semiannual report - national life group · 2012. 8. 29. · the company’s steadily growing...

Proof #6

Health Sciences Portfolio

June 30, 2012

Semiannual Report

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.

Proof #6

The views and opinions in this report were current as of June 30, 2012. 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.

T. Rowe Price Health Sciences Portfolio

Highlights

•Healthcarestockspostedoutstandingreturnsinthefirsthalfof2012,despiteuncertaintyabouthealthcarereformlegislation.

•TheHealthSciencesPortfolioreturned24.50%,surpassingtheresultsfortheS&P500IndexanditsLipperpeergroupinthesix-monthreportingperiod.

•Webelievethatgeneratingoutperformanceinthehealthcaresectorwilldependmoreonstockselectionthanonanemphasis on a particular industry.

•Ourfocusremainsoninvestingincompaniesthataredevelopingnewandimportantmedicinesforunmetmedicalneeds, as well as companies whose business models decrease costs or improve quality in our health care system.

Proof #6

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Manager’s LetterT. Rowe Price Health Sciences Portfolio

Dear InvestorHealthcarestocksgeneratedstrongperformanceinthefirsthalfof2012.Thetraditionallystableanddefensivesector came into favor as investors became concerned aboutearningsgrowthandthedurabilityoftheeco-nomic recovery. The sector also benefited from attractive valuations after a period of underperformance. In the pastsixmonths,stockselectionhelpedportfolioresultsrelativetoourbenchmark,butgroupallocationdecisionswere a modest detractor.

Performance Comparison

Performance ComparisonSix-MonthPeriodEnded6/30/12 TotalReturn

HealthSciencesPortfolio 24.50%

HealthSciencesPortfolio–II 24.30

S&P500Index 9.49

LipperVariableAnnuity UnderlyingHealth/Biotechnology FundsAverage 16.82

TheHealthSciencesPortfolioreturned24.50%inthesix-monthperiodendedJune30,2012,outperformingtheS&P500IndexandtheLipperVariableAnnuityUnderlyingHealth/BiotechnologyFundsAverage.Stockselection,especiallyinthebiotechnology,services,andpharmaceuticalssegments,generatedoutperformanceversustheLipperaverage,whileallocationdecisionsinseveralindustriesdetracted.TheHealthSciencesPortfoliohasdeliveredconsistentlystronglonger-termperformancecomparedwiththeLipperuniverseofhealth/biotechnologyfunds.(Basedoncumulativetotalreturn,LipperrankedtheHealthSciencesPortfolio5of 26,5of26,3of25,and1of18portfoliosintheuniverseofvariableannuityunderlyinghealth/biotech-nologyfundsforthe1-,3-,5-,and10-yearperiodsendedJune30,2012,respectively. Past performance cannot guarantee future results.)

Market EnvironmentDuringthefirsthalfof2012,themarketwasvolatileandlargelydrivenbymacroeconomicforces.Earlyintheyear,equitiesralliedonoptimismthatEuropewouldaddressitssovereigndebtproblemsandthatChinawouldstimulateitsslowingeconomy.Thesecondquarterfeaturedworseningnewsfromabroad,whichquicklyunderminedconfidenceintheU.S.recovery.Atthe forefront of investor concerns was the eurozone’s struggletodealeffectivelywithproblemsinGreece,

Spain,andItaly.EconomicgrowthalsoslowedinChinaandotheremergingmarkets.

Althoughthebroadmarketgavebacksomeofitsfirst-quartergainsinthesecondquarter,theLipperVariableAnnuityUnderlyingHealth/BiotechnologyFundsAveragemarchedhigher.WithintheLipperpeergroup,thebest-performingsegmentsforthepastsixmonthswerebiotechnology,lifesciences,andproductsanddevicemakers.Servicesandpharmaceuticalsstocks,whichrepresentmorethantwo-fifthsofthebenchmark,postedmore-modestgains.Aswehavewritteninpreviousshareholderreports,yourportfolioholdingsare selected based on their individual merit, commonly referredtoasbottom-upstockselection.Whilewekeep aneyeonouroverallsectorallocationsandmarket/macroconditions,webelievestockselectionwill havefarmorebearingonourperformancethanallocation decisions.

Supreme Court Gives Health Care Reform the Thumbs Up

OnJune28,2012,theSupremeCourtrevealeditsdecisiontoupholdthePatientProtectionandAffordableCareAct(ACA).YoumayrecallthatACAwaspassedin 2010andsubsequentlyfacednumerouslawsuitsregardingitsconstitutionality.TheSupremeCourtjustices ruled on three items: whether the individual mandate is constitutional, whether other areas of the billwouldneedtobestruckdownifthemandateisunconstitutional,andwhetherthefederalgovernmentcouldwithholdMedicaidfundingtostatesthatdidnotwanttoexpandtheirMedicaidprogram.

Consensuscomingintothehearingwasthatthecourtwould reject the individual mandate and therefore eliminateportionsofthelaw.However,thecourtupheldtheindividualmandateasatax—rulingthatthepenaltyto those that fail to have insurance could be interpreted asatax,makinggoingwithoutinsurancejustanotherthingthegovernmenttaxes,suchasgasolineorearnedincome.Becausetheindividualmandatewasupheld,therestofthebillremainedintact.However,thecourtdecidedthatthefederalgovernmentcouldnotwithholdMedicaidfundingtostatesthatdidnotwishtoexpandtheirMedicaidprograms,effectivelyallowingstatesto“optout”ofMedicaidexpansion.

Impact on Our HoldingsTheportfolioinvestsintwobroadcategoriesofhealthcarebusinesses:therapeutic-basedcompanieswithinnovative medicines or devices that treat or prevent disease and health care service providers that improve quality,lowercost,ordoboth.Morethanhalfthe

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portfolioisinvestedinbiotechnologyandpharmaceuti-calscompanies.Theportfolioalsohasalargeallocationtotheservicessector,althoughmuchofthatweightisin health care distributors and information systems companies.SinceACAissomewhatneutralfortherapeu-ticsindustries,suchaspharmaceuticals,biotechnology,andproductsanddevices,wedonotexpectthecourt’sdecisiontohavealargeimpactontheportfolio.

Strategy ReviewTheportfolio’slargeallocationtothebiotechnologyandpharmaceuticalssegmentsstemsfromourbeliefthatthepharmaceuticalindustry’sbusinessmodel—thediscov-ery, development, manufacture, and commercialization ofmedicines—istheprimarydriveroflong-termvalueinthehealthcaresector.Typically,largepharmaceuticalcompanies have a broad base of revenues and income, andonedrug—evenifitisextremelysuccessful—maynotbeenoughtoaffectthebottomlinesignificantly.

Industry Diversification PercentofNetAssets 12/31/11 6/30/12

Biotechnology 35.8% 31.9%

Services 28.4 27.9

Pharmaceuticals 16.5 19.3

ProductsandDevices 15.5 13.9

LifeSciences 3.6 3.5

OtherandReserves 0.2 3.5

Total 100.0% 100.0%

Historicalweightingsreflectcurrentindustry/sectorclassifications.

Biotechnologycompanies,however,tendtobesmaller,and the successful introduction of one important new medicine can materially affect a company’s revenues and earnings.Ourgoalinmanagingtheportfolioistoownthebestcompaniesthatcanperformwell,regardlessoftheactivitiesinWashington.Weintendtoremainfocused on those companies with new and important medicines or treatments for unmet medical needs.

Portfolio ReviewAlexion Pharmaceuticals was the portfolio’s best contributorinthesixmonthsendedJune30,2012,and forthepastseveralyears.Thismid-capbiotechisa longtimepositionintheportfolioandbecameourlargestholdingovertimethroughappreciation.Thecompanydevelopsdrugsforpatientswithrarelife-threateningdiseasesandotherseriousmedicalconditions. It has only one commercial product, Soliris,

andtherearerelativelyfewpatientsforthedrug.Soliriswaslaunchedin2007forthetreatmentofPNH,arareblood-bornegeneticdisease;itisafirst-in-classandonly-in-classproduct.Thecompanycontinuedtogeneratestrongsales,andwethinkthatitcangenerate$1billioninannualsalesfromSolirisforthetreatmentofPNHthisyear.(Pleaserefertotheportfolioofinvestmentsforacompletelistofourholdingsandtheamount each represents in the portfolio.)

WeliketheprospectsforAlexionbecauseSolirishasa longpatentlifeandthedrugrequiresmodestcom-mercial expensestosell.Additionally,Soliriswasrecentlyapprovedforanotherraredisorder,addingtorevenue this year. Future approvals could double the product’slong-termcommercialpotential.Becauseofthecompany’ssteadilygrowingrevenuesandimprovingprofitmargins,wearecomfortablewithourlargeallocationandthinkthatAlexioncanmaintainitspremium valuation.

Pharmacyclics was another solid contributor in the first half.Afterpostingstrongpricegainsin2011,thesharesenjoyedameteoricrunupin2012’sfirsthalf.The clinical-stagebiopharmaceuticalcompanyisinthe spotlightforitsdrugibrutinib,whichhasmega-blockbusterpotentialfortreatingmultiplelymphomasandluekemias.Pharmacyclicsisasmall-capstockwithasingleproductthatisextremelyunusualinthatitispotentiallyasingle-agenttreatmentand,duetoitslowtoxicity,canbeeasilycombinedwithcertainexistingtherapeuticregimens. Johnson & Johnson is convinced thatibrutinibcanbeahugewinnerand,basedonitscommercialassessmentofthedrug,inkedanextremelyrich deal with Pharmacyclics.

LikePharmacyclics,Regeneron Pharmaceuticals, Incyte, and Medivation are similarly well positioned in thesmall-capbiotechspace,andeachwasatopcontributorforthepastsixmonths.Owningsmall-capcompaniesencompassesmoreriskthaninvestinginlarge-capsthathavealargerproductbasebecauseafirmthatishighlydependentonthesuccessofasingledrugcandeclinesignificantlyonbadnews.Wemanagethisriskinpartbyowningadiversifiedbasketofstocksandbycontrollingourpositionsizes.

Twoofourbestcontributorsinthesix-monthperiodmergedshortlyafterthereportingperiodended.Catalyst Health Solutions was acquired by SXC Health SolutionsinadealvaluingCatalystatapproximately$4.8billion.Thenewlyformedpharmacybenefitsmanagementcompany(PBM)promptlyrenameditselfCatamaran.

Itisnowthefourth-largestPBMbehindfundholdingsExpress Scripts, CVS Caremark, and UnitedHealth Group.Webelievethemergerisawinforboth

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companiesasCatalystalreadyusesSXC’sclaimsprocessingtechnology,and,througheconomiesofscale,Catamaranshouldbenefitfromimprovedoperatingleverageandothercostsynergies.

Theportfolioalsohadseveralsignificantperformancedetractors. Allscripts Healthcare Solutions was the largestdetractorforthesix-monthperiod.Attheendof April,andseeminglyoutoftheblue,Allscripts,anelectronic health record solutions provider, announced thatresultsforthefirstquarterof2012weresignifi-cantlybelowWallStreet’sexpectedforecasts.Atthesametime, the company announced the termination of its chairmanandtheresignationofthechieffinancialofficer andthreeBoardmembers.Wetrimmedourholdings becausewethinkthecompany’sshort-andintermediate-termgrowthandearningsprospectswillstruggle.Additionally,managementisindisarray,whichisnotconducivetogoodstockperformance.

Dublin,Ireland-basedShirewasamongourlargestdetractorsduringtheperiodduetotheapprovalofagenericdrugalternativetoitsleadingproductAdderallXRforhyperactivity/attentiondeficitdisorder.WethinkShirecancontinuetogeneraterevenuesandprofitsfromitsAdderallXRfranchisebutatlowerlevelsthanhadbeenpreviouslyforecast.Withintheservicessegment,Centene and Aetnawerethelargestdetractorsinthepayorsindustrygroup.Bothcompaniestrimmedtheirrevenueandincometargetsfor2012.

Whilemostoftheportfolio’sinvestmentsareinU.S.commonstocks,theportfoliowillselectivelyinvestinnon-U.S.companies.Overthepastsixmonths,ouroverseas investments contributed to returns. Additionally,theportfoliowritescallandputoptionsprimarilyasameansofaugmentingincome.Normally,the portfolio will own the securities on which it writes these options. The premium income recovered by writingcoveredcallscanhelpreduce,butnoteliminate,volatility.Overthepastsixmonths,theoptionsstrategybenefited the portfolio’s results.

Outlook Webelievethathealthcarecanremainastrongper-formergiventheeconomicuncertaintiesatthispointinthe economic cycle. There are no indications that the economyisgoingtoenjoyasuddenresurgence,andinthesloweconomicgrowthscenariothatweexpect,healthcareshouldcontinuetoperformwell.Althoughithasbeenatopperformerforthepastsixmonths,valuations appear reasonable, and the asset class is still underrepresented in many investors’ portfolios.

For the sector to sustain multiyear outperformance, we thinktheleadinglarge-capcompaniesneedtogenerate

newproductsandinnovativemedicines.Whilethemarkethasrewardedlarge-cappharmaceuticalsforbeingmorethoughtfulanddisciplinedabouttheircapital allocation, we do not see a pipeline of products tosupportthatlong-termbullishcaseatthispoint.Therearealwayscompany-specificrisks,andbecausehealthcareisahighlyregulatedindustry,thereareadditionalrisksassociatedwithregulatoryactions.Thebiggestquestionaboutthelonger-termperformanceinthissectoris:HowdowepayfortheservicesthatmanyAmericansviewasafundamentalright?

WhiletherulingfromtheSupremeCourtwasimportantinclarifyingthefateofhealthcarereform,webelievetheelectionsinNovemberandthedebtceilingdiscus-sionsin2013havethepotentialtobejustasimportantforthesector.Forexample,ifprospectivenomineeMittRomney wins the presidency and the Republicans sweep Congress,reformcouldberepealed,regardlessoftheSupremeCourt’sdecisions.Thereislittledoubtthatentitlementreformisgoingtobeafocalpointofthe2013debtceilingdebate,andMedicaidexpansion(viareform)mayendupbeingdialedbackeventhoughitwasupheldbytheSupremeCourt.Webelievethatuncertaintywillcontinuetobeanoverhangonthesectorforthenext12to18months.

Regardlessofinvestorsentimentebbsandflows,webelievehealthcarewillremainagrowthindustry.Itislikelythatwewillseepocketsofexcitingperformancewithin the two areas that the portfolio continues to emphasize—theintroductionofhighlyinnovative,important new medical products and businesses in the health care services area that provide quality outcomes inacost-effectivemanner.Otherpositivelong-termdynamicsincludedemographics(therisingnumberofbabyboomersreachingretirementage),thepaceofscientific advances and prospects for safer and better medicines,anddemandforahigherqualityoflifeandsociety’swillingnesstospendonhealthcare.

Asalways,weappreciateyourcontinuedconfidenceand support.

Respectfully submitted,

KrisH.JennerPresident of the portfolio and chairman of its Investment Advisory Committee

July13,2012

The committee chairman has day-to-day responsibility for managing the portfolio and works with committee members in developing and executing its investment program.

Proof #6

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Portfolio Highlights

Twenty-Five Largest Holdings Percent of Net Assets 6/30/12

AlexionPharmaceuticals 7.2%

SXCHealthSolutions 4.1

Pharmacyclics 2.6

GileadSciences 2.5

Incyte 2.3

UnitedHealthGroup 2.2

ValeantPharmaceuticalsInternational 2.1

RegeneronPharmaceuticals 1.9

McKesson 1.8

Covidien 1.6

DentsplyInternational 1.6

Stryker 1.5

CatalystHealthSolutions 1.5

BaxterInternational 1.5

Amerigroup 1.4

Elan 1.4

MedicinesCompany 1.3

Merck 1.3

Celgene 1.3

Medivation 1.3

Amgen 1.3

ExpressScripts 1.2

HenrySchein 1.1

Alkermes 1.1

EdwardsLifesciences 1.1

Total 48.2%

Note:Theinformationshowndoesnotreflectanyexchange-tradedfunds(ETFs),cashreserves,orcollateralforsecuritieslendingthatmaybeheldin the portfolio.

Risk of Growth InvestingGrowthstockscanbevolatileforseveralreasons.Sincethesecompaniesusuallyinvestahighportionofearningsintheirbusinesses,theymaylackthedividendsofvaluestocksthatcancushionstockpricesinafallingmarket.Also,earningsdisappointmentsoftenleadtosharplyfallingpricesbecauseinvestorsbuygrowthstocksinanticipationofsuperiorearningsgrowth.

Risk of Health Sciences InvestingPortfoliosthatinvestonlyinspecificindustrieswillexpe-riencegreatervolatilitythanfundsinvestinginabroadrangeofindustries. Companiesinthehealthsciencesfieldaresubjecttospecialriskssuchasincreasedcompetitionwithinthehealthcareindustry,changesinlegislationorgovernmentregulations,reductionsingovernmentfunding,productliabilityorotherlitigation,and the obsolescence of popular products.

GlossaryLipper averages: TheaveragereturnofallportfoliosinaparticularcategoryasdefinedbyLipperInc.

Lipper index: FundbenchmarksthatconsistofasmallnumberofthelargestmutualfundsinaparticularcategoryasdefinedbyLipperInc.

S&P 500 Index: Anindexconsistingof500stockschosenformarketsize,liquidity,andindustrygrouprepresentation.Itisamarket-valueweightedindex,witheachstock’sweightintheindexproportionatetoitsmarket value.

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Six Months Ended 6/30/12

BEST CONTRIBUTORS

AlexionPharmaceuticals 44¢

Pharmacyclics 40

SXCHealthSolutions 32

RegeneronPharmaceuticals 18

Incyte 16

CatalystHealthSolutions 12

Medivation 11

GileadSciences 10

AmylinPharmaceuticals 8

EdwardsLifesciences 8

Total 199¢

WORST CONTRIBUTORS

AllscriptsHealthcareSolutions -7¢

Centene -4

Shire -2

ValeantPharmaceuticalsInternational -2

Aetna -2

Dendreon -1

CubistPharmaceuticals -1

WellcareHealthPlans -1

CardiomePharma -1

ShanghaiPharmaceuticals -1

Total -22¢

12 Months Ended 6/30/12

BEST CONTRIBUTORS

AlexionPharmaceuticals 89¢

Pharmacyclics 49

SXCHealthSolutions 36

Pharmasset 30

RegeneronPharmaceuticals 20

Medivation 17

CatalystHealthSolutions 13

Incyte 12

GileadSciences 11

Athenahealth 10

Total 287¢

WORST CONTRIBUTORS

InterMune -14¢

Dendreon -13

AllscriptsHealthcareSolutions -8

Illumina -7

HumanGenomeSciences -6

ValeantPharmaceuticalsInternational -6

WellPoint -5

Centene -5

Exelixis -4

ShanghaiPharmaceuticals -3

Total -71¢

Contributions to the Change in Net Asset Value

Portfolio Highlights

Proof #6

Performance and ExpensesT. Rowe Price Health Sciences Portfolio

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Growth of $10,000Thischartshowsthevalueofahypothetical$10,000investmentintheportfoliooverthepast10fiscalyearperiodsorsinceinception(forportfolioslacking10-yearrecords).Theresultiscomparedwithbenchmarks,whichmayincludeabroad-basedmarketindexandapeergroupaverageorindex.Marketindexesdonotincludeexpenses,which are deducted from portfolio returns as well as mutualfundaveragesandindexes.

Health Sciences Portfolio

Note: Performance for the II Class will vary due to its differing feestructure. See the returns table below.

Health Sciences PortfolioS&P 500 IndexLipper Variable Annuity UnderlyingHealth/Biotechnology Funds Average

As of6/30/12________$31,610$16,813$23,197

3,000

10,000

17,000

24,000

31,000

$38,000

6/126/116/106/096/086/076/066/056/046/036/02

Average Annual Compound Total ReturnPeriods Ended 6/30/12 1 Year 5 Years 10 Years

Health Sciences Portfolio 16.70% 10.20% 12.20%

Health Sciences Portfolio–II 16.39 9.94 11.92

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, please contact a T. Rowe Price representative at 1-800-469-6587 (financial advisors, or customers who have an advisor, should call 1-800-638-8790). Total returns do not include charges imposed by your insurance company’s separate account. If these had been included, performance would have been lower.

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. When assessing performance, investors should consider both short- and long-term returns.

Fund Expense ExampleAs 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 distribu-tion, shareholder servicing, and/or certain administrative services under a Board-approved Rule 12b-1 plan.

Actual ExpensesThe first line of the following table (Actual) provides information about actual account values and actual expenses. You may use the information on 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 on 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 PurposesThe 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.

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Fund Expense Example (continued)

Health Sciences Portfolio Expenses Beginning Ending Paid During Account Account Period* Value Value 1/1/12 to 1/1/12 6/30/12 6/30/12

Health Sciences PortfolioActual $1,000.00 $1,245.00 $5.30

Hypothetical (assumes 5% return before expenses) 1,000.00 1,020.14 4.77

Health Sciences Portfolio–IIActual 1,000.00 1,243.00 6.69

Hypothetical (assumes 5% return before expenses) 1,000.00 1,018.90 6.02

* Expenses are equal to the portfolio’s annualized expense ratio for the 6-month period, multiplied by the average account value over the period, multiplied by the number of days in the most recent fiscal half year (182), and divided by the days in the year (366) to reflect the half-year period. The annualized expense ratio of the Health Sciences Portfolio was 0.95%, and the Health Sciences Portfolio–II was 1.20%.

Proof #6

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Financial HighlightsT. Rowe Price Health Sciences Portfolio(Unaudited)

The accompanying notes are an integral part of these financial statements.

Health Sciences Class

For a share outstanding throughout each period

6 Months Ended

6/30/12

Year Ended

12/31/11 12/31/10 12/31/09 12/31/08 12/31/07

NET ASSET VALUE

Beginning of period $ 16.45 $ 14.87 $ 12.86 $ 9.77 $ 13.94 $ 12.74

Investment activities

Net investment loss(1) (0.02) (0.08) (0.03) (0.03) (0.04) (0.04)

Net realized and unrealized gain (loss) 4.05 1.66 2.04 3.12 (4.01) 2.34

Total from investment activities 4.03 1.58 2.01 3.09 (4.05) 2.30

Distributions

Net realized gain – – – – (0.12) (1.10)

NET ASSET VALUE

End of period $ 20.48 $ 16.45 $ 14.87 $ 12.86 $ 9.77 $ 13.94

Ratios/Supplemental Data

Total return(2) 24.50% 10.63% 15.63% 31.63% (29.02)% 18.07%

Ratio of total expenses to average net assets 0.95%(3) 0.95% 0.95% 0.95% 0.95% 0.95%

Ratio of net investment loss to average net assets (0.20)%(3) (0.51)% (0.20)% (0.31)% (0.33)% (0.31)%

Portfolio turnover rate 6.9% 28.1% 37.8% 41.8% 53.5% 61.7%

Net assets, end of period (in thousands) $ 25,056 $ 16,366 $ 13,832 $ 10,949 $ 8,512 $ 12,966

(1) Per share amounts calculated using average shares outstanding method. (2) 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. Total return is not annualized for periods less than one year. (3) Annualized

Proof #6

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Financial HighlightsT. Rowe Price Health Sciences Portfolio(Unaudited)


Health Sciences-II Class

For a share outstanding throughout each period

6 Months Ended

6/30/12

Year Ended

12/31/11 12/31/10 12/31/09 12/31/08 12/31/07

NET ASSET VALUE

Beginning of period $ 16.05 $ 14.54 $ 12.61 $ 9.60 $ 13.73 $ 12.60

Investment activities

Net investment loss(1) (0.04) (0.12) (0.06) (0.06) (0.07) (0.08)

Net realized and unrealized gain (loss) 3.94 1.63 1.99 3.07 (3.94) 2.31

Total from investment activities 3.90 1.51 1.93 3.01 (4.01) 2.23

Distributions

Net realized gain – – – – (0.12) (1.10)

NET ASSET VALUE

End of period $ 19.95 $ 16.05 $ 14.54 $ 12.61 $ 9.60 $ 13.73

Ratios/Supplemental Data

Total return(2) 24.30% 10.39% 15.31% 31.35% (29.17)% 17.71%

Ratio of total expenses to average net assets 1.20%(3) 1.20% 1.20% 1.20% 1.20% 1.20%

Ratio of net investment loss to average net assets (0.45)%(3) (0.74)% (0.43)% (0.57)% (0.58)% (0.57)%

Portfolio turnover rate 6.9% 28.1% 37.8% 41.8% 53.5% 61.7%

Net assets, end of period (in thousands) $ 118,468 $ 66,828 $ 22,535 $ 10,631 $ 8,752 $ 8,256

(1) Per share amounts calculated using average shares outstanding method. (2) 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. Total return is not annualized for periods less than one year. (3) Annualized

Proof #6

Portfolio of Investments‡

T. Rowe Price Health Sciences PortfolioJune 30, 2012 (Unaudited)

Shares/$ Par Value(Cost and value in $000s)


10

COMMON STOCKS 96.4%

Biotechnology 31.9%

Major Biotechnology 11.2%

Achillion Pharmaceuticals (1) 12,800 79

Alkermes (1) 95,070 1,613

Allos Therapeutics (1) 19,200 34

Amgen (2) 24,800 1,812

ArQule (1) 15,900 94

Biogen Idec (1)(2) 6,500 939

Celgene (1)(2) 28,506 1,829

Dendreon (1) 50,700 375

Gilead Sciences (1)(2) 70,500 3,615

Human Genome Sciences (1) 80,980 1,063

Lexicon Pharmaceuticals (1) 20,600 46

Medicines Company (1) 81,900 1,879

Neurocrine Biosciences (1) 70,661 559

NPS Pharmaceuticals (1) 34,800 300

Savient Pharmaceuticals (1) 2,800 2

Seattle Genetics (1) 15,500 394

Sinovac Biotech (1) 17,500 37

United Therapeutics (1) 4,700 232

Vertex Pharmaceuticals (1)(2) 17,100 956

YM Biosciences (1) 107,600 213

16,071

Other Biotechnology 20.7%

3SBio, ADR (1) 12,400 169

Acorda Therapeutics (1) 15,100 356

Affymax (1) 11,100 143

Alexion Pharmaceuticals (1)(2) 104,480 10,375

Alexza Pharmaceuticals Warrants, 10/20/16 Acquisition Date: 10/5/09, Acquisition Cost $- (1)(3) 207 —

Amylin Pharmaceuticals (1) 37,700 1,064

AVEO Pharmaceuticals (1) 3,000 37

Biocon (INR) 9,044 39

BioCryst Pharmaceuticals (1) 18,400 73

BioMarin Pharmaceutical (1) 37,700 1,492

Cardiome Pharma (1) 26,600 12

Clovis Oncology (1) 5,100 111

Cubist Pharmaceuticals (1) 31,800 1,206

Cytokinetics (1) 98,600 63

Cytokinetics Warrants, 1/2/24 (1) 59,160 13

Dynavax Technologies (1) 22,100 96

Exelixis (1) 106,700 590

Grifols (EUR)(1) 2,500 47

Grifols, ADR 17,300 166

Halozyme Therapeutics (1) 15,700 139

Idenix Pharmaceuticals (1) 91,000 937

Incyte (1)(2) 145,500 3,303

Infinity Pharmaceuticals (1) 10,725 145

InterMune (1) 41,200 492

MAP Pharmaceuticals (1) 16,500 247

Medivation (1) 20,000 1,828

Momenta Pharmaceuticals (1) 15,100 204

Nektar Therapeutics (1) 13,800 111

Newron Pharmaceuticals (CHF)(1) 1,503 7

ONYX Pharmaceuticals (1) 15,800 1,050

Optimer Pharmaceuticals (1) 29,300 455

Puma Biotechnology (1) 16,075 179

Regeneron Pharmaceuticals (1)(2) 23,300 2,661

Rigel Pharmaceuticals (1) 30,700 286

Swedish Orphan Biovitrum (SEK)(1) 50,938 174

Targacept (1) 6,500 28

Tesaro (1) 6,100 85

Tesaro, Acquistion Date: 6/6/11 – 3/21/12 Acquistion Cost $95 (1)(3) 12,432 165

Theravance (1) 25,600 569

Tranzyme (1) 26,200 97

Proof #6




11

Vical (1) 63,100 227

ViroPharma (1) 9,300 220

29,661

Total Biotechnology 45,732

Life Sciences 3.5%

Life Sciences 3.5%

Abcam (GBP) 35,053 229

Agilent Technologies 1,600 63

BG Medicine (1) 8,400 59

Bruker (1) 30,400 405

Covance (1) 19,800 947

Dyadic International (1) 5,700 6

Gen-Probe (1) 1,300 107

GenMark Diagnostics (1) 40,000 173

Illumina (1) 5,300 214

Meridian Bioscience 7,900 162

Mettler-Toledo International (1) 2,400 374

Monsanto (2) 11,420 945

Thermo Fisher Scientific 26,000 1,350

Total Life Sciences 5,034

Pharmaceuticals 19.3%

European Major - Pharmaceuticals 0.5%

Bayer (EUR) 6,209 448

Bayer, ADR 200 14

Hikma Pharmaceuticals (GBP) 4,366 45

Stada Arzneimittel (EUR) 7,291 222

729

Major Pharmaceuticals 16.1%

Abbott Laboratories 15,900 1,025

Aegerion Pharmaceuticals (1) 31,800 472

Allergan (2) 4,800 444

Amarin, ADR (1) 65,000 940

Ariad Pharmaceuticals (1) 9,700 167

Basilea Pharmaceutica (CHF)(1) 728 34

Bristol Myers Squibb 3,300 119

Cadence Pharmaceuticals (1) 42,500 152

Cadence Pharmaceuticals Warrants, 2/18/14 Acquisition Date: 2/18/09, Acquisition Cost$- (1)(3) 1,100 —

ChemoCentryx (1) 3,000 45

Elan, ADR (1) 136,876 1,997

Endocyte (1) 6,800 56

Forest Laboratories (1) 100 3

GlaxoSmithKline Pharmaceuticals (INR) 1,546 56

GTX (1) 17,800 63

Intercell (EUR)(1) 4,075 10

Ironwood Pharmaceuticals (1) 11,100 153

Jazz Pharmaceuticals (1) 19,200 864

Lijun International Pharmaceutical (HKD) 145,000 39

Medicis Pharmaceutical Class A 10,500 359

Merck (2) 44,386 1,853

Mylan (1) 300 6

Novo Nordisk Series B (DKK) 2,921 423

Par Pharmaceutical (1) 1,500 54

Pfizer 32,000 736

Pharmacyclics (1) 67,800 3,703

Questcor Pharmaceuticals (1) 7,900 421

Ranbaxy Laboratories (INR)(1) 14,516 128

Roche Holding - Genusscheine (CHF) 5,509 951

Salix Pharmaceuticals (1) 8,000 435

Sanofi (EUR) 1,100 83

Sawai Pharmaceutical (JPY) 5,600 603

Shanghai Pharmaceuticals Holding, H Shares (HKD)(1) 155,900 196

Shire (GBP) 5,342 154

Shire, ADR 8,200 708

Simcere Pharmaceutical ADR (1) 13,800 124

Teva Pharmaceutical, ADR 11,223 443

Towa Pharmaceutical (JPY) 6,000 336

Proof #6




12

UCB (EUR) 17,313 874

Valeant Pharmaceuticals International (1)(2) 68,889 3,086

Vectura (GBP)(1) 34,929 42

Warner Chilcott (1) 11,900 213

Watson Pharmaceuticals (1) 2,400 178

XenoPort (1) 59,400 359

23,107

Specialty Pharmaceuticals 2.7%

AMAG Pharmaceuticals (1) 18,200 280

Anacor Pharmaceuticals (1) 25,000 162

Auxilium Pharmaceuticals (1)(2) 20,500 551

AVANIR Pharmaceuticals (1) 246,800 968

DepoMed (1) 15,400 88

Impax Laboratories (1) 20,800 422

Pacira Pharmaceuticals (1) 52,200 837

Sun Pharmaceuticals Industries (INR) 8,527 97

Supernus Pharmaceuticals (1) 39,900 374

Threshold Pharmaceuticals (1) 21,500 159

3,938

Total Pharmaceuticals 27,774

Products & Devices 13.9%

Implants 11.3%

ArthroCare (1) 14,100 413

Baxter International 39,200 2,083

BioMimetic Therapeutics (1) 5,900 16

China Kanghui Holdings ADR (1) 30,500 601

Covidien 42,950 2,298

Dentsply International 60,300 2,280

Edwards Lifesciences (1) 15,300 1,580

Endologix (1) 5,800 90

EnteroMedics (1) 58,353 201

EnteroMedics, Warrants 2/23/13, Acquisition Date: 2/23/09 Acquisition Cost$1 (1)(3) 9,950 —

EnteroMedics Warrants, 6/8/16 (1) 8,500 17

EnteroMedics Warrants, 9/28/16 (1) 2,620 6

HeartWare International (1) 10,650 946

Hospira (1) 14,600 511

Intuitive Surgical (1)(2) 450 249

Nobel Biocare (CHF) 4,017 42

Shandong Weigao Group Medical Polymer H Shares (HKD) 232,000 257

Sonova (CHF) 970 94

St. Jude Medical 600 24

Straumann (CHF) 663 97

Stryker 39,700 2,187

Tornier (1) 3,500 78

Urologix (1) 56,800 44

Volcano (1) 22,500 645

Zimmer Holdings (2) 23,000 1,480

16,239

Other Products & Devices 2.6%

Conceptus (1) 40,900 811

Cooper Companies 6,300 502

Cynosure, Class A (1) 6,300 133

DynaVox, Class A (1) 10,100 11

Hill-Rom Holdings 10,200 315

IDEXX Laboratories (1) 15,300 1,471

Insulet (1) 19,000 406

3,649

Total Products & Devices 19,888

Services 27.8%

Distribution 12.2%

AmerisourceBergen (2) 31,200 1,228

Cardinal Health 100 4

Catalyst Health Solutions (1) 22,800 2,130

Proof #6




13

Catamaran (1)(2) 59,500 5,903

China Medical System (HKD) 937,300 410

CP ALL (THB) 170,600 191

Express Scripts Holding (1)(2) 30,949 1,728

Henry Schein (1)(2) 20,600 1,617

McKesson (2) 27,800 2,606

MWI Veterinary Supply (1) 4,000 411

Owens & Minor 7,100 218

Raia Drogasil (BRL) 42,542 426

Shoppers Drug Mart (CAD) 12,100 488

Sinopharm H Shares (HKD) 42,000 116

17,476

Information 2.3%

Allscripts Healthcare Solutions (1) 10,300 112

Athenahealth (1) 15,900 1,259

Cerner (1) 7,100 587

Maximus 8,500 440

Nuance Communications (1) 38,500 917

3,315

Other Services 2.7%

Advisory Board (1) 11,400 565

Fleury (BRL) 20,600 262

HMS Holdings (1) 40,400 1,346

Laboratory Corporation of America (1) 2,300 213

MEDNAX (1) 12,000 822

Quest Diagnostics 11,100 665

3,873

Payors 6.1%

Aetna 21,500 833

AMERIGROUP (1) 31,400 2,070

Centene (1)(2) 23,800 718

Triple-S Management Class B (1) 6,200 113

UnitedHealth Group (2) 54,400 3,182

Wellcare Health Plans (1) 19,600 1,039

WellPoint 12,820 818

8,773

Providers 4.5%

Acadia Healthcare (1) 17,600 309

Amil Participacoes (BRL) 17,700 174

Bangkok Dusit Medical Services (THB) 244,100 749

Bumrungrad Hospital (THB)(1) 121,200 267

Community Health Systems (1) 8,600 241

DaVita (1)(2) 11,300 1,110

Fortis Healthcare (INR)(1) 65,375 120

Fresenius (EUR) 4,407 457

Fresenius Medical Care (EUR) 7,688 544

HCA Holdings 16,000 487

Health Management (1) 9,800 77

LCA-Vision (1) 31,300 134

OdontoPrev (BRL) 27,600 139

Select Medical Holdings (1) 26,500 268

Universal Health Services 30,900 1,334

6,410

Total Services 39,847

Total Common Stocks (Cost $105,580) 138,275

CONVERTIBLE PREFERRED STOCKS 0.1%

Services 0.1%

Information 0.1%

Castlight Health Acquistion Date: 4/26/12, Acquisition Cost $114 (1)(3) 18,966 114

Total Convertible Preferred Stocks (Cost $114) 114

CONVERTIBLE BONDS 0.0%

HeartWare International 3.50%, 12/15/17 24,000 29

Proof #6



14

Insulet 3.75%, 6/15/16 20,000 22

Total Convertible Bonds (Cost $43) 51

OPTIONS PURCHASED 0.0%

Eli Lilly & Co., Call 1/19/13 @ $45.00 (1) 14,800 26

Total Options Purchased (Cost $24) 26

SHORT-TERM INVESTMENTS 2.1%

Money Market Funds 2.1% T. Rowe Price

Reserve Investment Fund, 0.16% (4)(5) 2,997,977 2,998

Total Short-Term Investments (Cost $2,998) 2,998

Total Investments in Securities

98.6% of Net Assets (Cost $108,759) $ 141,464

‡ Denominated in U.S. dollars unless otherwise noted.(1) Non-income producing (2)

All or a portion of this security is pledged to cover written call options at June 30, 2012.

(3)

Security cannot be offered for public resale without first being registered under the Securities Act of 1933 and related rules ("restricted security"). Acquisition date represents the day on which an enforceable right to acquire such security is obtained and is presented along with related cost in the security description. The fund has registration rights for certain restricted securities. Any costs related to such registration are borne by the issuer. The aggregate value of restricted securities (excluding 144A holdings) at period-end amounts to $279 and represents 0.2% of net assets.

(4) Seven-day yield (5) Affiliated Companies

ADR American Depository Receipts BRL Brazilian Real

CAD Canadian Dollar CHF Swiss Franc DKK Danish Krone

EUR Euro GBP British Pound

HKD Hong Kong Dollar INR Indian Rupee JPY Japanese Yen

SEK Swedish Krona THB Thai Baht

Proof #6




15

OPTIONS WRITTEN (0.9)%

Abbott Laboratories, Put 1/19/13 @ $62.50 (1) 2,900 (7)

Agilent Technologies, Put 1/19/13 @ $45.00 (1) 700 (5)

Alexion Pharmaceuticals, Call 8/18/12 @ $85.00 (1) 1,400 (22)

Alexion Pharmaceuticals, Call 1/19/13 @ $100.00 (1) 1,500 (15)

Alexion Pharmaceuticals, Put 8/18/12 @ $80.00 (1) 1,100 (1)



Alexion Pharmaceuticals, Put 1/19/13 @ $95.00 (1) 600 (5)

Allergan, Call 7/21/12 @ $100.00 (1) 700 —

Allergan, Call 1/19/13 @ $105.00 (1) 700 (1)

Allergan, Put 1/19/13 @ $90.00 (1) 400 (2)

AMERIGROUP, Put 1/19/13 @ $70.00 (1) 700 (8)

AmerisourceBergen, Call 11/17/12 @ $40.00 (1) 2,200 (4)

Amgen, Call 7/21/12 @ $75.00 (1) 2,100 (1)

Amgen, Call 1/19/13 @ $75.00 (1) 1,500 (5)

Amgen, Call 1/19/13 @ $80.00 (1) 2,200 (4)

Amylin Pharmaceuticals, Put 1/19/13 @ $20.00 (1) 600 (1)

Amylin Pharmaceuticals, Put 1/19/13 @ $27.00 (1) 700 (2)

Auxilium Pharmaceuticals, Call 12/22/12 @ $25.00 (1) 3,300 (15)

Baxter International, Put 1/19/13 @ $60.00 (1) 1,100 (8)

Baxter International, Put 1/19/13 @ $65.00 (1) 1,100 (14)

Biogen Idec, Call 1/19/13 @ $135.00 (1) 1,400 (25)

Biogen Idec, Put 1/19/13 @ $115.00 (1) 1,900 (8)

Biogen Idec, Put 1/19/13 @ $120.00 (1) 1,300 (7)

Biogen Idec, Put 1/19/13 @ $135.00 (1) 2,900 (26)

Biogen Idec, Put 1/19/13 @ $140.00 (1) 3,100 (34)

Biogen Idec, Put 1/19/13 @ $145.00 (1) 1,600 (21)

Bristol Myers Squibb, Put 1/19/13 @ $34.00 (1) 2,400 (3)

Bristol Myers Squibb, Put 1/19/13 @ $35.00 (1) 7,800 (13)

Celgene, Call 7/21/12 @ $70.00 (1) 1,500 —

Celgene, Call 7/21/12 @ $72.50 (1) 2,300 —

Celgene, Call 7/21/12 @ $75.00 (1) 2,300 —

Celgene, Call 7/21/12 @ $85.00 (1) 3,600 —

Celgene, Call 10/20/12 @ $70.00 (1) 2,400 (4)

Celgene, Call 1/19/13 @ $85.00 (1) 3,600 (2)

Celgene, Call 1/19/13 @ $90.00 (1) 5,100 (1)

Celgene, Put 1/19/13 @ $60.00 (1) 800 (3)

Celgene, Put 1/19/13 @ $70.00 (1) 600 (5)

Celgene, Put 1/19/13 @ $72.50 (1) 600 (6)

Centene, Call 12/22/12 @ $45.00 (1) 300 —

Centene, Put 12/22/12 @ $32.50 (1) 1,100 (6)

Cerner, Put 1/19/13 @ $80.00 (1) 700 (5)

Cerner, Put 1/19/13 @ $85.00 (1) 700 (6)

Coventry Health Care, Put 8/18/12 @ $35.00 (1) 1,700 (6)

Covidien, Put 7/21/12 @ $50.00 (1) 600 —

CVS Caremark, Put 1/19/13 @ $45.00 (1) 5,500 (14)

CVS Caremark, Put 1/19/13 @ $50.00 (1) 7,300 (36)

DaVita, Call 7/21/12 @ $90.00 (1) 1,700 (13)

DaVita, Put 7/21/12 @ $90.00 (1) 100 —

Proof #6




16

Edwards Lifesciences, Put 1/19/13 @ $70.00 (1) 900 (1)



Eli Lilly, Put 1/19/13 @ $40.00 (1) 8,800 (16)

Express Scripts Holding, Call 1/19/13 @ $65.00 (1) 2,100 (3)

Express Scripts Holding, Call 1/19/13 @ $70.00 (1) 900 —

Express Scripts Holding, Put 1/19/13 @ $50.00 (1) 800 (2)

Express Scripts Holding, Put 1/19/13 @ $55.00 (1) 1,400 (6)

Express Scripts Holding, Put 1/19/13 @ $57.50 (1) 1,500 (8)

Forest Laboratories, Put 1/19/13 @ $35.00 (1) 1,300 (3)

Forest Laboratories, Put 1/19/13 @ $40.00 (1) 6,300 (40)

Gilead Sciences, Call 8/18/12 @ $55.00 (1) 4,400 (3)

Gilead Sciences, Put 8/18/12 @ $45.00 (1) 300 —

Gilead Sciences, Put 1/19/13 @ $35.00 (1) 800 (1)

Gilead Sciences, Put 1/19/13 @ $55.00 (1) 1,100 (7)

Gilead Sciences, Put 1/19/13 @ $60.00 (1) 1,100 (12)

Henry Schein, Call 7/21/12 @ $80.00 (1) 700 (1)

Henry Schein, Call 10/20/12 @ $80.00 (1) 1,500 (5)

Humana, Put 1/19/13 @ $85.00 (1) 1,300 (14)

Humana, Put 1/19/13 @ $97.50 (1) 2,100 (43)

Idenix Pharmaceuticals, Put 7/21/12 @ $12.50 (1) 800 (2)

Incyte, Call 9/22/12 @ $22.50 (1) 2,900 (7)

Incyte, Call 12/22/12 @ $25.00 (1) 2,900 (6)

InterMune, Put 1/19/13 @ $20.00 (1) 1,500 (13)

Intuitive Surgical, Call 1/19/13 @ $550.00 (1) 300 (17)

Intuitive Surgical, Put 1/19/13 @ $400.00 (1) 100 (1)

Johnson & Johnson, Put 1/19/13 @ $67.50 (1) 1,800 (5)

Johnson & Johnson, Put 1/19/13 @ $70.00 (1) 4,600 (21)

McKesson, Call 8/18/12 @ $95.00 (1) 700 (1)

McKesson, Call 1/19/13 @ $95.00 (1) 2,100 (10)

McKesson, Call 1/19/13 @ $100.00 (1) 700 (2)

Medicines Company, Put 1/19/13 @ $25.00 (1) 100 —

Medicis Pharmaceutical, Put 7/21/12 @ $35.00 (1) 2,000 (3)

Medicis Pharmaceutical, Put 10/20/12 @ $45.00 (1) 2,900 (31)

Medivation, Put 1/19/13 @ $100.00 (1) 300 (6)

MEDNAX, Put 11/17/12 @ $70.00 (1) 600 (3)

Medtronic, Put 1/19/13 @ $40.00 (1) 2,900 (11)

Merck & Co., Call 1/19/13 @ $40.00 (1) 2,500 (7)

Merck & Co., Put 1/19/13 @ $45.00 (1) 2,700 (12)

Monsanto, Call 7/21/12 @ $90.00 (1) 1,400 —

Monsanto, Call 1/19/13 @ $90.00 (1) 700 (2)

Monsanto, Put 7/21/12 @ $80.00 (1) 300 —

Monsanto, Put 1/19/13 @ $75.00 (1) 800 (3)

Monsanto, Put 1/19/13 @ $80.00 (1) 700 (4)

Nuance Communications, Put 1/19/13 @ $25.00 (1) 900 (3)

Nuance Communications, Put 1/19/13 @ $30.00 (1) 2,100 (15)

ONYX Pharmaceuticals, Put 1/19/13 @ $70.00 (1) 2,400 (24)

ONYX Pharmaceuticals, Put 1/19/13 @ $75.00 (1) 2,400 (32)

Pfizer, Put 1/19/13 @ $22.50 (1) 8,400 (10)

Pfizer, Put 1/19/13 @ $25.00 (1) 10,700 (29)

Proof #6




17

Pfizer, Put 1/19/13 @ $27.00 (1) 14,500 (66)

Quest Diagnostics, Put 8/18/12 @ $60.00 (1) 1,200 (2)

Quest Diagnostics, Put 8/18/12 @ $65.00 (1) 2,400 (13)

Quest Diagnostics, Put 11/17/12 @ $60.00 (1) 900 (3)

Regeneron Pharmaceuticals, Call 8/18/12 @ $175.00 (1) 300 —

Regeneron Pharmaceuticals, Call 1/19/13 @ $135.00 (1) 2,100 (18)



Regeneron Pharmaceuticals, Put 1/19/13 @ $105.00 (1) 1,100 (14)

Regeneron Pharmaceuticals, Put 1/19/13 @ $115.00 (1) 600 (10)

Salix Pharmaceuticals, Put 7/21/12 @ $45.00 (1) 200 —

Sanofi, Put 9/22/12 @ $41.00 (1) 5,600 (17)

St. Jude Medical, Put 1/19/13 @ $45.00 (1) 1,000 (7)

Stryker, Put 1/19/13 @ $60.00 (1) 700 (5)

Stryker, Put 1/19/13 @ $65.00 (1) 300 (3)

SXC Health Solutions, Call 10/20/12 @ $95.00 (1) 700 (8)

SXC Health Solutions, Call 10/20/12 @ $110.00 (1) 2,900 (14)

SXC Health Solutions, Put 7/21/12 @ $65.00 (1) 700 —

SXC Health Solutions, Put 10/20/12 @ $70.00 (1) 1,400 (1)

SXC Health Solutions, Put 10/20/12 @ $105.00 (1) 800 (10)

Teva Pharmaceutical, Put 1/19/13 @ $45.00 (1) 700 (5)

Teva Pharmaceutical, Put 1/19/13 @ $50.00 (1) 2,000 (22)



UnitedHealth Group, Call 1/19/13 @ $65.00 (1) 4,200 (8)

UnitedHealth Group, Put 1/19/13 @ $55.00 (1) 700 (2)

Valeant Pharmaceuticals International, Call 1/19/13 @ $65.00 (1) 5,900 (5)

Valeant Pharmaceuticals International, Put 1/19/13 @ $45.00 (1) 800 (5)



Valeant Pharmaceuticals International, Put 1/19/13 @ $60.00 (1) 2,700 (45)

Vertex Pharmaceuticals, Put 1/19/13 @ $45.00 (1) 2,900 (10)

Vertex Pharmaceuticals, Put 1/19/13 @ $55.00 (1) 800 (6)

Vertex Pharmaceuticals, Put 1/19/13 @ $60.00 (1) 900 (10)



Warner Chilcott, Put 1/19/13 @ $20.00 (1) 1,200 (5)

Watson Pharmaceuticals, Put 8/18/12 @ $60.00 (1) 600 —

Watson Pharmaceuticals, Put 11/17/12 @ $65.00 (1) 100 —

Watson Pharmaceuticals, Put 11/17/12 @ $80.00 (1) 3,700 (32)

WellPoint, Put 1/19/13 @ $70.00 (1) 2,900 (27)

Zimmer Holdings, Call 1/19/13 @ $65.00 (1) 1,400 (6)

Zimmer Holdings, Call 1/19/13 @ $70.00 (1) 3,500 (7)

Zimmer Holdings, Put 1/19/13 @ $65.00 (1) 800 (4)

Zimmer Holdings, Put 1/19/13 @ $70.00 (1) 300 (2)

Total Options Written (Premiums Received $(1,728)) (1,345)

Proof #6


18


Affiliated Companies($000s)

The fund may invest in certain securities that are considered affiliated companies. As defined by the 1940 Act, an affiliated company is one in which the fund owns 5% or more of the outstanding voting securities, or a company which is under common ownership or control. Based on the fund’s relative ownership, the following securities were considered affiliated companies for all or some portion of the six months ended June 30, 2012. Purchase and sales cost and investment income reflect all activity for the period then ended. Affiliate

PurchaseCost

SalesCost

InvestmentIncome

Value6/30/12

Value12/31/11

T. Rowe Price Reserve Investment Fund, 0.16% ¤ ¤ $ 3^ $ 2,998 $ 1,677 Totals $ 3 $ 2,998 $ 1,677

¤ Purchase and sale information not shown for cash management funds. ̂Excludes earnings on securities lending collateral invested in the T. Rowe Price Reserve Investment Fund, which are subject to rebates and fees as described in Note 4.

Amounts reflected on the accompanying financial statements include the following amounts related to affiliated companies: Investment in securities, at cost $ 2,998

Dividend income 3 Interest income -

Investment income $ 3

Realized gain (loss) on securities $ -

Capital gain distributions from mutual funds $ -

Proof #6

19

Statement of Assets and LiabilitiesT. Rowe Price Health Sciences PortfolioJune 30, 2012 (Unaudited)($000s, except shares and per share amounts)


Assets Investments in securities, at value (cost $108,759) $ 141,464 Receivable for shares sold 3,667 Dividends and interest receivable 68 Receivable for investment securities sold 32 Cash 7 Other assets 36

Total assets 145,274 Liabilities Written options (premiums $1,728) 1,345 Payable for investment securities purchased 205 Investment management and administrative fees payable 129 Payable for shares redeemed 71

Total liabilities 1,750 NET ASSETS $ 143,524 Net Assets Consist of: Accumulated net investment loss $ (227) Accumulated undistributed net realized gain 63 Net unrealized gain 33,087 Paid-in capital applicable to 7,160,621 shares of $0.0001 par value capital stock outstanding; 1,000,000,000 shares of the Corporation authorized 110,601 NET ASSETS $ 143,524 NET ASSET VALUE PER SHARE Health Sciences Class ($25,055,880 / 1,223,165 shares outstanding) $ 20.48 Health Sciences - II Class ($118,468,015 / 5,937,456 shares outstanding) $ 19.95

Proof #6

20

Statement of OperationsT. Rowe Price Health Sciences Portfolio(Unaudited)($000s)


6 Months Ended

6/30/12Investment Income (Loss) Income

Dividend $ 419 Securities lending 5 Interest 1 Total income 425

Expenses Investment management and administrative expense 537 Rule 12b-1 fees - Health Sciences-II Class 115 Total expenses 652

Net investment loss (227) Realized and Unrealized Gain (Loss) Net realized gain (loss)

Securities 1,974 Written options 340 Foreign currency transactions 1 Net realized gain 2,315

Change in net unrealized gain (loss)

Securities 21,206 Written options 204 Other assets and liabilities denominated in foreign currencies (1) Change in net unrealized gain 21,409

Net realized and unrealized gain 23,724 INCREASE IN NET ASSETS FROM OPERATIONS $ 23,497

Proof #6

21

Statement of Changes in Net AssetsT. Rowe Price Health Sciences Portfolio(Unaudited)($000s)


6 Months Ended

6/30/12

Year Ended

12/31/11Increase (Decrease) in Net Assets Operations

Net investment loss $ (227) $ (411) Net realized gain (loss) 2,315 (915) Change in net unrealized gain 21,409 3,363 Increase in net assets from operations 23,497 2,037

Capital share transactions*

Shares sold Health Sciences Class 6,191 5,838 Health Sciences-II Class 47,610 68,961

Shares redeemed Health Sciences Class (1,859) (4,832) Health Sciences-II Class (15,109) (25,177)

Increase in net assets from capital share transactions 36,833 44,790 Net Assets Increase during period 60,330 46,827 Beginning of period 83,194 36,367 End of period $ 143,524 $ 83,194 Undistributed (accumulated) net investment income (loss) (227) – *Share information

Shares sold Health Sciences Class 327 367 Health Sciences-II Class 2,591 4,254

Shares redeemed Health Sciences Class (99) (302) Health Sciences-II Class (819) (1,639)

Increase in shares outstanding 2,000 2,680

Proof #6

22

Notes to Financial StatementsT. Rowe Price Health Sciences PortfolioJune 30, 2012 (Unaudited)

T.RowePriceEquitySeries,Inc.(thecorporation),isregisteredundertheInvestmentCompanyActof1940(the1940Act).TheHealthSciencesPortfolio(thefund)isadiversified,open-endmanagementinvestmentcompanyestablishedbythecorporation.Sharesofthefundcurrentlyareofferedonlythroughcertaininsurancecompaniesasaninvestmentmediumforbothvariableannuitycontractsandvariablelifeinsurancepolicies.Thefundseekslong-termcapitalappreciation.Thefundhastwoclassesofshares:theHealthSciencesPortfoliooriginalshareclass(HealthSciencesClass),offeredsinceDecember29,2000,andtheHealthSciencesPortfolio–II(HealthSciences–IIClass),offeredsinceApril30,2002.HealthSciences–IIClasssharesaresoldthroughfinancialintermediaries,whichitcompensatesfordistribution,shareholderservicing,and/orcertainadministrativeservicesunderaBoard-approvedRule12b-1plan.Eachclasshasexclusivevotingrightsonmattersrelatedsolelytothatclass;separatevotingrightsonmattersthatrelatetobothclasses;and,inallotherrespects,thesamerightsandobligationsastheotherclass.

NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES

Basis of Preparation TheaccompanyingfinancialstatementswerepreparedinaccordancewithaccountingprinciplesgenerallyacceptedintheUnitedStatesofAmerica(GAAP),whichrequiretheuseofestimatesmadebymanagement.Managementbelievesthatestimatesandvaluationsareappropriate;however,actualresultsmaydifferfromthoseestimates,andthevaluationsreflectedintheaccompanyingfinancialstatementsmaydifferfromthevalueultimatelyrealizeduponsale or maturity.

Investment Transactions, Investment Income, and Distributions Incomeandexpensesarerecordedontheaccrualbasis.Premiumsanddiscountsondebtsecuritiesareamortizedforfinancialreportingpurposes.Dividendsreceivedfrommutualfundinvestmentsarereflectedasdividendincome;capitalgaindistributionsarereflectedasrealizedgain/loss.Dividendincomeandcapitalgaindistributionsarerecordedontheex-dividenddate.Incometax-relatedinterestandpenalties,ifincurred,wouldberecordedasincometaxexpense.Investmenttransactionsareaccountedforonthetradedate.Realizedgainsandlossesarereportedontheidentifiedcostbasis.Distributionstoshareholdersarerecordedontheex-dividenddate.Incomedistributionsaredeclaredandpaidbyeachclassannually.Capitalgaindistributions,ifany,aregenerallydeclaredandpaidbythefundannually.

Currency Translation Assets,includinginvestments,andliabilitiesdenominatedinforeigncurrenciesaretranslatedintoU.S.dollarvalueseachdayattheprevailingexchangerate,usingthemeanofthebidandaskedpricesofsuchcurrenciesagainstU.S.dollarsasquotedbyamajorbank.Purchasesandsalesofsecurities,income,andexpensesaretranslatedinto U.S.dollarsattheprevailingexchangerateonthedateofthetransaction.Theeffectofchangesinforeigncurrencyexchangeratesonrealizedandunrealizedsecuritygainsandlossesisreflectedasacomponentofsecuritygainsand losses.

Class Accounting HealthSciences–IIpaysdistribution,shareholderservicing,and/orcertainadministrativeexpensesintheformofRule12b-1fees,inanamountnotexceeding0.25%oftheclass’saveragedailynetassets.Investmentincome,investmentmanagementandadministrativeexpense,andrealizedandunrealizedgainsandlossesareallocatedtotheclasses based upon the relative daily net assets of each class.

Rebates Subjecttobestexecution,thefundmaydirectcertainsecuritytradestobrokerswhohaveagreedtorebateaportionoftherelatedbrokeragecommissiontothefundincash.Commissionrebatesarereflectedasrealizedgainonsecuritiesintheaccompanyingfinancialstatements.

Credits Creditsareearnedonthefund’stemporarilyuninvestedcashbalancesheldatthecustodianandsuchcreditsreducetheamountpaidbythemanagerforcustodyofthefund’sassets.Inordertopassthebenefitofcustodycreditstothefund,themanagerhasvoluntarilyreduceditsinvestmentmanagementandadministrativeexpenseintheaccompanyingfinancial statements.

New Accounting Pronouncements InMay2011,theFinancialAccountingStandardsBoard(FASB)issuedamendedguidancetoalignfairvaluemeasurementanddisclosurerequirementsinU.S.GAAPwithInternationalFinancialReportingStandards.TheguidanceiseffectiveforfiscalyearsandinterimperiodsbeginningonorafterDecember 15,2011.Adoptionhadnoeffectonnetassetsorresultsofoperations.

InDecember2011,theFASBissuedamendedguidancetoenhancedisclosureforoffsettingassetsandliabilities.TheguidanceiseffectiveforfiscalyearsandinterimperiodsbeginningonorafterJanuary1,2013.Adoptionwillhavenoeffect on the fund’s net assets or results of operations.

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NOTE 2 - VALUATION

Thefund’sfinancialinstrumentsarereportedatfairvalueasdefinedbyGAAP.Thefunddeterminesthevaluesofitsassetsandliabilitiesandcomputeseachclass’snetassetvaluepershareatthecloseoftheNewYorkStockExchange(NYSE),normally4p.m.ET,eachdaythattheNYSEisopenforbusiness.

Valuation Methods Equitysecuritieslistedorregularlytradedonasecuritiesexchangeorintheover-the-counter(OTC)marketarevaluedatthelastquotedsalepriceor,forcertainmarkets,theofficialclosingpriceatthetimethevaluationsaremade,exceptforOTCBulletinBoardsecurities,whicharevaluedatthemeanofthelatestbidandaskedprices.Asecuritythatislistedortradedonmorethanoneexchangeisvaluedatthequotationontheexchangedeterminedtobetheprimarymarketforsuchsecurity.Listedsecuritiesnottradedonaparticulardayarevaluedatthemeanofthelatestbidandaskedpricesfordomesticsecuritiesandthelastquotedsalepriceforinternationalsecurities.

DebtsecuritiesaregenerallytradedintheOTCmarket.Securitieswithremainingmaturitiesofoneyearormoreatthetimeofacquisitionarevaluedatpricesfurnishedbydealerswhomakemarketsinsuchsecuritiesorbyanindependentpricingservice,whichconsiderstheyieldorpriceofbondsofcomparablequality,coupon,maturity,andtype,aswellaspricesquotedbydealerswhomakemarketsinsuchsecurities.Securitieswithremainingmaturitiesoflessthanoneyearatthetimeofacquisitiongenerallyuseamortizedcostinlocalcurrencytoapproximatefairvalue.However,ifamortizedcostisdeemednottoreflectfairvalueorthefundholdsasignificantamountofsuchsecuritieswithremainingmaturitiesofmorethan60days,thesecuritiesarevaluedatpricesfurnishedbydealerswhomakemarketsinsuchsecuritiesorbyanindependentpricingservice.

Investmentsinmutualfundsarevaluedatthemutualfund’sclosingnetassetvaluepershareonthedayofvaluation.Purchasedandwrittenoptions,andOTCoptionswithalistedequivalent,arevaluedatthemeanoftheclosingbidandaskedprices.Optionsonfuturescontractsarevaluedattheclosingsettlementprices.

Otherinvestments,includingrestrictedsecuritiesandprivateplacements,andthosefinancialinstrumentsforwhichtheabove valuation procedures are inappropriate or are deemed not to reflect fair value, are stated at fair value as determined ingoodfaithbytheT.RowePriceValuationCommittee,establishedbythefund’sBoardofDirectors(theBoard).SubjecttooversightbytheBoard,theValuationCommitteedevelopspricing-relatedpoliciesandproceduresandapprovesallfair-valuedeterminations.TheValuationCommitteeregularlymakesgoodfaithjudgments,usingawidevarietyofsourcesand information, to establish and adjust valuations of certain securities as events occur and circumstances warrant. For instance,indeterminingthefairvalueofprivate-equityinstruments,theValuationCommitteeconsidersavarietyoffactors,includingthecompany’sbusinessprospects,itsfinancialperformance,strategiceventsimpactingthecompany,relevantvaluationsofsimilarcompanies,newroundsoffinancing,andanynegotiatedtransactionsofsignificantsizebetweenotherinvestorsinthecompany.Becauseanyfair-valuedeterminationinvolvesasignificantamountofjudgment,thereisadegreeofsubjectivityinherentinsuchpricingdecisions.

Forvaluationpurposes,thelastquotedpricesofnon-U.S.equitysecuritiesmaybeadjustedunderthecircumstancesdescribedbelow.IfthefunddeterminesthatdevelopmentsbetweenthecloseofaforeignmarketandthecloseoftheNYSEwill,initsjudgment,materiallyaffectthevalueofsomeorallofitsportfoliosecurities,thefundwilladjustthepreviousclosingpricestoreflectwhatitbelievestobethefairvalueofthesecuritiesasofthecloseoftheNYSE.Indecidingwhetheritisnecessarytoadjustclosingpricestoreflectfairvalue,thefundreviewsavarietyoffactors,includingdevelopmentsinforeignmarkets,theperformanceofU.S.securitiesmarkets,andtheperformanceofinstrumentstradinginU.S.marketsthatrepresentforeignsecuritiesandbasketsofforeignsecurities.Afundmayalsofairvaluesecuritiesinothersituations,suchaswhenaparticularforeignmarketisclosedbutthefundisopen.Thefundusesoutsidepricingservicestoprovideitwithclosingpricesandinformationtoevaluateand/oradjustthoseprices.Thefundcannotpredicthowoftenitwilluseclosingpricesandhowoftenitwilldetermineitnecessarytoadjustthosepricestoreflectfairvalue.Asameansofevaluatingitssecurityvaluationprocess,thefundroutinelycomparesclosingprices,thenextday’sopeningpricesinthesamemarkets,andadjustedprices.Additionally,tradingintheunderlyingsecuritiesofthefundmaytakeplaceinvariousforeignmarketsoncertaindayswhenthefundisnotopenforbusinessanddoesnotcalculateanetassetvalue.Asaresult,netassetvaluesmaybesignificantlyaffectedondayswhenshareholderscannotmaketransactions.

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Valuation Inputs Variousinputsareusedtodeterminethevalueofthefund’sfinancialinstruments.Theseinputsaresummarized in the three broad levels listed below:

Level1–quotedpricesinactivemarketsforidenticalfinancialinstruments

Level2–observableinputsotherthanLevel1quotedprices(including,butnotlimitedto,quotedpricesforsimilarfinancialinstruments,interestrates,prepaymentspeeds,andcreditrisk)

Level3–unobservableinputs

Observableinputsarethosebasedonmarketdataobtainedfromsourcesindependentofthefund,andunobservableinputs reflect the fund’s own assumptions based on the best information available. The input levels are not necessarily an indicationoftheriskorliquidityassociatedwithfinancialinstrumentsatthatlevel.Forexample,non-U.S.equitysecuri-tiesactivelytradedinforeignmarketsgenerallyarereflectedinLevel2despitetheavailabilityofclosingpricesbecausethefundevaluatesanddetermineswhetherthoseclosingpricesreflectfairvalueatthecloseoftheNYSEorrequireadjustment,asdescribedabove.Thefollowingtablesummarizesthefund’sfinancialinstruments,basedontheinputsusedtodeterminetheirvaluesonJune30,2012:

Significant Significant Quoted Observable Unobservable Prices Inputs Inputs AssetsInvestmentsinSecurities,except: $ 2,998 $ – $ – $ 2,998

CommonStocks 127,825 10,437 13 138,275

ConvertiblePreferredStocks – – 114 114

ConvertibleBonds – 51 – 51

PurchaseOptions – 26 – 26

Total $ 130,823 $ 10,514 $ 127 $ 141,464

LiabilitiesOptionsWritten $ – $ 1,345 $ – $ 1,345

($000s) Total ValueLevel 3Level 2Level 1

Followingisareconciliationofthefund’sLevel3holdingsforthesixmonthsendedJune30,2012.TransfersintoandoutofLevel3arereflectedatthevalueofthefinancialinstrumentatthebeginningoftheperiod.Gain(loss)reflectsbothrealizedandchangeinunrealizedgain(loss)onLevel3holdingsduringtheperiod,ifany,andisincludedontheaccompanyingStatementofOperations.Thechangeinunrealizedgain(loss)onLevel3instrumentsheldatJune30,2012,totaled$12,000forthesixmonthsendedJune30,2012.

Investments in Securities

CommonStocks $ 49 $ 12 $ – $ (48) $ 13

ConvertiblePreferredStocks 40 – 114 (40) 114

TotalLevel3 $ 89 $ 12 $ 114 $ (88) $ 127

($000s) Ending Balance

6/30/12

TransfersOut of

Level 3Total

Purchases

Gain (Loss) DuringPeriod

Beginning Balance1/1/12

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NOTE 3 - DERIVATIVE INSTRUMENTS

DuringthesixmonthsendedJune30,2012,thefundinvestedinderivativeinstruments.AsdefinedbyGAAP,aderivativeisafinancialinstrumentwhosevalueisderivedfromanunderlyingsecurityprice,foreignexchangerate,interestrate,indexofpricesorrates,orothervariable;itrequireslittleornoinitialinvestmentandpermitsorrequiresnetsettlement.Thefundinvestsinderivativesonlyiftheexpectedrisksandrewardsareconsistentwithitsinvestmentobjectives,policies,andoverallriskprofile,asdescribedinitsprospectusandStatementofAdditionalInformation.Thefundmayusederivativesforavarietyofpurposes,suchasseekingtohedgeagainstdeclinesinprincipalvalue,increaseyield,investinanassetwithgreaterefficiencyandatalowercostthanispossiblethroughdirectinvestment,ortoadjustcreditexposure.Therisksassociatedwiththeuseofderivativesaredifferentfrom,andpotentiallymuchgreaterthan,therisksassociatedwithinvestingdirectlyintheinstrumentsonwhichthederivativesarebased.Investmentsinderivativescanmagnifyreturnspositivelyornegatively;however,thefundatalltimesmaintainssufficientcashreserves,liquidassets,orotherSEC-permittedassettypestocoverthesettlementobligationsunderitsopenderivativecontracts.

Thefundvaluesitsderivativesatfairvalue,asdescribedbelowandinNote2,andrecognizeschangesinfairvaluecurrentlyinitsresultsofoperations.Accordingly,thefunddoesnotfollowhedgeaccounting,evenforderivativesemployedaseco-nomichedges.Thefunddoesnotoffsetthefairvalueofderivativeinstrumentsagainsttherighttoreclaimorobligationtoreturncollateral.Thefollowingtablesummarizesthefairvalueofthefund’sderivativeinstrumentsheldasofJune 30,2012,andtherelatedlocationontheaccompanyingStatementofAssetsandLiabilities,presentedbyprimaryunderlyingriskexposure:

AssetsEquityderivatives Securities^ $ 26

LiabilitiesEquityderivatives Writtenoptions $ 1,345

^PurchasedoptionsarereportedassecuritiesandarereflectedintheaccompanyingPortfolioofInvestments.

($000s)Fair Value

Location on Statement ofAssets and Liabilities

Additionally,theamountofgainsandlossesonderivativeinstrumentsrecognizedinfundearningsduringthesixmonthsendedJune30,2012,andtherelatedlocationontheaccompanyingStatementofOperationsissummarizedinthefollowingtablebyprimaryunderlyingriskexposure:

Location of Gain (Loss) on Statement of Operations

Written Securities^ Options TotalRealized Gain (Loss)Equityderivatives $ (16) $ 340 $ 324

Change in Unrealized Gain (Loss)Equityderivatives $ 2 $ 204 $ 206

^Purchasedoptionsarereportedassecurities.

($000s)

Counterpartyriskrelatedtoexchange-tradedderivatives,includingfuturesandoptionscontracts,isminimalbecausetheexchange’sclearinghouseprovidesprotectionagainstdefaults.Additionally,forexchange-tradedderivatives,eachbroker,initssolediscretion,maychangemarginrequirementsapplicabletothefund.

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Options Thefundissubjecttoequitypriceriskinthenormalcourseofpursuingitsinvestmentobjectivesandusesoptionstohelpmanagesuchrisk.Thefundmayusecallandputoptionstomanageexposuretointerestrates,securityprices,foreigncurrencies,andcreditquality;asanefficientmeansofadjustingexposuretoallorapartofatargetmarket;toenhanceincome;asacashmanagementtool;and/ortoadjustcreditexposure.Callandputoptionsgivetheholdertheright,inreturnforapremiumpaid,topurchaseorsell,respectively,asecurityataspecifiedexercisepriceatanytimeduringtheperiodoftheoption.Optionsareincludedinnetassetsatfairvalue;purchasedoptionsareincludedinInvestmentsinSecurities;andwrittenoptionsareseparatelyreflectedasaliabilityontheaccompanyingStatementofAssetsandLiabilities.Premiumsonunexercised,expiredoptionsarerecordedasrealizedgainsorlosses;premiumsonexercisedoptionsarerecordedasanadjustmenttotheproceedsfromthesaleorcostofthepurchase.Thedifferencebetweenthepremiumandtheamountreceivedorpaidinaclosingtransactionisalsotreatedasrealizedgainorloss.Risksrelatedtotheuseofoptionsincludepossibleilliquidityoftheoptionsmarkets;tradingrestrictionsimposedbyanexchange;movementsinunderlyingsecurityvalues;and,forwrittenoptions,potentiallossesinexcessofthefund’sinitialinvestment.DuringthesixmonthsendedJune30,2012,thefund’sexposuretooptions,basedonunderlyingnotionalamounts,wasgenerallylessthan1%ofnetassets.TransactionsinwrittenoptionsandrelatedpremiumsreceivedduringthesixmonthsendedJune30,2012,wereasfollows:

Number of Contracts PremiumsOutstandingatbeginningofperiod 2,115 $ 1,235

Written 2,950 1,711

Exercised (179) (132)

Expired (1,125) (538)

Closed (927) (548)

Outstandingatendofperiod 2,834 $ 1,728

($000s)

NOTE 4 - OTHER INVESTMENT TRANSACTIONS

Consistentwithitsinvestmentobjective,thefundengagesinthefollowingpracticestomanageexposuretocertainrisksand/ortoenhanceperformance.Theinvestmentobjective,policies,program,andriskfactorsofthefundaredescribedmorefullyinthefund’sprospectusandStatementofAdditionalInformation.

Restricted Securities Thefundmayinvestinsecuritiesthataresubjecttolegalorcontractualrestrictionsonresale.Prompt sale of such securities at an acceptable price may be difficult and may involve substantial delays and additional costs.

Securities Lending Thefundlendsitssecuritiestoapprovedbrokerstoearnadditionalincome.ItreceivesascollateralcashandU.S.governmentsecuritiesvaluedat102%to105%ofthevalueofthesecuritiesonloan.Collateralismain-tained over the life of the loan in an amount not less than the value of loaned securities as determined at the close of fund businesseachday;anyadditionalcollateralrequiredduetochangesinsecurityvaluesisdeliveredtothefundthenextbusinessday.Cashcollateralisinvestedbythefund’slendingagent(s)inaccordancewithinvestmentguidelinesapprovedbymanagement.Althoughriskismitigatedbythecollateral,thefundcouldexperienceadelayinrecoveringitssecuritiesand a possible loss of income or value if the borrower fails to return the securities or if collateral investments decline in value.Securitieslendingrevenuerecognizedbythefundconsistsofearningsoninvestedcollateralandborrowingfees,netofanyrebatestotheborrowerandcompensationtothelendingagent.InaccordancewithGAAP,investmentsmadewithcashcollateralarereflectedintheaccompanyingfinancialstatements,butcollateralreceivedintheformofsecuritiesarenot.AtJune30,2012,therewerenosecuritiesonloan.

Other Purchasesandsalesofportfoliosecuritiesotherthanshort-termsecuritiesaggregated$39,811,000and$7,658,000,respectively,forthesixmonthsendedJune30,2012.

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NOTE 5 - FEDERAL INCOME TAXES

NoprovisionforfederalincometaxesisrequiredsincethefundintendstocontinuetoqualifyasaregulatedinvestmentcompanyunderSubchapterMoftheInternalRevenueCodeanddistributetoshareholdersallofitstaxableincomeandgains.Distributionsdeterminedinaccordancewithfederalincometaxregulationsmaydifferinamountorcharacterfromnetinvestmentincomeandrealizedgainsforfinancialreportingpurposes.Financialreportingrecordsareadjustedforpermanentbook/taxdifferencestoreflecttaxcharacterbutarenotadjustedfortemporarydifferences.Theamountandcharacteroftax-basisdistributionsandcompositionofnetassetsarefinalizedatfiscalyear-end;accordingly,tax-basisbalances have not been determined as of the date of this report.

Thefundintendstoretainrealizedgainstotheextentofavailablecapitallosscarryforwards.AsaresultoftheRegulatedInvestmentCompanyModernizationActof2010,netcapitallossesrealizedonorafterJanuary1,2011(effectivedate)maybecarriedforwardindefinitelytooffsetfuturerealizedcapitalgains;however,post-effectivelossesmustbeusedbeforepre-effectivecapitallosscarryforwardswithexpirationdates.Accordingly,itispossiblethatalloraportionofthefund’spre-effectivecapitallosscarryforwardscouldexpireunused.AsofDecember31,2011,thefundhad$130,000ofavailablecapitallosscarryforwards,whichallexpireinfiscal2017.

AtJune30,2012,thecostofinvestmentsforfederalincometaxpurposeswas$110,833,000.Netunrealizedgainaggregated$31,013,000atperiod-end,ofwhich$36,922,000relatedtoappreciatedinvestmentsand$5,909,000relatedto depreciated investments.

NOTE 6 - RELATED PARTY TRANSACTIONS

ThefundismanagedbyT.RowePriceAssociates,Inc.(PriceAssociates),awhollyownedsubsidiaryofT.RowePriceGroup,Inc.(PriceGroup).TheinvestmentmanagementandadministrativeagreementbetweenthefundandPriceAssociatesprovidesforanall-inclusiveannualfeeequalto0.95%ofthefund’saveragedailynetassets.Thefeeiscom-puteddailyandpaidmonthly.Theall-inclusivefeecoversinvestmentmanagement,shareholderservicing,transferagency,accounting,andcustodyservicesprovidedtothefund,aswellasfunddirectors’feesandexpenses;interest,taxes,brokeragecommissions,andextraordinaryexpensesarepaiddirectlybythefund.

ThefundmayinvestintheT.RowePriceReserveInvestmentFundandtheT.RowePriceGovernmentReserveInvestmentFund(collectively,theT.RowePriceReserveInvestmentFunds),open-endmanagementinvestmentcompaniesmanagedbyPriceAssociatesandconsideredaffiliatesofthefund.TheT.RowePriceReserveInvestmentFundsareofferedascashmanagementoptionstomutualfunds,trusts,andotheraccountsmanagedbyPriceAssociatesand/oritsaffiliatesandarenot available for direct purchase by members of the public. The T. Rowe Price Reserve Investment Funds pay no investment managementfees.

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Information on Proxy Voting Policies, Procedures, and Records

AdescriptionofthepoliciesandproceduresusedbyT.RowePricefundsandportfoliostodeterminehowtovoteproxiesrelatingtoportfoliosecuritiesisavailableineachfund’sStatementofAdditionalInformation,whichyoumayrequestbycall-ing1-800-225-5132orbyaccessingtheSEC’swebsite,sec.gov.Thedescriptionofourproxyvotingpoliciesandproceduresisalsoavailableonourwebsite,troweprice.com.Toaccessit,clickonthewords“OurCompany”atthetopofourcorporatehomepage.Then,whenthenextpageappears,clickonthewords“ProxyVotingPolicies”ontheleftsideofthepage.

Eachfund’smostrecentannualproxyvotingrecordisavailableonourwebsiteandthroughtheSEC’swebsite.Toaccessitthroughourwebsite,followthedirectionsabove,thenclickonthewords“ProxyVotingRecords”ontherightsideoftheProxyVotingPoliciespage.

How to Obtain Quarterly Portfolio Holdings

ThefundfilesacompletescheduleofportfolioholdingswiththeSecuritiesandExchangeCommissionforthefirstandthirdquartersofeachfiscalyearonFormN-Q.Thefund’sFormN-QisavailableelectronicallyontheSEC’swebsite(sec.gov);hardcopiesmaybereviewedandcopiedattheSEC’sPublicReferenceRoom,100FSt.N.E.,Washington,DC20549.FormoreinformationonthePublicReferenceRoom,call1-800-SEC-0330.

T.RowePriceHealthSciencesPortfolio

Proof #6

29

Approval of Investment Management Agreement

OnMarch6,2012,thefund’sBoardofDirectors(Board),includingamajorityofthefund’sindependentdirectors,approvedthecontinuationoftheinvestmentmanagementagreement(AdvisoryContract)betweenthefundanditsinvest-mentadvisor,T.RowePriceAssociates,Inc.(Advisor).Inconnectionwithitsdeliberations,theBoardrequested,andtheAdvisorprovided,suchinformationastheBoard(withadvicefromindependentlegalcounsel)deemedreasonablynecessary.TheBoardconsideredavarietyoffactorsinconnectionwithitsreviewoftheAdvisoryContract,alsotakingintoaccountinformationprovidedbytheAdvisorduringthecourseoftheyear,asdiscussedbelow:

Services Provided by the AdvisorTheBoardconsideredthenature,quality,andextentoftheservicesprovidedtothefundbytheAdvisor.Theseservicesincluded,butwerenotlimitedto,directingthefund’sinvestmentsinaccordancewithitsinvestmentprogramandtheover-allmanagementofthefund’sportfolio,aswellasavarietyofrelatedactivitiessuchasfinancial,investmentoperations,andadministrativeservices;compliance;maintainingthefund’srecordsandregistrations;andshareholdercommunications.TheBoardalsoreviewedthebackgroundandexperienceoftheAdvisor’sseniormanagementteamandinvestmentpersonnelinvolvedinthemanagementofthefund,aswellastheAdvisor’scompliancerecord.TheBoardconcludedthatitwassatisfiedwiththenature,quality,andextentoftheservicesprovidedbytheAdvisor.

Investment Performance of the Fund TheBoardreviewedthefund’saverageannualtotalreturnsoverthethree-monthand1-,3-,5-,and10-yearperiods,aswellasthefund’syear-by-yearreturns,andcomparedthesereturnswithawidevarietyofpreviouslyagreeduponcomparableperformancemeasuresandmarketdata,includingthosesuppliedbyLipperandMorningstar,whichareindependent providers of mutual fund data.

OnthebasisofthisevaluationandtheBoard’songoingreviewofinvestmentresults,andfactoringintherelativemarketconditionsduringcertainoftheperformanceperiods,theBoardconcludedthatthefund’sperformancewassatisfactory.

Costs, Benefits, Profits, and Economies of ScaleTheBoardrevieweddetailedinformationregardingtherevenuesreceivedbytheAdvisorundertheAdvisoryContractandotherbenefitsthattheAdvisor(anditsaffiliates)mayhaverealizedfromitsrelationshipwiththefund,includinganyresearchreceivedunder“softdollar”agreementsandcommission-sharingarrangementswithbroker-dealers.TheBoardconsideredthattheAdvisormayreceivesomebenefitfromsoft-dollararrangementspursuanttowhichresearchisreceivedfrombroker-dealersthatexecutetheapplicablefund’sportfoliotransactions.TheBoardreceivedinformationontheestimatedcostsincurredandprofitsrealizedbytheAdvisorfrommanagingT.RowePricemutualfunds.WhiletheBoarddidnotreviewinformationregardingprofitsrealizedfrommanagingthefundinparticularbecausethefundhadnotachievedsufficientscaletoproducemeaningfulprofitmarginpercentages,theBoardconcludedthattheAdvisor’sprofitswerereasonableinlightoftheservicesprovidedtothefunds.

TheBoardalsoconsideredwhetherthefundbenefitsunderthefeelevelssetforthintheAdvisoryContractfromanyeconomiesofscalerealizedbytheAdvisor.TheBoardnotedthat,undertheAdvisoryContract,thefundpaystheAdvisorasinglefeebasedonthefund’saveragedailynetassetsthatincludesinvestmentmanagementservicesandprovidesfortheAdvisortopayallexpensesofthefund’soperationsexceptforinterest,taxes,portfoliotransactionfees,andanynon-recurringextraordinaryexpensesthatmayarise.TheBoardconcludedthat,basedontheprofitabilitydataitreviewedandconsistentwiththissingle-feestructure,theAdvisoryContractprovidedforareasonablesharingofanybenefitsfromeconomies of scale with the fund.

FeesTheBoardwasprovidedwithinformationregardingindustrytrendsinmanagementfeesandexpenses,andtheBoardreviewedthefund’ssingle-feestructure(fortheInvestorClassandIIClass)incomparisonwithfeesandexpensesofothercomparablefundsbasedoninformationanddatasuppliedbyLipper.Forthesepurposes,theBoardassumedthatthefund’smanagementfeeratewasequaltothesinglefeelessthefund’soperatingexpenses.TheinformationprovidedtotheBoardindicatedthatthefund’smanagementfeeratewasbelowthemedianforcomparablefunds.TheinformationalsoindicatedthatthetotalexpenseratiofortheInvestorClasswasbelowthemedianforcomparablefundsandthetotalexpenseratiofortheIIClasswasabovethemedianforcomparablefunds.


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Approval of Investment Management Agreement (continued)

TheBoardalsoreviewedthefeeschedulesforinstitutionalaccountsandprivateaccountswithsimilarmandatesthatareadvisedorsubadvisedbytheAdvisoranditsaffiliates.ManagementprovidedtheBoardwithinformationabouttheAdvisor’sresponsibilitiesandservicesprovidedtoinstitutionalaccountclients,includinginformationabouthowtherequirements and economics of the institutional business are fundamentally different from those of the mutual fund business.TheBoardconsideredinformationshowingthatthemutualfundbusinessisgenerallymorecomplexfromabusinessandcomplianceperspectivethantheinstitutionalbusinessandthattheAdvisorgenerallyperformssignificantadditionalservicesandassumesgreaterriskinmanagingthefundandotherT.RowePricemutualfundsthanitdoesforinstitutional account clients.

Onthebasisoftheinformationprovidedandthefactorsconsidered,theBoardconcludedthatthefeespaidbythefundundertheAdvisoryContractarereasonable.

Approval of the Advisory ContractAsnoted,theBoardapprovedthecontinuationoftheAdvisoryContract.Nosinglefactorwasconsideredinisolationortobedeterminativetothedecision.Rather,theBoardconcluded,inlightofaweightingandbalancingofallfactorsconsidered,thatitwasinthebestinterestsofthefundanditsshareholdersfortheBoardtoapprovethecontinuationoftheAdvisoryContract(includingthefeestobechargedforservicesthereunder).Theindependentdirectorswereadvisedthroughouttheprocessbyindependentlegalcounsel.


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122246

TRP596 (6/12) E309-051 8/12

100EastPrattStreet Baltimore,MD21202

semiannual report - national life group · 2012. 8. 29. · the company’s steadily growing...

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