PRICE T ROWE TAX EFFICIENT BALANCED FUND INC, 497, 1999-07-02

PRICE T ROWE TAX EFFICIENT BALANCED FUND INC
497, 1999-07-02

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<PAGE>

PROSPECTUS
July 1, 1999
Tax-EfficientBalanced Fund

A fund seeking attractive after-tax total returns from a portfolio of stocks
and tax-exempt bonds.
The Securities and Exchange Commission has not approved or disapproved these
securities or passed upon the adequacy of this prospectus. Any representation
to the contrary is a criminal offense.
(T. ROWE PRICE RAM LOGO)
<PAGE>

T. Rowe Price Tax-Efficient Balanced Fund, Inc.
Prospectus

July 1, 1999

<TABLE>
<CAPTION>
<S> <C> <C> <C>
1 ABOUT THE FUND
Objective, Strategy, Risks, and Expenses 1
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Other Information About the Fund 5
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2 ABOUT YOUR ACCOUNT
Pricing Shares and Receiving 7
Sale Proceeds
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Distributions and Taxes 9
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Transaction Procedures and 11
Special Requirements
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3 MORE ABOUT THE FUND
Organization and Management 15
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Understanding Performance Information 17
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Investment Policies and Practices 18
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Financial Highlights 26
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4 INVESTING WITH T. ROWE PRICE
Account Requirements 28
and Transaction Information
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Opening a New Account 28
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Purchasing Additional Shares 29
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Exchanging and Redeeming 30
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Rights Reserved by the Fund 31
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Information About Your Services 32
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T. Rowe Price Brokerage 34
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Investment Information 35
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</TABLE>

Founded in 1937 by the late Thomas Rowe Price, Jr., T. Rowe Price Associates,
Inc., and its affiliates managed $149.2 billion, including over $8 billion in
municipal bond assets, for more than seven million individual and institutional
investor accounts as of March 31, 1999.
Mutual fund shares are not deposits or obligations of, or guaranteed by, any
depository institution. Shares are not insured by the FDIC, Federal Reserve, or
any other government agency, and are subject to investment risks, including
possible loss of the principal amount invested.
<PAGE>

ABOUT THE FUND
1
OBJECTIVE, STRATEGY, RISKS, AND EXPENSES
----------------------------------------------------------
To help you decide whether this fund is appropriate for you, this section
reviews its major characteristics.

What is the fund's objective?

The fund seeks to provide attractive long-term total returns on an after-tax
basis with a balanced portfolio of stocks and municipal bonds.

What is the fund's principal investment strategy?

We invest a minimum of 50% of total assets in municipal bonds (measured at
the end of each quarter) and the balance in stocks. The stock portion is
invested primarily in large-capitalization stocks selected mainly from the
1,000 largest U.S. companies. The bond portion will be invested primarily in
long-term municipal bonds, with maturities generally exceeding 10 years and
investment-grade ratings of BBB or higher. A maximum of 10% of the bond
component may be invested in below-investment-grade ("junk") bonds to take
advantage of their relatively high tax-exempt income and potential for price
appreciation.

Stock selection is based on fundamental, bottom-up analysis that seeks to
identify companies with superior long-term appreciation prospects. Generally
we use a growth approach to stock selection, looking for companies with a
demonstrated ability to increase revenues, earnings, and cash flow
consistently; capable management; attractive business niches; and a
sustainable competitive advantage. Valuation measures, such as a company's
price/earnings ratio relative to the market and its own growth rate, and its
dividend yield relative to the market are also considered.

Generally, the fund will limit exposure to high-yielding stocks. However, the
payment of dividends - even higher-than-average dividends - does not
disqualify a stock from consideration for the fund's portfolio.

Bond selection reflects the manager's outlook for interest rates and the
economy as well as the prices and yields of various securities. For example,
if we expect rates to fall, the managers may buy longer-term securities to
provide higher yield. Conversely, shorter maturities may be favored if rates
are expected to rise.

To accomplish the fund's goal of minimizing taxable distributions, we will
strive to avoid realizing capital gains. However, gains may be realized when
it is believed that the risk of holding a security outweighs tax
considerations. When gains are taken, we will attempt to offset them with
losses from other securities. This may be accomplished by selling certain
securities at a loss and investing the proceeds in similar securities.
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T. ROWE PRICE

While most assets will be invested in U.S. common stocks and municipal
securities, other securities may also be purchased, including foreign stocks,
futures, and options, in keeping with fund objectives.

. For details about the fund's investment program, please see the Investment
Policies and Practices section.

What are the main risks of investing in the fund?

The stock market as a whole can decline for many reasons, including adverse
political or economic developments here or abroad, 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, our assessment of companies held in the fund may prove incorrect,
resulting in losses or poor performance even in a rising market. The fund's
balance between stocks and bonds may also mean it will not fully participate
in rallies in either individual asset class.

Growth stocks can be volatile for several reasons. Since they usually
reinvest a high proportion of their earnings in their own businesses, they
may lack the dividends often associated with value stocks that could cushion
their decline in a falling market. Also, since investors buy growth stocks
because of their expected superior earnings growth, earnings disappointments
often result in sharp price declines.

Investments in stocks that appear undervalued carry the risk that the market
will not recognize a security's intrinsic value for a long time, or that a
stock judged to be undervalued may actually be appropriately priced.

The fund also invests a substantial percentage of assets in municipal bonds,
which have two main sources of risk: interest rate and credit risk. Interest
rate risk is the decline in bond prices that usually accompanies a rise in
interest rates. Longer-maturity bonds typically suffer greater declines than
those with shorter maturities. Credit risk is the chance that any fund
holding could have its credit rating downgraded, or that a bond issuer will
default (fail to make timely payments of interest or principal), potentially
reducing the fund's income level and share price. To the extent that we
invest in junk bonds, credit risk will be higher since their issuers are more
vulnerable to financial setbacks and recession than more creditworthy
companies.

The fund is also exposed to risks specific to municipal bonds, such as the
possibility that tax reform may broadly reduce their value, or that
individual issuers will be unable to meet their obligations due to problems
in that state or locality.

There is no guarantee the fund's attempts to manage its portfolio in a
tax-efficient manner will be successful.
<PAGE>

ABOUT THE FUND
To the extent that the fund invests in foreign stocks, it is also subject to
the risk that some holdings may lose value because of declining foreign
currencies or adverse political or economic events overseas. If the fund uses
futures and options, it is exposed to additional volatility and potential
losses.

As with any mutual fund, there can be no guarantee the fund will achieve its
objective.

. The fund's share price may decline, so when you sell your shares, you may
lose money.

How can I tell if the fund is appropriate for me?

Consider your investment goals, your time horizon for achieving them, and
your tolerance for risk. If you can accept the possibility of share price
decline in an effort to achieve attractive after-tax total return over the
long-term, the fund could be appropriate for you. The higher your tax
bracket, the more likely that this fund will be appropriate. This fund should
not represent your complete investment program or be used for short-term
trading purposes.

The fund is inappropriate for tax-deferred accounts, such as IRAs.

. Investors should have a long-term investment horizon and be willing to wait
out bear markets.

How has the fund performed in the past?

The bar chart and the average annual total return table indicate risk by
illustrating how much returns can differ from one year to the next. The
fund's past performance is no guarantee of its future returns.

The fund can also experience short-term performance swings, as shown by the
best and worst calendar quarter returns accompanying the following chart. The
returns are only for the years depicted in the chart.

<TABLE>
INSERT BAR
CHART HERE
<CAPTION>
Calendar Year Total Returns
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<S> <C>
1998 19.87%
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</TABLE>

Quarter ended Total return

Best quarter 12/31/1998 12.56%

Worst quarter 9/30/1998 -3.30%

The fund's return for the 3 months ended 3/31/99 was 2.93%.

<PAGE>

T. ROWE PRICE
<TABLE>
Table 1 Average Annual Total Returns
<CAPTION>
Periods ended December 31, 1998
Since inception
1 year (6/30/97)
<S> <C> <C> <S>

Tax-Efficient Balanced Fund 19.87% 19.35%
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Lehman Brothers Municipal Bond
Index /a/ 6.48
52% Lehman Brothers Muni. Bond
Index/48% S&P 500 Stock Index 17.08 17.10
Lipper Balanced Funds Average 13.48 14.55
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</TABLE>

These figures include changes in principal value, reinvested dividends, and
capital gain distributions, if any.

/a/ The fund's performance will differ from that of this index because of the
fund's investments in stocks.

What fees or expenses will I pay?

The fund is 100% no load. The fund charges a 1.00% redemption fee, payable to
the fund, on shares held less than one year. The fee applies to exchanges as
well. There are no other fees or charges to buy or sell fund shares, reinvest
dividends, or exchange into other T. Rowe Price funds. There are no 12b-1
fees.

<TABLE>
Table 2 Fees and Expenses of the Fund
<CAPTION>
Shareholder fees (fees paid directly from your investment)
Redemption fee (for shares held less than one 1.00%/a/
year) Annual fund operating expenses
(expenses that are deducted from fund assets)

------------------------------------------------------------------------------
<S> <C>
Management fee 0.52%/b/
Other expenses 0.95%
Total annual fund operating expenses 1.47%/b/
Fee waiver/reimbursement 0.47%
Net expenses 1.00%
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</TABLE>

/a/
Please see Contingent Redemption Fee under Pricing Shares and Receiving Sale
Proceeds for additional information.

/b/
To limit the fund's expenses during its initial period of operations, T. Rowe
Price contractually obligated itself to waive its fees and bear any expenses
through February 28, 1999, that would cause the fund's ratio of expenses to
average net assets to exceed 1.00%. Effective March 1, 1999, T. Rowe Price
agreed to extend the expense limitation for an additional two-year period
through February 28, 2001. Fees waived or expenses paid or assumed under
these agreements are subject to reimbursement to T. Rowe Price by the fund
whenever the fund's expense ratio is below 1.00%; however, no reimbursement
will be made after February 28, 2001 (for the first agreement), or February
28, 2003 (for the second agreement), or if it would result in the expense
ratio exceeding 1.00%. Any amounts reimbursed will have the effect of
increasing fees otherwise paid by the fund.

<PAGE>

ABOUT THE FUND
Example. The following table gives you a rough idea of how expense ratios
may translate into dollars and helps you to compare the cost of investing in
this fund with that of other funds. Although your actual costs may be higher
or lower, the table shows how much you would pay if operating expenses remain
the same, the expense limitation currently in place is not renewed, you
invest $10,000, you earn a 5% annual return, and you hold the investment for
the following periods:

<TABLE>
<CAPTION>
<S> <C> <C> <C>
1 year 3 years 5 years 10 years

$102 $ $ $
370 711 1,674
----------------------------------------------------
</TABLE>

OTHER INFORMATION ABOUT THE FUND
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What are the fund's potential rewards?

We seek to achieve total return while producing as few taxable dividends and
taxable capital gains as possible. This approach attempts to limit the
effects of annual taxation on an investor's long-term return potential and
maximize after-tax return compared with balanced funds that generate regular
taxable distributions. In addition, by using a balanced investment approach,
the fund hopes to provide these tax-efficient returns over time with less
risk than that of the Standard & Poor's 500 Stock Index/(R)/. Stocks and
municipal bonds have a low historical performance correlation, which could
help cushion the fund's share price when either market declines. It is
important for investors to view the fund as a long-term investment (at least
five years).

What is a "balanced" investment approach?

This approach attempts to balance the potential for growth and greater
volatility of stocks with the stable income and normally more moderate price
fluctuations of fixed income securities. It is widely regarded as a
relatively conservative strategy designed to cushion an investment from the
volatility associated with funds composed exclusively of common stocks.

What distinguishes the fund from many other balanced funds?

The stock portion of the portfolio in this fund will be balanced with
tax-exempt income from municipal bonds rather than taxable income in an
effort to achieve the fund's objective of generating high after-tax returns.
Investors in higher tax brackets, in particular, are increasingly aware of
the negative impact of taxes on their overall investment returns.
<PAGE>

T. ROWE PRICE
What other measures will be taken to enhance the fund's tax efficiency?

When gains are taken, the managers will attempt to offset them with losses
from other securities. This may be accomplished by selling bonds or stocks at
losses and investing the proceeds in similar securities. In addition, the
fund will attempt to limit realized capital gains by selling the highest-cost
shares first (that is, the shares on which the fund has the smallest gain).
The fund is required to invest a minimum of 50% of its assets in municipal
securities (measured at the end of each fiscal quarter) to maintain the
tax-advantaged status of the bond income. The managers will also strive to
keep income from taxable dividends relatively low. In addition, the fund will
not purchase bonds subject to the alternative minimum tax.

While turnover is expected to be low in rising markets, it is likely to
increase in falling markets as gains from the sale of stocks will be offset
by losses whenever possible.

Is there other information I can review before making a decision?

Investment Policies and Practices in Section 3 discusses various types of
portfolio securities the fund may purchase as well as types of investment
management practices the fund may use.

You should also review the information in Section 2 that discusses contingent
redemption fees.
<PAGE>

ABOUT YOUR ACCOUNT
2
PRICING SHARES AND RECEIVING SALE PROCEEDS
----------------------------------------------------------
Here are some procedures you should know when investing in a T. Rowe Price
fund.

How and when shares are priced

The share price (also called "net asset value" or NAV per share) for a fund
is calculated at the close of the New York Stock Exchange, normally 4 p.m.
ET, each day the New York Stock Exchange is open for business. To calculate
the NAV, the fund's assets are valued and totaled, liabilities are
subtracted, and the balance, called net assets, is divided by the number of
shares outstanding. Current market values are used to price fund shares.

. The various ways you can buy, sell, and exchange shares are explained at the
end of this prospectus and on the New Account Form. These procedures may
differ for institutional accounts.

How your purchase, sale, or exchange price is determined

If we receive your request in correct form by 4 p.m. ET, your transaction
will be priced at that day's NAV. If we receive it after 4 p.m., it will be
priced at the next business day's NAV.

We cannot accept orders that request a particular day or price for your
transaction or any other special conditions.

Fund shares may be purchased through various third-party intermediaries
including banks, brokers, and investment advisers. Where authorized by a
fund, orders will be priced at the NAV next computed after receipt by the
intermediary. Consult your intermediary to determine when your orders will be
priced. The intermediary may charge a fee for its services.

Note: The time at which transactions and shares are priced and the time until
which orders are accepted may be changed in case of an emergency or if the
New York Stock Exchange closes at a time other than 4 p.m. ET.

How you can receive the proceeds from a sale

. When filling out the New Account Form, you may wish to give yourself the
widest range of options for receiving proceeds from a sale.

If your request is received by 4 p.m. ET in correct form, proceeds are
usually sent on the next business day. Proceeds can be sent to you by mail or
to your bank account by Automated Clearing House (ACH) transfer or bank wire.
Proceeds sent by ACH transfer should be credited the second day after the
sale. ACH is an automated method of initiating payments from, and receiving
payments in, your
<PAGE>

T. ROWE PRICE
financial institution account. The ACH system is supported by over 20,000
banks, savings banks, and credit unions. Proceeds sent by bank wire should be
credited to your account the next business day.

. Exception: Under certain circumstances and when deemed to be in the fund's
best interests, your proceeds may not be sent for up to seven calendar days
after we receive your redemption request.

. If for some reason we cannot accept your request to sell shares, we will
contact you.

Contingent Redemption Fee
The fund is not designed for short-term traders, whose frequent purchases,
redemptions, and exchanges can unnecessarily disrupt the fund's investment
program and drive up the fund's transaction costs. For these reasons, the
fund assesses a 1.00% fee on redemptions (including exchanges) of shares held
for less than one year.

Redemption fees are paid to the fund to help offset transaction costs and to
protect the fund's long-term shareholders. The fund will use the "first-in,
first-out" (FIFO) method to determine the one-year holding period. Under this
method, the date of the redemption or exchange will be compared with the
earliest purchase date of shares held in the account. If this holding period
is less than one year, the fee will be charged.

The fee does not apply to any shares purchased through reinvested
distributions (dividends and capital gains) or to shares held in retirement
plans such as 401(k), 403(b), 457, Keogh, profit sharing, SIMPLE IRA,
SEP-IRA, and money purchase pension accounts. The fee does apply to shares
held in other IRA accounts and to shares purchased through automatic
investment plans (described under Shareholder Services). The fee may apply to
shares in retirement plans held in broker omnibus accounts.

In determining "one year," the fund will use the anniversary date of a
transaction. Thus, shares purchased on July 1, 1999, for example, will be
subject to the fee if they are redeemed on or prior to June 30, 2000. If they
are redeemed on or after July 1, 2000, they will not be subject to the fee.
<PAGE>

ABOUT THE FUND
USEFUL INFORMATION ON DISTRIBUTIONS AND TAXES
----------------------------------------------------------
. All net investment income and realized capital gains are distributed to
shareholders.

Dividends and Other Distributions

Dividend and capital gain distributions are reinvested in additional fund
shares in your account unless you select another option on your New Account
Form. The advantage of reinvesting distributions arises from compounding;
that is, you receive income dividends and capital gain distributions on a
rising number of shares.

Distributions not reinvested are paid by check or transmitted to your bank
account via ACH. If the Post Office cannot deliver your check, or if your
check remains uncashed for six months, the fund reserves the right to
reinvest your distribution check in your account at the NAV on the day of the
reinvestment and to reinvest all subsequent distributions in shares of the
fund. No interest will accrue on amounts represented by uncashed distribution
or redemption checks.

Income dividends
. A dividend on the tax-exempt portion of the fund's portfolio will be
declared daily at 4 p.m. ET to shareholders of record at that time provided
payment has been received on the previous business day, and these dividends
will be paid quarterly.

. A dividend (if any) on the taxable portion of the fund's portfolio will be
declared and paid annually.

. A portion of the fund's dividends may be eligible for the 70% deduction for
dividends received by corporations.

Capital gains
. A capital gain or loss is the difference between the purchase and sale price
of a security.

. If a fund has net capital gains for the year (after subtracting any capital
losses), they are usually declared and paid in December to shareholders of
record on a specified date that month.

Tax Information

. You will be sent timely information for your tax filing needs.

A significant portion of the fund's dividend is expected to be exempt from
federal income taxes. However, you need to be aware of the possible tax
consequences when:

. You sell fund shares, including an exchange from one fund to another.
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T. ROWE PRICE
. The fund makes a distribution to your account.

Note: You must report your total tax-exempt income on IRS Form 1040. The IRS
uses this information to help determine the tax status of any Social Security
payments you may have received during the year. For shareholders who receive
Social Security benefits, the receipt of tax-exempt interest may increase the
portion of benefits that are subject to tax.

Taxes on fund redemptions
When you sell shares in any fund, you may realize a gain or loss. An exchange
from one fund to another is still a sale for tax purposes. If you realize a
loss on the sale or exchange of fund shares held six months or less, your
capital loss is reduced by the tax-exempt dividends received on those shares.

In January, you will be sent Form 1099-B indicating the date and amount of
each sale you made in the fund during the prior year. This information will
also be reported to the IRS. For most new accounts or those opened by
exchange in 1984 or later, we will provide the gain or loss on the shares you
sold during the year, based on the "average cost," single category method.
This information is not reported to the IRS, and you do not have to use it.
You may calculate the cost basis using other methods acceptable to the IRS,
such as "specific identification."

To help you maintain accurate records, we send you a confirmation immediately
following each transaction you make (except for systematic purchases and
redemptions) and a year-end statement detailing all your transactions in each
fund account during the year.

Taxes on fund distributions
The fund intends to invest a sufficient portion of its assets in municipal
bonds and notes so that it will qualify to pay tax-exempt dividends. The
portion of your income dividend derived from investment in tax-exempt
securities, will be exempt from federal income tax. The amount of such
dividends will be reported to you on your calendar year-end statement.

In January, you will be sent Form 1099-DIV indicating the tax status of any
taxable income and capital gain distributions made to you. This information
will also be reported to the IRS. A fund's distributions are generally
taxable to you for the year in which they were paid. You will be sent any
additional information you need to determine your taxes on fund
distributions, such as the portion of your dividend, if any, that may be
exempt from state income taxes.

ABOUT THE FUND
exchange of fund shares that you held six months or less, your short-term
loss will be reclassified to a long-term loss to the extent of any long-term
capital gain distribution received during the period you held the shares.

Gains and losses from the sale of foreign currencies and the foreign currency
gain or loss resulting from the sale of a foreign debt security can increase
or decrease a fund's ordinary income dividend.

A portion of the capital gains realized on the sale of market discount bonds
with maturities beyond one year may be treated as ordinary income and cannot
be offset by other capital losses. Therefore, to the extent the fund invests
in these securities, the likelihood of a taxable gain distribution will be
increased.

. Distributions are taxable whether reinvested in additional shares or
received in cash.

Tax effect of buying shares before a capital gain distribution
If you buy shares shortly before or on the "record date" - the date that
establishes you as the person to receive the upcoming distribution - you may
receive a portion of the money you just invested in the form of a taxable
distribution. Therefore, you may wish to find out a fund's record date before
investing. Of course, a fund's share price may, at any time, reflect
undistributed capital gains, taxable income, and unrealized appreciation,
which may result in future taxable distributions.

TRANSACTION PROCEDURES AND SPECIAL REQUIREMENTS
----------------------------------------------------------
. Following these procedures helps assure timely and accurate transactions.

Purchase Conditions

Nonpayment
If your payment is not received or you pay with a check or ACH transfer that
does not clear, your purchase will be canceled. You will be responsible for
any losses or expenses incurred by the fund or transfer agent, and the fund
can redeem shares you own in this or another identically registered T. Rowe
Price fund as reimbursement. The fund and its agents have the right to reject
or cancel any purchase, exchange, or redemption due to nonpayment.

U.S. dollars
All purchases must be paid for in U.S. dollars; checks must be drawn on U.S.
banks. The fund does not accept purchases made by credit card check.
<PAGE>

T. ROWE PRICE
Sale (Redemption) Conditions

Holds on immediate redemptions: 10-day hold
If you sell shares that you just purchased and paid for by check or ACH
transfer, the fund will process your redemption but will generally delay
sending you the proceeds for up to 10 calendar days to allow the check or
transfer to clear. If your redemption request was sent by mail or mailgram,
proceeds will be mailed no later than the seventh calendar day following
receipt unless the check or ACH transfer has not cleared. If, during the
clearing period, we receive a check drawn against your bond or money market
account, it will be returned marked "uncollected." (The 10-day hold does not
apply to the following: purchases paid for by bank wire; cashier's,
certified, or treasurer's checks; or automatic purchases through your
paycheck.)

Telephone, Tele*Access/(R)/, and personal computer transactions
Exchange and redemption services through telephone and Tele*Access are
established automatically when you sign the New Account Form unless you check
the boxes that state you do not want these services. Personal computer
transactions must be authorized separately. T. Rowe Price funds and their
agents use reasonable procedures (including shareholder identity
verification) to confirm that instructions given by telephone or computer are
genuine; they are not liable for acting on these instructions. If these
procedures are not followed, it is the opinion of certain regulatory agencies
that the funds and their agents may be liable for any losses that may result
from acting on the instructions. A confirmation is sent promptly after a
transaction. All telephone conversations are recorded.

Redemptions over $250,000
Large sales can adversely affect a portfolio manager's ability to implement a
fund's investment strategy by causing the premature sale of securities that
would otherwise be held. If, in any 90-day period, you redeem (sell) more
than $250,000, or your sale amounts to more than 1% of fund net assets, the
fund has the right to pay the difference between the redemption amount and
the lesser of the two previously mentioned figures with securities from the
fund.

Excessive Trading

. T. Rowe Price may bar excessive traders from purchasing shares.

Frequent trades, involving either substantial fund assets or a substantial
portion of your account or accounts controlled by you, can disrupt management
of the fund and raise its expenses. To deter such activity, we have adopted
an excessive trading policy. If you violate our excessive trading policy, you
may be barred indefinitely and without further notice from further purchases
of T. Rowe Price funds.

. Trades placed directly with T. Rowe Price If you trade directly with T.
Rowe Price, you can make one purchase and sale involving the same fund within
any 120-day
<PAGE>

ABOUT THE FUND
period. For example, if you are in fund A, you can move substantial assets
from fund A to fund B and, within the next 120 days, sell your shares in fund
B to return to fund A or move to fund C. If you exceed this limit, you are in
violation of our excessive trading policy.

Two types of transactions are exempt from this policy: 1) trades solely in
money market funds (exchanges between a money fund and a nonmoney fund are
not exempt); and 2) systematic purchases or redemptions (see Information
About Your Services).

. Trades placed through intermediaries If you purchase fund shares through an
intermediary including a broker, bank, investment adviser, or other third
party and hold them for less than 60 calendar days, you are in violation of
our excessive trading policy.

Keeping Your Account Open

Due to the relatively high cost to a fund of maintaining small accounts, we
ask you to maintain an account balance of at least $1,000. If your balance is
below $1,000 for three months or longer, we have the right to close your
account after giving you 60 days in which to increase your balance.

Small Account Fee

Because of the disproportionately high costs of servicing accounts with low
balances, a $10 fee, paid to T. Rowe Price Services, the fund's transfer
agent, will automatically be deducted from nonretirement accounts with
balances falling below a minimum level. The valuation of accounts and the
deduction are expected to take place during the last five business days of
September. The fee will be deducted from accounts with balances below $2,000,
except for UGMA/ UTMA accounts, for which the limit is $500. The fee will be
waived for any investor whose T. Rowe Price mutual fund investments total
$25,000 or more. Accounts employing automatic investing (e.g., payroll
deduction, automatic purchase from a bank account, etc.) are also exempt from
the charge. The fee will not apply to IRAs and other retirement plan
accounts. (A separate custodial fee may apply to IRAs and other retirement
plan accounts.)
<PAGE>

T. ROWE PRICE
Signature Guarantees

. A signature guarantee is designed to protect you and the T. Rowe Price funds
from fraud by verifying your signature.

You may need to have your signature guaranteed in certain situations, such
as:

. Written requests 1) to redeem over $100,000, or 2) to wire redemption
proceeds.

. Remitting redemption proceeds to any person, address, or bank account not on
record.

. Transferring redemption proceeds to a T. Rowe Price fund account with a
different registration (name or ownership) from yours.

. Establishing certain services after the account is opened.

You can obtain a signature guarantee from most banks, savings institutions,
broker-dealers, and other guarantors acceptable to T. Rowe Price. We cannot
accept guarantees from notaries public or organizations that do not provide
reimbursement in the case of fraud.
<PAGE>

MORE ABOUT THE FUND
3
ORGANIZATION AND MANAGEMENT
----------------------------------------------------------

How is the fund organized?

The T. Rowe Price Tax-Efficient Funds, Inc. (the "corporation"), formerly
known as T. Rowe Price Tax-Efficient Balanced Fund, Inc., was incorporated in
Maryland in 1997 and is a "diversified, open-end investment company," or
mutual fund. Currently the corporation consists of two series, each
representing a separate class of shares having different objectives and
investment policies. The two series and the year in which each was
established are as follows: the Tax-Efficient Balanced Fund, 1997, and
Tax-Efficient Growth Fund, 1999. The Tax-Efficient Growth Fund is described
in a separate prospectus.

. Shareholders benefit from T. Rowe Price's 62 years of investment management
experience.

What is meant by "shares"?

As with all mutual funds, investors purchase shares when they put money in a
fund. These shares are part of a fund's authorized capital stock, but share
certificates are not issued.

Each share and fractional share entitles the shareholder to:

. Receive a proportional interest in a fund's income and capital gain
distributions.

. Cast one vote per share on certain fund matters, including the election of
fund directors, changes in fundamental policies, or approval of changes in
the fund's management contract.

Do T. Rowe Price funds have annual shareholder meetings?

The fund is not required to hold annual meetings and, to avoid unnecessary
costs to fund shareholders, does not intend to do so except when certain
matters, such as a change in its fundamental policies, must be decided. In
addition, shareholders representing at least 10% of all eligible votes may
call a special meeting, if they wish, for the purpose of voting on the
removal of any fund director or trustee. If a meeting is held and you cannot
attend, you can vote by proxy. Before the meeting, the fund will send you
proxy materials that explain the issues to be decided and include
instructions on voting by mail or telephone, or on the Internet.
<PAGE>

T. ROWE PRICE
Who runs the fund?

General Oversight
The fund is governed by a Board of Directors that meets regularly to review
the fund's investments, performance, expenses, and other business affairs.
The Board elects the fund's officers. The policy of the fund is that the
majority of Board members are independent of T. Rowe Price Associates, Inc.
(T. Rowe Price).

. All decisions regarding the purchase and sale of fund investments are made
by T. Rowe Price - specifically by the fund's portfolio managers.

Portfolio Management
The fund has an Investment Advisory Committee with the following members:
William F. Snider and Donald J. Peters, Co-chairmen, Stephen W. Boesel, Eric
N. Mader, Mary J. Miller, William J. Stromberg, and Arthur S. Varnado. The
committee co-chairmen have day-to-day responsibility for managing the fund
and work with the committee in developing and executing the fund's investment
program. Mr. Snider joined T. Rowe Price in 1991 and has been managing
investments since 1993. Mr. Peters has been managing investments since
joining T. Rowe Price in 1993.

The Management Fee
This fee has two parts - an "individual fund fee," which reflects a fund's
particular characteristics, and a "group fee." The group fee, which is
designed to reflect the benefits of the shared resources of the T. Rowe Price
investment management complex, is calculated daily based on the combined net
assets of all T. Rowe Price funds (except the Spectrum Funds, and any
institutional, index, or private label mutual funds). The group fee schedule
(shown below) is graduated, declining as the asset total rises, so
shareholders benefit from the overall growth in mutual fund assets.

<TABLE>
Group Fee Schedule
<CAPTION>
<S> <C> <C> <C>

0.3 First
34 $
% 50
/a/ billion
--------------------------------------
0.305% Next $30 billion

--------------------------------------
0.300% Next $40 billion

--------------------------------------
0.295% Thereafter

--------------------------------------------------------------------------------------------------------------
</TABLE>

/a/ Represents a blended group fee rate containing various break points.

The fund's portion of the group fee is determined by the ratio of its daily
net assets to the daily net assets of all the T. Rowe Price funds described
previously. Based on combined T. Rowe Price funds' assets of over $87 billion
at February 28, 1999, the group fee was 0.32%. The individual fund fee is
0.20%.
<PAGE>

ABOUT THE FUND
UNDERSTANDING PERFORMANCE INFORMATION
----------------------------------------------------------
This section should help you understand the terms used to describe fund
performance. You will come across them in shareholder reports you receive
from us; in our newsletter, The Price Report; in T. Rowe Price
advertisements; and in the media.

Total Return

This tells you how much an investment in a fund has changed in value over a
given time period. It reflects any net increase or decrease in the share
price and assumes that all dividends and capital gains (if any) paid during
the period were reinvested in additional shares. Therefore, total return
numbers include the effect of compounding.

Advertisements for a fund may include cumulative or average annual total
return figures, which may be compared with various indices, other performance
measures, or other mutual funds.

Cumulative Total Return

This is the actual return of an investment for a specified period. A
cumulative return does not indicate how much the value of the investment may
have fluctuated during the period. For example, a fund could have a 10-year
positive cumulative return despite experiencing three negative years during
that time.

Average Annual Total Return

This is always hypothetical and should not be confused with actual
year-by-year results. It smooths out all the variations in annual performance
to tell you what constant year-by-year return would have produced the
investment's actual cumulative return. This gives you an idea of an
investment's annual contribution to your portfolio, provided you held it for
the entire period.

Yield

The current or "dividend" yield on a fund or any investment tells you the
relationship between the investment's current level of annual income and its
price on a particular day. The dividend yield reflects the actual income paid
to shareholders for a given period, annualized, and divided by the price at
the end of the given period. For example, a fund providing $5 of annual
income per share and a price of $50 has a current yield of 10%. Yields can be
calculated for any time period.

For bond funds, the advertised or Securities and Exchange Commission (SEC)
yield is found by determining the net income per share (as defined by the
SEC) earned by a fund during a 30-day base period and dividing this amount by
the per share price on the last day of the base period. The SEC yield may
differ from the dividend yield.
<PAGE>

T. ROWE PRICE
INVESTMENT POLICIES AND PRACTICES
----------------------------------------------------------
This section takes a detailed look at some of the types of securities the
fund may hold in its portfolio and the various kinds of investment practices
that may be used in day-to-day portfolio management. The fund's investment
program is subject to further restrictions and risks described in the
Statement of Additional Information.

Shareholder approval is required to substantively change the fund's objective
and certain investment restrictions noted in the following section as
"fundamental policies." The managers follow certain "operating policies,"
which can be changed without shareholder approval. However, significant
changes are discussed with shareholders in fund reports. The fund adheres to
applicable investment restrictions and policies at the time it makes an
investment. A later change in circumstances will not require the sale of an
investment if it was proper at the time it was made.

The fund's holdings of certain kinds of investments cannot exceed maximum
percentages of total assets, which are set forth in this prospectus. For
instance, this fund is not permitted to invest more than 10% of total assets
in hybrid instruments. While these restrictions provide a useful level of
detail about the fund's investment program, investors should not view them as
an accurate gauge of the potential risk of such investments. For example, in
a given period, a 5% investment in hybrid instruments could have
significantly more of an impact on the fund's share price than its weighting
in the portfolio. The net effect of a particular investment depends on its
volatility and the size of its overall return in relation to the performance
of all the fund's other investments.

Changes in the fund's holdings, the fund's performance, and the contribution
of various investments are discussed in the shareholder reports sent to you.

. Fund managers have considerable leeway in choosing investment strategies and
selecting securities they believe will help the fund achieve its objective.

Types of Portfolio Securities

In seeking to meet its investment objective, the fund may invest in any type
of security or instrument (including certain potentially high-risk
derivatives described in this section) whose investment characteristics are
consistent with the fund's investment program. The following pages describe
various types of portfolio securities and investment management practices of
the fund.

Fundamental policy The fund will not purchase a security if, as a result,
with respect to 75% of its total assets, more than 5% of its total assets
would be invested in securities of a single issuer, or if more than 10% of
the voting securities of the issuer would be held by the fund.
<PAGE>

ABOUT THE FUND
The municipal portion of the fund's portfolio can include the following types
of securities:

Municipal Securities
The fund's assets are invested primarily in various tax-free municipal debt
securities. The issuers have a contractual obligation to pay interest at a
stated rate on specific dates and to repay principal (the bond's face value)
on a specified date or dates. An issuer may have the right to redeem or
"call" a bond before maturity, and the fund may have to reinvest the proceeds
at lower rates.

There are two broad categories of municipal bonds. General obligation bonds
are backed by the issuer's "full faith and credit," that is, its full taxing
and revenue raising power. Revenue bonds usually rely exclusively on a
specific revenue source, such as charges for water and sewer service, to
generate money for debt service.

. In purchasing municipals, the fund relies on the opinion of the issuer's
bond counsel regarding the tax-exempt status of the investment.

In addition to general obligation and revenue bonds, the funds' investments
may include, but are not limited to, the following types of securities:

Municipal Lease Obligations
A lease is not a full faith and credit obligation of the issuer and is
usually backed only by the borrowing government's unsecured pledge to make
annual appropriations for lease payments. There have been challenges to the
legality of lease financing in numerous states and, from time to time,
certain municipalities have considered not appropriating money for lease
payments. In deciding whether to purchase a lease obligation, the fund would
assess the financial condition of the borrower, the merits of the project,
the level of public support for the project, and the legislative history of
lease financing in the state. These securities may be less readily marketable
than other municipals. The fund may also purchase unrated lease obligations.

Municipal Warrants
Municipal warrants are essentially call options on municipal bonds. In
exchange for a premium, they give the purchaser the right, but not the
obligation, to purchase a municipal bond in the future. The fund might
purchase a warrant to lock in forward supply in an environment where the
current issuance of bonds is sharply reduced. Like options, warrants may
expire worthless and they may have reduced liquidity.

Operating policy The fund will not invest more than 2% of its total municipal
assets in municipal warrants.
<PAGE>

T. ROWE PRICE
Securities With "Puts"
Some longer-term municipals give the investor the right to "put" or sell the
security at par (face value) within a specified number of days following the
investor's request - usually one to seven days. This feature enhances a
security's liquidity by dramatically shortening its effective maturity and
enables it to trade at a price equal to or very close to par. If a put
feature terminates prior to being exercised, the fund may be forced to hold
the longer-term security, which could experience substantially more
volatility.

Securities With Credit Enhancements
. Letters of credit Letters of credit are issued by a third party, usually a
bank, to enhance liquidity and ensure repayment of principal and any accrued
interest if the underlying municipal security should default.

. Municipal Bond Insurance This insurance, which is usually purchased by the
bond issuer from a private, nongovernmental insurance company, provides an
unconditional and irrevocable guarantee that the insured bond's principal and
interest will be paid when due. Insurance does not guarantee the price of the
bond or the share price of any fund. The credit rating of an insured bond
reflects the credit rating of the insurer, based on its claims-paying
ability.

The obligation of a municipal bond insurance company to pay a claim extends
over the life of each insured bond. Although defaults on insured municipal
bonds have been low to date and municipal bond insurers have met their
claims, there is no assurance this will continue. A higher-than-expected
default rate could strain the insurer's loss reserves and adversely affect
its ability to pay claims to bondholders, such as the fund. The number of
municipal bond insurers is relatively small, and not all of them have the
highest rating.

. Standby Purchase Agreements A Standby Bond Purchase Agreement (SBPA) is a
liquidity facility provided to pay the purchase price of bonds that cannot be
remarketed. The obligation of the liquidity provider (usually a bank) is only
to advance funds to purchase tendered bonds that cannot be remarketed and
does not cover principal or interest under any other circumstances. The
liquidity provider's obligations under the SBPA are usually subject to
numerous conditions, including the continued creditworthiness of the
underlying borrower.

Synthetic or Derivative Securities
Derivatives and synthetics in which the fund may invest include:

. Residual Interest Bonds (These are a type of potentially high-risk
derivative.) The income stream provided by an underlying bond is divided to
create two securities, one short term and one long term. The interest rate on
the short-term component is reset by an index or auction process normally
every seven to 35 days. After income is paid on the short-term securities at
current rates, the residual income goes to the long-term securities.
Therefore, rising short-term
<PAGE>

ABOUT THE FUND
interest rates result in lower income for the longer-term portion, and vice
versa. The longer-term bonds can be very volatile and may be less liquid than
other municipals of comparable maturity. The fund will invest only in
securities deemed tax-exempt by a nationally recognized bond counsel, but
there is no guarantee the interest will be exempt because the IRS has not
issued a definitive ruling on the matter.

Operating policy The fund may invest up to 10% of its total municipal assets
in residual interest bonds.

. Participation Interests This term covers various types of securities created
by converting fixed rate bonds into short-term, variable rate certificates.
These securities have been developed in the secondary market to meet the
demand for short-term, tax-exempt securities. The fund will invest only in
securities deemed tax-exempt by a nationally recognized bond counsel, but
there is no guarantee the interest will be exempt because the IRS has not
issued a definitive ruling on the matter. There is no limit on the amount of
the fund's municipal assets that it can invest in these securities.

. Embedded Interest Rate Swaps and Caps In a fixed rate, long-term municipal
bond with an interest rate swap attached to it, the bondholder usually
receives the bond's fixed coupon payment as well as a variable rate payment
that represents the difference between a fixed rate for the term of the swap
(which is typically shorter than the bond it is attached to) and a variable
rate, short-term municipal index. The bondholder receives excess income when
short-term rates remain below the fixed interest rate swap rate. If
short-term rates rise above the fixed income swap rate, the bondholder's
income is reduced. At the end of the interest rate swap term, the bond
reverts to a single fixed coupon payment.

Both instruments may be volatile and of limited liquidity, and their use may
adversely affect the fund's total return.

Operating policy The fund may invest up to 10% of its total municipal assets
in embedded interest rate swaps and caps.

High-Yield, High-Risk Investing
The total return and yield of lower-quality (high-yield, high-risk) bonds,
commonly referred to as "junk" bonds, can be expected to fluctuate more than
the total return and yield of higher-quality, shorter-term bonds, but not as
much as those of common stocks. Junk bonds (those rated below BBB or in
default) are regarded as predominantly speculative with respect to the
issuer's continuing ability to meet principal and interest payments.
<PAGE>

T. ROWE PRICE
Operating policy The fund may purchase any type of noninvestment-grade debt
security (or junk bond) including those in default. The fund will not
purchase this type of security if immediately after such purchase the fund
would have more than 10% of its total municipal assets invested in such
securities. The fund's investments in convertible securities are not subject
to this limit.

Credit-Quality Considerations
The credit quality of most bond issues is evaluated by rating agencies such
as Moody's and Standard & Poor's on the basis of the issuer's ability to meet
all required interest and principal payments. The highest ratings are
assigned to issuers perceived to be the best credit risks. T. Rowe Price
research analysts also evaluate all portfolio holdings of theeach fund,
including those rated by outside agencies. Other things being equal,
lower-rated bonds have higher yields due to greater risk. High-yield bonds,
also called "junk" bonds, are those rated below BBB.

The equity portion of the fund's portfolio can include the following types of
securities:

Common and Preferred Stocks
Stocks represent shares of ownership in a company. Generally, preferred stock
has a specified dividend and ranks after bonds and before common stocks in
its claim on income for dividend payments and on assets should the company be
liquidated. After other claims are satisfied, common stockholders participate
in company profits on a pro-rata basis; profits may be paid out in dividends
or reinvested in the company to help it grow. Increases and decreases in
earnings are usually reflected in a company's stock price, so common stocks
generally have the greatest appreciation and depreciation potential of all
corporate securities. While most preferred stocks pay a dividend, the fund
may purchase preferred stock where the issuer has omitted, or is in danger of
omitting, payment of its dividend. Such investments would be made primarily
for their capital appreciation potential.

Convertible Securities and Warrants
The fund may invest in debt or preferred equity securities convertible into,
or exchangeable for, equity securities. Traditionally, convertible securities
have paid dividends or interest at rates higher than common stocks but lower
than nonconvertible securities. They generally participate in the
appreciation or depreciation of the underlying stock into which they are
convertible, but to a lesser degree. In recent years, convertibles have been
developed which combine higher or lower current income with options and other
features. Warrants are options to buy a stated number of shares of common
stock at a specified price anytime during the life of the warrants
(generally, two or more years).
<PAGE>

ABOUT THE FUND
Foreign Securities
The fund may invest in foreign securities. These include
nondollar-denominated securities traded outside of the U.S. and
dollar-denominated securities of foreign issuers traded in the U.S. (such as
ADRs). Such investments increase a portfolio's diversification and may
enhance return, but they also involve some special risks, such as exposure to
potentially adverse local political and economic developments;
nationalization and exchange controls; potentially lower liquidity and higher
volatility; possible problems arising from accounting, disclosure,
settlement, and regulatory practices that differ from U.S. standards; and the
chance that fluctuations in foreign exchange rates will decrease the
investment's value (favorable changes can increase its value). These risks
are heightened for investments in developing countries, and there is no limit
on the amount of the fund's foreign investments that may be made in such
countries.

Operating policy The fund may invest up to 25% of its total equity assets
(excluding reserves) in foreign securities.

Hybrid Instruments
These instruments (a type of potentially high-risk derivative) can combine
the characteristics of securities, futures, and options. For example, the
principal amount, redemption, or conversion terms of a security could be
related to the market price of some commodity, currency, or securities index.
Such securities may bear interest or pay dividends at below market or even
relatively nominal rates. Under certain conditions, the redemption value of
such an investment could be zero.

. Hybrids can have volatile prices and limited liquidity, and their use by the
fund may not be successful.

Operating policy The fund may invest up to 10% of its total equity assets in
hybrid instruments.

The municipal and equity portions of the fund's portfolio may contain the
following:

Private Placements
These securities are sold directly to a small number of investors, usually
institutions. Unlike public offerings, such securities are not registered
with the SEC. Although certain of these securities may be readily sold, for
example, under Rule 144A, others may be illiquid, and their sale may involve
substantial delays and additional costs.

Operating policy The fund may invest up to 15% of its net assets in illiquid
securities.
<PAGE>

T. ROWE PRICE
Types of Investment Management Practices

Reserve Position
The fund will hold a portion of its assets in short-term, tax-exempt money
market securities maturing in one year or less. The reserve position provides
flexibility in meeting redemptions, expenses, and the timing of new
investments; can help in structuring the fund's weighted average maturity;
and serves as a short-term defense during periods of unusual market
volatility. The fund's reserve position can consist of shares of one or more
T. Rowe Price internal money market funds as well as short-term,
investment-grade securities, including tax-exempt commercial paper, municipal
notes, and short-term maturity bonds. Some of these securities may have
adjustable, variable, or floating rates. For temporary, defensive purposes,
the fund may invest without limitation in money market reserves. The effect
of taking such a position is that the fund may not achieve its investment
objective.

Borrowing Money and Transferring Assets
The fund can borrow money from banks and other Price funds as a temporary
measure for emergency purposes, to facilitate redemption requests, or for
other purposes consistent with the fund's investment objective and program.
Such borrowings may be collateralized with fund assets, subject to
restrictions.

Fundamental policy Borrowings may not exceed 33/1//\\/3/\\% of total fund
assets.

Operating policy The fund may not transfer as collateral any portfolio
securities except as necessary in connection with permissible borrowings or
investments, and then such transfers may not exceed 33/1//\\/3/\\% of the
fund's total assets. The fund may not purchase additional securities when
borrowings exceed 5% of total assets.

When-Issued Securities and Forwards
New issues of municipals are often sold on a "when-issued" basis, that is,
delivery and payment take place 15 - 45 days after the buyer has agreed to
the purchase. Some bonds, called "forwards," have longer-than-standard
settlement dates, typically six to 24 months. When buying these securities,
the fund will maintain cash or high-grade marketable securities held by its
custodian equal in value to its commitment for these securities. The fund
does not earn interest on when-issued and forward securities until
settlement, and the value of the securities may fluctuate between purchase
and settlement. Municipal "forwards" typically carry a substantial yield
premium to compensate the buyer for their greater interest rate, credit, and
liquidity risks.

Futures and Options

Futures (a type of potentially high-risk derivative) are often used to manage
or hedge risk because they enable the investor to buy or sell an asset in the
future at an agreed-upon price. Options (another type of potentially
high-risk derivative)
<PAGE>

ABOUT THE FUND
give the investor the right (where the investor purchases the option), or the
obligation (where the investor writes (sells) the option), to buy or sell an
asset at a predetermined price in the future. The fund may buy and sell
futures and options contracts for any number of reasons, including: to manage
its exposure to changes in securities prices and foreign currencies; as an
efficient means of adjusting its overall exposure to certain markets; to
hedge against a potentially unfavorable change in interest rates; in an
effort to enhance income; as a cash management tool; to protect the value of
portfolio securities; and to adjust portfolio duration. The fund may
purchase, sell, or write call and put options on securities, financial
indices, and foreign currencies.

Futures contracts and options may not always be successful hedges; their
prices can be highly volatile; using them could lower the fund's total
return, and the potential loss from the use of futures can exceed the fund's
initial investment in such contracts.

Operating policies Futures: Initial margin deposits and premiums on options
used for non-hedging purposes will not exceed 5% of the fund's net asset
value. Options on securities: The total market value of securities against
which the fund writes call or put options may not exceed 25% of its total
assets. The fund will not commit more than 5% of its total assets to premiums
when purchasing call or put options.

Managing Foreign Currency Risk
Investors in foreign securities may "hedge" their exposure to potentially
unfavorable currency changes by purchasing a contract to exchange one
currency for another on some future date at a specified exchange rate. In
certain circumstances, a "proxy currency" may be substituted for the currency
in which the investment is denominated, a strategy known as "proxy hedging."
If the fund were to engage in foreign currency transactions, they would be
used primarily to protect the fund's foreign securities from adverse currency
movements relative to the dollar. Such transactions involve the risk that
anticipated currency movements will not occur, and the fund's total return
could be reduced.

Lending of Portfolio Securities
Like other mutual funds, the fund may lend securities to broker-dealers,
other institutions, or other persons to earn additional income. The principal
risk is the potential insolvency of the broker-dealer or other borrower. In
this event, the fund could experience delays in recovering its securities and
possibly capital losses.

Fundamental policy The value of loaned securities may not exceed
33/1//\\/3/\\% of total fund assets.
<PAGE>

T. ROWE PRICE
Portfolio Turnover
The fund will not generally trade in securities for short-term profits, but,
when circumstances warrant, securities may be purchased and sold without
regard to the length of time held. A high turnover rate may increase
transaction costs and result in higher capital gain distributions by the
fund. The fund's portfolio turnover rates for the fiscal years ending
February 28, 1999 and 1998, were 19.8% and 12.5% (annualized), respectively.

Year 2000 Processing Issue

Many computer programs use two digits rather than four to identify the year.
These programs, if not adapted, will not correctly handle the change from
"99" to "00" on January 1, 2000, and will not be able to perform necessary
functions. The Year 2000 issue affects virtually all companies and
organizations.

T. Rowe Price has implemented steps intended to assure that major computer
systems and processes are capable of Year 2000 processing. We are working
with third parties to assess the adequacy of their compliance efforts and are
developing contingency plans intended to assure that third-party
noncompliance will not materially affect T. Rowe Price's operations.

Companies, organizations, governmental entities, and markets in which the T.
Rowe Price funds invest will be affected by the Year 2000 issue, but at this
time the funds cannot predict the degree of impact. For funds that invest in
foreign markets, especially emerging markets, it is possible foreign
companies and markets will not be as prepared for Year 2000 as domestic
companies and markets. To the extent the effect of Year 2000 is negative, a
fund's returns could be reduced.

FINANCIAL HIGHLIGHTS
----------------------------------------------------------
Table 3, which provides information about the fund's financial history, is
based on a single share outstanding throughout each fiscal year. The table is
part of the fund's financial statements, which are included in its annual
report and are incorporated by reference into the Statement of Additional
Information (available upon request). The total returns in the table
represent the rate that an investor would have earned or lost on an
investment in the fund (assuming reinvestment of all dividends and
distributions). The financial statements in the annual report were audited by
the fund's independent accountants, PricewaterhouseCoopers LLP.
<PAGE>

ABOUT THE FUND
<TABLE>
Table 3 Financial Highlights
<CAPTION>
6/30/97/*/
through Year ended February 28
2/28/98
------------ 1999
-------------------------------------- -----------------------------
<S> <C> <C> <C> <S>

Net asset value,
beginning of period $ 10.00 $ 11.34
Income From Investment Operations
Net investment income 0.15/a/ 0.24
------------------------------------
Net gains or losses
on securities (both
realized and 1.34 1.38
unrealized)
------------------------------------
Total from investment
operations 1.49 1.62
Less Distributions
Dividends (from net (0.15)/a/ (0.24)
investment income)
------------------------------------
Distributions (from -- --
capital gains)
------------------------------------
Returns of capital -- --
------------------------------------
Total distributions (0.15)/a/ (0.24)
------------------------------------
Net asset value, end $ 11.34 $ 12.72
of period
------------------------------------
Total return 14.96% 14.45%
Ratios/Supplemental Data
Net assets, end of
period $17,714 $33,767
(in thousands)
-----------------------------------------
Ratio of expenses to 1.00%/ab/ 1.00%
average net assets
------------------------------------
Ratio of net income 2.31%/ab/ 2.03%
to average net assets
------------------------------------
Portfolio turnover 12.5%/b/ 19.8
rate
-------------------------------------------------------------------------------
</TABLE>

/a/
Excludes expenses in excess of a 1.00% voluntary expense limitation in effect
through February 28, 1999.

/b/ Annualized.

/*/ Inception date.
<PAGE>

INVESTING WITH T. ROWE PRICE
4
ACCOUNT REQUIREMENTS AND TRANSACTION INFORMATION
----------------------------------------------------------
Tax Identification Number
We must have your correct Social Security or corporate tax identification number
on a signed New Account Form or W-9 Form. Otherwise, federal law requires the
funds to withhold a percentage (currently 31%) of your dividends, capital gain
distributions, and redemptions, and may subject you to an IRS fine. If this
information is not received within 60 days after your account is established,
your account may be redeemed, priced at the NAV on the date of redemption.

Always verify your transactions by carefully reviewing the confirmation we send
you. Please report any discrepancies to Shareholder Services promptly.

Institutional Accounts
Transaction procedures in the following sections may not apply to institutional
accounts. For institutional account procedures, please call your designated
account manager or service representative.

OPENING A NEW ACCOUNT
----------------------------------------------------------
$2,500 minimum initial investment; $1,000 for retirement plans or gifts or
transfers to minors (UGMA/UTMA) accounts

Account Registration
If you own other T. Rowe Price funds, be sure to register any new account just
like your existing accounts so you can exchange among them easily. (The name and
account type would have to be identical.)

By Mail
Please make your check payable to T. Rowe Price Funds (otherwise it will be
returned) and send your check, together with the New Account Form, to the
appropriate address in the next paragraph. We do not accept third-party checks
to open new accounts.

Mail via United States Postal Service
T. Rowe Price Account Services P.O. Box 17300 Baltimore, MD 21297-1300
<PAGE>

ABOUT THE FUND
Mail via private carriers/overnight services
T. Rowe Price Account Services 10090 Red Run Blvd. Owings Mills, MD 21117-4842

By Wire
Call Investor Services for an account number and give the following wire
information to your bank:

Receiving Bank: PNC Bank, N.A. (Pittsburgh) Receiving Bank ABA#: 043000096
Beneficiary: T. Rowe Price [fund name] Beneficiary Account: 1004397951
Originator to Beneficiary Information (OBI): name of owner(s) and account
number

Complete a New Account Form and mail it to one of the appropriate addresses
listed below.

Note: No services will be established and IRS penalty withholding may occur
until a signed New Account Form is received.

By Exchange
Call Shareholder Services or use Tele*Access or your personal computer (see
Automated Services under Information About Your Services). The new account will
have the same registration as the account from which you are exchanging.
Services for the new account may be carried over by telephone request if
preauthorized on the existing account. For limitations on exchanging, see
explanation of Excessive Trading under Transaction Procedures and Special
Requirements.

In Person
Drop off your New Account Form at any location listed on the cover and obtain a
receipt.

PURCHASING ADDITIONAL SHARES
----------------------------------------------------------
$100 minimum purchase; $50 minimum for retirement plans, Automatic Asset
Builder, and gifts or transfers to minors (UGMA/UTMA) accounts.

By ACH Transfer
Use Tele*Access or your personal computer or call Investor Services if you have
established electronic transfers using the ACH network.
<PAGE>

T. ROWE PRICE
By Wire
Call Shareholder Services or use the wire address listed in Opening a New
Account.

By Mail
1. Make your check payable to T. Rowe Price Funds (otherwise it may be
returned).

2. Mail the check to us at the following address with either a fund reinvestment
slip or a note indicating the fund you want to buy and your fund account
number.

3. Remember to provide your account number and the fund name on the memo line of
your check.

Mail via United States Postal Service
T. Rowe Price Funds Account Services P.O. Box 17300 Baltimore, MD 21297-1300

/(For //mail via private carriers and overnight services//, see previous /
/section.)/

By Automatic Asset Builder
Fill out the Automatic Asset Builder section on the New Account or Shareholder
Services Form.

EXCHANGING AND REDEEMING SHARES
----------------------------------------------------------
Exchange Service
You can move money from one account to an existing identically registered
account or open a new identically registered account. Remember, exchanges are
purchases and sales for tax purposes. (Exchanges into a state tax-free fund are
limited to investors living in states where the fund is registered.)

Redemptions
Redemption proceeds can be mailed to your account address, sent by ACH transfer
to your bank, or wired to your bank (provided your bank information is already
on file). For charges, see Electronic Transfers - By Wire under Information
About Your Services.

Some of the T. Rowe Price funds may impose a redemption fee of 0.5% to 2% on
shares held for less than six months, one year, or two years, as specified in
the prospectus. The fee is paid to the fund.
<PAGE>

ABOUT THE FUND
By Phone
Call Shareholder Services
If you find our phones busy during unusually volatile markets, please consider
placing your order by your personal computer or Tele*Access (if you have
previously authorized these services), mailgram, or express mail. For exchange
policies, please see Transaction Procedures and Special Requirements - Excessive
Trading.

By Mail
For each account involved, provide the account name, number, fund name, and
exchange or redemption amount. For exchanges, be sure to indicate any fund you
are exchanging out of and the fund or funds you are exchanging into. T. Rowe
Price requires the signatures of all owners exactly as registered, and possibly
a signature guarantee (see Transaction Procedures and Special Requirements -
Signature Guarantees). Please use the appropriate address below:

Mail via United States Postal Service
T. Rowe Price Account Services P.O. Box 17302 Baltimore, MD 21297-1302

Mailgram, Express, Registered, or Certified Mail
T. Rowe Price Account Services 10090 Red Run Boulevard Owings Mills, MD 21117

RIGHTS RESERVED BY THE FUND
----------------------------------------------------------
The fund and its agents reserve the following rights: (1) to waive or lower
investment minimums; (2) to accept initial purchases by telephone or mailgram;
(3) to refuse any purchase or exchange order; (4) to cancel or rescind any
purchase or exchange order (including, but not limited to, orders deemed to
result in excessive trading, market timing, fraud, or 5% ownership) upon notice
to the shareholder within five business days of the trade or if the written
confirmation has not been received by the shareholder, whichever is sooner; (5)
to freeze any account and suspend account services when notice has been received
of a dispute
<PAGE>

T. ROWE PRICE
between the registered or beneficial account owners or there is reason to
believe a fraudulent transaction may occur; (6) to otherwise modify the
conditions of purchase and any services at any time; or (7) to act on
instructions believed to be genuine. These actions will be taken when, in the
sole discretion of management, they are deemed to be in the best interest of the
fund.

In an effort to protect the fund from the possible adverse effects of a
substantial redemption in a large account, as a matter of general policy, no
shareholder or group of shareholders controlled by the same person or group of
persons will knowingly be permitted to purchase in excess of 5% of the
outstanding shares of the fund, except upon approval of the fund's management.

INFORMATION ABOUT YOUR SERVICES
----------------------------------------------------------
Shareholder Services 1-800-225-5132 Investor Services 1-800-638-5660
Many services are available to you as a T. Rowe Price shareholder; some you
receive automatically, and others you must authorize or request on the New
Account Form. By signing up for services on the New Account Form rather than
later on, you avoid having to complete a separate form and obtain a signature
guarantee. This section discusses some of the services currently offered. Our
Services Guide, which we mail to all new shareholders, contains detailed
descriptions of these and other services.

Note: Corporate and other institutional accounts require an original or
certified resolution to establish services and to redeem by mail. For more
information, call Investor Services.

Retirement Plans
We offer a wide range of plans for individuals, institutions, and large and
small businesses: Traditional IRAs, Roth IRAs, SIMPLE IRAs, SEP-IRAs, Keoghs
(profit sharing, money purchase pension), 401(k), and 403(b)(7). For information
on IRAs, call Investor Services. For information on all other retirement plans,
including our no-load variable annuity, please call our Trust Company at
1-800-492-7670.
<PAGE>

ABOUT THE FUND
Automated Services Tele*Access 1-800-638-2587 24 hours, 7 days
Tele*Access
24-hour service via toll-free number enables you to (1) access information on
fund yields, prices, distributions, account balances, and your latest
transaction; (2) request checks, prospectuses, services forms, duplicate
statements, and tax forms; and (3) initiate purchase, redemption, and exchange
transactions in your accounts (see Electronic Transfers in this section).

Web Address www.troweprice.com
After authorizing this service, account transactions may also be conducted
through our Web site on the Internet. If you subscribe to America Online/(R)/,
you can access our Web site via keyword "T. Rowe Price" and conduct transactions
in your account.

Plan Account Line 1-800-401-3279
Plan Account Line
This 24-hour service is similar to Tele*Access but is designed specifically to
meet the needs of retirement plan investors.

Telephone and Walk-In Services
Buy, sell, or exchange shares by calling one of our service representatives or
by visiting one of our investor center locations whose addresses are listed on
the back cover.

Electronic Transfers
By ACH
With no charges to pay, you can initiate a purchase or redemption for as little
as $100 or as much as $100,000 between your bank account and fund account using
the ACH network. Enter instructions via Tele*Access or your personal computer,
or call Shareholder Services.

By Wire
Electronic transfers can be conducted via bank wire. There is currently a $5 fee
for wire redemptions under $5,000, and your bank may charge for incoming or
outgoing wire transfers regardless of size.

Checkwriting
(Not available for equity funds, or the High Yield or Emerging Markets Bond
Funds) You may write an unlimited number of free checks on any money market
fund, and most bond funds, with a minimum of $500 per check. Keep in mind,
however, that a check results in a redemption; a check written on a bond fund
will create a taxable event which you and we must report to the IRS.
<PAGE>

T. ROWE PRICE
Automatic Investing
($50 minimum) You can invest automatically in several different ways, including:

Automatic Asset Builder
You instruct us to move $50 or more from your bank account, or you can instruct
your employer to send all or a portion of your paycheck to the fund or funds you
designate.

Automatic Exchange
You can set up systematic investments from one fund account into another, such
as from a money fund into a stock fund.

T. ROWE PRICE BROKERAGE
----------------------------------------------------------
To Open an Account 1-800-638-5660 For Existing Brokerage Investors
1-800-225-7720
This service gives you the opportunity to consolidate all of your investments
with one company. Investments available through our brokerage service include
stocks, options, bonds, and others at commission savings over full-service
brokers. We also provide a wide range of services, including:

Automated Telephone and Computer Services
You can enter stock and option orders, access quotes, and review account
information around the clock by phone with Tele-Trader or via the Internet with
Internet-Trader. Any trades executed through Tele-Trader save you an additional
10% on commissions. You will save 20% on commissions for stock trades and 10% on
option trades when you use Internet-Trader. All trades are subject to a $35
minimum commission except stock trades placed through Internet-Trader, which are
subject to a $29.95 minimum commission.

Investor Information
A variety of informative reports, such as our Brokerage Insights series and S&P
Market Month newsletter, as well as access to on-line research tools can help
you better evaluate economic trends and investment opportunities.
<PAGE>

ABOUT THE FUND
Dividend Reinvestment Service
Virtually all stocks held in customer accounts are eligible for this free
service.

/T. Rowe Price// Brokerage is a division of //T. Rowe Price// Investment /
/Services, Inc., Member NASD/SIPC./

INVESTMENT INFORMATION
----------------------------------------------------------
To help shareholders monitor their current investments and make decisions that
accurately reflect their financial goals, T. Rowe Price offers a wide variety of
information in addition to account statements. Most of this information is also
available on our Web site at www.troweprice.com.

Shareholder Reports
Fund managers' reviews of their strategies and performance. If several members
of a household own the same fund, only one fund report is mailed to that
address. To receive additional copies, please call Shareholder Services or write
to us at 100 East Pratt Street, Baltimore, Maryland 21202.

The T. Rowe Price Report
A quarterly investment newsletter discussing markets and financial strategies.

Performance Update
A quarterly review of all T. Rowe Price fund results.

Insights
Educational reports on investment strategies and financial markets.

Investment Guides
Asset Mix Worksheet, College Planning Kit, Diversifying Overseas: A T. Rowe
Price Guide to International Investing, Managing Your Retirement Distribution,
Personal Strategy Planner, Retirees Financial Guide, Retirement Planning Kit,
and Tax Considerations for Investors.
<PAGE>

To help you achieve your financial goals, T. Rowe Price offers a wide range of
stock, bond, and money market investments, as well as convenient services and
informative reports.
For Mutual Fund or T. Rowe Price Brokerage Information
Investor Services
1-800-638-5660

For Existing Accounts
Shareholder Services
1-800-225-5132

For Yields, Prices, Account Information, or to Conduct Transactions
Tele*Access/(R)/
24 hours, 7 days 1-800-638-2587

Internet Address
www.troweprice.com

Headquarters
100 East Pratt St. Baltimore, MD 21202
Walk-in
Investor Centers
101 East Lombard St. Baltimore, MD 21202

T. Rowe Price Financial Center 10090 Red Run Blvd. Owings Mills, MD 21117

Farragut Square 900 17th Street, N.W. Washington, D.C. 20006

Warner Center, Plaza 5 21800 Oxnard Street Suite 270 Woodland Hills, CA 91367

4200 West Cypress St. 10th Floor Tampa, FL 33607

4410 Arrows West Drive Colorado Springs, CO 80907
A Statement of Additional Information about the fund has been filed with the
Securities and Exchange Commission and is incorporated by reference into this
prospectus. Further information about the fund's investments, including a review
of market conditions and the manager's recent strategies and their impact on
performance, is available in the annual and semiannual shareholder reports. To
obtain free copies of any of these documents, or for shareholder inquiries, call
1-800-638-5660.

Fund reports and Statements of Additional Information are also available from
the Securities and Exchange Commission by calling 1-800-SEC-0330 or by writing
the SEC's Public Reference Section, Washington, D.C. 20549-6009 (you will be
charged a duplicating fee); by visiting the SEC's public reference room; or by
consulting the SEC's Web site at www.sec.gov.
1940 Act File No. 811-08207
(LOGO)
F19-040 7/1/99

<PAGE>

PROSPECTUS
July 1, 1999
Tax-EfficientGrowth Fund

A fund seeking long-term capital appreciation while minimizing taxable
distributions to shareholders.
The Securities and Exchange Commission has not approved or disapproved these
securities or passed upon the adequacy of this prospectus. Any representation
to the contrary is a criminal offense.
(T. ROWE PRICE RAM LOGO)
<PAGE>

T. Rowe Price Tax-Efficient Funds, Inc.
Tax-Efficient Growth Fund
Prospectus

July 1, 1999

<TABLE>
<CAPTION>
<S> <C> <C> <C>
ABOUT THE FUND
1
Objective, Strategy, Risks, and Expenses 1

-----------------------------------------------
Other Information About the Fund 4

-----------------------------------------------

ABOUT YOUR ACCOUNT
2
Pricing Shares and Receiving 6
Sale Proceeds
-----------------------------------------------
Distributions and Taxes 8

-----------------------------------------------
Transaction Procedures and 10
Special Requirements
-----------------------------------------------

MORE ABOUT THE FUND
3
Organization and Management 13

-----------------------------------------------
Understanding Performance Information 15

-----------------------------------------------
Investment Policies and Practices 15

-----------------------------------------------

INVESTING WITH T. ROWE PRICE
4
Account Requirements 21
and Transaction Information
-----------------------------------------------
Opening a New Account 21

-----------------------------------------------
Purchasing Additional Shares 23

-----------------------------------------------
Exchanging and Redeeming 23

-----------------------------------------------
Rights Reserved by the Fund 25

-----------------------------------------------
Shareholder Services 25

-----------------------------------------------
T. Rowe Price 27
Brokerage
-----------------------------------------------
Investment Information 28

-----------------------------------------------
</TABLE>

What is the fund's objective?

The fund seeks attractive long-term capital appreciation on an after-tax
basis.

What is the fund's principal investment strategy?

We will invest primarily in large-capitalization stocks selected mainly from
the 1,000 largest U.S. companies.

While most assets will be invested in U.S. common stocks, other securities
may also be purchased, including foreign stocks, futures, and options, in
keeping with fund objectives.

. For details about the fund's investment program, please see the Investment
Policies and Practices section.

What are the main risks of investing in the fund?

As with all equity funds, this fund's share price can fall because of
weakness in the broad market, a particular industry, or specific holdings.
The market as a whole can decline for many reasons, including adverse
political or economic developments here or abroad, changes in investor
psychology, or heavy institutional sell-
<PAGE>

T. ROWE PRICE
ing. 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, our assessment of companies held in the
fund may prove incorrect, resulting in losses or poor performance even in a
rising market. Finally, the fund's investment approach could fall out of
favor with the investing public, resulting in lagging performance versus
other types of stock funds.

There is no guarantee that the fund's attempts to manage its portfolio in a
tax-efficient manner will be successful.

To the extent that the fund invests in foreign stocks, it is also subject to
the risk that some holdings may lose value because of declining foreign
currencies or adverse political or economic events overseas. If the fund uses
futures and options, it is exposed to additional volatility and potential
losses.

As with any mutual fund, there can be no guarantee the fund will achieve its
objective.

. The fund's share price may decline, so when you sell your shares, you may
lose money.

How can I tell if the fund is appropriate for me?

Consider your investment goals, your time horizon for achieving them, and
your tolerance for risk. If you can accept the possibility of share price
declines in an effort to achieve long-term capital appreciation, the fund
could be appropriate for you. This fund should not represent your complete
investment program or be used for short-term trading purposes.

The fund can be used in both regular and tax-deferred accounts, such as IRAs.

. Investors should have a long-term investment horizon and be willing to wait
out bear markets.
<PAGE>

MORE ABOUT THE FUND

How has the fund performed in the past?

Because the fund commenced operations in 1999, there is no historical
performance information shown here. Performance history will be available in
the prospectus after the fund has been in operation for one calendar year.

What fees or expenses will I pay?

The fund is 100% no load. The fund charges a 1.00% redemption fee payable to
the fund, on shares held less than two years. The fee applies to exchanges as
well. There are no other fees or charges to buy or sell fund shares, reinvest
dividends, or exchange into other T. Rowe Price funds. There are no 12b-1
fees.

<TABLE>
Table 1 Fees and Expenses of the Fund
<CAPTION>
Shareholder fees (fees paid directly from your investment)
Redemption fee (for shares held less than two years) 1.00%/a/
Annual fund operating expenses
(expenses that are deducted from fund assets)
----------------------------------------------------------------------------------
<S> <C>
Management fee 0.62%
Other expenses 0.61%
Total annual fund operating expenses 1.23%/b/
Fee waiver/reimbursement 0.13%
Net expenses 1.10%
----------------------------------------------------------------------------------
</TABLE>

/a/
Please see Contingent Redemption Fee under Pricing Shares and Receiving Sale
Proceeds for additional information.

/b/
To limit the fund's expenses during its initial period of operations, T. Rowe
Price contractually obligated itself to waive fees and bear any expenses
through February 28, 2001, that would cause the ratio of expenses to average
net assets to exceed 1.10%. Fees waived or expenses paid or assumed under
this agreement are subject to reimbursement to T. Rowe Price by the fund
whenever the fund's expense ratio is below 1.10%; however, no reimbursement
will be made after February 28, 2003, or if it would result in the expense
ratio exceeding 1.10%.

Example. The following table gives you a rough idea of how expense ratios
may translate into dollars and helps you to compare the cost of investing in
this fund with that of other funds. Although your actual costs may be higher
or lower, the table shows how much you would pay if operating expenses remain
the same, the expense limitation currently in place is not renewed, you
invest $10,000, you earn a 5% annual return, and you hold the investment for
the following periods:

<TABLE>
<CAPTION>
<S> <C> <C> <C>
1 year 3 years 5 years 10 years

$112 $ $ $
363 648 1,460
----------------------------------------------------
</TABLE>

<PAGE>

T. ROWE PRICE
OTHER INFORMATION ABOUT THE FUND
----------------------------------------------------------

What are the fund's potential rewards?

The portfolio seeks to achieve long-term capital appreciation while limiting
taxable distributions of capital gains and dividends. This approach seeks to
reduce the effects of federal taxation on an investor's long-term return
potential and to increase after-tax return compared with similar funds for
which tax efficiency is not a primary goal. Common stocks, in general, offer
a way to invest for long-term growth of capital. As the U.S. economy has
expanded, corporate profits have grown and share prices have risen.

What is meant by a "growth" investment approach?

Thomas Rowe Price, Jr. pioneered the growth stock theory of investing over 60
years ago. It is based on the premise that inflation represents a more
serious long-term threat to an investor's portfolio than stock market
fluctuations or recessions. Mr. Price believed that when a company's earnings
grow faster than both inflation and the economy in general, the market will
eventually reward its long-term earnings growth with a higher stock price. In
addition, the company should be able to raise its dividend in line with its
growth in earnings. However, investors should be aware that, during periods
of adverse economic and market conditions, stock prices may fall despite
favorable earnings trends.

. Growth investors look for companies with above-average earnings gains.

What distinguishes the fund from many other growth funds?

For those who are not investing in tax-deferred or tax-free accounts, such as
IRAs or retirement accounts, there are relatively few vehicles focused on
maximizing after-tax returns. Investors in higher tax brackets, in
particular, could be giving up a significant portion of their overall
investment returns due to taxation. To address this problem, the fund will
attempt to capture the growth potential of equities while minimizing the need
to distribute net capital gains and keeping taxable income low. (Investors in
taxable accounts, however, could potentially incur capital gains when they
sell fund shares.)

For those investing in tax-deferred accounts, the use of our tax-minimizing
strategies should not necessarily limit long-term returns. Buying and holding
quality growth stocks and minimizing portfolio turnover are strategies that
can achieve attractive long-term investment growth, notwithstanding tax
considerations.
<PAGE>

MORE ABOUT THE FUND
What other measures will be taken to enhance the fund's tax efficiency?

To protect the interests of long-term investors and inhibit short-term
trading in fund shares, the fund imposes a 1% fee on redemptions (including
exchanges) of shares held for less than two years. The fee is paid to the
fund to help cover transaction costs.

When the fund does sell securities that have appreciated in value, the
manager will attempt to limit realized capital gains by selling the
highest-cost shares first (that is, the shares on which the fund has the
smallest gain).

Is there other information I can review before making a decision?

Investment Policies and Practices in Section 3 discusses various types of
portfolio securities the fund may purchase as well as types of investment
management practices the fund may use.

You should also review the information in Section 2 that discusses contingent
redemption fees.
<PAGE>

How and when shares are priced

The share price (also called "net asset value" or NAV per share) for the fund
is calculated at the close of the New York Stock Exchange, normally 4 p.m.
ET, each day the New York Stock Exchange is open for business. To calculate
the NAV, the fund's assets are valued and totaled, liabilities are
subtracted, and the balance, called net assets, is divided by the number of
shares outstanding. Current market values are used to price fund shares.

. The various ways you can buy, sell, and exchange shares are explained at the
end of this prospectus and on the New Account Form. These procedures may
differ for institutional and employer-sponsored retirement accounts.

How your purchase, sale, or exchange price is determined

If we receive your request in correct form by 4 p.m. ET, your transaction
will be priced at that day's NAV. If we receive it after 4 p.m., it will be
priced at the next business day's NAV.

We cannot accept orders that request a particular day or price for your
transaction or any other special conditions.

How you can receive the proceeds from a sale

. When filling out the New Account Form, you may wish to give yourself the
widest range of options for receiving proceeds from a sale.

MORE ABOUT THE FUND
financial institution account. The ACH system is supported by over 20,000
banks, savings banks, and credit unions. Proceeds sent by bank wire should be
credited to your account the next business day.

. Exception: Under certain circumstances and when deemed to be in the fund's
best interests, your proceeds may not be sent for up to seven calendar days
after we receive your redemption request.

. If for some reason we cannot accept your request to sell shares, we will
contact you.

Redemption fees are paid to the fund to help offset transaction costs and to
protect the fund's long-term shareholders. The fund will use the "first-in,
first-out" (FIFO) method to determine the two-year holding period. Under this
method, the date of the redemption or exchange will be compared with the
earliest purchase date of shares held in the account. If this holding period
is less than two years, the fee will be charged.

In determining "two years," the fund will use the anniversary date of a
transaction. Thus, shares purchased on August 1, 1999, for example, will be
subject to the fee if they are redeemed on or prior to July 31, 2001. If they
are redeemed on or after August 1, 2001, they will not be subject to the fee.
<PAGE>

T. ROWE PRICE
USEFUL INFORMATION ON DISTRIBUTIONS AND TAXES
----------------------------------------------------------
. All net investment income and realized capital gains are distributed to
shareholders.

Dividends and Other Distributions

Income dividends
. The fund declares and pays dividends (if any) annually.

. A portion of the fund's dividends may be eligible for the 70% deduction for
dividends received by corporations.

Capital gains
. A capital gain or loss is the difference between the purchase and sale price
of a security.

. If a fund has net capital gains for the year (after subtracting any capital
losses), they are usually declared and paid in December to shareholders of
record on a specified date that month.

Tax Information

. You will be sent timely information for your tax filing needs.

You need to be aware of the possible tax consequences when:

. You sell fund shares, including an exchange from one fund to another.

. The fund makes a distribution to your account.

Taxes on fund redemptions
When you sell shares in any fund, you may realize a gain or loss. An exchange
from one fund to another is still a sale for tax purposes.
<PAGE>

MORE ABOUT THE FUND
In January, you will be sent Form 1099-B indicating the date and amount of
each sale you made in the fund during the prior year. This information will
also be reported to the IRS. For most new accounts or those opened by
exchange in 1984 or later, we will provide the gain or loss on the shares you
sold during the year, based on the "average cost," single category method.
This information is not reported to the IRS, and you do not have to use it.
You may calculate the cost basis using other methods acceptable to the IRS,
such as "specific identification."

Taxes on fund distributions
. The following summary does not apply to retirement accounts, such as IRAs,
which are not subject to current tax.

In January, you will be sent Form 1099-DIV indicating the tax status of any
dividend and capital gain distributions made to you. This information will
also be reported to the IRS. Distributions are generally taxable to you for
the year in which they were paid. You will be sent any additional information
you need to determine your taxes on fund distributions, such as the portion
of your dividends, if any, that may be exempt from state income taxes.

The tax treatment of a capital gain distribution is determined by how long
the fund held the portfolio securities, not how long you held shares in the
fund. Short-term (one year or less) capital gain distributions are taxable at
the same rate as ordinary income and long-term gains on securities held more
than 12 months are taxed at a maximum rate of 20%. However, if you realized a
loss on the sale or exchange of fund shares that you held six months or less,
your short-term loss will be reclassified to a long-term loss to the extent
of any long-term capital gain distribution received during the period you
held the shares.

. Distributions are taxable whether reinvested in additional shares or
received in cash.

T. ROWE PRICE
fund's share price may, at any time, reflect undistributed capital gains,
taxable income, and unrealized appreciation, which may result in future
taxable distributions.

TRANSACTION PROCEDURES AND SPECIAL REQUIREMENTS
----------------------------------------------------------
. Following these procedures helps assure timely and accurate transactions.

Purchase Conditions

U.S. dollars
All purchases must be paid for in U.S. dollars; checks must be drawn on U.S.
banks. The fund does not accept purchases made by credit card check.

Sale (Redemption) Conditions

MORE ABOUT THE FUND
ion of certain regulatory agencies that the funds and their agents may be
liable for any losses that may result from acting on the instructions. A
confirmation is sent promptly after a transaction. All telephone
conversations are recorded.

Excessive Trading

. T. Rowe Price may bar excessive traders from purchasing shares.

. Trades placed directly with T. Rowe Price If you trade directly with T.
Rowe Price, you can make one purchase and sale involving the same fund within
any 120-day period. For example, if you are in fund A, you can move
substantial assets from fund A to fund B and, within the next 120 days, sell
your shares in fund B to return to fund A or move to fund C. If you exceed
this limit, you are in violation of our excessive trading policy.

Keeping Your Account Open

T. ROWE PRICE
Small Account Fee

Signature Guarantees

. A signature guarantee is designed to protect you and the T. Rowe Price funds
from fraud by verifying your signature.

You may need to have your signature guaranteed in certain situations, such
as:

. Written requests 1) to redeem over $100,000, or 2) to wire redemption
proceeds.

. Remitting redemption proceeds to any person, address, or bank account not on
record.

. Transferring redemption proceeds to a T. Rowe Price fund account with a
different registration (name or ownership) from yours.

. Establishing certain services after the account is opened.

MORE ABOUT THE FUND
3
ORGANIZATION AND MANAGEMENT
----------------------------------------------------------

How is the fund organized?

. Shareholders benefit from T. Rowe Price's 62 years of investment management
experience.

What is meant by "shares"?

As with all mutual funds, investors purchase shares when they put money in a
fund. These shares are part of a fund's authorized capital stock, but share
certificates are not issued.

Each share and fractional share entitles the shareholder to:

. Receive a proportional interest in a fund's income and capital gain
distributions.

. Cast one vote per share on certain fund matters, including the election of
fund directors, changes in fundamental policies, or approval of changes in
the fund's management contract.

Do T. Rowe Price funds have annual shareholder meetings?

T. ROWE PRICE
Who runs the fund?

. All decisions regarding the purchase and sale of fund investments are made
by T. Rowe Price - specifically by the fund's portfolio managers.

Portfolio Management
The fund has an Investment Advisory Committee with the following members:
Donald J. Peters, Chairman, Stephen W. Boesel, Jill L. Hauser, Thomas J.
Huber, Larry J. Puglia, Robert W. Sharps, William J. Stromberg, and Mark R.
Weigman. The committee chairman has day-to-day responsibility for managing
the fund and works with the committee in developing and executing the fund's
investment program. Mr. Peters has been managing investments since joining T.
Rowe Price in 1993.

<TABLE>
Group Fee Schedule
<CAPTION>
<S> <C> <C> <C>

0.3 First
34 $
% 50
/a/ billion
--------------------------------------
0.305% Next $30 billion

--------------------------------------
0.300% Next $40 billion

--------------------------------------
0.295% Thereafter

--------------------------------------------------------------------------------------------------------------
</TABLE>

/a/ Represents a blended group fee rate containing various break points.

MORE ABOUT THE FUND
UNDERSTANDING PERFORMANCE INFORMATION
----------------------------------------------------------
This section should help you understand the terms used to describe fund
performance. You will come across them in shareholder reports you receive
from us; in our newsletter, The Price Report; in T. Rowe Price
advertisements; and in the media.

Total Return

Advertisements for a fund may include cumulative or average annual total
return figures, which may be compared with various indices, other performance
measures, or other mutual funds.

Cumulative Total Return

Average Annual Total Return

INVESTMENT POLICIES AND PRACTICES
----------------------------------------------------------
This section takes a detailed look at some of the types of securities the
fund may hold in its portfolio and the various kinds of investment practices
that may be used in day-to-day portfolio management. The fund's investment
program is subject to further restrictions and risks described in the
Statement of Additional Information.

T. ROWE PRICE
discussed with shareholders in fund reports. The fund adheres to applicable
investment restrictions and policies at the time it makes an investment. A
later change in circumstances will not require the sale of an investment if
it was proper at the time it was made.

Changes in the fund's holdings, the fund's performance, and the contribution
of various investments are discussed in the shareholder reports sent to you.

. Fund managers have considerable leeway in choosing investment strategies and
selecting securities they believe will help the fund achieve its objective.

Types of Portfolio Securities

The fund invests primarily in common stocks and may, to a lesser degree,
purchase other types of securities described below.

MORE ABOUT THE FUND
While most preferred stocks pay a dividend, the fund may purchase preferred
stock where the issuer has omitted, or is in danger of omitting, payment of
its dividend. Such investments would be made primarily for their capital
appreciation potential.

Foreign Securities
The fund may invest in foreign securities. These include
nondollar-denominated securities traded outside of the U.S. and
dollar-denominated securities of foreign issuers traded in the U.S. (such as
ADRs). Such investments increase a portfolio's diversification and may
enhance return, but they also involve some special risks, such as exposure to
potentially adverse local political and economic developments;
nationalization and exchange controls; potentially lower liquidity and higher
volatility; possible problems arising from accounting, disclosure,
settlement, and regulatory practices that differ from U.S. standards; and the
chance that fluctuations in foreign exchange rates will decrease the
investment's value (favorable changes can increase its value). These risks
are heightened for investments in developing countries, and there is no limit
on the amount of the fund's foreign investments that may be made in such
countries.

Operating policy The fund may invest up to 25% of its total assets
(excluding reserves) in foreign securities.

. Hybrids can have volatile prices and limited liquidity, and their use by the
fund may not be successful.
<PAGE>

T. ROWE PRICE
Operating policy The fund may invest up to 10% of its total assets in hybrid
instruments.

Operating policy The fund may invest up to 15% of its net assets in illiquid
securities.

Types of Investment Management Practices

Fundamental policy Borrowings may not exceed 33/1//\\/3/\\% of total fund
assets.

Futures and Options

MORE ABOUT THE FUND
give the investor the right (where the investor purchases the option), or the
obligation (where the investor writes (sells) the option), to buy or sell an
asset at a predetermined price in the future. The fund may buy and sell
futures and options contracts for any number of reasons, including: to manage
its exposure to changes in securities prices and foreign currencies; as an
efficient means of adjusting its overall exposure to certain markets; in an
effort to enhance income; as a cash management tool; and to protect the value
of portfolio securities. The fund may purchase, sell, or write call and put
options on securities, financial indices, and foreign currencies.

Fundamental policy The value of loaned securities may not exceed
33/1//\\/3/\\% of total fund assets.
<PAGE>

T. ROWE PRICE
Portfolio Turnover
The fund will not generally trade in securities for short-term profits, but,
when circumstances warrant, securities may be purchased and sold without
regard to the length of time held. A high turnover rate may increase
transaction costs and result in additional taxable gains. The fund's
portfolio turnover rate for its initial period of operations is not expected
to exceed 150%.

Year 2000 Processing Issue

Always verify your transactions by carefully reviewing the confirmation we send
you. Please report any discrepancies to Shareholder Services promptly.

Employer-Sponsored Retirement Plans and Institutional Accounts T. Rowe Price
Trust Company 1-800-492-7670
Transaction procedures in the following sections may not apply to
employer-sponsored retirement plans and institutional accounts. For procedures
regarding employer-sponsored retirement plans, please call T. Rowe Price Trust
Company or consult your plan administrator. For institutional account
procedures, please call your designated account manager or service
representative.

OPENING A NEW ACCOUNT
----------------------------------------------------------
$2,500 minimum initial investment; $1,000 for retirement plans or gifts or
transfers to minors (UGMA/UTMA) accounts

T. ROWE PRICE
Mail via United States Postal Service
T. Rowe Price Account Services P.O. Box 17300 Baltimore, MD 21297-1300

Mail via private carriers/overnight services
T. Rowe Price Account Services 10090 Red Run Blvd. Owings Mills, MD 21117-4842

By Wire
Call Investor Services for an account number and give the following wire
information to your bank:

Complete a New Account Form and mail it to one of the appropriate addresses
listed below.

Note: No services will be established and IRS penalty withholding may occur
until a signed New Account Form is received. Also, retirement plan accounts and
IRAs cannot be opened by wire.

In Person
Drop off your New Account Form at any location listed on the cover and obtain a
receipt.
<PAGE>

MORE ABOUT THE FUND
PURCHASING ADDITIONAL SHARES
----------------------------------------------------------
$100 minimum purchase; $50 minimum for retirement plans, Automatic Asset
Builder, and gifts or transfers to minors (UGMA/UTMA) accounts.

By ACH Transfer
Use Tele*Access or your personal computer or call Investor Services if you have
established electronic transfers using the ACH network.

By Wire
Call Shareholder Services or use the wire address listed in Opening a New
Account.

By Mail
1. Make your check payable to T. Rowe Price Funds (otherwise it may be
returned).

2. Mail the check to us at the following address with either a fund reinvestment
slip or a note indicating the fund you want to buy and your fund account
number.

3. Remember to provide your account number and the fund name on the memo line of
your check.

Mail via United States Postal Service
T. Rowe Price Funds Account Services P.O. Box 17300 Baltimore, MD 21297-1300

/(For //mail via private carriers and overnight services//, see previous /
/section.)/

By Automatic Asset Builder
Fill out the Automatic Asset Builder section on the New Account or Shareholder
Services Form.

T. ROWE PRICE
Redemptions
Redemption proceeds can be mailed to your account address, sent by ACH transfer
to your bank, or wired to your bank (provided your bank information is already
on file). For charges, see Electronic Transfers - By Wire under Information
About Your Services.

Some of the T. Rowe Price funds may impose a redemption fee of 0.5% to 2% on
shares held for less than six months, one year, or two years, as specified in
the prospectus. The fee is paid to the fund.

By Phone
Call Shareholder Services
If you find our phones busy during unusually volatile markets, please consider
placing your order by your personal computer or Tele*Access (if you have
previously authorized these services), mailgram, or express mail. For exchange
policies, please see Transaction Procedures and Special Requirements - Excessive
Trading.

Mail via United States Postal Service
T. Rowe Price Account Services P.O. Box 17302 Baltimore, MD 21297-1302

Mailgram, Express, Registered, or Certified Mail
T. Rowe Price Account Services 10090 Red Run Boulevard Owings Mills, MD 21117
<PAGE>

MORE ABOUT THE FUND
RIGHTS RESERVED BY THE FUND
----------------------------------------------------------
The fund and its agents reserve the following rights: (1) to waive or lower
investment minimums; (2) to accept initial purchases by telephone or mailgram;
(3) to refuse any purchase or exchange order; (4) to cancel or rescind any
purchase or exchange order (including, but not limited to, orders deemed to
result in excessive trading, market timing, fraud, or 5% ownership) upon notice
to the shareholder within five business days of the trade or if the written
confirmation has not been received by the shareholder, whichever is sooner; (5)
to freeze any account and suspend account services when notice has been received
of a dispute between the registered or beneficial account owners or there is
reason to believe a fraudulent transaction may occur; (6) to otherwise modify
the conditions of purchase and any services at any time; or (7) to act on
instructions believed to be genuine. These actions will be taken when, in the
sole discretion of management, they are deemed to be in the best interest of the
fund.

T. ROWE PRICE
Note: Corporate and other institutional accounts require an original or
certified resolution to establish services and to redeem by mail. For more
information, call Investor Services.

Automated Services Tele*Access 1-800-638-2587 24 hours, 7 days
Tele*Access
24-hour service via toll-free number enables you to (1) access information on
fund yields, prices, distributions, account balances, and your latest
transaction; (2) request checks, prospectuses, services forms, duplicate
statements, and tax forms; and (3) initiate purchase, redemption, and exchange
transactions in your accounts (see Electronic Transfers in this section).

Plan Account Line 1-800-401-3279
Plan Account Line
This 24-hour service is similar to Tele*Access but is designed specifically to
meet the needs of retirement plan investors.

MORE ABOUT THE FUND
By Wire
Electronic transfers can be conducted via bank wire. There is currently a $5 fee
for wire redemptions under $5,000, and your bank may charge for incoming or
outgoing wire transfers regardless of size.

Automatic Investing
($50 minimum) You can invest automatically in several different ways, including:

Automatic Asset Builder
You instruct us to move $50 or more from your bank account, or you can instruct
your employer to send all or a portion of your paycheck to the fund or funds you
designate.

Automatic Exchange
You can set up systematic investments from one fund account into another, such
as from a money fund into a stock fund.

T. ROWE PRICE
option trades when you use Internet-Trader. All trades are subject to a $35
minimum commission except stock trades placed through Internet-Trader, which are
subject to a $29.95 minimum commission.

Dividend Reinvestment Service
Virtually all stocks held in customer accounts are eligible for this free
service.

/T. Rowe Price// Brokerage is a division of //T. Rowe Price// Investment /
/Services, Inc., Member NASD/SIPC./

The T. Rowe Price Report
A quarterly investment newsletter discussing markets and financial strategies.

Performance Update
A quarterly review of all T. Rowe Price fund results.

Insights
Educational reports on investment strategies and financial markets.
<PAGE>

MORE ABOUT THE FUND
Investment Guides
Asset Mix Worksheet, College Planning Kit, Diversifying Overseas: A T. Rowe
Price Guide to International Investing, Managing Your Retirement Distribution,
Personal Strategy Planner, Retirees Financial Guide, Retirement Planning Kit,
and Tax Considerations for Investors.
<PAGE>

For Existing Accounts
Shareholder Services
1-800-225-5132

For Yields, Prices, Account Information, or to Conduct Transactions
Tele*Access/(R)/
24 hours, 7 days 1-800-638-2587

Internet Address
www.troweprice.com

Headquarters
100 East Pratt St. Baltimore, MD 21202
Walk-in
Investor Centers
101 East Lombard St. Baltimore, MD 21202

T. Rowe Price Financial Center 10090 Red Run Blvd. Owings Mills, MD 21117

Farragut Square 900 17th Street, N.W. Washington, D.C. 20006

Warner Center, Plaza 5 21800 Oxnard Street Suite 270 Woodland Hills, CA 91367

4200 West Cypress St. 10th Floor Tampa, FL 33607

<PAGE>

STATEMENT OF ADDITIONAL INFORMATION
The date of this Statement of Additional Information is July 1, 1999.

T. ROWE PRICE CALIFORNIA TAX-FREE INCOME TRUST (the "Trust")
California Tax-Free Bond Fund
California Tax-Free Money Fund
and
T. ROWE PRICE STATE TAX-FREE INCOME TRUST (the "Trust")
Florida Intermediate Tax-Free Fund
Georgia Tax-Free Bond Fund
Maryland Short-Term Tax-Free Bond Fund
Maryland Tax-Free Bond Fund
New Jersey Tax-Free Bond Fund
New York Tax-Free Bond Fund
New York Tax-Free Money Fund
Virginia Short-Term Tax-Free Bond Fund
Virginia Tax-Free Bond Fund
and
T. ROWE PRICE TAX-EFFICIENT FUNDS, INC.
T. Rowe Price Tax-Efficient Balanced Fund
T. Rowe Price Tax-Efficient Growth Fund
T. ROWE PRICE TAX-EXEMPT MONEY FUND, INC.
T. Rowe Price Tax-Exempt Money Fund--PLUS Class
(A Separate Class of T. Rowe Price Tax-Exempt Money Fund,
Inc.)
T. ROWE PRICE TAX-FREE HIGH YIELD FUND, INC.
T. ROWE PRICE TAX-FREE INCOME FUND, INC.
T. ROWE PRICE TAX-FREE INTERMEDIATE BOND FUND, INC.
T. ROWE PRICE TAX-FREE SHORT-INTERMEDIATE FUND, INC.

______________________________________________________________________________

Mailing Address:
T. Rowe Price Investment Services, Inc.
100 East Pratt Street
Baltimore, Maryland 21202
1-800-638-5660

This Statement of Additional Information is not a prospectus but should be
read in conjunction with the appropriate fund prospectus dated July 1, 1999,
which may be obtained from T. Rowe Price Investment Services, Inc.
("Investment Services"). Shareholders of the T. Rowe Price Tax-Exempt Money
Fund--PLUS Class should refer to the Tax-Exempt Money Fund for information
relating to their investment.

Each fund's financial statements for the year ended February 28, 1999, and
the report of independent accountants are included in each fund's Annual
Report and incorporated by reference into this Statement of Additional
Information.

If you would like a prospectus or an annual or semiannual shareholder report
for a fund of which you are not a shareholder, please call 1-800-638-5660. A
prospectus with more complete information, including management fees and
expenses, will be sent to you. Please read it carefully.

C03-043 7/1/99
<PAGE>

<TABLE>
<CAPTION>
TABLE OF CONTENTS
-----------------
Page Page
---- ----
<S> <S> <C> <S> <S>
Capital Stock 69 Pricing of Securities 60
- ------------------------------ --------------------------------------------
Code of Ethics 54 Principal Holders of Securities 48
- ------------------------------ --------------------------------------------
Custodian 54 Ratings of Commercial Paper 75
- ------------------------------ --------------------------------------------
Distributor for the 53 Ratings of Municipal Debt Securities 73
Funds
- ------------------------------ --------------------------------------------
Dividends and 62 Ratings of Municipal Notes and 75
Distributions Variable Rate Securities
- ------------------------------ --------------------------------------------
Federal Registration 71 Risk Factors 3
of Shares
- ------------------------------ --------------------------------------------
Independent 71 Risk Factors Associated with a 5
Accountants California Portfolio
- ------------------------------ --------------------------------------------
Investment Management 48 Risk Factors Associated with a 8
Services Florida Portfolio
- ------------------------------ --------------------------------------------
Investment Objectives 2 Risk Factors Associated with a 10
and Policies Georgia Portfolio
- ------------------------------ --------------------------------------------
Investment Performance 67 Risk Factors Associated with a 11
Maryland Portfolio
- ------------------------------ --------------------------------------------
Investment Program 19 Risk Factors Associated with a New 12
Jersey Portfolio
- ------------------------------ --------------------------------------------
Investment 37 Risk Factors Associated with a New 14
Restrictions York Portfolio
- ------------------------------ --------------------------------------------
Legal Counsel 71 Risk Factors Associated with a 16
Virginia Portfolio
- ------------------------------ --------------------------------------------
Management of the Risk Factors Associated with
Funds Tax-Efficient Growth Fund and the
40 Equity Portion of Tax-Efficient 19
Balanced Fund
- ------------------------------ --------------------------------------------
Net Asset Value Per 62 Shareholder Services by Outside 54
Share Parties
- ------------------------------ --------------------------------------------
Organization of the 70 Tax Status 62
Funds
- ------------------------------ --------------------------------------------
Portfolio Management 26 Yield Information 64
Practices
- ------------------------------ --------------------------------------------
Portfolio Transactions 54
- ------------------------------ --------------------------------------------
</TABLE>

INVESTMENT OBJECTIVES AND POLICIES
-------------------------------------------------------------------------------
The following information supplements the discussion of each fund's
investment objectives and policies discussed in each funds prospectus.

The funds will not make a material change in their investment objectives
without obtaining shareholder approval. Unless otherwise specified, the
investment programs and restrictions of the funds are not fundamental
policies. Each fund's operating policies are subject to change by each Board
of Directors/Trustees without shareholder approval. However, shareholders
will be notified of a material change in an operating policy. Each fund's
fundamental policies may not be changed without the approval of at least a
majority of the outstanding shares of the fund or, if it is less, 67% of the
shares represented at a meeting of shareholders at which the holders of 50%
or more of the shares are represented. References to the following are as
indicated:

Investment Company Act of 1940 ("1940 Act")
Securities and Exchange Commission ("SEC")
T. Rowe Price Associates, Inc. ("T. Rowe Price")
Moody's Investors Service, Inc. ("Moody's")
Standard & Poor's Corporation ("S&P")
Internal Revenue Code of 1986 ("Code")
Rowe Price-Fleming International, Inc. ("Price-Fleming")

Throughout this Statement of Additional Information, "the fund" is intended
to refer to each fund listed on the cover page, unless otherwise indicated.

<PAGE>

RISK FACTORS
-------------------------------------------------------------------------------
Reference is also made to the sections entitled "Types of Securities" and
"Portfolio Management Practices" for discussions of the risks associated with
the investments and practices described therein as they apply to the fund.

All Funds (other than Tax-Efficient Growth Fund)

The funds are designed for investors who, because of their tax bracket, can
benefit from investment in municipal bonds whose income is exempt from
federal taxes. The funds are not appropriate for qualified retirement plans
where income is already tax-deferred.

All Funds

Because of their investment policies, the funds may or may not be suitable or
appropriate for all investors. The funds (except for the Money Funds) are not
an appropriate investment for those whose primary objective is principal
stability. The value of the portfolio securities of the fund will fluctuate
based upon market conditions. The Tax-Efficient Balanced Fund will normally
have 40-50% of its assets in equity securities. The Tax-Efficient Growth Fund
will normally invest substantially all of its assets in common stocks. Assets
of these funds invested in equity securities will be subject to all of the
risks of investing in the stock market. There can, of course, be no assurance
that the funds will achieve their investment objectives.

All Funds (other than Tax-Efficient Growth Fund)

Municipal Securities

Yields on municipal securities are dependent on a variety of factors,
including the general conditions of the money market and the municipal bond
market, the size of a particular offering, the maturity of the obligations,
and the rating of the issue. Municipal securities with longer maturities tend
to produce higher yields and are generally subject to potentially greater
capital appreciation and depreciation than obligations with shorter
maturities and lower yields. The market prices of municipal securities
usually vary, depending upon available yields. An increase in interest rates
will generally reduce the value of portfolio investments, and a decline in
interest rates will generally increase the value of portfolio investments.
The ability of all the funds to achieve their investment objectives is also
dependent on the continuing ability of the issuers of municipal securities in
which the funds invest to meet their obligations for the payment of interest
and principal when due. The ratings of Moody's, S&P, and Fitch IBCA, Inc.
("Fitch") represent their opinions as to the quality of municipal securities
which they undertake to rate. Ratings are not absolute standards of quality;
consequently, municipal securities with the same maturity, coupon, and rating
may have different yields. There are variations in municipal securities, both
within a particular classification and between classifications, depending on
numerous factors. It should also be pointed out that, unlike other types of
investments, offerings of municipal securities have traditionally not been
subject to regulation by, or registration with, the SEC, although there have
been proposals which would provide for regulation in the future.

The federal bankruptcy statutes relating to the debts of political
subdivisions and authorities of states of the United States provide that, in
certain circumstances, such subdivisions or authorities may be authorized to
initiate bankruptcy proceedings without prior notice to or consent of
creditors, which proceedings could result in material and adverse changes in
the rights of holders of their obligations.

Proposals have been introduced in Congress to restrict or eliminate the
federal income tax exemption for interest on municipal securities, and
similar proposals may be introduced in the future. Proposed "Flat Tax" and
"Value Added Tax" proposals would also have the effect of eliminating the tax
preference for municipal securities. Some of the past proposals would have
applied to interest on municipal securities issued before the date of
enactment, which would have adversely affected their value to a material
degree. If such a proposal were enacted, the availability of municipal
securities for investment by the funds and the value of a fund's portfolio
would be affected and, in such an event, a fund would reevaluate its
investment objectives and policies.

<PAGE>

Although the banks and securities dealers with which the fund will transact
business will be banks and securities dealers that T. Rowe Price believes to
be financially sound, there can be no assurance that they will be able to
honor their obligations to the fund with respect to such transactions.

After purchase by a fund, a security may cease to be rated or its rating may
be reduced below the minimum required for purchase by the fund. For the Money
Funds, the procedures set forth in Rule 2a-7, under the 1940 Act, may require
the prompt sale of any such security. For the other funds, neither event
would require a sale of such security by the fund. However, T. Rowe Price
will consider such event in its determination of whether the fund should
continue to hold the security. To the extent that the ratings given by
Moody's, S&P, or Fitch may change as a result of changes in such
organizations or their rating systems, the fund will attempt to use
comparable ratings as standards for investments in accordance with the
investment policies contained in the prospectus. When purchasing unrated
securities, T. Rowe Price, under the supervision of the fund's Board of
Directors/Trustees, determines whether the unrated security is of a quality
comparable to that which the fund is allowed to purchase.

Municipal Bond Insurance All of the funds may purchase insured bonds from
time to time. Municipal bond insurance provides an unconditional and
irrevocable guarantee that the insured bond's principal and interest will be
paid when due. The guarantee is purchased from a private, non-governmental
insurance company.

There are two types of insured securities that may be purchased by the funds:
bonds carrying either (1) new issue insurance; or (2) secondary insurance.
New issue insurance is purchased by the issuer of a bond in order to improve
-------------------
the bond's credit rating. By meeting the insurer's standards and paying an
insurance premium based on the bond's principal value, the issuer is able to
obtain a higher credit rating for the bond. Once purchased, municipal bond
insurance cannot be canceled, and the protection it affords continues as long
as the bonds are outstanding and the insurer remains solvent.

The funds may also purchase bonds that carry secondary insurance purchased by
-------------------
an investor after a bond's original issuance. Such policies insure a security
for the remainder of its term. Generally, the funds expect that portfolio
bonds carrying secondary insurance will have been insured by a prior
investor. However, the funds may, on occasion, purchase secondary insurance
on their own behalf.

Each of the municipal bond insurance companies has established reserves to
cover estimated losses. Both the method of establishing these reserves and
the amount of the reserves vary from company to company. The risk that a
municipal bond insurance company may experience a claim extends over the life
of each insured bond. Municipal bond insurance companies are obligated to pay
a bond's interest and principal when due if the issuing entity defaults on
the insured bond. Although defaults on insured municipal bonds have been low
to date, there is no assurance this low rate will continue in the future. A
higher than expected default rate could deplete loss reserves and adversely
affect the ability of a municipal bond insurer to pay claims to holders of
insured bonds, such as the fund.

Money Funds

The Money Funds will limit their purchases of portfolio instruments to those
U.S. dollar-denominated securities which the fund's Board of
Directors/Trustees determines present minimal credit risk, and which are
Eligible Securities as defined in Rule 2a-7 under the 1940 Act. Eligible
Securities are generally securities which have been rated (or whose issuer
has been rated or whose issuer has comparable securities rated) in one of the
two highest short-term rating categories (which may include sub-categories)
by nationally recognized statistical rating organizations or, in the case of
any instrument that is not so rated, is of comparable high quality as
determined by T. Rowe Price pursuant to written guidelines established under
the supervision of the fund's Board of Directors/Trustees. In addition, the
fund may treat variable and floating rate instruments with demand features as
short-term securities pursuant to Rule 2a-7 under the 1940 Act.

Bond and Balanced Funds

Because of their investment policies, the Bond and Balanced Funds may not be
suitable or appropriate for all investors. The funds are designed for
investors who wish to invest in non-money market funds for income, and who
would benefit, because of their tax bracket, from receiving income that is
exempt from federal

<PAGE>

income taxes. The Bond and Balanced Funds' investment programs permit the
purchase of investment-grade securities that do not meet the high-quality
standards of the Money Funds. Since investors generally perceive that there
are greater risks associated with investment in lower-quality securities, the
yield from such securities normally exceeds those obtainable from
higher-quality securities. In addition, the principal value of long-term
lower-rated securities generally will fluctuate more widely than
higher-quality securities. Lower-quality investments entail a higher risk of
default--that is, the nonpayment of interest and principal by the issuer than
higher-quality investments. The value of the portfolio securities of the Bond
and Balanced Funds will fluctuate based upon market conditions. Although
these funds seek to reduce credit risk by investing in a diversified
portfolio, such diversification does not eliminate all risk. These funds are
also not intended to provide a vehicle for short-term trading purposes.

Special Risks of High-Yield Investing The fund may invest in low-quality
bonds commonly referred to as "junk bonds." Junk bonds are regarded as
predominantly speculative with respect to the issuer's continuing ability to
meet principal and interest payments. Because investment in low- and
lower-medium-quality bonds involves greater investment risk, to the extent
the fund invests in such bonds, achievement of its investment objective will
be more dependent on T. Rowe Price's credit analysis than would be the case
if the fund were investing in higher-quality bonds. High-yield bonds may be
more susceptible to real or perceived adverse economic conditions than
investment-grade bonds. A projection of an economic downturn, or higher
interest rates, for example, could cause a decline in high-yield bond prices
because the advent of such events could lessen the ability of highly
leveraged issuers to make principal and interest payments on their debt
securities. In addition, the secondary trading market for high-yield bonds
may be less liquid than the market for higher-grade bonds, which can
adversely affect the ability of a fund to dispose of its portfolio
securities. Bonds for which there is only a "thin" market can be more
difficult to value inasmuch as objective pricing data may be less available
and judgment may play a greater role in the valuation process.

RISK FACTORS ASSOCIATED WITH A CALIFORNIA PORTFOLIO

The funds' concentration in debt obligations of one state carries a higher
risk than a portfolio that is geographically diversified. In addition to
state general obligations and notes, the funds will invest in local bond
issues, lease obligations and revenue bonds, the credit quality and risk of
which will vary according to each security's own structure and underlying
economics.

Debt The state, its agencies and local governmental entities issued $34.3
billion in long-term debt in 1998. Approximately 26% was general obligation
debt, backed by the taxing power of the issuer, and 74% were revenue bonds
and lease backed obligations, issued for a wide variety of purposes,
including transportation, housing, education and health care.

As of February 1, 1999, the State of California had approximately $19.2
billion in outstanding general obligation bonds secured by the state's
revenue and taxing power. An additional $14.3 billion in authorized but
unissued state general obligation debt remains to be issued to comply with
voter initiatives and legislative mandates. Debt service on roughly 20% of
the state's outstanding debt is met from revenue producing projects such as
water, harbor, and housing facilities. As part of its cash management
program, the state regularly issues short-term notes to meet its disbursement
requirements in advance of revenue collections. During fiscal 1999, the state
issued $1.7 billion in short-term notes for this purpose. California also
operates a commercial paper program which it uses to finance construction
projects. $0.5 billion of commercial paper was outstanding as of February 1,
1999.

The state supports $6.7 billion in lease-purchase obligations attributable to
the State Public Works Board and other issuers. These obligations are not
backed by the full faith and credit of the state but instead, are subject to
annual appropriations from the State's General Fund.

In addition to the state obligations described above, bonds have been issued
by special public authorities in California that are not obligations of the
state. These include bonds issued by the California Housing Finance

<PAGE>

Agency, the Department of Water Resources, the Department of Veterans
Affairs, California State University and the California Transportation
Commission.

Economy California's economy is the largest among the 50 states and one of
the largest in the world. The 1998 population of 33 million represents 12% of
the U.S. total. The state's per capita personal income in 1997 exceeded the
U.S. average by 4%. The Asian economic crisis, which began in 1997, has had
some dampening effect on the state's economy, particularly in high technology
manufacturing.

California's economy suffered through a severe recession during the early
1990s as the effects of a slowdown in the national economy were compounded by
federal defense spending cuts and military base closings. Since 1994, the
state has been in a steady recovery, exhibiting significant job growth and
gains in personal income. Growth is expected to moderate in 1999 and 2000.
The level of economic activity within the state is important as it influences
the growth or contraction of state and local government revenues available
for operations and debt service.

Recessionary influences and the effects of overbuilding in selected areas
have resulted in a contraction in real estate values in many regions of the
state in prior years. Most areas have begun to show improvement corresponding
to gains in the general economic level. Future declines in property values
could have a negative effect on the ability of certain local governments to
meet their obligations.

As a state, California is more prone to earthquakes than most other states in
the country, creating potential economic losses from damages. On January 17,
1994, a major earthquake, measuring 6.8 on the Richter scale, hit Southern
California centered in the area of Northridge. Total damage has been
estimated at $20 billion. Significant federal aid has been received.

Legislative Due to the funds' concentration in California state and its
municipal issuers, the funds may be affected by certain amendments to the
California constitution and state statutes which limit the taxing and
spending authority of California governmental entities and may affect their
ability to meet their debt service obligations.

In 1978, California voters approved "Proposition 13" adding Article XIIIA, to
the state constitution which limits ad valorem taxes on real property to 1%
of "full cash value" and restricts the ability of taxing entities to increase
real property taxes. In subsequent actions, the state substantially increased
its expenditures to provide assistance to its local governments to offset the
losses in revenues and to maintain essential local services; later the state
phased out most local aid in response to its own fiscal pressures.

Another constitutional amendment, Article XIIIB, was passed by voters in 1979
prohibiting the state from spending revenues beyond its annually adjusted
"appropriations limit." Any revenues exceeding this limit must be returned to
the taxpayers as a revision in the tax rate or fee schedule over the
following two years. Such a refund, in the amount of $1.1 billion, occurred
in fiscal year 1987.

Proposition 218, the "Right to Vote on Taxes Act," was approved by the voters
in 1996. It further restricts the ability of local governments to levy and
collect both existing and future taxes, assessments and fees. In addition to
further limiting the financial flexibility of local governments in the state,
it also increases the possibility of voter determined tax rollbacks and
repeals. The interpretation and application of this proposition will
ultimately be determined by the courts.

An effect of the tax and spending limitations in California has been a broad
scale shift by local governments away from general obligation debt that
requires voter approval and pledging future tax revenues, towards lease
revenue financing that is subject to abatement and does not require voter
approval. Lease-backed debt is generally viewed as a less secure form of
borrowing and therefore entails greater credit risk. Local governments also
raise capital through the use of Mello-Roos, 1915 Act, and Tax Increment
Bonds, all of which are generally riskier than general obligation debt as
they often rely on tax revenues to be generated by future development for
their support.

Proposition 98, enacted in 1988, changed the state's method of funding
education for grades below the university level. Under this constitutional
amendment, the schools are guaranteed a minimum share of State

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General Fund revenues. The major effect of Proposition 98 has been to
restrict the state's flexibility to respond to fiscal stress.

Future initiatives, if proposed and adopted, or future court decisions could
create renewed pressure on California governments and their ability to raise
revenues. The state and its underlying localities have displayed flexibility,
however, in overcoming the negative effects of past initiatives.

Financial The recession of the early 1990s placed California's finances under
pressure. From 1991 through 1995, accumulated deficits were carried over into
the following years and the state's general obligation bonds were downgraded
from AAA to A.

Reflecting the recent trend of economic recovery, the state's financial
condition has improved considerably. Fiscal 1998 closed with a reserve
balance of $2.8 billion. Much of this cushion is the result of explosive
growth in capital gains tax collections triggered by a federal tax rate cut.
The Governor has proposed a budget for fiscal 1999 which features continued
growth in capital gains tax collections, offset by a cut in the vehicle
license fee. The state's reserve is projected to be $1.1 billion at the end
of fiscal 1999 (1.9% of revenues.) This reserve will be dedicated to balance
the ongoing costs of reductions in the vehicle license fee. In October 1998,
Moody's upgraded the state's general obligation bonds to Aa3 from A1; the
state's general obligations are rated A+ by S&P, and AA- by Fitch. The
consequences of the state's fiscal actions reach beyond its own general
obligation bond ratings. Many state agencies and local governments which
depend upon state appropriations realized significant cutbacks in funding
during the last recession. Entities which have been forced to make program
reductions or to increase fees or raise special taxes to cover their debt
service and lease obligations may recover somewhat during periods of economic
prosperity.

On December 6, 1994, Orange County filed for protection under Chapter 9 of
the U.S. Bankruptcy Code after reports of significant losses in its
investment pool. Upon restructuring, the realized losses in the pool were
$1.6 billion or 21% of assets. More than 200 public entities, most of which,
but not all, are located in Orange County were also depositors in the pool.
The County defaulted on a number of its debt obligations. The County emerged
from bankruptcy on June 12, 1996. Through a series of long-term financings,
it repaid most of its obligations to pool depositors and has become current
on its public debt obligations. The balance of claims against the County are
payable from any proceeds received from litigation against securities dealers
and other parties. The County's ratings were restored to investment grade in
1998.

Sectors Certain areas of potential investment concentration present unique
risks. In 1998, $3.5 billion of tax-exempt debt issued in California was for
public or nonprofit hospitals. A significant portion of the funds' assets may
be invested in health care issues. For over a decade, the hospital industry
has been under significant pressure to reduce expenses and shorten length of
stay, a phenomenon which has negatively affected the financial health of many
hospitals. All hospitals are dependent on third-party reimbursement sources
such as the federal Medicare and state MediCal programs or private insurers.
To the extent these third party payers reduce reimbursement levels, the
individual hospitals may be affected. In the face of these pressures, the
trend of hospital mergers and acquisitions has accelerated in recent years.
These organizational changes present both risks and opportunities for the
institutions involved.

The funds may from time to time invest in electric revenue issues. The
financial performance of these utilities may be impacted as the industry
moves toward deregulation and increased competition. California's electric
utility restructuring plan, Assembly Bill 1890, permits direct competition to
be phased in between 1998 and 2002. Municipal utilities, while not subject to
the legislation, are being faced with competitive market forces and must use
the transition period wisely to proactively prepare for deregulation. They
are under pressure to reduce rates and cut costs in order to maintain their
customer bases. In addition, some electric revenue issues have exposure to or
participate in nuclear power plants which could affect the issuer's financial
performance. Risks include unexpected outages or plant shutdowns, increased
Nuclear Regulatory Commission surveillance or inadequate rate relief.

The funds may invest in private activity bond issues for corporate and
nonprofit borrowers. These issues sold through various governmental conduits,
are backed solely by the revenues pledged by the respective borrower
corporations. No governmental support is implied.

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RISK FACTORS ASSOCIATED WITH A FLORIDA PORTFOLIO
The fund's program of investing primarily in AAA-rated Florida municipal
bonds should significantly lessen the credit risks which would be associated
with a portfolio of lower-quality Florida bonds. Nevertheless, the fund's
concentration in securities issued by the State of Florida and its political
subdivisions involves greater risk than a fund broadly invested in bonds
across many states and municipalities. The credit quality of the fund will
depend upon the continued financial strength of the State of Florida and the
numerous public bodies, municipalities and other issuers of debt securities
in Florida.

Debt The State of Florida and its local governments issue three basic types
of debt, with varying degrees of credit risk: general obligation bonds backed
by the unlimited taxing power of the issuer, revenue bonds secured by
specific pledged funds or charges for a related project, and tax-exempt lease
obligations, supported by annual appropriations from the issuer, usually with
no implied tax or specific revenue pledge. During 1998, $15.2 billion in
state and local debt was issued in Florida, a 27% increase from the previous
year. Of this total debt amount, approximately 16% represented general
obligation debt and 84% represented revenue bonds and lease-backed
obligations. Debt issued in 1998 was for a wide variety of public purposes,
including transportation, housing, education, health care and utilities.

As of April 9, 1999, the State of Florida had $11.5 billion outstanding
general obligation bonds secured by the state's full faith and credit and
taxing power. General bonded debt service accounted for a modest 2.4% of all
governmental expenditures in fiscal year 1998. An additional $4 billion in
outstanding bonds have been issued by the state and secured by limited state
tax and revenue sources. General obligation debt of the State of Florida is
rated Aa2 by Moody's, AA+ by S&P, and AA by Fitch as of April 5, 1999. State
debt may only be used to fund capital outlay projects; Florida is not
authorized to issue obligations to fund operations.

Several agencies of the state are also authorized to issue debt which does
not represent a pledge of the state's credit. The Florida Housing Finance
Authority and Florida Board of Regents are the largest issuers of this type.
The principal and interest on bonds issued by these bodies are payable solely
from specified sources such as mortgage repayments and university tuition and
fees.

Economy The State of Florida has a population of approximately 14.7 million,
making it the fourth largest state. Due to immigration, the state's
population has grown at a rate exceeding the nation for four decades.
Florida's economy is broadly based with a large concentration in the service
and trade sectors. Tourism is one of Florida's most important industries.
Visitor traffic grew by 10% in 1998 and reached an all-time high of 47.3
million visitors. This trend is expected to continue again in 1999.

During most of the 1980s, as Florida's population and employment base grew,
its job growth rate was double that of the nation. However, beginning in
1988, job growth slowed and unemployment rates began trending above national
levels for a number of years. During 1995, Florida's unemployment rate was
8.2% versus 7.4% nationally. Florida's rapid non-farm job growth since 1996
has reversed this trend and the state's February 1999 unemployment rate
stands at 4.4% versus the national average of 4.6%. State per capita income
is 98% of the national average, well above norms for the Southeast.

Legislative The State of Florida does not have a personal income tax. A
constitutional amendment would be required in order to implement such a tax.
Although the probability appears very low, the fund cannot rule out the
possibility that a personal income tax may be implemented at some time in the
future. If such a tax were to be imposed, there is no assurance that interest
earned on Florida Municipal Obligations would be exempt from this tax.

Under current Florida law, shares of the fund will be exempt from the state's
intangible personal property tax to the extent that on the annual assessment
date (January 1) its assets are solely invested in Florida Municipal
Obligations and U.S. government securities, certain short-term cash
investments, or other exempt securities. There can be no assurance that this
exemption for Florida securities will be maintained. Also, the
constitutionality of the intangibles tax has been challenged in court.

The Florida Constitution limits the total ad valorem property tax that may be
levied by each county, municipality and school district to ten mills (1.0% of
value). The limit applies only to taxes levied for

<PAGE>

operating purposes and excludes taxes levied for the payment of bonds. This
restricts the operating flexibility of local governments in the state and may
result from time to time in budget deficits for some local units.

Financial The Florida Constitution and Statutes mandate that the state budget
as a whole, and each separate fund within the state budget, be kept in
balance from currently available revenues each state fiscal year (July 1-June
30). The Governor and Comptroller are responsible for insuring that
sufficient revenues are collected to meet appropriations and that no deficit
occurs in any state fund.

The state's revenue structure is narrowly based, relying on the sales and use
tax for 70% of its general revenues. This structure, combined with the
effects of the recession and heavy spending demands, created budget
shortfalls in fiscal years 1991 and 1992. Through midyear spending
adjustments and a draw upon its reserves, the state was able to achieve
budget balance for both fiscal years. The state's finances received a
substantial boost in fiscal 1993 as a result of increased economic activity
associated with rebuilding efforts after Hurricane Andrew, which hit south
Florida on August 24, 1992. Additionally, Florida recently settled a lawsuit
with the tobacco industry where the state sought to recover the costs
associated with tobacco usage by Floridians. This settlement resulted in a
$750 million payment to the state in 1997, a $220 million payment in 1998 and
future payments that rise to $440 million in 2003. At the end of 1998, the
state had reserves of $2.5 billion in the General Revenue Fund (15% of
revenues).

In November 1994, state voters passed a proposal to limit state revenue
growth to the average annual growth in personal income over the previous five
years. The cap excludes revenue to pay certain expenditures, including debt
service. The limitation should not pose an onerous burden on state finance.
However, the demand for governmental services continues to grow because of
above-average population growth and demographics.

Sectors Certain areas of potential investment concentration present unique
risks. In 1997, $1.9 billion of tax-exempt debt issued in Florida was for
public or nonprofit hospitals. A significant portion of the fund's assets may
be invested in health care issues.

For over a decade, the hospital industry has been under significant pressure
to reduce expenses and shorten length of stay, a phenomenon which has
negatively affected the financial health of many hospitals. All hospitals are
dependent on third party reimbursement sources such as the federal Medicare
and state Medicaid programs or private insurers. To the extent these payors
reduce reimbursement levels, the individual hospitals may be affected. In the
face of these pressures, the trend of hospital mergers and acquisitions has
accelerated in recent years. These organizational changes present both risks
and opportunities for the institutions involved. Due to the high proportion
of elderly residents, Florida hospitals tend to be highly dependent on
Medicare. In addition to the regulations imposed by Medicare, the state also
regulates health care. A state board must approve the budgets of all Florida
hospitals; certificates of need are required for all significant capital
expenditures. The primary management objective is cost control. The inability
of some hospitals to achieve adequate cost control while operating in a
competitive environment has led to a number of hospital bond defaults.

The fund may from time to time invest in electric revenue issues which have
exposure to or participate in nuclear power plants which could affect the
issuers' financial performance. Such risks include unexpected outages or
plant shutdowns, increased Nuclear Regulatory Commission surveillance or
inadequate rate relief. In addition, the financial performance of electric
utilities may be impacted by increased competition and deregulation in the
electric utility industry.

The fund may invest in private activity bond issues for corporate and
nonprofit borrowers. These issues, sold through various governmental
conduits, are backed solely by the revenues pledged by the respective
borrowing corporations. No government support is implied.

<PAGE>

RISK FACTORS ASSOCIATED WITH A GEORGIA PORTFOLIO
The fund's concentration in the debt obligations of one state carries a
higher risk than a portfolio that is geographically diversified. In addition
to State of Georgia general obligations and state agency issues, the fund
will invest in local bond issues, lease obligations and revenue bonds, the
credit quality and risk of which will vary according to each security's own
structure and underlying economics.

Debt The State of Georgia and its local governments issued $6 billion in
municipal bonds in 1998, a 34% increase from the previous year. Of this total
debt amount, approximately 30% was general obligation debt backed by the
unlimited taxing power of the issuer and 70% was revenue bond debt secured by
specific pledged fees or charges for an enterprise or project. As of June 1,
1999, the state was rated Aaa by Moody's and AAA by S&P and Fitch.

The State of Georgia currently has net direct obligations of approximately
$5.2 billion. Since 1973, when a Constitutional Amendment authorizing the
issuance of state general obligation (GO) bonds was implemented, the state
has funded most of its capital needs through the issuance of GO bonds.
Previously, capital requirements were funded through the issuance of bonds by
10 separate authorities and secured by lease rental agreements and annual
state appropriations. Its Constitution permits the state to issue bonds for
two types of public purposes: (1) general obligation debt and (2) guaranteed
revenue debt. The Constitution imposes certain debt limits and controls. GO
debt service cannot exceed 10% of total revenue receipts less refunds of the
state treasury. GO bonds have a maximum maturity of 25 years. Currently,
maximum GO debt service requirements are well below the legal limit at 5.1%
of fiscal year 1998 treasury receipts.

In addition to the general obligation and lease-backed debt described above,
$318 million bonds have been issued and are outstanding by the Georgia World
Congress Authority and $754 million bonds have been issued and are
outstanding by the Georgia Housing and Finance Authority, none of which
represent direct obligations of the state.

Economy The State of Georgia has a population of approximately 7.6 million,
making it the 10th largest state. Since the 1960s, the state's population has
grown at a rate exceeding the national average, with the growth rate during
the 1980s nearly twice that of the entire country. Stable to strong economic
growth during the 1980s was led by the Atlanta metropolitan statistical area,
where approximately 45% of the state's population is located. This area
includes the capital city of Atlanta, and 18 surrounding counties. The next
largest metropolitan area is the Columbus-Muscogee area followed by the Macon
area.

The state's economy is well diversified. The current labor force of 4 million
is largely concentrated in service and wholesale/retail trade jobs, followed
by lesser amounts in manufacturing and government. Employment gains have
substantially exceeded the region and the U.S. since 1980. Georgia's one year
employment growth (February 1998 to February 1999) stood at 3.2% compared to
the national rate of 2.2%. The state's economy continues to outperform the
nation. Georgia's per capita income has steadily improved against the
national average since the 1960s and currently is 94% of the U.S., ranking it
25th among the states.

Financial To a large degree, the creditworthiness of the portfolio is
dependent on the financial strength of the State of Georgia and its
localities. During the 1980s, the state's strong economic performance
translated into solid financial performance and the accumulation of
substantial reserves.

During fiscal 1989 to 1991, the state's financial condition was affected by
three years of revenue shortfalls brought on by recession. During these
periods, the Governor called special legislative sessions to enact sizable
spending cuts to achieve budget balance. Economic conditions improved in
1992, allowing the state to restore its financial cushion. Results for fiscal
1998 showed a continuation of this positive trend with a surplus of $685
million and an ending general fund balance of $1.2 billion, or 9% of
revenues.

A significant portion of the portfolio's assets is expected to be invested in
the debt obligations of local governments and public authorities with
investment-grade ratings of BBB or higher. While local governments in Georgia
are primarily reliant on independent revenue sources, such as property taxes,
they are not immune to budget shortfalls caused by cutbacks in state aid. The
fund may purchase obligations issued by public authorities in Georgia which
are not backed by the full faith and credit of the state and may or may not
be

<PAGE>

subject to annual appropriations from the State's General Fund. Likewise,
certain enterprises such as water and sewer systems or hospitals may be
affected by changes in economic activity.

Sectors Certain areas of potential investment concentration present unique
risks. In 1997, $676 million of tax-exempt debt issued in Georgia was for
public or nonprofit hospitals. A significant portion of the fund's assets may
be invested in health care issues. For over a decade, the hospital industry
has been under significant pressure to reduce expenses and shorten length of
stay, a phenomenon which has negatively affected the financial health of many
hospitals. All hospitals are dependent on third party reimbursement sources
such as the federal Medicare and state Medicaid programs or private insurers.
To the extent these payors reduce reimbursement levels, the individual
hospitals may be affected. In the face of these pressures, the trend of
hospital mergers and acquisitions has accelerated in recent years. These
organizational changes present both risks and opportunities for the
institutions involved.

The fund may invest in private activity bond issues for corporate and
nonprofit borrowers. These issues sold through various governmental conduits,
are backed solely by the revenues pledged by the respective borrowing
corporations. No governmental support is implied.

RISK FACTORS ASSOCIATED WITH A MARYLAND PORTFOLIO
The fund's concentration in the debt obligations of one state carries a
higher risk than a portfolio that is more geographically diversified. In
addition to State of Maryland general obligations and state agency issues,
the fund will invest in local bond issues, lease obligations and revenue
bonds, the credit quality and risk of which will vary according to each
security's own structure and underlying economics.

Debt The State of Maryland and its local governments issue two basic types of
debt, with varying degrees of credit risk: general obligation bonds backed by
the unlimited taxing power of the issuer and revenue bonds secured by
specific pledged fees or charges for a related project. In 1998, $3.8 billion
in state and local debt was issued in Maryland, a 33% increase from the
previous year. Of this total amount, approximately 45% represented general
obligation debt and 55% revenue bonds. Included within the revenue bond
sector are tax-exempt lease obligations that are subject to annual
appropriations of a governmental body, usually with no implied tax or
specific revenue pledge. Debt issued in 1998 was for a wide variety of public
purposes, including health care, housing, utilities, and education.

The State of Maryland had approximately $3.4 billion in general obligation
bonds outstanding as of December 31, 1998 along with an additional $1.1
billion in other tax-supported debt. General obligation debt of the State of
Maryland is rated Triple-A by Moody's, S&P, and Fitch. There is no general
debt limit imposed by the State Constitution or public general laws. The
State Constitution imposes a 15-year maturity limit on state general
obligation bonds. Although voters approved a constitutional amendment in 1982
permitting the state to borrow up to $100 million in short-term notes in
anticipation of taxes and revenues, the state has not made use of this
authority.

Many agencies of the state government are authorized to borrow money under
legislation which expressly provides that the loan obligations shall not be
deemed to constitute debt or a pledge of the faith and credit of the state.
The Community Development Administration of the Department of Housing and
Community Development, the Maryland Stadium Authority, the Board of Trustees
of St. Mary's College of Maryland, the Maryland Environmental Service, the
Board of Regents of the University of Maryland System, the Board of Regents
of Morgan State University, the Maryland Food Center Authority, and the
Maryland Water Quality Financing Administration have issued and have
outstanding bonds of this type. The principal of and interest

<PAGE>

on bonds issued by these bodies are payable solely from pledged revenues,
principally fees generated from use of the facilities, enterprises financed
by the bonds, or other dedicated fees.

Economy Maryland's economic growth has recovered from the effects of federal
downsizing in the early 1990s. Employment growth data suggest that the state
matched national growth rates of about 2% in 1998. The per capita income
level is another sign of strength in the economy. It continues to maintain a
high 112% of national per capita, as demonstrated by 1997 data. According to
the Maryland Board of Revenue Estimates, the national economy is expected to
slow in the later part of 1999 and the state's economy is expected to mirror
this trend. However, the state's economy is expected to be resilient because
of its overall diversification and particularly because of its low share of
manufacturing employment (7% of total employment compared to 16% nationally).
The manufacturing sector tends to be more vulnerable during economic
downturns.

Financial To a large degree, the risk of the portfolio is dependent upon the
financial strength of the State of Maryland and its localities. Financial
management continues to demonstrate a conservative approach to managing the
state's finances. Fiscal year 1998 concluded with a General Fund operating
surplus of $1.2 billion. The general fund balance rose to a healthy $1.6
billion or 14% of general revenues. For the current fiscal year, the state's
Board of Revenue Estimates reported in January 1999 that the revenue forecast
has been revised upward to $8.2 billion, an increase of $195 million. These
results are reassuring that the budget will remain balanced as the state
implements income tax reduction.

Sectors Certain areas of potential investment concentration present unique
risks. In 1998, $815.5 million or 22% of Maryland tax-exempt debt was issued
in the health care sector by public or nonprofit hospitals. A significant
portion of the funds' assets may be invested in health care issues. For over
a decade, the hospital industry has been under significant pressure to reduce
expenses and shorten length of stay, a phenomenon which has negatively
affected the financial health of some hospitals. All hospitals are dependent
on third party reimbursement mechanisms. At the present time, Maryland
hospitals operate under a system in which reimbursement is determined by a
state-administered set of rates and charges that applies to all payors. A
federal waiver allows this system to be applied to Medicare reimbursement as
well rather than the Federal Diagnosis-Related Group (DRG) system required
elsewhere. In order to maintain this Medicare waiver, the cumulative rate of
increase in Maryland hospital charges since the base year 1980 must remain
below that of U.S. hospitals overall. From 1983 through 1992, the rate of
increase for Maryland hospitals was below the national average; for the six
years from 1993 through 1998, Maryland hospital costs have grown faster than
the national rate, although the cumulative rate of increase since the base
year is still below the national average. Any loss of the Medicare waiver in
the future may have an adverse impact upon the credit quality of Maryland
hospitals.

The fund may from time to time invest in electric revenue issues which have
exposure to or participate in nuclear power plants which could affect the
issuer's financial performance. Such risks include unexpected outages or
plant shutdowns, increased Nuclear Regulatory Commission surveillance or
inadequate rate relief. In addition, the financial performance of electric
utilities may be impacted by increased competition and deregulation of the
industry.

RISK FACTORS ASSOCIATED WITH A NEW JERSEY PORTFOLIO
The fund's concentration in the debt obligations of one state carries a
higher risk than a portfolio that is more geographically diversified. In
addition to State of New Jersey general obligations and state agency issues,
the fund will invest in local bond issues, lease obligations and revenue
bonds, the credit quality and risk of which will vary according to each
security's own structure and underlying economics.

Debt The State of New Jersey and its local governments issue two basic types
of debt, with varying degrees of credit risk: general obligation bonds backed
by the unlimited taxing power of the issuer and revenue bonds

<PAGE>

secured by specific pledged fees or charges for a related project. In 1998,
$8.7 billion in state and local debt was issued in New Jersey, a 4% decrease
from the previous year. Of this total amount, approximately 31% represented
general obligation debt and 69% revenue bonds. Included within the revenue
bond sector are tax-exempt lease obligations that are subject to annual
appropriations of a governmental body, usually with no implied tax or
specific revenue pledge. Debt issued in 1998 was for a wide variety of public
purposes, including health care, education, and transportation.

The State of New Jersey had approximately $3.6 billion in general obligation
bonds outstanding as of June 30, 1998. General obligation debt of the state
is rated Aa1 by Moody's and AA+ by S&P and Fitch.

Many agencies of the state government are authorized to borrow money under
legislation which expressly provides that the loan obligations shall not be
deemed to constitute debt or a pledge of the faith and credit of the state.
The New Jersey Economic Development Authority, New Jersey Building Authority,
New Jersey Educational Facilities Authority, New Jersey Sports and Exposition
Authority, and New Jersey Transportation Trust Fund Authority have
outstanding bonds of this type.

Economy The state has recovered from the recession of the early 1990s. New
Jersey's large and diverse economy had the best two-year period of economic
growth from 1997-1998 since 1987-1988. However, employment growth in
1997-1998 was slightly lower than national growth rates. New Jersey may
narrow the employment growth gap further, but is expected to remain below
national growth levels. New Jersey personal income growth was stronger than
the national average. Per capita income in 1997 was also very strong at
approximately 128% of the nation. Real Gross State Product increased about
3.5% in 1998, the highest growth in 10 years. For the duration of 1999, New
Jersey's economy is expected to track the national economy with a possible
slowdown by the middle to end of the year.

Financial To a large degree, the risk of the portfolio is dependent on the
financial strength of the State of New Jersey and its localities. The State
of New Jersey had General Fund operating deficits in the 1996 and 1997 fiscal
years, but in fiscal year 1998 the state reported a $130 million surplus. The
surplus caused the general fund balance to increase to $1.8 billion and
unreserved funds to increase to $905 million (5% of general revenues). In
1998 and in the current 1999 fiscal year the state has benefited from
stronger than expected revenue growth. A recent initiative that may have an
affect on the state's financial condition is the Governor's proposed property
tax rebate program. The program is projected to cost $200 million per year
over five years for a total of $1 billion.

Sectors Certain areas of potential investment concentration present unique
risks. In 1998, 20% of New Jersey tax-exempt debt was issued in the health
care sector by public or nonprofit hospitals. A significant portion of the
fund's assets may be invested in health care issues. For over a decade, the
hospital industry has been under significant pressure to reduce expenses and
shorten length of stay, a phenomenon which has negatively affected the
financial health of many hospitals. While each hospital bond issue is
separately secured by the individual hospital's revenues, third-party
reimbursement sources such as the federal Medicare or Medicaid programs and
private insurers are common to all hospitals. To the extent these payors
reduce reimbursement levels, the individual hospitals may be affected. In the
face of these pressures, the trend of hospital mergers and acquisitions have
accelerated in recent years. These organizational changes present both risks
and opportunities for the institutions involved.

The fund may from time to time invest in electric revenue issues which have
exposure to or participate in nuclear power plants which could affect the
issuer's financial performance. Such risks include delay in construction and
operation due to increased regulation, unexpected outages or plant shutdowns,
increased Nuclear Regulatory Commission surveillance or inadequate rate
relief. In addition, financial performance of electric utilities may be
impacted by increased competition and deregulation in the industry.

The fund may invest in private activity bond issues for corporate and
nonprofit borrowers. These issues sold through government conduits, such as
the New Jersey Economic Development Authority and various local issuers, are
backed solely by the revenues pledged by the respective borrowing
corporations. No governmental support is implied. In the past, a number of
New Jersey Economic Development Authority issues have defaulted as a result
of borrower financial difficulties. A number of counties and utility
authorities in the state

<PAGE>

have issued several billion dollars of bonds to fund incinerator projects and
solid waste projects. A federal decision striking down New Jersey's system of
solid waste flow control increases the potential risk of default absent a
legislative solution, or some form of subsidy by local or state governments.

RISK FACTORS ASSOCIATED WITH A NEW YORK PORTFOLIO
The funds' concentration in the debt obligations of one state carries a
higher risk than a portfolio that is geographically diversified. In addition
to state general obligation bonds and notes and the debt of various state
agencies, the fund will invest in local bond issues, lease obligations and
revenue bonds, the credit quality and risk of which will vary according to
each security's own structure and underlying economics.

The funds' ability to maintain a high level of "triple-exempt" income is
primarily dependent upon the ability of New York issuers to continue to meet
debt service obligations in a timely fashion. In 1975 the state, New York
City, and other related issuers experienced serious financial difficulties
that ultimately resulted in much lower credit ratings and loss of access to
the public debt markets. A series of fiscal reforms and an improved economic
climate allowed these entities to return to financial stability by the early
1980s. Credit ratings were reinstated or raised and access to the public
credit markets was restored. During the early 1990s, the State and City
confronted renewed fiscal pressure, as the region suffered moderate economic
decline. Conditions began to improve in 1993, though below-average economic
performance and tight budgetary conditions persisted. Both entities
experienced financial relief in fiscal 1997 because of the strong national
economy, a robust financial services sector, and vigilant spending control.
The State and City continue to face challenging budgets while they attempt to
adjust spending levels and priorities.

New York State

The state, its agencies, and local governments issued $36.5 billion in
long-term municipal bonds in 1998, a 32% increase from the previous year. As
of March 31, 1999, total state-related bonded debt was projected to be $34.7
billion, of which $4.7 billion was general obligation debt and $29.7 billion
was financed under lease-purchase or other contractual obligations. In
addition, the state had $293 million in bond anticipation notes outstanding.
Since 1993, the state has not issued Tax and Revenue Anticipation Notes
(TRANs) terminating the practice of annual seasonal borrowing which had
occurred since 1952. As of June 1, 1999, the state's general obligation bonds
were rated A2 by Moody's, A by S&P and A+ by Fitch. All general obligation
bonds must be approved by the voters prior to issuance.

The fiscal stability of the state is also important for numerous authorities
which have responsibilities for financing, constructing, and operating
revenue-producing public benefit facilities. As of September 30, 1997, there
were 17 authorities that had aggregate debt outstanding, including refunding
bonds, of $846.

The authorities most reliant upon annual direct state support include the
Metropolitan Transit Authority (MTA), the Urban Development Authority (UDC),
and the New York Housing Finance Agency (HFA). In February 1975, the UDC
defaulted on approximately $1.0 billion of short-term notes. The default was
ultimately cured by the creation of the Project Finance Authority (PFA),
through which the state provided assistance to the UDC, including support for
debt service. Since then, there have been no additional defaults by state
authorities although substantial annual assistance is required by the MTA and
the HFA in particular.

Subsequent to the fiscal crisis of the mid-70s, New York State maintained
balanced operations on a cash basis, although by 1992 it had built up an
accumulated general fund deficit of over $6 billion on a "Generally Accepted
Accounting Principles" (GAAP) basis. This deficit consisted mainly of overdue
tax refunds and payments due localities.

To resolve its accumulated general fund deficit the state established the
Local Government Assistance Corporation (LGAC) in 1990. A total of $5.2
billion in LGAC bonds have been issued. The proceeds of these bonds were used
to provide the state's assistance to localities and school districts,
enabling the state to reduce its accumulated general fund deficit. State
short-term borrowing requirements, which peaked at a record $5.9 billion in
fiscal 1991, have been reduced to zero. Due to a strong wall street
performance and a booming

<PAGE>

economy, New York ended fiscal 1998 with an accumulated surplus of $567
million. The adopted budget for fiscal 1996 included a multi-year tax
reduction plan which lowers the maximum personal income tax rate from 7.875
to 6.85%. The original budget proposal for the fiscal year ended March
31,1997, included a multi-year personal income tax rate cut and emphasized
cost control to balance against the effects of a weak economy. Because of
strong growth in personal income and business taxes, fiscal year 1998 ended
with an operating surplus of $1.8 billion, which will helped smooth budget
balancing efforts for fiscal year 1999. Fiscal year 1998 is estimated to have
ended with another large operating surplus.

New York State has a large, diversified economy which has witnessed a basic
shift away from manufacturing toward service sector employment. In 1997, per
capita income in New York State was $30,752, 20% above the national average.
Like most northeastern states, New York suffered a population loss during the
1970s. However, during the 1980s that trend reversed and population increased
slightly, standing at 18,175,301 in 1998. During 1990-1992, the state
experienced a slowing of economic growth evidenced by the loss of 425,000
jobs. Conditions have improved with non-farm employment growing by an average
of 0.9% between 1994 and 1998, well below the national average. Such economic
trends are important as they influence the growth or contraction of state
revenues available for operations and debt service.

New York City

The financial problems of New York City were acute between 1975 and 1979,
highlighted by a payment moratorium on the City's short-term obligations. In
the subsequent decade, the City made a significant recovery. The most
important contribution to the City's fiscal recovery was the creation of the
Municipal Assistance Corporation for the City of New York (MAC). Backed by
sales, use, stock transfer, and other taxes, MAC issued bonds and used the
proceeds to purchase City bonds and notes. Although the MAC bonds met with
reluctance by investors at first, the program has proven to be very
successful.

Much progress has been made since the fiscal crisis of 1975. By 1981, the
City achieved a budget balanced in accordance with Generally Accepted
Accounting Principles (GAAP) and has continued to generate small surpluses on
an operating basis. By 1983, the City eliminated its accumulated General Fund
deficit and as of the fiscal year ending June 30, 1998, had a total General
Fund balance of $378 million. Although the City continues to finance its
seasonal cash flow needs through public borrowings, the total amount of these
borrowings has not exceeded 10% of any year's revenues and all have been
repaid by the end of the fiscal year.

As of May 1, 1999 the City's general obligation bonds are rated A3 by
Moody's, A- by S&P and A by Fitch. S&P has listed the City's rating on
positive credit watch.

While New York City sustained a decade long record of relative financial
stability, during the 1990s budgetary pressures have been evident. Its major
revenue sources, income and sales taxes, were slowed and a downturn in the
real estate market reduced property tax revenues. Nonetheless, the City
concluded the 1999 fiscal year with an operating surplus of $1.66 billion.
The City's finances have been bolstered by strong tax receipts growth, fueled
by strong financial markets over the last several years. Revenues and
expenditures for the 1999 fiscal year were balanced in accordance with GAAP
for the nineteenth consecutive year. New York City remains exposed to future
budget pressure should there be a sharp down turn in the financial services
sector, though it has established a budget stabilization account for
contingency.

Long Island and LILCO

The Long Island Lighting Company (LILCO) was the single largest property
taxpayer in both Nassau and Suffolk Counties. LILCO experienced substantial
financial difficulty primarily arising from problems related to its completed
but unlicensed 809 megawatt Shoreham Nuclear Power Facility located in
Suffolk County. In 1986, the State Legislature created the Long Island Power
Authority (LIPA) and ownership of the Shoreham Plant was subsequently
transferred to LIPA for one dollar in exchange for certain rate benefits to
LILCO.

As requested by the Governor, LIPA proposed a plan to restructure LILCO,
reduce rates on Long Island and provide a framework for long-term competition
in power production. Included in the plan would be a settlement of the
Suffolk County tax liability. With the issuance of $7 billion in debt, LIPA
will purchase LILCO common stock, acquire or redeem certain preferred stock
and outstanding debt, and fund the cost of

<PAGE>

certain rebates and credits to LIPA's customers. With these purchases, LIPA
would acquire LILCO's electric transmission and distribution system, its 18%
ownership interest in the Nine Mile Point 2 nuclear plant and the regulatory
asset of Shoreham. In May 1998, LIPA sold its first two series of bonds
amounting to $4.9 billion. This allowed for the acquisition of LILCO by LIPA
and a merger of the remaining portions of the former LILCO business with
Keyspan Energy to form Marketspan Corp. LIPA will now be the provider of
retail electric service throughout most of Long Island.

Sectors Certain areas of potential investment concentration present unique
risks. In 1998, $4.6 billion of tax-exempt debt issued in New York was for
public or nonprofit hospitals. A significant portion of the fund's assets may
be invested in health care issues. For over a decade, the hospital industry
has been under significant pressure to reduce expenses and shorten length of
stay, a phenomenon which has negatively affected the financial health of many
hospitals. While each hospital bond issue is separately secured by the
individual hospital's revenues, third-party reimbursement sources such as the
federal Medicare and state Medicaid programs or private insurers are common
to all hospitals. To the extent these third-party payors reduce reimbursement
levels, the individual hospitals may be affected. The state's support for
Medicaid and health services has slowed over the last several years. In 1997
health care reform was implemented. Under the new system, hospitals are
permitted to negotiate inpatient payment rates with private payors. In
addition, the federal balanced budget act of 1997 contains provisions to
reduce Medicare expenditures. In the face of these pressures, the trend of
hospital mergers and acquisitions has accelerated in recent years. These
organizational changes present both risks and opportunities for the
institutions.

The funds may from time to time invest in electric revenue issues which have
exposure to or participate in nuclear power plants which could affect the
issuers' financial performance. Such risks include unexpected outages or plan
shutdowns, increased Nuclear Regulatory Commission surveillance or inadequate
rate relief. In addition, the financial performance of electric utilities may
be impacted by increased competition and deregulation in the industry.

The funds may invest in private activity bond issues for corporate and
nonprofit borrowers. These issues sold through various governmental conduits,
are backed solely by the revenues pledged by the respective borrowing
corporations. No governmental support is implied. This category accounted for
9.8% of the tax-exempt debt issued in New York during 1997.

RISK FACTORS ASSOCIATED WITH A VIRGINIA PORTFOLIO

The funds' concentration in the debt obligations of one state carries a
higher risk than a portfolio that is geographically diversified. In addition
to Commonwealth of Virginia general obligations and agency issues, the fund
will invest in local bond issues, lease obligations and revenue bonds, the
credit quality and risk of which will vary according to each security's own
structure and underlying economics.

Debt The Commonwealth of Virginia and its local governments issued $5.8
billion of municipal bonds in 1998, including general obligation debt backed
by the unlimited taxing power of the issuer and revenue bonds secured by
specific pledged fees or charges for an enterprise or project. Included
within the revenue bond category are tax-exempt lease obligations that are
subject to annual appropriations of a governmental body to meet debt service,
usually with no implied tax or specific revenue pledge. Debt issued in 1998
was for a wide variety of public purposes, including transportation, housing,
education, health care, and industrial development.

As of June 30, 1998, the Commonwealth of Virginia had $1.1 billion
outstanding general obligation bonds secured by the Commonwealth's revenue
and taxing power, a modest amount compared to many other states. Under state
law, general obligation debt is limited to 1.15 times the average of the
preceding three years' income tax and sales and use tax collections. The
Commonwealth's outstanding general obligation debt is well below that limit
and over 90% of the debt service is actually met from revenue producing
capital projects such as universities and toll roads.

<PAGE>

The Commonwealth also supports $2.6 billion in debt issued by the Virginia
Public Building Authority, the Virginia College Building Authority, the
Virginia Biotechnology Research Park Authority, the Virginia Port Authority,
and the Innovative Technology Authority for transportation purposes. These
bonds are not backed by the full faith and credit of the Commonwealth but
instead, are subject to annual appropriations from the Commonwealth's General
Fund.

In addition to the Commonwealth and public authorities described above, an
additional $8.0 billion in bonds has been issued by special public
authorities in Virginia that are not obligations of the Commonwealth. These
bonds include debt issued by the Virginia Education Loan Authority, the
Virginia Public School Authority, the Virginia Resources Authority, and the
Virginia Housing Development Authority.

Economy The Commonwealth of Virginia has a population of approximately 6.8
million, making it the twelfth largest state. Since the 1930s the
Commonwealth's population has grown at a rate near or exceeding the national
average. Stable to strong economic growth during the 1980s was led by the
northern Virginia area outside of Washington, D.C. where approximately 30% of
the Commonwealth's population is concentrated. The next largest metropolitan
area is the Norfolk-Virginia Beach-Newport News area, followed by the
Richmond-Petersburg area, including the Commonwealth's capital of Richmond.
The Commonwealth's economy is broadly based, with a large concentration in
service and governmental jobs, followed by manufacturing. Virginia has
significant concentrations of high technology employers, with nearly 150,000
people employed in 3,900 establishments. Per capita income exceeds national
averages while unemployment figures have consistently tracked below national
averages.

Financial To a large degree, the risk of the portfolio is dependent on the
financial strength of the Commonwealth of Virginia and its localities.
Virginia is rated Triple-A by Moody's, S&P and Fitch. The Commonwealth's
budget is prepared on a biennial basis. From 1970 through 1998 the General
Fund showed a positive balance for all of its two-year budgetary periods. The
national recession and its negative effects on Virginia's personal income tax
collections did, however, force the Commonwealth to draw down its General
Fund balances to a deficit position in 1992. Spending cuts and improved
economic conditions allowed for positive operations from 1993 on. The
Commonwealth posted a budgetary surplus for fiscal years 1995 to 1998 despite
federal retiree settlements and other transfers. On June 30, 1998, the
unreserved general fund balance, including a revenue stabilization account,
totaled $970 million.

A significant portion of the funds' assets is expected to be invested in the
debt obligations of local governments and public authorities with investment
grade ratings of BBB or higher. While local governments in Virginia are
primarily reliant on independent revenue sources, such as property taxes,
they are not immune to budget shortfalls caused by cutbacks in state aid.
Likewise, certain enterprises such as toll roads or hospitals may be affected
by changes in economic activity.

Sectors Certain areas of potential investment concentration present unique
risks. A significant portion of the fund's assets may be invested in health
care issues. For over a decade, the hospital industry has been under
significant pressure to reduce expenses and shorten length of stay, a
phenomenon which has negatively affected the financial health of many
hospitals. While each hospital bond issue is separately secured by the
individual hospital's revenues, third-party reimbursement sources such as the
federal Medicare and state Medicaid programs or private insurers are common
to all hospitals. To the extent these payors reduce reimbursement levels, the
individual hospitals may be affected. In the face of these pressures, the
trend of hospital mergers and acquisitions has accelerated in recent years.
These organizational changes present both risks and opportunities for the
institutions involved.

The funds may from time to time invest in electric revenue issues which have
exposure to or participate in nuclear power plants which could affect the
issuers' financial performance. Such risks include unexpected outages or
plant shutdowns, increased Nuclear Regulatory Commission surveillance or
inadequate rate relief.

The funds may invest in private activity bond issues for corporate and
nonprofit borrowers. These issues sold through various governmental conduits,
are backed solely by the revenues pledged by the respective borrowing
corporations. No governmental support is implied.

<PAGE>

All Funds

Puerto Rico From time to time the funds invest in obligations of the
Commonwealth of the Puerto Rico and its public Corporations which are exempt
form general state and city or local income taxes. The majority of the
Commonwealth's debt is issued by the major public agencies that are
responsible for many of the island's public functions, such as water,
wastewater, highways, telecommunications, education and public construction.
As of January 31, 1999, public sector debt issued by the Commonwealth and its
public corporations totaled $21.3 billion.

Since the 1980's Puerto Rico's economy and financial operations have
paralleled the economic cycles of the United States. The island's economy,
particularly the manufacturing sector has experienced substantial gains in
employment. Much of these economic gains are attributable in part to
favorable treatment under Section 936 of the Federal Internal Revenue Code
for United States corporations doing business in Puerto Rico. The number of
persons employed in Puerto Rico during fiscal year 1998 reached 1.1 million
people. The number of unemployed citizens, however, remains high at 13.7
percent.

Debt ratios for the Commonwealth remain high as it assumes much of the
responsibility for the local infrastructure. Sizable infrastructure programs
are ongoing to upgrade the island's water, sewer and road systems. The
Commonwealth's general obligations debt is secured by a first lien on
revenues. The Commonwealth has maintained a fiscal policy which seeks to
correlate the growth in spending with the growth of the economic base
available to service that debt. Between fiscal years 1994 and 1998, however
the debt increased 46% while gross product rose 36%. Short term debt remains
a modest 11.7% of total debt outstanding as of January 31, 1999. The maximum
annual debt service requirement on Commonwealth general obligation debt
totals 9.7% of governmental revenues for fiscal year 1998. This is well below
the 15% limit imposed by the Commonwealth of Puerto Rico.

The fiscal year 1994 budget was balanced with an increase in the tollgate tax
on Section 936 companies and improved revenue collections, which enabled the
Commonwealth to record a strong turnaround in the General Fund balance to
$309 million (6.8% of general fund expenses). A General Fund balance of $324
million was recorded for the end of fiscal year 1998.

The Commonwealth's economy remains vulnerable to changes in oil prices,
American trade, foreign policy, levels of foreign assistance, and natural
disasters. On September 21, 1998, Puerto Rico was directly hit by Hurricane
Georges, which caused extensive public and private damage. Despite the
overall destructiveness of the storm, the net impact may have been positive,
as aid from the Federal Emergency Management Agency and insurers is estimated
to exceed $3 billion.

Per capita income levels, while being the highest in the Caribbean, lag far
behind the United States. In 1997 legislation was introduced proposing a
mechanism to permanently settle the political relationship with the United
States. In March 1998, the U.S. House of Representatives voted in favor of a
political status act that includes a referendum and a 10-year transition
plan. A referendum held in December of 1998 resulted in an ambiguous outcome
to the status question. Of the voting options available, a majority of voters
opted for the choice labeled "None of the Above." While there are various
interpretations to this result, it remains clear that no definite resolution
to the status issue is anticipated in the near future.

For many years U.S. companies operating in Puerto Rico were eligible to
receive a special tax credit available under Section 936 of the federal tax
code, which helped spur significant expansion in capital intensive
manufacturing activity. Federal tax legislation was passed in 1993 which
revised the tax benefits received by U.S. corporations (Section 936 firms)
that operate manufacturing facilities in Puerto Rico. The legislation
provides these firms with two options: a 5-year phased reduction of the
income based tax credit to 40% of the preciously allowable credit or the
conversion to a wage based standard, allowing a tax credit for the first 60%
of qualified compensation paid to employees as defined in the IRS Code.
Studies indicate that there have been no reductions in the economic growth
rate or employment in industries which were expected to be impacted by the
1993 amendments. In 1996, amendments were signed into law to phase out the
tax credit over a 10-year period for existing claimants and to eliminate it
for corporations without established operations after

<PAGE>

October 1995. At present, it is difficult to forecast what the short- and
long-term effects of a phaseout of the Section 936 credit would have on the
Puerto Rican economy.

A final risk factor with Commonwealth is the large amount of unfunded pension
liabilities. The two main public pension systems are largely unfunded. The
employees retirement system has an unfunded liability of $6 billion and the
teachers retirement system has an unfunded liability of $1 billion. The
government is working to resolve the liability as evidenced by the use of a
portion of the proceeds of a sale of the Puerto Rican Telephone Company to
cover a portion of the fund's deficiency.

RISK FACTORS ASSOCIATED WITH TAX-EFFICIENT GROWTH FUND AND

THE EQUITY PORTION OF TAX-EFFICIENT BALANCED FUND
Foreign Securities

The funds may invest in foreign securities. These include
nondollar-denominated securities traded outside of the U.S. and
dollar-denominated securities of foreign issuers traded in the U.S. (such as
ADRs). Such investments increase a portfolio's diversification and may
enhance return, but they also involve some special risks, such as exposure to
potentially adverse local political and economic developments;
nationalization and exchange controls; potentially lower liquidity and higher
volatility; possible problems arising from accounting, disclosure,
settlement, and regulatory practices that differ from U.S. standards; and the
chance that fluctuations in foreign exchange rates will decrease the
investment's value (favorable changes can increase its value). These risks
are heightened for investments in developing countries, and there is no limit
on the amount of the funds' foreign investments that may be made in such
countries.

INVESTMENT PROGRAM
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Types of Securities

Set forth below is additional information about certain of the investments
described in each fund's prospectus.

Municipal Securities

Subject to the investment objectives and programs described in the prospectus
and the additional investment restrictions described in this Statement of
Additional Information, each fund's portfolio may consist of any combination
of the various types of municipal securities described below or other types
of municipal securities that may be developed. The amount of each fund's
assets invested in any particular type of municipal security can be expected
to vary.

The term "municipal securities" means obligations issued by or on behalf of
states, territories, and possessions of the United States and the District of
Columbia and their political subdivisions, agencies and instrumentalities, as
well as certain other persons and entities, the interest from which is exempt
from federal, state, and/or city or local, if applicable, income tax. In
determining the tax-exempt status of a municipal security, the fund relies on
the opinion of the issuer's bond counsel at the time of the issuance of the
security. However, it is possible this opinion could be overturned, and as a
result, the interest received by the fund from such a security might not be
exempt from federal income tax.

Municipal securities are classified by maturity as notes, bonds, or
adjustable rate securities.

Municipal Notes

Municipal notes generally are used to provide short-term operating or capital
needs and generally have maturities of one year or less. Municipal notes
include:

. Tax Anticipation Notes Tax anticipation notes are issued to finance working
capital needs of municipalities. Generally, they are issued in anticipation
of various seasonal tax revenue, such as income, property, use and business
taxes, and are payable from these specific future taxes.

<PAGE>

. Revenue Anticipation Notes Revenue anticipation notes are issued in
expectation of receipt of other types of revenue, such as federal or state
revenues available under the revenue sharing or grant programs.

. Bond Anticipation Notes Bond anticipation notes are issued to provide
interim financing until long-term financing can be arranged. In most cases,
the long-term bonds then provide the money for the repayment of the notes.

. Tax-Exempt Commercial Paper Tax-exempt commercial paper is a short-term
obligation with a stated maturity of 270 days or less. It is issued by state
and local governments or their agencies to finance seasonal working capital
need or as short-term financing in anticipation of longer-term financing.

. Municipal Bonds Municipal bonds, which meet longer-term capital needs and
generally have maturities of more than one year when issued, have two
principal classifications: general obligation bonds and revenue bonds. Two
additional categories of potential purchases are lease revenue bonds and
pre-refunded/escrowed to maturity bonds. Another type of municipal bond is
referred to as an Industrial Development Bond.

. General Obligation Bonds Issuers of general obligation bonds include states,
counties, cities, towns, and special districts. The proceeds of these
obligations are used to fund a wide range of public projects, including
construction or improvement of schools, public buildings, highways and roads,
and general projects not supported by user fees or specifically identified
revenues. The basic security behind general obligation bonds is the issuer's
pledge of its full faith and credit and taxing power for the payment of
principal and interest. The taxes that can be levied for the payment of debt
service may be limited or unlimited as to the rate or amount of special
assessments. In many cases voter approval is required before an issuer may
sell this type of bond.

. Revenue Bonds The principal security for a revenue bond is generally the net
revenues derived from a particular facility, or enterprise, or in some cases,
the proceeds of a special charge or other pledged revenue source. Revenue
bonds are issued to finance a wide variety of capital projects including:
electric, gas, water and sewer systems; highways, bridges, and tunnels; port
and airport facilities; colleges and universities; and hospitals. Revenue
bonds are sometimes used to finance various privately operated facilities
provided they meet certain tests established for tax-exempt status.

Although the principal security behind these bonds may vary, many provide
additional security in the form of a mortgage or debt service reserve fund.
Some authorities provide further security in the form of the state's ability
(without obligation) to make up deficiencies in the debt service reserve
fund. Revenue bonds usually do not require prior voter approval before they
may be issued.

. Lease Revenue Bonds Municipal borrowers may also finance capital
improvements or purchases with tax-exempt leases. The security for a lease is
generally the borrower's pledge to make annual appropriations for lease
payments. The lease payment is treated as an operating expense subject to
appropriation risk and not a full faith and credit obligation of the issuer.
Lease revenue bonds are generally considered less secure than a general
obligation or revenue bond and often do not include a debt service reserve
fund. To the extent the fund's Board determines such securities are illiquid,
they will be subject to the fund's limit on illiquid securities. There have
also been certain legal challenges to the use of lease revenue bonds in
various states.

The liquidity of such securities will be determined based on a variety of
factors which may include, among others: (1) the frequency of trades and
quotes for the obligation; (2) the number of dealers willing to purchase or
sell the security and the number of other potential buyers; (3) the
willingness of dealers to undertake to make a market in the security; (4) the
nature of the marketplace trades, including the time needed to dispose of the
security, the method of soliciting offers, and the mechanics of transfer; and
(5) the rating assigned to the obligation by an established rating agency or
T. Rowe Price.

. Pre-refunded/Escrowed to Maturity Bonds Certain municipal bonds have been
refunded with a later bond issue from the same issuer. The proceeds from the
later issue are used to defease the original issue. In many cases the
original issue cannot be redeemed or repaid until the first call date or
original maturity date. In these cases, the refunding bond proceeds typically
are used to buy U.S. Treasury securities that are held in an escrow account
until the original call date or maturity date. The original bonds then become
"pre-refunded" or "escrowed to maturity" and are considered as high-quality
investments. While still tax-exempt, the security is

<PAGE>

the proceeds of the escrow account. To the extent permitted by the SEC and
the Internal Revenue Service, a fund's investment in such securities refunded
with U.S. Treasury securities will, for purposes of diversification rules
applicable to the fund, be considered as an investment in the U. S. Treasury
securities.

. Private Activity Bonds Under current tax law all municipal debt is divided
broadly into two groups: governmental purpose bonds and private activity
bonds. Governmental purpose bonds are issued to finance traditional public
purpose projects such as public buildings and roads. Private activity bonds
may be issued by a state or local government or public authority but
principally benefit private users and are considered taxable unless a
specific exemption is provided.

The tax code currently provides exemptions for certain private activity bonds
such as not-for-profit hospital bonds, small-issue industrial development
revenue bonds and mortgage subsidy bonds, which may still be issued as
tax-exempt bonds. Some, but not all, private activity bonds are subject to
alternative minimum tax.

. Industrial Development Bonds Industrial development bonds are considered
Municipal Bonds if the interest paid is exempt from federal income tax. They
are issued by or on behalf of public authorities to raise money to finance
various privately operated facilities for business and manufacturing,
housing, sports, and pollution control. These bonds are also used to finance
public facilities such as airports, mass transit systems, ports, and parking.
The payment of the principal and interest on such bonds is dependent solely
on the ability of the facility's user to meet its financial obligations and
the pledge, if any, of real and personal property so financed as security for
such payment.

Adjustable Rate Securities

Municipal securities may be issued with adjustable interest rates that are
reset periodically by pre-determined formulas or indexes in order to minimize
movements in the principal value of the investment. Such securities may have
long-term maturities, but may be treated as a short-term investment under
certain conditions. Generally, as interest rates decrease or increase, the
potential for capital appreciation or depreciation on these securities is
less than for fixed-rate obligations. These securities may take the following
forms:

Variable Rate Securities Variable rate instruments are those whose terms
provide for the adjustment of their interest rates on set dates and
which, upon such adjustment, can reasonably be expected to have a market
value that approximates its par value. Subject to the provisions of Rule
2a-7 under the 1940 Act, (1) a variable rate instrument, the principal
amount of which is scheduled to be paid in 397 days or less, is deemed to
have a maturity equal to the period remaining until the next readjustment
of the interest; (2) a variable rate instrument which is subject to a
demand feature which entitles the purchaser to receive the principal
amount of the underlying security or securities either (i) upon notice of
usually 30 days, or (ii) at specified intervals not exceeding 397 days
and upon no more than 30 days' notice is deemed to have a maturity equal
to the longer of the period remaining until the next readjustment of the
interest rate or the period remaining until the principal amount can be
recovered through demand; and (3) an instrument that is issued or
guaranteed by the U.S. government or any agency thereof which has a
variable rate of interest readjusted no less frequently than every 762
days may be deemed to have a maturity equal to the period remaining until
the next readjustment of the interest rate. Should the provisions of Rule
2a-7 change, the funds will determine the maturity of these securities in
accordance with the amended provisions of such rule.

Floating Rate Securities Floating rate instruments are those whose terms
provide for the adjustment of their interest rates whenever a specified
interest rate changes and which, at any time, can reasonably be expected
to have a market value that approximates its par value. Subject to the
provisions of Rule 2a-7 under the 1940 Act, (1) the maturity of a
floating rate instrument is deemed to be the period remaining until the
date (noted on the face of the instrument) on which the principal amount
must be paid, or in the case of an instrument called for redemption, the
date on which the redemption payment must be made; and (2) floating rate
instruments with demand features are deemed to have a maturity equal to
the period remaining until the principal amount can be recovered through
demand. Should the provisions of Rule 2a-7 change, the funds will
determine the maturity of these securities in accordance with the amended
provisions or such rule.

<PAGE>

Put Option Bonds Long-term obligations with maturities longer than one
year may provide purchasers an optional or mandatory tender of the
security at par value at predetermined intervals, often ranging from one
month to several years (e.g., a 30-year bond with a five-year tender
period). These instruments are deemed to have a maturity equal to the
period remaining to the put date.

Participation Interests The funds may purchase from third parties
participation interests in all or part of specific holdings of municipal
securities. The purchase may take different forms: in the case of
short-term securities, the participation may be backed by a liquidity
facility that allows the interest to be sold back to the third party
(such as a trust, broker or bank) for a predetermined price of par at
stated intervals. The seller may receive a fee from the funds in
connection with the arrangement.

In the case of longer-term bonds, the funds may purchase interests in a
pool of municipal bonds or a single municipal bond or lease without the
right to sell the interest back to the third party.

The funds will not purchase participation interests unless a satisfactory
opinion of counsel or ruling of the Internal Revenue Service has been
issued that the interest earned from the municipal securities on which
the funds hold participation interests is exempt from federal income tax
to the funds. However, there is no guarantee the IRS would treat such
interest income as tax-exempt.

Bond and Balanced Funds

. Residual Interest Bonds are a type of high-risk derivative. The funds may
purchase municipal bond issues that are structured as two-part, residual
interest bond and variable rate security offerings. The issuer is obligated
only to pay a fixed amount of tax-free income that is to be divided among the
holders of the two securities. The interest rate for the holders of the
variable rate securities will be determined by an index or auction process
held approximately every seven to 35 days while the bondholders will receive
all interest paid by the issuer minus the amount given to the variable rate
security holders and a nominal auction fee. Therefore, the coupon of the
residual interest bonds, and thus the income received, will move inversely
with respect to short-term, seven- to 35-day tax-exempt interest rates. There
is no assurance that the auction will be successful and that the variable
rate security will provide short-term liquidity. The issuer is not obligated
to provide such liquidity. In general, these securities offer a significant
yield advantage over standard municipal securities, due to the uncertainty of
the shape of the yield curve (i.e., short-term versus long-term rates) and
consequent income flows.

Unlike many adjustable rate securities, residual interest bonds are not
necessarily expected to trade at par and in fact present significant market
risks. In certain market environments, residual interest bonds may carry
substantial premiums or be at deep discounts. This is a relatively new
product in the municipal market with limited liquidity to date.

An embedded interest rate cap allows the bondholder to receive payments
whenever short-term rates rise above a level established at the time of
purchase. They normally are used to hedge against rising short-term interest
rates. Both instruments may be volatile and of limited liquidity, and their
use may adversely affect the fund's total return.

The funds may invest in other types of derivative instruments as they become
available.

For the purpose of the funds' investment restrictions, the identification of
the "issuer" of municipal securities which are not general obligation bonds
is made by the funds' investment manager, T. Rowe Price, on the basis

<PAGE>

of the characteristics of the obligation as described above, the most
significant of which is the source of funds for the payment of principal and
interest on such securities.

There are, of course, other types of securities that are, or may become
available, which are similar to the foregoing and the funds may invest in
these securities.

All Funds

When-Issued Securities

New issues of municipal securities are often offered on a when-issued basis;
that is, delivery and payment for the securities normally takes place 15 to
45 days or more after the date of the commitment to purchase. The payment
obligation and the interest rate that will be received on the securities are
each fixed at the time the buyer enters into the commitment. A fund will only
make a commitment to purchase such securities with the intention of actually
acquiring the securities. However, a fund may sell these securities before
the settlement date if it is deemed advisable as a matter of investment
strategy. Each fund will maintain cash, high-grade marketable debt securities
or other suitable cover with its custodian bank equal in value to commitments
for when-issued securities. Such securities either will mature or, if
necessary, be sold on or before the settlement date. Securities purchased on
a when-issued basis and the securities held in a fund's portfolio are subject
to changes in market value based upon the public perception of the
creditworthiness of the issuer and changes in the level of interest rates
(which will generally result in similar changes in value, i.e., both
experiencing appreciation when interest rates decline and depreciation when
interest rates rise). Therefore, to the extent a fund remains fully invested
or almost fully invested at the same time that it has purchased securities on
a when-issued basis, there will be greater fluctuations in its net asset
value than if it solely set aside cash to pay for when-issued securities. In
the case of the Money Funds, this could increase the possibility that the
market value of the fund's assets could vary from $1.00 per share. In
addition, there will be a greater potential for the realization of capital
gains, which are not exempt from federal income tax. When the time comes to
pay for when-issued securities, a fund will meet its obligations from
then-available cash flow, sale of securities or, although it would not
normally expect to do so, from sale of the when-issued securities themselves
(which may have a value greater or less than the payment obligation). The
policies described in this paragraph are not fundamental and may be changed
by a fund upon notice to its shareholders.

All Funds (other than the Money Funds)

Forwards

The funds may purchase bonds on a when-issued basis with longer than standard
settlement dates, in some cases exceeding one to two years. In such cases,
the funds must execute a receipt evidencing the obligation to purchase the
bond on the specified issue date, and must segregate cash internally to meet
that forward commitment. Municipal "forwards" typically carry a substantial
yield premium to compensate the buyer for the risks associated with a long
when-issued period, including: shifts in market interest rates that could
materially impact the principal value of the bond, deterioration in the
credit quality of the issuer, loss of alternative investment options during
the when-issued period, changes in tax law or issuer actions that would
affect the exempt interest status of the bonds and prevent delivery, failure
of the issuer to complete various steps required to issue the bonds, and
limited liquidity for the buyer to sell the escrow receipts during the
when-issued period.

All Funds

Investment in Taxable Money Market Securities

Although the funds (other than Tax-Efficient Balanced and Tax-Efficient
Growth Funds) expect to be solely invested in municipal securities, for
temporary defensive purposes they may elect to invest in the taxable money
market securities listed next (without limitation) when such action is deemed
to be in the best interests of shareholders. The interest earned on these
money market securities is not exempt from federal income tax and may be
taxable to shareholders as ordinary income.

. U.S. Government Obligations Bills, notes, bonds, and other debt securities
issued by the U.S. Treasury. These are direct obligations of the U.S.
government and differ mainly in the length of their maturities.

<PAGE>

. U.S. Government Agency Securities Issued or guaranteed by U.S.
government-sponsored enterprises and federal agencies. These include
securities issued by the Federal National Mortgage Association, Government
National Mortgage Association, Federal Home Loan Bank, Federal Land Banks,
Farmers Home Administration, Banks for Cooperatives, Federal Intermediate
Credit Banks, Federal Financing Bank, Farm Credit Banks, the Small Business
Association, and the Tennessee Valley Authority. Some of these securities are
supported by the full faith and credit of the U.S. Treasury; the remainder
are supported only by the credit of the instrumentality, which may or may not
include the right of the issuer to borrow from the Treasury.

. Bank Obligations Certificates of deposit, bankers' acceptances, and other
short-term debt obligations. Certificates of deposit are short-term
obligations of commercial banks. A bankers' acceptance is a time draft drawn
on a commercial bank by a borrower, usually in connection with international
commercial transactions. Certificates of deposit may have fixed or variable
rates. The fund may invest in U.S. banks, foreign branches of U.S. banks,
U.S. branches of foreign banks, and foreign branches of foreign banks.

. Short-Term Corporate Debt Securities Short-term corporate debt securities
rated at least AA by S&P, Moody's or Fitch.

. Commercial Paper Paper rated A-2 or better by S&P, Prime-2 or better by
Moody's, or F-2 or better by Fitch, or, if not rated, is issued by a
corporation having an outstanding debt issue rated A or better by Moody's,
S&P or Fitch and, with respect to the Money Funds, is of equivalent
investment quality as determined by the Board of Directors/Trustees.

. Determination of Maturity of Money Market Securities The Money Funds may
only purchase securities which at the time of investment have remaining
maturities of 397 calendar days or less. The other funds may also purchase
money market securities. In determining the maturity of money market
securities, funds will follow the provisions of Rule 2a-7 under the 1940 Act.

Tax-Efficient Balanced and Tax-Efficient Growth Funds

Hybrid Instruments

Hybrid Instruments (a type of potentially high-risk derivative) have been
developed and combine the elements of futures contracts or options with those
of debt, preferred equity, or a depository instrument (hereinafter "Hybrid
Instruments"). Generally, a Hybrid Instrument will be a debt security,
preferred stock, depository share, trust certificate, certificate of deposit,
or other evidence of indebtedness on which a portion of or all interest
payments, and/or the principal or stated amount payable at maturity,
redemption, or retirement, is determined by reference to prices, changes in
prices, or differences between prices, of securities, currencies,
intangibles, goods, articles, or commodities (collectively "Underlying
Assets") or by another objective index, economic factor, or other measure,
such as interest rates, currency exchange rates, commodity indices, and
securities indices (collectively "Benchmarks"). Thus, Hybrid Instruments may
take a variety of forms, including, but not limited to, debt instruments with
interest or principal payments or redemption terms determined by reference to
the value of a currency or commodity or securities index at a future point in
time, preferred stock with dividend rates determined by reference to the
value of a currency, or convertible securities with the conversion terms
related to a particular commodity.

Hybrid Instruments can be an efficient means of creating exposure to a
particular market, or segment of a market, with the objective of enhancing
total return. For example, a fund may wish to take advantage of expected
declines in interest rates in several European countries, but avoid the
transaction costs associated with buying and currency-hedging the foreign
bond positions. One solution would be to purchase a U.S. dollar-denominated
Hybrid Instrument whose redemption price is linked to the average three-year
interest rate in a designated group of countries. The redemption price
formula would provide for payoffs of greater than par if the average interest
rate was lower than a specified level, and payoffs of less than par if rates
were above the specified level. Furthermore, the fund could limit the
downside risk of the security by establishing a minimum redemption price so
that the principal paid at maturity could not be below a predetermined
minimum level if interest rates were to rise significantly. The purpose of
this arrangement, known as a structured security with an embedded put option,
would be to give the fund the desired European bond exposure while avoiding
currency risk, limiting downside market risk, and lowering transactions
costs. Of

<PAGE>

course, there is no guarantee that the strategy will be successful, and the
fund could lose money if, for example, interest rates do not move as
anticipated or credit problems develop with the issuer of the Hybrid.

The risks of investing in Hybrid Instruments reflect a combination of the
risks of investing in securities, options, futures and currencies. Thus, an
investment in a Hybrid Instrument may entail significant risks that are not
associated with a similar investment in a traditional debt instrument that
has a fixed principal amount, is denominated in U.S. dollars, or bears
interest either at a fixed rate or a floating rate determined by reference to
a common, nationally published benchmark. The risks of a particular Hybrid
Instrument will, of course, depend upon the terms of the instrument, but may
include, without limitation, the possibility of significant changes in the
Benchmarks or the prices of Underlying Assets to which the instrument is
linked. Such risks generally depend upon factors which are unrelated to the
operations or credit quality of the issuer of the Hybrid Instrument and which
may not be readily foreseen by the purchaser, such as economic and political
events, the supply and demand for the Underlying Assets, and interest rate
movements. In recent years, various Benchmarks and prices for Underlying
Assets have been highly volatile, and such volatility may be expected in the
future. Reference is also made to the discussion of futures, options, and
forward contracts herein for a discussion of the risks associated with such
investments.

Hybrid Instruments are potentially more volatile and carry greater market
risks than traditional debt instruments. Depending on the structure of the
particular Hybrid Instrument, changes in a Benchmark may be magnified by the
terms of the Hybrid Instrument and have an even more dramatic and substantial
effect upon the value of the Hybrid Instrument. Also, the prices of the
Hybrid Instrument and the Benchmark or Underlying Asset may not move in the
same direction or at the same time.

Hybrid Instruments may bear interest or pay preferred dividends at below
market (or even relatively nominal) rates. Alternatively, Hybrid Instruments
may bear interest at above market rates but bear an increased risk of
principal loss (or gain). The latter scenario may result if "leverage" is
used to structure the Hybrid Instrument. Leverage risk occurs when the Hybrid
Instrument is structured so that a given change in a Benchmark or Underlying
Asset is multiplied to produce a greater value change in the Hybrid
Instrument, thereby magnifying the risk of loss as well as the potential for
gain.

Hybrid Instruments may also carry liquidity risk since the instruments are
often "customized" to meet the portfolio needs of a particular investor, and
therefore, the number of investors that are willing and able to buy such
instruments in the secondary market may be smaller than that for more
traditional debt securities. In addition, because the purchase and sale of
Hybrid Instruments could take place in an over-the-counter market without the
guarantee of a central clearing organization or in a transaction between the
fund and the issuer of the Hybrid Instrument, the creditworthiness of the
counter party of issuer of the Hybrid Instrument would be an additional risk
factor which the fund would have to consider and monitor. Hybrid Instruments
also may not be subject to regulation of the Commodities Futures Trading
Commission ("CFTC"), which generally regulates the trading of commodity
futures by U.S. persons, the SEC, which regulates the offer and sale of
securities by and to U.S. persons, or any other governmental regulatory
authority.

The various risks discussed above, particularly the market risk of such
instruments, may in turn cause significant fluctuations in the net asset
value of the fund. Accordingly, the fund will limit its investments in Hybrid
Instruments to 10% of total assets. However, because of their volatility, it
is possible that the fund's investment in Hybrid Instruments will account for
more than 10% of the fund's return (positive or negative).

Illiquid or Restricted Securities

Restricted securities may be sold only in privately negotiated transactions
or in a public offering with respect to which a registration statement is in
effect under the Securities Act of 1933 (the "1933 Act"). Where registration
is required, the fund may be obligated to pay all or part of the registration
expenses, and a considerable period may elapse between the time of the
decision to sell and the time the fund may be permitted to sell a security
under an effective registration statement. If, during such a period, adverse
market conditions were to develop, the fund might obtain a less favorable
price than prevailed when it decided to sell. Restricted securities will be
priced at fair value as determined in accordance with procedures prescribed
by the fund's Board of Directors/Trustees. If, through the appreciation of
illiquid securities or the depreciation of

<PAGE>

liquid securities, the fund should be in a position where more than 15% of
the value of its net assets is invested in illiquid assets, including
restricted securities, the fund will take appropriate steps to protect
liquidity.

Notwithstanding the above, the fund may purchase securities which, while
privately placed, are eligible for purchase and sale under Rule 144A under
the 1933 Act. This rule permits certain qualified institutional buyers, such
as the fund, to trade in privately placed securities even though such
securities are not registered under the 1933 Act. T. Rowe Price, under the
supervision of the fund's Board of Directors/Trustees, will consider whether
securities purchased under Rule 144A are illiquid and thus subject to the
fund's restriction of investing no more than 15% of its net assets in
illiquid securities. A determination of whether a Rule 144A security is
liquid or not is a question of fact. In making this determination, T. Rowe
Price will consider the trading markets for the specific security taking into
account the unregistered nature of a Rule 144A security. In addition, T. Rowe
Price could consider the following: (1) frequency of trades and quotes; (2)
number of dealers and potential purchases; (3) dealer undertakings to make a
market; and (4) the nature of the security and of marketplace trades (e.g.,
the time needed to dispose of the security, the method of soliciting offers,
and the mechanics of transfer). The liquidity of Rule 144A securities would
be monitored and, if as a result of changed conditions it is determined that
a Rule 144A security is no longer liquid, the fund's holdings of illiquid
securities would be reviewed to determine what, if any, steps are required to
assure that the fund does not invest more than 15% of its net assets in
illiquid securities. Investing in Rule 144A securities could have the effect
of increasing the amount of the fund's assets invested in illiquid securities
if qualified institutional buyers are unwilling to purchase such securities.

Warrants

The fund may acquire warrants. Warrants can be highly volatile and have no
voting rights, pay no dividends, and have no rights with respect to the
assets of the corporation issuing them. Warrants basically are options to
purchase securities at a specific price valid for a specific period of time.
They do not represent ownership of the securities, but only the right to buy
them. Warrants differ from call options in that warrants are issued by the
issuer of the security which may be purchased on their exercise, whereas call
options may be written or issued by anyone. The prices of warrants do not
necessarily move parallel to the prices of the underlying securities.

PORTFOLIO MANAGEMENT PRACTICES
-------------------------------------------------------------------------------
All Funds (other than the Money Funds)

Futures Contracts

Futures contracts are a type of potentially high-risk derivative.

Transactions in Futures

The Bond Funds may enter into futures contracts including stock index,
interest rate, and currency futures ("futures" or "futures contracts").

The Tax-Efficient Balanced and Tax-Efficient Growth Funds may enter into
futures contracts including stock index, interest rate, and currency futures
("futures or futures contracts").

All Funds (other than the Money Funds)

The nature of such futures and the regulatory limitations and risks are the
same as those described below.

Stock index futures contracts may be used to provide a hedge for a portion of
the fund's portfolio, as a cash management tool, or as an efficient way for
T. Rowe Price to implement either an increase or decrease in portfolio market
exposure in response to changing market conditions. The fund may purchase or
sell futures contracts with respect to any stock index. Nevertheless, to
hedge the fund's portfolio successfully, the fund

<PAGE>

must sell futures contacts with respect to indices or subindices whose
movements will have a significant correlation with movements in the prices of
the fund's portfolio securities.

Interest rate or currency futures contracts may be used as a hedge against
changes in prevailing levels of interest rates or currency exchange rates in
order to establish more definitely the effective return on securities or
currencies held or intended to be acquired by the fund. In this regard, the
fund could sell interest rate or currency futures as an offset against the
effect of expected increases in interest rates or currency exchange rates and
purchase such futures as an offset against the effect of expected declines in
interest rates or currency exchange rates.

The fund will enter into futures contracts which are traded on national (and
for the Tax-Efficient Balanced and Tax-Efficient Growth Funds, foreign)
futures exchanges, and are standardized as to maturity date and underlying
financial instrument. Futures exchanges and trading in the United States are
regulated under the Commodity Exchange Act by the CFTC. Although techniques
other than the sale and purchase of futures contracts could be used for the
above-referenced purposes, futures contracts offer an effective and
relatively low cost means of implementing the fund's objectives in these
areas.

Regulatory Limitations
If the fund purchases or sells futures contracts or related options which do
not qualify as bona fide hedging under applicable CFTC rules, the aggregate
initial margin deposits and premium required to establish those positions
cannot exceed 5% of the liquidation value of the fund after taking into
account unrealized profits and unrealized losses on any such contracts it has
entered into; provided, however, that in the case of an option that is
in-the-money at the time of purchase, the in-the-money amount may be excluded
in calculating the 5% limitation. For purposes of this policy, options on
futures contracts and foreign currency options traded on a commodities
exchange will be considered "related options." This policy may be modified by
the Board of Directors/Trustees without a shareholder vote and does not limit
the percentage of the fund's assets at risk to 5%.

In instances involving the purchase of futures contracts or the writing of
call or put options thereon by the fund, an amount of cash, liquid assets, or
other suitable cover as permitted by the SEC, equal to the market value of
the futures contracts and options thereon (less any related margin deposits),
will be identified by the fund to cover the position, or alternative cover
(such as owning an offsetting position) will be employed. Assets used as
cover or held in an identified account cannot be sold while the position in
the corresponding option or future is open, unless they are replaced with
similar assets. As a result, the commitment of a large portion of a fund's
assets to cover or identified accounts could impede portfolio management or
the fund's ability to meet redemption requests or other current obligations.

If the CFTC or other regulatory authorities adopt different (including less
stringent) or additional restrictions, the fund would comply with such new
restrictions.

Trading in Futures Contracts
A futures contract provides for the future sale by one party and purchase by
another party of a specified amount of a specific financial instrument (e.g.,
units of a stock index) for a specified price, date, time and place
designated at the time the contract is made. Brokerage fees are incurred when
a futures contract is bought or sold and margin deposits must be maintained.
Entering into a contract to buy is commonly referred to as buying or
purchasing a contract or holding a long position. Entering into a contract to
sell is commonly referred to as selling a contract or holding a short
position.

Unlike when the fund purchases or sells a security, no price would be paid or
received by the fund upon the purchase or sale of a futures contract. Upon
entering into a futures contract, and to maintain the fund's open positions
in futures contracts, the fund would be required to deposit with its
custodian in a segregated account in the name of the futures broker an amount
of cash, or liquid assets known as "initial margin." The margin required for
a particular futures contract is set by the exchange on which the contract is
traded, and may be significantly modified from time to time by the exchange
during the term of the contract. Futures contracts are customarily purchased
and sold on margins that may range upward from less than 5% of the value of
the contract being traded.

<PAGE>

If the price of an open futures contract changes (by increase in the case of
a sale or by decrease in the case of a purchase) so that the loss on the
futures contract reaches a point at which the margin on deposit does not
satisfy margin requirements, the broker will require an increase in the
margin. However, if the value of a position increases because of favorable
price changes in the futures contract so that the margin deposit exceeds the
required margin, the broker will pay the excess to the fund.

These subsequent payments, called "variation margin," to and from the futures
broker, are made on a daily basis as the price of the underlying assets
fluctuate, making the long and short positions in the futures contract more
or less valuable, a process known as "marking to market."

Although certain futures contracts, by their terms, require actual future
delivery of and payment for the underlying instruments, in practice most
futures contracts are usually closed out before the delivery date. Closing
out an open futures contract purchase or sale is effected by entering into an
offsetting futures contract sale or purchase, respectively, for the same
aggregate amount of the identical securities and the same delivery date. If
the offsetting purchase price is less than the original sale price, the fund
realizes a gain; if it is more, the fund realizes a loss. Conversely, if the
offsetting sale price is more than the original purchase price, the fund
realizes a gain; if it is less, the fund realizes a loss. The transaction
costs must also be included in these calculations. There can be no assurance,
however, that the fund will be able to enter into an offsetting transaction
with respect to a particular futures contract at a particular time. If the
fund is not able to enter into an offsetting transaction, the fund will
continue to be required to maintain the margin deposits on the futures
contract.

As an example of an offsetting transaction in which the underlying instrument
is not delivered, the contractual obligations arising from the sale of one
contract of September Treasury bills on an exchange may be fulfilled at any
time before delivery of the contract is required (i.e., on a specified date
in September, the "delivery month") by the purchase of one contract of
September Treasury bills on the same exchange. In such instance, the
difference between the price at which the futures contract was sold and the
price paid for the offsetting purchase, after allowance for transaction
costs, represents the profit or loss to the fund.

Tax-Efficient Balanced and Tax-Efficient Growth Funds

For example, the S&P's 500 Stock Index is made up of 500 selected common
stocks, most of which are listed on the New York Stock Exchange. The S&P 500
Index assigns relative weightings to the common stocks included in the Index,
and the Index fluctuates with changes in the market values of those common
stocks. In the case of futures contracts on the S&P 500 Index, the contracts
are to buy or sell 250 units. Thus, if the value of the S&P 500 Index were
$150, one contract would be worth $37,500 (250 units x $150). The stock index
futures contract specifies that no delivery of the actual stocks making up
the index will take place. Instead, settlement in cash occurs. Over the life
of the contract, the gain or loss realized by the fund will equal the
difference between the purchase (or sale) price of the contract and the price
at which the contract is terminated. For example, if the fund enters into a
futures contract to buy 250 units of the S&P 500 Index at a specified future
date at a contract price of $150 and the S&P 500 Index is at $154 on that
future date, the fund will gain $1,000 (250 units x gain of $4). If the fund
enters into a futures contract to sell 250 units of the stock index at a
specified future date at a contract price of $150 and the S&P 500 Index is at
$152 on that future date, the fund will lose $500 (250 units x loss of $2).

Special Risks of Transactions in Futures Contracts

. Volatility and Leverage The prices of futures contracts are volatile and are
influenced, among other things, by actual and anticipated changes in the
market and interest rates, which in turn are affected by fiscal and monetary
policies and national and international political and economic events.

Most United States futures exchanges limit the amount of fluctuation
permitted in futures contract prices during a single trading day. The daily
limit establishes the maximum amount that the price of a futures contract may
vary either up or down from the previous day's settlement price at the end of
a trading session. Once the daily limit has been reached in a particular type
of futures contract, no trades may be made on that day at a price beyond that
limit. The daily limit governs only price movement during a particular
trading day and therefore does not limit potential losses, because the limit
may prevent the liquidation of unfavorable

<PAGE>

positions. Futures contract prices have occasionally moved to the daily limit
for several consecutive trading days with little or no trading, thereby
preventing prompt liquidation of futures positions and subjecting some
futures traders to substantial losses.

Margin deposits required on futures trading are low. As a result, a
relatively small price movement in a futures contract may result in immediate
and substantial loss, as well as gain, to the investor. For example, if at
the time of purchase, 10% of the value of the futures contract is deposited
as margin, a subsequent 10% decrease in the value of the futures contract
would result in a total loss of the margin deposit, before any deduction for
the transaction costs, if the account were then closed out. A 15% decrease
would result in a loss equal to 150% of the original margin deposit, if the
contract were closed out. Thus, a purchase or sale of a futures contract may
result in losses in excess of the amount invested in the futures contract.

. Liquidity The fund may elect to close some or all of its futures positions
at any time prior to their expiration. The fund would do so to reduce
exposure represented by long futures positions or short futures positions.
The fund may close its positions by taking opposite positions which would
operate to terminate the fund's position in the futures contracts. Final
determinations of variation margin would then be made, additional cash would
be required to be paid by or released to the fund, and the fund would realize
a loss or a gain.

Futures contracts may be closed out only on the exchange or board of trade
where the contracts were initially traded. Although the fund intends to
purchase or sell futures contracts only on exchanges or boards of trade where
there appears to be an active market, there is no assurance that a liquid
market on an exchange or board of trade will exist for any particular
contract at any particular time. In such event, it might not be possible to
close a futures contract, and in the event of adverse price movements, the
fund would continue to be required to make daily cash payments of variation
margin. However, in the event futures contracts have been used to hedge the
underlying instruments, the fund would continue to hold the underlying
instruments subject to the hedge until the futures contracts could be
terminated. In such circumstances, an increase in the price of underlying
instruments, if any, might partially or completely offset losses on the
futures contract. However, as described next, there is no guarantee that the
price of the underlying instruments will, in fact, correlate with the price
movements in the futures contract and thus provide an offset to losses on a
futures contract.

. Hedging Risk A decision of whether, when, and how to hedge involves skill
and judgment, and even a well-conceived hedge may be unsuccessful to some
degree because of unexpected market behavior, market or interest rate trends.
There are several risks in connection with the use by the fund of futures
contracts as a hedging device. One risk arises because of the imperfect
correlation between movements in the prices of the futures contracts and
movements in the prices of the underlying instruments which are the subject
of the hedge. T. Rowe Price will, however, attempt to reduce this risk by
entering into futures contracts whose movements, in its judgment, will have a
significant correlation with movements in the prices of the fund's underlying
instruments sought to be hedged.

Successful use of futures contracts by the fund for hedging purposes is also
subject to T. Rowe Price's ability to correctly predict movements in the
direction of the market. It is possible that, when the fund has sold futures
to hedge its portfolio against a decline in the market, the index, indices,
or instruments underlying futures might advance and the value of the
underlying instruments held in the fund's portfolio might decline. If this
were to occur, the fund would lose money on the futures and also would
experience a decline in value in its underlying instruments. However, while
this might occur to a certain degree, T. Rowe Price believes that over time
the value of the fund's portfolio will tend to move in the same direction as
the market indices used to hedge the portfolio. It is also possible that, if
the fund were to hedge against the possibility of a decline in the market
(adversely affecting the underlying instruments held in its portfolio) and
prices instead increased, the fund would lose part or all of the benefit of
increased value of those underlying instruments that it has hedged, because
it would have offsetting losses in its futures positions. In addition, in
such situations, if the fund had insufficient cash, it might have to sell
underlying instruments to meet daily variation margin requirements. Such
sales of underlying instruments might be, but would not necessarily be, at
increased prices (which would reflect the rising market). The fund might have
to sell underlying instruments at a time when it would be disadvantageous to
do so.

<PAGE>

In addition to the possibility that there might be an imperfect correlation,
or no correlation at all, between price movements in the futures contracts
and the portion of the portfolio being hedged, the price movements of futures
contracts might not correlate perfectly with price movements in the
underlying instruments due to certain market distortions. First, all
participants in the futures market are subject to margin deposit and
maintenance requirements. Rather than meeting additional margin deposit
requirements, investors might close futures contracts through offsetting
transactions, which could distort the normal relationship between the
underlying instruments and futures markets. Second, the margin requirements
in the futures market are less onerous than margin requirements in the
securities markets and, as a result, the futures market might attract more
speculators than the securities markets do. Increased participation by
speculators in the futures market might also cause temporary price
distortions. Due to the possibility of price distortion in the futures market
and also because of imperfect correlation between price movements in the
underlying instruments and movements in the prices of futures contracts, even
a correct forecast of general market trends by T. Rowe Price might not result
in a successful hedging transaction over a very short time period.

All Funds (other than the Money Funds)

The fund may purchase and sell options on the same types of futures in which
it may invest.

Bond and Balanced Funds

Options on Futures Contracts

The fund might trade in municipal bond index option futures or similar
options on futures developed in the future. In addition, the fund may also
trade in options on futures contracts on U.S. government securities and any
U.S. government securities futures index contract which might be developed.
In the opinion of T. Rowe Price, there is a high degree of correlation in the
interest rate, and price movements of U.S. government securities and
municipal securities. However, the U.S. government securities market and
municipal securities markets are independent and may not move in tandem at
any point in time.

The fund may purchase put options on futures contracts to hedge its portfolio
of municipal securities against the risk of rising interest rates, and the
consequent decline in the prices of the municipal securities it owns. The
funds will also write call options on futures contracts as a hedge against a
modest decline in prices of the municipal securities held in the fund's
portfolio. If the futures price at expiration of a written call option is
below the exercise price, the fund will retain the full amount of the option
premium, thereby partially hedging against any decline that may have occurred
in the fund's holdings of debt securities. If the futures price when the
option is exercised is above the exercise price, however, the fund will incur
a loss, which may be wholly or partially offset by the increase of the value
of the securities in the fund's portfolio which were being hedged.

Writing a put option on a futures contract serves as a partial hedge against
an increase in the value of securities the fund intends to acquire. If the
futures price at expiration of the option is above the exercise price, the
fund will retain the full amount of the option premium which provides a
partial hedge against any increase that may have occurred in the price of the
debt securities the fund intends to acquire. If the futures price when the
option is exercised is below the exercise price, however, the fund will incur
a loss, which may be wholly or partially offset by the decrease in the price
of the securities the fund intends to acquire.

Options (another type of potentially high-risk derivative) on futures are
similar to options on underlying instruments except that options on futures
give the purchaser the right, in return for the premium paid, to assume a
position in a futures contract (a long position if the option is a call and a
short position if the option is a put), rather than to purchase or sell the
futures contract, at a specified exercise price at any time during the period
of the option. Upon exercise of the option, the delivery of the futures
position by the writer of the option to the holder of the option will be
accompanied by the delivery of the accumulated balance in the writer's
futures margin account which represents the amount by which the market price
of the futures contract, at exercise, exceeds (in the case of a call) or is
less than (in the case of a put) the exercise price of the option on the
futures contract. Purchasers of options who fail to exercise their options
prior to the exercise date suffer a loss of the premium paid.

<PAGE>

From time to time a single order to purchase or sell futures contracts (or
options thereon) may be made on behalf of the fund and other T. Rowe Price
Funds. Such aggregated orders would be allocated among the fund and the other
T. Rowe Price Funds in a fair and non-discriminatory manner.

Tax-Efficient Balanced and Tax-Efficient Growth Funds

As an alternative to writing or purchasing call and put options on stock
index futures, the fund may write or purchase call and put options on stock
indices. Such options would be used in a manner similar to the use of options
on futures contracts.

Special Risks of Transactions in Options on Futures Contracts

The risks described under "Special Risks in Transactions on Futures
Contracts" are substantially the same as the risks of using options on
futures. If the fund were to write an option on a futures contract, it would
be required to deposit and maintain initial and variation margin in the same
manner as a regular futures contract. In addition, where the fund seeks to
close out an option position by writing or buying an offsetting option
covering the same index, underlying instrument or contract and having the
same exercise price and expiration date, its ability to establish and close
out positions on such options will be subject to the maintenance of a liquid
secondary market. Reasons for the absence of a liquid secondary market on an
exchange include the following: (1) there may be insufficient trading
interest in certain options; (2) restrictions may be imposed by an exchange
on opening transactions or closing transactions or both; (3) trading halts,
suspensions or other restrictions may be imposed with respect to particular
classes or series of options, or underlying instruments; (4) unusual or
unforeseen circumstances may interrupt normal operations on an exchange; (5)
the facilities of an exchange or a clearing corporation may not at all times
be adequate to handle current trading volume; or (6) one or more exchanges
could, for economic or other reasons, decide or be compelled at some future
date to discontinue the trading of options (or a particular class or series
of options), in which event the secondary market on that exchange (or in the
class or series of options) would cease to exist, although outstanding
options on the exchange that had been issued by a clearing corporation as a
result of trades on that exchange would continue to be exercisable in
accordance with their terms. There is no assurance that higher than
anticipated trading activity or other unforeseen events might not, at times,
render certain of the facilities of any of the clearing corporations
inadequate, and thereby result in the institution by an exchange of special
procedures which may interfere with the timely execution of customers'
orders.

In addition, the correlation between movements in the price of options on
futures contracts and movements in the price of the securities hedged can
only be approximate. This risk is significantly increased when an option on a
U.S. government securities future or an option on some type of index future
is used as a proxy for hedging a portfolio consisting of other types of
securities. Another risk is that the movements in the price of options on
futures contract and the value of the call increases by more than the
increase in the value of the securities held as cover, the fund may realize a
loss on the call which is not completely offset by the appreciation in the
price of the securities held as cover and the premium received for writing
the call.

The successful use of options on futures contracts requires special expertise
and techniques different from those involved in portfolio securities
transactions. A decision of whether, when and how to hedge involves skill and
judgment, and even a well-conceived hedge may be unsuccessful to some degree
because of unexpected market behavior or interest rate trends. During periods
when municipal securities market prices are appreciating, the fund may
experience poorer overall performance than if it had not entered into any
options on futures contracts.

General Considerations Transactions by the fund in options on futures will be
subject to limitations established by each of the exchanges, boards of trade
or other trading facilities governing the maximum number of options in each
class which may be written or purchased by a single investor or group of
investors acting in concert, regardless of whether the options are written on
the same or different exchanges, boards of trade or other trading facilities
or are held or written in one or more accounts or through one or more
brokers. Thus, the number of contracts which the fund may write or purchase
may be affected by contracts written or purchased by other investment
advisory clients of T. Rowe Price. An exchange, board of trade or other
trading

<PAGE>

facility may order the liquidations of positions found to be in excess of
these limits, and it may impose certain other sanctions.

Additional Futures and Options Contracts

Although the fund has no current intention of engaging in futures or options
transactions other than those described above, it reserves the right to do
so. Such futures and options trading might involve risks which differ from
those involved in the futures and options described above.

Federal Tax Treatment of Options, Futures Contracts, and Forward Foreign
Exchange Contracts

Although the fund invests almost exclusively in securities that generate
income that is exempt from federal income taxes, the fund may enter into
certain option, futures, and foreign exchange contracts, including options
and futures on currencies, which will be treated as Section 1256 contracts or
straddles that are not exempt from such taxes. Therefore, use of the
investment techniques described above could result in taxable income to
shareholders of the fund.

Transactions which are considered Section 1256 contracts will be considered
to have been closed at the end of the fund's fiscal year and any gains or
losses will be recognized for tax purposes at that time. Gains or losses
recognized from the normal closing or settlement of such transactions will be
characterized as 60% long-term capital gain or loss and 40% short-term
capital gain or loss, without regard to the holding period of the contract.
The fund will be required to distribute net gains on such transactions to
shareholders even though it may not have closed the transaction and received
cash to pay such distributions.

Options, futures and forward foreign exchange contracts, including options
and futures on currencies, which offset a foreign dollar denominated bond or
currency position may be considered straddles for tax purposes, in which case
a loss on any position in a straddle will be subject to deferral to the
extent of unrealized gain in an offsetting position. The holding period of
the securities or currencies comprising the straddle will be deemed not to
begin until the straddle is terminated. The holding period of the security
offsetting an "in-the-money qualified covered call" option on an equity
security will not include the period of time the option is outstanding.

Losses on written covered calls and purchased puts on securities, excluding
certain "qualified covered call" options on equity securities, may be
long-term capital losses, if the security covering the option was held for
more than 12 months prior to the writing of the option.

In order for the fund to continue to qualify for federal income tax treatment
as a regulated investment company, at least 90% of its gross income for a
taxable year must be derived from qualifying income, i.e., dividends,
interest, income derived from loans of securities, and gains from the sale of
securities or currencies. Tax regulations could be issued limiting the extent
that net gain realized from option, futures or foreign forward exchange
contracts on currencies is qualifying income for purposes of the 90%
requirement.

As a result of the "Taxpayer Relief Act of 1997," entering into certain
options, futures contracts, or forward contracts may result in the
"constructive sale" of offsetting stocks or debt securities of the fund.

Options on Securities

Options are another type of potentially high-risk derivative.

Bond and Money Funds

The funds have no current intention of investing in options on securities,
although they reserve the right to do so. Appropriate disclosure would be
added to the funds' prospectus and Statement of Additional Information when
and if the funds decide to invest in options.

<PAGE>

Tax-Efficient Balanced and Tax-Efficient Growth Funds

Writing Covered Call Options

The fund may write (sell) American or European style "covered" call options
and purchase options to close out options previously written by the fund. In
writing covered call options, the fund expects to generate additional premium
income which should serve to enhance the fund's total return and reduce the
effect of any price decline of the security or currency involved in the
option. Covered call options will generally be written on securities or
currencies which, in T. Rowe Price's opinion, are not expected to have any
major price increases or moves in the near future but which, over the long
term, are deemed to be attractive investments for the fund.

A call option gives the holder (buyer) the "right to purchase" a security or
currency at a specified price (the exercise price) at expiration of the
option (European style) or at any time until a certain date (the expiration
date) (American style). So long as the obligation of the writer of a call
option continues, he may be assigned an exercise notice by the broker-dealer
through whom such option was sold, requiring him to deliver the underlying
security or currency against payment of the exercise price. This obligation
terminates upon the expiration of the call option, or such earlier time at
which the writer effects a closing purchase transaction by repurchasing an
option identical to that previously sold. To secure his obligation to deliver
the underlying security or currency in the case of a call option, a writer is
required to deposit in escrow the underlying security or currency or other
assets in accordance with the rules of a clearing corporation.

The fund generally will write only covered call options. This means that the
fund will either own the security or currency subject to the option or an
option to purchase the same underlying security or currency, having an
exercise price equal to or less than the exercise price of the "covered"
option. From time to time, the fund will write a call option that is not
covered as indicated above but where the fund will establish and maintain
with its custodian for the term of the option, an account consisting of cash,
U.S. government securities, other liquid high-grade debt obligations, or
other suitable cover as permitted by the SEC having a value equal to the
fluctuating market value of the optioned securities or currencies. While such
an option would be "covered" with sufficient collateral to satisfy SEC
prohibitions on issuing senior securities, this type of strategy would expose
the fund to the risks of writing uncovered options.

Portfolio securities or currencies on which call options may be written will
be purchased solely on the basis of investment considerations consistent with
the fund's investment objective. The writing of covered call options is a
conservative investment technique believed to involve relatively little risk
(in contrast to the writing of naked or uncovered options, which the fund
generally will not do), but capable of enhancing the fund's total return.
When writing a covered call option, a fund, in return for the premium, gives
up the opportunity for profit from a price increase in the underlying
security or currency above the exercise price, but conversely retains the
risk of loss should the price of the security or currency decline. Unlike one
who owns securities or currencies not subject to an option, the fund has no
control over when it may be required to sell the underlying securities or
currencies, since it may be assigned an exercise notice at any time prior to
the expiration of its obligation as a writer. If a call option which the fund
has written expires, the fund will realize a gain in the amount of the
premium; however, such gain may be offset by a decline in the market value of
the underlying security or currency during the option period. If the call
option is exercised, the fund will realize a gain or loss from the sale of
the underlying security or currency. The fund does not consider a security or
currency covered by a call to be "pledged" as that term is used in the fund's
policy which limits the pledging or mortgaging of its assets. If the fund
writes an uncovered option as described above, it will bear the risk of
having to purchase the security subject to the option at a price higher than
the exercise price of the option. As the price of a security could appreciate
substantially, the fund's loss could be significant.

The premium received is the market value of an option. The premium the fund
will receive from writing a call option will reflect, among other things, the
current market price of the underlying security or currency, the relationship
of the exercise price to such market price, the historical price volatility
of the underlying security or currency, and the length of the option period.
Once the decision to write a call option has been made, T. Rowe Price, in
determining whether a particular call option should be written on a
particular security or currency, will consider the reasonableness of the
anticipated premium and the likelihood that a liquid

<PAGE>

secondary market will exist for those options. The premium received by the
fund for writing covered call options will be recorded as a liability of the
fund. This liability will be adjusted daily to the option's current market
value, which will be the latest sale price at the time at which the net asset
value per share of the fund is computed (close of the New York Stock
Exchange), or, in the absence of such sale, the latest asked price. The
option will be terminated upon expiration of the option, the purchase of an
identical option in a closing transaction, or delivery of the underlying
security or currency upon the exercise of the option.

Closing transactions will be effected in order to realize a profit on an
outstanding call option, to prevent an underlying security or currency from
being called, or, to permit the sale of the underlying security or currency.
Furthermore, effecting a closing transaction will permit the fund to write
another call option on the underlying security or currency with either a
different exercise price or expiration date or both. If the fund desires to
sell a particular security or currency from its portfolio on which it has
written a call option, or purchased a put option, it will seek to effect a
closing transaction prior to, or concurrently with, the sale of the security
or currency. There is, of course, no assurance that the fund will be able to
effect such closing transactions at favorable prices. If the fund cannot
enter into such a transaction, it may be required to hold a security or
currency that it might otherwise have sold. When the fund writes a covered
call option, it runs the risk of not being able to participate in the
appreciation of the underlying securities or currencies above the exercise
price, as well as the risk of being required to hold on to securities or
currencies that are depreciating in value. This could result in higher
transaction costs. The fund will pay transaction costs in connection with the
writing of options to close out previously written options. Such transaction
costs are normally higher than those applicable to purchases and sales of
portfolio securities.

Call options written by the fund will normally have expiration dates of less
than nine months from the date written. The exercise price of the options may
be below, equal to, or above the current market values of the underlying
securities or currencies at the time the options are written. From time to
time, the fund may purchase an underlying security or currency for delivery
in accordance with an exercise notice of a call option assigned to it, rather
than delivering such security or currency from its portfolio. In such cases,
additional costs may be incurred.

The fund will realize a profit or loss from a closing purchase transaction if
the cost of the transaction is less or more than the premium received from
the writing of the option. Because increases in the market price of a call
option will generally reflect increases in the market price of the underlying
security or currency, any loss resulting from the repurchase of a call option
is likely to be offset in whole or in part by appreciation of the underlying
security or currency owned by the fund.

The fund will not write a covered call option if, as a result, the aggregate
market value of all portfolio securities or currencies covering written call
or put options exceeds 25% of the market value of the fund's net assets. In
calculating the 25% limit, the fund will offset, against the value of assets
covering written calls and puts, the value of purchased calls and puts on
identical securities or currencies with identical maturity dates.

Writing Covered Put Options

The fund may write American or European style covered put options and
purchase options to close out options previously written by the fund. A put
option gives the purchaser of the option the right to sell, and the writer
(seller) has the obligation to buy, the underlying security or currency at
the exercise price during the option period (American style) or at the
expiration of the option (European style). So long as the obligation of the
writer continues, he may be assigned an exercise notice by the broker-dealer
through whom such option was sold, requiring him to make payment to the
exercise price against delivery of the underlying security or currency. The
operation of put options in other respects, including their related risks and
rewards, is substantially identical to that of call options.

The fund would write put options only on a covered basis, which means that
the fund would maintain in a segregated account cash, U.S. government
securities, other liquid high-grade debt obligations, or other suitable cover
as determined by the SEC, in an amount not less than the exercise price or
the fund will own an option to sell the underlying security or currency
subject to the option having an exercise price equal to or greater than the
exercise price of the "covered" option at all times while the put option is
outstanding. (The

<PAGE>

rules of a clearing corporation currently require that such assets be
deposited in escrow to secure payment of the exercise price.)

The fund would generally write covered put options in circumstances where T.
Rowe Price wishes to purchase the underlying security or currency for the
fund's portfolio at a price lower than the current market price of the
security or currency. In such event the fund would write a put option at an
exercise price which, reduced by the premium received on the option, reflects
the lower price it is willing to pay. Since the fund would also receive
interest on debt securities or currencies maintained to cover the exercise
price of the option, this technique could be used to enhance current return
during periods of market uncertainty. The risk in such a transaction would be
that the market price of the underlying security or currency would decline
below the exercise price less the premiums received. Such a decline could be
substantial and result in a significant loss to the fund. In addition, the
fund, because it does not own the specific securities or currencies which it
may be required to purchase in exercise of the put, cannot benefit from
appreciation, if any, with respect to such specific securities or currencies.

The fund will not write a covered put option if, as a result, the aggregate
market value of all portfolio securities or currencies covering put or call
options exceeds 25% of the market value of the fund's net assets. In
calculating the 25% limit, the fund will offset, against the value of assets
covering written puts and calls, the value of purchased puts and calls on
identical securities or currencies with identical maturity dates.

Purchasing Put Options

The fund may purchase American or European style put options. As the holder
of a put option, the fund has the right to sell the underlying security or
currency at the exercise price at any time during the option period (American
style) or at the expiration of the option (European style). The fund may
enter into closing sale transactions with respect to such options, exercise
them or permit them to expire. The fund may purchase put options for
defensive purposes in order to protect against an anticipated decline in the
value of its securities or currencies. An example of such use of put options
is provided next.

The fund may purchase a put option on an underlying security or currency (a
"protective put") owned by the fund as a defensive technique in order to
protect against an anticipated decline in the value of the security or
currency. Such hedge protection is provided only during the life of the put
option when the fund, as the holder of the put option, is able to sell the
underlying security or currency at the put exercise price regardless of any
decline in the underlying security's market price or currency's exchange
value. For example, a put option may be purchased in order to protect
unrealized appreciation of a security or currency where T. Rowe Price deems
it desirable to continue to hold the security or currency because of tax
considerations. The premium paid for the put option and any transaction costs
would reduce any capital gain otherwise available for distribution when the
security or currency is eventually sold.

The fund may also purchase put options at a time when the fund does not own
the underlying security or currency. By purchasing put options on a security
or currency it does not own, the fund seeks to benefit from a decline in the
market price of the underlying security or currency. If the put option is not
sold when it has remaining value, and if the market price of the underlying
security or currency remains equal to or greater than the exercise price
during the life of the put option, the fund will lose its entire investment
in the put option. In order for the purchase of a put option to be
profitable, the market price of the underlying security or currency must
decline sufficiently below the exercise price to cover the premium and
transaction costs, unless the put option is sold in a closing sale
transaction.

The fund will not commit more than 5% of its assets to premiums when
purchasing put and call options. The premium paid by the fund when purchasing
a put option will be recorded as an asset of the fund. This asset will be
adjusted daily to the option's current market value, which will be the latest
sale price at the time at which the net asset value per share of the fund is
computed (close of New York Stock Exchange), or, in the absence of such sale,
the latest bid price. This asset will be terminated upon expiration of the
option, the selling (writing) of an identical option in a closing
transaction, or the delivery of the underlying security or currency upon the
exercise of the option.

<PAGE>

Purchasing Call Options

The fund may purchase American or European style call options. As the holder
of a call option, the fund has the right to purchase the underlying security
or currency at the exercise price at any time during the option period
(American style) or at the expiration of the option (European style). The
fund may enter into closing sale transactions with respect to such options,
exercise them or permit them to expire. The fund may purchase call options
for the purpose of increasing its current return or avoiding tax consequences
which could reduce its current return. The fund may also purchase call
options in order to acquire the underlying securities or currencies. Examples
of such uses of call options are provided next.

Call options may be purchased by the fund for the purpose of acquiring the
underlying securities or currencies for its portfolio. Utilized in this
fashion, the purchase of call options enables the fund to acquire the
securities or currencies at the exercise price of the call option plus the
premium paid. At times the net cost of acquiring securities or currencies in
this manner may be less than the cost of acquiring the securities or
currencies directly. This technique may also be useful to the fund in
purchasing a large block of securities or currencies that would be more
difficult to acquire by direct market purchases. So long as it holds such a
call option rather than the underlying security or currency itself, the fund
is partially protected from any unexpected decline in the market price of the
underlying security or currency and in such event could allow the call option
to expire, incurring a loss only to the extent of the premium paid for the
option.

The fund will not commit more than 5% of its assets to premiums when
purchasing call and put options. The fund may also purchase call options on
underlying securities or currencies it owns in order to protect unrealized
gains on call options previously written by it. A call option would be
purchased for this purpose where tax considerations make it inadvisable to
realize such gains through a closing purchase transaction. Call options may
also be purchased at times to avoid realizing losses.

Dealer (Over-the-Counter) Options

The fund may engage in transactions involving dealer options. Certain risks
are specific to dealer options. While the fund would look to a clearing
corporation to exercise exchange-traded options, if the fund were to purchase
a dealer option, it would rely on the dealer from whom it purchased the
option to perform if the option were exercised. Failure by the dealer to do
so would result in the loss of the premium paid by the fund as well as loss
of the expected benefit of the transaction.

Exchange-traded options generally have a continuous liquid market while
dealer options have none. Consequently, the fund will generally be able to
realize the value of a dealer option it has purchased only by exercising it
or reselling it to the dealer who issued it. Similarly, when the fund writes
a dealer option, it generally will be able to close out the option prior to
its expiration only by entering into a closing purchase transaction with the
dealer to which the fund originally wrote the option. While the fund will
seek to enter into dealer options only with dealers who will agree to and
which are expected to be capable of entering into closing transactions with
the fund, there can be no assurance that the fund will be able to liquidate a
dealer option at a favorable price at any time prior to expiration. Until the
fund, as a covered dealer call option writer, is able to effect a closing
purchase transaction, it will not be able to liquidate securities (or other
assets) or currencies used as cover until the option expires or is exercised.
In the event of insolvency of the contra party, the fund may be unable to
liquidate a dealer option. With respect to options written by the fund, the
inability to enter into a closing transaction may result in material losses
to the fund. For example, since the fund must maintain a secured position
with respect to any call option on a security it writes, the fund may not
sell the assets which it has segregated to secure the position while it is
obligated under the option. This requirement may impair a fund's ability to
sell portfolio securities or currencies at a time when such sale might be
advantageous.

The Staff of the SEC has taken the position that purchased dealer options and
the assets used to secure the written dealer options are illiquid securities.
The fund may treat the cover used for written Over-the-Counter ("OTC")
options as liquid if the dealer agrees that the fund may repurchase the OTC
option it has written for a maximum price to be calculated by a predetermined
formula. In such cases, the OTC option would be considered illiquid only to
the extent the maximum repurchase price under the formula exceeds the
intrinsic value of the option.

<PAGE>

Lending of Portfolio Securities

Securities loans are made to broker-dealers or institutional investors or
other persons, pursuant to agreements requiring that the loans be
continuously secured by collateral at least equal at all times to the value
of the securities lent, marked to market on a daily basis. The collateral
received will consist of cash, U.S. government securities, letters of credit
or such other collateral as may be permitted under its investment program.
While the securities are being lent, the fund will continue to receive the
equivalent of the interest or dividends paid by the issuer on the securities,
as well as interest on the investment of the collateral or a fee from the
borrower. The fund has a right to call each loan and obtain the securities,
within such period of time which coincides with the normal settlement period
for purchases and sales of such securities in the respective markets. The
fund will not have the right to vote on securities while they are being lent,
but it will call a loan in anticipation of any important vote. The risks in
lending portfolio securities, as with other extensions of secured credit,
consist of possible delay in receiving additional collateral or in the
recovery of the securities or possible loss of rights in the collateral
should the borrower fail financially. Loans will only be made to firms deemed
by T. Rowe Price to be of good standing and will not be made unless, in the
judgment of T. Rowe Price, the consideration to be earned from such loans
would justify the risk.

Repurchase Agreements

The fund may enter into a repurchase agreement through which an investor
(such as the fund) purchases a security (known as the "underlying security")
from a well-established securities dealer or a bank that is a member of the
Federal Reserve System. Any such dealer or bank will be on T. Rowe Price's
approved list and have a credit rating with respect to its short-term debt of
at least A1 by S&P, P1 by Moody's, or the equivalent rating by T. Rowe Price.
At that time, the bank or securities dealer agrees to repurchase the
underlying security at the same price, plus specified interest. Repurchase
agreements are generally for a short period of time, often less than a week.
Repurchase agreements which do not provide for payment within seven days will
be treated as illiquid securities. The fund will only enter into repurchase
agreements where (1) the underlying securities are of the type (excluding
maturity limitations) which the fund's investment guidelines would allow it
to purchase directly, (2) the market value of the underlying security,
including interest accrued, will be at all times equal to or exceed the value
of the repurchase agreement, and (3) payment for the underlying security is
made only upon physical delivery or evidence of book-entry transfer to the
account of the custodian or a bank acting as agent. In the event of a
bankruptcy or other default of a seller of a repurchase agreement, the fund
could experience both delays in liquidating the underlying security and
losses, including: (a) possible decline in the value of the underlying
security during the period while the fund seeks to enforce its rights
thereto; (b) possible subnormal levels of income and lack of access to income
during this period; and (c) expenses of enforcing its rights.

Reverse Repurchase Agreements

Although the fund has no current intention of engaging in reverse repurchase
agreements, the fund reserves the right to do so. Reverse repurchase
agreements are ordinary repurchase agreements in which a fund is the seller
of, rather than the investor in, securities, and agrees to repurchase them at
an agreed upon time and price. Use of a reverse repurchase agreement may be
preferable to a regular sale and later repurchase of the securities because
it avoids certain market risks and transaction costs. A reverse repurchase
agreement may be viewed as a type of borrowing by the fund, subject to
Investment Restriction (1). (See "Investment Restrictions.")

All Funds

INVESTMENT RESTRICTIONS
-------------------------------------------------------------------------------
Fundamental policies may not be changed without the approval of the lesser of
(1) 67% of the fund's shares present at a meeting of shareholders if the
holders of more than 50% of the outstanding shares are present in person or
by proxy or (2) more than 50% of a fund's outstanding shares. Other
restrictions in the form of operating policies are subject to change by the
fund's Board of Directors/Trustees without shareholder approval. Any
investment restriction which involves a maximum percentage of securities or
assets shall not be

<PAGE>

considered to be violated unless an excess over the percentage occurs
immediately after, and is caused by, an acquisition of securities or assets
of, or borrowings by, the fund. Calculation of the fund's total assets for
compliance with any of the following fundamental or operating policies or any
other investment restrictions set forth in the fund's prospectus or Statement
of Additional Information will not include cash collateral held in connection
with securities lending activities.

Fundamental Policies

As a matter of fundamental policy, the fund may not:

(1) Borrowing Borrow money except that the fund may (i) borrow for
non-leveraging, temporary or emergency purposes; and (ii) engage in
reverse repurchase agreements and make other investments or engage in
other transactions, which may involve a borrowing, in a manner consistent
with the fund's investment objective and program, provided that the
combination of (i) and (ii) shall not exceed 33/1//\\/3/\\% of the value
of the fund's total assets (including the amount borrowed) less
liabilities (other than borrowings) or such other percentage permitted by
law. Any borrowings which come to exceed this amount will be reduced in
accordance with applicable law. The fund may borrow from banks, other
Price Funds, or other persons to the extent permitted by applicable law;

(2) Commodities Purchase or sell physical commodities; except that the fund
(other than the Money Funds) may enter into futures contracts and options
thereon;

(3) Industry Concentration Purchase the securities of any issuer if, as a
result, more than 25% of the value of the fund's total assets would be
invested in the securities of issuers having their principal business
activities in the same industry;

(4) Loans Make loans, although the fund may (i) lend portfolio securities and
participate in an interfund lending program with other Price Funds
provided that no such loan may be made if, as a result, the aggregate of
such loans would exceed 33/1//\\/3/\\% of the value of the fund's total
assets; (ii) purchase money market securities and enter into repurchase
agreements; and (iii) acquire publicly distributed or privately placed
debt securities and purchase debt;

(5) Percent Limit on Assets Invested in Any One Issuer (National Tax-Free,
California, Tax-Efficient Balanced, and Tax-Efficient Growth Funds Only)
Purchase a security if, as a result, with respect to 75% of the value of
its total assets, more than 5% of the value of the fund's total assets
would be invested in the securities of a single issuer, except securities
issued or guaranteed by the U.S. government or any of its agencies or
instrumentalities;

(6) Percent Limit on Share Ownership of Any One Issuer (National Tax-Free,
California, Tax-Efficient Balanced, and Tax-Efficient Growth Funds Only)
Purchase a security if, as a result, with respect to 75% of the value of
the fund's total assets, more than 10% of the outstanding voting
securities of any issuer would be held by the fund (other than
obligations issued or guaranteed by the U.S. government, its agencies or
instrumentalities);

(7) Real Estate Purchase or sell real estate, including limited partnership
interests therein, unless acquired as a result of ownership of securities
or other instruments (but this shall not prevent the fund from investing
in securities or other instruments backed by real estate or securities of
companies engaged in the real estate business);

(8) Senior Securities Issue senior securities except in compliance with the
1940 Act;

(9) Taxable Securities (All Funds, except Tax-Efficient Balanced and
Tax-Efficient Growth Funds) During periods of normal market conditions,
purchase any security if, as a result, less than 80% of the fund's income
would be exempt from federal, and if applicable, any state, city, or
local income tax. Normally, the fund will not purchase a security if, as
a result, more than 20% of the fund's income would be subject to the AMT;
or

<PAGE>

(10) Underwriting Underwrite securities issued by other persons, except to
the extent that the fund may be deemed to be an underwriter within the
meaning of the 1933 Act in connection with the purchase and sale of its
portfolio securities in the ordinary course of pursuing its investment
program.

NOTES

The following Notes should be read in connection with the above-described
fundamental policies. The Notes are not fundamental policies.

With respect to investment restriction (1), the Money Funds have no
current intention of engaging in any borrowing transactions.

With respect to investment restriction (2), the fund does not consider
currency contracts or hybrid investments to be commodities.

For purposes of investment restriction (3), U.S., state or local
governments, or related agencies or instrumentalities, are not considered
an industry. Industries are determined by reference to the
classifications of industries set forth in the fund's semiannual and
annual reports. It is the position of the Staff of the SEC that foreign
governments are industries for purposes of this restriction.

For purposes of investment restriction (4), the fund will consider the
acquisition of a debt security to include the execution of a note or
other evidence of an extension of credit with a term of more than nine
months.

Operating Policies

As a matter of operating policy, the fund may not:

(1) Borrowing Purchase additional securities when money borrowed exceeds 5%
of its total assets;

(2) Control of Portfolio Companies Invest in companies for the purpose of
exercising management or control;

(3) Equity Securities (All Funds except Tax-Efficient Balanced and
Tax-Efficient Growth Funds) Purchase any equity security or security
convertible into an equity security provided that the fund (other than
the Money Funds) may invest up to 10% of its total assets in equity
securities which pay tax-exempt dividends and which are otherwise
consistent with the fund's investment objective and, further provided,
that each Money Fund may invest up to 10% of its total assets in equity
securities of other tax-free open-end money market funds;

(4) Futures Contracts Purchase a futures contract or an option thereon, if,
with respect to positions in futures or options on futures which do not
represent bona fide hedging, the aggregate initial margin and premiums on
such options would exceed 5% of the fund's net asset value;

(5) Illiquid Securities Purchase illiquid securities if, as a result, more
than 15% (10% for Money Funds) of its net assets would be invested in
such securities;

(6) Investment Companies Purchase securities of open-end or closed-end
investment companies except (i) in compliance with the Investment Company
Act of 1940; (ii) in the case of the Tax-Free Funds, only securities of
other tax-free money market funds; or (iii) in the case of Tax-Efficient
Balanced and Tax-Efficient Growth Funds, securities of the Reserve
Investment or Government Reserve Investment Funds;

(7) Margin Purchase securities on margin, except (i) for use of short-term
credit necessary for clearance of purchases of portfolio securities and
(ii) it may make margin deposits in connection with futures contracts or
other permissible investments;

(8) Mortgaging Mortgage, pledge, hypothecate or, in any manner, transfer any
security owned by the fund as security for indebtedness except as may be
necessary in connection with permissible borrowings or investments and
then such mortgaging, pledging or hypothecating may not exceed
33/1//\\/3/\\% of the fund's total assets at the time of borrowing or
investment;

<PAGE>

(9) Oil and Gas Programs Purchase participations or other direct interests
in, or enter into leases with respect to oil, gas, or other mineral
exploration or development programs if, as a result thereof, more than 5%
of the value of the total assets of the fund would be invested in such
programs;

(10) Options, etc. Invest in puts, calls, straddles, spreads, or any
combination thereof, except to the extent permitted by the prospectus and
Statement of Additional Information;

(11) Short Sales Effect short sales of securities; or

(12) Warrants Invest in warrants if, as a result thereof, more than 2% of the
value of the net assets of the fund would be invested in warrants.

NOTES

With respect to investment restriction (6), the funds have no current
intention of purchasing the securities of other investment companies.
Duplicate fees could result from any such purchases.

MANAGEMENT OF THE FUNDS
-------------------------------------------------------------------------------
The officers and directors/trustees of the fund are listed below. Unless
otherwise noted, the address of each is 100 East Pratt Street, Baltimore,
Maryland 21202. Except as indicated, each has been an employee of T. Rowe
Price for more than five years. In the list below, the fund's
directors/trustees who are considered "interested persons" of T. Rowe Price
as defined under Section 2(a)(19) of the 1940 Act are noted with an asterisk
(*). These directors/trustees are referred to as inside directors by virtue
of their officership, directorship, and/or employment with T. Rowe Price.

Independent Directors/Trustees/(a)/

All Funds except Tax-Efficient Funds

CALVIN W. BURNETT, PH.D., 3/16/32, President, Coppin State College; Director,
Maryland Chamber of Commerce and Provident Bank of Maryland; Former
President, Baltimore Area Council Boy Scouts of America; Vice President,
Board of Directors, The Walters Art Gallery; Address: 2500 West North Avenue,
Baltimore, Maryland 21216

ANTHONY W. DEERING, 1/28/45, Director, Chairman of the Board, President and
Chief Operating Officer, The Rouse Company, real estate developers, Columbia,
Maryland; Advisory Director, Kleinwort, Benson (North America) Corporation, a
registered broker-dealer; Address: 10275 Little Patuxent Parkway, Columbia,
Maryland 21044

F. PIERCE LINAWEAVER, 8/22/34, President, F. Pierce Linaweaver & Associates,
Inc.; Consulting Environmental & Civil Engineer(s); formerly (1987-1991)
Executive Vice President, EA Engineering, Science, and Technology, Inc., and
President, EA Engineering, Inc., Baltimore, Maryland; Address: Green Spring
Station, 2360 West Joppa Road, Suite 224, Lutherville, Maryland 21093

JOHN G. SCHREIBER, 10/21/46, Owner/President, Schreiber Investments, Inc., a
real estate investment company; Director, AMLI Residential Properties Trust
and Urban Shopping Centers, Inc.; Partner, Blackstone Real Estate Partners,
L.P.; Director and formerly Executive Vice President, JMB Realty Corporation,
a national real estate investment manager and developer; Address: 1115 East
Illinois Road, Lake Forest, Illinois 60045

Tax-Efficient Funds

DONALD W. DICK, JR., 1/27/43, Principal, EuroCapital Advisors, LLC, an
acquisition and management advisory firm; formerly (5/89-6/95) Principal,
Overseas Partners, Inc., a financial investment firm; formerly (6/65-3/89)
Director and Vice President; Consumer Products Division, McCormick & Company,
Inc., international food processors; Director, Waverly, Inc., Baltimore,
Maryland; Address: 925 Cleveland Street, #177, Greenville, South Carolina
29601

<PAGE>

DAVID K. FAGIN, 4/9/38, Chairman and Chief Executive Officer, Western
Exploration and Development, Ltd.; Director Golden Star Resources Ltd. and
Miranda Mining Development Corporation; formerly (7/91- 9/97) Chairman,
Chief Executive Officer, Golden Star Resources Ltd.; (1986-7/91) President,
Chief Operating Officer and Director, Homestake Mining Company; Address: 1700
Lincoln Street, Suite 4710, Denver, Colorado 80203

HANNE M. MERRIMAN, 11/16/41, Retail business consultant; formerly President
and Chief Operating Officer (1991-92), Nan Duskin, Inc., a women's specialty
store, Director (1984-90) and Chairman (1989-90) Federal Reserve Bank of
Richmond, and President and Chief Executive Officer (1988-89), Honeybee,
Inc., a division of Spiegel, Inc.; Director, Central Illinois Public Service
Company, CIPSCO Incorporated, Finlay Enterprises, Inc., The Rouse Company,
State Farm Mutual Automobile Insurance Company and USAir Group, Inc.;
Address: 3201 New Mexico Avenue, N.W., Suite 350, Washington, D.C. 20016

HUBERT D. VOS, 8/2/33, Owner/President, Stonington Capital Corporation, a
private investment company; Address: 1114 State Street, Suite 247, P.O. Box
90409, Santa Barbara, California 93190-0409

PAUL M. WYTHES, 6/23/33, Founding General Partner, Sutter Hill Ventures, a
venture capital limited partnership, providing equity capital to young high
technology companies throughout the United States; Director, Teltone
Corporation, Interventional Technologies Inc. and Stuart Medical, Inc.;
Address: 755 Page Mill Road, Suite A200, Palo Alto, California 94304-1005

(a) Unless otherwise indicated, the Independent Directors/Trustees have been
at their respective companies for at least five years.

Officers

HENRY H. HOPKINS, 12/23/42, Vice President-Vice President, Price-Fleming and
T. Rowe Price Retirement Plan Services, Inc.; Director and Managing Director,
T. Rowe Price; Vice President and Director, T. Rowe Price Investment
Services, Inc., T. Rowe Price Services, Inc. and T. Rowe Price Trust Company

PATRICIA S. LIPPERT, 1/12/53, Secretary-Assistant Vice President, T. Rowe
Price and T. Rowe Price Investment Services, Inc.

CARMEN F. DEYESU, 8/1/41, Treasurer-Vice President, T. Rowe Price, T. Rowe
Price Services, Inc., and T. Rowe Price Trust Company

DAVID S. MIDDLETON, 1/18/56, Controller-Vice President, T. Rowe Price and T.
Rowe Price Trust Company

INGRID I. VORDEMBERGE, 9/27/35, Assistant Vice President-Employee, T. Rowe
Price

California and State Tax-Free Trusts

* WILLIAM T. REYNOLDS, 5/26/48, Chairman of the Board -Director and Managing
Director, T. Rowe Price; Chartered Financial Analyst

* JAMES S. RIEPE, 6/25/43, Trustee and Vice President -Vice Chairman of the
Board, Managing Director, and Director, T. Rowe Price; Chairman of the Board,
T. Rowe Price Investment Services, Inc., T. Rowe Price Services, Inc., and T.
Rowe Price Retirement Plan Services, Inc.; Chairman of the Board, President,
and Trust Officer, T. Rowe Price Trust Company; Director, Price-Fleming and
General Re Corporation

* M. DAVID TESTA, 4/22/44, Trustee -Chairman of the Board and Director,
Price-Fleming; Vice Chairman of the Board, Chief Investment Officer, and
Managing Director, T. Rowe Price; Vice President and Director, T. Rowe Price
Trust Company; Chartered Financial Analyst

MARY J. MILLER, 7/19/55, President -Managing Director, T. Rowe Price

JANET G. ALBRIGHT, 3/31/57, Vice President -Vice President, T. Rowe Price

JEREMY N. BAKER, 2/27/68, Vice President -Employee, T. Rowe Price

PATRICE BERCHTENBREITER ELY, 1/13/53, Vice President -Vice President, T. Rowe
Price

<PAGE>

PATRICIA S. DEFORD, 9/29/57, Vice President -Vice President, T. Rowe Price

CHARLES B. HILL, 9/22/61, Vice President -Vice President, T. Rowe Price

JOSEPH K. LYNAGH, 6/9/58, Vice President -Vice President, T. Rowe Price

KONSTANTINE B. MALLAS, 5/26/63, Vice President -Vice President, T. Rowe Price

EDWARD T. SCHNEIDER, 9/19/59, Vice President -Vice President, T. Rowe Price

WILLIAM F. SNIDER, 9/16/69, Vice President -Vice President, T. Rowe Price

C. STEPHEN WOLFE II, 4/5/59, Vice President -Vice President, T. Rowe Price

State Tax-Free Trust Only

ROBERT A. DONAHUE, 11/8/64, Vice President -Assistant Vice President and
Municipal Credit Analyst, T. Rowe Price; (1998) formerly Director of Policy
Evaluation, District of Columbia Public Schools

MARCY M. LASH, 1/30/63, Vice President -Assistant Vice President and
Municipal Credit Analyst, T. Rowe Price; (1998) formerly Assistant Vice
President, underwriting, at Connie Lee Insurance Company

HUGH D. MCGUIRK, 7/6/60, Vice President -Vice President, T. Rowe Price

JULIE A. SALSBERY, 4/29/70, Vice President -Assistant Vice President and
Fixed Income Trader, T. Rowe Price; (1997) formerly assistant portfolio
manager/trader at Wainwright Asset Management

Tax-Efficient Funds

* JAMES A.C. KENNEDY, 8/17/53, Director-Director and Managing Director, T.

Rowe Price; Chartered Financial Analyst

* JAMES S. RIEPE, 6/25/43, Director and President -Vice Chairman of the
Board, Managing Director, and Director, T. Rowe Price; Chairman of the Board,
T. Rowe Price Investment Services, Inc., T. Rowe Price Services, Inc., and T.
Rowe Price Retirement Plan Services, Inc.; Chairman of the Board, President,
and Trust Officer, T. Rowe Price Trust Company; Director, Price-Fleming and
General Re Corporation

* M. DAVID TESTA, 4/22/44, Director -Chairman of the Board and Director,
Price-Fleming; Vice Chairman of the Board, Chief Investment Officer, and
Managing Director, T. Rowe Price; Vice President and Director, T. Rowe Price
Trust Company; Chartered Financial Analyst

MARY J. MILLER, 7/19/55, Executive Vice President -Managing Director, T. Rowe
Price

DONALD J. PETERS, 7/3/59, Executive Vice President -Vice President, T. Rowe
Price; formerly portfolio manager, Geewax Terker and Company

STEPHEN W. BOESEL, 12/28/44, Vice President -Managing Director, T. Rowe
Price; Vice President, T. Rowe Price Trust Company and T. Rowe Price
Retirement Plan Services, Inc.

JILL L. HAUSER, 6/23/58, Vice President -Vice President, T. Rowe Price

THOMAS J. HUBER, 9/23/66, Vice President -Vice President, T. Rowe Price;
formerly a Corporate Banking Officer with NationsBank; Chartered Financial
Analyst

HUGH D. MCGUIRK, 7/6/60, Vice President -Vice President, T. Rowe Price

LARRY J. PUGLIA, 8/25/60, Vice President -Managing Director, T. Rowe Price;
Chartered Financial Analyst

WILLIAM T. REYNOLDS, 5/26/48, Vice President -Director and Managing Director,
T. Rowe Price; Chartered Financial Analyst

ROBERT W. SHARPS, 6/10/71, Vice President -Assistant Vice President, T. Rowe
Price; formerly Senior Consultant, KPMG Peat Marwick; Chartered Financial
Analyst

WILLIAM F. SNIDER, 9/16/69, Vice President -Vice President, T. Rowe Price

<PAGE>

WILLIAM J. STROMBERG, 3/10/60, Vice President -Managing Director, T. Rowe
Price; Chartered Financial Analyst

ARTHUR S. VARNADO, 6/1/60, Vice President -Vice President, T. Rowe Price

MARK R. WEIGMAN, 7/30/62, Vice President-Vice President, T. Rowe Price; Vice
President, T. Rowe Price Trust Company; Chartered Financial Analyst

J. JEFFREY LANG, 1/10/62, Assistant Vice President-Assistant Vice President,
T. Rowe Price; Vice President, T. Rowe Price Trust Company

Tax-Exempt Money Fund

* WILLIAM T. REYNOLDS, 5/26/48, Chairman of the Board -Director and Managing
Director, T. Rowe Price; Chartered Financial Analyst

* JAMES S. RIEPE, 6/25/43, Director and Vice President -Vice Chairman of the
Board, Managing Director, and Director, T. Rowe Price; Chairman of the Board,
T. Rowe Price Investment Services, Inc., T. Rowe Price Services, Inc., and T.
Rowe Price Retirement Plan Services, Inc.; Chairman of the Board, President,
and Trust Officer, T. Rowe Price Trust Company; Director, Price-Fleming and
General Re Corporation

PATRICE BERCHTENBREITER ELY, 1/13/53, President -Vice President, T. Rowe
Price

JANET G. ALBRIGHT, 3/31/57, Vice President -Vice President, T. Rowe Price

JEREMY N. BAKER, 2/27/68, Vice President -Employee, T. Rowe Price

PATRICIA S. DEFORD, 9/29/57, Vice President -Vice President, T. Rowe Price

JOSEPH K. LYNAGH, 6/9/58, Vice President -Vice President, T. Rowe Price

MARY J. MILLER, 7/19/55, Vice President -Managing Director, T. Rowe Price

EDWARD T. SCHNEIDER, 9/19/59, Vice President -Vice President, T. Rowe Price

C. STEPHEN WOLFE II, 4/5/59, Vice President -Vice President, T. Rowe Price

Tax-Free High Yield Fund

* WILLIAM T. REYNOLDS, 5/26/48, Chairman of the Board -Director and Managing
Director, T. Rowe Price; Chartered Financial Analyst

WILLIAM F. SNIDER, 9/16/69, President -Vice President, T. Rowe Price

PATRICIA S. DEFORD, 9/29/57, Executive Vice President -Vice President, T.
Rowe Price

JANET G. ALBRIGHT, 3/31/57, Vice President -Vice President, T. Rowe Price

CHARLES B. HILL, 9/22/61, Vice President -Vice President, T. Rowe Price

KONSTANTINE B. MALLAS, 5/26/63, Vice President -Vice President, T. Rowe Price

HUGH D. MCGUIRK, 7/6/60, Vice President -Vice President, T. Rowe Price

<PAGE>

MARY J. MILLER, 7/19/55, Vice President -Managing Director, T. Rowe Price

EDWARD T. SCHNEIDER, 9/19/59, Vice President -Vice President, T. Rowe Price

C. STEPHEN WOLFE II, 4/5/59, Vice President -Vice President, T. Rowe Price

Tax-Free Income Fund