N-CSR 1 argsf.htm T. ROWE PRICE GROWTH STOCK FUND T. Rowe Price Growth Stock Fund - December 31, 2006


Item 1: Report to Shareholders

T. Rowe Price Annual Report
 Growth Stock Fund December 31, 2006 

The views and opinions in this report were current as of December 31, 2006. 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.

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Fellow Shareholders

Large-cap growth stocks posted strong second-half gains after a lack-luster first half. Traditional growth sectors, including technology and health care, perked up since the end of June but lagged the S&P 500 Index for the year. The benchmark’s best-performing sectors for the year were from the value camp, including telecommunication services, energy, and utilities. Over the past 12 months, generally good economic data helped the companies in the S&P 500 log their 18th consecutive quarter of double-digit earnings growth, but the pace of earnings gains appeared to slow in the fourth quarter. Investor sentiment was broadly bullish at year-end, and many of the widely watched equity market indexes finished 2006 near their all-time highs.

The Growth Stock Fund posted strong second-half gains that accounted for the majority of its 12-month performance. Your portfolio’s six-month results outperformed the S&P 500 Stock Index, the Lipper Large-Cap Growth Funds Index, and the Russell 1000 Growth Index. For the year, we also outperformed the Russell and Lipper indexes, but trailed the S&P 500. (Results for Advisor and R Class shares were slightly lower, reflecting their higher expense ratios.) Although stock selection was strong over the past 12 months, our sector allocation decisions—overweight information technology and health care and underweight energy—detracted from our comparison with the S&P 500 Index.


HIGHLIGHTS

  • The Growth Stock Fund posted strong second-half gains and outperformed its Lipper peer group for the 6- and 12-month periods.
  • Traditional growth sectors, including technology and health care, perked up since the end of June but lagged the S&P 500 Index for the year.
  • We continue to believe that large-cap growth companies that generate stable earnings and cash flow growth are undervalued and underappreciated in the market.
  • We think that stocks can still perform reasonably well but could be held back by earnings disappointments as the year progresses.

We have commented in our last several reports about the disparate performance between large- and small-caps and how significantly growth has trailed value. Unfortunately for our shareholders, this pattern emerged again in 2006. Value stocks in the large-cap Russell 1000 Index, and across all market capitalizations, significantly outperformed their growth counterparts. Nevertheless, the Growth Stock Fund’s performance continues to compare extremely well relative to its competitors. Lipper ranked the fund in the top 3% of its large-cap growth funds universe for the 10-year period, and in the top 4% for the one- and three-year periods ended December 31, 2006. (Based on cumulative total return, Lipper ranked the Growth Stock Fund 23 out of 723, 20 out of 616, 36 out of 505, and 5 out of 186 funds for the 1-, 3-, 5-, and 10-year periods ended December 31, 2006, respectively. Past performance cannot guarantee future results.)

MARKET ENVIRONMENT

For the past few years, I’ve stated that the market was focused on the short term and was overlooking the potential of large-cap growth stocks that have generated sustainable earnings and cash flow growth. Through this lens, I saw larger, diversified companies as unloved and undervalued. In addition, it was my view that many of these companies were growing at very reasonable rates and, over the long haul, the gains in intrinsic value would be reflected in stock prices.

In this regard, the last year has been humbling. I thought that big companies would perform better, but they did not. When I refer to performance, I’m addressing absolute results, as well as our results compared with the market yardsticks. Last year, I expected fundamental improvements from GE, Microsoft, Wal-Mart, and Dell, and I thought their stocks would pace the market’s advance. In each case, the fundamental gains were less than my expectations, and although the stocks moved higher, they were performance detractors for the year relative to the S&P 500. (Please refer to the portfolio of investments for a complete listing of holdings and the amount each represents of the portfolio.)

In the case of GE and Microsoft, we remain confident that both are still solid growth companies and can continue to take market share. As such, they are still large holdings in your portfolio. On the other hand, we are less sure about Dell and Wal-Mart’s ability to profitably grow market share, and we have trimmed our holdings in both positions. We find it hard to believe that Dell and Wal-Mart have lost their edge after so many winning years, but evidently we were wrong in thinking their problems were short term.

We continue to believe that large-cap growth companies that generate stable earnings and cash flow growth are undervalued and underappreciated in the market. Globalization, abundant low-cost capital, and the Internet have made it easier for medium- and small-sized businesses to compete. Additionally, accounting changes have taken away some of the flexibility that larger companies once enjoyed.

Before I get into the Portfolio Review portion of this report, I feel it is important to reiterate our core investment philosophy and beliefs about stock market investing. I do this for two reasons: First, to affirm that we have not changed our management style or stock selection process; but more importantly, to allow you, our shareholders, an opportunity to decide if our investing style and strategy fits with your goals and investment objectives.

  • Our key investing tenet is to focus on owning companies that can produce better earnings and cash flow growth than the market.
  • We believe that free cash flow generation drives stock prices over time—we take a long-term view to owning stocks and rarely trade for short-term profits.
  • Over short periods, stock prices may not track free cash flow, but we believe that over longer periods they will move together.
  • We look for companies with a sustainable business model, dominance in a market segment, and a flexible culture that allows a top-notch management team to maximize growth over time.
  • Additionally, we try to take advantage of pricing opportunities resulting from other investors’ shortsightedness, allowing us to buy great companies at attractive valuations.

PORTFOLIO REVIEW

The financials sector, which accounts for almost 20% of the portfolio’s total net assets, was the largest second-half contributor. Within the capital markets industry, Goldman Sachs and Morgan Stanley benefited from strong market performance and the growing wave of mergers and acquisitions. State Street and Franklin Resources also thrived in this environment, due in large part to the global growth of their asset management and securities-processing businesses. American International Group and Prudential Insurance were the top performers in the insurance segment.

We maintained a modest overweight allocation in the consumer discretionary sector, which was the second-best sector contributor for the past six months and the best performer for the year by a large margin. Hotels, restaurants, and leisure companies, including casino operators MGM Mirage and Wynn Resorts, generated strong returns due to their significant presence at home (Las Vegas) and abroad (Macau). Both stocks posted enviable profit growth and sharp share price gains. Other strong performers in the sector included multiline retailer Kohl’s, gaming equipment maker International Game Technology, and Grupo Televisa, Mexico’s leading television broadcaster and a publisher of Spanish-language magazines.


The information technology sector—our largest allocation at almost 21% of net assets—produced solid second-half results and was a decent full-year contributor. Our software industry holdings, led by the stellar performance of Microsoft, paced the sector’s advance. It seems that investors have begun to appreciate that Microsoft’s earnings potential could be exceptionally good in 2007, thanks to several important product launches and the new operating system, Vista. Software leaders Oracle and Adobe Systems also produced strong gains. Accenture, the top gainer in the information technology sector, was the portfolio’s second-best contributor in the second half. The company is a leading management consulting firm that benefited from this year’s good economic growth and the increase in merger and acquisition activity. The company’s shares surged in response to better-than-expected revenue and earnings gains. Communications equipment leader Cisco Systems benefited from strong sales of consumer-based equipment (under the Scientific-Atlanta and Linksys brands), as well as routers and other equipment used by corporations. Apple Computer was also among our 10 best performers for the past six months and a top contributor for the year.

However, the portfolio’s largest sector also had its share of second-half detractors. Yahoo! and several semiconductor companies were major disappointments. Yahoo! has had difficulty dealing with aggressive competitors, such as Google. We reduced our stake in Yahoo! over the past six months, but we are comfortable with the current position size, given that the company made several management changes and its paid search platform "Project Panama" appears promising. Fortunately, we have a larger investment in Google, which performed well. Semiconductor holdings Marvell Technology and Maxim Integrated Products were significant detractors. We trimmed our positions but continue to believe these companies are well managed. We think that their results are somewhat depressed on a cyclical basis, but the long-term growth prospects are solid.


The telecommunication services sector was the best performer in the S&P 500 for the past six months. Our portfolio also held a number of strong telecom contributors, but our strongest, including Rogers Communications, America Movil, Bharti Airtel, and Telus, were domiciled outside the U.S. In other areas, industrial conglomerate GE was the fund’s best contributor, and in health care, UnitedHealth Group and Caremark RX posted strong returns following a dismal first-half performance. Although Caremark’s 12-month return was solid, UnitedHealth was among our largest detractors for the year.

OUTLOOK

In 2007, we expect a gradual economic slowdown in the U.S., narrower profit margins, and interest rates to be flat or trend slightly lower. We think that stocks can still perform reasonably well but could be held back by earnings disappointments as the year progresses. In an environment where earnings become less predictable, we feel your portfolio can do relatively well because of our focus on companies that generate durable earnings and above-average cash flow growth.

As always, we will work diligently to find these companies on your behalf.

Respectfully submitted,


Robert W. Smith
Chairman of the fund’s Investment Advisory Committee

January 19, 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 STOCK INVESTING

The fund’s share price can fall because of weakness in the stock markets, a particular industry, or specific holdings. Stock markets can decline for many reasons, including adverse political or economic developments, changes in investor psychology, or heavy institutional selling. The prospects for an industry or company may deteriorate because of a variety of factors, including disappointing earnings or changes in the competitive environment. In addition, the investment manager’s assessment of companies held in a fund may prove incorrect, resulting in losses or poor performance even in rising markets.

GLOSSARY

Dividend yield: The annual dividend of a stock divided by the stock’s price.

Free cash flow: The excess cash a company is generating from its operations that can be taken out of the business for the benefit of shareholders, such as dividends, share repurchases, investments, and acquisitions.

Lipper indexes: Fund benchmarks that consist of a small number (10 to 30) of the largest mutual funds in a particular category as tracked by Lipper Inc.

Price/book ratio: A valuation measure that compares a stock’s market price with its book value, i.e., the company’s net worth divided by the number of outstanding shares.

Price/earnings ratio (P/E): A valuation measure calculated by dividing the price of a stock by its current or projected earnings per share. This ratio gives investors an idea of how much they are paying for current or future earnings power.

Russell 1000 Growth Index: A market capitalization-weighted index of those firms in the Russell 1000 with higher price-to-book ratios and higher forecasted growth values.

S&P 500 Stock Index: An unmanaged index that tracks the stocks of 500 primarily large-cap U.S. companies.



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.


AVERAGE ANNUAL COMPOUND TOTAL RETURN 

This table shows how the fund would have performed each year if its actual (or cumulative) returns had been earned at a constant rate.

FUND EXPENSE EXAMPLE 

As a mutual fund shareholder, you may incur two types of costs: (1) transaction costs, such as redemption fees or sales loads, and (2) ongoing costs, including management fees, distribution and service (12b-1) fees, and other fund expenses. The following example is intended to help you understand your ongoing costs (in dollars) of investing in the fund and to compare these costs with the ongoing costs of investing in other mutual funds. The example is based on an investment of $1,000 invested at the beginning of the most recent six-month period and held for the entire period.

Please note that the fund has three share classes: The original share class ("investor class") charges no distribution and service (12b-1) fee; Advisor Class shares are offered only through unaffiliated brokers and other financial intermediaries and charge a 0.25% 12b-1 fee; R Class shares are available to retirement plans serviced by intermediaries and charge a 0.50% 12b-1 fee. Each share class is presented separately in the table.

Actual Expenses
The first line of the following table ("Actual") provides information about actual account values and expenses based on the fund’s actual returns. You may use the information in this line, together with your account balance, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading "Expenses Paid During Period" to estimate the expenses you paid on your account during this period.

Hypothetical Example for Comparison Purposes
The information on the second line of the table ("Hypothetical") is based on hypothetical account values and expenses derived from the fund’s actual expense ratio and an assumed 5% per year rate of return before expenses (not the fund’s actual return). You may compare the ongoing costs of investing in the fund with other funds by contrasting this 5% hypothetical example and the 5% hypothetical examples that appear in the shareholder reports of the other funds. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period.

Note: T. Rowe Price charges an annual small-account maintenance fee of $10, generally for accounts with less than $2,000 ($500 for UGMA/UTMA). The fee is waived for any investor whose T. Rowe Price mutual fund accounts total $25,000 or more, accounts employing automatic investing, and IRAs and other retirement plan accounts that utilize a prototype plan sponsored by T. Rowe Price (although a separate custodial or administrative fee may apply to such accounts). This fee is not included in the accompanying table. If you are subject to the fee, keep it in mind when you are estimating the ongoing expenses of investing in the fund and when comparing the expenses of this fund with other funds.

You should also be aware that the expenses shown in the table highlight only your ongoing costs and do not reflect any transaction costs, such as redemption fees or sales loads. Therefore, the second line of the table is useful in comparing ongoing costs only and will not help you determine the relative total costs of owning different funds. To the extent a fund charges transaction costs, however, the total cost of owning that fund is higher.



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



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



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









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



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



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



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

NOTES TO FINANCIAL STATEMENTS 

NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES

T. Rowe Price Growth Stock Fund, Inc. (the fund), is registered under the Investment Company Act of 1940 (the 1940 Act) as a diversified, open-end management investment company. The fund seeks to provide long-term capital growth and, secondarily, increasing dividend income through investments in the common stocks of well-established growth companies. The fund has three classes of shares: the Growth Stock Fund original share class, referred to in this report as the Investor Class, offered since April 11, 1950; the Growth Stock Fund—Advisor Class (Advisor Class), offered since December 31, 2001; and the Growth Stock Fund—R Class (R Class), offered since September 30, 2002. Advisor Class shares are sold only through unaffiliated brokers and other unaffiliated financial intermediaries, and R Class shares are available to retirement plans serviced by intermediaries. The Advisor Class and R Class each operate under separate Board-approved Rule 12b-1 plans, pursuant to which each class compensates financial intermediaries for distribution, shareholder servicing, and/or certain administrative services. Each class has exclusive voting rights on matters related solely to that class, separate voting rights on matters that relate to all classes, and, in all other respects, the same rights and obligations as the other classes.

The accompanying financial statements were prepared in accordance with accounting principles generally accepted in the United States of America, which require the use of estimates made by fund management. 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.

Investments in mutual funds are valued at the mutual fund’s closing net asset value per share on the day of valuation. Purchased and written options are valued at the mean of the closing bid and asked prices.

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.

Currency Translation Assets, including investments, and liabilities denominated in foreign currencies are translated into U.S. dollar values each day at the prevailing exchange rate, using the mean of the bid and asked prices of such currencies against U.S. dollars as quoted by a major bank. Purchases and sales of securities, income, and expenses are translated into U.S. dollars at the prevailing exchange rate on the date of the transaction. The effect of changes in foreign currency exchange rates on realized and unrealized security gains and losses is reflected as a component of security gains and losses.

Class Accounting The Advisor Class and R Class each pay distribution, shareholder servicing, and/or certain administrative expenses in the form of Rule 12b-1 fees, in an amount not exceeding 0.25% and 0.50%, respectively, of the class’s average daily net assets. Shareholder servicing, prospectus, and shareholder report expenses incurred by each class are charged directly to the class to which they relate. Expenses common to all classes, investment income, and realized and unrealized gains and losses are allocated to the classes based upon the relative daily net assets of each class.

Rebates and Credits Subject to best execution, the fund may direct certain security trades to brokers who have agreed to rebate a portion of the related brokerage commission to the fund in cash. Commission rebates are reflected as realized gain on securities in the accompanying financial statements and totaled $839,000 for the year ended December 31, 2006. Additionally, the fund earns credits on temporarily uninvested cash balances at the custodian that reduce the fund’s custody charges. Custody expense in the accompanying financial statements is presented before reduction for credits, which are reflected as expenses paid indirectly.

In-Kind Redemptions In accordance with guidelines described in the fund’s prospectus, the fund may distribute portfolio securities rather than cash as payment for a redemption of fund shares (in-kind redemption). For financial reporting purposes, the fund recognizes a gain on in-kind redemptions to the extent the value of the distributed securities on the date of redemption exceeds the cost of those securities. Gains and losses realized on in-kind redemptions are not recognized for tax purposes and are reclassified from undistributed realized gain (loss) to paid-in capital. During the year ended December 31, 2006, the fund realized $46,082,000 of net gain on $105,045,000 of in-kind redemptions.

Investment Transactions, Investment Income, and Distributions Income and expenses are recorded on the accrual basis. Dividends received from mutual fund investments are reflected as dividend income; capital gain distributions are reflected as realized gain/loss. Dividend income and capital gain distributions are recorded on the ex-dividend date. Investment transactions are accounted for on the trade date. Realized gains and losses are reported on the identified cost basis. Distributions to shareholders are recorded on the ex-dividend date. Income distributions are declared and paid by each class on an annual basis. Capital gain distributions, if any, are declared and paid by the fund, typically on an annual basis.

New Accounting Pronouncements In June 2006, the Financial Accounting Standards Board ("FASB") issued 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 reporting rules regarding recognition and measurement of tax positions taken or expected to be taken on a tax return. Management is evaluating the anticipated impact, if any, that FIN 48 will have on the fund upon adoption, which, pursuant to a delay granted by the U.S. Securities and Exchange Commission, is expected to be on the last business day of the fund’s semi-annual period, June 29, 2007.

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, 2008. 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.

Options Call and put options give the holder the right to purchase or sell, respectively, a security at a specified price on a certain date. Risks arise from possible illiquidity of the options market and from movements in security values. Transactions in options written and related premiums received during the year ended December 31, 2006, were as follows:

Securities Lending The fund lends its securities to approved brokers to earn additional income. It receives as collateral cash and U.S. government securities valued at 102% to 105% of the value of the securities on loan. Cash collateral is invested in a money market pooled trust managed by the fund’s lending agent in accordance with investment guidelines approved by fund management. Collateral is maintained over the life of the loan in an amount not less than the value of loaned securities, as determined at the close of fund business each day; any additional collateral required due to changes in security values is delivered to the fund the next business day. Although risk is mitigated by the collateral, the fund could experience a delay in recovering its securities and a possible loss of income or value if the borrower fails to return the securities. Securities lending revenue recognized by the fund consists of earnings on invested collateral and borrowing fees, net of any rebates to the borrower and compensation to the lending agent. At December 31, 2006, there were no securities on loan.

Other Purchases and sales of portfolio securities, other than short-term securities, aggregated $9,582,770,000 and $5,667,170,000, respectively, for the year ended December 31, 2006.

NOTE 3 - FEDERAL INCOME TAXES

No provision for federal income taxes is required since the fund intends to continue to qualify as a regulated investment company under Subchapter M of the Internal Revenue Code and distribute to shareholders all of its taxable income and gains. Federal income tax regulations differ from generally accepted accounting principles; therefore, distributions determined in accordance with tax regulations may differ significantly in amount or character from net investment income and realized gains for financial reporting purposes. Financial reporting records are adjusted for permanent book/tax differences to reflect tax character. Financial records are not adjusted for temporary differences.

Distributions during the year ended December 31, 2006, were characterized as follows for tax purposes:

At December 31, 2006, the tax-basis components of net assets were as follows:


The fund intends to retain realized gains to the extent of available capital loss carryforwards. During the year ended December 31, 2006, the fund utilized $41,575,000 of capital loss carryforwards. As of December 31, 2006, the fund had $18,224,000 of capital loss carryforwards, of which $10,934,000 expire in 2009, and $7,290,000 expire in thereafter through 2011. Further, all of the fund’s unused capital loss carryforwards may be subject to certain limitations on amount and/or timing of use, related to being acquired through tax-free reorganizations.

For the year ended December 31, 2006, the fund recorded the following permanent reclassifications to reflect tax character. Reclassifications to paid-in capital relate primarily to redemptions in kind and a tax practice that treats a portion of the proceeds from each redemption of capital shares as a distribution of taxable net investment income and/or realized capital gain. Results of operations and net assets were not affected by these reclassifications.


At December 31, 2006, the cost of investments for federal income tax purposes was $15,081,738,000.

NOTE 4 - FOREIGN TAXES

The fund is subject to foreign income taxes imposed by certain countries in which it invests. Additionally, capital gains realized by the fund upon disposition of securities issued in or by certain foreign countries are subject to capital gains tax imposed by those countries, which is payable prior to repatriation of sale proceeds. Similarly, a tax on net profits, including interest income and realized and unrealized capital gains, is imposed by certain other countries. All taxes are computed in accordance with the applicable foreign tax law, and, to the extent permitted, capital losses are used to offset capital gains. Tax expense attributable to income is accrued by the fund as a reduction of income. Current and deferred tax expense attributable to net capital gains is reflected as a component of realized and/or change in unrealized gain/loss on securities in the accompanying financial statements. At December 31, 2006, the fund had no taxes payable attributable to foreign securities, no deferred tax liability attributable to foreign securities, and $3,007,000 of foreign capital loss carryforwards that expire in 2013.

NOTE 5 - ACQUISITION

On June 19, 2006, the fund acquired substantially all of the assets of the Preferred Large Cap Growth Fund (the acquired fund), pursuant to the Agreement and Plan of Reorganization dated February 15, 2006, and approved by shareholders of the acquired fund on June 9, 2006. The acquisition was accomplished by a tax-free exchange of 2,979,781 shares of the fund (with a value of $83,464,000) for the 7,056,568 shares of the acquired fund outstanding on June 16, 2006. The net assets of the acquired fund at that date included $6,324,000 of unrealized appreciation. Net assets of the acquired fund were combined with those of the fund, resulting in aggregate net assets of $12,226,750,000 immediately after the acquisition and $20,171,000 of net realized losses carried forward for tax purposes to offset distributable gains realized by the fund in the future.

NOTE 6 - RELATED PARTY TRANSACTIONS

The fund is managed by T. Rowe Price Associates, Inc. (the manager or Price Associates), a wholly owned subsidiary of T. Rowe Price Group, Inc. The investment management agreement between the fund and the manager provides for an annual investment management fee, which is computed daily and paid monthly. The fee consists of an individual fund fee and a group fee. The individual fund fee is equal to 0.25% of the fund’s average daily net assets up to $15 billion and 0.21% of the fund’s average daily net assets in excess of $15 billion. The group fee rate is calculated based on the combined net assets of certain mutual funds sponsored by Price Associates (the group) applied to a graduated fee schedule, with rates ranging from 0.48% for the first $1 billion of assets to 0.29% for assets in excess of $160 billion. The fund’s group fee is determined by applying the group fee rate to the fund’s average daily net assets. At December 31, 2006, the effective annual group fee rate was 0.31%.

In addition, the fund has entered into service agreements with Price Associates and two wholly owned subsidiaries of Price Associates (collectively, Price). Price Associates computes the daily share prices and provides certain other administrative services to the fund. T. Rowe Price Services, Inc., provides shareholder and administrative services in its capacity as the fund’s transfer and dividend disbursing agent. T. Rowe Price Retirement Plan Services, Inc., provides subaccounting and recordkeeping services for certain retirement accounts invested in the Investor Class and R Class. For the year ended December 31, 2006, expenses incurred pursuant to these service agreements were $103,000 for Price Associates, $2,795,000 for T. Rowe Price Services, Inc., and $4,883,000 for T. Rowe Price Retirement Plan Services, Inc. The total amount payable at period-end pursuant to these service agreements is reflected as Due to Affiliates in the accompanying financial statements.

The fund is also one of several mutual funds sponsored by Price Associates (underlying Price funds) in which the T. Rowe Price Spectrum Funds (Spectrum Funds) and T. Rowe Price Retirement Funds (Retirement Funds) may invest. Neither the Spectrum Funds nor the Retirement Funds invest in the underlying Price funds for the purpose of exercising management or control. Pursuant to separate special servicing agreements, expenses associated with the operation of the Spectrum and Retirement Funds are borne by each underlying Price fund to the extent of estimated savings to it and in proportion to the average daily value of its shares owned by the Spectrum and Retirement Funds, respectively. Expenses allocated under these agreements are reflected as shareholder servicing expenses in the accompanying financial statements. For the year ended December 31, 2006, the fund was allocated $856,000 of Spectrum Funds’ expenses and $5,577,000 of Retirement Funds’ expenses. Of these amounts, $5,029,000 related to services provided by Price. The amount payable at period-end pursuant to this agreement is reflected as Due to Affiliates in the accompanying financial statements. At December 31, 2006, approximately 4% of the outstanding shares of the Investor Class were held by the Spectrum Funds and 20% were held by the Retirement Funds.

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 Funds), open-end management investment companies managed by Price Associates and affiliates of the fund. The T. Rowe Price Reserve Funds are offered as cash management options to mutual funds, trusts, and other accounts managed by Price Associates and/or its affiliates, and are not available for direct purchase by members of the public. The T. Rowe Price Reserve Funds pay no investment management fees. During the year ended December 31, 2006, dividend income from the T. Rowe Price Reserve Funds totaled $23,352,000, and the value of shares of the T. Rowe Price Reserve Funds held at December 31, 2006, and December 31, 2005, was $628,576,000 and $450,829,000, respectively.

As of December 31, 2006, T. Rowe Price Group, Inc., and/or its wholly owned subsidiaries owned 1,580,261 shares of the Investor Class, representing less than 1% of the fund’s net assets.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 

To the Board of Directors and Shareholders of T. Rowe Price Growth Stock Fund, Inc.

In our opinion, the accompanying statement of assets and liabilities, including the portfolio of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of T. Rowe Price Growth Stock Fund, Inc. (the "Fund") at December 31, 2006, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended and the financial highlights for each of the fiscal periods presented, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund’s management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the auditing standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 2006 by correspondence with the custodian and by agreement to the underlying ownership records for T. Rowe Price Reserve Investment Fund, provide a reasonable basis for our opinion.

PricewaterhouseCoopers LLP
Baltimore, Maryland
February 12, 2007

TAX INFORMATION (UNAUDITED) FOR THE TAX YEAR ENDED 12/31/06

We are providing this information as required by the Internal Revenue Code. The amounts shown may differ from those elsewhere in this report because of differences between tax and financial reporting requirements.

The fund’s distributions to shareholders included:

  • $65,513,000 from short-term capital gains,
  • $307,477,000 from long-term capital gains, of which $307,477,000 was subject to the 15% rate gains category.

For taxable non-corporate shareholders, $163,118,000 of the fund’s income represents qualified dividend income subject to the 15% rate category.

For corporate shareholders, $122,304,000 of the fund’s income qualifies for the dividends-received deduction.

INFORMATION ON PROXY VOTING POLICIES, PROCEDURES, AND RECORDS 

A description of the policies and procedures used by T. Rowe Price funds and portfolios to determine how to vote proxies relating to portfolio securities is available in each fund’s Statement of Additional Information, which you may request by calling 1-800-225-5132 or by accessing the SEC’s Web site, www.sec.gov. The description of our proxy voting policies and procedures is also available on our Web site, www.troweprice.com. To access it, click on the words "Company Info" at the top of our homepage for individual investors. Then, in the window that appears, click on the "Proxy Voting Policy" navigation button in the top left corner.

Each fund’s most recent annual proxy voting record is available on our Web site and through the SEC’s Web site. To access it through our Web site, follow the directions above, then click on the words "Proxy Voting Record" at the bottom of the Proxy Voting Policy page.

HOW TO OBTAIN QUARTERLY PORTFOLIO HOLDINGS 

The fund files a complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarters of each fiscal year on Form N-Q. The fund’s Form N-Q is available electronically on the SEC’s Web site (www.sec.gov); hard copies may be reviewed and copied at the SEC’s Public Reference Room, 450 Fifth St. N.W., Washington, DC 20549. For more information on the Public Reference Room, call 1-800-SEC-0330.

ABOUT THE FUND’S DIRECTORS AND OFFICERS 

Your fund is governed by a Board of Directors that meets regularly to review a wide variety of matters affecting the fund, including performance, investment programs, compliance matters, advisory fees and expenses, service providers, and other business affairs. The Board of Directors elects the fund’s officers, who are listed in the final table. At least 75% of Board members are independent of T. Rowe Price Associates, Inc. (T. Rowe Price), and T. Rowe Price International, Inc. (T. Rowe Price International); "inside" or "interested" directors are officers of T. Rowe Price. The business address of each director and officer is 100 East Pratt Street, Baltimore, Maryland 21202. The Statement of Additional Information includes additional information about the fund directors and is available without charge by calling a T. Rowe Price representative at 1-800-225-5132.

Independent Directors   
 
Name   
(Year of Birth)  Principal Occupation(s) During Past 5 Years and Directorships of 
Year Elected *  Other Public Companies 
 
Jeremiah E. Casey  Director, Allfirst Financial Inc. (previously First Maryland Bankcorp) 
(1940)  (1983 to 2002); Director, National Life Insurance (2001 to 2005); 
2005  Director, The Rouse Company, real estate developers (1990 to 2004) 
 
Anthony W. Deering  Chairman, Exeter Capital, LLC, a private investment firm (2004 to 
(1945)  present); Director, Vornado Real Estate Investment Trust (3/04 to 
2001  present); Director, Mercantile Bankshares (4/03 to present); Member, 
  Advisory Board, Deutsche Bank North America (2004 to present); 
  Director, Chairman of the Board, and Chief Executive Officer, The 
  Rouse Company, real estate developers (1997 to 2004) 
 
Donald W. Dick, Jr.  Principal, EuroCapital Advisors, LLC, an acquisition and management 
(1943)  advisory firm; Chairman, President, and Chief Executive Officer, 
1980  The Haven Group, a custom manufacturer of modular homes (1/04 
  to present) 
 
David K. Fagin  Chairman and President, Nye Corporation (6/88 to present); Director, 
(1938)  Canyon Resources Corp., Golden Star Resources Ltd. (5/92 to pres- 
1994  ent), and Pacific Rim Mining Corp. (2/02 to present) 
 
Karen N. Horn  Director, Federal National Mortgage Association (9/06 to present); 
(1943)  Managing Director and President, Global Private Client Services, 
2003  Marsh Inc. (1999 to 2003); Director, Georgia Pacific (5/04 to 
  12/05), Eli Lilly and Company, and Simon Property Group 
 
Theo C. Rodgers  President, A&R Development Corporation 
(1941)   
2005   

John G. Schreiber  Owner/President, Centaur Capital Partners, Inc., a real estate invest- 
(1946)  ment company; Partner, Blackstone Real Estate Advisors, L.P. 
2001   
 
* Each independent director oversees 115 T. Rowe Price portfolios and serves until retirement, resignation, or 
 election of a successor.   

Inside Directors   
 
Name   
(Year of Birth)   
Year Elected *   
[Number of T. Rowe Price  Principal Occupation(s) During Past 5 Years and Directorships of 
Portfolios Overseen]  Other Public Companies 
 
Edward C. Bernard  Director and Vice President, T. Rowe Price and T. Rowe Price Group, 
(1956)  Inc.; Chairman of the Board, Director, and President, T. Rowe Price 
2006  Investment Services, Inc.; Chairman of the Board and Director, 
[115]  T. Rowe Price International, Inc., T. Rowe Price Retirement Plan 
  Services, Inc., T. Rowe Price Services, Inc., and T. Rowe Price Savings 
  Bank; Director, T. Rowe Price Global Asset Management Limited and 
  T. Rowe Price Global Investment Services Limited; Chief Executive 
  Officer, Chairman of the Board, Director, and President, T. Rowe Price 
  Trust Company; Chairman of the Board, all funds 
 
Brian C. Rogers, CFA, CIC  Chief Investment Officer, Director, and Vice President, T. Rowe 
(1955)  Price and T. Rowe Price Group, Inc.; Vice President, T. Rowe Price 
2006  Trust Company 
[62]   
 
* Each inside director serves until retirement, resignation, or election of a successor. 

Officers   
 
Name (Year of Birth)   
Title and Fund(s) Served  Principal Occupation(s) 
 
P. Robert Bartolo, CPA (1972)  Vice President, T. Rowe Price and T. Rowe Price 
Vice President, Growth Stock Fund  Group, Inc. 
 
Joseph A. Carrier, CPA (1960)  Vice President, T. Rowe Price, T. Rowe Price 
Treasurer, Growth Stock Fund  Group, Inc., T. Rowe Price Investment Services, 
  Inc., and T. Rowe Price Trust Company 
 
D. Kyle Cerminara, CFA (1977)  Vice President, T. Rowe Price and T. Rowe Price 
Vice President, Growth Stock Fund  Group, Inc. 
 
Anna M. Dopkin, CFA (1967)  Vice President, T. Rowe Price, T. Rowe Price 
Vice President, Growth Stock Fund  Group, Inc., and T. Rowe Price Trust Company 
 
Henry M. Ellenbogen (1971)  Vice President, T. Rowe Price and T. Rowe Price 
Vice President, Growth Stock Fund  Group, Inc. 
 
Joseph B. Fath, CPA (1971)  Vice President, T. Rowe Price and T. Rowe Price 
Vice President, Growth Stock Fund  Group, Inc. 
 
Roger L. Fiery III, CPA (1959)  Vice President, T. Rowe Price, T. Rowe Price 
Vice President, Growth Stock Fund  Group, Inc., T. Rowe Price International, Inc., 
  and T. Rowe Price Trust Company 
 
Robert N. Gensler (1957)  Vice President, T. Rowe Price, T. Rowe Price 
Vice President, Growth Stock Fund  Group, Inc., and T. Rowe Price International, Inc. 
 
John R. Gilner (1961)  Chief Compliance Officer and Vice President, 
Chief Compliance Officer, Growth Stock Fund  T. Rowe Price; Vice President, T. Rowe Price 
  Group, Inc., and T. Rowe Price Investment 
  Services, Inc. 
 
Gregory S. Golczewski (1966)  Vice President, T. Rowe Price and T. Rowe Price 
Vice President, Growth Stock Fund  Trust Company 
 
Henry H. Hopkins (1942)  Director and Vice President, T. Rowe Price 
Vice President, Growth Stock Fund  Investment Services, Inc., T. Rowe Price 
  Services, Inc., and T. Rowe Price Trust 
  Company; Vice President, T. Rowe Price, 
  T. Rowe Price Group, Inc., T. Rowe Price 
  International, Inc., and T. Rowe Price 
  Retirement Plan Services, Inc. 

Kris H. Jenner, M.D., D. Phil. (1962)  Vice President, T. Rowe Price and T. Rowe Price 
Vice President, Growth Stock Fund  Group, Inc. 
 
Patricia B. Lippert (1953)  Assistant Vice President, T. Rowe Price and 
Secretary, Growth Stock Fund  T. Rowe Price Investment Services, Inc. 
 
D. James Prey III (1959)  Vice President, T. Rowe Price and T. Rowe Price 
Vice President, Growth Stock Fund  Group, Inc. 
 
Larry J. Puglia, CFA, CPA (1960)  Vice President, T. Rowe Price, T. Rowe Price 
Vice President, Growth Stock Fund  Group, Inc., and T. Rowe Price Trust Company 
 
Robert W. Sharps, CFA, CPA (1971)  Vice President, T. Rowe Price and T. Rowe Price 
Executive Vice President, Growth Stock Fund  Group, Inc. 
 
Robert W. Smith (1961)  Vice President, T. Rowe Price, T. Rowe Price 
President, Growth Stock Fund  Group, Inc., and T. Rowe Price Trust Company 
 
Michael F. Sola, CFA (1969)  Vice President, T. Rowe Price and T. Rowe Price 
Vice President, Growth Stock Fund  Group, Inc. 
 
Joshua K. Spencer, CFA (1973)  Vice President, T. Rowe Price and T. Rowe Price 
Vice President, Growth Stock Fund  Group, Inc.; formerly Research Analyst and 
  Sector Fund Portfolio Manager, Fidelity 
  Investments (to 2004) 
 
Julie L. Waples (1970)  Vice President, T. Rowe Price 
Vice President, Growth Stock Fund   
 
Unless otherwise noted, officers have been employees of T. Rowe Price or T. Rowe Price International for at 
least five years.   

Item 2. Code of Ethics.

The registrant has adopted a code of ethics, as defined in Item 2 of Form N-CSR, applicable to its principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions A copy of this code of ethics is filed as an exhibit to this Form N-CSR. No substantive amendments were approved or waivers were granted to this code of ethics during the period covered by this report.

Item 3. Audit Committee Financial Expert.

The registrant’s Board of Directors/Trustees has determined that Mr. Donald W. Dick Jr. qualifies as an audit committee financial expert, as defined in Item 3 of Form N-CSR. Mr. Dick is considered independent for purposes of Item 3 of Form N-CSR.

Item 4. Principal Accountant Fees and Services.

(a) – (d) Aggregate fees billed to the registrant for the last two fiscal years for professional services rendered by the registrant’s principal accountant were as follows:


Audit fees include amounts related to the audit of the registrant’s annual financial statements and services normally provided by the accountant in connection with statutory and regulatory filings. Audit-related fees include amounts reasonably related to the performance of the audit of the registrant’s financial statements and specifically include the issuance of a report on internal controls and, if applicable for 2006, agreed-upon procedures related to fund acquisitions. Tax fees include amounts related to services for tax compliance, tax planning, and tax advice. The nature of these services specifically includes the review of distribution calculations and the preparation of Federal, state, and excise tax returns. Reclassification from tax fees to audit fees of fiscal 2005 amounts related to the auditing of tax disclosures within the registrant’s annual financial statements has been made in order to conform to fiscal 2006 presentation. All other fees include the registrant’s pro-rata share of amounts for agreed-upon procedures in conjunction with service contract approvals by the registrant’s Board of Directors/Trustees.

(e)(1) The registrant’s audit committee has adopted a policy whereby audit and non-audit services performed by the registrant’s principal accountant for the registrant, its investment adviser, and any entity controlling, controlled by, or under common control with the investment adviser that provides ongoing services to the registrant require pre-approval in advance at regularly scheduled audit committee meetings. If such a service is required between regularly scheduled audit committee meetings, pre-approval may be authorized by one audit committee member with ratification at the next scheduled audit committee meeting. Waiver of pre-approval for audit or non-audit services requiring fees of a de minimis amount is not permitted.

    (2) No services included in (b) – (d) above were approved pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X.

(f) Less than 50 percent of the hours expended on the principal accountant’s engagement to audit the registrant’s financial statements for the most recent fiscal year were attributed to work performed by persons other than the principal accountant’s full-time, permanent employees.

(g) The aggregate fees billed for the most recent fiscal year and the preceding fiscal year by the registrant’s principal accountant for non-audit services rendered to the registrant, its investment adviser, and any entity controlling, controlled by, or under common control with the investment adviser that provides ongoing services to the registrant were $1,401,000 and $883,000, respectively, and were less than the aggregate fees billed for those same periods by the registrant’s principal accountant for audit services rendered to the T. Rowe Price Funds. Preceding fiscal year amount reflects the reclassification of tax fees described in (a) – (d) above.

(h) All non-audit services rendered in (g) above were pre-approved by the registrant’s audit committee. Accordingly, these services were considered by the registrant’s audit committee in maintaining the principal accountant’s independence.

Item 5. Audit Committee of Listed Registrants.

Not applicable.

Item 6. Schedule of Investments.

Not applicable. The complete schedule of investments is included in Item 1 of this Form N-CSR.

Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies.

Not applicable.

Item 8. Portfolio Managers of Closed-End Management Investment Companies.

Not applicable.

Item 9. Purchases of Equity Securities by Closed-End Management Investment Company and Affiliated Purchasers.

Not applicable.

Item 10. Submission of Matters to a Vote of Security Holders.

Not applicable.

Item 11. Controls and Procedures.

(a) The registrant’s principal executive officer and principal financial officer have evaluated the registrant’s disclosure controls and procedures within 90 days of this filing and have concluded that the registrant’s disclosure controls and procedures were effective, as of that date, in ensuring that information required to be disclosed by the registrant in this Form N-CSR was recorded, processed, summarized, and reported timely.

(b) The registrant’s principal executive officer and principal financial officer are aware of no change in the registrant’s internal control over financial reporting that occurred during the registrant’s second fiscal quarter covered by this report that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.

Item 12. Exhibits.

(a)(1) The registrant’s code of ethics pursuant to Item 2 of Form N-CSR is attached.

    (2) Separate certifications by the registrant's principal executive officer and principal financial officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 and required by Rule 30a-2(a) under the Investment Company Act of 1940, are attached.

    (3) Written solicitation to repurchase securities issued by closed-end companies: not applicable.

(b) A certification by the registrant's principal executive officer and principal financial officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and required by Rule 30a-2(b) under the Investment Company Act of 1940, is attached.

                                                                                 
  SIGNATURES 
 
  Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment 
Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the 
undersigned, thereunto duly authorized. 
 
T. Rowe Price Growth Stock Fund, Inc. 
 
 
 
By  /s/ Edward C. Bernard 
  Edward C. Bernard 
  Principal Executive Officer 
 
Date  February 16, 2007 
 
 
  Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment 
Company Act of 1940, this report has been signed below by the following persons on behalf of 
the registrant and in the capacities and on the dates indicated. 
 
 
By  /s/ Edward C. Bernard 
  Edward C. Bernard 
  Principal Executive Officer 
 
Date  February 16, 2007 
 
 
 
By  /s/ Joseph A. Carrier 
  Joseph A. Carrier 
  Principal Financial Officer 
 
Date  February 16, 2007