PRICE T ROWE PRIME RESERVE FUND INC, 497, 1995-10-13

PRICE T ROWE PRIME RESERVE FUND INC
497, 1995-10-13

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PAGE 1

Combined Prospectus, dated March 1, 1995, should be inserted
here.

TO OPEN AN ACCOUNT
INVESTOR SERVICES
1-800-638-5660
1-410-547-2308

FOR EXISTING ACCOUNTS
SHAREHOLDER SERVICES
1-800-225-5132
1-410-625-6500

FOR YIELDS AND PRICES
TELE*ACCESS(REGISTERED TRADEMARK)
1-800-638-2587
1-410-625-7676
24 HOURS, 7 DAYS

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

ARCO TOWER
31ST FLOOR
515 SOUTH FLOWER ST.
LOS ANGELES, CA 90071

Invest With Confidence

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
timely, informative reports.

PROSPECTUS

T. ROWE PRICE
PRIME RESERVE FUND
NEW INCOME FUND
EQUITY INCOME FUND
INTERNATIONAL STOCK FUND

T. ROWE PRICE PRIME RESERVE FUND, INC.

T. ROWE PRICE NEW INCOME FUND, INC.

T. ROWE PRICE EQUITY INCOME FUND

T. ROWE PRICE INTERNATIONAL FUNDS, INC.

OCTOBER 1, 1995

_____________________________________________________________________________
A selection of stock, bond, and money market funds to help investors meet
their financial objectives.

Facts at a Glance

Investment Goal

Each of the four funds seeks the highest total return over time consistent
with its particular investment strategy and level of potential risk. There is
no assurance the funds will achieve their goal.

Strategies and Risk/Reward

Prime Reserve Fund. A money market fund seeking preservation of capital,
liquidity, and, consistent with these goals, the highest possible income
through investments in high-quality money market securities. Risk/Reward:
Lowest potential risk and reward. Your investment in the fund is neither
insured nor guaranteed by the U.S. government, and there is no assurance the
fund will be able to maintain a stable net asset value of $1.00 per share.

New Income Fund. A bond fund seeking the highest level of income consistent
with the preservation of capital over time through investments primarily in
marketable debt securities. Risk/Reward: Moderate income and share price
fluctuation.

Equity Income Fund. A conservative stock fund with the potential for dividend
income and some capital appreciation by investing primarily in dividend-paying
common stocks of established companies. Risk/Reward: Lower risk than a fund
focusing on growth stocks, but greater risk than a bond fund.

International Stock Fund.(registered trademark) A moderately aggressive stock
fund seeking long-term growth of capital through investments primarily in
common stocks of established, non-U.S. companies. Risk/Reward: High potential
risk and reward. In addition to the usual risks of stock market investing, the
fund's share price may be affected by foreign currency exchange conditions.

Investor Profile

Investors should select funds that closely match their goals (e.g.,
preservation of principal or capital appreciation) and investment time
horizons (e.g., short or long term). The funds are appropriate for both
regular and tax-deferred accounts, such as IRAs.

Fees and Charges

100% no load. No sales charges; no 12b-1 marketing fees; free telephone
exchange.

Investment Manager

The Prime Reserve, New Income, and Equity Income Funds are managed by T. Rowe
Price Associates, Inc. ("T. Rowe Price"), which was founded in 1937 and
managed over $66 billion as of June 30, 1995. The International Stock Fund is
managed by Rowe Price-Fleming International, Inc., a joint venture established
in 1979 between T. Rowe Price and Robert Fleming Holdings, Ltd. which managed
over $20 billion as of June 30, 1995.

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION, OR ANY STATE SECURITIES COMMISSION, PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.

T. Rowe Price
Prime Reserve Fund, Inc.
New Income Fund, Inc.
Equity Income Fund
International Funds, Inc.
October 1, 1995

Prospectus

Contents

_____________________________________________________________________________
1 About the Funds
_____________________________________________________________________________
Transaction and
Fund Expenses 2
_____________________________________________________________________________
Financial Highlights 4
_____________________________________________________________________________
Fund, Market, and Risk
Characteristics 6
_____________________________________________________________________________
2 About Your Account
_____________________________________________________________________________
Pricing Shares and
Receiving Sale Proceeds 20
_____________________________________________________________________________
Distributions and Taxes 21
_____________________________________________________________________________
Transaction Procedures and
Special Requirements 23
_____________________________________________________________________________
3 More About the Funds
_____________________________________________________________________________
Organization and Management 25
_____________________________________________________________________________
Understanding Fund
Performance 28
_____________________________________________________________________________
Investment Policies and
Practices 29
_____________________________________________________________________________
4 Investing With T. Rowe Price
_____________________________________________________________________________
Account Requirements and
Transaction Information 43
_____________________________________________________________________________
Opening a New Account 44
_____________________________________________________________________________
Purchasing Additional
Shares 45
_____________________________________________________________________________
Exchanging and Redeeming 45
_____________________________________________________________________________
Shareholder Services 46

This prospectus contains information you should know before investing. Please
keep it for future reference. A Statement of Additional Information about the
funds, dated October 1, 1995, has been filed with the Securities and Exchange
Commission and is incorporated by reference in this prospectus. To obtain a
free copy, call 1-800-638-5660.

1 About the Funds

Transaction and Fund Expenses

_____________________________________________________________________________
LIKE ALL T. ROWE PRICE FUNDS, THESE FUNDS ARE 100% NO LOAD.

These tables should help you understand the kinds of expenses you will bear
directly or indirectly as a fund shareholder.

The first part of the table, "Shareholder Transaction Expenses," shows that
you pay no sales charges. All the money you invest in a fund goes to work for
you, subject to the fees explained below. "Annual Fund Expenses," provides an
estimate of how much it will cost to operate each fund for a year, based on
fiscal year expenses. These are costs you pay indirectly, because they are
deducted from the fund's total assets before the daily share price is
calculated and before dividends and other distributions are made. In other
words, you will not see these expenses on your account statement.

_____________________________________________________________________________
Shareholder Transaction Expenses
Prime New Equity International
Reserve Income Income Stock
_____________________________________________________________________________
Sales load "charge"
on purchases None None None None
_____________________________________________________________________________
Sales load "charge"
on reinvested
dividends None None None None
_____________________________________________________________________________
Redemption fees None None None None
_____________________________________________________________________________
Exchange fees None None None None

Annual Fund
Expenses Percentage of Fiscal Year Average Net Assetsa
Prime New Equity International
Reserve Income Income Stock
_____________________________________________________________________________
Management fee 0.39% 0.49% 0.59% 0.69%
_____________________________________________________________________________
Marketing fees
(12b-1) None None None None
_____________________________________________________________________________
Total other
(shareholder servicing,
custodial,
auditing, etc.) 0.28% 0.29% 0.29% 0.27%
_____________________________________________________________________________
Total fund expensesb 0.67% 0.78% 0.88% 0.96%
_____________________________________________________________________________
a Expenses are expressed as a percent of fiscal year 1995 (Prime Reserve
and New Income Funds) and fiscal year 1994 (Equity Income and
International Stock Funds) average fund net assets.
b Each fund charges a $5 fee for wire redemptions under $5,000, subject
to change without notice.
_____________________________________________________________________________
Table 1

The main types of expenses, which all mutual funds may charge against fund
assets, are:

0 A management fee: the percent of fund assets paid to the fund's
investment manager. Each fund's fee comprises both a group fee, 0.34% as
of June 30, 1995, and an individual fund fee, as follows:

0.05% for the Prime Reserve Fund, 0.15% for the New Income Fund, 0.25%
for the Equity Income Fund, and 0.35% for the International Stock Fund.

0 "Other" administrative expenses: primarily the servicing of shareholder
accounts, such as providing statements and reports and disbursing
dividends, as well as custodial services. For the years ended May 31,
1995 (Prime Reserve and New Income Funds), December 31, 1994 (Equity
Income Fund) and October 31, 1994 (International Stock Fund), the funds
paid the fees shown in Table 3 to T. Rowe Price Services, Inc. for
transfer and dividend disbursing functions and shareholders services; T.
Rowe Price Retirement Plan Services, Inc. for recordkeeping services for
certain retirement plans; and T. Rowe Price for fund accounting
services.

0 Marketing or distribution fees: an annual charge ("12b-1") to existing
shareholders to defray the cost of selling shares to new shareholders.
T. Rowe Price funds do not levy 12b-1 fees.

For further details on fund expenses, please see "Organization and
Management."

0 Hypothetical example: Assume you invest at least $1,000, the fund
returns 5% annually, expense ratios remain as previously listed, and you
close your account at the end of the time periods shown. Your expenses
would be:

_____________________________________________________________________________
THE TABLE AT RIGHT IS JUST AN EXAMPLE; ACTUAL EXPENSES CAN BE HIGHER OR LOWER
THAN THOSE SHOWN.

_____________________________________________________________________________
Fund 1 year 3 years 5 years 10 years
_____________________________________________________________________________
Prime Reserve $ 7 $ 21 $ 37 $ 83
_____________________________________________________________________________
New Income 8 25 43 97
_____________________________________________________________________________
Equity Income 9 28 49 108
_____________________________________________________________________________
International Stock 10 31 53 118
_____________________________________________________________________________
Table 2

_____________________________________________________________________________
Service Fees Paid
Transfer Subaccounting
Agent Services Accounting
_____________________________________________________________________________
Prime Reserve 5/31/95 $4,421,000 $3,575,000 $ 85,000
_____________________________________________________________________________
New Income 5/31/95 1,247,000 1,723,000 154,000
_____________________________________________________________________________
Equity Income 1,839,000 3,979,000 85,000
_____________________________________________________________________________
International Stock 2,515,000 4,002,000 125,000
_____________________________________________________________________________
Table 3

Financial Highlights

The following tables provide information about each fund's financial history.
It is based on a single share outstanding throughout each fiscal year. The
respective table is part of each fund's financial statements which are
included in each fund's annual report and are incorporated by reference into
the Statement of Additional Information. This document is available to
shareholders upon request. The financial statements in the annual report have
been audited by the funds' independent accountants whose respective
unqualified reports cover the most recent five-year periods.

___________________________________________________________________________________________________________

Investment Activities Distributions End of Period

Net Ratio
Realized of Net
and Total Ratio Invest-
Net Unreal- Return of Ex- ment
Asset Net ized Total Net (Incl- penses Income
Value, Invest- Gain from Net Asset udes Net to to
Begin- ment (Loss) Invest- Invest- Net Value, Rein- Assets Aver- Aver-
ning In- of ment ment Real- Total End vested ($ age age
Year of come Invest- Activi- In- ized Distri- of Divi- Thou- Net Net
Ended Period (Loss) ments ties come Gain butions Period dends) sands) Assets Assets
____________________________________________________________________________________________________________
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>

Prime Reserve
1986 $1.000 $0.075 - $0.075 $(0.075) - $(0.075) $1.000 7.9% $2,812,921 0.65% 7.61%
1987 1.000 0.059 - 0.059 (0.059) - (0.059) 1.000 6.0% 2,633,001 0.76% 5.89%
1988a 1.000 0.063 - 0.063 (0.063) - (0.063) 1.000 6.5% 3,424,753 0.79% 6.37%
1989 1.000 0.072 - 0.072 (0.072) - (0.072) 1.000 7.5% 4,063,417 0.79% 7.29%
1990 1.000 0.085 - 0.085 (0.085) - (0.085) 1.000 8.8% 4,841,954 0.75% 8.45%
1991 1.000 0.073 - 0.073 (0.073) - (0.073) 1.000 7.6% 4,753,267 0.75% 7.33%
1992a 1.000 0.051 - 0.051 (0.051) - (0.051) 1.000 5.3% 4,115,224 0.78% 5.14%
1993 1.000 0.030 - 0.030 (0.030) - (0.030) 1.000 3.1% 3,596,590 0.75% 3.04%
1994 1.000 0.026 - 0.026 (0.026) - (0.026) 1.000 2.6% 3,378,976 0.74% 2.56%
1994b 1.000 0.008 - 0.008 (0.008) - (0.008) 1.000 0.8% 3,627,255 0.73%b 3.02%b
1995 1.000 0.047 - 0.047 (0.047) - (0.047) 1.000 0.7% 3,840,778 0.67% 4.76%

____________________________________________________________________________________________________________
<FN>
a Year ended February 29.
b For the three months ended May 31, 1994. Fiscal year-end changed from February 28 to May 31. All
ratios are annualized.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
___________________________________________________________________________________________________________

Investment Activities Distributions End of Period

Net Ratio
Realized of Net
and Total Ratio Invest-
Net Unreal- Return of Ex- ment
Asset Net ized Total Net (Incl- penses Income
Year Value, Invest- Gain from Net Asset udes Net to to Port-
Ended,Begin- ment (Loss) Invest- Invest- Net Value, Rein- Assets Aver- Aver- folio
Dece- ning In- on ment ment Real- Total End vested ($ age age Turn-
mber of come Invest- Activi- In- ized Distri- of Divi- Thou- Net Net over
31 Period (Loss) ments ties come Gain butions Period dends) sands) Assets Assets Rate
____________________________________________________________________________________________________________
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>

New Income
1986 $8.18 $0.88 $0.77 $1.65 $(0.88) - $(0.88) $8.95 21.4% $ 936,137 0.66% 10.39% 184.9%
1987 8.95 0.75 0.22 0.97 (0.75) - (0.75) 9.17 11.2% 939,078 0.65% 8.22% 125.4%
1988c 9.17 0.76 (0.41) 0.35 (0.76) - (0.76) 8.76 4.3% 834,487 0.80% 8.77% 157.9%
1989 8.76 0.81 (0.50) 0.31 (0.81) - (0.81) 8.26 3.7% 860,231 0.91% 9.50% 91.8%
1990 8.26 0.75 0.12 0.87 (0.75) $(0.01) (0.76) 8.37 10.7% 992,566 0.86% 8.85% 51.1%
1991 8.37 0.70 0.24 0.94 (0.70) (0.01) (0.71) 8.60 11.8% 1,130,857 0.88% 8.33% 20.7%
1992c 8.60 0.67 0.36 1.03 (0.67) (0.02) (0.69) 8.94 12.4% 1,306,674 0.87% 7.64% 49.7%
1993 8.94 0.57 0.30 0.87 (0.57) - (0.57) 9.24 10.1% 1,527,299 0.84% 6.36% 85.8%
1994 9.24 0.54 (0.05) 0.49 (0.54) (0.07) (0.61) 9.12 5.4% 1,457,959 0.82% 5.77% 58.3%
1994d 9.12 0.14 (0.40) (0.26) (0.14) (0.07) (0.21) 8.65 (2.8)% 1,375,056 0.80%d 6.43%d 91.5%d
1995 8.65 0.58 0.34 0.92 (0.58) (0.02) (0.60) 8.97 11.1% 1,566,903 0.78% 6.95% 54.1%
____________________________________________________________________________________________________________
<FN>
a Total return reflects the following capital gain distributions: long-term gains of $0.01, $0.07 on
1/4/78 and 12/31/93, respectively, short-term gains of $0.01 and $0.02 on 12/31/90 and 12/31/91,
respectively.
b Portfolio turnover rate prior to February 28, 1986 excludes long-term U.S. government securities.
c Year ended February 29.
d For the three months ended May 31, 1994. Fiscal year-end changed from February 28 to May 31. All ratios
are annualized.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>

___________________________________________________________________________________________________________

Investment Activities Distributions End of Period

Equity Income
1985a$10.00 $0.14 $0.86 $1.00 - - - $11.00 10.0% $ 16,623 1.00%b 7.62% 36.6%
1986 11.00 0.66 2.21 2.87 $(0.65) $(0.26)$(0.91) 12.96 26.8% 93,991 1.00%b 5.16% 72.5%
1987 12.96 0.64 (0.14) 0.50 (0.82) (1.35) (2.17) 11.29 3.5% 185,096 1.10%c 4.58% 79.8%
1988 11.29 0.63 2.46 3.09 (0.62) (0.38) (1.00) 13.38 27.6% 500,922 1.30% 4.83% 36.4%
1989 13.38 0.77 1.06 1.83 (0.76) (0.39) (1.15) 14.06 13.7% 968,441 1.11% 5.31% 34.4%
1990 14.06 0.67 (1.62) (0.95) (0.65) (0.19) (0.84) 12.27 (6.8)% 862,059 1.13% 5.09% 24.4%
1991 12.27 0.62 2.44 3.06 (0.61) (0.10) (0.71) 14.62 25.3% 1,335,400 1.05% 4.44% 33.5%
1992 14.62 0.62 1.41 2.03 (0.63) (0.39) (1.02) 15.63 14.1% 2,091,535 0.97% 3.95% 30.0%
1993 15.63 0.54 1.74 2.28 (0.54) (0.72) (1.26) 16.65 14.8% 2,851,347 0.91% 3.23% 31.2%
1994 16.65 0.60 0.13 0.73 (0.59) (0.81) (1.40) 15.98 4.5% 3,203,851 0.88% 3.63% 36.3%
____________________________________________________________________________________________________________
<FN>
a For the period October 31, 1985 (commencement of operations) to December 31, 1985.
b Excludes expenses in excess of a 1.00% voluntary expense limitation in effect through December 31, 1986.
c Excludes expenses in excess of a state expense limitation.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>

___________________________________________________________________________________________________________

Investment Activities Distributions End of Period

International Stocka

1985 $ 6.59 $0.11 $2.71 $2.82 $(0.15) $(0.22) $(0.37) $ 9.04 45.3% $ 376,843 1.11% 1.54% 61.9%
1986 9.04 0.11 5.23 5.34 (0.11) (1.38) (1.49) 12.89 61.3% 790,020 1.10% 0.89% 56.4%
1987 12.89 0.12 0.74 0.86 (0.23) (4.98) (5.21) 8.54 8.0% 642,463 1.14% 0.93% 76.5%
1988 8.54 0.16 1.36 1.52 (0.16) (0.93) (1.09) 8.97 17.9% 630,114 1.16% 1.78% 42.4%
1989 8.97 0.16 1.94 2.10 (0.16) (0.67) (0.83) 10.24 23.7% 970,214 1.10% 1.63% 47.8%
1990 10.24 0.22 (1.13) (0.91) (0.16) (0.36) (0.52) 8.81 (8.9%) 1,030,848 1.09% 2.16% 47.1%
1991 8.81 0.15 1.22 1.37 (0.15) (0.49) (0.64) 9.54 15.9% 1,476,309 1.10% 1.51% 45.0%
1992 9.54 0.14 (0.47) (0.33) (0.16) (0.16) (0.32) 8.89 (3.5%) 1,949,631 1.05% 1.49% 37.8%
1993c 8.89 0.10 2.75 2.85 - - - 11.74 32.1% 2,746,055 1.01%b 1.52%b 29.8%b
1994 11.74 0.09 1.30 1.39 (0.09) (0.20) (0.29) 12.84 12.0% 6,205,713 0.96% 1.11% 22.9%
____________________________________________________________________________________________________________
<FN>
a All share and per-share figures reflect the 2-for-1 stock split effective August 31, 1987.
b Annualized.
c For the ten months ended October 31, 1993. Fiscal year-end changed from December 31 to October 31.
</FN>
____________________________________________________________________________________________________________
Table 4
</TABLE>

<PAGE>
Fund, Market, and Risk Characteristics: What to Expect

Prime Reserve Fund

To help you decide if the fund is appropriate for you, this section takes a
closer look at its investment objectives and approach.

What are the fund's investment objectives?

The fund's objectives are preservation of capital, liquidity, and, consistent
with these, the highest possible current income through investments primarily
in high-quality, money market securities.

_____________________________________________________________________________
THERE IS NO ASSURANCE THE FUND WILL BE ABLE TO MAINTAIN A STABLE NET ASSET
VALUE OF $1.00 PER SHARE.

What is the fund's investment program?

The fund invests at least 95% of its total assets in prime money market
instruments, that is, securities receiving the highest credit rating assigned
by at least two established rating agencies, by one rating agency if the
security is rated by only one, or, if unrated, the equivalent rating as
established by T. Rowe Price. The fund's dollar-weighted average maturity will
not exceed 90 days. It will generally purchase securities with maturities of
13 months or less, although U.S. government securities with maturities of up
to 25 months may also be purchased. Its yield will fluctuate in response to
changes in interest rates, but the share price is managed to remain stable at
$1.00. Unlike most bank accounts or certificates of deposit, the fund is not
insured or guaranteed by the U.S. government.

What is a money market fund?

A money market fund is a pool of assets invested in U.S. dollar-denominated,
short-term debt obligations with fixed or floating rates of interest and
maturities generally less than 13 months. Issuers can include the U.S.
government and its agencies, domestic and foreign banks and other
corporations, and municipalities. Money funds can be taxable or tax-exempt,
depending on their investment program. Because of the high degree of safety
they provide, money market funds typically offer the lowest return potential
of any type of mutual fund.

_____________________________________________________________________________
FOR FURTHER DETAILS OF THE FUND'S INVESTMENT PROGRAM AND RISKS, PLEASE SEE THE
SECTION ENTITLED "INVESTMENT POLICIES AND PRACTICES."

What are the main types of money market securities the fund can invest in?

0 Commercial paper: unsecured promissory notes that corporations typically
issue to finance current operations and other expenditures.

0 Treasury bills: debt obligations sold at a discount and repaid at face
value by the U.S. Treasury. Bills mature in one year or less and are
backed by the full faith and credit of the U.S. government.

0 Certificates of deposit: receipts for funds deposited at large banks that
guarantee a fixed interest rate over a specified time period.

0 Repurchase agreements: contracts, usually involving U.S. government
securities, that require one party to repurchase securities at a fixed
price on a designated date.

0 Banker's acceptances: bank-issued commitment to pay for merchandise sold
in the import/ export market.

0 Agency notes: debt obligations of agencies sponsored by the U.S.
government that are not backed by the full faith and credit of the United
States.

0 Medium-term notes: unsecured corporate debt obligations that are
continuously offered in a broad range of maturities and structures.

0 Bank notes: unsecured obligations of a bank that rank on an equal basis
with other kinds of deposits but do not carry FDIC insurance.

What are the main risks of investing in money market funds?

Since they are managed to maintain a $1.00 share price, money market funds
should have little risk of principal loss. However, the potential for
realizing a loss of principal could derive from:

0 Credit risk: the chance that any of the fund's holdings will have its
credit rating downgraded or will default (fail to make scheduled interest
and principal payments), potentially reducing the fund's income level and
share price. Regulations require that 95% of the holdings in money market
funds be rated in the highest credit category, and that the remaining 5%
be rated no lower than the second highest credit category.

0 Interest rate or market risk: the decline in the prices of fixed income
securities and funds that may accompany a rise in the overall level of
interest rates. A sharp and unexpected rise in interest rates could cause
a money fund's price to drop below a dollar. However, the extremely
short-term securities held in money market portfolios-a means of achieving
an overall fund objective of principal safety-reduces much of their
potential for price fluctuation.

How does the portfolio manager try to reduce risk?

Consistent with the fund's objectives, the portfolio manager actively manages
the fund in an effort to manage risk and increase yield. Risk management tools
include:

0 Diversification of assets to reduce the impact of a single holding on the
fund's net asset value.

0 Thorough credit research by our own analysts.

0 Maturity adjustments to reflect the fund manager's interest rate outlook.

What are derivatives and can the fund invest in them?

The term derivative is used to describe financial instruments whose value is
derived from an underlying security (e.g., a stock or bond) or a market
benchmark (e.g., an interest rate index). Many types of investments
representing a wide range of potential risks and rewards fall under the
"derivatives" umbrella -- from conventional instruments such as callable
bonds, futures, and options, to more exotic investments such as stripped
mortgage securities and structured notes. While it was only recently that the
term derivative has become widely known among the investing public,
derivatives have in fact been employed by investment managers for many years.

The fund does not invest in high-risk, highly leveraged derivatives, and will
invest in derivatives only if the expected risks and rewards are consistent
with its objective, policies, and overall risk profile as described in this
prospectus.

_____________________________________________________________________________
YOU MAY WANT TO REVIEW SOME FUNDAMENTALS OF MONEY MARKET SECURITIES.

Is a fund's yield fixed or will it vary?

It will vary. Yield is calculated every day by dividing the fund's net income
per share, expressed at annual rates, by the share price. Since income in the
fund will fluctuate as the short-term securities in its portfolio mature and
the proceeds are reinvested, its yield will vary.

Is a fund's "yield" the same thing as the "total return"?

Yes. The total return reported for a fund is the result of reinvested
distributions (income and capital gains) and the change in share price for a
given time period. Since money funds are managed to maintain a stable share
price, their yield and total return should be the same. Of course, there is no
guarantee a money fund will maintain a $1.00 share price.

What is credit quality and how does it affect a money market fund's yield?

Credit quality refers to a borrower's expected ability to make all required
interest and principal payments in a timely manner. Because highly rated
issuers represent less risk, they can borrow at lower interest rates than less
creditworthy issuers. Securities backed by the full faith and credit of the
U.S. government are regarded as free of credit risk. Among money market
securities, Treasury bills generally carry lower yields than other instruments
of comparable maturity.

What is meant by a fund's "maturity"?

Every money market instrument has a stated maturity date when the issuer must
repay the entire principal to the investor. The fund has no maturity in the
strict sense of the word, but does have a dollar-weighted average maturity,
expressed in days. This number is an average of the maturities of the
underlying instruments, with each maturity "weighted" by the percentage of
fund assets it represents.

Do money market securities react to changes in interest rates?

Yes. As interest rates change, the prices of money market securities
fluctuate, but changes are usually small because of their very short
maturities. Investments are typically held until maturity in a money fund to
help it maintain a $1.00 share price.

_____________________________________________________________________________
AN INVESTMENT IN THE FUND SHOULD HELP YOU MEET YOUR INDIVIDUAL INVESTMENT
GOALS FOR PRINCIPAL STABILITY, LIQUIDITY AND INCOME, BUT SHOULD NOT REPRESENT
YOUR COMPLETE INVESTMENT PROGRAM.

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

Review your own financial objectives, time horizon, and risk tolerance. For
example, a money fund is designed to provide principal stability, which makes
it a good choice for money you may need for occasional or unexpected expenses
and for money awaiting investment in longer-term bond or stock funds.

Is there additional information about the fund to help me make a decision?

Be sure to read "Investment Policies and Practices" in Section 3, which
reviews the following topics: Types of Portfolio Securities (money market
securities, asset-backed securities, foreign securities, and private
placements); Types of Management Practices (borrowing money and transferring
assets, and lending of portfolio securities).

New Income Fund

To help you decide if the fund is appropriate for you, this section takes a
closer look at its investment objectives and approach.

_____________________________________________________________________________
THE FUND SHOULD NOT BE RELIED UPON AS A COMPLETE INVESTMENT PROGRAM NOR BE
USED FOR SHORT-TERM TRADING PURPOSES.

What is the fund's objective?

The fund's objective is to provide a high level of income over time consistent
with the preservation of capital through investment primarily in marketable
debt securities.

What is the fund's investment program?

At least 80% of the fund's total assets will be invested in income-producing,
investment-grade instruments, including (but not limited to) U.S. government
and agency obligations, mortgage-backed securities, corporate debt securities,
asset-backed securities, bank obligations, collateralized mortgage obligations
(CMOs), commercial paper, foreign securities, and others. There are no
maturity restrictions on securities purchased by the fund, but the fund's
dollar-weighted average maturity is generally expected to be between 4 and 15
years.

_____________________________________________________________________________
FOR FURTHER DETAILS ON THE FUND'S INVESTMENT PROGRAM, PLEASE SEE THE SECTION
ENTITLED "INVESTMENT POLICIES AND PRACTICES."

What is the credit quality of the fund's investments?

Securities purchased by the fund will be rated within the four highest credit
categories by at least one established public rating agency (or, if unrated, a
T. Rowe Price equivalent), and the fund will not purchase any security which
is rated below investment grade by Standard & Poors, Moody's, or Fitch
Investor Services. An investment-grade security can range from the highest
rated (AAA) to medium quality (BBB). Securities in the BBB category may be
more susceptible to adverse economic conditions or changing circumstances and
the securities at the lower end of the BBB category have certain speculative
characteristics. The fund may retain a security that is downgraded to a
noninvestment-grade level after purchase.

Is the fund a substitute for a money market fund?

No. Money market funds, which have an average maturity under one year,
ordinarily generate lower income in return for stability of net asset value.
The fund is designed to provide higher income with moderate fluctuation of net
asset value. As such, it should be viewed as a longer-term investment.

What are the most important influences on fund performance?

Performance (total return) is determined by the change in the fund's share
price and income level over a given period. Both components are affected by
changes in interest rates.

The fund's share price will generally move in the opposite direction of
interest rates. For example, as interest rates rise, share price will likely
decline. Rising rates provide the opportunity for the fund's income to
increase, but it is unlikely that the higher income by itself will entirely
offset the fall in price.

The maturity and type of securities in the fund's portfolio determine just how
much the share price rises or falls when rates change. Generally, when rates
fall, long-term securities rise more in price than short-term securities.
Mortgage-backed securities usually follow this pattern, but, because of
prepayments, would not be expected to rise as much in price as Treasury or
corporate bonds.

You will find more information about the types of securities the fund may own
and how they may perform further on in this section and in section 3.

_____________________________________________________________________________
THE FUND'S SHARE PRICE WILL FLUCTUATE. WHEN YOU SELL YOUR SHARES, YOU MAY LOSE
MONEY.

What some of are the main risks of investing in the fund?

0 Interest rate or market risk: the decline in fixed income securities and
funds that may accompany a rise in the overall level of interest rates.
(Please see Table 5.)

0 Credit risk: the chance that any of a fund's holdings will have its credit
rating downgraded or will default (fail to make scheduled interest and
principal payments), potentially reducing the fund's share price and
income level and/or share price.

0 Currency risk: the possibility that the fund's foreign holdings will be
adversely affected by fluctuations in currency markets.

How does the portfolio manager try to reduce risk?

Consistent with the fund's objective, the portfolio manager actively manages
the fund in an effort to manage risk and increase total return. Risk
management tools include:

0 Diversification of assets to reduce the impact of a single holding on the
fund's net asset value.

0 Thorough credit research by our own analysts.

0 Adjustments in the fund's duration to try to reduce the negative impact of
rising interest rates or take advantage of the favorable effects of
falling rates.

What are derivatives and can the fund invest in them?

The term derivative is used to describe financial instruments whose value is
derived from an underlying security (e.g., a stock or bond) or a market
benchmark (e.g., an interest rate index). Many types of investments
representing a wide range of potential risks and rewards fall under the
"derivatives" umbrella-from conventional instruments such as callable bonds,
futures, and options, to more exotic investments such as stripped mortgage
securities and structured notes. While it was only recently that the term
derivative has become widely known among the investing public, derivatives
have in fact been employed by investment managers for many years.

The fund will not invest in any high-risk, highly leveraged derivative
instrument which is expected to cause the price volatility of the portfolio to
be meaningfully different than that of a long-term investment-grade bond.
Accordingly, it will invest in derivatives only if the expected risks and
rewards are consistent with its objective, policies, and overall risk profile
as described in this prospectus. The fund will only use derivatives in an
effort to: increase yield; hedge against a decline in principal value; invest
in eligible asset classes with greater efficiency and lower cost than is
possible through direct investment; or adjust portfolio duration.

_____________________________________________________________________________
YOU MAY WANT TO REVIEW SOME FUNDEMENTALS THAT APPLY TO ALL FIXED INCOME
INVESTMENTS.

Is a fund's yield fixed or will it vary?

It will vary. The yield is calculated every day by dividing the fund's net
income per share, expressed at annual rates, by the share price. Since both
income and share price will fluctuate, a fund's yield will also vary.

Is a fund's "yield" the same thing as the "total return"?

Not for bond funds. The total return reported for a fund is the result of
reinvested distributions (income and capital gains) and the change in share
price for a given time period. Income is always a positive contributor to
total return and can enhance a rise in share price or serve as an offset to a
drop in share price.

What is "credit quality" and how does it affect the fund's yield?

Credit quality refers to a bond issuer's expected ability to make all required
interest and principal payments in a timely manner. Because highly rated
issuers represent less risk, they can borrow at lower interest rates than less
creditworthy issuers. Therefore, a fund investing in high credit-quality
securities should have a lower yield than an otherwise comparable fund
investing in lower credit-quality securities.

What is meant by a bond fund's "maturity"?

Every bond has a stated maturity date when the issuer must repay the
security's entire principal value to the investor. Some types of bonds may
also have an "effective maturity" that is shorter than the stated date. For
example, mortgage securities are subject to unscheduled principal prepayments.
In addition, many bonds are "callable," meaning their principal can be repaid
before their stated maturity dates on (or after) specified call dates. Bonds
are most likely to be called when interest rates are falling, because the
issuer wants to refinance at a lower rate. In such an environment, a bond's
"effective maturity" is calculated using its nearest call date.

A bond mutual fund has no maturity in the strict sense of the word, but does
have an average maturity and an average effective maturity. This number is an
average of the stated or effective maturities of the underlying bonds, with
each bond's maturity "weighted" by the percentage of fund assets it
represents. Funds that target effective maturities would use the effective
(rather than stated) maturities of the underlying instruments when computing
the average. Targeting effective maturity provides additional flexibility in
portfolio management but, all else being equal, could result in higher
volatility than a fund targeting a stated maturity or maturity range.

What is meant by a bond fund's "duration"?

Duration is a calculation that seeks to measure the price sensitivity of a
bond or bond fund to changes in interest rates. It measures bond price
sensitivity to interest rate changes more accurately than maturity because it
takes into account the time value of cash flows generated over the bond's
life. Future interest and principal payments are discounted to reflect their
present value and then are multiplied by the number of years they will be
received to produce a value that is expressed in years, i.e., the duration.
Effective duration takes into account call features, prepayment assumptions,
and sinking fund payments that may shorten a bond's life.

Since duration can also be computed for bond funds, you can estimate the
effect of interest rates on a fund's share price. Simply multiply the fund's
duration (available for T. Rowe Price bond funds in our shareholder reports)
by an expected change in interest rates. For example, the price of a bond fund
with a duration of five years would be expected to fall approximately 5% if
rates rose by one percentage point. However, the relationship between duration
and price can vary significantly from fund to fund.

How is a bond's price affected by changes in interest rates?

When interest rates rise, a bond's price usually falls, and vice versa.
_____________________________________________________________________________

IN GENERAL, THE LONGER A BOND'S MATURITY, THE GREATER THE PRICE INCREASE OR
DECREASE IN RESPONSE TO A GIVEN CHANGE IN INTEREST RATES, AS SHOWN IN THE
TABLE AT RIGHT.

________________________________________________________________________
How Interest Rates Affect Bond Prices

Bond Coupon Price Per $1,000 of
Maturity Bond Face Value if Interest Rates

Increase Decrease
1% 2% 1% 2%
________________________________________________________________________
1 year 5.70% $990 $981 $1,010 $1,019
_____________________________________________________________________________
5 years 6.15 959 919 1,044 1,089
_____________________________________________________________________________
10 years 6.45 930 867 1,076 1,160
_____________________________________________________________________________
30 years 6.85 885 791 1,141 1,314

_____________________________________________________________________________
Table 5 Coupons reflect yields on Treasury securities as of July 31, 1995.
The table may not be as representative of price changes for mortgage
securities because of prepayments. This table illustrates typical
bond price behavior and not that of any T. Rowe Price fund.

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

Review your own financial objectives, time horizon, and risk tolerance to
choose a fund (or funds) suitable for your particular needs. The fund may be
appropriate for a variety of objectives. For instance, steadily reinvesting
the fund's income is a conservative strategy for building capital over time.
The fund may also be appropriate if you are looking for a higher level of
income than provided by a shorter-term bond fund and can accept greater
fluctuations in share price. If you are investing for principal safety and
liquidity, you should consider a money market fund.

Is there additional information about the fund to help me make a decision?

Be sure to review the "Investment Policies and Practices" section, which
discusses the following: Types of Portfolio Securities (bonds, common and
preferred stocks, convertible securities and warrants, foreign securities,
asset-backed securities, mortgage-backed securities, hybrid instruments,
private placements, and utility industry concentration); Types of Management
Practices (cash position, borrowing money and transferring assets, futures and
options, managing foreign exchange risk, lending of portfolio securities,
when-issued securities and forward commitment contracts, and portfolio
turnover).

Equity Income Fund

_____________________________________________________________________________
THE FUND SHOULD NOT BE RELIED UPON AS A COMPLETE INVESTMENT PROGRAM NOR BE
USED FOR SHORT-TERM TRADING PURPOSES.

To help you decide whether the fund is appropriate for you, this section takes
a closer look at its investment objectives and approach.

What is the fund's objective?

The objective is to provide substantial dividend income as well as long-term
capital appreciation through investments in common stocks of established
companies.

What is the fund's overall investment program?

Under normal circumstances, the fund will invest at least 65% of total assets
in the common stocks of established companies paying above-average dividends.
These companies are expected to have favorable prospects for dividend growth
and capital appreciation, as determined by T. Rowe Price.

Most of the assets will be invested in U.S. common stocks. However, the fund
may also purchase other types of securities, for example, foreign securities,
convertible stocks and bonds, and warrants, when considered consistent with
the fund's investment objectives and program. The portfolio manager may also
engage in a variety of investment management practices, such as buying and
selling futures and options.

What are the fund's major characteristics?

T. Rowe Price believes that income can be a significant contributor to total
return over time, and expects the fund's yield to be above that of the
Standard & Poor's 500 Stock Index. The fund will tend to take a "value"
approach and invest in stocks and other securities that appear to be
temporarily undervalued by various measures, such as price/earnings ratios.

How does the fund select stocks for the portfolio?

The fund will generally consider companies with the following characteristics:

0 Established operating histories;

0 Above-average current dividend yields relative to the S&P 500;

0 Low price/earnings ratios relative to the S&P 500;

0 Sound balance sheets and other financial characteristics;

0 Low stock price relative to company's underlying value measured by
assets, earnings, cash flow, or business franchises.

_____________________________________________________________________________
VALUE INVESTORS LOOK FOR UNDERVALUED ASSETS.

What is a "value" investment approach?

Value investors seek to buy a stock when its price is low relative to its
perceived worth. They hope to identify companies whose stocks are currently
out of favor. Usually these stocks have above-average dividend yields and
offer the potential for capital appreciation as other investors recognize
their intrinsic value and drive up their prices. Some of the principal
measures used to identify such stocks are:

0 Price/earnings ratio. Dividing a stock's price by its earnings per share
generates a price/earnings or P/E ratio. A stock with a P/E that is
significantly below that of its peers, the market as a whole, or its own
historical norm may represent an attractive opportunity.

0 Price/book value ratio. This ratio, calculated by dividing a stock's
price by its book value per share, indicates how a stock is priced
relative to the accounting (i.e., book) value of the company's assets. A
ratio below the market, that of its competitors, or its own historic
norm could indicate an undervalued situation.

_____________________________________________________________________________
A STOCK SELLING AT $10 WITH A DIVIDEND OF $0.50 HAS A 5% YIELD.

0 Dividend yield. A stock's dividend yield is found by dividing its annual
dividend by its share price. A yield significantly above a stock's own
historic norm or that of its peers may suggest an investment
opportunity.

0 Price/cash flow. This is found by dividing a stock's price by the amount
of cash flow per share generated by the company. A ratio below that of
the market or of its peers suggests the market may be incorrectly
valuing the company's cash flow for reasons that may be temporary.

0 Undervalued assets. This analysis compares a company's stock price with
its underlying asset values, its projected value in the private (as
opposed to public) market, or its expected value if the company or parts
of it were sold or liquidated.

0 Restructuring opportunities. The market can react favorably to the
announcement or the successful implementation of a corporate
restructuring, financial engineering, or asset redeployment. Such events
can result in an increase in a company's stock price. A value investor
may try to anticipate these actions and invest before the market places
an appropriate value on any actual or expected changes.

_____________________________________________________________________________
THE FUND'S SHARE PRICE WILL FLUCTUATE. WHEN YOU SELL YOUR SHARES, YOU MAY LOSE
MONEY.

What are some of the fund's potential risks?

The fund's emphasis on stocks of established, high dividend-paying companies,
as well as its possible exposure to fixed income securities, could limit its
potential for capital appreciation. Sharply rising interest rates could also
decrease the appeal of stocks purchased by the fund, further restraining total
return.

What are some of the fund's potential rewards?

Dividends are normally a more stable and predictable component of total return
than capital appreciation. While the price of a company's stock can go up or
down in response to earnings or to fluctuations in the general market,
dividends are usually more reliable. Stocks paying a high level of dividend
income tend to be less volatile than those with below-average dividends.

What are some potential risks and rewards of investing in the stock market?

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. Economic growth has been punctuated by periodic
declines. Share prices of even the best managed, most profitable corporations
are subject to market risk, which means their stock prices can decline. In
addition, swings in investor psychology or significant trading by large
institutional investors can result in price fluctuations. For this reason,
equity investors should have a long-term investment horizon and be willing to
wait out bear markets.

How can I decide if the fund is right for me?

Consider your investment goals, your time horizon for achieving them, and your
tolerance for risk. If you can accept the price fluctuations inherent in stock
investing in an effort to achieve income and capital appreciation, the fund
could be an appropriate part of your overall investment strategy.

Is there additional information about the fund to help me decide if it is
appropriate for me?

Be sure to review "Investment Policies and Practices" in Types of Portfolio
Securities (common and preferred stocks, convertible securities and warrants,
foreign securities, fixed income securities, high-yield/high-risk investing,
hybrid instruments, and private placements); Types of Management Practices
(cash position, borrowing money and transferring assets, futures and options,
managing foreign currency risk, lending of portfolio securities, and portfolio
turnover).

International Stock Fund

To help you decide whether the fund is appropriate for you, this section takes
a closer look at the fund's investment programs and the markets in which it
invests.

Why invest internationally?

There are three main reasons:

0 Expanded investment opportunities. More than half of the world's total
stock market capitalization and two-thirds of global GNP consists of
non-U.S. stocks and companies.

0 The potential for higher returns. Foreign stocks represented by the
Morgan Stanley EAFE Index (Europe, Australia, Far East) outperformed
U.S. stocks measured by the S&P 500 Stock Index in all but one rolling
10-year period from 1981 through 1994. Of course, during this time there
were shorter periods when U.S. stocks outperformed.

0 Lower overall volatility in your investment portfolio through increased
diversification. Since foreign stock markets tend to move independently
of the U.S. market and each other, spreading investments across a number
of markets can help smooth out fluctuations in the returns of your total
equity holdings.

What are some of the opportunities represented by major overseas markets?

0 Europe: Market deregulation, privatization, and lower trade barriers
have expanded the range of investment opportunities. The emergence of
capitalist economies in Eastern Europe could, over the long term, open
previously inaccessible markets and also provide a lower-cost, skilled
labor pool, which may further stimulate European economies.

0 Asia: No longer solely dependent on the Japanese "engine" for growth,
the newly industrialized countries of the Pacific Rim are powered by
worldwide exports and, increasingly, by strong inter-regional demand. In
addition, China's move toward a more capitalistic economy has positive
implications for the entire region's future.

0 Japan: Although its growth rate has slowed, the longer-term outlook for
Japan's economy is positive. In addition to its productive labor force,
technological expertise, and commitment to capital investment, Japan's
shift to a more domestic-oriented economy should promote future growth
and create new investment opportunities.

0 Latin America: After years of stagnation, some countries here are
experiencing rising growth rates that reflect lower trade barriers,
privatization of industry, progress on reducing inflation and
restructuring of national debt burdens.

0 Emerging markets: A number of countries in Latin America, Eastern
Europe, and Africa are emerging from economic periods of stagnation and
offer the potential for growth exceeding that of the United States and
other developed countries. The emerging market countries initiating
market-based economic reforms are expected to benefit from significant
amounts of capital in-flows.

_____________________________________________________________________________
THE FUND'S SHARE PRICE WILL FLUCTUATE. WHEN YOU SELL YOUR SHARES, YOU MAY LOSE
MONEY.

What can I expect in terms of price volatility?

Like U.S. stock investments, common stocks of foreign companies offer
investors a way to build capital over time. Nevertheless, the long-term rise
of foreign stock prices as a group has been punctuated by periodic declines.
As in the U.S., share prices of even the best managed, most profitable
corporations are subject to market risk, which means they can fluctuate
widely.

In less well developed stock markets, such as those in some Asian and most
Latin American, Eastern European, and African countries, volatility may be
heightened by actions of a few major investors. For example, substantial
increases or decreases in cash flows of mutual funds investing in these
markets could significantly affect local stock prices and, therefore, fund
share prices.

What are the major risks associated with international investing and this
fund?

Foreign stock prices are subject to many of the same influences as U.S.
stocks, such as general economic conditions, company and industry earnings
prospects, and investor psychology. International investing also involves
additional risks which can increase the potential for the losses in the fund.
These risks can be significantly magnified for investments in emerging
markets.

_____________________________________________________________________________
EXCHANGE RATE MOVEMENTS CAN BE LARGE AND CAN LAST FOR EXTENDED PERIODS.

0 Currency fluctuations. Transactions in foreign securities are conducted
in local currencies, so dollars must be exchanged for another currency
each time a stock is bought or sold or a dividend is paid. Likewise,
share price quotations and total return information reflect conversion
into dollars. Fluctuations in foreign exchange rates can significantly
increase or decrease the dollar value of a foreign investment, boosting
or offsetting its local market return. For example, if a French stock
rose 10% in price during a year, but the U.S. dollar gained 5% against
the French franc during that time, the U.S. investor's return would be
reduced to 5%. This is because the franc would "buy" fewer dollars at
the end of the year than at the beginning, or, conversely, a dollar
would buy more francs.

0 Costs. It is more expensive for U.S. investors to trade in foreign
markets than in the U.S. mutual funds offer a very efficient way for
individuals to invest abroad, but the overall expense ratios of
international funds are usually somewhat higher than those of typical
domestic stock funds.

_____________________________________________________________________________
WHILE CERTAIN COUNTRIES HAVE MADE PROGRESS IN ECONOMIC GROWTH, LIBERALIZATION,
FISCAL DISCIPLINE, AND POLITICAL AND SOCIAL STABILITY, THERE IS NO ASSURANCE
THESE TRENDS WILL CONTINUE.

0 Political and economic factors. The economies, markets, and political
structures of a number of the countries in which each fund can invest do
not compare favorably with the United States and other mature economies
in terms of wealth and stability. Therefore, investments in these
countries will be riskier and more subject to erratic and abrupt price
movements. This is especially true for emerging markets such as those
found in Latin America, China and certain Asian countries, Eastern
Europe, and Africa.

Some economies are less well developed (for example, Latin America, Eastern
Europe, Africa, and certain Asian countries), overly reliant on particular
industries and more vulnerable to the ebb and flow of international trade,
trade barriers, and other protectionist or retaliatory measures (for example,
Japan, Southeast Asia, Latin America, Eastern Europe and Africa). This makes
investment in such markets significantly riskier than in other countries. Some
countries, particularly in Latin America, are grappling with severe inflation
and high levels of national debt. Investments in countries that have recently
begun moving away from central planning and state-owned industries toward free
markets, such as the Eastern Europe, China and Africa, should be regarded as
speculative.

_____________________________________________________________________________
FOR MORE DETAILS ON POTENTIAL RISKS OF FOREIGN INVESTMENTS, SEE "INVESTMENT
POLICIES AND PRACTICES."

Certain countries have histories of instability and upheaval (for example,
Latin America and Africa) with respect to their internal politics that could
cause their governments to act in a detrimental or hostile manner toward
private enterprise or foreign investment. Such actions, for example,
nationalizing a company or industry, could have a severe effect on security
prices and impair the fund's ability to repatriate capital or income.
Significant external risks, including war, currently affect some countries.
Governments in many emerging market countries participate to some degree in
their economies and securities markets.

0 Legal, regulatory, and operational. Certain countries lack uniform
accounting, auditing, and financial reporting standards, have less
governmental supervision of financial markets than in the U.S., do not
honor legal rights enjoyed in the U.S., and have settlement practices,
such as delays, which could subject the fund to risks of loss not
customary in the U.S. In addition, securities markets in these countries
have substantially lower trading volumes than U.S. markets, resulting in
less liquidity and more volatility than experienced in the U.S.

0 Pricing. Portfolio securities may be listed on foreign exchanges that
are open on days (such as Saturdays) when the funds do not compute their
prices. As a result, a fund's net asset value may be significantly
affected by trading on days when shareholders cannot make transactions.

How do fund managers try to reduce risk?

The principal tools are intensive research and diversification; currency
hedging techniques are used from time to time.

0 In addition to conducting on-site research in portfolio countries and
companies, Rowe Price-Fleming has close ties with investment analysts
based throughout the world.

0 Diversification significantly reduces but does not eliminate risk. The
impact on a fund's share price from a drop in the price of a particular
stock is reduced substantially by investing in a portfolio with dozens
of different companies. Likewise, the impact of unfavorable developments
in a particular country is reduced because investments are spread among
many countries.

Portfolio managers keep close watch on individual investments as well as on
political and economic trends in each country and region. Holdings are
adjusted according to the manager's analysis and outlook.

0 While currency translation does affect the shorter-run returns provided
by foreign stocks, its influence on longer-term results has been far
outweighed by price trends on local stock exchanges. As a result, under
normal conditions, the funds do not engage in extensive hedging
programs. However, when foreign exchange rates are expected to be
unfavorable for U.S. investors, fund managers can hedge the risk through
use of currency forwards and options. In a general sense, these tools
allow a manager to exchange currencies in the future at a rate specified
in the present. (For more details, please see "Foreign Currency
Transactions" under "Investment Policies and Practices.") If the
manager's forecast is wrong, the hedge may cause a loss. Also, it may be
difficult or not practical to hedge currency risk in many emerging
countries.

_____________________________________________________________________________
THE FUND SHOULD NOT BE RELIED UPON AS A COMPLETE INVESTMENT PROGRAM NOR BE
USED FOR SHORT-TERM TRADING PURPOSES.

How can I decide if the fund may be appropriate for me?

First, be sure that your investment objective is the same as the fund's:
capital appreciation over time. If you will need the money you plan to invest
in the near future, the fund is not suitable.

Second, your decision should take into account whether you have any other
foreign stock investments.

Third, consider your risk tolerance and the risk profile of the fund.

Is there additional information about the fund to help me make a decision?

Yes. You should review the following details about the fund discussed in this
prospectus and other materials you receive about the fund.

The fund expects to invest substantially all of its assets outside the U.S.
and to diversify broadly among countries throughout the world, both developed,
newly industrialized, and emerging.

The fund expects to invest substantially all of its assets in common stocks.
However, it may also invest in a variety of other equity-related securities,
such as preferred stocks, warrants and convertible securities, as well as
corporate and governmental debt securities, when considered consistent with
the fund's investment objectives and program. The fund may also engage in a
variety of investment management practices, such as buying and selling futures
and options. Under normal market conditions, the fund's investments in
securities other than common stocks is limited to no more than 35% of total
assets. However, for temporary defensive purposes, the fund may invest all or
a significant portion of its assets in U.S. government and corporate debt
obligations. The fund will not purchase any debt security which at the time of
purchase is rated below investment grade. This would not prevent the fund from
retaining a security downgraded to below investment grade after purchase.

Where can I find more details about the fund's policies and practices?

Be sure to review "Investment Policies and Practices" in Section 3, which
discusses the following: Types of Portfolio Securities (common and preferred
stocks, convertible securities and warrants, fixed income securities, hybrid
instruments, passive foreign investment companies, and private placements);
and Types of Management Practices (cash position, borrowing money and
transferring assets, foreign currency transactions, futures and options,
lending of portfolio securities, and portfolio turnover).

2 About Your Account

Pricing Shares and Receiving Sale Proceeds

_____________________________________________________________________________
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.

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 each
fund is calculated at 4 p.m. ET each day the New York Stock Exchange is open
for business. To calculate the NAV, a fund's assets are valued and totaled,
liabilities are subtracted, and the balance, called net assets, is divided by
the number of shares outstanding. Amortized cost or amortized market value is
used to value money fund securities that mature in 60 days or less.

The calculation of the International Stock Fund's net asset value normally
will not take place contemporaneously with the determination of the value of
the fund's portfolio securities. Events affecting the values of portfolio
securities that occur between the time their prices are determined and the
time the fund's net asset value is calculated will not be reflected in the
fund's net asset value unless Price-Fleming, under the supervision of the
fund's Board of Directors, determines that the particular event should be
taken into account in computing the fund's net asset value.

How your purchase, sale, or exchange price is determined

If we receive your request in correct form before 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.

Note: The time at which transactions 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.

_____________________________________________________________________________
WHEN FILLING OUT THE NEW ACCOUNT FORM, YOU MAY WISH TO GIVE YOURSELF THE
WIDEST RANGE OF OPTIONS FOR RECEIVING PROCEEDS FROM A SALE.

How you can receive the proceeds from a sale

If your request is received by 4 p.m. ET in correct form, proceeds are usually
sent the next business day. Proceeds can be sent to you by mail, or to your
bank account by ACH transfer or bank wire. Proceeds sent by ACH transfer
should be credited the second day after the sale. ACH (Automated Clearing
House) is an automated method of initiating payments from and receiving
payments in your financial institution account. ACH is a payment system
supported by over 20,000 banks, savings banks, and credit unions, which
electronically exchanges the transactions through the Federal Reserve Banks.
Proceeds sent by bank wire should be credited to your bank account the next
business day.

_____________________________________________________________________________
IF FOR SOME REASON WE CANNOT ACCEPT YOUR REQUEST TO SELL SHARES, WE WILL
CONTACT YOU.

Exception:

0 Under certain circumstances and when deemed to be in the fund's best
interests, your proceeds may not be sent for up to five business days
after receiving your sale or exchange request. If you were exchanging
into another bond or money fund, your new investment would not begin to
earn dividends until the sixth business day.

Useful Information on Distributions and Taxes

Dividends and Other Distributions

_____________________________________________________________________________
ALL NET INVESTMENT INCOME AND REALIZED CAPITAL GAINS ARE DISTRIBUTED TO
SHAREHOLDERS.

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 interest and capital gain distributions on a rising number of
shares.

Dividends 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, each fund reserves the right to reinvest your
distribution check in your account at the then current NAV and to reinvest all
subsequent distributions in shares of the fund.

Income dividends

0 The New Income Fund declares income dividends daily at 4 p.m. ET to
shareholders of record at that time provided payment has been received
on the previous business day.

0 The Prime Reserve Fund declares income dividends daily to shareholders
of record at noon ET provided payment has been received at that time.

0 Bond and money funds pay dividends on the first business day of each
month.

0 Bond and money fund shares will earn dividends through the date of
redemption; shares redeemed on a Friday or prior to a holiday will
continue to earn dividends until the next business day. Generally, if
you redeem all of your shares at any time during the month, you will
also receive all dividends earned through the date of redemption in the
same check. When you redeem only a portion of your shares, all dividends
accrued on those shares will be reinvested, or paid in cash, on the next
dividend payment date.

0 The Equity Income Fund declares and pays a dividend quarterly. All or
part of the fund's dividends will be eligible for the 70% deduction for
dividends received by corporations.

_____________________________________________________________________________
SINCE MONEY FUNDS ARE MANAGED TO MAINTAIN A CONSTANT SHARE PRICE, THE PRIME
RESERVE FUND IS NOT EXPECTED TO MAKE CAPITAL GAIN DISTRIBUTIONS.

0 The International Stock Fund declares and pays dividends (if any)
annually. The dividends of the fund will not be eligible for the 70%
deduction for dividends received by corporations, if, as expected, none
of the funds' income consists of dividends paid by U.S. corporations.

Capital gains

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

0 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. If a second
distribution is necessary, it is usually declared and paid during the
first quarter of the following year.

_____________________________________________________________________________
YOU WILL BE SENT TIMELY INFORMATION FOR YOUR TAX FILING NEEDS.

Tax Information

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

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

0 A fund makes a short- and/or long-term capital distribution to your
account.

Taxes on fund redemptions (excluding Prime Reserve Fund). 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.

In January, you will be sent Form 1099-B, indicating the date and amount of
each sale you made during the prior year. This information will also be
reported to the IRS. For accounts opened new or by exchange in 1983 or later,
we will provide you with the gain or loss of the shares you sold during the
year, based on the "average cost" 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 (except for systematic purchases and redemptions)
and a year-end statement detailing all your transactions in each fund account
during the year.

_____________________________________________________________________________
CAPITAL GAIN DISTRIBUTIONS ARE TAXABLE WHETHER REINVESTED IN ADDITIONAL SHARES
OR RECEIVED IN CASH.

Taxes on fund distributions. The following summary does not apply to
retirement accounts, such as IRAs, which are tax-deferred until you withdraw
money from them.

In January, you will be sent Form 1099-DIV indicating the tax status of any
dividend and capital gain distribution made to you. This information will also
be reported to the IRS. All distributions made by the funds are taxable to you
for the year in which they were paid. The only exception is that distributions
declared during the last three months of the year and paid in January are
taxed as though they were paid by December 31. 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.

Short-term capital gains are taxable as ordinary income and long-term gains
are taxable at the applicable long-term gain rate. The gain is long- or
short-term depending on how long the fund held the securities, not how long
you held shares in the fund. If you realize a loss on the sale or exchange of
fund shares held six months or less, your short-term loss recognized is
reclassified to long-term to the extent of any long-term capital gain
distribution received.

Foreign investments (not applicable to Prime Reserve Fund). Distributions
resulting from the sale of certain foreign currencies and debt securities, to
the extent of foreign exchange gains, are taxed as ordinary income or loss. If
any of the funds pays nonrefundable taxes to foreign governments during the
year, the taxes will reduce the fund's dividends, and with respect to the
International Stock Fund, will also be included in your taxable income.
However, you may be able to claim an offsetting credit or deduction on your
tax return for your portion of foreign taxes paid by the International Stock
Fund.

Tax effect of buying shares before a capital gain distribution (excluding
Prime Reserve Fund). 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 will receive in the form of a taxable distribution a portion
of the money you just invested. Therefore, you may wish to find out a fund's
record date(s) before investing. Of course, a fund's share price may at any
time reflect undistributed capital gains or unrealized appreciation.

Transaction Procedures and Special Requirements

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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 a 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 funds and their 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.

Sale (Redemption) Conditions

10-day hold. If you sell shares that you just purchased and paid for by check
or ACH transfer, the funds 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(registered trademark), and PC*Access(registered
trademark) Transactions. These exchange and redemption services are
established automatically when you sign the New Account Form unless you check
the box which states that you do not want these services. Each fund uses
reasonable procedures (including shareholder identity verification) to confirm
that instructions given by telephone are genuine and is not liable for acting
on these instructions. If these procedures are not followed, it is the opinion
of certain regulatory agencies that a fund may be liable for any losses that
may result from acting on the instructions given. All conversations are
recorded, and a confirmation is sent promptly after the telephone transaction.

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 the fund's net assets, the fund has the right to delay sending your
proceeds for up to five business days after receiving your request, or to pay
the difference between the redemption amount and the lesser of the two
previously mentioned figures with securities from the fund.

_____________________________________________________________________________
T. ROWE PRICE MAY BAR EXCESSIVE TRADERS FROM PURCHASING SHARES.

Excessive Trading

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. We define "excessive trading" as exceeding
one purchase and sale involving the same fund within any 120-day period.

For example, 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 the number of trades described above, you may be barred
indefinitely from further purchases of T. Rowe Price funds.

Three types of transactions are exempt from excessive trading guidelines: 1)
trades solely between money market funds; 2) redemptions that are not part of
exchanges; and 3) systematic purchases or redemptions (see "Shareholder
Services").

Keeping Your Account Open

Due to the relatively high cost to the funds 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.

_____________________________________________________________________________
A SIGNATURE GUARANTEE IS DESIGNED TO PROTECT YOU AND THE T. ROWE PRICE
FUNDS FROM FRAUD BY VERIFYING YOUR SIGNATURE.

Signature Guarantees

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

0 Written requests 1) to redeem over $50,000, or 2) to wire redemption
proceeds;

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

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

0 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.

3 More About the Funds

Organization and Management

_____________________________________________________________________________
SHAREHOLDERS BENEFIT FROM T. ROWE PRICE'S 58 YEARS OF MANAGEMENT EXPERIENCE.

How are the funds organized?

The Prime Reserve and New Income Funds are Maryland corporations organized
in 1975 and 1973, respectively, and the Equity Income Fund, for tax and
business reasons, was organized as a Massachusetts business trust in 1985. The
International Stock Fund is a series of the T. Rowe Price International Funds,
Inc. (the Corporation) which was originally organized in 1979 as a Maryland
corporation. Effective May 1, 1986, the Corporation converted from a Maryland
corporation to a Massachusetts business trust known as the T. Rowe Price
International Trust (Trust). On May 1, 1990, the Trust converted back to a
Maryland corporation. The Prime Reserve, New Income, Equity Income Funds, and
the Corporation are registered with the Securities and Exchange Commission
under the Investment Company Act of 1940 as "diversified, open-end investment
companies," or mutual funds. Mutual funds pool money received from
shareholders and invest it to try to achieve specified objectives.

What is meant by "shares"?

As with all mutual funds, investors receive "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:

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

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

Do T. Rowe Price funds have annual shareholder meetings?

The funds are not required to hold meetings and do not intend to do so except
when certain matters, such as a change in a fund's fundamental policies, are
to 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(s)/trustee(s). 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 a voting card for you to mail back.

Who runs the funds?

_____________________________________________________________________________
ALL DECISIONS REGARDING THE PURCHASE AND SALE OF FUND INVESTMENTS ARE MADE BY
T. ROWE PRICE-SPECIFICALLY BY THE FUNDS' PORTFOLIO MANAGERS.

General Oversight. The funds are governed by a Board of Directors or Trustees
that meets regularly to review the fund's investments, performance, expenses,
and other business affairs. The Board elects the funds' officers. The policy
of each fund is that a majority of Board members will be independent of T.
Rowe Price and Price-Fleming.

Investment Manager. For the Prime Reserve, New Income, and Equity Income
Funds, all decisions regarding the purchase and sale of fund investments are
made by T. Rowe Price-specifically by the funds' portfolio managers. T. Rowe
Price's office is located at 100 East Pratt Street, Baltimore, Maryland 21202.
For the International Stock Fund, Price-Fleming is responsible for selection
and management of portfolio investments. Price-Fleming's U.S. office is
located at 100 East Pratt Street, Baltimore, Maryland 21202. Price-Fleming
also has offices in London, Tokyo, and Hong Kong.

_____________________________________________________________________________
FLEMINGS IS A DIVERSIFIED INVESTMENT ORGANIZATION WHICH PARTICIPATES IN A
GLOBAL NETWORK OF REGIONAL INVESTMENT OFFICES IN NEW YORK, LONDON, ZURICH,
GENEVA, TOKYO, HONG KONG, MANILA, KUALA LUMPUR, SEOUL, TAIPEI, BOMBAY,
JAKARTA, SINGAPORE, BANGKOK, AND JOHANNESBURG.

Price-Fleming was incorporated in Maryland in 1979 as a joint venture between
T. Rowe Price and Robert Fleming Holdings Limited (Flemings).

T. Rowe Price, Flemings, and Jardine Fleming are owners of Price-Fleming. The
common stock of Price-Fleming is 50% owned by a wholly owned subsidiary of T.
Rowe Price, 25% by a subsidiary of Flemings and 25% by Jardine Fleming Group
Limited (Jardine Fleming). (Half of Jardine Fleming is owned by Flemings and
half by Jardine Matheson Holdings Limited.) T. Rowe Price has the right to
elect a majority of the board of directors of Price-Fleming, and Flemings has
the right to elect the remaining directors, one of whom will be nominated by
Jardine Fleming.

Portfolio Management. The Prime Reserve Fund has an Investment Advisory
Committee composed of the following members: Edward A. Wiese, Chairman,
Patrice L. Berchtenbreiter, Paul W. Boltz, Brian E. Burns, Robert P. Campbell,
Donna M. Davis Ennis, James M. McDonald, Joan R. Potee, Robert M. Rubino, and
Gwendolyn G. Wagner. 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. Wiese has been chairman of the fund's committee
since 1990. He joined T. Rowe Price in 1984 and has been managing investments
since 1985.

The New Income Fund has an Investment Advisory Committee composed of the
following members: Charles P. Smith, Chairman, Paul W. Boltz, Heather R.
Landon, Edmund M. Notzon, Robert M. Rubino, Peter Van Dyke, and Gwendolyn G.
Wagner. 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. Smith has been chairman of the fund's committee since
1988. He joined T. Rowe Price in 1972 and has been managing investments since
1975.

The Equity Income Fund has an Investment Advisory Committee composed of the
following members: Brian C. Rogers, Chairman, Thomas H. Broadus, Jr., Richard
P. Howard, Robert W. Smith, and William J. Stromberg. 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.
Rogers has been chairman of the committee since 1993. He joined T. Rowe Price
in 1982 and has been managing investments since 1983.

The International Stock Fund has an investment advisory group that has
day-to-day responsibility for managing the portfolio and developing and
executing the fund's investment program. The fund's advisory group is composed
of the following members: Martin G. Wade, Christopher D. Alderson, Peter B.
Askew, Richard J. Bruce, Mark J. T. Edwards, John R. Ford, Robert C. Howe,
James B. M. Seddon, Benedict R. F. Thomas, and David J. L. Warren.

Martin Wade joined Price-Fleming in 1979 and has 25 years of experience with
the Fleming Group in research, client service, and investment management.
(Fleming Group includes Robert Fleming and/or Jardine Fleming.) Christopher
Alderson joined Price-Fleming in 1988, and has eight years of experience with
the Fleming Group in research and portfolio management. Peter Askew joined
Price-Fleming in 1988 and has 19 years of experience managing multi-currency
fixed income portfolios. Richard Bruce joined Price-Fleming in 1991 and has
six years of experience in investment management with the Fleming Group in
Tokyo. Mark Edwards joined Price-Fleming in 1986 and has 13 years of
experience in financial analysis. John Ford joined Price-Fleming in 1982 and
has 14 years of experience with the Fleming Group in research and portfolio
management. Robert Howe joined Price-Fleming in 1986 and has 13 years of
experience in economic research, company research, and portfolio management.
James Seddon joined Price-Fleming in 1987 and has nine years of experience in
portfolio management. Benedict Thomas joined Price-Fleming in 1988 and has
five years of portfolio management experience. David Warren joined
Price-Fleming in 1984 and has 14 years of experience in equity research, fixed
income research, and portfolio management.

Portfolio Transactions. The International Stock Fund's Board of Directors has
authorized Price-Fleming to utilize affiliates of Flemings and Jardine Fleming
in the capacity of broker in connection with the execution of a fund's
portfolio transactions if Price-Fleming believes that doing so would result in
an economic advantage (in the form of lower execution costs or otherwise)
being obtained by the fund.

Marketing. T. Rowe Price Investment Services, Inc., a wholly owned subsidiary
of T. Rowe Price, distributes (sells) shares of these and all other T. Rowe
Price funds.

Shareholder Services. T. Rowe Price Services, Inc., another wholly owned
subsidiary, acts as the funds' transfer and dividend disbursing agent and
provides shareholder and administrative services. Services for certain types
of retirement plans are provided by T. Rowe Price Retirement Plan Services,
Inc., also a wholly owned subsidiary. The address for each is 100 East Pratt
St., Baltimore, MD 21202.

How are fund expenses determined?

The management agreement spells out the expenses to be paid by each fund. In
addition to the management fee, each fund pays for the following: shareholder
service expenses; custodial, accounting, legal, and audit fees; costs of
preparing and printing prospectuses and reports sent to shareholders;
registration fees and expenses; proxy and annual meeting expenses (if any);
and director/trustee fees and expenses.

The Management Fee. This fee has two parts -- an "individual fund fee"
(discussed under "Transaction and Fund Expenses") which reflects the fund's
particular investment management costs, and a "group fee." The group fee,
which reflects the benefits each fund derives from sharing the 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 Equity Index, the
Spectrum Funds, and any institutional 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.

0.480% First $1 billion 0.370% Next $1 billion 0.330% Next $10 billion
0.450% Next $1 billion 0.360% Next $2 billion 0.320% Next $10 billion
0.420% Next $1 billion 0.350% Next $2 billion 0.310% Thereafter
0.390% Next $1 billion 0.340% Next $5 billion

Each 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 Price Funds as described above.
Based on combined Price funds' assets of approximately $47.8 billion at June
30, 1995, the group fee was 0.34%.

_____________________________________________________________________________
INTERNATIONAL STOCK FUND

Research and Administration. Certain administrative support is provided by T.
Rowe Price which receives from Price-Fleming a fee of .15% of the market value
of all assets in equity accounts, .15% of the market value of all assets in
active fixed income accounts and .035% of the market value of all assets in
passive fixed income accounts under Price-Fleming's management. Additional
investment research and administrative support for equity investments is
provided to Price-Fleming by Fleming Investment Management Limited (FIM) and
Jardine Fleming Investment Holdings Limited (JFIH) for which each receives
from Price-Fleming a fee of .075% of the market value of all assets in equal
accounts under Price-Fleming's management. FIM and JFIH are wholly owned
subsidiaries of Flemings and Jardine Fleming, respectively. JFIH receives a
fee of .075% of the market value of all assets in active fixed income accounts
and .0175% of such market value in passive fixed income accounts under
Price-Fleming's management.

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, Insights, in reports, in T. Rowe Price advertisements,
and in the media.

_____________________________________________________________________________
TOTAL RETURN IS THE MOST WIDELY USED PERFORMANCE MEASURE. DETAILED
PERFORMANCE INFORMATION IS INCLUDED IN FUND ANNUAL REPORTS AND SHAREHOLDER
REPORTS.

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. Including reinvested
distributions means that total return numbers include the effect of
compounding, i.e., you receive income and capital gain distributions on a
rising number of shares.

Advertisements for a fund may include cumulative or compound 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 rate of return on an investment for a specified period. A
cumulative return does not indicate how much the value of the investment may
have fluctuated between the beginning and the end of the period specified.

Average Annual Total Return

This is always hypothetical. Working backward from the actual cumulative
return, it tells you what constant year-by-year return would have produced the
actual, cumulative return. By smoothing out all the variations in annual
performance, it gives you an idea of the investment's annual contribution to
your portfolio provided you held it for the entire period in question.

Yield

_____________________________________________________________________________
YOU WILL SEE FREQUENT REFERENCES TO A FUND'S YIELD IN OUR REPORTS,
ADVERTISEMENTS, IN MEDIA STORIES, AND SO ON.

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 average
price during 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.

Prime Reserve Fund. The fund may advertise current "yield," reflecting the
latest 7-day income annualized, or an "effective" yield, which assumes the
income has been reinvested in the fund.

New Income Fund. The advertised or "SEC yield" is found by determining the net
income per share (as defined by the SEC) earned by the 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.

Investment Policies and Practices

_____________________________________________________________________________
FUND MANAGERS HAVE CONSIDERABLE LEEWAY IN CHOOSING INVESTMENT STRATEGIES AND
SELECTING INVESTMENTS THEY BELIEVE WILL HELP THE FUND ACHIEVE ITS OBJECTIVES.

This section takes a detailed look at some of the types of securities the
funds may hold in their portfolios and the various kinds of investment
practices that may be used in day-to-day portfolio management. The funds'
investment programs are subject to further restrictions and risks described in
the "Statement of Additional Information."

Shareholder approval is required to substantively change a fund's objectives
and certain investment restrictions noted in the following section as
"fundamental policies." The managers also follow certain "operating policies"
which can be changed without shareholder approval. However, significant
changes are discussed with shareholders in fund reports. Each 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.

A fund's holdings of certain kinds of investments cannot exceed maximum
percentages of total assets, which are set forth in the prospectus. For
instance, the New Income 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 a 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 securities could have
significantly more than a 5% impact on a fund's share price. 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 a fund's holdings, a fund's performance, and the contribution of
various investments are discussed in the shareholder reports sent to you.

Prime Reserve Fund

Types of Portfolio Securities

In seeking to meet its investment objectives, the fund may invest in any type
of short-term security whose yield, credit quality, and maturity
characteristics are consistent with the fund's investment program. These and
some of the other investment techniques the fund may use are described in the
following pages.

Money Market Securities. Money market securities are an IOUs issued by
companies or governmental units. Money market securities may be
interest-bearing or discounted to reflect the rate of interest paid. In the
case of interest-bearing securities, the issuer has a contractual obligation
to pay coupon interest at a stated rate on specific dates and to repay the
face value on a specified date. In the case of a discount security, no coupon
interest is paid, but the security's price is discounted such that the
interest is realized when the security matures at face value. In either case,
an issuer may have the right to redeem or "call" the security before maturity,
and the investor may have to reinvest the proceeds at lower market rates.

Except for adjustable rate instruments, the money market security's interest
rate, as reflected in the coupon rate or discount, is usually fixed for the
life of the security. Its current yield (coupon or discount as a percent of
current price) will fluctuate to reflect changes in interest rate levels. A
money market security's price usually rises when interest rates fall, and vice
versa.

Money market securities may be unsecured (backed by the issuer's general
creditworthiness only) or secured (also backed by specified collateral).

Certain money market securities have interest rates that are adjusted
periodically which tend to minimize fluctuations in their principal value. The
maturity of those securities may be shortened under certain specified
conditions.

Operating policy: The fund will not purchase any security (other than a U.S.
government security) if it would cause the fund to have more than: (1) 5% of
its total assets in securities of that issuer, where the securities are prime
securities (other than for certain temporary, limited purposes); or (2) where
the securities are not prime securities, 5% of its total assets in such
securities and 1% of its total assets in the securities of that issuer.

Asset-Backed Securities. An underlying pool of assets, such as credit card or
automobile trade receivables or corporate loans or bonds, backs these bonds
and provides the interest and principal payments to investors. Credit quality
depends primarily on the quality of the underlying assets and the level of
credit support, if any, provided by the issuer. The underlying assets (i.e.,
loans) are subject to prepayments which can shorten the securities' weighted
average life and may lower their return. The value of these securities also
may change because of actual or perceived changes in the creditworthiness of
the originator, servicing agent, or of the financial institution providing the
credit support. There is no limit on the funds' investment in these
securities.

_____________________________________________________________________________
FOREIGN SECURITIES INCREASE THE FUND'S DIVERSIFICATION AND MAY ENHANCE RETURN,
BUT INVOLVE SOME SPECIAL RISKS.

Foreign Securities. The fund may invest in foreign securities --
dollar-denominated money market securities of foreign issuers, foreign
branches of U.S. banks, and U.S. branches of foreign banks. 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; and possible problems
arising from accounting, disclosure, settlement, and regulatory practices that
differ from U.S. standards.

Operating policy: The fund may invest without limit in U.S. dollar-denominated
foreign securities.

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 will not invest more than 10% of its net assets in
illiquid securities.

Types of Management Practices

Borrowing Money and Transferring Assets. The fund can borrow money from banks
as a temporary measure for emergency purposes, to facilitate redemption
requests, or for other purposes consistent with the fund's investment
objectives 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 policies: 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.

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
the fund's total assets.

New Income Fund

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) whose yield, credit quality, and maturity characteristics are
consistent with the fund's investment program. These and some of the other
investment techniques the fund may use are described in the following pages.

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 more than 10% of the
outstanding voting securities of the issuer would be held by the fund,
provided that these limitations do not apply to the fund's purchases of
securities issued or guaranteed by the U.S. government, its agencies or
instrumentalities.

Bonds. A bond is an interest-bearing security -- an IOU -- issued by companies
or governmental units. The issuer has 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. An issuer may have the right to redeem or "call" a
bond before maturity, and the investor may have to reinvest the proceeds at
lower market rates.

A bond's annual interest income, set by its coupon rate, is usually fixed for
the life of the bond. Its yield (income as a percent of current price) will
fluctuate to reflect changes in interest rate levels. A bond's price usually
rises when interest rates fall, and vice versa, so its yield stays current.

Bonds may be unsecured (backed by the issuer's general creditworthiness only)
or secured (also backed by specified collateral).

Certain bonds have interest rates that are adjusted periodically which tend to
minimize fluctuations in their principal value. In calculating the fund's
weighted average maturity, the maturity of these securities may be shortened
under certain specified conditions.

Bonds may be senior or subordinated obligations. Senior obligations generally
have the first claim on a corporation's earnings and assets and, in the event
of liquidation, are paid before subordinated debt.

_____________________________________________________________________________
WITHOUT REGARD TO QUALITY, THE FUND MAY INVEST UP TO 25% OF ITS TOTAL ASSETS
(NOT INCLUDING CASH) IN PREFERRED AND COMMON STOCKS AND CONVERTIBLE
SECURITIES, CONVERTIBLE INTO OR WHICH CARRY WARRANTS FOR COMMON STOCKS OR
OTHER EQUITY 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 non-convertible 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).

Foreign Securities. The fund may invest in foreign securities, including
nondollar-denominated securities traded outside of the U.S. and
dollar-denominated securities of foreign issuers.

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).

Operating policy: The fund may invest without limitation, in U.S.
dollar-denominated debt securities issued by foreign issuers, foreign branches
of U.S. banks, and U.S. branches of foreign banks. The fund may also invest up
to 20% of its total assets (excluding reserves) in non-U.S. dollar-denominated
fixed income securities principally traded in financial markets outside the
United States.

_____________________________________________________________________________
THERE IS NO LIMIT ON THE FUND'S INVESTMENT IN MORTGAGE-BACKED SECURITIES.

Mortgage-Backed Securities. The fund may invest in a variety of
mortgage-backed securities. Mortgage lenders pool individual home mortgages
with similar characteristics to back a certificate or bond, which is sold to
investors such as the fund. Interest and principal payments generated by the
underlying mortgages are passed through to the investors. The "big three"
issuers are the Government National Mortgage Association (GNMA), the Federal
National Mortgage Association (Fannie Mae), and the Federal Home Loan Mortgage
Corporation (Freddie Mac). GNMA certificates are backed by the full faith and
credit of the U.S. government, while others, such as Fannie Mae and Freddie
Mac certificates, are only supported by the ability to borrow from the U.S.
Treasury or supported only by the credit of the agency. Private mortgage
bankers and other institutions also issue mortgage-backed securities.

Mortgage securities are subject to scheduled and unscheduled principal
payments as homeowners pay down or prepay their mortgages. As these payments
are received, they must be reinvested when interest rates may be higher or
lower than on the original mortgage security. Therefore, mortgage securities
are not an effective means of locking in long-term interest rates. In
addition, when interest rates fall, the pace of mortgage prepayments picks up.
These refinanced mortgages are paid off at face value (par), causing a loss
for any investor who may have purchased the security at a price above par. In
such an environment, this risk limits the potential price appreciation of
these securities and can negatively affect the fund's net asset value. When
rates rise, the prices of mortgage-backed securities can be expected to
decline, although historically these securities have experienced smaller price
declines than comparable quality bonds.

Additional mortgage-backed securities in which the fund may invest include:

0 Collateralized Mortgage Obligations (CMOs). CMOs are debt securities
that are fully collateralized by a portfolio of mortgages or
mortgage-backed securities. All interest and principal payments from the
underlying mortgages are passed through to the CMOs in such a way as to
create, in most cases, more definite maturities than is the case with
the underlying mortgages. CMOs may pay fixed or variable rates of
interest, and certain CMOs have priority over others with respect to the
receipt of prepayments.

0 Stripped Mortgage Securities. Stripped mortgage securities (a
potentially high-risk type of derivative) are created by separating the
interest and principal payments generated by a pool of mortgage-backed
securities or a CMO to create additional classes of securities.
Generally, one class receives only interest payments (IOs) and one
principal payments (POs). Unlike other mortgage-backed securities and
POs, the value of IOs tends to move in the same direction as interest
rates. The fund could use IOs as a hedge against falling prepaying rates
(interest rates are rising) and/or a bear market environment. POs can be
used as a hedge against rising prepayment rates (interest rates are
falling) and/or a bull market environment. IOs and POs are acutely
sensitive to interest rate changes and to the rate of principal
prepayments. A rapid or unexpected increase in prepayments can severely
depress the price of IOs, while a rapid or unexpected decrease in
prepayments could have the same effect on POs. These securities are very
volatile in price and may have lower liquidity than most other
mortgage-backed securities. Certain non-stripped CMOs may also exhibit
these qualities, especially those which pay variable rates of interest
which adjust inversely with and more rapidly than short-term interest
rates. There is no guarantee the fund's investment in CMOs, IOs, or POs
will be successful, and the fund's total return could be adversely
affected as a result.

Operating policy: The fund may invest up to 10% of its total assets in
stripped mortgage securities.

_____________________________________________________________________________
HYBRIDS CAN HAVE VOLATILE PRICES AND LIMITED LIQUIDITY AND THEIR USE BY A FUND
MAY NOT BE SUCCESSFUL.

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 or interest rate of a hybrid could
be tied (positively or negatively) to the price of some commodity, currency,
or securities index or another interest rate (each a "benchmark"). Hybrids can
be used as an efficient means of pursuing a variety of investment goals,
including currency hedging, duration management, and increased total return.
Hybrids may not bear interest or pay dividends. The value of a hybrid or its
interest rate may be a multiple of a benchmark and, as a result, may be
leveraged and move (up or down) more steeply and rapidly than the benchmark.
These benchmarks may be sensitive to economic and political events, such as
commodity shortages and currency devaluations, which cannot be readily
foreseen by the purchaser of a hybrid. Under certain conditions, the
redemption value of a hybrid could be zero. Thus, an investment in a hybrid
may entail significant market risks that are not associated with a similar
investment in a traditional, U.S. dollar-denominated bond that has a fixed
principal amount and pays a fixed rate or floating rate of interest. The
purchase of hybrids also exposes the fund to the credit risk of the issuer of
the hybrid. These risks may cause significant fluctuations in the net asset
value of the fund.

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

Operating policy: The fund will not invest more than 15% of its net assets in
illiquid securities.

Utility Industry Concentration. The fund may, under certain circumstances,
invest a substantial amount of its assets in the utility industry. Investments
in any of these industries may be affected by environmental conditions, energy
conservation programs, fuel shortages, availability of capital to finance
operations and construction programs, and federal and state legislative and
regulatory actions. T. Rowe Price believes that any risk to the fund which
might result from concentrating in any such industry will be minimized by
diversification of the fund's investments.

Fundamental policy: As a matter of fundamental policy, the fund will, under
certain conditions, invest up to 50% of its assets in any one of the following
industries: gas utility, gas transmission utility, electric utility, telephone
utility, and petroleum.

_____________________________________________________________________________
CASH RESERVES PROVIDE FLEXIBILITY AND SERVE AS A SHORT-TERM DEFENSE DURING
PERIODS OF UNUSUAL MARKET VOLATILITY.

Types of Management Practices

Cash Position. The fund will hold a certain portion of its assets in U.S. and
foreign dollar-denominated money market securities, including repurchase
agreements, in the two highest rating categories, maturing in one year or
less. For temporary, defensive purposes, the fund may invest without
limitation in such securities. This reserve position provides flexibility in
meeting redemptions, expenses, and the timing of new investments, and serves
as a short-term defense during periods of unusual market volatility.

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

_____________________________________________________________________________
FUTURES ARE USED TO MANAGE RISK; OPTIONS GIVE THE INVESTOR THE OPTION TO BUY
OR SELL AN ASSET AT A PREDETERMINED PRICE IN THE FUTURE.

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) give the investor the right, but not the
obligation, to buy or sell an asset at a predetermined price in the future.
The fund may buy and sell futures contracts for a number of reasons including:
to manage its exposure to changes in interest rates, bond prices, and foreign
currencies; as an efficient means of adjusting its overall exposure to certain
markets; to enhance income; 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.

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 equal more than 5% of the fund's net
asset value. Options on securities: The total market value of securities
against which the fund has written 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 Exchange 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." The fund may also use these contracts to
create a synthetic bond -- issued by a U.S. company, for example, but with the
dollar component transformed into a foreign currency. Although foreign
currency transactions will be used primarily to protect the fund's foreign
securities from adverse currency movements relative to the dollar, they
involve the risk that anticipated currency movements will not occur and the
fund's total return could be reduced.

Operating policy: The fund will not commit more than 20% of its total assets
to forward currency contracts.

Fundamental policy: The value of loaned securities may not exceed 33 1/3% of
the fund's total assets.

When-Issued Securities and Forward Commitment Contracts. The fund may purchase
securities on a when-issued or delayed delivery basis or may purchase or sell
securities on a forward commitment basis. There is no limit on the portion of
the fund's fixed income investments in these securities. The price of these
securities is fixed at the time of the commitment to buy, but delivery and
payment can take place a month or more later. During the interim period, the
market value of the securities can fluctuate, and no interest accrues to the
purchaser. At the time of delivery, the value of the securities may be more or
less than the purchase or sale price. To the extent the fund remains fully or
almost fully invested (in securities with a remaining maturity of more than
one year) at the same time it purchases these securities, there will be
greater fluctuations in the fund's net asset value than if the fund did not
purchase them.

Portfolio Turnover. Although the fund will not generally trade for short-term
profits, circumstances may warrant a sale without regard to the length of time
a security was held. A high turnover rate may increase transaction costs and
result in additional taxable gains. The fund's portfolio turnover rate for the
fiscal year ended May 31, 1995, was 54.1%. The fund's annualized portfolio
turnover rate for the three-month fiscal year ended May 31, 1994, was 91.5%;
and the fund's portfolio turnover for the fiscal years ended February 28,
1994, and February 28, 1993, were 58.3%, and 85.8%, respectively.

Equity Income Fund

Types of Portfolio Securities

In seeking to meet its investment objective, the fund may invest in any type
of security whose investment characteristics are consistent with the fund's
investment program. These and some of the other investment techniques the fund
may use are described in the following pages.

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 non-convertible 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 any time during the life
of the warrants (generally, two or more years).

Foreign Securities. The fund may invest in foreign securities. These include
nondollar-denominated securities traded outside of the U.S. and
dollar-denominated securities 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 greater for investments in emerging
markets.

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

Fixed Income Securities. The fund may invest in debt securities of any type
including municipal securities without regard to quality or rating. Such
securities would be purchased in companies, municipalities, or entities which
meet the investment criteria for the fund. The price of a bond fluctuates with
changes in interest rates, rising when interest rates fall and falling when
interest rates rise.

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 common stocks. Junk bonds are regarded
as predominantly speculative with respect to the issuer's continuing ability
to meet principal and interest payments.

Operating policy: The fund will not purchase a noninvestment-grade debt
security (or junk bond) if immediately after such purchase the fund would have
more than 10% of its total assets invested in such securities.

_____________________________________________________________________________
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 assets in hybrid
instruments.

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, the sale of others may involve
substantial delays and additional costs.

Operating policy: The fund will not invest more than 15% of its net assets in
illiquid securities and no more than 5% of its total assets in certain
restricted securities.

Types of Management Practices

_____________________________________________________________________________
CASH RESERVES PROVIDE FLEXIBILITY AND SERVE AS A SHORT-TERM DEFENSE DURING
PERIODS OF UNUSUAL MARKET VOLATILITY.

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

Futures and Options. Futures (a type of potentially high-risk derivative) are
often used to manage 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) give the investor the right, but not the
obligation, to buy or sell an asset at a predetermined price in the future.
The fund may buy and sell futures and options contracts for a 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 enhance income; 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.

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.

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." Although foreign currency transactions will
be used primarily to protect the fund's foreign securities from adverse
currency movements relative to the dollar, they involve the risk that
anticipated currency movements will not occur and the fund's total return
could be reduced.

Fundamental policy: The value of loaned securities may not exceed 33 1/3% of
the fund's total assets.

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. The fund's
portfolio turnover rates for the fiscal years ending December 31, 1994, 1993,
and 1992, were 36.3%, 31.2%, and 30.0%, respectively.

International Stock Fund

Types of Portfolio Securities

In seeking to meet its investment objective, the fund may invest in any type
of security whose investment characteristics are consistent with the fund's
investment program. These and some of the other investment techniques the
funds may use are described in the following pages.

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

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 non-convertible 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 any time during the life
of the warrants (generally, two or more years).

Fixed Income Securities. The fund may invest in any type of investment-grade
security. Such securities would be purchased in companies which meet the
investment criteria for the fund. The price of a bond fluctuates with changes
in interest rates, rising when interest rates fall and falling when interest
rates rise.
_____________________________________________________________________________

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 assets in hybrid
instruments.

Passive Foreign Investment Companies. The fund may purchase the securities of
certain foreign investment funds or trusts called passive foreign investment
companies. Such trusts have been the only or primary way to invest in certain
countries. In addition to bearing their proportionate share of the trust's
expenses (management fees and operating expenses) shareholders will also
indirectly bear similar expenses of such trusts. Capital gains on the sale of
such holdings are considered ordinary income regardless of how long the fund
held its investment. In addition, the fund may be subject to corporate income
tax and an interest charge on certain dividends and capital gains earned from
these investments, regardless of whether such income and gains are distributed
to shareholders.

In accordance with tax regulations, the fund intends to treat these securities
as sold on the last day of its fiscal year and recognize any gains for tax
purposes at that time; losses will not be recognized. Such gains will be
considered ordinary income, which the fund will be required to distribute even
though it has not sold the security.

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, the sale of others may involve
substantial delays and additional costs.

Operating policy: The fund will not invest more than 15% of its net assets in
illiquid securities, and no more than 5% in certain restricted securities.

_____________________________________________________________________________
CASH RESERVES PROVIDE FLEXIBILITY AND SERVE AS A SHORT-TERM DEFENSE DURING
PERIODS OF UNUSUAL MARKET VOLATILY.

Types of Management Practices

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

Fundamental policy: Borrowings may not exceed 33 1/3% of the fund's total fund
assets.

Foreign Currency Transactions. The fund will normally conduct its foreign
currency exchange transactions either on a spot (i.e., cash) basis at the spot
rate prevailing in the foreign currency exchange market, or through entering
into forward contracts to purchase or sell foreign currencies. The fund will
generally not enter into a forward contract with a term of greater than one
year.

The fund will generally enter into forward foreign currency exchange contracts
only under two circumstances. First, when the fund enters into a contract for
the purchase or sale of a security denominated in a foreign currency, it may
desire to "lock in" the U.S. dollar price of the security. Second, when
Price-Fleming believes that the currency of a particular foreign country may
suffer or enjoy a substantial movement against another currency, it may enter
into a forward contract to sell or buy the former foreign currency (or another
currency which acts as a proxy for that currency) approximating the value of
some or all of the fund's portfolio securities denominated in such foreign
currency. Under certain circumstances, the fund may commit a substantial
portion or the entire value of its portfolio to the consummation of these
contracts. Price-Fleming will consider the effect such a commitment of its
portfolio to forward contracts would have on the investment program of the
fund and the flexibility of the fund to purchase additional securities.
Although forward contracts will be used primarily to protect the fund from
adverse currency movements, they also involve the risk that anticipated
currency movements will not be accurately predicted and a fund's total return
could be adversely affected as a result.

There are certain markets where it is not possible to engage in effective
foreign currency hedging. This may be true, for example, for the currencies of
various Latin American countries where the foreign exchange markets are not
sufficiently developed to permit hedging activity to take place.

Futures and Options. Futures (a type of potentially high-risk derivative) are
often used to manage 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) give the investor the right, but not the
obligation, to buy or sell an asset at a predetermined price in the future.
The fund may buy and sell futures contracts (and options on such contracts) to
manage its exposure to changes in securities prices and foreign currencies and
as an efficient means of adjusting overall exposure to certain markets. The
fund may purchase, sell, or write call and put options on securities,
financial indices, and foreign currencies.

Tax Consequences of Hedging. Under applicable tax law, the fund may be
required to limit their gains from hedging in foreign currency forwards,
futures, and options. Although the fund is expected to comply with such
limits, the extent to which these limits apply is subject to tax regulations
as yet unissued. Hedging may also result in the application of the
mark-to-market and straddle provisions of the Internal Revenue Code. These
provisions could result in an increase (or decrease) in the amount of taxable
dividends paid by the fund and could affect whether dividends paid by the fund
are classified as capital gains or ordinary income.

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 funds could experience
delays in recovering securities and possibly capital losses.

Fundamental policy: The value of loaned securities may not exceed 33 1/3% of
the fund's total assets.

Portfolio Turnover. Turnover is an indication of frequency. 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. The fund's portfolio turnover rates for the fiscal years ended
December 31, 1992, December 31, 1993, and October 31, 1994, were 37.8%, 29.8%,
and 22.9%, respectively.

4 Investing with T. Rowe Price

Account Requirements and Transaction Information

_____________________________________________________________________________
ALWAYS VERIFY YOUR TRANSACTIONS BY CAREFULLY REVIEWING THE CONFIRMATION WE
SEND YOU. PLEASE REPORT ANY DISCREPANCIES TO SHAREHOLDER SERVICES.

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.

Unless you request otherwise, one shareholder report will be mailed to
multiple account owners with the same tax identification number and same zip
code and to shareholders who have requested that their account be combined
with someone else's for financial reporting.

_____________________________________________________________________________
T. ROWE PRICE
TRUST COMPANY
1-800-492-7670
1-410-625-6585

Employer-Sponsored Retirement Plans and Institutional Accounts

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 or gifts or transfers to minors (UGMA/UTMA) accounts

_____________________________________________________________________________
REGULAR MAIL
T. ROWE PRICE
ACCOUNT SERVICES
P.O. BOX 17300
BALTIMORE, MD
21298-9353

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.)

_____________________________________________________________________________
MAILGRAM, EXPRESS,
REGISTERED, OR CERTIFIED MAIL
T. ROWE PRICE
ACCOUNT SERVICES
10090 RED RUN BLVD.
OWINGS MILLS, MD 21117

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
address at left. We do not accept third party checks, except for IRA Rollover
checks, to open new accounts.

By Wire

0 Call Investor Services for an account number and give the following wire
address to your bank:

Morgan Guaranty Trust Co. of New York
ABA 021000238
T. Rowe Price [fund name]
AC-00153938
account name(s) and account number

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

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

By Exchange

Call Shareholder Services or use Tele*Access or PC*Access (see "Automated
Services" under "Shareholder 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. (See explanation of "Excessive Trading" under "Transaction
Procedures.")

In Person

Drop off your New Account Form at any of the locations listed on the cover and
obtain a receipt.

Purchasing Additional Shares: $100 minimum purchase;
$50 minimum for retirement plans and Automatic Asset Builder

By ACH Transfer

Use Tele*Access, PC*Access, or call Investor Services if you have established
electronic transfers using the ACH network.

By Wire

Call Shareholder Services or use the wire address in "Opening a New Account."
_____________________________________________________________________________

REGULAR MAIL
T. ROWE PRICE FUNDS
ACCOUNT SERVICES
P.O. BOX 89000
BALTIMORE, MD
21289-1500
(FOR MAILGRAMS, EXPRESS, REGISTERED,
OR CERTIFIED MAIL, SEE PREVIOUS SECTION.)

By Mail

0 Provide your account number and the fund name on your check.

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

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

By Automatic Asset Builder

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

Exchanging and Redeeming Shares

By Phone

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

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

_____________________________________________________________________________
FOR MAILGRAM, EXPRESS, REGISTERED, OR CERTIFIED MAIL, SEE ADDRESSES UNDER
"OPENING A NEW ACCOUNT."

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. Please
mail to the appropriate address below or as indicated at left. 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").

Regular Mail

For nonretirement and IRA accounts:

T. Rowe Price Account Services
P.O. Box 89000
Baltimore, MD 21289-0220

For employer-sponsored retirement accounts:

T. Rowe Price Trust Company
P.O. Box 89000
Baltimore, MD 21289-0300

Redemptions from employer-sponsored retirement accounts must be in writing;
please call T. Rowe Price Trust Company or your plan administrator for
instructions. IRA distributions may be requested in writing or by telephone;
please call Shareholder Services to obtain an IRA Distribution Form or an IRA
Shareholder Services Form to authorize the telephone redemption service.

Rights Reserved By the Fund

The fund and its agents reserve the right to waive or lower investment
minimums; to accept initial purchases by telephone or mailgram; to cancel or
rescind any purchase or exchange (for example, if an account has been
restricted due to excessive trading or fraud) 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; 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; to otherwise modify the conditions
of purchase and any services at any time; or to act on instructions believed
to be genuine.

Shareholder Services

_____________________________________________________________________________
SHAREHOLDER SERVICES
1-800-225-5132
1-410-625-6500

Many services are available to you as a T. Rowe Price shareholder; some you
receive automatically and others you must authorize 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 reviews some of the principal services currently offered. Our
Services Guide contains detailed descriptions of these and other services.

If you are a new T. Rowe Price investor, you will receive a Services Guide
with our Welcome Kit.

_____________________________________________________________________________
INVESTOR SERVICES
1-800-638-5660
1-410-547-2308

Note: Corporate and other entity 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 and institutions, including
large and small businesses: 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, please call
our Trust Company at 1-800-492-7670.

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 funds are registered.)
Some of the T. Rowe Price funds may impose a redemption fee of .50% to 2%,
payable to such funds, on shares held for less than one year, or in some
funds, six months.

_____________________________________________________________________________
TELE*ACCESS
1-800-638-2587
1-410-625-7676

Automated Services

Tele*Access. 24-hour service via a toll-free number provides information on
fund yields and prices, dividends, account balances, and your latest
transaction as well as the ability to request prospectuses, account and tax
forms, duplicate statements, checks, and to initiate purchase, redemption, and
exchange orders in your accounts (see "Electronic Transfers" below).

PC*Access. 24-hour service via a dial-up modem provides the same information
as Tele*Access, but on a personal computer. Please call Investor Services for
an information guide.

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 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, PC*Access,
or call Shareholder Services.

By Wire. Electronic transfers can also 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 Fund or
Emerging Markets Bond Fund) 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.

Automatic Investing ($50 minimum)

You can invest automatically in several different ways, including:

0 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.

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

_____________________________________________________________________________
DISCOUNT BROKERAGE IS A DIVISION OF T. ROWE PRICE INVESTMENT SERVICES, INC.

Discount Brokerage

You can trade stocks, bonds, options, precious metals, and other securities at
a savings over regular commission rates. Call Investor Services for
information.

Note: If you buy or sell T. Rowe Price Funds through anyone other than T. Rowe
Price, such as broker-dealers or banks, you may be charged transaction or
service fees by those institutions. No such fees are charged by T. Rowe Price
Investment Services or the fund for transactions conducted directly with the
fund.

_____________________________________________________________________________

DESCRIPTION OF SIGNIFICANT DIFFERENCES BETWEEN EDGAR FILING AND PRINTED COPY

Information appearing in all capital letters before a paragraph in the Edgar
filing will appear, in the printed copy, as call-outs in the left margin.

PAGE 2
STATEMENT OF ADDITIONAL INFORMATION

T. Rowe Price Prime Reserve Fund, Inc.
T. Rowe Price New Income Fund, Inc.
T. Rowe Price Equity Income Fund
T. Rowe Price International Stock FundR
(the "Funds")

This Statement of Additional Information is not a prospectus
but should be read in conjunction with the Funds' prospectus
dated October 1, 1995, which may be obtained from T. Rowe Price
Investment Services, Inc., 100 East Pratt Street, Baltimore,
Maryland 21202.

If you would like a prospectus 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.

The date of this Statement of Additional Information is
October 1, 1995.

PAGE 3
TABLE OF CONTENTS

Page Page

Adjustable Rate Mortgages . 13 Investment Program . . . . 8
Adjustable Rate Securities 14 Investment Restrictions . 40
Asset-Backed Securities . . 15 Legal Counsel . . . . . . 86
Code of Ethics . . . . . . 57 Lending of Portfolio
Covered Call and Put Securities . . . . . . . 23
Options . . . . . . . . . 25 Management of Funds . . . 44
Custodian . . . . . . . . . 57 Mortgage-Related Securities 9
Dealer Options . . . . . . 29 Net Asset Value Per Share 69
Distributor for Funds . . . 56 Organization of the Funds 83
Dividends . . . . . . . . . 70 Portfolio Management
Federal and State Registration Practices . . . . . . . . 23
of Shares . . . . . . . . 86 Portfolio Transactions . 58
Foreign Currency Pricing of Securities . . 67
Transactions . . . . . . . 37 Principal Holders of
Foreign Securities . . . . . 5 Securities . . . . . . . 52
Futures Contracts . . . . . 30 Ratings of Commercial
Hybrid Instruments . . . . 19 Paper . . . . . . . . . 88
Illiquid or Restricted Ratings of Corporate Debt
Securities . . . . . . . . 21 Securities . . . . . . . 89
Independent Accountants . . 87 Repurchase Agreements . . 24
Industry Concentration . . 18 Risk Factors . . . . . . . 3
Investment Management Tax Status . . . . . . . 70
Services . . . . . . . . . 53 Warrants . . . . . . . . 19
Investment Objectives and When-Issued Securities and
Policies . . . . . . . . . . 2 Forward Commitment
Investment Performance . . 73 Contracts . . . . . . . 21
Yield Information . . . . 73

INVESTMENT OBJECTIVES AND POLICIES

The following information supplements the discussion of each
Fund's investment objectives and policies discussed in the
prospectus. The International Stock Fund's investment objective
is a fundamental policy. The Prime Reserve, New Income, and
Equity Income Funds will not make a material change in their
investment objectives without obtaining shareholder approval.
Unless otherwise specified, the investment program and
restrictions of each Fund are not fundamental policies. The
operating policies of each Fund are subject to change by its
Board of Directors/Trustees without shareholder approval.
However, shareholders will be notified of a material change in an
operating policy. The fundamental policies of each Fund 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

PAGE 4
shares represented at a meeting of shareholders at which the
holders of 50% or more of the shares are represented.

RISK FACTORS

General

New Income and Equity Income Funds

Because of its investment policy, the Fund may or may not be
suitable or appropriate for all investors. The Funds are not
money market funds and are not an appropriate investment for
those whose primary objective is principal stability. The Equity
Income Fund will normally have substantially all of its assets in
equity securities (e.g., common stocks). This portion of the
Equity Income Fund's assets will be subject to all of the risks
of investing in the stock market. There is risk in all
investment. The value of the portfolio securities of the Funds
will fluctuate based upon market conditions. Although the Funds
seek to reduce risk by investing in a diversified portfolio, such
diversification does not eliminate all risk. There can, of
course, be no assurance that the Funds will achieve their
investment objectives. 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.

Prime Reserve Fund

There can be no assurance that the Fund will achieve its
investment objectives or be able to maintain its net asset value
per share at $1.00. The price of the Fund is not guaranteed or
insured by the U.S. Government, and its yield is not fixed. An
increase in interest rates could reduce the value of the Fund's
portfolio investments, and a decline in interest rates could
increase the value.

New Income and Equity Income Funds

Debt Obligations

Although substantially all of the Equity Income Fund's
assets are invested in common stocks, the Fund may invest in
convertible securities, corporate debt securities and preferred
stocks which hold the prospect of contributing to the achievement
of the Fund's objectives. Yields on short, intermediate, and
long-term securities are dependent on a variety of factors,
including the general conditions of the money and bond markets,

PAGE 5
the size of a particular offering, the maturity of the
obligation, and the credit quality and rating of the issue. Debt
securities with longer maturities tend to have 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 debt 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 each Fund to achieve its
investment objective is also dependent on the continuing ability
of the issuers of the debt securities in which the Fund invests
to meet their obligations for the payment of interest and
principal when due. The Equity Income Fund's investment program
permits it to purchase below investment grade securities. Since
investors generally perceive that there are greater risks
associated with investment in lower quality securities, the
yields from such securities normally exceed those obtainable from
higher quality securities. However, the principal value of
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. Such
securities are also subject to special risks, discussed below.
Although each Fund seeks to reduce risk by portfolio
diversification, credit analysis, and attention to trends in the
economy, industries and financial markets, such efforts will not
eliminate all risk. There can, of course, be no assurance that
the Fund will achieve their investment objectives.

Prime Reserve, New Income and Equity Income Funds

After purchase by each Fund, a debt security may cease to be
rated or its rating may be reduced below the minimum required for
purchase by the Fund. For the Prime Reserve Fund, the procedures
set forth in Rule 2a-7, under the Investment Company Act of 1940,
may require the prompt sale of any such security. For the other
Funds, neither event will 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 or S&P
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 each 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.

PAGE 6
Equity Income Fund

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 was 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 leverage 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.

New Income Fund

Mortgage securities differ from conventional bonds in that
principal is paid back over the life of the security rather than
at maturity. As a result, the holder of a mortgage security
(i.e., the Fund) receives monthly scheduled payments of principal
and interest, and may receive unscheduled principal payments
representing prepayments on the underlying mortgages. The
incidence of unscheduled principal payments is also likely to
increase in mortgage pools owned by the Fund when prevailing
mortgage loan rates fall below the mortgage rates of the
securities underlying the individual pool. The effect of such
prepayments in a falling rate environment is to (1) cause the
Fund to reinvest principal payments at the then lower prevailing
interest rate, and (2) reduce the potential for capital
appreciation beyond the face amount of the security. Conversely,
the Fund may realize a gain on prepayments of mortgage pools
trading at a discount. Such prepayments will provide an early
return of principal which may then be reinvested at the then
higher prevailing interest rate.

The market value of adjustable rate mortgage securities
("ARMs"), like other U.S. government securities, will generally

PAGE 7
vary inversely with changes in market interest rates, declining
when interest rates rise and rising when interest rates decline.
Because of their periodic adjustment feature, ARMs should be more
sensitive to short-term interest rates than long-term rates.
They should also display less volatility than long-term mortgage
securities. Thus, while having less risk of a decline during
periods of rapidly rising rates, ARMs may also have less
potential for capital appreciation than other investments of
comparable maturities. Interest rate caps on mortgages
underlying ARM securities may prevent income on the ARM from
increasing to prevailing interest rate levels and cause the
securities to decline in value. In addition, to the extent ARMS
are purchased at a premium, mortgage foreclosures and unscheduled
principal prepayments may result in some loss of the holders'
principal investment to the extent of the premium paid. On the
other hand, if ARMs are purchased at a discount, both a scheduled
payment of principal and an unscheduled prepayment of principal
will increase current and total returns and will accelerate the
recognition of income which when distributed to shareholders will
be taxable as ordinary income.

All Funds, except Prime Reserve Fund

Foreign Securities

The Equity Income Fund may invest in U.S. dollar-denominated
and non U.S. dollar-denominated securities of foreign issuers.

Risk Factors of Foreign Investing

There are special risks in foreign investing. Certain of
these risks are inherent in any international mutual fund while
others relate more to the countries in which the Funds will
invest. Many of the risks are more pronounced for investments in
developing or emerging countries, such as many of the countries
of Southeast Asia, Latin America, Eastern Europe and the Middle
East. Although there is no universally accepted definition, a
developing country is generally considered to be a country which
is in the initial stages of its industrialization cycle with a
per capita gross national product of less than $8,000.

General (International Stock Fund). Investors should
understand that all investments have a risk factor. There can be
no guarantee against loss resulting from an investment in the
Fund, and there can be no assurance that the Fund's investment
policies will be successful, or that its investment objective
will be attained. The Fund is designed for individual and
institutional investors seeking to diversify beyond the United
States in actively researched and managed portfolios, and is

PAGE 8
intended for long-term investors who can accept the risks
entailed in investment in foreign securities.

Political and Economic Factors. Individual foreign
economies of certain countries may differ favorably or
unfavorably from the United States' economy in such respects as
growth of gross national product, rate of inflation, capital
reinvestment, resource self-sufficiency and balance of payments
position. The internal politics of certain foreign countries are
not as stable as in the United States. For example, in 1991, the
existing government in Thailand was overthrown in a military
coup. In 1992, there were two military coup attempts in
Venezuela and in 1992 the President of Brazil was impeached. In
addition, significant external political risks currently affect
some foreign countries. Both Taiwan and China still claim
sovereignty of one another and there is a demilitarized border
between North and South Korea.

Governments in certain foreign countries continue to
participate to a significant degree, through ownership interest
or regulation, in their respective economies. Action by these
governments could have a significant effect on market prices of
securities and payment of dividends. The economies of many
foreign countries are heavily dependent upon international trade
and are accordingly affected by protective trade barriers and
economic conditions of their trading partners. The enactment by
these trading partners of protectionist trade legislation could
have a significant adverse effect upon the securities markets of
such countries.

Currency Fluctuations. The Funds will invest in securities
denominated in various currencies. Accordingly, a change in the
value of any such currency against the U.S. dollar will result in
a corresponding change in the U.S. dollar value of the Funds'
assets denominated in that currency. Such changes will also
affect the Funds' income. Generally, when a given currency
appreciates against the dollar (the dollar weakens) the value of
the Fund's securities denominated in that currency will rise.
When a given currency depreciates against the dollar (the dollar
strengthens) the value of the Funds' securities denominated in
that currency would be expected to decline.

Investment and Repatriation of Restrictions. Foreign
investment in the securities markets of certain foreign countries
is restricted or controlled in varying degrees. These
restrictions may limit at times and preclude investment in
certain of such countries and may increase the cost and expenses
of the Funds. Investments by foreign investors are subject to a
variety of restrictions in many developing countries. These
restrictions may take the form of prior governmental approval,

PAGE 9
limits on the amount or type of securities held by foreigners,
and limits on the types of companies in which foreigners may
invest. Additional or different restrictions may be imposed at
any time by these or other countries in which the Funds invest.
In addition, the repatriation of both investment income and
capital from several foreign countries is restricted and
controlled under certain regulations, including in some cases the
need for certain government consents. For example, capital
invested in Chile normally cannot be repatriated for one year.

Market Characteristics. It is contemplated that most
foreign securities, other than Latin American securities, will be
purchased in over-the-counter markets or on stock exchanges
located in the countries in which the respective principal
offices of the issuers of the various securities are located, if
that is the best available market. Currently, it is anticipated
that many Latin American investments will be made through ADRs
traded in the United States. Foreign stock markets are generally
not as developed or efficient as, and may be more volatile than,
those in the United States. While growing in volume, they
usually have substantially less volume than U.S. markets and the
Funds' portfolio securities may be less liquid and subject to
more rapid and erratic price movements than securities of
comparable U.S. companies. Equity securities may trade at
price/earnings multiples higher than comparable United States
securities and such levels may not be sustainable. Fixed
commissions on foreign stock exchanges are generally higher than
negotiated commissions on United States exchanges, although the
Funds will endeavor to achieve the most favorable net results on
their portfolio transactions. There is generally less government
supervision and regulation of foreign stock exchanges, brokers
and listed companies than in the United States. Moreover,
settlement practices for transactions in foreign markets may
differ from those in United States markets. Such differences may
include delays beyond periods customary in the United States and
practices, such as delivery of securities prior to receipt of
payment, which increase the likelihood of a "failed settlement."
Failed settlements can result in losses to a Fund.

Investment Funds. The Funds may invest in investment funds
which have been authorized by the governments of certain
countries specifically to permit foreign investment in securities
of companies listed and traded on the stock exchanges in these
respective countries. If the Funds invest in such investment
funds, the Funds' shareholders will bear not only their
proportionate share of the expenses of the Funds (including
operating expenses and the fees of the investment manager), but
also will bear indirectly similar expenses of the underlying
investment funds. In addition, the securities of these

PAGE 10
investment funds may trade at a premium over their net asset
value.

Information and Supervision. There is generally less
publicly available information about foreign companies comparable
to reports and ratings that are published about companies in the
United States. Foreign companies are also generally not subject
to uniform accounting, auditing and financial reporting
standards, practices and requirements comparable to those
applicable to United States companies. It also may be more
difficult to keep currently informed of corporate actions which
affect the prices of portfolio securities.

Taxes. The dividends and interest payable on certain of the
Funds' foreign portfolio securities may be subject to foreign
withholding taxes, thus reducing the net amount of income
available for distribution to the Funds' shareholders. A
shareholder otherwise subject to United States federal income
taxes may, subject to certain limitations, be entitled to claim a
credit or deduction for U.S. federal income tax purposes for his
or her proportionate share of such foreign taxes paid by the
Funds. (See "Tax Status," page 70.)

Other. With respect to certain foreign countries,
especially developing and emerging ones, there is the possibility
of adverse changes in investment or exchange control regulations,
expropriation or confiscatory taxation, limitations on the
removal of funds or other assets of the Funds, political or
social instability, or diplomatic developments which could affect
investments by U.S. persons in those countries.

Eastern Europe and Russia. Changes occurring in Eastern
Europe and Russia today could have long-term potential
consequences. As restrictions fall, this could result in rising
standards of living, lower manufacturing costs, growing consumer
spending, and substantial economic growth. However, investment
in the countries of Eastern Europe and Russia is highly
speculative at this time. Political and economic reforms are too
recent to establish a definite trend away from centrally-planned
economies and state owned industries. In many of the countries
of Eastern Europe and Russia, there is no stock exchange or
formal market for securities. Such countries may also have
government exchange controls, currencies with no recognizable
market value relative to the established currencies of western
market economies, little or no experience in trading in
securities, no financial reporting standards, a lack of a banking
and securities infrastructure to handle such trading, and a legal
tradition which does not recognize rights in private property.
In addition, these countries may have national policies which
restrict investments in companies deemed sensitive to the

PAGE 11
country's national interest. Further, the governments in such
countries may require governmental or quasi-governmental
authorities to act as custodian of a Fund's assets invested in
such countries and these authorities may not qualify as a foreign
custodian under the Investment Company Act of 1940 and exemptive
relief from such Act may be required. All of these
considerations are among the factors which could cause
significant risks and uncertainties to investment in Eastern
Europe and Russia. Each Fund will only invest in a company
located in, or a government of, Eastern Europe and Russia, if it
believes the potential return justifies the risk. To the extent
any securities issued by companies in Eastern Europe and Russia
are considered illiquid, each Fund will be required to include
such securities within its 15% restriction on investing in
illiquid securities.

INVESTMENT PROGRAM

Types of Securities

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

Debt Securities

Prime Reserve, New Income and Equity Income Funds

Fixed-income securities in which the Funds may invest
include, but are not limited to, those described below.

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.

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; and 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.

PAGE 12
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 Funds may invest in U.S. banks, foreign branches of
U.S. banks, U.S. branches of foreign banks, and foreign branches
of foreign banks.

Corporate Debt Securities. Outstanding nonconvertible
corporate debt securities (e.g., bonds and debentures).
Corporate notes may have fixed, variable, or floating rates.

Commercial Paper. Short-term promissory notes issued by
corporations primarily to finance short-term credit needs.
Certain notes may have floating or variable rates.

Foreign Government Securities. Issued or guaranteed by a
foreign government, a province, instrumentality or political
subdivision, or similar unit thereof.

Savings and Loan Obligations. Negotiable certificates of
deposit and other short-term debt obligations of savings and loan
associations.

Supranational Agencies. Securities of certain supranational
entities, such as the International Development Bank.

New Income Fund

Mortgage-Related Securities

Mortgage-related securities in which the Fund may invest
include, but are not limited to, those described below.

Mortgage-Backed Securities. Mortgage-backed securities are
securities representing an interest in a pool of mortgages. The
mortgages may be of a variety of types, including adjustable
rate, conventional 30-year fixed rate, graduated payment, and 15-
year. Principal and interest payments made on the mortgages in
the underlying mortgage pool are passed through to the Fund. This
is in contrast to traditional bonds where principal is normally
paid back at maturity in a lump sum. Unscheduled prepayments of
principal shorten the securities' weighted average life and may
lower their total return. (When a mortgage in the underlying
mortgage pool is prepaid, an unscheduled principal prepayment is
passed through to the Fund. This principal is returned to the
Fund at par. As a result, if a mortgage security were trading at
a premium, its total return would be lowered by prepayments, and

PAGE 13
if a mortgage security were trading at a discount, its total
return would be increased by prepayments.) The value of these
securities also may change because of changes in the market's
perception of the creditworthiness of the federal agency that
issued them. In addition, the mortgage securities market in
general may be adversely affected by changes in governmental
regulation or tax policies.

U.S. Government Agency Mortgage-Backed Securities. These
are obligations issued or guaranteed by the United States
Government or one of its agencies or instrumentalities, such as
the Government National Mortgage Association ("Ginnie Mae" or
"GNMA"), the Federal National Mortgage Association ("Fannie Mae"
or "FNMA") the Federal Home Loan Mortgage Corporation ("Freddie
Mac" or "FHLMC"), and the Federal Agricultural Mortgage
Corporation ("Farmer Mac" or "FAMC"). FNMA, FHLMC, and FAMC
obligations are not backed by the full faith and credit of the
U.S. Government as GNMA certificates are, but they are supported
by the instrumentality's right to borrow from the United States
Treasury. U.S. Government Agency Mortgage-Backed Certificates
provide for the pass-through to investors of their pro-rata share
of monthly payments (including any prepayments) made by the
individual borrowers on the pooled mortgage loans, net of any
fees paid to the guarantor of such securities and the servicer of
the underlying mortgage loans. Each of GNMA, FNMA, FHLMC, and
FAMC guarantees timely distributions of interest to certificate
holders. GNMA and FNMA guarantee timely distributions of
scheduled principal. FHLMC has in the past guaranteed only the
ultimate collection of principal of the underlying
mortgage loan; however, FHLMC now issues Mortgage-Backed
Securities (FHLMC Gold PCs) which also guarantee timely payment
of monthly principal reductions.

Ginnie Mae Certificates. Ginnie Mae is a wholly-owned
corporate instrumentality of the United States within the
Department of Housing and Urban Development. The National
Housing Act of 1934, as amended (the "Housing Act"), authorizes
Ginnie Mae to guarantee the timely payment of the principal of
and interest on certificates that are based on and backed by a
pool of mortgage loans insured by the Federal Housing
Administration under the Housing Act, or Title V of the Housing
Act of 1949 ("FHA Loans"), or guaranteed by the Department of
Veterans Affairs under the Servicemen's Readjustment Act of 1944,
as amended ("VA Loans"), or by pools of other eligible mortgage
loans. The Housing Act provides that the full faith and credit
of the United States government is pledged to the payment of all
amounts that may be required to be paid under any guaranty. In
order to meet its obligations under such guaranty, Ginnie Mae is
authorized to borrow from the United States Treasury with no
limitations as to amount.

PAGE 14

Fannie Mae Certificates. Fannie Mae is a federally
chartered and privately owned corporation organized and existing
under the Federal National Mortgage Association Charter Act of
1938. FNMA Certificates represent a pro-rata interest in a group
of mortgage loans purchased by Fannie Mae. FNMA guarantees the
timely payment of principal and interest on the securities it
issues. The obligations of FNMA are not backed by the full faith
and credit of the U.S. Government.

Freddie Mac Certificates. Freddie Mac is a corporate
instrumentality of the United States created pursuant to the
Emergency Home Finance Act of 1970, as amended (the "FHLMC Act").
Freddie Mac Certificates represent a pro-rata interest in a group
of mortgage loans (a "Freddie Mac Certificate group") purchased
by Freddie Mac. Freddie Mac guarantees timely payment of
interest and principal on certain securities it issues and timely
payment of interest and eventual payment of principal on other
securities is issues. The obligations of Freddie Mac are
obligations solely of Freddie Mac and are not backed by the full
faith and credit of the U.S. Government.

Farmer Mac Certificates. The Federal Agricultural Mortgage
Corporation ("Farmer Mac") is a federally chartered
instrumentality of the United States established by Title VIII of
the Farm Credit Act of 1971, as amended ("Charter Act"). Farmer
Mac was chartered primarily to attract new capital for financing
of agricultural real estate by making a secondary market in
certain qualified agricultural real estate loans. Farmer Mac
provides guarantees of timely payment of principal and interest
on securities representing interests in, or obligations backed
by, pools of mortgages secured by first liens on agricultural
real estate ("Farmer Mac Certificates"). Similar to Fannie Mae
and Freddie Mac, Farmer Mac's Certificates are not supported by
the full faith and credit of the U.S. Government; rather, Farmer
Mac may borrow up from the U.S. Treasury to meet its guaranty
obligations.

As discussed above, prepayments on the underlying mortgages
and their effect upon the rate of return of a Mortgage-Backed
Security, is the principal investment risk for a purchaser of
such securities, like the Fund. Over time, any pool of mortgages
will experience prepayments due to a variety of factors,
including (1) sales of the underlying homes (including
foreclosures), (2) refinancings of the underlying mortgages, and
(3) increased amortization by the mortgagee. These factors, in
turn, depend upon general economic factors, such as level of
interest rates and economic growth. Thus, investors normally
expect prepayment rates to increase during periods of strong
economic growth or declining interest rates, and to decrease in

PAGE 15
recessions and rising interest rate environments. Accordingly,
the life of the Mortgage-Backed Security is likely to be
substantially shorter than the stated maturity of the mortgages
in the underlying pool. Because of such variation in prepayment
rates, it is not possible to predict the life of a particular
Mortgage-Backed Security, but FHA statistics indicate that 25- to
30-year single family dwelling mortgages have an average life of
approximately 12 years. The majority of Ginnie Mae Certificates
are backed by mortgages of this type, and, accordingly, the
generally accepted practice treats Ginnie Mae Certificates as 30-
year securities which prepay full in the 12th year. FNMA and
Freddie Mac Certificates may have differing prepayment
characteristics.

Fixed Rate Mortgage-Backed Securities bear a stated "coupon
rate" which represents the effective mortgage rate at the time of
issuance, less certain fees to GNMA, FNMA and FHLMC for providing
the guarantee, and the issuer for assembling the pool and for
passing through monthly payments of interest and principal.

Payments to holders of Mortgage-Backed Securities consist of
the monthly distributions of interest and principal less the
applicable fees. The actual yield to be earned by a holder of
Mortgage-Backed Securities is calculated by dividing interest
payments by the purchase price paid for the Mortgage-Backed
Securities (which may be at a premium or a discount from the face
value of the certificate).

Monthly distributions of interest, as contrasted to semi-
annual distributions which are common for other fixed interest
investments, have the effect of compounding and thereby raising
the effective annual yield earned on Mortgage-Backed Securities.
Because of the variation in the life of the pools of mortgages
which back various Mortgage-Backed Securities, and because it is
impossible to anticipate the rate of interest at which future
principal payments may be reinvested, the actual yield earned
from a portfolio of Mortgage-Backed Securities will differ
significantly from the yield estimated by using an assumption of
a certain life for each Mortgage-Backed Security included in such
a portfolio as described above.

U.S. Government Agency Multiclass Pass-Through Securities.
Unlike CMOs, U.S. Government Agency Multiclass Pass-Through
Securities, which include FNMA Guaranteed REMIC Pass-Through
Certificates and FHLMC Multi-Class Mortgage Participation
Certificates, are ownership interests in a pool of Mortgage
Assets. Unless the context indicates otherwise, all references
herein to CMOs include multiclass pass-through securities.

PAGE 16
Multi-Class Residential Mortgage Securities. Such
securities represent interests in pools of mortgage loans to
residential home buyers made by commercial banks, savings and
loan associations or other financial institutions. Unlike GNMA,
FNMA and FHLMC securities, the payment of principal and interest
on Multi-Class Residential Mortgage Securities is not guaranteed
by the U.S. Government or any of its agencies. Accordingly,
yields on Multi-Class Residential Mortgage Securities have been
historically higher than the yields on U.S. government mortgage
securities. However, the risk of loss due to default on such
instruments is higher since they are not guaranteed by the U.S.
Government or its agencies. Additionally, pools of such
securities may be divided into senior or subordinated segments.
Although subordinated mortgage securities may have a higher yield
than senior mortgage securities, the risk of loss of principal is
greater because losses on the underlying mortgage loans must be
borne by persons holding subordinated securities before those
holding senior mortgage securities.

Privately-Issued Mortgage-Backed Certificates. These are
pass-through certificates issued by non-governmental issuers.
Pools of conventional residential mortgage loans created by such
issuers generally offer a higher rate of interest than government
and government-related pools because there are no direct or
indirect government guarantees of payment. Timely payment of
interest and principal of these pools is, however, generally
supported by various forms of insurance or guarantees, including
individual loan, title, pool and hazard insurance. The insurance
and guarantees are issued by government entities, private
insurance or the mortgage poolers. Such insurance and guarantees
and the creditworthiness of the issuers thereof will be
considered in determining whether a mortgage-related security
meets the Fund's quality standards. The Fund may buy mortgage-
related securities without insurance or guarantees if through an
examination of the loan experience and practices of the poolers,
the investment manager determines that the securities meet the
Fund's quality standards.

Collateralized Mortgage Obligations (CMOs). CMOs are bonds
that are collateralized by whole loan mortgages or mortgage pass-
through securities. The bonds issued in a CMO deal are divided
into groups, and each group of bonds is referred to as a
"tranche." Under the traditional CMO structure, the cash flows
generated by the mortgages or mortgage pass-through securities in
the collateral pool are used to first pay interest and then pay
principal to the CMO bondholders. The bonds issued under a CMO
structure are retired sequentially as opposed to the pro rata
return of principal found in traditional pass-through
obligations. Subject to the various provisions of individual CMO

PAGE 17
issues, the cash flow generated by the underlying collateral (to
the extent it exceeds the amount required to pay the stated
interest) is used to retire the bonds. Under the CMO structure,
the repayment of principal among the different tranches is
prioritized in accordance with the terms of the particular CMO
issuance. The "fastest-pay" tranche of bonds, as specified in
the prospectus for the issuance, would initially receive all
principal payments. When that tranche of bonds is retired, the
next tranche, or tranches, in the sequence, as specified in the
prospectus, receive all of the principal payments until they are
retired. The sequential retirement of bond groups continues
until the last tranche, or group of bonds, is retired.
Accordingly, the CMO structure allows the issuer to use cash
flows of long maturity, monthly-pay collateral to formulate
securities with short, intermediate and long final maturities and
expected average lives.

CMO structures may also include floating rate CMOs, planned
amortization classes, accrual bonds and CMO residuals. These
structures affect the amount and timing of principal and interest
received by each tranche from the underlying collateral. Under
certain of these structures, given classes of CMOs have priority
over others with respect to the receipt of prepayments on the
mortgages. Therefore, depending on the type of CMOs in which the
Fund invests, the investment may be subject to a greater or
lesser risk of prepayment than other types of mortgage-related
securities.

The primary risk of any mortgage security is the uncertainty
of the timing of cash flows. For CMOs, the primary risk results
from the rate of prepayments on the underlying mortgages serving
as collateral. An increase or decrease in prepayment rates
(resulting from a decrease or increase in mortgage interest
rates) will affect the yield, average life and price of CMOs.
The prices of certain CMOs, depending on their structure and the
rate of prepayments, can be volatile. Some CMOs may also not be
as liquid as other securities.

Stripped Mortgage-Backed Securities. Stripped Mortgage-
Backed securities represent interests in a pool of mortgages, the
cash flow of which has been separated into its interest and
principal components. "IOs" (interest only securities) receive
the interest portion of the cash flow while "POs" (principal only
securities) receive the principal portion. IOs and POs are
usually structured as tranches of a CMO. Stripped
Mortgage-Backed Securities may be issued by U.S. Government
Agencies or by private issuers similar to those described above
with respect to CMOs and privately-issued mortgage-backed
certificates. As interest rates rise and fall, the value of IOs

PAGE 18
tends to move in the same direction as interest rates. The value
of the other mortgage-backed securities described herein, like
other debt instruments, will tend to move in the opposite
direction compared to interest rates. Under the Internal Revenue
Code of 1986, as amended (the "Code"), POs may generate taxable
income from the current accrual of original issue discount,
without a corresponding distribution of cash to the Fund.

The cash flows and yields on IO and PO classes are extremely
sensitive to the rate of principal payments (including
prepayments) on the related underlying mortgage assets. In the
case of IOs, prepayments affect the amount, but not the timing,
of cash flows provided to the investor. In contrast, prepayments
on the mortgage pool affect the timing, but not the amount, of
cash flows received by investors in POs. A rapid or slow rate of
principal payments may have a material adverse effect on the
prices of IOs or POs, respectively. If the underlying mortgage
assets experience greater than anticipated prepayments of
principal, an investor may fail to recoup fully its initial
investment in an IO class of a stripped mortgage-backed security,
even if the IO class is rated AAA or Aaa or is derived from a
full faith and credit obligation. Conversely, if the underlying
mortgage assets experience slower than anticipated prepayments of
principal, the price on a PO class will be affected more severely
than would be the case with a traditional mortgage-backed
security.

The staff of the Securities and Exchange Commission has
advised the Fund that it believes the Fund should treat IOs and
POs, other than government-issued IOs or POs backed by fixed rate
mortgages, as illiquid securities and, accordingly, limit its
investments in such securities, together with all other illiquid
securities, to 15% of the Fund's net assets. Under the Staff's
position, the determination of whether a particular
government-issued IO and PO backed by fixed rate mortgages may be
made on a case by case basis under guidelines and standards
established by the Fund's Board of Directors/Trustees. The
Fund's Board of Directors/Trustees has delegated to T. Rowe Price
the authority to determine the liquidity of these investments
based on the following guidelines: the type of issuer; type of
collateral, including age and prepayment characteristics; rate of
interest on coupon relative to current market rates and the
effect of the rate on the potential for prepayments; complexity
of the issue's structure, including the number of tranches; size
of the issue and the number of dealers who make a market in the
IO or PO. The Fund will treat non-government-issued IOs and POs
not backed by fixed or adjustable rate mortgages as illiquid
unless and until the Securities and Exchange Commission modifies
its position.

PAGE 19
Adjustable Rate Mortgages. Adjustable rate mortgage (ARM)
securities are collateralized by adjustable rate, rather than
fixed rate, mortgages.

ARMs, like fixed rate mortgages, have a specified maturity
date, and the principal amount of the mortgage is repaid over the
life of the mortgage. Unlike fixed rate mortgages, the interest
rate on ARMs is adjusted at regular intervals based on a
specified, published interest rate "index" such as a Treasury
rate index. The new rate is determined by adding a specific
interest amount, the "margin," to the interest rate of the index.
Investment in ARM securities allows the Fund to participate in
changing interest rate levels through regular adjustments in the
coupons of the underlying mortgages, resulting in more variable
current income and lower price volatility than longer term fixed
rate mortgage securities. The ARM securities in which the Fund
expects to invest will generally adjust their interest rates at
regular intervals of one year or less. ARM securities are a less
effective means of locking in long-term rates than fixed rate
mortgages since the income from adjustable rate mortgages will
increase during periods of rising interest rates and decline
during periods of falling rates.

Characteristics of Adjustable Rate Mortgage Securities -
Interest Rate Indices. The interest rates paid on adjustable
rate securities are readjusted periodically to an increment over
some predetermined interest rate index. Such readjustments occur
at intervals ranging from one to 60 months. There are three main
categories of indexes: (1) those based on U.S. Treasury
securities (2) those derived from a calculated measure such as a
cost of funds index ("COFI") or a moving average of mortgage
rates and (3) those based on actively traded or prominently
posted short-term, interest rates. Commonly utilized indexes
include the one-year, three-year and five-year constant maturity
Treasury rates, the three-month Treasury bill rate, the 180-day
Treasury bill rate, rates on longer-term Treasury securities, the
11th District Federal Home Loan Bank Cost of Funds, the National
Median Cost of Funds, the one-month, three-month, six-month or
one-year London Interbank Offered Rate (LIBOR), the prime rate of
a specific bank, or commercial paper rates. Some indexes, such
as the one-year constant maturity Treasury rate, closely mirror
changes in market interest rate levels. Others, such as the 11th
District Home Loan Bank Cost of Funds index, tend to lag behind
changes in market rate levels. The market value of the Fund's
assets and of the net asset value of the Fund's shares will be
affected by the length of the adjustment period, the degree of
volatility in the applicable indexes and the maximum increase or
decrease of the interest rate adjustment on any one adjustment
date, in any one year and over the life of the securities. These

PAGE 20
maximum increases and decreases are typically referred to as
"caps" and "floors", respectively.

A number of factors affect the performance of the Cost of
Funds Index and may cause the Cost of Funds Index to move in a
manner different from indices based upon specific interest rates,
such as the One Year Treasury Index. Additionally, there can be
no assurance that the Cost of Funds Index will necessarily move
in the same direction or at the same rate as prevailing interest
rates. Furthermore, any movement in the Cost of Funds Index as
compared to other indices based upon specific interest rates may
be affected by changes instituted by the FHLB of San Francisco in
the method used to calculate the Cost of Funds Index. To the
extent that the Cost of Funds Index may reflect interest changes
on a more delayed basis than other indices, in a period of rising
interest rates, any increase may produce a higher yield later
than would be produced by such other indices, and in a period of
declining interest rates, the Cost of Funds Index may remain
higher than other market interest rates which may result in a
higher level of principal prepayments on mortgage loans which
adjust in accordance with the Cost of Funds Index than mortgage
loans which adjust in accordance with other indices.

LIBOR, the London interbank offered rate, is the interest
rate that the most creditworthy international banks dealing in
U.S. dollar-denominated deposits and loans charge each other for
large dollar-denominated loans. LIBOR is also usually the base
rate for large dollar-denominated loans in the international
market. LIBOR is generally quoted for loans having rate
adjustments at one, three, six or 12 month intervals.

Caps and Floors. ARMs will frequently have caps and floors
which limit the maximum amount by which the interest rate to the
residential borrower may move up or down, respectively, each
adjustment period and over the life of the loan. Interest rate
caps on ARM securities may cause them to decrease in value in an
increasing interest rate environment. Such caps may also prevent
their income from increasing to levels commensurate with
prevailing interest rates. Conversely, interest rate floors on
ARM securities may cause their income to remain higher than
prevailing interest rate levels and result in an increase in the
value of such securities. However, this increase may be tempered
by the acceleration of prepayments.

Mortgage securities generally have a maximum maturity of up
to 30 years. However, due to the adjustable rate feature of ARM
securities, their prices are considered to have volatility
characteristics which approximate the average period of time
until the next adjustment of the interest rate. As a result, the
principal volatility of ARM securities may be more comparable to

PAGE 21
short- and intermediate-term securities than to longer term fixed
rate mortgage securities. Prepayments, however, will increase
their principal volatility. See also the discussion of Mortgage-
Backed Securities on page 9. Several characteristics of ARMs may
make them more susceptible to prepayments than other Mortgage-
Backed Securities. An adjustable rate mortgage has greater
incentives to refinance with a fixed rate mortgage during
favorable interest rate environments, in order to avoid interest
rate risk. Also, homes financed with adjustable rate mortgages
may be sold more frequently because of the prevalence of first-
time home buyers in the adjustable rate mortgage market. Also,
delinquency and foreclosure rates are higher in this market since
many buyers use adjustable rate mortgages to purchase homes that
they could not otherwise finance on a fixed rate basis.
Significant increases in the index rates for the adjustable rate
mortgages may also result in increased delinquency and default
rates, which in turn, may affect prepayment rates on the ARMs.

Other Mortgage Related Securities. The Fund expects that
governmental, government-related or private entities may create
mortgage loan pools offering pass-through investments in addition
to those described above. The mortgages underlying these
securities may be alternative mortgage instruments, that is,
mortgage instruments whose principal or interest payments may
vary or whose terms to maturity may differ from customary long-
term fixed rate mortgages. As new types of mortgage-related
securities are developed and offered to investors, the investment
manager will, consistent with the Fund's objective, policies and
quality standards, consider making investments in such new types
of securities.

Asset-Backed Securities

Prime Reserve, New Income and Equity Income Funds

The credit quality of most asset-backed securities depends
primarily on the credit quality of the assets underlying such
securities, how well the entity issuing the security is insulated
from the credit risk of the originator or any other affiliated
entities and the amount and quality of any credit support
provided to the securities. The rate of principal payment on
asset-backed securities generally depends on the rate of
principal payments received on the underlying assets which in
turn may be affected by a variety of economic and other factors.
As a result, the yield on any asset-backed security is difficult
to predict with precision and actual yield to maturity may be
more or less than the anticipated yield to maturity. Asset-
backed securities may be classified either as pass-through
certificates or collateralized obligations.

PAGE 22
Pass-through certificates are asset-backed securities which
represent an undivided fractional ownership interest in an
underlying pool of assets. Pass-through certificates usually
provide for payments of principal and interest received to be
passed through to their holders, usually after deduction for
certain costs and expenses incurred in administering the pool.
Because pass-through certificates represent an ownership interest
in the underlying assets, the holders thereof bear directly the
risk of any defaults by the obligors on the underlying assets not
covered by any credit support. See "Types of Credit Support".

Asset-backed securities issued in the form of debt
instruments, also known as collateralized obligations, are
generally issued as the debt of a special purpose entity
organized solely for the purpose of owning such assets and
issuing such debt. Such assets are most often trade, credit card
or automobile receivables. The assets collateralizing such
asset-backed securities are pledged to a trustee or custodian for
the benefit of the holders thereof. Such issuers generally hold
no assets other than those underlying the asset-backed securities
and any credit support provided. As a result, although payments
on such asset-backed securities are obligations of the issuers,
in the event of defaults on the underlying assets not covered by
any credit support (see "Types of Credit Support"), the issuing
entities are unlikely to have sufficient assets to satisfy their
obligations on the related asset-backed securities.

Methods of Allocating Cash Flows. While many asset-backed
securities are issued with only one class of security, many
asset-backed securities are issued in more than one class, each
with different payment terms. Multiple class asset-backed
securities are issued for two main reasons. First, multiple
classes may be used as a method of providing credit support.
This is accomplished typically through creation of one or more
classes whose right to payments on the asset-backed security is
made subordinate to the right to such payments of the remaining
class or classes. See "Types of Credit Support". Second,
multiple classes may permit the issuance of securities with
payment terms, interest rates or other characteristics differing
both from those of each other and from those of the underlying
assets. Examples include so-called "strips" (asset-backed
securities entitling the holder to disproportionate interests
with respect to the allocation of interest and principal of the
assets backing the security), and securities with class or
classes having characteristics which mimic the characteristics of
non-asset-backed securities, such as floating interest rates
(i.e., interest rates which adjust as a specified benchmark
changes) or scheduled amortization of principal.

PAGE 23
Asset-backed securities in which the payment streams on the
underlying assets are allocated in a manner different than those
described above may be issued in the future. The Fund may invest
in such asset-backed securities if such investment is otherwise
consistent with its investment objectives and policies and with
the investment restrictions of the Fund.

Types of Credit Support. Asset-backed securities are often
backed by a pool of assets representing the obligations of a
number of different parties. To lessen the effect of failures by
obligors on underlying assets to make payments, such securities
may contain elements of credit support. Such credit support
falls into two classes: liquidity protection and protection
against ultimate default by an obligor on the underlying assets.
Liquidity protection refers to the provision of advances,
generally by the entity administering the pool of assets, to
ensure that scheduled payments on the underlying pool are made in
a timely fashion. Protection against ultimate default ensures
ultimate payment of the obligations on at least a portion of the
assets in the pool. Such protection may be provided through
guarantees, insurance policies or letters of credit obtained from
third parties, through various means of structuring the
transaction or through a combination of such approaches.
Examples of asset-backed securities with credit support arising
out of the structure of the transaction include "senior-
subordinated securities" (multiple class asset-backed securities
with certain classes subordinate to other classes as to the
payment of principal thereon, with the result that defaults on
the underlying assets are borne first by the holders of the
subordinated class) and asset-backed securities that have
"reserve funds" (where cash or investments, sometimes funded from
a portion of the initial payments on the underlying assets, are
held in reserve against future losses) or that have been
"overcollateralized" (where the scheduled payments on, or the
principal amount of, the underlying assets substantially exceeds
that required to make payment of the asset-backed securities and
pay any servicing or other fees). The degree of credit support
provided on each issue is based generally on historical
information respecting the level of credit risk associated with
such payments. Delinquency or loss in excess of that anticipated
could adversely affect the return on an investment in an asset-
backed security.

Automobile Receivable Securities. The Fund may invest in
Asset-Backed Securities which are backed by receivables from
motor vehicle installment sales contracts or installment loans
secured by motor vehicles ("Automobile Receivable Securities").
Since installment sales contracts for motor vehicles or
installment loans related thereto ("Automobile Contracts")
typically have shorter durations and lower incidences of

PAGE 24
prepayment, Automobile Receivable Securities generally will
exhibit a shorter average life and are less susceptible to
prepayment risk.

Most entities that issue Automobile Receivable Securities
create an enforceable interest in their respective Automobile
Contracts only by filing a financing statement and by having the
servicer of the Automobile Contracts, which is usually the
originator of the Automobile Contracts, take custody thereof. In
such circumstances, if the servicer of the Automobile Contracts
were to sell the same Automobile Contracts to another party, in
violation of its obligation not to do so, there is a risk that
such party could acquire an interest in the Automobile Contracts
superior to that of the holders of Automobile Receivable
Securities. Also although most Automobile Contracts grant a
security interest in the motor vehicle being financed, in most
states the security interest in a motor vehicle must be noted on
the certificate of title to create an enforceable security
interest against competing claims of other parties. Due to the
large number of vehicles involved, however, the certificate of
title to each vehicle financed, pursuant to the Automobile
Contracts underlying the Automobile Receivable Security, usually
is not amended to reflect the assignment of the seller's security
interest for the benefit of the holders of the Automobile
Receivable Securities. Therefore, there is the possibility that
recoveries on repossessed collateral may not, in some cases, be
available to support payments on the securities. In addition,
various state and federal securities laws give the motor vehicle
owner the right to assert against the holder of the owner's
Automobile Contract certain defenses such owner would have
against the seller of the motor vehicle. The assertion of such
defenses could reduce payments on the Automobile Receivable
Securities.

Credit Card Receivable Securities. The Fund may invest in
Asset Backed Securities backed by receivables from revolving
credit card agreements ("Credit Card Receivable Securities").
Credit balances on revolving credit card agreements ("Accounts")
are generally paid down more rapidly than are Automobile
Contracts. Most of the Credit Card Receivable Securities issued
publicly to date have been Pass-Through Certificates. In order
to lengthen the maturity of Credit Card Receivable Securities,
most such securities provide for a fixed period during which only
interest payments on the underlying Accounts are passed through
to the security holder and principal payments received on such
Accounts are used to fund the transfer to the pool of assets
supporting the related Credit Card Receivable Securities of
additional credit card charges made on an Account. The initial
fixed period usually may be shortened upon the occurrence of
specified events which signal a potential deterioration in the

PAGE 25
quality of the assets backing the security, such as the
imposition of a cap on interest rates. The ability of the issuer
to extend the life of an issue of Credit Card Receivable
Securities thus depends upon the continued generation of
additional principal amounts in the underlying accounts during
the initial period and the non-occurrence of specified events.
An acceleration in cardholders' payment rates or any other event
which shortens the period during which additional credit card
charges on an Account may be transferred to the pool of assets
supporting the related Credit Card Receivable Security could
shorten the weighted average life and yield of the Credit Card
Receivable Security.

Credit cardholders are entitled to the protection of a
number of state and federal consumer credit laws, many of which
give such holder the right to set off certain amounts against
balances owed on the credit card, thereby reducing amounts paid
on Accounts. In addition, unlike most other Asset Backed
Securities, Accounts are unsecured obligations of the cardholder.

Other Assets. T. Rowe Price anticipates that Asset Backed
Securities backed by assets other than those described above will
be issued in the future. The Fund may invest in such securities
in the future if such investment is otherwise consistent with its
investment objective and policies.

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

Industry Concentration

When the market for corporate debt securities is dominated
by issues in the gas utility, gas transmission utility, electric
utility, telephone utility, or petroleum industry, the Fund will
as a matter of fundamental policy concentrate 25% or more, but
not more than 50% of its assets, in any one such industry, if the
Fund has cash for such investment (i.e., the Fund will not sell
portfolio securities to raise cash) and, if in T. Rowe Price's
judgment, the return available and the marketability, quality,
and availability of the debt securities of such industry
justifies such concentration in light of the Fund's investment
objectives. Domination would exist with respect to any one such
industry, when, in the preceding 30-day period, more than 25% of
all new-issue corporate debt offerings (within the four highest
grades of Moody's or Standard & Poor's and with maturities of 10
years or less) of $25,000,000 or more consisted of issues in such
industry. Although the Fund will normally purchase corporate
debt securities in the secondary market as opposed to new
offerings, T. Rowe Price believes that the new issue-based

PAGE 26
dominance standard, as defined above, is appropriate because it
is easily determined and represents an accurate correlation to
the secondary market. Investors should understand that
concentration in any industry may result in increased risk.
Investments in any of these industries may be affected by
environmental conditions, energy conservation programs, fuel
shortages, difficulty in obtaining adequate return on capital in
financing operations and large construction programs, and the
ability of the capital markets to absorb debt issues. In
addition, it is possible that the public service commissions
which have jurisdiction over these industries may not grant
future increases in rates sufficient to offset increases in
operating expenses. These industries also face numerous
legislative and regulatory uncertainties at both federal and
state government levels. Management believes that any risk to
the Fund which might result from concentration in any industry
will be minimized by the Fund's practice of diversifying its
investments in other respects. The Fund's policy with respect to
industry concentration is a fundamental policy. (For investment
restriction on industry concentration, see Investment Restriction
(3) on page 40.)

New Income, Equity Income and International Stock Funds

Warrants

The Fund may invest in warrants. Warrants are pure
speculation in that they 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 equity
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.

Hybrid Instruments (All Funds, except Prime Reserve)

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

PAGE 27
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 transactions 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 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

PAGE 28
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 or 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

PAGE 29
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 net 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).

Prime Reserve, New Income and Equity Income Funds

When-Issued Securities and Forward Commitment Contracts

The Fund may purchase securities on a "when-issued" or
delayed delivery basis ("When-Issueds") and may purchase
securities on a forward commitment basis ("Forwards"). Any or
all of the Fund's investments in debt securities may be in the
form of When-Issueds and Forwards. The price of such securities,
which may be expressed in yield terms, is fixed at the time the
commitment to purchase is made, but delivery and payment take
place at a later date. Normally, the settlement date occurs
within 90 days of the purchase for the When-Issueds, but may be
substantially longer for Forwards. During the period between
purchase and settlement, no payment is made by a Fund to the
issuer and no interest accrues to the Fund. The purchase of
these securities will result in a loss if their value declines
prior to the settlement date. This could occur, for example, if
interest rates increase prior to settlement. The longer the
period between purchase and settlement, the greater the risks
are. At the time the Fund makes the commitment to purchase these
securities, it will record the transaction and reflect the value
of the security in determining its net asset value. The Fund
will cover these securities by maintaining cash and/or liquid,
high-grade debt securities with its custodian bank equal in value
to commitments for them during the time between the purchase and
the settlement. Therefore, the longer this period, the longer
the period during which alternative investment options are not
available to the Fund (to the extent of the securities used for
cover). Such securities either will mature or, if necessary, be
sold on or before the settlement date.

To the extent the Fund remains fully or almost fully
invested (in securities with a remaining maturity of more than
one year) at the same time it purchases these securities, there
will be greater fluctuations in the Fund's net asset value than
if the Fund did not purchase them.

PAGE 30
All Funds

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, a
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,
a 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 Funds' Boards of Directors/Trustees. If through the
appreciation of illiquid securities or the depreciation of liquid
securities, a Fund should be in a position where more than 15%
(10% for Prime Reserve Fund) of the value of its net assets are
invested in illiquid assets, including restricted securities, the
Fund will take appropriate steps to protect liquidity.

Notwithstanding the above, the Funds 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 Funds, to trade in
privately placed securities even though such securities are not
registered under the 1933 Act. T. Rowe Price or Price-Fleming,
under the supervision of the Funds' Boards of Directors/Trustees,
will consider whether securities purchased under Rule 144A are
illiquid and thus subject to each Fund's restriction of investing
no more than 15% (10% for Prime Reserve Fund) of its 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 or Price-Fleming 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 or Price-Fleming could consider the (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, a
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% (10% for Prime Reserve Fund)
of its assets in illiquid securities. Investing in Rule 144A

PAGE 31
securities could have the effect of increasing the amount of a
Fund's assets invested in illiquid securities if qualified
institutional buyers are unwilling to purchase such securities.

Prime Reserve and New Income Funds

Additional Adjustable Rate Securities

Certain 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 rate on set dates and which, upon adjustment, can
reasonably be expected to have a market value which
approximates its par value. A variable rate instrument, the
principal amount of which is scheduled to be paid in 397
calendar days or less, is deemed to have a maturity equal to
the period remaining until the next readjustment of the
interest rate. A variable rate instrument which is subject
to a demand feature entitles the purchaser to receive the
principal amount of the underlying security or securities,
either (i) upon notice of no more than 30 days, or (ii) at
specified intervals not exceeding 397 calendar 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.

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. 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. 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.

PAGE 32
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.

There are, of course, other types of securities that are, or
may become, available, which are similar to the foregoing.

International Stock Fund

It is the present intention of Price-Fleming to invest in
companies based in (or governments of or within) the Far East
(for example, Japan, Hong Kong, Singapore, and Malaysia), Western
Europe (for example, United Kingdom, Germany, Hungary, Poland,
Netherlands, France, Spain, and Switzerland), South Africa,
Australia, Canada, Latin America, and such other areas and
countries as Price-Fleming may determine from time to time.

In determining the appropriate distribution of investments
among various countries and geographic regions, Price-Fleming
ordinarily considers the following factors: prospects for
relative economic growth between foreign countries; expected
levels of inflation; government policies influencing business
conditions; the outlook for currency relationships; and the range
of individual investment opportunities available to international
investors.

In analyzing companies for investment, Price-Fleming
ordinarily looks for one or more of the following
characteristics: an above-average earnings growth per share;
high return on invested capital; healthy balance sheet; sound
financial and accounting policies and overall financial strength;
strong competitive advantages; effective research and product
development and marketing; efficient service; pricing
flexibility; strength of management; and general operating
characteristics which will enable the companies to compete
successfully in their market place. While current dividend
income is not a prerequisite in the selection of portfolio
companies, the companies in which the Fund invests normally will
have a record of paying dividends, and will generally be expected
to increase the amounts of such dividends in future years as
earnings increase.

It is expected that the Fund's investments will ordinarily
be traded on exchanges located at least in the respective
countries in which the various issuers of such securities are
principally based.

PAGE 33

PORTFOLIO MANAGEMENT PRACTICES

All Funds

Lending of Portfolio Securities

Securities loans are made to broker-dealers, 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, each 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. Each Fund has a
right to call each loan and obtain the securities within the
lesser of five business days' notice or, in connection with
securities trading the normal settlement period for such
securities. The Funds will not have the right to vote 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 or Price-Fleming to
be of good standing and will not be made unless, in the judgment
of T. Rowe Price or Price-Fleming, the consideration to be earned
from such loans would justify the risk.

Other Lending/Borrowing

Subject to approval by the Securities and Exchange
Commission, each Fund may make loans to, or borrow funds from,
other mutual funds sponsored or advised by T. Rowe Price or
Price-Fleming (collectively, "Price Funds"). The Funds have no
current intention of engaging in these practices at this time.

Repurchase Agreements

Each 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.
At that time, the bank or securities dealer agrees to repurchase

PAGE 34
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. Each Fund will only enter into repurchase
agreements where (i) Prime Reserve Fund -- the underlying
securities are either U.S. government securities or securities
that, at the time the repurchase agreement is entered into, are
rated in the highest rating category by the requisite number of
NRSROs (as required by Rule 2a-7 under the 1940 Act) and
otherwise are of the type (excluding maturity limitations) which
the Fund's investment guidelines would allow it to purchase
directly, New Income, Equity Income, and International Stock
Funds -- the underlying securities are of the type (excluding
maturity limitations) which each Fund's investment guidelines
would allow it to purchase directly, (ii) 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 (iii) 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, a 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.

New Income, Equity Income and International Stock Funds

Options

Options are a type of potentially high-risk derivative.

Writing Covered Call Options

Each Fund may write (sell) "covered" call options and
purchase options to close out options previously written by a
Fund. In writing covered call options, a 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 or Price-Fleming'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 a Fund.

PAGE 35
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 Funds will write only covered call options. This means
that a Fund will 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, or will establish and
maintain with its custodian for the term of the option, an
account consisting of cash, U.S. government securities or other
liquid high-grade debt obligations having a value equal to the
fluctuating market value of the optioned securities or
currencies.

Portfolio securities or currencies on which call options may
be written will be purchased solely on the basis of investment
considerations consistent with each 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 Funds
will not do), but capable of enhancing a 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, a 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 a 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

PAGE 36
or currency. The Funds do not consider a security or currency
covered by a call to be "pledged" as that term is used in the
Funds' policy which limits the pledging or mortgaging of its
assets.

The premium received is the market value of an option. The
premium a 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 or Price-Fleming, 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 secondary market will
exist for those options. The premium received by a 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 a 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 a Fund to write another call
option on the underlying security or currency with either a
different exercise price or expiration date or both. If a 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 a Fund will be able to
effect such closing transactions at favorable prices. If a Fund
cannot enter into such a transaction, it may be required to hold
a security or currency that it might otherwise have sold. When a
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. Each Fund will pay transaction costs in
connection with the writing of options to close out previously

PAGE 37
written options. Such transaction costs are normally higher than
those applicable to purchases and sales of portfolio securities.

Call options written by a 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, a 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.

A 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.

In order to comply with the requirements of several states,
each Fund will not write a covered call option if, as a result,
the aggregate market value of all portfolio securities or
currencies covering call or put options exceeds 25% of the market
value of the Fund's net assets. Should these state laws change
or should each Fund obtain a waiver of their application, each
Fund reserves the right to increase this percentage. In
calculating the 25% limit, each 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 Funds 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 of 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.

PAGE 38
Each 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 or other liquid high-grade debt
obligations in an amount not less than the exercise price or each
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 rules of a
clearing corporation currently require that such assets be
deposited in escrow to secure payment of the exercise price.)

A Fund would generally write covered put options in
circumstances where T. Rowe Price or Price-Fleming 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 a 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 a 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, a 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.

In order to comply with the requirements of several states,
the Funds 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 each Fund's net assets. Should these state laws change
or should each Fund obtain a waiver of their application, each
Fund reserves the right to increase this percentage. In
calculating the 25% limit, each 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

Each Fund may purchase American or European style put
options. As the holder of a put option, each 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). Each Fund may enter

PAGE 39
into closing sale transactions with respect to such options,
exercise them or permit them to expire. Each 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 below.

A 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 a 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 or Price-Fleming 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.

Each Fund may also purchase put options at a time when the
Fund does not own the underlying security or currency. Although
the Equity Income Fund has no current intention, in the
foreseeable future, of purchasing put options at a time when the
Fund does not own the underlying security, it reserves the right
to do so. By purchasing put options on a security or currency it
does not own, a 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, a 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.

To the extent required by the laws of certain states, each
Fund may not be permitted to commit more than 5% of its assets to
premiums when purchasing put and call options. Should these
state laws change or should each Fund obtain a waiver of their
application, each Fund may commit more than 5% of its assets to
premiums when purchasing call and put options. The premium paid
by a 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

PAGE 40
price at the time at which the net asset value per share of each
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.

Purchasing Call Options

The Funds may purchase American or European style call
options. As the holder of a call option, each 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). Each Fund may
enter into closing sale transactions with respect to such
options, exercise them or permit them to expire. Each Fund may
purchase call options for the purpose of increasing its current
return or avoiding tax consequences which could reduce its
current return. Each Fund may also purchase call options in
order to acquire the underlying securities or currencies.
Examples of such uses of call options are provided below.

Call options may be purchased by a Fund for the purpose of
acquiring the underlying securities or currencies for its
portfolio. Utilized in this fashion, the purchase of call
options enables a 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 a 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, a 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.

To the extent required by the laws of certain states, each
Fund may not be permitted to commit more than 5% of its assets to
premiums when purchasing call and put options. Should these
state laws change or should each Fund obtain a waiver of their
application, each Fund may commit more than 5% of its assets to
premiums when purchasing call and put options. Each 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

PAGE 41
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 New Income, Equity Income, and International Stock Funds
may engage in transactions involving dealer options. Certain
risks are specific to dealer options. While a 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 a 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, a 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 a 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 each 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 a
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, a Fund may be unable to liquidate a dealer
option. With respect to options written by a Fund, the inability
to enter into a closing transaction may result in material losses
to the Fund. For example, since a 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 Funds may treat the cover
used for written 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

PAGE 42
the extent the maximum repurchase price under the formula exceeds
the intrinsic value of the option. Accordingly, each Fund will
treat dealer options as subject to the Fund's limitation on
unmarketable securities. If the SEC changes its position on the
liquidity of dealer options, each Fund will change its treatment
of such instrument accordingly.

New Income, Equity Income and International Stock Funds

Futures Contracts

Futures are a type of potentially high-risk derivative.

Transactions in Futures

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

Stock index futures contracts may be used to provide a hedge
for a portion of the Equity Income and International Stock Funds'
portfolios, as a cash management tool, or as an efficient way for
Price-Fleming to implement either an increase or decrease in
portfolio market exposure in response to changing market
conditions. Stock index futures contracts are currently traded
with respect to the S&P 500 Index and other broad stock market
indices, such as the New York Stock Exchange Composite Stock
Index and the Value Line Composite Stock Index. The Fund may,
however, purchase or sell futures contracts with respect to any
stock index whose movements will, in its judgment, have a
significant correlation with movements in the prices of all or
portions 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 a Fund. In this regard, a 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. Futures can also be used as an efficient means of
regulating the Fund's exposure to the market.

The Funds will enter into futures contracts which are traded
on national or foreign futures exchange 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. Futures are traded in

PAGE 43
London at the London International Financial Futures Exchange, in
Paris at the MATIF and in Tokyo at the Tokyo Stock Exchange.
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 each Fund's objectives in these areas.

Regulatory Limitations

The Fund will engage in transactions in futures contracts
and options thereon only for bona fide hedging, yield enhancement
and risk management purposes, in each case in accordance with the
rules and regulations of the CFTC, and not for speculation.

The Funds may not purchase or sell futures contracts or
related options if, with respect to positions which do not
qualify as bona fide hedging under applicable CFTC rules, the sum
of the amounts of initial margin deposits and premiums paid on
these positions would exceed 5% of the net asset 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 accordance with the rules of the State of California, the
Fund may have to apply the above 5% test without excluding the
value of initial margin and premiums paid for bona fide hedging
positions.

The Fund's use of futures contracts will not result in
leverage. Therefore, to the extent necessary, in instances
involving the purchase of futures contracts or the writing of
call or put options thereon by each Fund, an amount of cash, U.S.
government securities or other liquid, high-grade debt
obligations, equal to the market value of the futures contracts
and options thereon (less any related margin deposits), will be
identified in an account with the Fund's custodian 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

PAGE 44
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

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 with respect
to the Equity Income and International Stock Funds, and a debt
security with respect to the New Income Fund) 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 a 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, U.S. government securities, suitable money market
instruments, or liquid, high-grade debt securities, 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.

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

PAGE 45
positions in the futures contract more or less valuable, a
process known as "marking to the market." Each Fund expects to
earn interest income on its margin deposits.

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 purchase or sale, 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.

For the New Income Fund, 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.

With respect to the Equity Income Fund, for example, the
Standard & Poor's 500 Stock Index is composed 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 the S&P 500 Index, contracts are to buy or sell 500
units. Thus, if the value of the S&P 500 Index were $150, one
contract would be worth $75,000 (500 units x $150). The stock
index futures contract specifies that no delivery of the actual
stock 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

PAGE 46
the contract is terminated. For example, if the Fund enters into
a futures contract to buy 500 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 $2,000
(500 units x gain of $4). If the Fund enters into a futures
contract to sell 500 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 $1,000 (500 units
x loss of $2).

With respect to the International Stock Fund, for example,
one contract in the Financial Times Stock Exchange 100 Index
future is a contract to buy 25 pounds sterling multiplied by the
level of the UK Financial Times 100 Share Index on a given future
date. Settlement of a stock index futures contract may or may
not be in the underlying security. If not in the underlying
security, then settlement will be made in cash, equivalent over
time to the difference between the contract price and the actual
price of the underlying asset at the time the stock index futures
contract expires.

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 policies 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 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.

Because of the low margin deposits required, futures trading
involves an extremely high degree of leverage. 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

PAGE 47
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.
However, a Fund would presumably have sustained comparable losses
if, instead of the futures contract, it had invested in the
underlying instrument and sold it after the decline.
Furthermore, in the case of a futures contract purchase, in order
to be certain that a Fund has sufficient assets to satisfy its
obligations under a futures contract, the Fund earmarks to the
futures contract money market instruments equal in value to the
current value of the underlying instrument less the margin
deposit.

Liquidity. Each Fund may elect to close some or all of its
futures positions at any time prior to their expiration. A Fund
would do so to reduce exposure represented by long futures
positions or increase exposure represented by short futures
positions. Each 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 Funds intend 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, a 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, a
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 the underlying
instruments, if any, might partially or completely offset losses
on the futures contract. However, as described below, 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.

PAGE 48
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
and Price-Fleming 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 Funds for hedging
purposes is also subject to T. Rowe Price's and Price-Fleming's
ability to correctly predict movements in the direction of the
market. It is possible that, when a Fund has sold futures to
hedge its portfolio against a decline in the market, the index,
indices, or underlying instruments on which the futures are
written 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 and Price-Fleming believe that over time the value of a
Fund's portfolio will tend to move in the same direction as the
market indices which are intended to correlate to the price
movements of the underlying instruments sought to be hedged. It
is also possible that if a 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 a 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). A Fund
might have to sell underlying instruments at a time when it would
be disadvantageous to do so.

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

PAGE 49
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 the 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 or Price-Fleming might not result in a successful
hedging transaction over a very short time period.

Options on Futures Contracts

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

Options 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.

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 with respect to the Equity
Income and International Stock Funds, or financial indices with
respect to the New Income Funds. Such options would be used in a
manner similar to the use of options on futures contracts. From
time to time, a single order to purchase or sell futures
contracts (or options thereon) may be made on behalf of the Funds
and other T. Rowe Price Funds. Such aggregated orders would be
allocated among the Funds and the other T. Rowe Price Funds in a
fair and non-discriminatory manner.

PAGE 50

Special Risks of Transactions in Options on Futures Contracts

The risks described under "Special Risks of Transactions on
Futures Contracts" are substantially the same as the risks of
using options on futures. In addition, where the Funds seek to
close out an option position by writing or buying an offsetting
option covering the same index, underlying instruments, or
contract and having the same exercise price and expiration date.
The 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: (i) there may be insufficient
trading interest in certain options; (ii) restrictions may be
imposed by an exchange on opening transactions or closing
transactions or both; (iii) trading halts, suspensions or other
restrictions may be imposed with respect to particular classes or
series of options, or underlying instruments; (iv) unusual or
unforeseen circumstances may interrupt normal operations on an
exchange; (v) the facilities of an exchange or a clearing
corporation may not at all times be adequate to handle current
trading volume; or (vi) 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.

Additional Futures and Options Contracts

Although each Fund has no current intention of engaging in
financial 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.

Foreign Futures and Options--New Income, Equity Income and
International Stock Funds

Participation in foreign futures and foreign options
transactions involves the execution and clearing of trades on or
subject to the rules of a foreign board of trade. Neither the

PAGE 51
National Futures Association nor any domestic exchange regulates
activities of any foreign boards of trade, including the
execution, delivery and clearing of transactions, or has the
power to compel enforcement of the rules of a foreign board of
trade or any applicable foreign law. This is true even if the
exchange is formally linked to a domestic market so that a
position taken on the market may be liquidated by a transaction
on another market. Moreover, such laws or regulations will vary
depending on the foreign country in which the foreign futures or
foreign options transaction occurs. For these reasons, customers
who trade foreign futures or foreign options contracts may not be
afforded certain of the protective measures provided by the
Commodity Exchange Act, the CFTC's regulations and the rules of
the National Futures Association and any domestic exchange,
including the right to use reparations proceedings before the
Commission and arbitration proceedings provided by the National
Futures Association or any domestic futures exchange. In
particular, funds received from customers for foreign futures or
foreign options transactions may not be provided the same
protections as funds received in respect of transactions on
United States futures exchanges. In addition, the price of any
foreign futures or foreign options contract and, therefore, the
potential profit and loss thereon may be affected by any variance
in the foreign exchange rate between the time your order is
placed and the time it is liquidated, offset or exercised.

New Income, Equity Income and International Stock Funds

Foreign Currency Transactions

A forward foreign currency exchange contract involves an
obligation to purchase or sell a specific currency at a future
date, which may be any fixed number of days from the date of the
contract agreed upon by the parties, at a price set at the time
of the contract. These contracts are principally traded in the
interbank market conducted directly between currency traders
(usually large, commercial banks) and their customers. A forward
contract generally has no deposit requirement, and no commissions
are charged at any stage for trades.

The Funds may enter into forward contracts for a variety of
purposes in connection with the management of the foreign
securities portion of its portfolio. The Fund's use of such
contracts would include, but not be limited to, the following:

First, when a Fund enters into a contract for the purchase
or sale of a security denominated in a foreign currency, it may
desire to "lock in" the U.S. dollar price of the security. By
entering into a forward contract for the purchase or sale, for a
fixed amount of dollars, of the amount of foreign currency

PAGE 52
involved in the underlying security transactions, a Fund will be
able to protect itself against a possible loss resulting from an
adverse change in the relationship between the U.S. dollar and
the subject foreign currency during the period between the date
the security is purchased or sold and the date on which payment
is made or received.

Second, when T. Rowe Price or Price-Fleming believe that the
currency of a particular foreign country may experience a
substantial movement against another currency, including the U.S.
dollar, it may enter into a forward contract to sell or buy the
amount of the former foreign currency, approximating the value of
some or all of a Fund's portfolio securities denominated in such
foreign currency. Alternatively, where appropriate, each Fund
may hedge all or part of its foreign currency exposure through
the use of a basket of currencies or a proxy currency where such
currency or currencies act as an effective proxy for other
currencies. In such a case, the Fund may enter into a forward
contract where the amount of the foreign currency to be sold
exceeds the value of the securities denominated in such currency.
The use of this basket hedging technique may be more efficient
and economical than entering into separate forward contracts for
each currency held in the Fund. The precise matching of the
forward contract amounts and the value of the securities involved
will not generally be possible since the future value of such
securities in foreign currencies will change as a consequence of
market movements in the value of those securities between the
date the forward contract is entered into and the date it
matures. The projection of short-term currency market movement
is extremely difficult, and the successful execution of a short-
term hedging strategy is highly uncertain. Under normal
circumstances, consideration of the prospect for currency
parities will be incorporated into the longer term investment
decisions made with regard to overall diversification strategies.
However, T. Rowe Price and Price-Fleming believe that it is
important to have the flexibility to enter into such forward
contracts when either determines that the best interests of the
Fund will be served.

Third, the New Income Fund may use forward contracts when
the Fund wishes to hedge out of the dollar into a foreign
currency in order to create a synthetic bond or money market
instrument -- the security would be issued by a U.S. issuer but
the dollar component would be transformed into a foreign currency
through a forward contract.

A Fund may enter into forward contracts for any other
purpose consistent with the Fund's investment objective and
program. However, a Fund will not enter into a forward contract,
or maintain exposure to any such contract(s), if the amount of

PAGE 53
foreign currency required to be delivered thereunder would exceed
the Fund's holdings of liquid, high-grade debt securities and
currency available for cover of the forward contract(s). In
determining the amount to be delivered under a contract, a Fund
may net offsetting positions.

At the maturity of a forward contract, a Fund may either
sell the portfolio security and make delivery of the foreign
currency, or it may retain the security and either extend the
maturity of the forward contract (by "rolling" that contract
forward) or may initiate a new forward contract.

If a Fund retains the portfolio security and engages in an
offsetting transaction, the Fund will incur a gain or a loss (as
described below) to the extent that there has been movement in
forward contract prices. If a Fund engages in an offsetting
transaction, it may subsequently enter into a new forward
contract to sell the foreign currency. Should forward prices
decline during the period between a Fund's entering into a
forward contract for the sale of a foreign currency and the date
it enters into an offsetting contract for the purchase of the
foreign currency, the Fund will realize a gain to the extent the
price of the currency it has agreed to sell exceeds the price of
the currency it has agreed to purchase. Should forward prices
increase, a Fund will suffer a loss to the extent of the price of
the currency it has agreed to purchase exceeds the price of the
currency it has agreed to sell.

A Fund's dealing in forward foreign currency exchange
contracts will generally be limited to the transactions described
above. However, the Funds reserve the right to enter into
forward foreign currency contracts for different purposes and
under different circumstances. Of course, a Fund is not required
to enter into forward contracts with regard to its foreign
currency-denominated securities and will not do so unless deemed
appropriate by T. Rowe Price or Price-Fleming. It also should be
realized that this method of hedging against a decline in the
value of a currency does not eliminate fluctuations in the
underlying prices of the securities. It simply establishes a
rate of exchange at a future date. Additionally, although such
contracts tend to minimize the risk of loss due to a decline in
the value of the hedged currency, at the same time, they tend to
limit any potential gain which might result from an increase in
the value of that currency.

Although each Fund values its assets daily in terms of U.S.
dollars, it does not intend to convert its holdings of foreign
currencies into U.S. dollars on a daily basis. It will do so
from time to time, and investors should be aware of the costs of
currency conversion. Although foreign exchange dealers do not

PAGE 54
charge a fee for conversion, they do realize a profit based on
the difference (the "spread") between the prices at which they
are buying and selling various currencies. Thus, a dealer may
offer to sell a foreign currency to a Fund at one rate, while
offering a lesser rate of exchange should the Fund desire to
resell that currency to the dealer.

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

The discussion herein may refer to transactions in which the
Equity Income Fund does not engage. The Fund's prospectus sets
forth the types of transactions permissible for the Fund.

The Funds may enter into certain option, futures, and
forward foreign exchange contracts, including options and futures
on currencies, which may be treated as Section 1256 contracts or
straddles.

Transactions which are considered Section 1256 contracts
will be considered to have been closed at the end of a Fund's
fiscal year and any gains or losses will be recognized for tax
purposes at that time. Such gains or losses 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 regardless of the holding period of the instrument.
A 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. For
securities offsetting a purchased put, this adjustment of the
holding period may increase the gain from sales of securities
held less than three months. 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 loss, if the security
covering the option was held for more than twelve months prior to
the writing of the option.

PAGE 55

In order for each 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. Pending tax regulations could limit 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. In addition, gains realized on
the sale or other disposition of securities, including option,
futures or foreign forward exchange contracts on securities or
securities indexes and, in some cases, currencies, held for less
than three months, must be limited to less than 30% of a Fund's
annual gross income. In order to avoid realizing excessive gains
on securities or currencies held less than three months, a Fund
may be required to defer the closing out of option, futures or
foreign forward exchange contracts beyond the time when it would
otherwise be advantageous to do so. It is anticipated that
unrealized gains on Section 1256 option, futures and foreign
forward exchange contracts, which have been open for less than
three months as of the end of a Fund's fiscal year and which are
recognized for tax purposes, will not be considered gains on
securities or currencies held less than three months for purposes
of the 30% test.

INVESTMENT RESTRICTIONS

Fundamental policies may not be changed without the approval
of the lesser of (1) 67% of a 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 each
Fund's Board of Directors/Trustees without shareholder approval.
Any investment restriction which involves a maximum percentage of
securities or assets shall not be 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, a Fund.

All Funds

Fundamental Policies

As a matter of fundamental policy, each Fund may not:

PAGE 56
(1) Borrowing. Borrow money except that each 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 a Fund's
investment objective and program, provided that
the combination of (i) and (ii) shall not exceed
33 1/3% of the value of a 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. Each 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 Funds (other than the
Prime Reserve Fund) may enter into futures
contracts and options thereon;

(3) (a) Industry Concentration (Equity Income and
International Stock Funds). Purchase the
securities of any issuer if, as a result, more
than 25% of the value of each Fund's total assets
would be invested in the securities of issuers
having their principal business activities in the
same industry;

(b) Industry Concentration (Prime Reserve Fund).
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; provided,
however, that this limitation does not apply to
securities of the banking industry including, but
not limited to, certificates of deposit and
bankers' acceptances; and

(c) Industry Concentration (New Income Fund).
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; provided,
however, that the Fund will invest more than 25%
of its total assets, but not more than 50%, in any
one of the gas utility, gas transmission utility,

PAGE 57
electric utility, telephone utility, and petroleum
industries under certain circumstances, and
further provided that this limitation does not
apply to securities of the banking industry
including, but not limited to, certificates of
deposit and bankers' acceptances;

(4) Loans. Make loans, although each 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 a 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. 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 each 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. Purchase a security if, as a result, with
respect to 75% of the value of each Fund's total
assets, more than 10% of the outstanding voting
securities of any issuer would be held by a Fund
(other than obligations issued or guaranteed by
the U.S. Government, its agencies or
instrumentalities);

(7) Real Estate. Purchase or sell real estate unless
acquired as a result of ownership of securities or
other instruments (but this shall not prevent each
Fund from investing in securities or other
instruments backed by real estate or in securities
of companies engaged in the real estate business);

(8) Senior Securities. Issue senior securities except
in compliance with the Investment Company Act of
1940; or

(9) Underwriting. Underwrite securities issued by
other persons, except to the extent that each Fund
may be deemed to be an underwriter within the

PAGE 58
meaning of the Securities Act of 1933 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 restrictions (1) and (4),
each Fund will not borrow from or lend to any other
Price Fund unless each Fund applies for and receives an
exemptive order from the SEC or the SEC issues rules
permitting such transactions. Each Fund has no current
intention of engaging in any such activity and there is
no assurance the SEC would grant any order requested by
a Fund or promulgate any rules allowing the
transactions.

With respect to investment restriction (1), the Prime
Reserve Fund has no current intention of engaging in any
borrowing transactions.

With respect to investment restriction (2), each Fund
does not consider currency contracts or hybrid
instruments 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 each Fund's
Semi-annual and Annual reports.

For purposes of investment restriction (4), each 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.

For purposes of investment restriction (5), the Prime
Reserve and New Income Funds will consider a repurchase
agreement fully collateralized with U.S. government
securities to be U.S. government securities.

Operating Policies

As a matter of operating policy, each Fund may not:

PAGE 59

(1) Borrowing. Each Fund will not 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) (a) Equity Securities (Prime Reserve Fund).
Purchase any common stocks or other equity
securities, or securities convertible into equity
securities except as set forth in its operating
policy on investment companies; and

(b) Equity Securities (New Income Fund). Invest
more than 25% of its total assets in equity
securities;

(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 positions would exceed
5% of each Fund's net asset value;

(5) (a) Illiquid Securities (Equity Income and
International Stock Funds). Purchase illiquid
securities and securities of unseasoned issuers
if, as a result, more than 15% of its net assets
would be invested in such securities, provided
that each Fund will not invest more than 5% of its
total assets in restricted securities and not more
than 5% in securities of unseasoned issuers.
Securities eligible for resale under Rule 144A of
the Securities Act of 1933 are not included in the
5% limitation but are subject to the 15%
limitation; and

(b) Illiquid Securities (Prime Reserve and New
Income Funds). Purchase illiquid securities if,
as a result, more than 15% (10% for the Prime
Reserve Fund) of its net assets would be invested
in such securities;

(6) Investment Companies. Purchase securities of
open-end or closed-end investment companies except
in compliance with the Investment Company Act of
1940 and applicable state law, and in the case of
the Prime Reserve Fund, only securities of other

PAGE 60
money market funds. Duplicate fees may result
from such purchases;

(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 each
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 a Fund's total assets at the
time of borrowing or investment;

(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;

(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) Ownership of Portfolio Securities by Officers and
Directors/Trustees. Purchase or retain the
securities of any issuer if those officers and
directors/trustees of a Fund, and of its
investment manager, who each owns beneficially
more than .5% of the outstanding securities of
such issuer, together own beneficially more than
5% of such securities;

(12) Short Sales. Effect short sales of securities;

(13) Unseasoned Issuers. Purchase a security (other
than obligations issued or guaranteed by the U.S.,
any foreign, state or local government, their
agencies or instrumentalities) if, as a result,
more than 5% of the value of each Fund's total
assets would be invested in the securities of
issuers which at the time of purchase had been in
operation for less than three years (for this
purpose, the period of operation of any issuer
shall include the period of operation of any

PAGE 61
predecessor or unconditional guarantor of such
issuer). This restriction does not apply to
securities of pooled investment vehicles or
mortgage or asset-backed securities; or

(14) Warrants. Invest in warrants if, as a result
thereof, more than 2% of the value of the net
assets of each Fund would be invested in warrants
which are not listed on the New York Stock
Exchange, the American Stock Exchange, or a
recognized foreign exchange, or more than 5% of
the value of the net assets of a Fund would be
invested in warrants whether or not so listed.
For purposes of these percentage limitations, the
warrants will be valued at the lower of cost or
market and warrants acquired by each Fund in units
or attached to securities may be deemed to be
without value.

International Stock Fund

In addition to the restrictions described above, some
foreign countries limit, or prohibit, all direct foreign
investment in the securities of their companies. However, the
governments of some countries have authorized the organization of
investment funds to permit indirect foreign investment in such
securities. For tax purposes these funds may be known as Passive
Foreign Investment Companies. The Fund is subject to certain
percentage limitations under the 1940 Act and certain states
relating to the purchase of securities of investment companies,
and may be subject to the limitation that no more than 10% of the
value of the Fund's total assets may be invested in such
securities.

MANAGEMENT OF FUNDS

The officers and directors/trustees of each 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 or the Funds as defined under Section 2(a)(19) of the
Investment Company Act of 1940 are noted with an asterisk (*).
The directors/trustees are referred to as inside
directors/trustees by virtue of their officership, directorship
and/or employment with T. Rowe Price.

PAGE 62
Prime Reserve Fund

ROBERT P. BLACK, Director--Retired; formerly President, Federal
Reserve Bank of Richmond; Address: 10 Dahlgren Road, Richmond,
Virginia 23233
CALVIN W. BURNETT, PH.D., Director--President, Coppin State
College; Director, Maryland Chamber of Commerce and Provident
Bank of Maryland; 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
*GEORGE J. COLLINS, Vice President and Director--President,
Managing Director, and Chief Executive Officer, T. Rowe Price;
Director, Price-Fleming, T. Rowe Price Trust Company and T. Rowe
Price Retirement Plan Services, Inc., Chartered Investment
Counselor
ANTHONY W. DEERING, Director--Director, 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, Director--President, F. Pierce Linaweaver &
Associates, Inc.; formerly (1987-1991) Executive Vice President,
EA Engineering, Science, and Technology, Inc., and (1987-1990)
President, EA Engineering, Inc., Baltimore, Maryland; Address:
The Legg Mason Tower, 111 South Calvert Street, Suite 2700,
Baltimore, Maryland 21202
*WILLIAM T. REYNOLDS, Chairman of the Board--Managing Director,
T. Rowe Price
*JAMES S. RIEPE, Vice President and Director--Managing Director,
T. Rowe Price; Chairman of the Board, T. Rowe Price Services,
Inc. and T. Rowe Price Retirement Plan Services, Inc.; President
and Director, T. Rowe Price Investment Services, Inc; President
and Trust Officer, T. Rowe Price Trust Company, Director, Price-
Fleming and Rhone-Poulenc Rorer, Inc.
JOHN G. SCHREIBER, Director--President, Schreiber Investments,
Inc., a real estate investment company; Director, AMCI
Residential Properties Trust; Partner, Blackstone Real Estate
Partners, L.P.; Director and formerly (1/80-12/90) Executive Vice
President, JMB Realty Corporation, a national real estate
investment manager and developer; Address: 1115 East Illinois
Road, Lake Forest, Illinois 60045
EDWARD A. WIESE, President--Vice President, T. Rowe Price, Price-
Fleming and T. Rowe Price Trust Company
ROBERT P. CAMPBELL, Executive Vice President--Vice President, T.
Rowe Price and Price-Fleming; formerly (4/80-5/90) Vice President
and Director, Private Finance, New York Life Insurance Company,
New York, New York
JAMES M. MCDONALD, Executive Vice President--Vice President, T.
Rowe Price

PAGE 63
PATRICE L. BERCHTENBREITER, Vice President--Vice President, T.
Rowe Price
PAUL W. BOLTZ, Vice President--Vice President and Financial
Economist of T. Rowe Price
HENRY H. HOPKINS, Vice President--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; Vice President, Price-Fleming and T. Rowe Price
Retirement Plan Services, Inc.
JOAN R. POTEE, Vice President--Vice President, T. Rowe Price
ROBERT M. RUBINO, Vice President--Vice President, T. Rowe Price
LENORA V. HORNUNG, Secretary--Vice President, T. Rowe Price
PATRICIA S. BUTCHER, Assistant Secretary--Assistant Vice
President, T. Rowe Price and T. Rowe Price Investment Services,
Inc.
CARMEN F. DEYESU, Treasurer--Vice President, T. Rowe Price, T.
Rowe Price Services, Inc., and T. Rowe Price Trust Company
DAVID S. MIDDLETON, Controller--Vice President, T. Rowe Price,
and T. Rowe Price Trust Company
BRIAN E. BURNS, Assistant Vice President--Assistant Vice
President, T. Rowe Price
ROGER L. FIERY, III, Assistant Vice President--Vice President,
Price-Fleming and T. Rowe Price
EDWARD T. SCHNEIDER, Assistant Vice President--Vice President, T.
Rowe Price
INGRID I. VORDEMBERGE, Assistant Vice President--Employee, T.
Rowe Price
GWENDOLYN G. WAGNER, Assistant Vice President--Assistant Vice
President, T. Rowe Price

New Income Fund

PAGE 64
America) Corporation, a registered broker-dealer; Address: 10275
Little Patuxent Parkway, Columbia, Maryland 21044
*CARTER O. HOFFMAN, Vice President and Director--Managing
Director, T. Rowe Price; Chartered Investment Counselor
F. PIERCE LINAWEAVER, Director--President, F. Pierce Linaweaver &
Associates, Inc.; formerly (1987-1991) Executive Vice President,
EA Engineering, Science, and Technology, Inc., and (1987-1990)
President, EA Engineering, Inc., Baltimore, Maryland; Address:
The Legg Mason Tower, 111 South Calvert Street, Suite 2700,
Baltimore, Maryland 21202
*JAMES S. RIEPE, Vice President and Director--Managing Director,
T. Rowe Price; Chairman of the Board, T. Rowe Price Services,
Inc. and T. Rowe Price Retirement Plan Services, Inc.; President
and Director, T. Rowe Price Investment Services, Inc; President
and Trust Officer, T. Rowe Price Trust Company, Director, Price-
Fleming and Rhone-Poulenc Rorer, Inc.
JOHN G. SCHREIBER, Director--President, Schreiber Investments,
Inc., a real estate investment company; Director, AMCI
Residential Properties Trust; Partner, Blackstone Real Estate
Partners, L.P.; Director and formerly (1/80-12/90) Executive Vice
President, JMB Realty Corporation, a national real estate
investment manager and developer; Address: 1115 East Illinois
Road, Lake Forest, Illinois 60045
*CHARLES P. SMITH, President and Director--Managing Director, T.
Rowe Price; Vice President, Price-Fleming
ROBERT P. CAMPBELL, Vice President--Vice President, T. Rowe Price
and Price-Fleming; formerly (4/80-5/90) Vice President and
Director, Private Finance, New York Life Insurance Company, New
York, New York
HENRY H. HOPKINS, Vice President--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; Vice President, Price-Fleming and T. Rowe Price
Retirement Plan Services, Inc.
HEATHER R. LANDON, Vice President--Vice President, T. Rowe Price
and T. Rowe Price Trust Company
JAMES M. McDONALD, Vice President--Vice President, T. Rowe Price
EDMUND M. NOTZON, Vice President--Vice President, T. Rowe Price
and T. Rowe Price Trust Company; formerly (1972-1989) charter
member of the U.S. Senior Executive Service and Director,
Analysis and Evaluation Division in the Office of Water
Regulations and Standards of the U.S. Environmental Protection
Agency
JOAN R. POTEE, Vice President--Vice President, T. Rowe Price
ROBERT M. RUBINO, Vice President--Vice President, T. Rowe Price
THOMAS E. TEWKSBURY, Vice President--Vice President, T. Rowe
Price; formerly (1/89-12/93) senior bond trader, Scudder, Stevens
& Clark, Boston, Massachusetts
PETER VAN DYKE, Vice President--Managing Director, T. Rowe Price;
Vice President, Price-Fleming and T. Rowe Price Trust Company

PAGE 65
LENORA V. HORNUNG, Secretary--Vice President, T. Rowe Price
PATRICIA S. BUTCHER, Assistant Secretary--Assistant Vice
President, T. Rowe Price and T. Rowe Price Investment Services,
Inc.
CARMEN F. DEYESU, Treasurer--Vice President, T. Rowe Price, T.
Rowe Price Services, Inc., and T. Rowe Price Trust Company
DAVID S. MIDDLETON, Controller--Vice President, T. Rowe Price,
and T. Rowe Price Trust Company
ROGER L. FIERY, III, Assistant Vice President--Vice President,
Price-Fleming and T. Rowe Price
EDWARD T. SCHNEIDER, Assistant Vice President--Vice President, T.
Rowe Price
INGRID I. VORDEMBERGE, Assistant Vice President--Employee, T.
Rowe Price

Equity Income Fund

*THOMAS H. BROADUS, JR., Vice President and Trustee--Managing
Director, T. Rowe Price; Chartered Financial Analyst and
Chartered Investment Counselor
LEO C. BAILEY, Trustee--Retired; Address: 3396 South Placita
Fabula, Green Valley, Arizona 85614
DONALD W. DICK, JR., Trustee--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: 111 Pavonia Avenue, Suite 334,
Jersey City, New Jersey 07310
DAVID K. FAGIN, Trustee--Chairman, Chief Executive Officer and
Director, Golden Star Resources, Ltd.; formerly (1986-7/91)
President, Chief Operating Officer and Director, Homestake Mining
Company; Address: One Norwest Center, 1700 Lincoln Street, Suite
1950, Denver, Colorado 80203
ADDISON LANIER, Trustee--Financial management; President and
Director, Thomas Emery's Sons, Inc., and Emery Group, Inc.;
Director, Scinet Development and Holdings, Inc.; Address: 441
Vine Street, #2310, Cincinnati, Ohio 45202-2913
JOHN K. MAJOR, Trustee--Chairman of the Board and President, KCMA
Incorporated, Tulsa, Oklahoma; Address: 126 E. 26 Place, Tulsa,
Oklahoma 74114-2422
HANNE M. MERRIMAN, Trustee--Retail business consultant; formerly
President and Chief Operating Officer (1991-92), Nan Duskin,
Inc., a women's specialty store, Director (1984-1990) 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, The Rouse Company, State
Farm Mutual Automobile Insurance Company and USAir Group, Inc.

PAGE 66
*JAMES S. RIEPE, Vice President and Trustee--Managing Director,
T. Rowe Price; Chairman of the Board, T. Rowe Price Services,
Inc. and T. Rowe Price Retirement Plan Services, Inc.; President
and Director, T. Rowe Price Investment Services, Inc; President
and Trust Officer, T. Rowe Price Trust Company; Director, Price-
Fleming and Rhone-Poulenc Rorer, Inc.
*M. DAVID TESTA, Trustee--Chairman of the Board, Price-Fleming;
Managing Director, T. Rowe Price; Vice President and Director, T.
Rowe Price Trust Company; Chartered Financial Analyst; Chartered
Investment Counselor
HUBERT D. VOS, Trustee--President, Stonington Capital
Corporation, a private investment company; Address: 1231 State
Street, Suite 210, Santa Barbara, California 93190-0409
PAUL M. WYTHES, Trustee--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
BRIAN C. ROGERS, President--Managing Director, T. Rowe Price
ANDREW M. BROOKS, Vice President--Vice President, T. Rowe Price
HENRY H. HOPKINS, Vice President--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; Vice President, Price-Fleming and T. Rowe Price
Retirement Plan Services, Inc.
RICHARD P. HOWARD, Vice President--Vice President, T. Rowe Price;
Chartered Financial Analyst
ROBERT W. SMITH, Vice President-Vice President, T. Rowe Price;
formerly (1987-1992) Investment Analyst, Massachusetts Financial
Services, Inc., Boston, Massachusetts
WILLIAM J. STROMBERG, Vice President--Vice President, T. Rowe
Price
DANIEL M. THERIAULT, Vice President--Vice President, T. Rowe
Price, Chartered Financial Analyst; formerly a Securities
Analyst, John A. Levin & Co.
MARK J. VASELKIV, Vice President-Vice President, T. Rowe Price
LENORA V. HORNUNG, Secretary--Vice President, T. Rowe Price
PATRICIA S. BUTCHER, Assistant Secretary--Assistant Vice
President, T. Rowe Price and T. Rowe Price Investment Services,
Inc.
CARMEN F. DEYESU, Treasurer--Vice President, T. Rowe Price, T.
Rowe Price Services, Inc., and T. Rowe Price Trust Company
DAVID S. MIDDLETON, Controller--Vice President, T. Rowe Price, T.
Rowe Price Services, Inc. and T. Rowe Price Trust Company
ROGER L. FIERY, III, Assistant Vice President--Vice President,
Price-Fleming and T. Rowe Price
EDWARD T. SCHNEIDER, Assistant Vice President--Assistant Vice
President, T. Rowe Price and T. Rowe Price Services, Inc.

PAGE 67
INGRID I. VORDEMBERGE, Assistant Vice President--Employee, T.
Rowe Price

International Stock Fund

*M. DAVID TESTA, Chairman of the Board--Chairman of the Board,
Price-Fleming; Managing Director, T. Rowe Price; Vice President
and Director, T. Rowe Price Trust Company; Chartered Financial
Analyst
*MARTIN G. WADE, President and Director--President,
Price-Fleming; Director, Robert Fleming Holdings Limited;
Address: 25 Copthall Avenue, London, EC2R 7DR, England
LEO C. BAILEY, Director--Retired; Address: 3396 South Placita
Fabula, Green Valley, Arizona 85614
ANTHONY W. DEERING, Director--Director, 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
DONALD W. DICK, JR., Director--Principal, Overseas Partners,
Inc., a financial investment firm; Director, Waverly Press, Inc.,
Baltimore, Maryland; Address: 375 Park Avenue, Suite 2201, New
York, New York 10152
ADDISON LANIER, Director--Financial management; President and
Director, Thomas Emery's Sons, Inc. and Emery Group, Inc.;
Director, Scinet Development and Holdings, Inc.; Address: 441
Vine Street, #2310, Cincinnati, Ohio 45202-2913
CHRISTOPHER D. ALDERSON, Vice President--Vice President,
Price-Fleming
PETER B. ASKEW, Vice President--Executive Vice President,
Price-Fleming
RICHARD J. BRUCE, Vice President--Vice President, Price-Fleming;
formerly (1985-1990) Investment Manager, Jardine Fleming
Advisers, Tokyo
ROBERT P. CAMPBELL, Vice President--Vice President, Price-Fleming
and T. Rowe Price; formerly (4/80-5/90) Vice President and
Director, Private Finance, New York Life Insurance Company, New
York, New York
MARK J.T. EDWARDS, Vice President--Vice President, Price-Fleming
JOHN R. FORD, Vice President--Executive Vice President,
Price-Fleming
HENRY H. HOPKINS, Vice President--Vice President, Price-Fleming
and T. Rowe Price Retirement Plan Services, Inc.; 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
ROBERT C. HOWE, Vice President--Vice President, Price-Fleming and
T. Rowe Price

PAGE 68
STEPHEN ILOTT, Vice President--Employee, Price-Fleming; formerly
(1988-1991) portfolio management, Fixed Income Portfolios Group,
Robert Fleming Holdings Limited, London
GEORGE A. MURNAGHAN, Vice President--Vice President,
Price-Fleming, T. Rowe Price, T. Rowe Price Trust Company, and T.
Rowe Price Investment Service
JAMES S. RIEPE, Vice President--Director, Price-Fleming and
Rhone-Poulenc Rorer, Inc.; Managing Director, T. Rowe Price;
Chairman of the Board, T. Rowe Price Services, Inc. and T. Rowe
Price Retirement Plan Services, Inc.; President and Director, T.
Rowe Price Investment Services, Inc.; President and Trust
Officer, T. Rowe Price Trust Company
CHRISTOPHER ROTHERY, Vice President--Vice President,
Price-Fleming; formerly (1987-1989) employee of Robert Fleming
Holdings Limited, London
JAMES B. M. SEDDON, Vice President--Vice President, Price-Fleming
CHARLES P. SMITH, Vice President--Vice President, Price-Fleming;
Managing Director, T. Rowe Price
BENEDICT R. F. THOMAS, Vice President--Vice President,
Price-Fleming
PETER VAN DYKE, Vice President--Vice President, Price-Fleming;
Managing Director, T. Rowe Price
DAVID J. L. WARREN, Vice President--Executive Vice President,
Price-Fleming
WILLIAM F. WENDLER, II, Vice President--Vice President,
Price-Fleming and T. Rowe Price, and T. Rowe Price Investment
Services, Inc.
EDWARD A. WIESE, Vice President--Vice President, Price-Fleming,
T. Rowe Price and T. Rowe Price Trust Company
LENORA V. HORNUNG, Secretary--Vice President, T. Rowe Price
PATRICIA S. BUTCHER, Assistant Secretary--Assistant Vice
President, T. Rowe Price and T. Rowe Price Investment Services,
Inc.
CARMEN F. DEYESU, Treasurer--Vice President, T. Rowe Price, T.
Rowe Price Services, Inc., and T. Rowe Price Trust Company
DAVID S. MIDDLETON, Controller--Vice President, T. Rowe Price, T.
Rowe Price Services, Inc. and T. Rowe Price Trust Company
ANN B. CRANMER, Assistant Vice President--Vice President,
Price-Fleming
ROGER L. FIERY, III, Assistant Vice President--Vice President,
Price-Fleming and T. Rowe Price
LEAH P. HOLMES, Assistant Vice President--Vice President,
Price-Fleming and Assistant Vice President, T. Rowe Price
EDWARD T. SCHNEIDER, Assistant Vice President--Assistant Vice
President, T. Rowe Price and T. Rowe Price Services, Inc.
INGRID I. VORDEMBERGE, Assistant Vice President--Employee, T.
Rowe Price

PAGE 69
Each Fund's Executive Committee, consisting of the
Fund's interested directors/trustees, has been authorized by its
respective Board of Directors/Trustees to exercise all powers of
the Board to manage the Fund in the intervals between meetings of
the Board, except the powers prohibited by statute from being
delegated. The members of each Fund's Executive Committee are as
follows:

Prime Reserve Fund--Messrs. Collins, Reynolds, and Riepe
New Income Fund--Messrs. Collins, Hoffman, Riepe, Smith
Equity Income Fund- Messrs. Broadus, Riepe, and Testa
International Stock Fund--Messrs. Testa and Wade

COMPENSATION TABLE

_________________________________________________________________
Total Compensation
Pension or from Fund and
Retirement Fund Complex
Name of Aggregate Benefits Paid to
Person, Compensation Accrued as Directors/
Position from Fund(a) Part of Fund(b) Trustees(c)
_________________________________________________________________
Prime Reserve Fund

Robert P. Black, $7,560 N/A $52,667
Director

Calvin W. Burnett, 7,560 N/A 55,583
PH.D, Director

Anthony W. Deering, 7,560 N/A 66,333
Director

F. Pierce Linaweaver, 7,560 N/A 55,583
Director

John G. Schreiber, 7,560 N/A 55,667
Director

George J. Collins, 0 N/A 0
Director(d)

Carter O. Hoffman, 0 N/A 0
Chairman of the Board(d)

James S. Riepe, 0 N/A 0
Director(d)

PAGE 70
_________________________________________________________________
New Income Fund

Robert P. Black, $3,981 N/A $52,667
Director

Calvin W. Burnett, 3,981 N/A 55,583
PH.D, Director

Anthony W. Deering, 3,981 N/A 66,333
Director

F. Pierce Linaweaver, 3,981 N/A 55,583
Director

John G. Schreiber, 3,981 N/A 55,667
Director

George J. Collins, 0 N/A 0
Chairman of the Board(d)

Carter O. Hoffman, 0 N/A 0
Director(d)

James S. Riepe, 0 N/A 0
Director(d)

Charles P. Smith, 0 N/A 0
Director(b)
_________________________________________________________________
Equity Income Fund

Leo C. Bailey, $5,642 N/A $64,583
Trustee

Donald W. Dick, Jr., 5,642 N/A 64,833
Trustee

David K. Fagin, 5,642 N/A 53,833
Trustee

Addison Lanier, 5,642 N/A 64,583
Trustee

John K. Major, 5,642 N/A 54,583
Trustee

Hanne M. Merriman, 5,642 N/A 42,083
Trustee

PAGE 71
Hubert D. Vos, 5,642 N/A 54,583
Trustee

Paul M. Wythes, 5,642 N/A 54,333
Trustee

Thomas H. Broadus, Jr., 0 N/A 0
Trustee(d)

James S. Riepe, 0 N/A 0
Trustee(d)

M. David Testa, 0 N/A 0
Trustee(d)
_________________________________________________________________
International Stock Fund

Leo C. Bailey, $11,299 N/A $64,583
Director

Anthony W. Deering, 11,299 N/A 66,333
Director

Donald W. Dick, 11,299 N/A 64,833
Director

Addison Lanier, 11,299 N/A 64,583
Director

M. David Testa, 0 N/A 0
Chairman of the Board(d)

Martin G. Wade, 0 N/A 0
Director(d)

a Amounts in this Column are for the period June 1, 1994
through May 31, 1995.
b Not applicable. The Fund does not pay pension or retirement
benefits to officers or directors/trustees of the Fund.
c Amounts in this column are for calendar year 1994.
d Any director/trustee of the Fund who is an officer or
employee of T. Rowe Price receives no remuneration from the
Fund.

PRINCIPAL HOLDERS OF SECURITIES

As of the date of the prospectus, the officers and
directors/trustees of each Fund, as a group, owned less than 1%
of the outstanding shares of the Fund.

PAGE 72

As of April 30, 1995, the following shareholder
beneficially owned more than 5% of the outstanding shares of the
International Stock Fund: Charles Schwab & Co., Inc.,
Reinvestment Account, Attn: Mutual Fund Dept., 101 West
Montgomery Street, San Francisco, California 94104-4122.

As of August 31, 1995, Yachtcrew & Co., FBO Spectrum
Income Account, State Street Bank and Trust Co., 1776 Heritage
Drive-4W, North Quincy, MA 02171-2010 beneficially owned more
than 5% of the outstanding shares of the New Income Fund.

INVESTMENT MANAGEMENT SERVICES

Services

Under the Management Agreement, T. Rowe Price or Price-
Fleming provides each Fund with discretionary investment
services. Specifically, T. Rowe Price or Price-Fleming is
responsible for supervising and directing the investments of each
Fund in accordance with the Fund's investment objective, program,
and restrictions as provided in its prospectus and this Statement
of Additional Information. T. Rowe Price or Price-Fleming is
also responsible for effecting all security transactions on
behalf of each Fund, including the negotiation of commissions and
the allocation of principal business and portfolio brokerage. In
addition to these services, T. Rowe Price or Price-Fleming
provides each Fund with certain administrative services,
including: maintaining each Fund's existence, records, and
registering and qualifying a Fund's shares under federal and
state laws; monitoring the financial, accounting, and
administrative functions of each Fund; maintaining liaison with
the agents employed by each Fund such as the Fund's custodian and
transfer agent; assisting each Fund in the coordination of such
agents' activities; and permitting T. Rowe Price's or Price-
Fleming's employees to serve as officers, directors/trustees, and
committee members of each Fund without cost to the Fund.

The Management Agreement also provides that T. Rowe
Price or Price-Fleming, its directors, officers, employees, and
certain other persons performing specific functions for each Fund
will only be liable to a Fund for losses resulting from willful
misfeasance, bad faith, gross negligence, or reckless disregard
of duty.

PAGE 73
Management Fee

Each Fund pays T. Rowe Price or Price-Fleming a fee
("Fee") which consists of two components: a Group Management Fee
("Group Fee") and an Individual Fund Fee ("Fund Fee"). The Fee
is paid monthly to the T. Rowe Price or Price-Fleming on the
first business day of the next succeeding calendar month and is
calculated as described below.

The monthly Group Fee ("Monthly Group Fee") is the sum
of the daily Group Fee accruals ("Daily Group Fee Accruals") for
each month. The Daily Group Fee Accrual for any particular day
is computed by multiplying the Price Funds' group fee accrual as
determined below ("Daily Price Funds' Group Fee Accrual") by the
ratio of the Fund's net assets for that day to the sum of the
aggregate net assets of the Price Funds for that day. The Daily
Price Funds' Group Fee Accrual for any particular day is
calculated by multiplying the fraction of one (1) over the number
of calendar days in the year by the annualized Daily Price Funds'
Group Fee Accrual for that day as determined in accordance with
the following schedule:

Price Funds'
Annual Group Base Fee
Rate for Each Level of Assets

0.480% First $1 billion
0.450% Next $1 billion
0.420% Next $1 billion
0.390% Next $1 billion
0.370% Next $1 billion
0.360% Next $2 billion
0.350% Next $2 billion
0.340% Next $5 billion
0.330% Next $10 billion
0.320% Next $10 billion
0.310% Thereafter

For the purpose of calculating the Group Fee, the Price
Funds include all the mutual funds distributed by T. Rowe Price
Investment Services, Inc. (excluding T. Rowe Price Spectrum Fund,
Inc. and any institutional or private label mutual funds). For
the purpose of calculating the Daily Price Funds' Group Fee
Accrual for any particular day, the net assets of each Price Fund
are determined in accordance with the Fund's prospectus as of the
close of business on the previous business day on which the Fund
was open for business.

The monthly Fund Fee ("Monthly Fund Fee") is the sum of the
daily Fund Fee accruals ("Daily Fund Fee Accruals") for each

PAGE 74
month. The Daily Fund Fee accrual for any particular day is
computed by multiplying the fraction of one (1) over the number
of calendar days in the year by the individual Fund Fee Rate for
the Prime Reserve, New Income, Equity Income and International
Stock Funds of .05%, .15%, .25% and .35%, respectively, and
multiplying this product by the net assets of the Fund for that
day, as determined in accordance with the Fund's prospectus as of
the close of business on the previous business day on which the
Fund was open for business.

Listed below are the total amounts paid to T. Rowe Price by
the Prime Reserve and New Income Funds (for the fiscal year ended
May 31, 1995, the three-month fiscal year ended May 31, 1994 and
for the fiscal years ended February 28, 1994 and February 28,
1993), and Equity Income Fund (for the fiscal years ended
December 31, 1994, 1993, and 1992), and amounts paid to Price-
Fleming by the International Stock Fund (for the fiscal year
ended October 31, 1994, for the ten-month fiscal year ended
October 31, 1993 and for the fiscal year ended December 31, 1992)
under an investment management agreement, in effect at that time,
for each of the last three fiscal years or year ends.

Prime New Income Equity International
Reserve Fund Fund Income Fund Stock Fund

Fiscal Fiscal
Year Amount Year Amount Year Amount Year Amount

1995$14,784,000 1995$6,972,0001994 $17,847,000 1994$35,176,000
1994**3,601,000 1994**1,748,000 1993 15,154,800 1993*14,955,000
1994 13,617,000 1994 7,750,000 1992 10,430,000 1992 12,522,000
1993 15,620,000 1993 7,113,000

* For the ten-month fiscal year ended October 31, 1993.
** For the three-month fiscal year ended May 31, 1994.

Limitation on Fund Expenses

The Management Agreement between each Fund and T. Rowe Price
or Price-Fleming provides that each Fund will bear all expenses
of its operations not specifically assumed by T. Rowe Price or
Price-Fleming. However, in compliance with certain state
regulations, T. Rowe Price or Price-Fleming will reimburse a Fund
for certain expenses which in any year exceed the limits
prescribed by any state in which the Fund's shares are qualified
for sale. Presently, the most restrictive expense ratio
limitation imposed by any state is 2.5% of the first $30 million
of a Fund's average daily net assets, 2% of the next $70 million
of such assets, and 1.5% of net assets in excess of $100 million.
For the purpose of determining whether a Fund is entitled to

PAGE 75
reimbursement, the expenses of the Fund are calculated on a
monthly basis. If a Fund is entitled to reimbursement, that
month's management fee will be reduced or postponed, with any
adjustment made after the end of the year.

T. Rowe Price Spectrum Fund, Inc.

The Funds are party to a Special Servicing Agreement
("Agreement") between and among T. Rowe Price Spectrum Fund, Inc.
("Spectrum Fund"), T. Rowe Price, T. Rowe Price Services, Inc.
and various other T. Rowe Price funds which, along with the
Funds, are funds in which Spectrum Fund invests (collectively all
such funds "Underlying Price Funds").

The Agreement provides that, if the Board of
Directors/Trustees of any Underlying Price Fund determines that
such Underlying Fund's share of the aggregate expenses of
Spectrum Fund is less than the estimated savings to the
Underlying Price Fund from the operation of Spectrum Fund, the
Underlying Price Fund will bear those expenses in proportion to
the average daily value of its shares owned by Spectrum Fund,
provided further that no Underlying Price Fund will bear such
expenses in excess of the estimated savings to it. Such savings
are expected to result primarily from the elimination of numerous
separate shareholder accounts which are or would have been
invested directly in the Underlying Price Funds and the resulting
reduction in shareholder servicing costs. Although such cost
savings are not certain, the estimated savings to the Underlying
Price Funds generated by the operation of Spectrum Fund are
expected to be sufficient to offset most, if not all, of the
expenses incurred by Spectrum Fund.

International Stock Fund

Under the Management Agreement, Price-Fleming is permitted
to utilize the services or facilities of others to provide it or
the Fund with statistical and other factual information, advice
regarding economic factors and trends, advice as to occasional
transactions in specific securities, and such other information,
advice or assistance as Price-Fleming may deem necessary,
appropriate, or convenient for the discharge of its obligations
under the Management Agreement or otherwise helpful to the Fund.

Certain administrative support is provided by T. Rowe Price
which receives from Price-Fleming a fee of .15% of the market
value of all assets in equity accounts, .15% of the market value
of all assets in active fixed income accounts and .035% of the
market value of all assets in passive fixed income accounts under
Price-Fleming's management.

PAGE 76
Price-Fleming has entered into separate letters of agreement
with Fleming Investment Management Limited ("FIM") and Jardine
Fleming Investment Holdings Limited ("JFIH"), wherein FIM and
JFIH have agreed to render investment research and administrative
support to Price-Fleming. FIM is a wholly-owned subsidiary of
Robert Fleming Asset Management Limited which is a wholly-owned
subsidiary of Robert Fleming Holdings Limited ("Robert Fleming").
JFIH is an indirect wholly-owned subsidiary of Jardine Fleming
Group Limited. Under the letters of agreement, these companies
will provide Price-Fleming with research material containing
statistical and other factual information, advice regarding
economic factors and trends, advice on the allocation of
investments among countries and as between debt and equity
classes of securities, and research and occasional advice with
respect to specific companies. For these services, FIM and JFIH
each receives a fee of .075% of the market value of all assets in
equity accounts under Price-Fleming's management. JFIH each
receives a fee of .075% of the market value of all assets in
active fixed income accounts and .0175% of such market value in
passive fixed income accounts under Price-Fleming's management.

Robert Fleming personnel have extensive research resources
throughout the world. A strong emphasis is placed on direct
contact with companies in the research universe. Robert Fleming
personnel, who frequently speak the local language, have access
to the full range of research products available in the market
place and are encouraged to produce independent work dedicated
solely to portfolio investment management, which adds value to
that generally available.

DISTRIBUTOR FOR FUNDS

T. Rowe Price Investment Services, Inc. ("Investment
Services"), a Maryland corporation formed in 1980 as a wholly-
owned subsidiary of T. Rowe Price, serves as the Funds'
distributor. Investment Services is registered as a broker-
dealer under the Securities Exchange Act of 1934 and is a member
of the National Association of Securities Dealers, Inc. The
offering of each Fund's shares is continuous.

Investment Services is located at the same address as the
Funds and T. Rowe Price -- 100 East Pratt Street, Baltimore,
Maryland 21202.

Investment Services serves as distributor to each Fund
pursuant to an Underwriting Agreement ("Underwriting Agreement"),
which provides that each Fund will pay all fees and expenses in
connection with: registering and qualifying its shares under the
various state "blue sky" laws; preparing, setting in type,

PAGE 77
printing, and mailing its prospectuses and reports to
shareholders; and issuing its shares, including expenses of
confirming purchase orders.

The Underwriting Agreement provides that Investment Services
will pay all fees and expenses in connection with: printing and
distributing prospectuses and reports for use in offering and
selling Fund shares; preparing, setting in type, printing, and
mailing all sales literature and advertising; Investment
Services' federal and state registrations as a broker-dealer; and
offering and selling Fund shares, except for those fees and
expenses specifically assumed by each Fund. Investment Services'
expenses are paid by T. Rowe Price.

Investment Services acts as the agent of each Fund in
connection with the sale of its shares in all states in which the
shares are qualified and in which Investment Services is
qualified as a broker-dealer. Under the Underwriting Agreement,
Investment Services accepts orders for Fund shares at net asset
value. No sales charges are paid by investors or the Funds.

CUSTODIAN

State Street Bank and Trust Company is the custodian for
each Fund's domestic securities and cash, but it does not
participate in the Fund's investment decisions. Portfolio
securities purchased in the U.S. are maintained in the custody of
the Bank and may be entered into the Federal Reserve Book Entry
System, or the security depository system of the Depository Trust
Corporation. The New Income, Equity Income and International
Stock Funds have entered into a Custodian Agreement with The
Chase Manhattan Bank, N.A., London, pursuant to which portfolio
securities which are purchased outside the United States are
maintained in the custody of various foreign branches of The
Chase Manhattan Bank and such other custodians, including foreign
banks and foreign securities depositories as are approved by each
Fund's Board of Directors/Trustees in accordance with regulations
under the Investment Company Act of 1940. State Street Bank's
main office is at 225 Franklin Street, Boston, Massachusetts
02110. The address for The Chase Manhattan Bank, N.A., London is
Woolgate House, Coleman Street, London, EC2P 2HD, England.

CODE OF ETHICS

Prime Reserve, New Income and Equity Income Funds

The Funds' investment adviser (T. Rowe Price) has a written
Code of Ethics which requires all employees to obtain prior

PAGE 78
clearance before engaging in any personal securities
transactions. In addition, all employees must report their
personal securities transactions within ten days of their
execution. Employees will not be permitted to effect
transactions in a security: If there are pending client orders in
the security; the security has been purchased or sold by a client
within seven calendar days; the security is being considered for
purchase for a client; a change has occurred in T. Rowe Price's
rating of the security within five days; or the security is
subject to internal trading restrictions. In addition, employees
are prohibited from engaging in short-term trading (e.g.,
purchases and sales involving the same security within 60 days).
Any material violation of the Code of Ethics is reported to the
Board of the Fund. The Board also reviews the administration of
the Code of Ethics on an annual basis.

International Stock Fund

The Funds' investment adviser (Price-Fleming) has a written
Code of Ethics which requires all employees to obtain prior
clearance before engaging in any personal securities
transactions. In addition, all employees must report their
personal securities transactions within ten days of their
execution. Employees will not be permitted to effect
transactions in a security: If there are pending client orders in
the security; the security has been purchased or sold by a client
within seven calendar days; the security is being considered for
purchase for a client; the security is subject to internal
trading restrictions. In addition, employees are prohibited from
engaging in short-term trading (e.g., purchases and sales
involving the same security within 60 days. Any material
violation of the Code of Ethics is reported to the Board of the
Fund. The Board also reviews the administration of the Code of
Ethics on an annual basis.

PORTFOLIO TRANSACTIONS

Investment or Brokerage Discretion

Decisions with respect to the purchase and sale of portfolio
securities on behalf of the Funds are made by T. Rowe Price. T.
Rowe Price is also responsible for implementing these decisions,
including the negotiation of commissions and the allocation of
portfolio brokerage and principal business. Each Fund's
purchases and sales of fixed-income portfolio securities are
normally done on a principal basis and do not involve the payment
of a commission although they may involve the designation of
selling concessions. That part of the discussion below relating
solely to brokerage commissions would not normally apply to the

PAGE 79
Prime Reserve Fund (and except to the extent it purchases equity
securities, New Income Fund). However, it is included because T.
Rowe Price does manage a significant number of common stock
portfolios which do engage in agency transactions and pay
commissions and because some research and services resulting from
the payment of such commissions may benefit the Funds.

How Brokers and Dealers are Selected

Equity Securities

In purchasing and selling the Fund's portfolio securities,
it is T. Rowe Price's policy to obtain quality execution at the
most favorable prices through responsible brokers and dealers
and, in the case of agency transactions, at competitive
commission rates. However, under certain conditions, the Fund may
pay higher brokerage commissions in return for brokerage and
research services. As a general practice, over-the-counter
orders are executed with market-makers. In selecting among
market-makers, T. Rowe Price generally seeks to select those it
believes to be actively and effectively trading the security
being purchased or sold. In selecting broker-dealers to execute
the Fund's portfolio transactions, consideration is given to such
factors as the price of the security, the rate of the commission,
the size and difficulty of the order, the reliability, integrity,
financial condition, general execution and operational
capabilities of competing brokers and dealers, and brokerage and
research services provided by them. It is not the policy of T.
Rowe Price to seek the lowest available commission rate where it
is believed that a broker or dealer charging a higher commission
rate would offer greater reliability or provide better price or
execution.

Fixed Income Securities

Fixed income securities are generally purchased from the
issuer or a primary market-maker acting as principal for the
securities on a net basis, with no brokerage commission being
paid by the client although the price usually includes an
undisclosed compensation. Transactions placed through dealers
serving as primary market-makers reflect the spread between the
bid and asked prices. Securities may also be purchased from
underwriters at prices which include underwriting fees.

With respect to equity and fixed income securities, T. Rowe
Price may effect principal transactions on behalf of a Fund with
a broker or dealer who furnishes brokerage and/or research
services, designate any such broker or dealer to receive selling
concessions, discounts or other allowances, or otherwise deal

PAGE 80
with any such broker or dealer in connection with the acquisition
of securities in underwritings. T. Rowe Price may receive
research services in connection with brokerage transactions,
including designations in fixed priced underwritings.

How Evaluations are Made of the Overall Reasonableness of
Brokerage Commissions Paid

On a continuing basis, T. Rowe Price seeks to determine what
levels of commission rates are reasonable in the marketplace for
transactions executed on behalf of the Funds. In evaluating the
reasonableness of commission rates, T. Rowe Price considers: (a)
historical commission rates, both before and since rates have
been fully negotiable; (b) rates which other institutional
investors are paying, based on available public information; (c)
rates quoted by brokers and dealers; (d) the size of a particular
transaction, in terms of the number of shares, dollar amount, and
number of clients involved; (e) the complexity of a particular
transaction in terms of both execution and settlement; (f) the
level and type of business done with a particular firm over a
period of time; and (g) the extent to which the broker or dealer
has capital at risk in the transaction.

Description of Research Services Received from Brokers and
Dealers

T. Rowe Price receives a wide range of research services
from brokers and dealers. These services include information on
the economy, industries, groups of securities, individual
companies, statistical information, accounting and tax law
interpretations, political developments, legal developments
affecting portfolio securities, technical market action, pricing
and appraisal services, credit analysis, risk measurement
analysis, performance analysis and analysis of corporate
responsibility issues. These services provide both domestic and
international perspective. Research services are received
primarily in the form of written reports, computer generated
services, telephone contacts and personal meetings with security
analysts. In addition, such services may be provided in the form
of meetings arranged with corporate and industry spokespersons,
economists, academicians and government representatives. In some
cases, research services are generated by third parties but are
provided to T. Rowe Price by or through broker-dealers.

Research services received from brokers and dealers are
supplemental to T. Rowe Price's own research effort and, when
utilized, are subject to internal analysis before being
incorporated by T. Rowe Price into its investment process. As a
practical matter, it would not be possible for T. Rowe Price's
Equity Research Division to generate all of the information

PAGE 81
presently provided by brokers and dealers. T. Rowe Price pays
cash for certain research services received from external
sources. T. Rowe Price also allocates brokerage for research
services which are available for cash. While receipt of research
services from brokerage firms has not reduced T. Rowe Price's
normal research activities, the expenses of T. Rowe Price could
be materially increased if it attempted to generate such
additional information through its own staff. To the extent that
research services of value are provided by brokers or dealers, T.
Rowe Price may be relieved of expenses which it might otherwise
bear.

T. Rowe Price has a policy of not allocating brokerage
business in return for products or services other than brokerage
or research services. In accordance with the provisions of
Section 28(e) of the Securities Exchange Act of 1934, T. Rowe
Price may from time to time receive services and products which
serve both research and non-research functions. In such event,
T. Rowe Price makes a good faith determination of the anticipated
research and non-research use of the product or service and
allocates brokerage only with respect to the research component.

Commissions to Brokers who Furnish Research Services

Certain brokers and dealers who provide quality brokerage
and execution services also furnish research services to T. Rowe
Price. With regard to the payment of brokerage commissions, T.
Rowe Price has adopted a brokerage allocation policy embodying
the concepts of Section 28(e) of the Securities Exchange Act of
1934, which permits an investment adviser to cause an account to
pay commission rates in excess of those another broker or dealer
would have charged for effecting the same transaction, if the
adviser determines in good faith that the commission paid is
reasonable in relation to the value of the brokerage and research
services provided. The determination may be viewed in terms of
either the particular transaction involved or the overall
responsibilities of the adviser with respect to the accounts over
which it exercises investment discretion. Accordingly, while T.
Rowe Price cannot readily determine the extent to which
commission rates charged by broker-dealers reflect the value of
their research services, T. Rowe Price would expect to assess the
reasonableness of commissions in light of the total brokerage and
research services provided by each particular broker. T. Rowe
Price may receive research, as defined in Section 28(e), in
connection with selling concessions and designations in fixed
price offerings in which the Funds participate.

PAGE 82
Internal Allocation Procedures

T. Rowe Price has a policy of not precommitting a specific
amount of business to any broker or dealer over any specific time
period. Historically, the majority of brokerage placement has
been determined by the needs of a specific transaction such as
market-making, availability of a buyer or seller of a particular
security, or specialized execution skills. However, T. Rowe
Price does have an internal brokerage allocation procedure for
that portion of its discretionary client brokerage business where
special needs do not exist, or where the business may be
allocated among several brokers or dealers which are able to meet
the needs of the transaction.

Each year, T. Rowe Price assesses the contribution of the
brokerage and research services provided by brokers and dealers,
and attempts to allocate a portion of its brokerage business in
response to these assessments. Research analysts, counselors,
various investment committees, and the Trading Department each
seek to evaluate the brokerage and research services they receive
from brokers and dealers and make judgments as to the level of
business which would recognize such services. In addition,
brokers and dealers sometimes suggest a level of business they
would like to receive in return for the various brokerage and
research services they provide. Actual brokerage business
received by any firm may be less than the suggested allocations
but can, and often does, exceed the suggestions, because the
total business is allocated on the basis of all the
considerations described above. In no case is a broker or dealer
excluded from receiving business from T. Rowe Price because it
has not been identified as providing research services.

Miscellaneous

T. Rowe Price's brokerage allocation policy is consistently
applied to all its fully discretionary accounts, which represent
a substantial majority of all assets under management. Research
services furnished by brokers or dealers through which T. Rowe
Price effects securities transactions may be used in servicing
all accounts (including non-Fund accounts) managed by T. Rowe
Price. Conversely, research services received from brokers or
dealers which execute transactions for the Fund are not
necessarily used by T. Rowe Price exclusively in connection with
the management of the Fund.

From time to time, orders for clients may be placed through
a computerized transaction network.

Each Fund does not allocate business to any broker-dealer on
the basis of its sales of the Fund's shares. However, this does

PAGE 83
not mean that broker-dealers who purchase Fund shares for their
clients will not receive business from the Fund.

Some of T. Rowe Price's other clients have investment
objectives and programs similar to those of the Funds. T. Rowe
Price may occasionally make recommendations to other clients
which result in their purchasing or selling securities
simultaneously with the Funds. As a result, the demand for
securities being purchased or the supply of securities being sold
may increase, and this could have an adverse effect on the price
of those securities. It is T. Rowe Price's policy not to favor
one client over another in making recommendations or in placing
orders. T. Rowe Price frequently follows the practice of
grouping orders of various clients for execution which generally
results in lower commission rates being attained. In certain
cases, where the aggregate order is executed in a series of
transactions at various prices on a given day, each participating
client's proportionate share of such order reflects the average
price paid or received with respect to the total order. T. Rowe
Price has established a general investment policy that it will
ordinarily not make additional purchases of a common stock of a
company for its clients (including the T. Rowe Price Funds) if,
as a result of such purchases, 10% or more of the outstanding
common stock of such company would be held by its clients in the
aggregate.

To the extent possible, T. Rowe Price intends to recapture
solicitation fees paid in connection with tender offers through
T. Rowe Price Investment Services, Inc., the Fund's distributor.
At the present time, T. Rowe Price does not recapture commissions
or underwriting discounts or selling group concessions in
connection with taxable securities acquired in underwritten
offerings. T. Rowe Price does, however, attempt to negotiate
elimination of all or a portion of the selling-group concession
or underwriting discount when purchasing tax-exempt municipal
securities on behalf of its clients in underwritten offerings.

Transactions with Related Brokers and Dealers--New Income and
Equity Income Funds

As provided in the Investment Management Agreement between
the Fund and T. Rowe Price, T. Rowe Price is responsible not only
for making decisions with respect to the purchase and sale of the
Fund's portfolio securities, but also for implementing these
decisions, including the negotiation of commissions and the
allocation of portfolio brokerage and principal business. It is
expected that T. Rowe Price may place orders for the Fund's
portfolio transactions with broker-dealers through the same
trading desk T. Rowe Price uses for portfolio transactions in
domestic securities. The trading desk accesses brokers and

PAGE 84
dealers in various markets in which the Fund's foreign securities
are located. These brokers and dealers may include of certain
affiliates of Robert Fleming Holdings Limited ("Robert Fleming
Holdings") and Jardine Fleming Group Limited ("JFG"), persons
indirectly related to T. Rowe Price. Robert Fleming Holdings,
through Copthall Overseas Limited, a wholly-owned subsidiary,
owns 25% of the common stock of Rowe Price-Fleming International,
Inc. ("RPFI"), an investment adviser registered under the
Investment Advisers Act of 1940. Fifty percent of the common
stock of RPFI is owned by TRP Finance, Inc., a wholly-owned
subsidiary of T. Rowe Price, and the remaining 25% is owned by
Jardine Fleming International Holdings Limited, a subsidiary of
JFG. JFG is 50% owned by Robert Fleming Holdings and 50% owned
by Jardine Matheson Holdings Limited. Orders for the Fund's
portfolio transactions placed with affiliates of Robert Fleming
Holdings and JFG will result in commissions being received by
such affiliates.

The Board of Directors/Trustees of the Funds has authorized
T. Rowe Price to utilize certain affiliates of Robert Fleming and
JFG in the capacity of broker in connection with the execution of
the Fund's portfolio transactions. These affiliates include, but
are not limited to, Jardine Fleming (Securities) Limited ("JFS"),
a wholly-owned subsidiary of JFG, Robert Fleming & Co. Limited
("RF&Co."), Jardine Fleming Australia Securities Limited, and
Robert Fleming, Inc. (a New York brokerage firm). Other
affiliates of Robert Fleming Holdings and JFG also may be used.
Although it does not believe that the Funds' use of these brokers
would be subject to Section 17(e) of the Investment Company Act
of 1940, the Board of Directors/Trustees of the Funds has agreed
that the procedures set forth in Rule 17(e)(1) under that Act
will be followed when using such brokers.

Other

Prime Reserve Fund

For the fiscal year ended May 31, 1995, the three-month
fiscal year ended May 31, 1994, and for the fiscal years ended
February 28, 1994 and February 28, 1993, the Fund engaged in
portfolio transactions involving broker-dealers totaling
$53,302,615,000, $5,945,733,000, $29,024,172,000, and
$36,478,989,000, respectively. The entire amount for each of
these years represented principal transactions as to which the
Fund has no knowledge of the profits or losses realized by the
respective broker-dealers. Of all such portfolio transactions,
approximately 90%, 78%, 87%, and 81%, respectively, were placed
with firms which provided research, statistical, or other
services to T. Rowe Price in connection with the management of
the Fund or, in some cases, to the Fund.

PAGE 85

New Income Fund

For the fiscal year ended May 31, 1995, the three-month
fiscal year ended May 31, 1994, and for the fiscal years ended
February 28, 1994, and February 28, 1993, the Fund engaged in
portfolio transactions involving broker-dealers totaling
$5,469,278,000, $1,649,029,000, $20,265,475,000, and
$15,193,999,000, respectively. For the fiscal years ended May
31, 1995, February 28, 1994 and February 28, 1993,
$5,469,278,000, $20,206,382,000, and $15,189,019,000 consisted of
principal transactions as to which the Fund has no knowledge of
the profits or losses realized by the respective broker-dealers;
and for the years May 31, 1995, February 28, 1994 and February
28, 1993, $0, $59,093,000, and $4,980,000 involved trades with
brokers acting as agents or underwriters, in which such brokers
received total commissions, including discounts received in
connection with underwritings, of $0, $169,00, and $20,000. For
the three-month fiscal year ended May 31, 1994, the entire amount
represented principal transactions as to which the Fund has no
knowledge of the profits or losses realized by the respective
broker-dealers. Of all such portfolio transactions,
approximately 73%, 68%, 61%, and 61%, respectively, were placed
with firms which provided research, statistical, or other
services to T. Rowe Price in connection with the management of
the Fund or, in some cases, to the Fund.

The portfolio turnover rate of the Fund for the fiscal year
ended May 31, 1995, the three-month fiscal year ended May 31,
1994, and for the fiscal years ended February 28, 1994 and
February 28, 1993, was 54.1%, 91.5%, 58.3%, and 85.8%,
respectively.

Equity Income Fund

For the years 1994, 1993, and 1992, the total brokerage
commissions paid by the Fund, including the discounts received by
securities dealers in connection with underwritings, were
$4,511,187, $4,660,406, and $3,419,000, respectively. Of these
commissions, approximately 48.4%, 42%, and 37%, respectively,
were paid to firms which provided research, statistical, or other
services to T. Rowe Price in connection with the management of
the Fund, or, in some cases, to the Fund.

The portfolio turnover rate of the Fund for each of the last
three years has been as follows: 1994--36.3%, 1993--31.2%, and
1992--30.0%.

PAGE 86
International Stock Fund

Investment or Brokerage Discretion

Decisions with respect to the purchase and sale of portfolio
securities on behalf of the Fund is made by Price-Fleming.
Price-Fleming is also responsible for implementing these
decisions, including the allocation of portfolio brokerage and
principal business and the negotiation of commissions.

How Brokers and Dealers are Selected

Equity Securities

In purchasing and selling the Fund's portfolio securities,
it is Price-Fleming's policy to obtain quality execution at the
most favorable prices through responsible broker-dealers and, in
the case of agency transactions, at competitive commission rates
where such rates are negotiable. However, under certain
conditions, the Fund may pay higher brokerage commissions in
return for brokerage and research services. In selecting broker-
dealers to execute the Fund's portfolio transactions,
consideration is given to such factors as the price of the
security, the rate of the commission, the size and difficulty of
the order, the reliability, integrity, financial condition,
general execution and operational capabilities of competing
brokers and dealers, their expertise in particular markets and
the brokerage and research services they provide to Price-Fleming
or the Fund. It is not the policy of Price-Fleming to seek the
lowest available commission rate where it is believed that a
broker or dealer charging a higher commission rate would offer
greater reliability or provide better price or execution.

Transactions on stock exchanges involve the payment of
brokerage commissions. In transactions on stock exchanges in the
United States, these commissions are negotiated. Traditionally,
commission rates have generally not been negotiated on stock
markets outside the United States. In recent years, however, an
increasing number of overseas stock markets have adopted a system
of negotiated rates, although a number of markets continue to be
subject to an established schedule of minimum commission rates.
It is expected that equity securities will ordinarily be
purchased in the primary markets, whether over-the-counter or
listed, and that listed securities may be purchased in the
over-the-counter market if such market is deemed the primary
market. In the case of securities traded on the over-the-counter
markets, there is generally no stated commission, but the price
usually includes an undisclosed commission or markup. In
underwritten offerings, the price includes a disclosed, fixed
commission or discount.

PAGE 87

Fixed Income Securities

For fixed income securities, it is expected that purchases
and sales will ordinarily be transacted with the issuer, or
issuer's underwriter, or with a primary market maker acting as
principal on a net basis, with no brokerage commission being paid
by the Fund. However, the price of the securities generally
includes compensation which is not disclosed separately.
Transactions placed though dealers who are serving as primary
market makers reflect the spread between the bid and asked
prices.

With respect to equity and fixed income securities, Price-
Fleming may effect principal transactions on behalf of the Fund
with a broker or dealer who furnishes brokerage and/or research
services, designate any such broker or dealer to receive selling
concessions, discounts or other allowances or otherwise deal with
any such broker or dealer in connection with the acquisition of
securities in underwritings. The prices the Fund pays to
underwriters of newly-issued securities usually include a
concession paid by the issuer to the underwriter. Price-Fleming
may receive research services in connection with brokerage
transactions, including designations in fixed price offerings.

Price-Fleming may cause the Fund to pay a broker-dealer who
furnishes brokerage and/or research services a commission for
executing a transaction that is in excess of the commission
another broker-dealer would have received for executing the
transaction if it is determined that such commission is
reasonable in relation to the value of the brokerage and/or
research services which have been provided. In some cases,
research services are generated by third parties but are provided
to Price-Fleming by or through broker-dealers.

Descriptions of Research Services Received from Brokers and
Dealers

Price-Fleming receives a wide range of research services
from brokers and dealers covering investment opportunities
throughout the world, including information on the economies,
industries, groups of securities, individual companies,
statistics, political developments, technical market action,
pricing and appraisal services, and performance analyses of all
the countries in which the Fund's portfolio is likely to be
invested. Price-Fleming cannot readily determine the extent to
which commissions charged by brokers reflect the value of their
research services, but brokers occasionally suggest a level of
business they would like to receive in return for the brokerage
and research services they provide. To the extent that research

PAGE 88
services of value are provided by brokers, Price-Fleming may be
relieved of expenses which it might otherwise bear. In some
cases, research services are generated by third parties but are
provided to Price-Fleming by or through brokers.

Commissions to Brokers who Furnish Research Services

Certain broker-dealers which provide quality execution
services also furnish research services to Price-Fleming. Price-
Fleming has adopted a brokerage allocation policy embodying the
concepts of Section 28(e) of the Securities Exchange Act of 1934,
which permits an investment adviser to cause its clients to pay a
broker which furnishes brokerage or research services a higher
commission than that which might be charged by another broker
which does not furnish brokerage or research services, or which
furnishes brokerage or research services deemed to be of lesser
value, if such commission is deemed reasonable in relation to the
brokerage and research services provided by the broker, viewed in
terms of either that particular transaction or the overall
responsibilities of the adviser with respect to the accounts as
to which it exercises investment discretion. Accordingly, Price-
Fleming may assess the reasonableness of commissions in light of
the total brokerage and research services provided by each
particular broker.

Miscellaneous

Research services furnished by brokers through which Price-
Fleming effects securities transactions may be used in servicing
all accounts managed by Price-Fleming, Conversely, research
services received from brokers which execute transactions for the
Fund will not necessarily be used by Price-Fleming exclusively in
connection with the management of the Fund.

Some of Price-Fleming's other clients have investment
objectives and programs similar to those of the Fund. Price-
Fleming may occasionally make recommendations to other clients
which result in their purchasing or selling securities
simultaneously with the Fund. As a result, the demand for
securities being purchased or the supply of securities being sold
may increase, and this could have an adverse effect on the price
of those securities. It is Price-Fleming's policy not to favor
one client over another in making recommendations or in placing
orders. Price-Fleming frequently follows the practice of
grouping orders of various clients for execution which generally
results in lower commission rates being attained. In certain
cases, where the aggregate order is executed in a series of
transactions at various prices on a given day, each participating
client's proportionate share of such order reflects the average
price paid or received with respect to the total order. Price-

PAGE 89
Fleming has established a general investment policy that it will
ordinarily not make additional purchases of a common stock of a
company for its clients (including the T. Rowe Price Funds) if,
as a result of such purchases, 10% or more of the outstanding
common stock of such company would be held by its clients in the
aggregate.

The Fund does not allocate business to any broker-dealer on
the basis of its sales of the Fund's shares. However, this does
not mean that broker-dealers who purchase Fund shares for their
clients will not receive business from the Fund.

Transactions with Related Brokers and Dealers

As provided in the Investment Management Agreement between
the Fund and Price-Fleming, Price-Fleming is responsible not only
for making decisions with respect to the purchase and sale of the
Fund's portfolio securities, but also for implementing these
decisions, including the negotiation of commissions and the
allocation of portfolio brokerage and principal business. It is
expected that Price-Fleming will often place orders for the
Fund's portfolio transactions with broker-dealers through the
trading desks of certain affiliates of Robert Fleming Holdings
Limited ("Robert Fleming"), an affiliate of Price-Fleming.
Robert Fleming, through Copthall Overseas Limited, a wholly-owned
subsidiary, owns 25% of the common stock of Price-Fleming. Fifty
percent of the common stock of Price-Fleming is owned by TRP
Finance, Inc., a wholly-owned subsidiary of T. Rowe Price, and
the remaining 25% is owned by Jardine Fleming Holdings Limited, a
subsidiary of Jardine Fleming Group Limited ("JFG"). JFG is 50%
owned by Robert Fleming and 50% owned by Jardine Matheson
Holdings Limited. The affiliates through whose trading desks
such orders may be placed include Fleming Investment Management
Limited ("FIM") and Robert Fleming & Co. Limited ("RF&Co."). FIM
and RF&Co. are wholly-owned subsidiaries of Robert Fleming.
These trading desks will operate under strict instructions from
the Fund's portfolio manager with respect to the terms of such
transactions. Neither Robert Fleming, JFG, nor their affiliates
will receive any commission, fee, or other remuneration for the
use of their trading desks, although orders for the Fund's
portfolio transactions may be placed with affiliates of Robert
Fleming and JFG who may receive a commission.

The Board of Directors of the Fund has authorized Price-
Fleming to utilize certain affiliates of Robert Fleming and JFG
in the capacity of broker in connection with the execution of
each Fund's portfolio transactions, provided that Price-Fleming
believes that doing so will result in an economic advantage (in
the form of lower execution costs or otherwise) being obtained
for each Fund. These affiliates include Jardine Fleming

PAGE 90
Securities Limited ("JFS"), a wholly-owned subsidiary of JFG,
RF&Co., Jardine Fleming Australia Securities Limited, and Robert
Fleming, Inc. (a New York brokerage firm).

The above-referenced authorization was made in accordance
with Section 17(e) of the Investment Company Act of 1940 (the
"1940 Act") and Rule 17e-1 thereunder which require the Fund's
independent directors to approve the procedures under which
brokerage allocation to affiliates is to be made and to monitor
such allocations on a continuing basis. Except with respect to
tender offers, it is not expected that any portion of the
commissions, fees, brokerage, or similar payments received by the
affiliates of Robert Fleming in such transactions will be
recaptured by the Fund. The directors have reviewed and from
time to time may continue to review whether other recapture
opportunities are legally permissible and available and, if they
appear to be, determine whether it would be advisable for the
Fund to seek to take advantage of them.

During the year 1994, the Fund paid JFS and RF&Co.
$1,608,031 and $145,770, respectively, in total brokerage
commissions in connection with their portfolio transactions. The
brokerage commissions paid to JFS and RF&Co. represented 9% and
2%, respectively, of the Fund's aggregate brokerage commissions
paid during 1994. The aggregate dollar amount of transactions
effected through JFS and RF&Co., involving the payment of
commissions, represented 18% and 1%, respectively, of the
aggregate dollar amount of all transactions involving the payment
of commissions during 1994. In accordance with the written
procedures adopted pursuant to Rule 17e-1, the independent
directors of the Fund reviewed the 1994 transactions with
affiliated brokers and determined that such transactions resulted
in an economic advantage to the Fund either in the form of lower
execution costs or otherwise.

Other

For the years 1994, 1993, and 1992, the total brokerage
commissions paid by the Fund, including the discounts received by
securities dealers in connection with underwritings, were
$9,684,485, $5,419,000, and $4,052,000, respectively. Of these
commissions, approximately 83%; 76%, and 85%, respectively, were
paid to firms which provided research, statistical, or other
services to Price-Fleming in connection with the management of
the Fund or, in some cases, to the Fund.

The portfolio turnover rate of the Fund for each of the last
three years has been as follows: 1994--22.9%, 1993--29.8%, and
1992--37.8%.

PAGE 91
PRICING OF SECURITIES

Prime Reserve Fund

Securities with more than 60 days remaining to maturity are
stated at fair value which is determined by using a matrix system
that establishes a value for each security based on money market
yields. Securities originally purchased with remaining
maturities of 60 days or less are valued at amortized cost. In
addition, securities purchased with maturities in excess of 60
days, but which currently have maturities of 60 days or less, are
valued at their amortized cost for the 60 days prior to maturity-
-such amortization being based on the fair value of the
securities on the 61st day prior to maturity.

Maintenance of Net Asset Value Per Share

It is the policy of the Fund to attempt to maintain a net
asset value of $1.00 per share by rounding to the nearest one
cent. This method of valuation is commonly referred to as "penny
rounding" and is permitted by Rule 2a-7 under the Investment
Company Act of 1940. Under Rule 2a-7:

(a) the Board of Directors of the Fund must undertake to
assure, to the extent reasonably practical taking into
account current market conditions affecting the Fund's
investment objectives, that the Fund's net asset value will
not deviate from $1.00 per share;

(b) the Fund must (i) maintain a dollar-weighted average
portfolio maturity appropriate to its objective of
maintaining a stable price per share, (ii) not purchase any
instrument with a remaining maturity greater than 397 days
(or in the case of U.S. government securities greater than
762 days), and (iii) maintain a dollar-weighted average
portfolio maturity of 90 days or less;

(c) the Fund must limit its purchase of portfolio
instruments, including repurchase agreements, to those U.S.
dollar-denominated instruments which the Fund's Board of
Directors determines present minimal credit risks, and which
are eligible securities as defined by Rule 2a-7; and

(d) the Board of Directors must determine that (i) it is in
the best interest of the Fund and its shareholders to
maintain a stable price per share under the penny rounding
method; and (ii) the Fund will continue to use the penny
rounding method only so long as the Board of Directors
believes that it fairly reflects the market based net asset
value per share.

PAGE 92
Although the Fund believes that it will be able to maintain
its net asset value at $1.00 per share under most conditions,
there can be no absolute assurance that it will be able to do so
on a continuous basis. If the Fund's net asset value per share
declined, or was expected to decline, below $1.00 (rounded to the
nearest one cent), the Board of Directors of the Fund might
temporarily reduce or suspend dividend payments in an effort to
maintain the net asset value at $1.00 per share. As a result of
such reduction or suspension of dividends, an investor would
receive less income during a given period than if such a
reduction or suspension had not taken place. Such action could
result in an investor receiving no dividend for the period during
which he holds his shares and in his receiving, upon redemption,
a price per share lower than that which he paid. On the other
hand, if the Fund's net asset value per share were to increase,
or were anticipated to increase above $1.00 (rounded to the
nearest one cent), the Board of Directors of the Fund might
supplement dividends in an effort to maintain the net asset value
at $1.00 per share.

Prime Money Market Securities Defined. Prime money market
securities are those which are described as First Tier Securities
under Rule 2a-7 of the Investment Company Act of 1940. These
include any security with a remaining maturity of 397 days or
less that is rated (or that has been issued by an issuer that is
rated with respect to a class of short-term debt obligations, or
any security within that class that is comparable in priority and
security with the security) by any two nationally recognized
statistical rating organizations (NRSROs) (or if only one NRSRO
has issued a rating, that NRSRO) in the highest rating category
for short-term debt obligations (within which there may be sub-
categories). First Tier Securities also include unrated
securities comparable in quality to rated securities, as
determined by T. Rowe Price under the supervision of the Fund's
Board of Directors.

New Income Fund

Fixed income securities are generally traded in the over-
the-counter market. Investments in domestic securities with
remaining maturities of one year or more and foreign securities
are stated at fair value using bid-side valuation as furnished by
dealers who make markets in such securities or by an independent
pricing service, which considers yield or price of bonds of
comparable quality, coupon, maturity, and type, as well as prices
quoted by dealers who make markets in such securities. Domestic
securities with remaining maturities less than one year are
stated at fair value which is determined by using a matrix system
that establishes a value for each security based on bid-side
money market yields.

PAGE 93
There are a number of pricing services available, and the
Board of Directors, on the basis of an ongoing evaluation of
these services, may use or may discontinue the use of any pricing
service in whole or in part.

New Income, Equity Income and International Stock Funds

Equity securities listed or regularly traded on a securities
exchange are valued at the last quoted sales price on the day the
valuations are made. A security which is listed or traded on
more than one exchange is valued at the quotation on the exchange
determined to be the primary market for such security. Listed
securities that are not traded on a particular day and securities
that are regularly traded in the over-the-counter market are
valued at the mean of the latest bid and asked prices. Other
equity securities are valued at a price within the limits of the
latest bid and asked prices deemed by the Board of
Directors/Trustees, or by persons delegated by the Board, best to
reflect fair value.

Debt securities are generally traded in the over-the-counter
market and are valued at a price deemed best to reflect fair
value as quoted by dealers who make markets in these securities
or by an independent pricing service. Short-term debt securities
are valued at their cost in local currency which, when combined
with accrued interest, approximates fair value.

All Funds

For purposes of determining the Fund's net asset value per
share, all assets and liabilities initially expressed in foreign
currencies are converted into U.S. dollars at the mean of the bid
and offer prices of such currencies against U.S. dollars quoted
by a major bank.

Assets and liabilities for which the above valuation
procedures are inappropriate or are deemed not to reflect fair
value are stated at fair value as determined in good faith by or
under the supervision of the officers of the Fund, as authorized
by the Board of Directors/Trustees.

International Stock Fund

Trading in the portfolio securities of the International
Stock Fund may take place in various foreign markets on certain
days (such as Saturday) when the Fund is not open for business
and does not calculate its net asset value. In addition, trading
in the Fund's portfolio securities may not occur on days when the
Fund is open. The calculation of the Fund's net asset value
normally will not take place contemporaneously with the

PAGE 94
determination of the value of the Fund's portfolio securities.
Events affecting the values of portfolio securities that occur
between the time their prices are determined and the time the
Fund's net asset value is calculated will not be reflected in the
Fund's net asset value unless Price-Fleming, under the
supervision of the Fund's Board of Directors, determines that the
particular event should be taken into account in computing the
Fund's net asset value.

All Funds

NET ASSET VALUE PER SHARE

The purchase and redemption price of each Fund's shares is
equal to the Fund's net asset value per share or share price.
Each Fund determines its net asset value per share by subtracting
the Fund's liabilities (including accrued expenses and dividends
payable) from its total assets (the market value of the
securities the Fund holds plus cash and other assets, including
income accrued but not yet received) and dividing the result by
the total number of shares outstanding. The net asset value per
share of each Fund is calculated as of the close of trading on
the New York Stock Exchange ("NYSE") every day the NYSE is open
for trading. The net asset value of the Prime Reserve Fund is
also calculated as of 12:00 noon (Eastern time) every day the
NYSE is open for trading. The NYSE is closed on the following
days: New Year's Day, Washington's Birthday, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day, and
Christmas Day.

Determination of the net asset value (and the offering, sale
redemption and repurchase of shares) for a Fund may be suspended
at times (a) during which the NYSE is closed, other than
customary weekend and holiday closings, (b) during which trading
on the NYSE is restricted (c) during which an emergency exists as
a result of which disposal by a Fund of securities owned by it is
not reasonably practicable or it is not reasonably practicable
for a Fund fairly to determine the value of its net assets, or
(d) during which a governmental body having jurisdiction over a
Fund may by order permit such a suspension for the protection of
a Fund's shareholders; provided that applicable rules and
regulations of the Securities and Exchange Commission (or any
succeeding governmental authority) shall govern as to whether the
conditions prescribed in (b), (c) or (d) exist.

DIVIDENDS

Unless you elect otherwise, the Funds' dividends and, with
respect to the Equity Income and International Stock Funds,

PAGE 95
capital gain distributions, if any, and the Equity Income Fund's
final quarterly dividend, will be invested on the reinvestment
date using the NAV per share of that date. The reinvestment date
normally precedes the payment date by about 10 days although the
exact timing is subject to change.

TAX STATUS

Each Fund intends to qualify as a "regulated investment
company" under Subchapter M of the Internal Revenue Code of 1986,
as amended ("Code").

A portion of the dividends paid by the Prime Reserve, New
Income and Equity Income Funds may be eligible for the dividends-
received deduction for corporate shareholders. Dividends and
distributions paid by the Fund are not eligible for the
dividends-received deduction for corporate shareholders, if as
expected, none of the Fund's income consists of dividends paid by
United States corporations. Capital gain distributions paid from
the Fund are never eligible for this deduction.

For tax purposes, it does not make any difference whether
dividends and capital gain distributions are paid in cash or in
additional shares. Each Fund must declare dividends by December
31 of each year equal to at least 98% of ordinary income (as of
December 31) and capital gains (as of October 31) in order to
avoid a federal excise tax and distribute within 12 months 100%
of ordinary income and capital gains as of its tax year-end to
avoid federal income tax.

Foreign currency gains and losses, including the portion of
gain or loss on the sale of debt securities attributable to
foreign exchange rate fluctuations are taxable as ordinary
income. If the net effect of these transactions is a gain, the
ordinary income dividend paid by the International Stock Fund
will be increased; if the result is a loss, a portion of its
ordinary income dividend may be classified as a return of
capital. Adjustments, to reflect these gains and losses will be
made at the end of the Fund's taxable year.

At the time of your purchase, each Fund's net asset value
may reflect undistributed income, with respect to the Equity
Income and International Stock Funds, undistributed capital gains
or net unrealized appreciation of securities held by the Fund. A
subsequent distribution to you of such amounts, although
constituting a return of your investment, would be taxable either
as dividends or capital gain distributions. For federal income
tax purposes, each Fund is permitted to carry forward its net
realized capital losses, if any, for eight years and realize net

PAGE 96
capital gains up to the amount of such losses without being
required to pay taxes on, or distribute such gains. On May 31,
1995, the books of the Prime Reserve Fund indicated that the
Fund's aggregate net assets included undistributed net income of
$1,764,968, net realized capital gains of $613,219 and unrealized
appreciation of $2,004,740. On May 31, 1995, the books of the
New Income Fund indicated that the Fund's aggregate net assets
included undistributed net income of $2,666,066, net realized
capital losses of $11,115,122 and unrealized appreciation of
$68,296,084. On March 31, 1994, the books of the Equity Income
Fund indicated that the Fund's aggregate net assets included
undistributed net investment income of $1,175,502, net realized
capital gains of $56,048,432, and unrealized appreciation of
$338,468,435. On October 31, 1994, the books of the
International Stock Fund indicated that the Fund's aggregate net
assets included undistributed net income of $54,550,000, net
realized capital losses of $302,445,000 and unrealized
appreciation of $806,617,000.

If, in any taxable year, a Fund should not qualify as a
regulated investment company under the Code: (i) the Fund would
be taxed at normal corporate rates on the entire amount of its
taxable income without deduction for dividends or other
distributions to shareholders; (ii) the Fund's distributions to
the extent made out of the Fund's current or accumulated earnings
and profits would be taxable to shareholders as ordinary
dividends (regardless of whether they would otherwise have been
considered capital gain dividends), and with respect to the
International Stock Fund, may qualify for the 70% deduction for
dividends received by corporation; and (iii) foreign tax credits
would not "pass through" to International Stock Fund
shareholders.

To the extent the Fund invests in foreign securities, the
following would apply:

Passive Foreign Investment Companies

The Fund may purchase the securities of certain foreign
investment funds or trusts called passive foreign investment
companies. Capital gains on the sale of such holdings will be
deemed to be ordinary income regardless of how long the Fund
holds its investment. In addition to bearing their proportionate
share of the fund's expenses (management fees and operating
expenses) shareholders will also indirectly bear similar expenses
of such funds. In addition, the Fund may be subject to corporate
income tax and an interest charge on certain dividends and
capital gains earned from these investments, regardless of
whether such income and gains are distributed to shareholders.

PAGE 97
To avoid such tax and interest, the Funds in accordance
with tax regulations, intend to treat these securities as sold on
the last day of the Fund's fiscal year and recognize any gains
for tax purposes at that time; losses will not be recognized.
Such gains will be considered ordinary income which the Fund will
be required to distribute even though it has not sold the
security and received cash to pay such distributions.

Foreign Currency Gains and Losses

Foreign currency gains and losses, including the portion of
gain or loss on the sale of debt securities attributable to
foreign exchange rate fluctuations, are taxable as ordinary
income. If the net effect of these transactions is a gain, the
dividend paid by a Fund will be increased. If the result is a
loss, the income dividend paid by the Fund will be decreased, to
the extent such dividend has already been paid, it may be
reclassified as a return of capital. Adjustments to reflect
these gains and losses will be made at the end of each Fund's
taxable year.

Taxation of Foreign Shareholders--Equity Income and International
Stock Funds

The Code provides that dividends from net income (which are
deemed to include for this purpose each shareholder's pro rata
share of foreign taxes paid by the International Stock Fund--see
discussion of "pass through" of the foreign tax credit to U.S.
shareholders) will be subject to U.S. tax. For shareholders who
are not engaged in a business in the U.S., this tax would be
imposed at the rate of 30% upon the gross amount of the dividends
in the absence of a Tax Treaty providing for a reduced rate or
exemption from U.S. taxation. Distributions of net long-term
capital gains realized each Fund are not subject to tax unless
the foreign shareholder is a nonresident alien individual who was
physically present in the U.S. during the tax year for more than
182 days.

International Stock Fund

Income received by the Fund from sources within various
foreign countries will be subject to foreign income taxes
withheld at the source. Under the Code, if more than 50% of the
value of the Fund's total assets at the close of its taxable year
comprise securities issued by foreign corporations or
governments, the Fund may file an election with the Internal
Revenue Service to "pass through" to the Fund's shareholders the
amount of foreign income taxes paid by the Fund. Pursuant to
this election, shareholders will be required to: (i) include in

PAGE 98
gross income, even though not actually received, their respective
pro rata share of foreign taxes paid by the Fund; (ii) treat
their pro rata share of foreign taxes as paid by them; and
(iii) either deduct their pro rata share of foreign taxes in
computing their taxable income, or use it as a foreign tax credit
against U.S. income taxes (but not both). No deduction for
foreign taxes may be claimed by a shareholder who does not
itemize deductions.

The Fund intends to meet the requirements of the Code to
"pass through" to its shareholders foreign income taxes paid, but
there can be no assurance that the Fund will be able to do so.
Each shareholder will be notified within 60 days after the close
of each taxable year of the Fund, if the Fund will "pass through"
foreign taxes paid for that year, and, if so, the amount of each
shareholder's pro rata share (by country) of (i) the foreign
taxes paid, and (ii) the Fund's gross income from foreign
sources. Of course, shareholders who are not liable for federal
income taxes, such as retirement plans qualified under Section
401 of the Code, will not be affected by any such "pass through"
of foreign tax credits.

YIELD INFORMATION

Prime Reserve Fund

The Prime Reserve Fund's current and historical yield for a
period is calculated by dividing the net change in value of an
account (including all dividends accrued and dividends reinvested
in additional shares) by the account value at the beginning of
the period to obtain the base period return. This base period
return is divided by the number of days in the period then
multiplied by 365 to arrive at the annualized yield for that
period. The Fund's annualized compound yield for such period is
compounded by dividing the base period return by the number of
days in the period, and compounding that figure over 365 days.

The seven-day yield ending May 31, 1995 for the Fund was
5.47% and the Fund's compound yield for the same period was
5.62%.

New Income Fund

From time to time, the New income Fund may advertise a yield
figure calculated in the following manner:

An income factor is calculated for each security in the
portfolio based upon the security's market value at the beginning
of the period and yield as determined in conformity with

PAGE 99
regulation of the Securities and Exchange Commission. The income
factors are then totalled for all securities in the portfolio.
Next, expenses of the Fund for the period net of expected
reimbursement are deducted from the income to arrive at net
income, which is then converted to a per-share amount by dividing
net income by the average number of shares outstanding during the
period. The net income per share is divided by the net asset
value on the last day of the period to produce a monthly yield
which is then annualized. Quoted yield factors are for
comparison purposes only, and are not intended to indicate future
performance or forecast the dividend per share of the Fund.

The yield of the Fund calculated under the above described
method for the month ended May 31, 1995 was 6.53%.

INVESTMENT PERFORMANCE

Total Return Performance--New Income, Equity Income and
International Stock Funds

Each Fund's calculation of total return performance includes
the reinvestment of all capital gain distributions and income
dividends for the period or periods indicated, without regard to
tax consequences to a shareholder in the Fund. Total return is
calculated as the percentage change between the beginning value
of a static account in each Fund and the ending value of that
account measured by the then current net asset value, including
all shares acquired through reinvestment of income and capital
gains dividends. The results shown are historical and should not
be considered indicative of the future performance of a Fund.
Each average annual compound rate of return is derived from the
cumulative performance of each Fund over the time period
specified. The annual compound rate of return for each Fund over
any other period of time will vary from the average.

Cumulative Performance Percentage Change

1 Yr. 5 Yrs. 10 Yrs. Since
Ended Ended Ended Inception-
5/31/95 5/31/95 5/31/95 5/31/95

New Income Fund

T. Rowe Price New
Income Fund 11.13% 54.75% 139.69% 563.52%
(8/31/73)
Salomon Bros. Broad
Investment Grade Index 11.52 59.07 162.24 N/A

PAGE 100
Salomon Bros. High Grade
Corporate Bond Index 15.79 72.73 205.69 672.74
Lehman Bros. Govt./Corp.
Bond Index 11.61 59.48 158.85 626.52
Lipper Corporate Bond Fund's
-A Rated Average 10.67 56.68 148.15 562.22

Average Annual Compound Rates of Return

1 Yr. 5 Yrs. 10 Yrs. Since
Ended Ended Ended Inception-
5/31/95 5/31/95 5/31/95 5/31/95

T. Rowe Price
New Income Fund 11.13% 9.13% 9.14% 9.09%
(8/31/73)
Salomon Bros. Broad
Investment Grade Index 11.52 9.73 10.12 N/A
Salomon Bros. High Grade
Corporate Bond Index 15.79 11.55 11.82 9.86
Lehman Bros. Govt./Corp.
Bond Index 11.61 9.79 9.98 9.55
Lipper Corporate Bond Fund's
-A Rated Average 10.67 9.38 9.49 9.05

Equity Income Fund

Cumulative Performance Percentage Change

Since
1 Year 5 Years 10 Years Inception
Ended Ended Ended 10/31/85 to
12/31/94 12/31/94 12/31/94 12/31/94
________ _________ ________ ___________

Equity Income Fund 4.53% 59.99% N/A 235.30%
S&P 500 1.32% 51.74% 281.99%
Dow Jones Industrial
Average 4.98% 63.03% 349.26%
Lipper Equity Income
Fund Average -2.54% 42.48% 197.76% 160.18%
CPI 2.95% 19.03% 42.55%

PAGE 101
Average Annual Compound Rates of Return

Since
1 Year 5 Years 10 Years Inception
Ended Ended Ended 10/31/85 to
12/31/94 12/31/94 12/31/94 12/31/94
________ ________ ________ __________

Equity Income Fund 4.53% 9.85% N/A 14.11%
S&P 500 1.32% 8.70% 14.34%
Dow Jones Industrial
Average 4.98% 10.27% 16.21%
Lipper Equity Income
Fund Average -2.54% 7.23% 11.21% 10.69%
CPI 2.95% 3.55% 3.61%

The Lipper Equity Income Fund Average is the average
performance of 40 equity income funds reported by Lipper
Analytical Service.

International Stock Fund

Cumulative Performance Percentage Change

Since
1 Year 5 Years 10 Years Inception
Ended Ended Ended 5/9/80 to
12/31/94+ 12/31/94 12/31/94 12/31/94++
_________ ________ __________ __________

International
Stock Fund -0.76% 41.69% 423.20% 672.93%
S&P 500 1.32 51.74 281.99 603.09+++
Dow Jones Industrial
Average 4.98 63.03 349.26 704.86+++
Lipper International
Funds Average -0.71 31.13 328.06 482.54
EAFE Index 8.06 9.42 418.72 648.22+++
CPI 2.95 19.03 42.55 81.50
Financial Times
Actuaries World
Index++++ 5.83 22.17 N/A N/A

PAGE 102
Average Annual Compound Rates of Return

Since
1 Year 5 Years 10 Years Inception
Ended Ended Ended 5/9/80 to
12/31/94+ 12/31/94 12/31/94 12/31/94++
________ _______ __________ __________

International Stock
Fund -0.76% 7.22% 18.00% 14.98%
S&P 500 1.32 8.70 14.34 14.39+++
Dow Jones Industrial
Average 4.98 10.27 16.21 15.46+++
Lipper International
Funds Average -0.71 5.35 15.24 12.60+++
EAFE Index 8.06 1.82 17.89 14.88+++
CPI 2.95 3.55 3.61 4.20+++
Financial Times
Actuaries World
Index++++ 5.83 4.09 N/A N/A

+ If you invested $1,000 at the beginning of 1994, the total
return on December 31, 1994 would be $992.40 ($1,000 x
0.9924).
++ Assumes purchase of one share of International Stock Fund
at the public offering price of $5.00 on May 9, 1980. Over
this time, stock prices in general have risen.
+++ 06/30/80 - 12/31/94
++++ The inception date of this index is 12/31/85.

Price-Fleming believes that foreign economies have performed
well, and emerging economies are significantly better than the
world average, as shown in the chart below.

GDP Growth Rates
________________

Average
1976-85 1986 1987 1988 1989 1990 1991 1992 1993
_______ ____ ____ ____ ____ ____ ____ ____ ____

World 3.4 3.6 4.0 4.7 3.4 2.2 0.9 1.7 2.3
Industrialized 2.8 2.9 3.2 4.4 3.3 2.4 0.8 1.5 1.3
Developing (Asia)6.4 6.7 8.0 9.2 5.7 5.8 6.2 8.2 8.5

Source: World Economic Outlook, IMF, October 1994

PAGE 103
Outside Sources of Information

Prime Reserve and New Income Funds

From time to time, in reports and promotional literature,
one or more of the T. Rowe Price funds, including this Fund, may
compare its performance to Overnight Government Repurchase
Agreements, Treasury bills, notes, and bonds, certificates of
deposit, and six-month money market certificates. Bank
certificates of deposit differ from mutual funds in several ways:
the interest rate established by the sponsoring bank is fixed for
the term of a CD; there are penalties for early withdrawal from
CDs; and the principal on a CD is insured. Performance may also
be compared to (1) indices of broad groups of managed or
unmanaged securities considered to be representative of or
similar to Fund portfolio holdings; such as: Lipper Analytical
Services, Inc., "Lipper-Fixed Income Fund Performance Analysis"
is a monthly publication which tracks net assets, total return,
principal return and yield on approximately 950 fixed income
mutual funds offered in the United States; Morningstar, Inc., is
a widely used independent research firm which rates mutual funds
by overall performance, investment objectives and assets.; (2)
other mutual funds; or (3) other measures of performance set
forth in publications such as:

Advertising News Service, Inc., "Bank Rate Monitor+ - The
Weekly Financial Rate Reporter" is a weekly publication
which lists the yields on various money market instruments
offered to the public by 100 leading banks and thrift
institutions in the U.S., including loan rates offered by
these banks. Bank certificates of deposit differ from
mutual funds in several ways: the interest rate established
by the sponsoring bank is fixed for the term of a CD; there
are penalties for early withdrawal from CDs; and the
principal on a CD is insured.

IBC/Donoghue Organization, Inc., "IBC/Donoghue's Money
Fund Report" is a weekly publication which tracks net
assets, yield, maturity and portfolio holdings on
approximately 380 money market mutual funds offered in the
U.S. These funds are broken down into various categories
such as U.S. Treasury, Domestic Prime and Euros, Domestic
Prime and Euros and Yankees, and Aggressive.

First Boston High Yield Index. It shows statistics on the
Composite Index and analytical data on new issues in the
marketplace and low-grade issuers.

PAGE 104
Lipper Analytical Services, Inc., "Lipper-Fixed Income Fund
Performance Analysis" is a monthly publication which tracks
net assets, total return, principal return and yield on over
1900 fixed income mutual funds offered in the United States.

Merrill Lynch, Pierce, Fenner & Smith, Inc., "Taxable Bond
Indices" is a monthly publication which lists principal,
coupon and total return on over 100 different taxable bond
indices tracked by Merrill Lynch, together with the par
weighted characteristics of each Index. The index used as a
benchmark for the High Yield Fund is the High Yield Index.
The two indices used as benchmarks for the Short-Term Bond
Fund are the 91-Day Treasury Bill Index and the 1-2.99 Year
Treasury Note Index.

Morningstar, Inc. - is a widely used independent research
firm which rates mutual funds by overall performance,
investment objectives, and assets.

Salomon Brothers Inc., "Analytical Record of Yields and
Yield Spreads" is a publication which tracks historical
yields and yield spreads on short-term market rates, public
obligations of the U.S. Treasury and agencies of the U.S.
Government, public corporate debt obligations, municipal
debt obligations and preferred stocks.

Salomon Brothers Inc., "Bond Market Round-up" is a weekly
publication which tracks the yields and yield spreads on a
large, but select, group of money market instruments, public
corporate debt obligations, and public obligations of the
U.S. Treasury and agencies of the U.S. Government.

Salomon Brothers Inc., "High Yield Composite Index" is an
index which provides performance and statistics for the high
yield market place.

Salomon Brothers Inc., "Market Performance" - a monthly
publication which tracks principal return, total return and
yield on the Salomon Brothers Broad investment - Grade Bond
Index and the components of the Index.

Shearson Lehman Brothers, Inc., "The Bond Market Report" - a
monthly publication which tracks principal, coupon and total
return on the Shearson Lehman Govt./Corp.Index and Shearson
Lehman Aggregate Bond Index, as well as all the components
of these Indices.

PAGE 105
Telerate Systems, Inc. is a market data distribution network
which tracks a broad range of financial markets including,
the daily rates on money market instruments, public
corporate debt obligations and public obligations of the
U.S. Treasury and agencies of the U.S. Government.

Wall Street Journal, is a national daily financial news
publication which lists the yields and current market values
on money market instruments, public corporate debt
obligations, public obligations of the U.S. Treasury and
agencies of the U.S. government as well as common stocks,
preferred stocks, convertible preferred stocks, options and
commodities.

Indices prepared by the research departments of such
financial organizations as Shearson Lehman/American Express
Inc., and Merrill Lynch, Pierce, Fenner and Smith, Inc.,
including information provided by the Federal Reserve
Board.

Performance rankings and ratings reported periodically in
national financial publications such as MONEY, FORBES, BUSINESS
WEEK, BARRON'S, etc. will also be used.

Equity Income and International Stock Funds

From time to time, in reports and promotional literature:
(1) each Fund's total return performance or P/E ratio may be
compared to any one or combination of the following: (i) the
Standard & Poor's 500 Stock Index and Dow Jones Industrial
Average so that you may compare a Fund's results with those of a
group of unmanaged securities widely regarded by investors as
representative of the U.S. stock market in general; (ii) other
groups of mutual funds, including T. Rowe Price Funds, tracked
by: (A) Lipper Analytical Services, a widely used independent
research firm which ranks mutual funds by overall performance,
investment objectives, and assets; (B) Morningstar, Inc., another
widely used independent research firm which ranks mutual funds;
or (C) other financial or business publications, such as Business
Week, Money Magazine, Forbes and Barron's, which provide similar
information; (iii) indices of stocks comparable to those in which
the Equity Income Fund invests; with respect to the International
Stock Fund (iv) The Financial Times (a London based international
financial newspaper)-Actuaries World Indices, including Europe
and sub indices comprising this Index (a wide range of
comprehensive measures of stock price performance for the major
stock markets as well as for regional areas, broad economic
sectors and industry groups); (v) Morgan Stanley Capital
International Indices, including the EAFE Index, Pacific Basin

PAGE 106
Index, Japan Index and Pacific Ex Japan Index which is a widely-
recognized series of indices in international market performance;
(vi) Baring International Investment Management Limited (an
international securities trading, research, and investment
management firm), as a source for market capitalization, GDP and
GNP; (vii) the International Finance Corporation (an affiliate of
the World Bank established to encourage economic development in
less developed countries), World Bank, OECD (Organization for
Economic Co-Operation and Development) and IMF (International
Monetary Fund) as a source of economic statistics; (viii) the
Nikkei Average, a generally accepted benchmark for performance of
the Japanese stock market; (ix) indices of stocks comparable to
those in which the International Stock Fund invests including the
Topix Index, which reflects the performance of the First Section
of the Tokyo Stock Exchange; and (x) the performance of U.S.
government and corporate bonds, notes and bills. (The purpose of
these comparisons would be to illustrate historical trends in
different market sectors so as to allow potential investors to
compare different investment strategies.); (2) the Consumer Price
Index (measure for inflation) may be used to assess the real rate
of return from an investment in each Fund; (3) other U.S. or
foreign government statistics such as GNP, and net import and
export figures derived from governmental publications, e.g. The
Survey of Current Business, may be used to illustrate investment
attributes of a Fund or the general economic, business,
investment, or financial environment in which a Fund operates;
(4) the effect of tax-deferred compounding on each Fund's
investment returns, or on returns in general, may be illustrated
by graphs, charts, etc. where such graphs or charts would
compare, at various points in time, the return from an investment
in each Fund (or returns in general) on a tax-deferred basis
(assuming reinvestment of capital gains and dividends and
assuming one or more tax rates) with the return on a taxable
basis; and (5) the sectors or industries in which each Fund
invests may be compared to relevant indices or surveys (e.g. S&P
Industry Surveys) in order to evaluate each Fund's historical
performance or current or potential value with respect to
the particular industry or sector. In connection with (4) above,
information derived from the following chart may be used:

PAGE 107
IRA Versus Taxable Return

Assuming 9% annual rate of return, $2,000 annual
contribution and 28% tax bracket.

Year Taxable Tax Deferred
____ _______ ____________

10 $ 28,700 $ 33,100
15 51,400 64,000
20 82,500 111,500
25 125,100 184,600
30 183,300 297,200

All Funds

IRAs

An IRA is a long-term investment whose objective is to
accumulate personal savings for retirement. Due to the long-term
nature of the investment, even slight differences in performance
will result in significantly different assets at retirement.
Mutual funds, with their diversity of choice, can be used for IRA
investments. Generally, individuals may need to adjust their
underlying IRA investments as their time to retirement and
tolerance for risk changes.

Other Features and Benefits-All Funds

The Fund is a member of the T. Rowe Price Family of
Funds and may help investors achieve various long-term investment
goals, such as investing money for retirement, saving for a down
payment on a home, or paying college costs. To explain how the
Fund could be used to assist investors in planning for these
goals and to illustrate basic principles of investing, various
worksheets and guides prepared by T. Rowe Price Associates, Inc.
and/or T. Rowe Price Investment Services, Inc. may be made
available. These currently include: the Asset Mix Worksheet
which is designed to show shareholders how to reduce their
investment risk by developing a diversified investment plan; the
College Planning Guide which discusses various aspects of
financial planning to meet college expenses and assists parents
in projecting the costs of a college education for their
children; the Retirement Planning Kit (also available in a PC
version) includes a detailed workbook to determine how much money
you may need for retirement and suggests how you might invest to
achieve your objectives; and the Retirees Financial Guide which
includes a detailed workbook to determine how much money you can
afford to spend and still preserve your purchasing power and

PAGE 108
suggests how you might invest to reach your goal. Tax
Considerations for Investors discusses the tax advantages of
annuities and municipal bonds and how to assess whether they are
suitable for your portfolio, reviews pros and cons of placing
assets in a gift to minors account and summarizes the benefits
and types of tax-deferred retirement plans currently available.
Personal Strategy Planner simplifies investment decision making
by helping investors define personal financial goals, establish
length of time the investor intends to invest, determine risk
"comfort zone" and select diversified investment mix; and the How
to Choose a Bond Fund guide which discusses how to choose an
appropriate bond fund for your portfolio. From time to time,
other worksheets and guides may be made available as well. Of
course, an investment in the Fund cannot guarantee that such
goals will be met.

To assist investors in understanding the different returns
and risk characteristics of various investments, the
aforementioned guides will include presentation of historical
returns of various investments using published indices. An
example of this is shown on the next page.

Historical Returns for Different Investments

Annualized returns for periods ended 12/31/94

50 years 20 years 10 years 5 years

Small-Company Stocks 14.4% 20.3% 11.1% 11.8%

Large-Company Stocks 11.9 14.6 14.4 8.7

Foreign Stocks N/A 16.3 17.9 1.8

Long-Term Corporate Bonds 5.3 10.0 11.6 8.4

Intermediate-Term U.S.
Gov't. Bonds 5.6 9.3 9.4 7.5

Treasury Bills 4.7 7.3 5.8 4.7

U.S. Inflation 4.5 5.5 3.6 3.5

Sources: Ibbotson Associates, Morgan Stanley. Foreign stocks
reflect performance of The Morgan Stanley Capital International
EAFE Index, which includes some 1,000 companies representing the
stock markets of Europe, Australia, New Zealand, and the Far
East. This chart is for illustrative purposes only and should
not be considered as performance for, or the annualized return

PAGE 109
of, any T. Rowe Price Fund. Past performance does not guarantee
future results.

Also included will be various portfolios demonstrating how these
historical indices would have performed in various combinations
over a specified time period in terms of return. An example of
this is shown below.

Performance of Retirement Portfolios*

Asset Mix Average Annualized Value
Returns 20 Years of
Ended 12/31/94 $10,000
Investment
After Period
________________ __________________ ____________

Nominal Real BestWorst
Portfolio Growth IncomeSafety ReturnReturn** YearYear

I. Low
Risk 40% 40% 20% 12.4% 6.9% 24.9% 0.1% $ 92,515

II. Moderate
Risk 60% 30% 10% 13.5% 8.1% 29.1% -1.8%$118,217

III. High
Risk 80% 20% 0% 14.5% 9.1% 33.4% -5.2%$149,200

Source: T. Rowe Price Associates; data supplied by Lehman
Brothers, Wilshire Associates, and Ibbotson Associates.

* Based on actual performance for the 20 years ended 1993 of
stocks (85% Wilshire 5000 and 15% Europe, Australia, Far
East [EAFE] Index), bonds (Lehman Brothers Aggregate Bond
Index from 1976-94 and Lehman Brothers Government/Corporate
Bond Index from 1975), and 30-day Treasury bills from
January 1975 through December 1994. Past performance does
not guarantee future results. Figures include changes in
principal value and reinvested dividends and assume the same
asset mix is maintained each year. This exhibit is for
illustrative purposes only and is not representative of the
performance of any T. Rowe Price fund.
** Based on inflation rate of 5.5% for the 20-year period ended
12/31/94.

PAGE 110
Insights

From time to time, Insights, a T. Rowe Price publication of
reports on specific investment topics and strategies, may be
included in the Fund's fulfillment kit. Such reports may include
information concerning: calculating taxable gains and losses on
mutual fund transactions, coping with stock market volatility,
benefiting from dollar cost averaging, understanding
international markets, investing in high-yield "junk" bonds,
growth stock investing, conservative stock investing, value
investing, investing in small companies, tax-free investing,
fixed income investing, investing in mortgage-backed securities,
as well as other topics and strategies.

Other Publications

From time to time, in newsletters and other publications
issued by T. Rowe Price Investment Services, Inc., reference may
be made to economic, financial and political developments in the
U.S. and abroad and their effect on securities prices. Such
discussions may take the form of commentary on these developments
by T. Rowe Price mutual fund portfolio managers and their views
and analysis on how such developments could affect investments in
mutual funds.

Redemptions in Kind

In the unlikely event a shareholder of the Fund were to
receive an in kind redemption of portfolio securities of the
Fund, brokerage fees could be incurred by the shareholder in
subsequent sale of such securities.

Issuance of Fund Shares for Securities

Transactions involving issuance of Fund shares for
securities or assets other than cash will be limited to (1) bona
fide reorganizations; (2) statutory mergers; or (3) other
acquisitions of portfolio securities that: (a) meet the
investment objective and policies of the Fund; (b) are acquired
for investment and not for resale except in accordance with
applicable law; (c) have a value that is readily ascertainable
via listing on or trading in a recognized United States or
international exchange or market; and (d) are not illiquid.

PAGE 111
ORGANIZATION OF THE FUNDS

Prime Reserve, New Income and International Stock Funds

T. Rowe Price International Funds, Inc. (the "Corporation")
was originally organized in 1979 as a Maryland corporation under
the name T. Rowe Price International Fund, Inc. ("the Old
Corporation"). Pursuant to the Annual Meeting of Shareholders
held on April 22, 1986, an Agreement and Plan of Reorganization
and Liquidation was adopted in order to convert the Old
Corporation from a Maryland corporation to a Massachusetts
Business Trust, named the T. Rowe Price International Trust ("the
Trust"). This conversion became effective on May 1, 1986.
Pursuant to the Annual Meeting of Shareholders held on April 19,
1990, an Agreement and Plan of Reorganization and Liquidation was
adopted in order to convert the Trust from a Massachusetts
Business Trust to a Maryland corporation. This conversion become
effective May 1, 1990. The Corporation is registered with the
Securities and Exchange Commission under the 1940 Act as a
diversified, open-end investment company, commonly known as a
"mutual fund."

Currently, the Corporation consists of eleven series, each
of which represents a separate class of the Corporation's shares
and has different objectives and investment policies. The
International Bond Fund was added as a separate series of the
Trust in 1986, and the designation of the existing series of the
Trust was, at that time, changed to the International Stock Fund.
In 1988 and 1990, respectively, the International Discovery and
European Stock Funds were added as separate series of the Trust.
Effective May 1, 1990, all series of the Trust became series of
the Corporation. In the same year, after the May 1, 1990
reorganization, the New Asia and Global Government Bond Funds
were added as separate series of the Corporation. The Japan,
Short-Term Global Income, Latin America, Emerging Markets Bond
and Emerging Markets Stock Funds were added as separate series of
the Corporation in 1991, 1992, 1993, 1994, and 1995,
respectively. The Charter also provides that the Board of
Directors may issue additional series of shares.

Each Fund's Charter authorizes the Board of Directors to
classify and reclassify any and all shares which are then
unissued, including unissued shares of capital stock into any
number of classes, each class consisting of such number of shares
and having such designations, such powers, preferences, rights,
qualifications, limitations and restrictions, as shall be
determined by the Board subject to the Investment Company Act and
other applicable law, and provided that the authorized shares of
any class shall not be decreased below the number then
outstanding and the authorized shares of all classes shall not

PAGE 112
exceed 15,000,000,000 for the Prime Reserve Fund and
1,000,000,000 for the New Income Fund. The shares of any such
additional classes might therefore differ from the shares of the
present class of capital stock and from each other as to
preferences, conversion or other rights, voting powers,
restrictions, limitations as to dividends, qualifications or
terms or conditions of redemption, subject to applicable law, and
might thus be superior or inferior to the capital stock or to
other classes in various characteristics. Each Fund's Board of
Directors may increase or decrease the aggregate number of shares
of stock or the number of shares of stock of any class or series
authorized to be issued without shareholder approval.

Except to the extent that the Prime Reserve and New Income
Fund's Board of Directors might provide by resolution that
holders of shares of a particular class are entitled to vote as a
class on specified matters presented for a vote of the holders of
all shares entitled to vote on such matters, there would be no
right of class vote unless and to the extent that such a right
might be construed to exist under Maryland law. The Charter
contains no provision entitling the holders of the present class
of capital stock to a vote as a class on any matter.
Accordingly, the preferences, rights, and other characteristics
attaching to any class of shares, including the present class of
capital stock, might be altered or eliminated, or the class might
be combined with another class or classes, by action approved by
the vote of the holders of a majority of all the shares of all
classes entitled to be voted on the proposal, without any
additional right of vote as a class by the holders of the capital
stock or of another affected class or classes.

Each share of each series of the International Fund has
equal voting rights with every other share of every other series,
and all shares of all series vote as a single group except where
a separate vote of any class or series is required by the 1940
Act, the laws of the State of Maryland, the Corporation's
Articles of Incorporation, the By-Laws of the Corporation, or as
the Board of Directors may determine in its sole discretion.
Where a separate vote is required with respect to one or more
classes or series, then the shares of all other classes or series
vote as a single class or series, provided that, as to any matter
which does not affect the interest of a particular class or
series, only the holders of shares of the one or more affected
classes or series is entitled to vote. The preferences, rights,
and other characteristics attaching to any series of shares,
including the present series of capital stock, might be altered
or eliminated, or the series might be combined with another
series, by action approved by the vote of the holders of a
majority of all the shares of all series entitled to be voted on

PAGE 113
the proposal, without any additional right to vote as a series by
the holders of the capital stock or of another affected series.

Shareholders are entitled to one vote for each full share
held (and fractional votes for fractional shares held) and will
vote in the election of or removal of directors (to the extent
hereinafter provided) and on other matters submitted to the vote
of shareholders. There will normally be no meetings of
shareholders for the purpose of electing directors unless and
until such time as less than a majority of the directors holding
office have been elected by shareholders, at which time the
directors then in office will call a shareholders' meeting for
the election of directors. Except as set forth above, the
directors shall continue to hold office and may appoint successor
directors. Voting rights are not cumulative, so that the holders
of more than 50% of the shares voting in the election of
directors can, if they choose to do so, elect all the directors
of the Fund, in which event the holders of the remaining shares
will be unable to elect any person as a director. As set forth
in the By-Laws of each Fund, a special meeting of shareholders of
a Fund shall be called by the Secretary of the Fund on the
written request of shareholders entitled to cast at least 10% of
all the votes of the Fund entitled to be cast at such meeting.
Shareholders requesting such a meeting must pay to the Fund the
reasonably estimated costs of preparing and mailing the notice of
the meeting. Each Fund, however, will otherwise assist the
shareholders seeking to hold the special meeting in communicating
to the other shareholders of the Fund to the extent required by
Section 16(c) of the Investment Company Act of 1940.

Equity Income Fund

For tax and business reasons, the Fund was organized in 1985
as a Massachusetts Business Trust and is registered with the
Securities and Exchange Commission under the Investment Company
Act of 1940 as diversified, open-end investment companies,
commonly known as a "mutual funds."

The Fund's Declaration of Trust permits its Board of
Trustees to issue an unlimited number of full and fractional
shares of a single class. The Declarations of Trust also
provides that the Fund's Board of Trustees may issue additional
series or classes of shares. Each share represents an equal
proportionate beneficial interest in the Fund. In the event of
the liquidation of the Fund, each share is entitled to a pro rata
share of the net assets of the Fund.

Shareholders are entitled to one vote for each full share
held (and fractional votes for fractional shares held) and will
vote in the election of or removal of trustees (to the extent

PAGE 114
hereinafter provided) and on other matters submitted to the vote
of shareholders. There will normally be no meetings of
shareholders for the purpose of electing trustees unless and
until such time as less than a majority of the trustees holding
office have been elected by shareholders, at which time the
trustees then in office will call a shareholders' meeting for the
election of trustees. Pursuant to Section 16(c) of the
Investment Company Act of 1940, holders of record of not less
than two-thirds of the outstanding shares of a Fund may remove a
trustee by a vote cast in person or by proxy at a meeting called
for that purpose. Except as set forth above, the trustees shall
continue to hold office and may appoint successor trustees.
Voting rights are not cumulative, so that the holders of more
than 50% of the shares voting in the election of trustees can, if
they choose to do so, elect all the trustees of the Trust, in
which event the holders of the remaining shares will be unable to
elect any person as a trustee. No amendments may be made to the
Declarations of Trust without the affirmative vote of a majority
of the outstanding shares of the Trust.

Shares have no preemptive or conversion rights; the right of
redemption and the privilege of exchange are described in the
prospectus. Shares are fully paid and nonassessable, except as
set forth below. The Trust may be terminated (i) upon the sale
of its assets to another diversified, open-end management
investment company, if approved by the vote of the holders of
two-thirds of the outstanding shares of the Trust, or (ii) upon
liquidation and distribution of the assets of the Trust, if
approved by the vote of the holders of a majority of the
outstanding shares of the Trust. If not so terminated, the Trust
will continue indefinitely.

Under Massachusetts law, shareholders could, under certain
circumstances, be held personally liable for the obligations of a
Fund. However, the Declarations of Trust disclaim shareholder
liability for acts or obligations of a Fund and requires that
notice of such disclaimer be given in each agreement, obligation
or instrument entered into or executed by the Fund or a Trustee.
The Declarations of Trust provide for indemnification from Fund
property for all losses and expenses of any shareholder held
personally liable for the obligations of the Fund. Thus, the
risk of a shareholder incurring financial loss on account of
shareholder liability is limited to circumstances in which the
Fund itself would be unable to meet its obligations, a
possibility which T. Rowe Price believes is remote. Upon payment
of any liability incurred by the Fund, the shareholders of a Fund
paying such liability will be entitled to reimbursement from the
general assets of the Fund. The Trustees intend to conduct the
operations of each Fund in such a way so as to avoid, as far as

PAGE 115
possible, ultimate liability of the shareholders for liabilities
of such Fund.

Shareholders are entitled to one vote for each full share
held (and fractional votes for fractional shares held) and will
vote in the election of or removal of directors (to the extent
hereinafter provided) and on other matters submitted to the vote
of shareholders. There will normally be no meetings of
shareholders for the purpose of electing directors unless and
until such time as less than a majority of the directors holding
office have been elected by shareholders, at which time the
directors then in office will call a shareholders' meeting for
the election of directors. Except as set forth above, the
directors shall continue to hold office and may appoint successor
directors. Voting rights are not cumulative, so that the holders
of more than 50% of the shares voting in the election of
directors can, if they choose to do so, elect all the directors
of the Fund, in which event the holders of the remaining shares
will be unable to elect any person as a director. As set forth
in the By-Laws of the Corporation, a special meeting of
shareholders of the Corporation shall be called by the Secretary
of the Corporation on the written request of shareholders
entitled to cast at least 10% of all the votes of the
Corporation, entitled to be cast at such meeting. Shareholders
requesting such a meeting must pay to the Corporation the
reasonably estimated costs of preparing and mailing the notice of
the meeting. The Corporation, however, will otherwise assist the
shareholders seeking to hold the special meeting in communicating
to the other shareholders of the Corporation to the extent
required by Section 16(c) of the 1940 Act.

FEDERAL AND STATE REGISTRATION OF SHARES

Each Fund or its shares are registered under the laws of all
states which require registration, as well as the District of
Columbia and Puerto Rico.

LEGAL COUNSEL

Shereff, Friedman, Hoffman & Goodman LLP, whose address is
919 Third Avenue, New York, New York 10022, is legal counsel to
the Funds.

INDEPENDENT ACCOUNTANTS

Price Waterhouse LLP, 7 St. Paul Street, Suite 1700,
Baltimore, Maryland 21202, are independent accountants to the

PAGE 116
Funds. The financial statements of the Prime Reserve and New
Income Funds for the year ended May 31, 1995, and the report of
independent accountants are included in the Fund's Annual Report
for the year ended May 31, 1995. A copy of the Annual Report
accompanies this Statement of Additional Information. The
financial statements of the Equity Income Fund for the year ended
December 31, 1994, and the report of independent accountants are
included in the Fund's Annual Report for the year ended December
31, 1994. A copy of the Annual Report accompanies this Statement
of Additional Information. The financial statements of the
International Stock Fund for the year ended October 31, 1994, and
the report of independent accountants are included in the Fund's
Annual Report for the year ended October 31, 1994. A copy of the
Annual Report accompanies this Statement of Additional
Information. The following financial statements and the report
of independent accountants appearing in the Annual Reports for
the fiscal year ended May 31, 1995, for the year ended December
31, 1994, and for the fiscal year ended October 31, 1994, are
incorporated into this Statement of Additional Information by
reference:

Prime New Income
Reserve Fund Fund
Annual Report Annual Report
Page Page
___________ ____________

Report of Independent Accountants 13 15
Statement of Net Assets, May 31, 1995 5-8 6-10
Statement of Operations, fiscal year
ended May 31, 1995 9 10
Statement of Changes in Net Assets,
fiscal year ended May 31, 1995,
three-months ended May 31, 1994, and
fiscal year ended February 28, 1994 10 11
Notes to Financial Statements,
May 31, 1995 10-11 12-13
Financial Highlights 12 14

PAGE 117
Equity
Income Fund
Annual Report
Page
____________

Report of Independent Accountants 15
Statement of Net Assets, December 31, 1994 6-10
Statement of Operations, year ended
December 31, 1994 11
Statement of Changes in Net Assets, years ended
December 31, 1994 and December 31, 1993 12
Notes to Financial Statements,
December 31, 1994 13-14
Financial Highlights 14

International
Stock Fund
Annual Report
Page
______________

Report of Independent Accountants 19
Statement of Net Assets, October 31, 1994 8-14
Statement of Operations, year ended
October 31, 1994 14
Statement of Changes in Net Assets, year ended
October 31, 1994, ten months ended October 31,
1993, and year ended December 31, 1992 15
Notes to Financial Statements
October 31, 1994 16-18
Financial Highlights 18

RATINGS OF COMMERCIAL PAPER

Prime Reserve Fund

Moody's Investors Service, Inc. The rating of Prime-1 is the
highest commercial paper rating assigned by Moody's. Among the
factors considered by Moody's in assigning ratings are the
following: valuation of the management of the issuer; economic
evaluation of the issuer's industry or industries and an
appraisal of speculative-type risks which may be inherent in
certain areas; evaluation of the issuer's products in relation to
competition and customer acceptance; liquidity; amount and
quality of long-term debt; trend of earnings over a period of 10
years; financial strength of the parent company and the
relationships which exist with the issuer; and recognition by the
management of obligations which may be present or may arise as a

PAGE 118
result of public interest questions and preparations to meet such
obligations. These factors are all considered in determining
whether the commercial paper is rated P1, P2, or P3.

Standard & Poor's Corporation. Commercial paper rated A (highest
quality) by S&P has the following characteristics: liquidity
ratios are adequate to meet cash requirements; long-term senior
debt is rated "A" or better, although in some cases "BBB" credits
may be allowed. The issuer has access to at least two additional
channels of borrowing. Basic earnings and cash flow have an
upward trend with allowance made for unusual circumstances.
Typically, the issuer's industry is well established and the
issuer has a strong position within the industry. The
reliability and quality of management are unquestioned. The
relative strength or weakness of the above factors determines
whether the issuer's commercial paper is rated A1, A2, or A3.

Fitch Investors Service, Inc.: Fitch 1 - Highest grade.
Commercial paper assigned this rating is regarded as having the
strongest degree of assurance for timely payment. Fitch 2 - Very
good grade. Issues assigned this rating reflect an assurance of
timely payment only slightly less in degree than the strongest
issues.

RATINGS OF CORPORATE DEBT SECURITIES

New Income and Equity Income Funds

Moody's Investors Service, Inc.

Aaa - Bonds rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are
generally referred to as "gilt edge."

Aa - Bonds rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are
generally known as high grade bonds.

A - Bonds rated A possess many favorable investment
attributes and are to be considered as upper-medium grade
obligations.

Baa - Bonds rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly
secured. Interest payments and principal security appear
adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment

PAGE 119
characteristics and in fact have speculative characteristics as
well.

Ba - Bonds rated Ba are judged to have speculative elements:
their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very
moderate and thereby not well safeguarded during both good and
bad times over the future. Uncertainty of position characterize
bonds in this class.

B - Bonds rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal
payments of or maintenance of other terms of the contract over
any long period of time may be small.

Caa - Bonds rated Caa are of poor standing. Such issues may
be in default or there may be present elements of danger with
respect to principal or interest.

Ca - Bonds rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default
or have other marked short-comings.

C - Lowest rated, extremely poor prospects of ever attaining
investment standing.

Standard & Poor's Corporation

AAA - This is the highest rating assigned by Standard &
Poor's to a debt obligation and indicates an extremely strong
capacity to pay principal and interest.

AA - Bonds rated AA also qualify as high-quality debt
obligations. Capacity to pay principal and interest is very
strong.

A - Bonds rated A have a strong capacity to pay principal
and interest, although they are somewhat more susceptible to the
adverse effects of changes in circumstances and economic
conditions.

BBB - Bonds rated BBB are regarded as having an adequate
capacity to pay principal and interest. Whereas they normally
exhibit adequate protection parameters, adverse economic
conditions or changing circumstances are more likely to lead to a
weakened capacity to pay principal and interest for bonds in this
category than for bonds in the A category.

BB, B, CCC, CC - Bonds rated BB, B, CCC, and CC are regarded
on balance, as predominantly speculative with respect to the

PAGE 120
issuer's capacity to pay interest and repay principal in
accordance with the terms of the obligation. BB indicates the
lowest degree of speculation and CC the highest degree of
speculation. While such bonds will likely have some quality and
protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.

D - In default.

Fitch Investors Service, Inc.

AAA - High grade, broadly marketable, suitable for
investment by trustees and fiduciary institutions, and liable to
but slight market fluctuation other than through changes in the
money rate. The prime feature of a "AAA" bond is the showing of
earnings several times or many times interest requirements for
such stability of applicable interest that safety is beyond
reasonable question whenever changes occur in conditions. Other
features may enter, such as a wide margin of protection through
collateral, security or direct lien on specific property.
Sinking funds or voluntary reduction of debt by call or purchase
or often factors, while guarantee or assumption by parties other
than the original debtor may influence their rating.

AA - Of safety virtually beyond question and readily
salable. Their merits are not greatly unlike those of "AAA"
class but a bond so rated may be junior though of strong lien, or
the margin of safety is less strikingly broad. The issue may be
the obligation of a small company, strongly secured, but
influenced as to rating by the lesser financial power of the
enterprise and more local type of market.