NOTE 1 - THE COMPANY AND BASIS OF PREPARATION.

T. Rowe Price Group derives its consolidated revenues and net income primarily from investment advisory services that its subsidiaries provide to individual and institutional investors in the sponsored T. Rowe Price mutual funds and other investment portfolios.  We also provide our investment advisory clients with related administrative services, including mutual fund transfer agent, accounting and shareholder services; participant recordkeeping and transfer agent services for defined contribution retirement plans; discount brokerage; and trust services. 

Investment advisory revenues depend largely on the total value and composition of assets under our management.  Accordingly, fluctuations in financial markets and in the composition of assets under management impact our revenues and results of operations.

These unaudited condensed consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States and reflect all adjustments that are, in the opinion of management, necessary to a fair statement of our results for the interim periods presented.  All such adjustments are of a normal recurring nature.  We evaluated all subsequent events through the time that we filed these financial statements in our Form 10-Q Report with the Securities and Exchange Commission on July 24, 2009.

The unaudited interim financial information contained in these condensed consolidated financial statements should be read in conjunction with the consolidated financial statements contained in our 2008 Annual Report.

In the second quarter of 2009, we implemented new financial reporting guidance that changed the recognition guidance for other-than-temporary-impairments of debt securities and expanded our interim disclosures for all financial instruments.  The adoption of the new recognition guidance did not have a material impact on our condensed consolidated financial statements.  Appropriate interim disclosures are included in Notes 3, 4, and 5. 

NOTE 4 – DEBT SECURITIES HELD BY AND CUSTOMER DEPOSITS AT SAVINGS BANK SUBSIDIARY.

Our savings bank subsidiary holds investments in marketable debt securities, including mortgage- and other asset-backed securities, which are accounted for as available-for-sale.  The following table (in millions) details the components of these investments at June 30, 2009.

The unrealized losses in these investments were generally caused by changes in interest rates and market liquidity, and not by changes in credit quality.  We intend to hold these securities to their maturities, which generally correlate to the maturities of our customer deposits, and believe it is more-likely-than not that we will not be required to sell any of these securities before recovery of their amortized cost.  Accordingly, impairment of these investments is considered temporary. 

The estimated fair value of our customer deposit liability, based on discounting expected cash outflows at maturity dates that range up to five years, using current interest rates offered for deposits with the same dates of maturity, was $172.9 million at June 30, 2009.

NOTE 5 – OTHER INVESTMENTS.

These investments (in millions) at June 30, 2009 include:

NOTE 6 – FAIR VALUE MEASUREMENTS.

We determine the fair value of our investments using broad levels of inputs as defined by related accounting standards:

      Level 1 – quoted prices in active markets for identical securities.

      Level 2 – observable inputs other than Level 1 quoted prices including, but not limited to, quoted prices for similar securities, interest rates, prepayment speeds, and credit risk.  These inputs are based on market data obtained from independent sources.

      Level 3 – unobservable inputs reflecting our own assumptions based on the best information available.  We do not value any investments using level 3 inputs.

These levels are not necessarily an indication of the risk or liquidity associated with the investments.  The following table summarizes our investments (in millions) at June 30, 2009, that are recognized in our balance sheet using fair value measurements determined based on the differing levels of inputs.

NOTE 7 – STOCK-BASED COMPENSATION.

Stock-based grants.

In February 2009, our executive compensation committee of the board of directors reviewed our equity grant program for associates.  The annual grant was bifurcated to achieve the retention and other objectives of the program and align the interests of our associates with those of our common stockholders.  The following table summarizes the status of and changes in our stock option grants during the first half of 2009.

The following table summarizes the status of and changes in our nonvested restricted shares and restricted stock units during the first half of 2009.

Future stock-based compensation expense.

The following table presents the compensation expense (in millions) to be recognized over the remaining vesting periods of the stock-based awards outstanding at June 30, 2009.  Estimated future compensation expense will change to reflect future option grants, including reloads; future awards of unrestricted shares, restricted shares, and restricted stock units; changes in estimated forfeitures; and adjustments for actual forfeitures.

NOTE 8 – INVESTMENT GAINS (LOSSES) AND ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS).

The following table reconciles our net unrealized holding gains (in millions) for the first half of 2009 to that recognized in other comprehensive income.

The components of accumulated other comprehensive income (in millions) at June 30, 2009, are presented below.