value COMMON STOCKS 95.8% Consumer Discretionary 13.6% Automobiles 0.3% Ford Motor 619,400 5,835 5,835 Distributors 0.5% Genuine Parts 223,250 11,073 11,073 Diversified Consumer Services 0.7% H&R Block 678,000 15,845 15,845 Household Durables 2.6% D. R. Horton 360,900 7,193 Fortune Brands 206,100 16,977 Newell Rubbermaid 615,500 18,114 Sony (JPY) 268,300 13,755 56,039 Leisure Equipment & Products 1.4% Eastman Kodak 546,100 15,198 Mattel 609,200 15,406 30,604 Media 6.4% CBS, Class B 468,700 15,617 Citadel Broadcasting 40, Disney 532,900 18,193 Dow Jones 377,500 21,687 Gannett 320,500 17,612 New York Times, Class A 720,100 18,291 Time Warner 1,231,100 25,902 Tribune 319,448 9,392 Viacom, Class B (1) 313,500 13, ,009 Specialty Retail 1.7% Bed Bath & Beyond (1) 361,900 13,025 GAP 213,900 4,085 Home Depot 499,900 19,671 36,781 Total Consumer Discretionary 296,186 Consumer Staples 9.7% Beverages 2.4% Anheuser-Busch 440,400 22,971 Brown-Forman, Class B 86,100 6,292 Coca-Cola 420,800 22,012 51,275 Food & Staples Retailing 1.2% Sysco 154,500 5,097 Wal-Mart 417,500 20,086 25,183 Food Products 2.7% Archer-Daniels-Midland 172,400 5,705 Campbell Soup 265,300 10,296 General Mills 292,400 17,082 Hershey Foods 84,200 4,262 Kraft Foods, Class A 384,400 13,550 McCormick 206,900 7,900 58,795 Household Products 2.3% Colgate-Palmolive 376,000 24,384 Kimberly-Clark 191,100 12,783 Procter & Gamble 213,700 13,076 50,243 Personal Products 0.7% Avon 446,800 16,420 16,420 Tobacco 0.4% UST 163,200 8,765 8,765 Total Consumer Staples 210,681 10

13 T. Rowe Price Equity Income Portfolio (Cost and value in $ 000s) Shares/$ Par Value (Cost and value in $ 000s) Shares/$ Par Value Energy 11.2% Energy Equipment & Services 1.3% BJ Services 335,000 9,527 Schlumberger 215,500 18,305 Oil, Gas & Consumable Fuels 9.9% 27,832 Anadarko Petroleum 323,200 16,803 BP, ADR 236,196 17,039 Chevron 531,552 44,778 ExxonMobil 526,922 44,198 Hess 425,100 25,064 Murphy Oil 282,400 16,786 Royal Dutch Shell, ADR Class A 420,600 34,153 Spectra Energy 323,250 8,391 Statoil ASA (NOK) 296,700 9, ,397 Total Energy 244,229 Financials 17.1% Capital Markets 3.2% Charles Schwab 992,500 20,366 Legg Mason 77,600 7,634 Mellon Financial 543,000 23,892 State Street 236,300 16,163 Commercial Banks 3.6% 68,055 Fifth Third Bancorp 538,700 21,424 National City 295,300 9,840 Royal Bank of Scotland (GBP) 166,700 2,106 SunTrust 186,400 15,982 U.S. Bancorp 667,900 22,007 Wells Fargo 203,320 7,151 78,510 Consumer Finance 0.2% Capital One Financial 44,200 3,467 3,467 Diversified Financial Services 3.3% Citigroup 445,464 22,848 JPMorgan Chase 1,012,241 49,043 Insurance 6.0% 71,891 American International Group 365,000 25,561 Chubb 158,400 8,576 Genworth Financial Class A 110,100 3,788 Lincoln National 279,047 19,798 Marsh & McLennan 1,012,800 31,275 Progressive Corporation 445,700 10,666 The Travelers Companies 326,546 17,470 Unum Group 515,400 13, ,591 Thrifts & Mortgage Finance 0.8% Countrywide Financial 214,700 7,804 Fannie Mae 157,200 10,270 18,074 Total Financials 370,588 Health Care 9.3% Biotechnology 0.8% Amgen (1) 340,500 18,827 Health Care Equipment & Supplies 1.0% 18,827 Baxter International 257,600 14,513 Boston Scientific (1) 456,700 7,006 Pharmaceuticals 7.5% 21,519 Abbott Laboratories 271,000 14,512 Bristol Myers Squibb 563,700 17,790 Eli Lilly 495,600 27,694 Johnson & Johnson 363,900 22,424 Merck 672,700 33,500 Pfizer 954,600 24,409 11

14 T. Rowe Price Equity Income Portfolio (Cost and value in $ 000s) Shares/$ Par Value (Cost and value in $ 000s) Shares/$ Par Value Wyeth 388,500 22, ,606 Total Health Care 202,952 Industrials & Business Services 12.4% Aerospace & Defense 1.5% Honeywell International 321,500 18,094 Raytheon 256,200 13,807 31,901 Air Freight & Logistics 0.3% UPS, Class B 84,300 6,154 6,154 Airlines 0.3% Southwest Airlines 434,000 6,471 6,471 Building Products 1.0% Masco 616,000 17,537 USG (1) 87,700 4,301 21,838 Commercial Services & Supplies 1.4% Avery Dennison 246,000 16,354 Waste Management 335,472 13,100 29,454 Electrical Equipment 0.5% Cooper Industries, Class A 203,534 11,620 11,620 Industrial Conglomerates 4.5% 3M 366,300 31,791 GE 1,746,300 66,848 98,639 Machinery 1.6% Illinois Tool Works 298,700 16,187 Ingersoll-Rand, Class A 213,900 11,726 Pall 171,700 7,896 35,809 Road & Rail 1.3% Norfolk Southern 86,200 4,532 Union Pacific 199,500 22,972 27,504 Total Industrials & Business Services 269,390 Information Technology 7.1% Communications Equipment 1.4% Motorola 593,900 10,512 Nokia, ADR 680,300 19,123 Computers & Peripherals 1.4% 29,635 Dell (1) 699,800 19,979 IBM 86,000 9,052 Internet Software & Services 0.7% 29,031 Yahoo! (1) 583,400 15,828 IT Services 0.4% 15,828 Computer Sciences (1) 147,100 8,701 Semiconductor & Semiconductor Equipment 1.6% 8,701 Analog Devices 443,400 16,689 Applied Materials 385,800 7,666 Intel 427,600 10,160 Software 1.6% 34,515 Microsoft 1,202,400 35,435 35,435 Total Information Technology 153,145 Materials 5.3% Chemicals 1.8% Chemtura 53, DuPont 417,800 21,241 International Flavors & Fragrances 339,300 17,691 39,527 12

15 T. Rowe Price Equity Income Portfolio (Cost and value in $ 000s) Shares/$ Par Value (Cost and value in $ 000s) Shares/$ Par Value Construction Materials 0.8% Vulcan Materials 147,600 16,906 Metals & Mining 0.7% 16,906 Alcoa 374,900 15,195 Paper & Forest Products 2.0% 15,195 International Paper 845,953 33,034 MeadWestvaco 314,600 11,112 44,146 Total Materials 115,774 Telecommunication Services 5.4% Diversified Telecommunication Services 4.0% AT&T 1,030,636 42,772 Qwest Communications International (1) 2,129,000 20,651 Verizon Communications 488,342 20,105 Windstream 276,988 4,088 87,616 Wireless Telecommunication Services 1.4% Alltel 187,700 12,679 Sprint Nextel 813,200 16,842 29,521 Total Telecommunication Services 117,137 Utilities 4.7% Electric Utilities 3.0% Duke Energy 591,700 10,828 Entergy 202,600 21,749 FirstEnergy 202,420 13,103 Pinnacle West Capital 151,800 6,049 Progress Energy 295,000 13,449 65,178 NiSource 855,400 17,715 Teco Energy 239,100 4,108 XCEL Energy 523,600 10,718 35,673 Total Utilities 100,851 Total Common Stocks (Cost $1,629,552) 2,080,933 CONVERTIBLE BONDS 0.1% Ford Motor 4.25%, 12/15/36 2,521,000 3,175 Total Convertible Bonds (Cost $2,521) 3,175 SHORT-TERM INVESTMENTS 4.5% Money Market Funds 4.5% T. Rowe Price Reserve Investment Fund 5.37% (2)(3) 97,892,770 97,893 Total Short-Term Investments (Cost $97,893) 97,893 Total Investments in Securities 100.4% of Net Assets (Cost $1,729,966) $ 2,182,001 Denominated in U.S. dollars unless otherwise noted. (1) Non-income producing (2) Seven-day yield (3) Affiliated company see Note 4 ADR American Depository Receipts GBP British Pound JPY Japanese Yen NOK Norwegian Krone Multi-Utilities 1.7% Ameren 63,900 3,132 The accompanying notes are an integral part of these financial statements. 13

16 Statement of Assets and Liabilities T. Rowe Price Equity Income Portfolio June 30, 2007 (Unaudited) (In thousands except shares and per share amounts) Assets Investments in securities, at value Non-affiliated companies (cost $1,632,073) $ 2,084,108 Affiliated companies (cost $97,893) 97,893 Total investments in securities 2,182,001 Receivable for investment securities sold 6,512 Dividends and interest receivable 3,375 Receivable for shares sold 1,043 Cash 11 Other assets 48 Total assets 2,192,990 Liabilities Payable for investment securities purchased 10,172 Payable for shares redeemed 8,306 Due to affiliates 1,734 Total liabilities 20,212 NET ASSETS $ 2,172,778 Net Assets Consist of: Undistributed net investment income $ 347 Undistributed net realized gain 54,635 Net unrealized gain 452,039 Paid-in capital applicable to 82,430,837 shares of $ par value capital stock outstanding; 1,000,000,000 shares of the Corporation authorized 1,665,757 NET ASSETS $ 2,172,778 NET ASSET VALUE PER SHARE Equity Income Class ($1,461,426,426 / 55,411,083 shares outstanding) $ Equity Income - II Class ($711,351,895 / 27,019,754 shares outstanding) $ The accompanying notes are an integral part of these financial statements. 14

17 Statement of Operations T. Rowe Price Equity Income Portfolio (Unaudited) ($ 000s) Investment Income (Loss) 6 Months Ended 6/30/07 Income Dividend $ 25,047 Interest 152 Securities lending 72 Total income 25,271 Expenses Investment management and administrative expense 8,848 Rule 12b-1 fees - Equity Income-II Class 804 Total expenses 9,652 Net investment income 15,619 Realized and Unrealized Gain (Loss) Net realized gain (loss) Securities 54,931 Foreign currency transactions (22) Net realized gain 54,909 Change in net unrealized gain (loss) Securities 91,570 Other assets and liabilities denominated in foreign currencies 1 Change in net unrealized gain 91,571 Net realized and unrealized gain 146,480 INCREASE IN NET ASSETS FROM OPERATIONS $ 162,099 The accompanying notes are an integral part of these financial statements. 15

18 Statement of Changes in Net Assets T. Rowe Price Equity Income Portfolio (Unaudited) ($ 000s) 6 Months Ended 6/30/07 Year Ended 12/31/06 Increase (Decrease) in Net Assets Operations Net investment income $ 15,619 $ 28,195 Net realized gain 54, ,210 Change in net unrealized gain 91, ,496 Increase in net assets from operations 162, ,901 Distributions to shareholders Net investment income Equity Income Class (11,152) (21,199) Equity Income-II Class (4,432) (6,374) Net realized gain Equity Income Class (14,039) (37,959) Equity Income-II Class (6,282) (14,916) Decrease in net assets from distributions (35,905) (80,448) Capital share transactions* Shares sold Equity Income Class 73, ,951 Equity Income-II Class 122, ,724 Distributions reinvested Equity Income Class 25,190 59,152 Equity Income-II Class 10,713 21,291 Shares redeemed Equity Income Class (135,003) (415,924) Equity Income-II Class (49,015) (79,902) Increase (decrease) in net assets from capital share transactions 48,684 (32,708) Net Assets Increase during period 174, ,745 Beginning of period 1,997,900 1,787,155 End of period $ 2,172,778 $ 1,997,900 Undistributed net investment income *Share information Shares sold Equity Income Class 2,892 6,472 Equity Income-II Class 4,812 10,010 Distributions reinvested Equity Income Class 1,004 2,456 Equity Income-II Class Shares redeemed Equity Income Class (5,241) (17,963) Equity Income-II Class (1,926) (3,417) Increase (decrease) in shares outstanding 1,969 (1,563) The accompanying notes are an integral part of these financial statements. 16

19 Notes to Financial Statements T. Rowe Price Equity Income Portfolio June 30, 2007 (Unaudited) NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES T. Rowe Price Equity Series, Inc. (the corporation), is registered under the Investment Company Act of 1940 (the 1940 Act). The Equity Income Portfolio (the fund) is a diversified, open-end management investment company and is one portfolio established by the corporation. The fund seeks to provide substantial dividend income as well as long-term growth of capital through investments in the common stocks of established companies. Shares of the fund are currently offered only through certain insurance companies as an investment medium for both variable annuity contracts and variable life insurance policies. The fund has two classes of shares: the Equity Income Portfolio original share class (Equity Income Class), offered since March 31, 1994, and Equity Income II (Equity Income-II Class), offered since April 30, Equity Income II Class shares are sold through financial intermediaries, which it compensates for distribution, shareholder servicing, and/or certain administrative services under a Board-approved Rule 12b-1 plan. Each class has exclusive voting rights on matters related solely to that class, separate voting rights on matters that relate to both classes, and, in all other respects, the same rights and obligations as the other class. The accompanying financial statements were prepared in accordance with accounting principles generally accepted in the United States of America, which require the use of estimates made by fund management. Fund management believes that estimates and security valuations are appropriate; however, actual results may differ from those estimates, and the security valuations reflected in the financial statements may differ from the value the fund ultimately realizes upon sale of the securities. 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 (OTC) market are valued at the last quoted sale price or, for certain markets, the official closing price at the time the valuations are made, except for OTC Bulletin Board securities, which are valued at the mean of the latest bid and asked prices. A security that is listed or traded on more than one exchange is valued at the quotation on the exchange determined to be the primary market for such security. Listed securities not traded on a particular day are valued at the mean of the latest bid and asked prices for domestic securities and the last quoted sale price for international securities. Debt securities are generally traded in the over-thecounter market. Securities with original maturities of one year or more are valued at prices furnished by dealers who make markets in such securities or by an independent pricing service, which considers yield or price of bonds of comparable quality, coupon, maturity, and type, as well as prices quoted by dealers who make markets in such securities. Securities with original maturities of less than one year are valued at amortized cost in local currency, which approximates fair value when combined with accrued interest. Investments in mutual funds are valued at the mutual fund s closing net asset value per share on the day of valuation. 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 when and how often it will use closing prices and when it will adjust those prices to reflect fair value. 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. 17

20 T. Rowe Price Equity Income Portfolio 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 Equity Income II pays distribution, shareholder servicing, and/or certain administrative expenses in the form of Rule 12b-1 fees, in an amount not exceeding 0.25% of the class s average daily net assets. Management and administrative fee expenses, 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 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 reflected as realized gain on securities in the accompanying financial statements and totaled $5,000 for the six months ended June 30, Investment Transactions, Investment Income, and Distributions Income and expenses are recorded on the accrual basis. Premiums and discounts on debt securities are amortized for financial reporting purposes. Dividends received from mutual fund investments are reflected as dividend income; capital gain distributions are reflected as realized gain/loss. Dividend income and capital gain distributions are recorded on the ex-dividend date. Any income tax-related interest and penalties would be classified as income tax expense. 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 a quarterly basis. Capital gain distributions, if any, are declared and paid by the fund, typically on an annual basis. New Accounting Pronouncements Effective June 29, 2007, the fund adopted Financial Accounting Standards Board ( FASB ) Interpretation No. 48 ( FIN 48 ), Accounting for Uncertainty in Income Taxes, a clarification of FASB Statement No. 109, Accounting for Income Taxes. FIN 48 establishes financial accounting and disclosure requirements for recognition and measurement of tax positions taken or expected to be taken on an income tax return. The adoption of FIN 48 had no impact on the fund s net assets or results of operations. In September 2006, the FASB released the Statement of Financial Accounting Standard No. 157 ( FAS 157 ), Fair Value Measurements. FAS 157 clarifies the definition of fair value and establishes the framework for measuring fair value, as well as proper disclosure of this methodology in the financial statements. It will be effective for the fund s fiscal year beginning January 1, Management is evaluating the effects of FAS 157; however, it is not expected to have a material impact on the fund s net assets or results of operations. NOTE 2 - INVESTMENT TRANSACTIONS Consistent with its investment objective, the fund engages in the following practices to manage exposure to certain risks or to 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 June 30, 2007, there were no securities on loan. Other Purchases and sales of portfolio securities, other than short-term securities, aggregated $274,270,000 and $216,618,000, respectively, for the six months ended June 30,

21 T. Rowe Price Equity Income Portfolio 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 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. The amount and character of tax-basis distributions and composition of net assets are finalized at fiscal year-end; accordingly, tax-basis balances have not been determined as of June 30, At June 30, 2007, the cost of investments for federal income tax purposes was $1,729,966,000. Net unrealized gain aggregated $452,039,000 at period-end, of which $476,712,000 related to appreciated investments and $24,673,000 related to depreciated investments. pay no investment management fees. During the six months ended June 30, 2007, dividend income from the T. Rowe Price Reserve Investment Funds totaled $2,772,000, and the value of shares of the T. Rowe Price Reserve Investment Funds held at June 30, 2007, and December 31, 2006, was $97,893,000 and $113,452,000, respectively. 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 and administrative agreement between the fund and the manager provides for an all-inclusive annual fee equal to 0.85% of the fund s average daily net assets. The fee is computed daily and paid monthly. The agreement provides that investment management, shareholder servicing, transfer agency, accounting, custody services, and directors fees and expenses are provided to the fund, and interest, taxes, brokerage commissions, and extraordinary expenses are paid directly by the fund. The fund may invest in the T. Rowe Price Reserve Investment Fund and the T. Rowe Price Government Reserve Investment Fund (collectively, the T. Rowe Price Reserve Investment Funds), open-end management investment companies managed by Price Associates and affiliates of the fund. The T. Rowe Price Reserve Investment 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 T. Rowe Price Reserve Investment Funds 19

22 T. Rowe Price Equity Income Portfolio 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 or by accessing the SEC s Web site, The description of our proxy voting policies and procedures is also available on our Web site, 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 ( hard copies may be reviewed and copied at the SEC s Public Reference Room, 450 Fifth St. N.W., Washington, DC For more information on the Public Reference Room, call SEC

23 T. Rowe Price Equity Income Portfolio Approval of Investment Management Agreement On March 7, 2007, the fund s Board of Directors (Board) unanimously approved the investment advisory contract (Contract) between the fund and its investment manager, T. Rowe Price Associates, Inc. (Manager). The Board considered a variety of factors in connection with its review of the Contract, also taking into account information provided by the Manager during the course of the year, as discussed below: Services Provided by the Manager The Board considered the nature, quality, and extent of the services provided to the fund by the Manager. These services included, but were not limited to, management of the fund s portfolio and a variety of related activities, as well as financial and administrative services, reporting, and communications. The Board also reviewed the background and experience of the Manager s senior management team and investment personnel involved in the management of the fund. The Board concluded that it was satisfied with the nature, quality, and extent of the services provided by the Manager. Investment Performance of the Fund The Board reviewed the fund s average annual total return over the 1-, 3-, 5-, and 10-year periods as well as the fund s year-by-year returns and compared these returns with previously agreed upon comparable performance measures and market data, including those supplied by Lipper and Morningstar, which are independent providers of mutual fund data. On the basis of this evaluation and the Board s ongoing review of investment results, the Board concluded that the fund s performance was satisfactory. Costs, Benefits, Profits, and Economies of Scale The Board reviewed detailed information regarding the revenues received by the Manager under the Contract and other benefits that the Manager (and its affiliates) may have realized from its relationship with the fund, including research received under soft dollar agreements. The Board noted that soft dollars were not used to pay for third-party, nonbroker research. The Board also received information on the estimated costs incurred and profits realized by the Manager and its affiliates from advising T. Rowe Price mutual funds, as well as estimates of the gross profits realized from managing the fund in particular. The Board concluded that the Manager s profits were reasonable in light of the services provided to the fund. The Board also considered whether the fund or other funds benefit under the fee levels set forth in the Contract from any economies of scale realized by the Manager. The Board noted that, under the Contract, the fund pays the Manager a single fee based on the fund s assets and the Manager, in turn, pays all expenses of the fund, with certain exceptions. The Board concluded that, based on the profitability data it reviewed and consistent with this single-fee structure, the Contract provided for a reasonable sharing of benefits from any economies of scale with the fund. Fees The Board reviewed the fund s single-fee structure and compared the rate with fees and expenses of other comparable funds based on information and data supplied by Lipper. The information provided to the Board indicated that the fund s singlefee rate was above the median management fee rate for comparable funds but below the median expense ratio for comparable funds. The Board also reviewed the expense ratio of the fund s Class II share class, which pays a 12b-1 fee in addition to the single fee, and compared this expense ratio with the fees and expenses of comparable funds. The information provided to the Board indicated that the expense ratio for the Class II shares was below the median expense ratio for comparable funds. The Board also reviewed the fee schedules for comparable privately managed accounts of the Manager and its affiliates. Management informed the Board that the Manager s responsibilities for privately managed accounts are more limited than its responsibilities for the fund and other T. Rowe Price mutual funds that it or its affiliates advise. On the basis of the information provided, the Board concluded that the fees paid by the fund under the Contract were reasonable. Approval of the Contract As noted, the Board approved the continuation of the Contract. No single factor was considered in isolation or to be determinative to the decision. Rather, the Board concluded, in light of a weighting and balancing of all factors considered, that it was in the best interests of the fund to approve the continuation of the Contract, including the fees to be charged for services thereunder. 21