PRICE T ROWE PRIME RESERVE FUND INC
497, 1999-05-05
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<PAGE>
 
         
<PAGE>
 
 PROSPECTUS
May 1, 1999
T. Rowe Price Funds
   Prime Reserve New Income Equity Income International Stock
 
 A selection of stock, bond, and money market funds to help investors meet their
 financial objectives.
 
 
 The Securities and Exchange Commission has not approved or disapproved these
 securities or passed upon the adequacy of this prospectus. Any representation
 to the contrary is a criminal offense.
T. ROWE PRICE RAM LOGO
<PAGE>
 
T. Rowe Price
Prime Reserve Fund, Inc. New Income Fund, Inc. Equity Income Fund International
Funds, Inc.
Prospectus
 
May 1, 1999
   
<TABLE>
<CAPTION>
<S>      <C>  <C>                                     <C>
              ABOUT THE FUNDS
1
              Fund, Market, and Risk Characteristics
 
              ---------------------------------------------
              Prime Reserve Fund                        1
 
              ---------------------------------------------
              New Income Fund                           6
 
              ---------------------------------------------
              Equity Income Fund                       13
 
              ---------------------------------------------
              International Stock Fund                 19
 
              ---------------------------------------------
 
 
              ABOUT YOUR ACCOUNT
2
              Pricing Shares and Receiving             25
              Sale Proceeds
              ---------------------------------------------
              Distributions and Taxes                  26
 
              ---------------------------------------------
              Transaction Procedures and               29
              Special Requirements
              ---------------------------------------------
 
 
              MORE ABOUT THE FUNDS
3
              Organization and Management              32
 
              ---------------------------------------------
              Understanding Performance                36
              Information
              ---------------------------------------------
              Investment Policies and Practices        37
 
              ---------------------------------------------
              Financial Highlights                     56
 
              ---------------------------------------------
 
 
              INVESTING WITH T. ROWE PRICE
4
              Account Requirements                     61
              and Transaction Information
              ---------------------------------------------
              Opening a New Account                    61
 
              ---------------------------------------------
              Purchasing Additional Shares             63
 
              ---------------------------------------------
              Exchanging and Redeeming                 63
 
              ---------------------------------------------
              Rights Reserved by the Funds             65
 
              ---------------------------------------------
              Information About Your                   66
               Services
              ---------------------------------------------
              T. Rowe Price Brokerage                  68
 
              ---------------------------------------------
              Investment Information                   69
 
              ---------------------------------------------
</TABLE>
 
    
 
The Prime Reserve, New Income, and Equity Income Funds are managed by T. Rowe
Price Associates, Inc., which was founded in 1937 and managed over $147.8
billion as of December 31, 1998. 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
$32.9 billion as of December 31, 1998.
 Mutual fund shares are not deposits or obligations of, or guaranteed by, any
depository institution. Shares are not insured by the FDIC, Federal Reserve, or
any other agency, and are subject to investment risks, including possible loss
of the principal amount invested.
<PAGE>
 
 ABOUT THE FUNDS
                                        1
 FUND, MARKET, AND RISK CHARACTERISTICS: WHAT TO EXPECT
 ----------------------------------------------------------
 
 Prime Reserve Fund
 
   To help you decide whether this fund is appropriate for you, this section
   reviews its investment objective, strategy, and potential risks.
 
 
 What is the fund's objective?
 
   The fund's goals are preservation of capital, liquidity, and, consistent with
   these, the highest possible current income.
 
 
 What are the fund's principal investment strategies?
 
   The fund is managed to provide a stable share price of $1.00. The fund
   invests in high-quality, U.S. dollar-denominated money market securities. The
   fund's average weighted maturity will not exceed 90 days, and its yield will
   fluctuate with changes in short-term interest rates. In selecting securities,
   fund managers may examine the relationships among yields on various types and
   maturities of money market securities in the context of their outlook for
   interest rates. For example, commercial paper often offers a yield advantage
   over Treasury bills. And if rates are expected to fall, longer-maturities may
   be purchased, which typically have higher yields than shorter maturities, to
   try to preserve the fund's income level. Conversely, shorter maturities may
   be favored if rates are expected to rise.
 
  . For further details on the fund's investment program, please see the
   question "What is the fund's investment program?" later in this section, or
   see the Investment Policies and Practices section.
 
 
 What are the fund's principal risks?
 
   Since they are managed to maintain a constant $1.00 share price, money market
   funds such as Prime Reserve Fund should have little risk of principal loss.
   However, there is no assurance the fund will avoid principal losses in the
   rare event that fund holdings default or interest rates rise sharply in an
   unusually short period. In addition, the fund's yield will vary; it is not
   fixed for a specific period like the yield on a bank certificate of deposit.
   This should be an advantage when interest rates are rising but not when rates
   are falling. An investment in the fund is not insured or guaranteed by the
   Federal Deposit Insurance Corporation (FDIC) or any other government agency.
   Although the fund seeks to preserve the value of your investment at $1.00 per
   share, it is possible to lose money by investing in the fund. Additionally,
   there is no guarantee that the fund's return will equal or exceed the rate of
   inflation.
 
   As with all mutual funds, there is no guarantee this fund will achieve its
   goals.
<PAGE>
 
T. ROWE PRICE
 How can I tell if the fund is appropriate for me?
 
   Over time, money market securities have provided greater stability but lower
   returns than bonds or stocks. If you have some money for which safety and
   accessibility are more important than total return, the fund should be an
   appropriate investment. The fund can be used for both regular and
   tax-deferred accounts, such as IRAs and Keoghs.
 
 
 How has the fund performed in the past?
 
   The bar chart, which shows the fund's actual performance for each of the last
   10 calendar years through December 31, 1997, indicates risk by illustrating
   how much returns can differ from one year to the next. Although the fund has
   experienced no losses, its returns, as shown below, have reflected changes in
   prevailing interest rates.
 
   The fund can also experience short-term performance swings, as shown in the
   following chart by the best and worst calendar quarter returns during the
   years depicted. Of course, the fund's past performance is no guarantee of its
   future returns.
 
 
<TABLE>
 INSERT BAR
CHART HERE
<CAPTION>
  Calendar Year Total Returns
 -------------------------------
 <S>           <C>
  1989               8.90%
  1990               7.73
  1991               5.67
  1992               3.34
  1993               2.60
  1994               3.74
  1995               5.48
  1996               4.90
  1997               5.10
  1998               5.13
 -------------------------------
</TABLE>
 
 
 
          Quarter ended              Total return
 
 Best quarter                           0/00/1900 %
 
 Worst quarter                          0/00/1900 %
 
   In the following table, the fund's average annual total returns for the 1-,
   5-, and 10-year periods ending December 31, 1997 are compared with those of
   its appropriate benchmarks. By comparing the bar chart with Table 3, you can
   see that average returns smooth out year-to-year variations
 
 
<PAGE>
 
   
                                                 
 .
<TABLE>
 Table 1  Average Annual Total Returns
<CAPTION>
                                      Periods ended December 31, 1997
                                       1 year     5 years     10 years
 
 <S>                                 <C>         <C>         <C>         <S>
  Prime Reserve Fund                   5.10%       4.36%       5.45%
                                     ------------------------------------
  Lipper Money Market Funds Average    4.90%          4.31%       5.40%
 -----------------------------------------------------------------------------
</TABLE>
 
 
 These figures include changes in principal value, reinvested dividends, and
 capital gain distributions, if any.
 
 
 What fees or expenses will I pay?
 
   The fund is 100% no load. There are no fees or charges to buy or sell fund
   shares, reinvest dividends, or exchange into other T. Rowe Price funds. There
   are no 12b-1 marketing fees.
 
<TABLE>
 Table 2  Fees and Expenses of the Fund
<CAPTION>
 <S>                                   <C>
                                              Annual fund operating expenses
                                                             (
                                                         expenses
                                                           that
                                              are deducted from fund assets)
  Management fee                                           0.37%
  Other expenses                                           0.26%
  Total annual fund operating                              0.63%
  expenses
 -------------------------------------------------------------------------------------
</TABLE>
 
 
   The numbers in Table 2 provide an estimate of how much it will cost to
   operate the fund for a year, based on 1998 fiscal year expenses.
 
   Example. The following table gives you a rough idea of how expense ratios may
   translate into dollars and helps you to compare the cost of investing in this
   fund with the cost of investing in other funds. Although your actual costs
   may be higher or lower, the table shows expenses you would pay if operating
   expenses remain the same, you invest $10,000, you earn a 5% annual return,
   and you hold the investment for the following periods.
 
<TABLE>
<CAPTION>
    <C>                                                   <S>          <S>          <S>
                           1 year                           3 years      5 years      10 years
                            $64                              $202         $351          $786
    ---------------------------------------------------------------------------------------------
</TABLE>
 
 
 
 OTHER INFORMATION ABOUT THE FUND
 
 What are the fund's potential rewards?
 
   The fund offers a relatively secure, liquid investment for money you may need
   for occasional or unexpected expenses and for money awaiting investment in
   longer-term bond or stock funds. In addition to preserving capital, the fund
   seeks to provide the highest possible income available from low-risk,
   short-term securities.
<PAGE>
 
T. ROWE PRICE
 How does the portfolio manager try to reduce risk?
 
   Consistent with the fund's objective, the portfolio manager uses various
   tools to try to reduce risk and increase total return, including:
 
  . Diversification of assets to reduce the impact of a single holding on the
   fund's net asset value.
 
  . Thorough credit research by our own analysts.
 
  . Maturity adjustments to reflect the fund manager's interest rate outlook.
 
 
 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.
 
 
 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 a credit rating within the highest
   category assigned by at least two established rating agencies, or 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 not purchase any security
   with a maturity of more than 13 months. 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 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 in a bond or money market fund could derive
   from:
 
  . 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 or
   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 (e.g., A-1 or A-1+) and that the
   remaining 5% be rated no lower than the second highest credit category (e.g.,
   A-2).
 
  . 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
<PAGE>
 
   
ABOUT THE FUNDS                                   
   a dollar. However, the extremely short maturity of securities held in money
   market portfolios-a means of achieving an overall fund objective of principal
   safety-reduces their potential for price fluctuation.
 
 
 What are the main types of money market securities the fund can invest in?
 
  . Commercial paper Unsecured promissory notes that corporations typically
   issue to finance current operations and other expenditures.
 
  . Treasury bills Debt obligations sold at 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.
 
  . Certificates of deposit Receipts for funds deposited at banks that guarantee
   a fixed interest rate over a specified time period.
 
  . Repurchase agreements Contracts, usually involving U.S. government
   securities, that require one party to repurchase securities at a fixed price
   on a designated date.
 
  . Banker's acceptances Bank-issued commitments to pay for merchandise sold in
   the import/export market.
 
  . 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.
 
  . Medium-term notes Unsecured corporate debt obligations that are continuously
   offered in a broad range of maturities and structures.
 
  . Bank notes Unsecured obligations of a bank that rank on an equal basis with
   other kinds of deposits but do not carry FDIC insurance.
 
 
 Is there other information I can review before making a decision?
 
   Investment Policies and Practices in Section 3 discusses the principal types
   of portfolio securities that the fund may purchase as well as the types of
   management practices that the fund may use.
 
 
 SOME BASICS OF INVESTING
 
 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 yield the same as total return?
 
   Yes. The total return reported for the fund is the result of reinvested
   distributions (income and capital gains) and the change in share price for a
   given time period.
<PAGE>
 
T. ROWE PRICE
   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 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 money market 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 the fund 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 it should not
   represent your complete investment program.
 
 
 New Income Fund
 
   To help you decide whether this fund is appropriate for you, this section
   reviews its investment objective, strategy, and potential risks.
 
 
 What is the fund's objective?
 
   The fund seeks the highest level of income consistent with the preservation
   of capital over time by investing primarily in marketable debt securities.
 
 
 What are the fund's principal investment strategies?
 
   We will invest at least 80% of the fund's total assets in income-producing
   securities, including U.S. government and agency obligations, mortgage- and
   asset-backed securities, corporate bonds, foreign securities, collateralized
   mortgage obligations (CMOs), and others, including, on occasion, equity
   securities.
<PAGE>
 
   
ABOUT THE FUNDS                                   
   All securities purchased by the fund must be rated investment grade (AAA, AA,
   A, or BBB) by at least one major credit rating agency (or, if unrated, must
   have a T. Rowe Price equivalent). Up to 15% of total assets may be invested
   in "split-rated securities," or those rated investment grade by at least one
   rating agency, but below investment grade by others. However, none of the
   fund's remaining assets can be invested in bonds rated below investment grade
   by Standard & Poor's, Moody's, or Fitch IBAC, Inc. Securities in the BBB
   category, the lowest investment-grade credit rating, may have some
   speculative characteristics.
 
   We have considerable flexibility in seeking high yields for the fund. There
   are no maturity restrictions, so we can purchase longer-term bonds with
   higher yields than shorter-term issues. However, the portfolio's weighted
   average maturity is expected to be between four and 15 years. In addition,
   when there is a large yield difference between the various quality levels, we
   may move down the credit scale and purchase lower-rated bonds with higher
   yields. When the difference is small, we may concentrate investments in the
   higher-rated issues.
 
  . For details about the fund's investment program, please see the Investment
   Policies and Practices section.
 
 
 What are the main risks of investing in the fund?
 
   Investors should be concerned primarily with interest rate risk, or market
   risk. An increase in interest rates could cause the fund's share price to
   fall, resulting in a loss of principal (see the table entitled How Interest
   Rates May Affect Bond Prices). That's because the bonds in the fund's
   portfolio can become less attractive to other investors when securities with
   higher yields become available. The longer a bond's maturity, the greater its
   potential for price declines if rates rise and for price gains if rates fall.
   The fund may invest in bonds of any maturity, and thus carries more interest
   rate risk than short-term corporate funds, which increases the fund's
   potential for both losses and gains. However, the fund generally carries less
   interest rate risk than Treasury funds of comparable maturity.
 
   The fund is also subject to credit risk, which means shareholders could
   suffer declines in share price and income as a result of credit downgrades or
   defaults. The fund's price appreciation could be limited in a period of
   falling interest rates if investors fear an economic slowdown will result in
   credit downgrades and debt defaults. The fund's concentration in
   investment-grade bonds limits, but does not eliminate, its exposure to credit
   risk.
 
  . The fund may continue to hold a security that has been downgraded or loses
   its investment-grade rating after purchase.
 
   Shareholders are also exposed to foreign investing risk. There are special
   risks associated with investments in foreign securities whether denominated
   in U.S. dollars or foreign currencies. These risks include potentially
   adverse political and economic developments overseas, greater volatility,
   less liquidity and the
<PAGE>
 
T. ROWE PRICE
   possibility that foreign currencies will decline against the dollar, lowering
   the value of securities denominated in those currencies. Currency risk
   affects the fund to the extent that it holds nondollar foreign bonds.
 
   Because the fund can invest extensively in mortgage-backed securities, it
   carries special risks related to changing interest rates: prepayment risk and
   extension risk.
 
  . Prepayment risk A mortgage-backed bond, unlike most other bonds, can be hurt
   when interest rates fall, because homeowners tend to refinance. The loss of
   high-yielding underlying mortgages and the reinvestment of proceeds at lower
   interest rates can reduce the bond's potential price gain in response to
   falling interest rates, can reduce the bond's yield, or can even cause the
   bond's price to fall below what an investor paid for it, resulting in a
   capital loss. Any of these developments could cause a decrease in the fund's
   income, share price, or total return.
 
  . Extension risk  This is the flip side of prepayment risk, where rising
   interest rates can cause a fund's average maturity to lengthen unexpectedly
   due to a drop in mortgage prepayments. This would increase the fund's
   sensitivity to rising rates and its potential for price declines.
 
   Shareholders are also exposed to derivatives risk, the potential that our
   investments in these complex and volatile instruments could affect the fund's
   share price.
 
   In addition to CMOs and better-known instruments such as futures and options,
   other derivatives used in limited fashion by the fund include interest-only
   (IO) and principal-only (PO) securities known as "strips." The value of these
   instruments is derived from underlying securities such as mortgage-backed
   bonds. All these instruments can be highly volatile, and their value can fall
   dramatically in response to rapid or unexpected changes in the mortgage or
   interest rate environment.
 
   As with all mutual funds, there is no guarantee this fund will achieve its
   goals.
 
  . The fund's share price may decline, so when you sell your shares, you may
   lose money. An investment in the fund is not a deposit of a bank and is not
   insured or guaranteed by the Federal Deposit Insurance Corporation or any
   other government agency.
 
 
 How can I tell if the fund is appropriate for me?
 
   The fund may be appropriate for you if you seek an attractive level of income
   and are willing to accept the risk of a declining share price when interest
   rates rise. The fund may be used for both regular and tax-deferred accounts,
   such as IRAs and Keoghs.
 
  . The fund should not represent your complete investment program or be used
   for short-term trading purposes.
<PAGE>
 
   
ABOUT THE FUNDS                                   
 How has the fund performed in the past?
 
   The bar chart, which shows the fund's actual performance for each of the last
   10 calendar years through December 31, 1997, indicates risk by illustrating
   how much returns can differ from one year to the next.
 
   The fund can also experience short-term performance swings, as shown in the
   following chart by the best and worst calendar quarter returns during the
   years depicted. Of course, the fund's past performance is no guarantee of its
   future returns.
 
 
<TABLE>
 INSERT BAR
CHART HERE
<CAPTION>
  Calendar Year Total Returns
 -------------------------------
 <S>           <C>
  1989              12.22%
  1990               8.77
  1991              15.51
  1992               4.96
  1993               9.58
  1994              -2.22
  1995              18.36
  1996               2.38
  1997               9.32
  1998               5.04
 -------------------------------
</TABLE>
 
 
 
          Quarter ended              Total return
 
 Best quarter                           0/00/1900 %
 
 Worst quarter                          0/00/1900 %
 
 
   In the following table, the fund's average annual total returns for the 1-,
   5-, and 10-year periods ending December 31, 1997, are compared with those of
   its appropriate benchmarks. These average returns smooth out the year-to-year
   variations in actual returns.
 
 
<TABLE>
 Table 3  Average Annual Total Returns
<CAPTION>
                                       Periods ended December 31, 1997
 
 ------------------------------------- 1 year     5 years      10 years
 <S>                                  <C>        <C>         <C>
 
  New Income Fund                       9.32%      7.26%        8.50%
  Lehman Aggregate Bond Index           9.65       7.48         9.18
  Lipper Corp. Debt Funds A-Rated       9.17       7.32         8.95
  Average
 ------------------------------------------------------------------------
</TABLE>
 
 
 These figures include changes in principal value, reinvested dividends, and
 capital gain distributions, if any.
<PAGE>
 
T. ROWE PRICE
 What fees or expenses will I pay?
 
   The fund is 100% no load. There are no fees or charges to buy or sell fund
   shares, reinvest dividends, or exchange into other T. Rowe Price funds. There
   are no 12b-1 marketing fees.
 
<TABLE>
 Table 4  Fees and Expenses of the Fund
<CAPTION>
 <S>                                   <C>
                                              Annual fund operating expenses
                                                        (expenses
                                                           that
                                              are deducted from fund assets)
                                                           0.47%
  Management fee                                            / /
  Other expenses                                           0.24%
  Total annual fund operating                              0.71%
  expenses                                                  / /
 -------------------------------------------------------------------------------------
</TABLE>
 
 
   The numbers in Table 4 provide an estimate of how much it will cost to
   operate the fund for a year, based on 1998 fiscal year expenses.
 
   Example. The following table gives you a rough idea of how expense ratios may
   translate into dollars and helps you to compare the cost of investing in this
   fund with the cost of investing in other funds. Although your actual costs
   may be higher or lower, the table shows expenses you would pay if operating
   expenses remain the same, you invest $10,000, you earn a 5% annual return,
   and you hold the investment for the following periods.
 
<TABLE>
<CAPTION>
    <C>                                                   <S>          <S>          <S>
                           1 year                           3 years      5 years      10 years
                            $73                              $227         $395          $883
    ---------------------------------------------------------------------------------------------
</TABLE>
 
 
 
 OTHER INFORMATION ABOUT THE FUND
 
 What are the fund's potential rewards?
 
   The fund can provide an attractive level of income to investors who want only
   a modest level of credit risk. It should offer higher yields than money
   market and short-term bond funds and generally less volatility than
   longer-term bond funds. In addition, the portfolio is widely diversified
   among various fixed income securities, thus reducing the effect of a bond's
   price fluctuations on the fund's share price or total return.
 
 
 How does the portfolio manager try to reduce risk?
 
   Consistent with the fund's objective, the portfolio manager uses various
   tools to try to reduce risk and increase total return, including:
 
  . Diversification of assets to reduce the impact of a single holding on the
   fund's net asset value.
 
  . Thorough credit research by our own analysts.
<PAGE>
 
   
ABOUT THE FUNDS                                   
  . Adjustment of fund duration to try to reduce the drop in price when interest
   rates rise or to benefit from the rise in price when rates fall. Duration is
   a measure of a fund's sensitivity to interest rate changes.
 
 
 Do mortgage-backed securities differ from other high-quality bonds?
 
   Yes, in one major respect. Most bonds repay principal (face value of the
   bond) when their maturity date is reached, but most mortgage-backed
   securities repay principal continually as homeowners make mortgage payments.
   Homeowners have the option of paying either part or all of the loan balance
   before maturity, perhaps to refinance or buy a new home. As a result, the
   effective maturity of a mortgage-backed security is virtually always shorter
   than its stated maturity.
 
   For example, a new GNMA certificate backed by 30-year, fixed rate mortgages
   will generally have a far shorter life than 30 years  - probably 12 or less.
   Therefore, it will usually be about as volatile as a 10-year Treasury note.
   It is possible to estimate the average life of an entire mortgage pool
   backing a particular security with some accuracy, but not with certainty.
 
 
 Why are yields on mortgage-backed securities higher than yields on Treasuries
 of similar maturity?
 
   The structure of mortgage-backed securities is much more complex, and their
   effective maturities are uncertain because of unscheduled prepayments. Higher
   yields compensate investors for these potentially negative features. See the
   previous discussion of prepayment risk and extension risk.
 
 
 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's total return may be higher or lower than a money market fund's
   and, as such, it should be viewed as a longer-term investment.
 
 
 What are derivatives and can the fund invest in them?
 
   A derivative is a financial instrument whose value is derived from an
   underlying security, such as a stock or bond, or from a market benchmark such
   as an interest rate index. Many types of investments representing a wide
   range of potential risks and rewards are derivatives, including conventional
   instruments such as callable bonds, futures, and options, as well as more
   exotic investments such as stripped mortgage securities and structured notes.
   Investment managers have used derivatives for many years.
 
   We invest in derivatives only if the expected risks and rewards are
   consistent with the fund's objective, policies, and overall risk profile
   described in this prospectus. We use derivatives in situations where they may
   enable the fund to increase yield, hedge against a decline in principal,
   invest in other asset classes more efficiently and at a lower cost, or adjust
   duration.
<PAGE>
 
T. ROWE PRICE
   We will not invest in any high-risk, highly leveraged derivative that we
   believe would cause the portfolio to be more volatile than a long-term,
   investment-grade bond.
 
 
 Is there other information I can review before making a decision?
 
   Investment Policies and Practices in Section 3 discusses the principal types
   of portfolio securities that the fund may purchase as well as the types of
   management practices that the fund may use.
 
 
 SOME BASICS OF INVESTING
 
 Is a fund's yield fixed or will it vary?
 
   It will vary. We calculate the yield every day by dividing a fund's net
   income per share, expressed at annual rates, by the share price. Since income
   and share price fluctuate, a fund's yield also varies.
 
 
 Is yield the same as total return?
 
   Not for bond funds. A fund's total return is the result of reinvested
   distributions from income and capital gains and the change in share price for
   a given period. Income is always a positive contributor to total return and
   can either enhance a rise in share price or help offset a price decline.
 
 
 What is credit quality and how does it affect yield?
 
   Credit quality refers to a bond issuer's expected ability to make all
   required interest and principal payments on time. Because highly rated
   issuers represent less risk, they can borrow at lower interest rates than
   less creditworthy issuers. Therefore, a fund investing in high-quality
   securities should have a lower yield than an otherwise comparable fund
   investing in lower-quality securities.
 
 
 What is meant by a bond fund's maturity?
 
   Every bond has a stated maturity date when the issuer must repay the bond's
   entire principal value to the investor. However, many bonds are "callable,"
   meaning their principal can be repaid earlier, on or after specified call
   dates. Bonds are most likely to be called when interest rates are falling
   because the issuer can refinance at a lower rate, just as a homeowner
   refinances a mortgage. In that environment, a bond's "effective maturity" is
   usually its nearest call date. For example, the rate at which homeowners pay
   down their mortgage principal determines the effective maturity of
   mortgage-backed bonds.
 
   A bond mutual fund has no real maturity, but it does have a weighted 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 normally use the effective, rather than
   stated, maturities of
<PAGE>
 
   
ABOUT THE FUNDS                                   
   the bonds in the portfolio when computing the average. This 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 a bond fund to changes in interest rates. It measures this
   sensitivity 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
   expressed in years - the duration. Effective duration takes into account call
   features 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 share price by multiplying fund duration by an
   expected change in interest rates. (T. Rowe Price shareholder bond fund
   reports show duration.) 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.
 
 
 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 rates, as shown in Table 5.
 
<TABLE>
 Table 5  How Interest Rates May Affect Bond Prices
<CAPTION>
                                                                              Price per $1,000 of bond face value if interest rates:
  Bond maturity                                                       Coupon
                                                                                                     Increase                     De
                                                                                       1 point                     2 points
                                                                                                                                   p
 <S>                                                                  <C>     <C>                         <C>
 
  1 year                                                              5.36%              $990                        $981          $
  5 years                                                             5.50                958                         918
  10 years                                                            5.50                927                         861
  30 years                                                            5.72                872                         768
 -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
 
 
 The table reflects yields on Treasury securities as of July 31, 1998. The table
 may not be as representative of price changes for other types of bonds,
 including mortgage-backed securities because of prepayments. This is an
 illustration and does not represent expected yields or share price changes of
 any T. Rowe Price fund.
 
 
 Equity Income Fund
 
   
   To help you decide whether this fund is appropriate for you, this section
   reviews its investment objective, strategy, and risks.    
<PAGE>
 
T. ROWE PRICE
 What is the fund's objective?
 
   The fund seeks to provide substantial dividend income as well as long-term
   growth of capital through investments in the common stocks of established
   companies.
 
 
 What is the fund's principal investment strategy?
 
   We will normally invest at least 65% of the fund's total assets in the common
   stocks of well-established companies paying above-average dividends.
 
   We typically employ a "value" approach in selecting investments. Our in-house
   research team seeks companies that appear to be undervalued by various
   measures and may be temporarily out of favor, but have good prospects for
   capital appreciation and dividend growth.
 
   In selecting investments, we generally look for companies with the following:
 
   
  . an established operating history;
 
  . above-average dividend yield relative to the S&P 500;
 
  . low price/earnings ratio relative to the S&P 500;
 
  . a sound balance sheet and other positive financial characteristics; and
 
  . low stock price relative to a company's underlying value as measured by
   assets, cash flow, or business franchises.    
 
   While most of the fund's assets will be invested in U.S. common stocks, we
   may also invest in other securities, including foreign securities, futures,
   and options, in keeping with the fund's objective.
 
   The fund may sell securities for a variety of reasons, such as to secure
   gains, limit losses, or redeploy assets into more promising opportunities.
 
  . For details about the fund's investment program, please see the Investment
   Policies and Practices section.
 
 
 What are the main risks of investing in the fund?
 
   
   As with all equity funds, this fund's share price can fall because of
   weakness in the broad market, a particular industry, or specific holdings.
   The market as a whole can decline for many reasons, including adverse
   political or economic developments here or abroad, changes in investor
   psychology, or heavy institutional selling. The prospects for an industry or
   company may deteriorate because of a variety of factors, including
   disappointing earnings or changes in the competitive environment. In
   addition, our assessment of companies held in the fund may prove incorrect,
   resulting in losses or poor performance even in a rising market. Finally, the
   fund's investment approach could fall out of favor with the investing public,
   resulting in lagging performance versus other types of stock funds.    
<PAGE>
 
   
ABOUT THE FUNDS                                   
   The value approach carries the risk that the market will not recognize a
   security's intrinsic value for a long time, or that a stock judged to be
   undervalued may actually be appropriately priced.
 
   
   The fund's emphasis on stocks of established companies paying high dividends
   and its potential investments in fixed income securities may limit its
   potential for appreciation in a broad market advance. Such securities may
   also be hurt when interest rates rise sharply. Also, a company may reduce or
   eliminate its dividend.
 
   To the extent that the fund invests in foreign securities, it is also subject
   to the risk that some holdings may lose value because of declining foreign
   currencies or adverse political or economic events overseas. If the fund uses
   futures and options, it is exposed to additional volatility and potential
   losses.    
 
   As with any mutual fund, there can be no guarantee the fund will achieve its
   objective.
 
  . The fund's share price may decline, so when you sell your shares, you may
   lose money.
 
 
 How can I tell if the fund is appropriate for me?
 
   Consider your investment goals, your time horizon for achieving them, and
   your tolerance for the inherent risk of common stock investments. If you seek
   a relatively conservative equity investment that provides substantial
   dividend income along with the potential for capital growth, the fund could
   be an appropriate part of your overall investment strategy. This fund should
   not represent your complete investment program or be used for short-term
   trading purposes.
 
   The fund can be used in both regular and tax-deferred accounts, such as IRAs.
 
  . Equity investors should have a long-term investment horizon and be willing
   to wait out bear markets.
 
 
 How has the fund performed in the past?
 
   
   The bar chart and the average annual total return table indicate risk by
   illustrating how much returns can differ from one year to the next.The fund's
   past performance is no guarantee of its future returns.
 
   The fund can also experience short-term performance swings, as shown by the
   best and worst calendar quarter returns accompanying the following chart. The
   returns are only for the years depicted in the chart.    
 
 
<PAGE>
 
T. ROWE PRICE
 
<TABLE>
 INPUT BAR
CHART HERE
<CAPTION>
 Calendar Year Total Returns
 ------------------------------
 <S>           <C>
  1989              13.74%
  1990              -6.79
  1991              25.30
  1992              14.13
  1993              14.84
  1994               4.53
  1995              33.35
  1996              20.40
  1997              28.82
  1998               9.23
 ------------------------------
</TABLE>
 
 
 
          Quarter ended              Total return
 
 Best quarter                           3/31/1991 14.76%
 
 Worst quarter                          9/30/1990 -13.46%
 
 
 
<TABLE>
 Table 6  Average Annual Total Returns
<CAPTION>
                                       Periods ended December 31, 1998
 
 ------------------------------------- 1 year     5 years     10 years
 <S>                                  <C>        <C>         <C>         <S>
 
  Equity Income Fund                    9.23%      18.75%      15.18%
                                      -----------------------------------
  S&P 500 Stock Index                  28.57       24.06       19.21
 -----------------------------------------------------------------------------
</TABLE>
 
 
 
 These figures include changes in principal value, reinvested dividends, and
 capital gain distributions, if any.
 
 
 What fees or expenses will I pay?
 
   The fund is 100% no load. There are no fees or charges to buy or sell fund
   shares, reinvest dividends, or exchange into other T. Rowe Price funds. There
   are no 12b-1 fees.
 
<TABLE>
 Table 7  Fees and Expenses of the Fund
<CAPTION>
                                        Annual fund operating expenses
                                 (expenses that are deducted from fund assets)
 ------------------------------------------------------------------------------
 <S>                            <C>
 
  Management fee                                    0.57%
  Other expenses                                    0.20%
  Total annual fund operating                       0.77%
  expenses
 ------------------------------------------------------------------------------
</TABLE>
 
 
   Example.  The following table gives you a rough idea of how expense ratios
   may translate into dollars and helps you to compare the cost of investing in
   this fund with that of other funds. Although your actual costs may be higher
   or lower, the
<PAGE>
 
   
ABOUT THE FUNDS                                   
   table shows how much you would pay if operating expenses remain the same, you
   invest $10,000, you earn a 5% annual return, and you hold the investment for
   the following periods:
 
<TABLE>
<CAPTION>
    <S>          <C>          <C>          <C>
      1 year       3 years      5 years     10 years
 
        $79         $246         $428         $954
    ----------------------------------------------------
</TABLE>
 
 
 
 
 OTHER INFORMATION ABOUT THE FUND
 
 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.
 
 
 What is meant by a "value" investment approach?
 
   Value investors seek to invest in companies whose stock prices are low in
   relation to their real worth or future prospects. By identifying companies
   whose stocks are currently out of favor or misunderstood, value investors
   hope to realize significant appreciation as other investors recognize the
   stock's intrinsic value and the price rises accordingly.
 
   Finding undervalued stocks requires considerable research to identify the
   particular company, analyze its underlying financial condition and prospects,
   and assess the likelihood that the stock's underlying value will be
   recognized by the market and reflected in its price.
 
  . Value investors look for undervalued assets.
 
   Some of the principal measures used to identify such stocks are:
 
  . 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.
 
  . Price/book value ratio 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.
 
  . 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.
<PAGE>
 
T. ROWE PRICE
   
  . A stock selling at $10 with an annual dividend of $0.50 has a 5% yield.    
 
  . Price/cash flow Dividing a stock's price by the company's cash flow per
   share, rather than by its earnings or book value, provides a more useful
   measure of value in some cases. 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.
 
  . 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.
 
  . Restructuring opportunities The market can react favorably to the
   announcement of the successful implementation of a corporate restructuring,
   financial reengineering, 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.
 
 
 What are some examples of undervalued situations?
 
   There are numerous situations in which a company's value may not be reflected
   in its stock price. For example, a company may own a substantial amount of
   real estate that is valued on its financial statements well below market
   levels. If those properties were to be sold, or if their hidden value became
   recognized in some other manner, the company's stock price could rise. In
   another example, a company's management could spin off an unprofitable
   division into a separate company, potentially increasing the value of the
   parent. Or, in the reverse, a parent company could spin off a profitable
   division that has not drawn the attention it deserves, potentially resulting
   in higher valuations for both entities.
 
   Sometimes new management can revitalize companies that have grown fat or lost
   their focus, eventually leading to improved profitability. Management could
   increase shareholder value by using excess cash flow to pay down debt, buying
   back outstanding shares of common stock, or raising the dividend.
 
 
 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 and
   may hold up better in falling markets.
 
 
 What are some potential risks and rewards of investing in the stock market
 through this fund?
 
   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
<PAGE>
 
   
ABOUT THE FUNDS                                   
   have risen. Nevertheless, economic growth has been punctuated by periods of
   stagnation and recession. Share prices of all companies, even the best
   managed and most profitable, can fall for any number of reasons.
 
 
 Is there other information I can review before making a decision?
 
   
   Investment Policies and Practices in Section 3 discusses various types of
   portfolio securities the fund may purchase as well as types of investment
   management practices the fund may use.    
 
 
 International Stock Fund
 
   To help you decide whether this fund is appropriate for you, this section
   reviews its investment objective, strategy, and potential risks.
 
 
 What is the fund's objective?
 
   Long-term growth of capital through investments primarily in the common
   stocks of established, non-U.S. companies.
 
 
 What is the fund's principal investment strategy?
 
   We expect to invest substantially all of the fund's assets outside the U.S.
   and to diversify broadly among developed and emerging countries throughout
   the world. Stock selection reflects a growth style. We may purchase the
   stocks of companies of any size, but our focus will typically be on large
   and, to a lesser extent, medium-sized companies.
 
     Growth Investing
     Price-Fleming employs in-depth fundamental research in an effort to
     identify companies capable of achieving and sustaining above-average,
     long-term earnings growth. We seek to purchase such stocks at reasonable
     prices in relation to present or anticipated earnings, cash flow, or book
     value, and valuation factors often influence our allocations among large-,
     mid-, or small-cap shares.
 
     While we invest with an awareness of the global economic backdrop and our
     outlook for individual countries, bottom-up stock selection is the focus of
     our decision-making. Country allocation is driven largely by stock
     selection, though we may limit investments in markets that appear to have
     poor overall prospects.
 
   In selecting stocks, we generally favor companies with one or more of the
   following characteristics:
 
     . leading market position;
 
     . attractive business niche;
<PAGE>
 
T. ROWE PRICE
     . strong franchise or natural monopoly;
 
     . technological leadership or proprietary advantages;
 
     . seasoned management;
 
     . earnings growth and cash flow sufficient to support growing dividends;
 
     . healthy balance sheet with relatively low debt.
 
   While the fund invests primarily in common stocks, we may also purchase other
   securities, including futures and options, in keeping with the fund's
   objective.
 
   The fund may sell securities for a variety of reasons, such as to secure
   gains, limit losses, or redeploy assets into more promising opportunities.
 
 
 What are the main risks of investing in the fund?
 
   As with all stock funds, this fund's share price can fall because of weakness
   in one or more of its primary equity markets, a particular industry, or
   specific holdings. Stock markets can decline for many reasons, including
   adverse political or economic developments, changes in investor psychology,
   or heavy institutional selling. The prospects for an industry or company may
   deteriorate because of a variety of factors, including disappointing earnings
   or changes in the competitive environment. In addition, our assessment of
   companies held in the fund may prove incorrect, resulting in losses or poor
   performance by those holdings, even in rising markets.
 
   Even investments in countries with highly developed economies are subject to
   significant risks. For example, Japanese stocks have been in a steep decline
   for much of the 1990s.
 
   Funds that invest overseas generally carry more risk than funds that invest
   strictly in U.S. assets. Some particular risks affecting this fund include
   the following:
 
  . Currency risk  This refers to a decline in the value of a foreign currency
   versus the U.S. dollar, which reduces the dollar value of securities
   denominated in that currency. The overall impact on a fund's holdings can be
   significant and long-lasting, depending on the currencies represented in the
   portfolio, how each one appreciates or depreciates in relation to the U.S.
   dollar, and whether currency positions are hedged. Under normal conditions,
   the fund does not engage in extensive foreign currency hedging programs.
   Further, exchange rate movements are unpredictable and it is not possible to
   effectively hedge the currency risks of many developing countries. The
   introduction of the new european common currency on January 1, 1999, may have
   unanticipated adverse effects.
<PAGE>
 
   
ABOUT THE FUNDS                                   
  . Geographic risk The economies and financial markets of certain regions -
   such as Latin America and Asia -can be highly interdependent and may decline
   all at the same time.
 
  . Emerging market risk  To the extent the fund invests in emerging markets, it
   is subject to the abrupt and severe price declines these holdings can
   experience. The economic and political structures of developing nations, in
   most cases, do not compare favorably with the U.S. or other developed
   countries in terms of wealth and stability, and their financial markets often
   lack liquidity. Fund performance will likely be negatively affected by
   portfolio exposure to nations suffering severe inflation or currency
   devaluations.
 
  . Other risks of foreign investing  Other risks result from the varying stages
   of economic and political development of foreign countries, the differing
   regulatory environments, trading days, and accounting standards of non-U.S.
   markets, and higher transaction costs. Acts of government interfering in
   capital markets, such as capital or currency controls, nationalization of
   companies or industries, expropriation of assets, or impostion of punitive
   taxes would also have an adverse effect on the fund.
 
  . 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.
 
  . Futures/options risk  To the extent the fund uses futures and options, it is
   exposed to additional volatility and potential losses.
 
  . Year 2000 risk  Companies, organizations, governmental entities, and markets
   in which the fund invests will be affected by the Year 2000 problem. (See the
   discussion in Section 3.) While at this time the fund cannot predict the
   degree of impact, it is possible that foreign markets will be less prepared
   than U.S. ones. The fund's return could be adversely affected as a result.
 
   As with all mutual funds, there can be no guarantee the fund will achieve its
   objective.
 
  . The fund's share price may decline, so when you sell your shares, you may
   lose money.
 
 
 How can I tell if the fund is appropriate for me?
 
   Consider your investment goals, your time horizon for achieving them, and
   your tolerance for the inherent risk of common stock and international
   investments. This fund may be appropriate for you if you are seeking capital
   appreciation potential over time and greater diversification for your equity
   investments and can accept the volatility associated with investing in stocks
   as well as the special
<PAGE>
 
T. ROWE PRICE
   risks that accompany international investing. 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.
 
   The fund can be used in both regular and tax-deferred accounts, such as IRAs.
 
  . The fund should not represent your complete investment program or be used
   for short-term trading purposes.
 
 
 How has the fund performed in the past?
 
   The bar chart and the average annual total return table indicate risk by
   illustrating how much returns can differ from one year to the next. The
   fund's past performance is no guarantee of its future returns.
 
   The fund can also experience short-term performance swings, as shown in the
   following chart by the best and worst calendar quarter returns during the
   years depicted in the chart.
 
<TABLE>
 INPUT BAR CHART
HERE
<CAPTION>
  Calendar Year Total Returns
 -------------------------------
 <S>           <C>
  1989              23.72%
  1990              -8.89
  1991              15.87
  1992              -3.47
  1993              40.11
  1994              -0.76
  1995              11.39
  1996              15.99
  1997               2.70
  1998              16.14
 -------------------------------
</TABLE>
 
 
          Quarter ended              Total return
 
 Best quarter                          9/30/1989 14.89%
 
 Worst quarter                         9/30/1990 -18.70%
 
<TABLE>
 Table 8  Average Annual Total Returns
<CAPTION>
                                       Periods ended December 31, 1998
 
 ------------------------------------- 1 year     5 years     10 years
 <S>                                  <C>        <C>         <C>         <S>
 
  International Stock Fund             16.14%      8.87%       10.45%
                                      -----------------------------------
  MSCI EAFE Index                      20.33       9.50         5.85
  Lipper International Funds Average   13.02       7.69         8.98
 -----------------------------------------------------------------------------
</TABLE>
 
 
 
 These figures include changes in principal value, reinvested dividends, and
 capital gain distributions, if any.
<PAGE>
 
   
ABOUT THE FUNDS                                   
 What fees or expenses will I pay?
 
   The fund is 100% no load. There are no fees or charges to buy or sell fund
   shares, reinvest dividends, or exchange into other T. Rowe Price funds. There
   are no 12b-1 fees.
 
<TABLE>
 Table 9  Fees and Expenses of the Fund
<CAPTION>
                                              Annual fund operating expenses
                                       (expenses that are deducted from fund assets)
 ------------------------------------------------------------------------------------------
 <S>                                   <C>                                            <S>
  Management fee                                           0.67%
  Other expenses                                           0.18%
  Total annual fund operating                              0.85%
  expenses
 ------------------------------------------------------------------------------------------
</TABLE>
 
 
 
   Example.  The following table gives you a rough idea of how expense ratios
   may translate into dollars and helps you to compare the cost of investing in
   this fund with that of other funds. Although your actual costs may be higher
   or lower, the table shows how much you would pay if operating expenses remain
   the same, you invest $10,000 you earn a 5% annual return, and you hold the
   investment for the following periods:
 
<TABLE>
<CAPTION>
    <S>                                  <C>          <C>          <C>          <S>
                  1 year                   3 years      5 years     10 years
                    $87                     $271         $471        $1,049
    ---------------------------------------------------------------------------------
</TABLE>
 
 
 
 OTHER INFORMATION ABOUT THE FUND
 
 What are some of the potential rewards of investing overseas through the fund?
 
   Investing abroad increases the opportunities available to you. Many foreign
   countries may have greater potential for economic growth than the U.S. does.
   Foreign investments also provide effective diversification for an all-U.S.
   portfolio, since historically their returns have not moved in sync with U.S.
   stocks over long time periods. Investing a portion of your overall portfolio
   in foreign stock funds can enhance your diversification while providing the
   opportunity to boost long-term returns.
 
 
 How does the portfolio manager try to reduce risk?
 
   The principal tools we use to try to reduce risk are intensive research and
   diversification. Currency hedging techniques may be used from time to time.
 
  . Price-Fleming employs a team of experienced portfolio managers and analysts,
   with offices in Baltimore, London, Tokyo, Singapore, Hong Kong, Buenos Aires,
   and Paris. In addition to conducting our own on-site research on portfolio
   countries and companies, we have close ties to investment analysts based
   throughout the world. Portfolio managers keep close watch on individual
   investments as well
<PAGE>
 
   as on political and economic trends in each country and region. Holdings are
   adjusted according to the manager's analysis and outlook.
  . Price-Fleming employs a team of experienced portfolio managers and analysts,
   with offices in Baltimore, London, Tokyo, Singapore, Hong Kong, Buenos Aires,
   and Paris. In addition to conducting our own on-site research on portfolio
   countries and companies, we have close ties to investment analysts based
   throughout the world. 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.
 
  . Diversification significantly reduces, but does not eliminate, risk. The
   impact on the 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 when investments are spread among many
   countries. However, the economies and financial markets of countries in a
   certain region may be influenced heavily by one another.
 
  . Though the fund doesn't normally engage in extensive currency hedging, fund
   managers can employ currency forwards and options to hedge the risk to the
   portfolio when foreign exchange movements are expected to be unfavorable for
   U.S. investors. In a general sense, these tools allow a manager to lock in a
   specified exchange rate for a stated period of time. (For more details,
   please see Foreign Currency Transactions under Investment Policies and
   Practices.) If the manager's forecast proves to be wrong, such a hedge may
   cause a loss. Also, it may be difficult or impractical to hedge currency risk
   in many emerging countries.
 
 
 How may the euro affect the fund?
 
   The introduction of the new european common currency, the euro, on January 1,
   1999, should not have an immediate impact on fund share prices. However, the
   move to a common currency by 11 diverse nations with varying economic and
   political systems does carry risks for funds with significant investments in
   euro-denominated assets. (The participating nations are Germany, France,
   Italy, the Netherlands, Spain, Portugal, Austria, Belgium, Finland, Ireland,
   and Luxembourg.) The new currency, or the economies of those countries, could
   be adversely affected if the European Economic and Monetary Union does not
   appear to be working smoothly. On the other hand, the euro may be beneficial
   over time by encouraging competition and productivity.
 
 
 Is there other information I can review before making a decision?
 
   Investment Policies and Practices in Section 3 discusses various types of
   portfolio securities the fund may purchase as well as types of management
   practices the fund may use.
<PAGE>
 
   
ABOUT THE FUNDS                                   
 ABOUT YOUR ACCOUNT
                                        2
 
 
 PRICING SHARES AND RECEIVING SALE PROCEEDS
 ----------------------------------------------------------
   Here are some procedures you should know when investing in a T. Rowe Price
   fund.
 
 
 How and when shares are priced
 
   
   The share price (also called "net asset value" or NAV per share) for the
   funds is calculated at the close of the New York Stock Exchange, normally 4
   p.m. ET, each day the New York Stock Exchange is open for business. To
   calculate the NAV, the fund's assets are valued and totaled, liabilities are
   subtracted, and the balance, called net assets, is divided by the number of
   shares outstanding.Current market values are used to price fund shares.    
 
   The 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.
 
  . The various ways you can buy, sell, and exchange shares are explained at the
   end of this prospectus and on the New Account Form. These procedures may
   differ for institutional and employer-sponsored retirement accounts.
 
 
 How your purchase, sale, or exchange price is determined
 
   If we receive your request in correct form by 4 p.m. ET, your transaction
   will be priced at that day's NAV. If we receive it after 4 p.m., it will be
   priced at the next business day's NAV.
 
   We cannot accept orders that request a particular day or price for your
   transaction or any other special conditions.
 
   Fund shares may be purchased through various third-party intermediaries
   including banks, brokers, and investment advisers. Where authorized by a
   fund, orders will be priced at the NAV next computed after receipt by the
   intermediary. Consult your intermediary to determine when your orders will be
   priced. The intermediary may charge a fee for its services.
<PAGE>
 
T. ROWE PRICE
   Note: The time at which transactions and shares are priced and the time until
   which orders are accepted may be changed in case of an emergency or if the
   New York Stock Exchange closes at a time other than 4 p.m. ET.
 
 
 How you can receive the proceeds from a sale
 
  . When filling out the New Account Form, you may wish to give yourself the
   widest range of options for receiving proceeds from a sale.
 
   If your request is received by 4 p.m. ET in correct form, proceeds are
   usually sent on the next business day. Proceeds can be sent to you by mail or
   to your bank account by Automated Clearing House (ACH) transfer or bank wire.
   Proceeds sent by ACH transfer should be credited the second day after the
   sale. ACH is an automated method of initiating payments from, and receiving
   payments in, your financial institution account. The ACH system is supported
   by over 20,000 banks, savings banks, and credit unions. Proceeds sent by bank
   wire should be credited to your account the next business day.
 
   
  . Exception: Under certain circumstances and when deemed to be in the fund's
   best interests, your proceeds may not be sent for up to seven calendar days
   after we receive your redemption request.    
 
  . If for some reason we cannot accept your request to sell shares, we will
   contact you.
 
 
 USEFUL INFORMATION ON DISTRIBUTIONS AND TAXES
 ----------------------------------------------------------
  . All net investment income and realized capital gains are distributed to
   shareholders.
 
 
 Dividends and Other Distributions
 
   Dividend and capital gain distributions are reinvested in additional fund
   shares in your account unless you select another option on your New Account
   Form. The advantage of reinvesting distributions arises from compounding;
   that is, you receive income dividends and capital gain distributions on a
   rising number of shares.
 
   Distributions not reinvested are paid by check or transmitted to your bank
   account via ACH. If the Post Office cannot deliver your check, or if your
   check remains uncashed for six months, the fund reserves the right to
   reinvest your distribution check in your account at the NAV on the business
   day of the reinvestment and to reinvest all subsequent distributions in
   shares of the fund. No interest will accrue on amounts represented by
   uncashed distribution or redemption checks.
<PAGE>
 
   
ABOUT YOUR ACCOUNT                                
   Income dividends
  . The International Stock Fund declares and pays a dividend (if any) annually.
   The dividends will not be eligible for the 70% deduction for dividends
   received by corporations, if, as expected, none of the fund's income consists
   of dividends paid by U.S. corporations.
 
  . The Equity Income Fund declares and pays a dividend (if any) quarterly. All
   or part of the fund's dividends will be eligible for the 70% deduction for
   dividends received by corporations.
 
  . 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.
 
  . The Prime Reserve Fund declares income dividends daily to shareholders of
   record as of 12 noon ET on that day. Wire purchase orders received before 12
   noon ET receive the dividend for that day. Other purchase orders receive the
   dividend for the next business day after payment has been received.
 
  . Dividends are paid on the first business day of each month.
 
  . Fund shares will earn dividends through the date of redemption; also, 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.
 
   Capital gains
  . Since money funds are managed to maintain a constant share price, the Prime
   Reserve Fund is not expected to make capital gain distributions.
 
  . A capital gain or loss is the difference between the purchase and sale price
   of a security.
 
  . If a fund has net capital gains for the year (after subtracting any capital
   losses), they are usually declared and paid in December to shareholders of
   record on a specified date that month. For the Equity Income Fund, if a
   second distribution is necessary, it is usually declared and paid during the
   first quarter of the following year.
 
 
 Tax Information
 
  . You will be sent timely information for your tax filing needs.
 
   You need to be aware of the possible tax consequences when:
 
  . You sell fund shares, including an exchange from one fund to another.
<PAGE>
 
T. ROWE PRICE
  . The fund makes a distribution to your account.
 
   Taxes on fund redemptions
   When you sell shares in any fund, you may realize a gain or loss. An exchange
   from one fund to another is still a sale for tax purposes.
 
   
   In January, you will be sent Form 1099-B indicating the date and amount of
   each sale you made in the fund during the prior year. This information will
   also be reported to the IRS. For most new accounts or those opened by
   exchange in 1984 or later, we will provide the gain or loss on the shares you
   sold during the year, based on the "average cost," single category method.
   This information is not reported to the IRS, and you do not have to use it.
   You may calculate the cost basis using other methods acceptable to the IRS,
   such as "specific identification."    
 
   To help you maintain accurate records, we send you a confirmation immediately
   following each transaction you make (except for systematic purchases and
   redemptions) and a year-end statement detailing all your transactions in each
   fund account during the year.
 
   Taxes on fund distributions
  . The following summary does not apply to retirement accounts, such as IRAs,
   which are not subject to current tax.
 
   In January, you will be sent Form 1099-DIV indicating the tax status of any
   dividend and capital gain distributions made to you. This information will
   also be reported to the IRS. Distributions made by a fund are generally
   taxable to you for the year in which they were paid. You will be sent any
   additional information you need to determine your taxes on fund
   distributions, such as the portion of your dividend, if any, that may be
   exempt from state income taxes.
 
   The tax treatment of a capital gain distribution is determined by how long
   the fund held the portfolio securities, not how long you held shares in the
   fund. Short-term (one year or less) capital gain distributions are taxable at
   the same rate as ordinary income and long-term gains on securities held more
   than 12 months, are taxed at a maximum rate of 20%. If you realized a loss on
   the sale or exchange of fund shares that you held six months or less, your
   short-term loss will be reclassified to a long-term loss to the extent of any
   long-term capital gain distribution received during the period you held the
   shares.
 
   Gains and losses from the sale of foreign currencies and the foreign currency
   gain or loss resulting from the sale of a foreign debt security can increase
   or decrease a fund's ordinary income dividend. Net foreign currency losses
   may cause in a fund's dividend to be classified as a return of capital.
<PAGE>
 
   
ABOUT YOUR ACCOUNT                                
   If a fund pays nonrefundable taxes to foreign governments during the year,
   the taxes will reduce the fund's dividends but will still be included in your
   taxable income. However, you may be able to claim an offsetting deduction on
   your tax return for your portion of foreign taxes paid by a fund.
 
   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 a fund 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.
 
  . Distributions are taxable whether reinvested in additional shares or
   received in cash.
 
   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 a portion of the money you just invested in the form of a taxable
   distribution. Therefore, you may wish to find out a fund's record date before
   investing. Of course, a fund's share price may, at any time, reflect
   undistributed capital gains or income and unrealized appreciation, which may
   result in future taxable distributions.
 
 
 TRANSACTION PROCEDURES AND SPECIAL REQUIREMENTS
 ----------------------------------------------------------
  . Following these procedures helps assure timely and accurate transactions.
 
 
 Purchase Conditions
 
   Nonpayment
   If your payment is not received or you pay with a check or ACH transfer that
   does not clear, your purchase will be canceled. You will be responsible for
   any losses or expenses incurred by the fund or transfer agent, and the fund
   can redeem shares you own in this or another identically registered T. Rowe
   Price fund as reimbursement. The fund and its agents have the right to reject
   or cancel any purchase, exchange, or redemption due to nonpayment.
 
   U.S. dollars
   
   All purchases must be paid for in U.S. dollars; checks must be drawn on U.S.
   banks. The fund does not accept purchases made by credit card check.    
<PAGE>
 
T. ROWE PRICE
 Sale (Redemption) Conditions
 
   Holds on immediate redemptions: 10-day hold
   
   If you sell shares that you just purchased and paid for by check or ACH
   transfer, the fund will process your redemption but will generally delay
   sending you the proceeds for up to 10 calendar days to allow the check or
   transfer to clear. If your redemption request was sent by mail or mailgram,
   proceeds will be mailed no later than the seventh calendar day following
   receipt unless the check or ACH transfer has not cleared. (The 10-day hold
   does not apply to the following: purchases paid for by bank wire; cashier's,
   certified, or treasurer's checks; or automatic purchases through your
   paycheck.)    
 
   Telephone, Tele*Access/(R)/, and personal computer transactions
   Exchange and redemption services through telephone and Tele*Access are
   established automatically when you sign the New Account Form unless you check
   the boxes that state you do not want these services. Personal computer
   transactions must be authorized separately. T. Rowe Price funds and their
   agents use reasonable procedures (including shareholder identity
   verification) to confirm that instructions given by telephone or computer are
   genuine; they are not liable for acting on these instructions. If these
   procedures are not followed, it is the opinion of certain regulatory agencies
   that the funds and their agents may be liable for any losses that may result
   from acting on the instructions. A confirmation is sent promptly after a
   transaction. All telephone conversations are recorded.
 
   Redemptions over $250,000
   Large sales can adversely affect a portfolio manager's ability to implement a
   fund's investment strategy by causing the premature sale of securities that
   would otherwise be held. If, in any 90-day period, you redeem (sell) more
   than $250,000, or your sale amounts to more than 1% of fund net assets, the
   fund has the right to pay the difference between the redemption amount and
   the lesser of the two previously mentioned figures with securities from the
   fund.
 
 
 Excessive Trading
 
  . T. Rowe Price may bar excessive traders from purchasing shares.
 
   
   Frequent trades, involving either substantial fund assets or a substantial
   portion of your account or accounts controlled by you, can disrupt management
   of the fund and raise its expenses. To deter such activity, the fund has
   adopted an excessive trading policy. If you violate our excessive trading
   policy, you may be barred indefinitely and without further notice from
   further purchases of T. Rowe Price funds.    
 
  . Trades placed directly with T. Rowe Price If you trade directly with T. Rowe
   Price, you can make one purchase and sale involving the same fund within any
   120-day period. For example, if you are in fund A, you can move substantial
   assets from fund A to fund B and, within the next 120 days, sell your shares
   in fund B to
<PAGE>
 
   return to fund A or move to fund C. If you exceed this limit, you are in
   violation of our excessive trading policy.
  . Trades placed directly with T. Rowe Price If you trade directly with T. Rowe
   Price, you can make one purchase and sale involving the same fund within any
   120-day period. For example, if you are in fund A, you can move substantial
   assets from fund A to fund B and, within the next 120 days, sell your shares
   in fund B to
   return to fund A or move to fund C. If you exceed this limit, you are in
   violation of our excessive trading policy.
 
   
   Two types of transactions are exempt from this policy: 1) trades solely in
   money market funds (exchanges between a money fund and a nonmoney fund are
   not exempt); and 2) systematic purchases or redemptions (see Information
   About Your Services).    
 
  . Trades placed through intermediaries If you purchase fund shares through an
   intermediary including a broker, bank, investment adviser, or other third
   party and hold them for less than 60 calendar days, you are in violation of
   our excessive trading policy.
 
  . If you violate our excessive trading policy, you may be barred indefinitely
   and without further notice from further purchases of T. Rowe Price funds.
 
 
 Keeping Your Account Open
 
   Due to the relatively high cost to a fund of maintaining small accounts, we
   ask you to maintain an account balance of at least $1,000. If your balance is
   below $1,000 for three months or longer, we have the right to close your
   account after giving you 60 days in which to increase your balance.
 
 
 Small Account Fee
 
   Because of the disproportionately high costs of servicing accounts with low
   balances, a $10 fee, paid to T. Rowe Price Services, the fund's transfer
   agent, will automatically be deducted from nonretirement accounts with
   balances falling below a minimum level. The valuation of accounts and the
   deduction are expected to take place during the last five business days of
   September. The fee will be deducted from accounts with balances below $2,000,
   except for UGMA/ UTMA accounts, for which the limit is $500. The fee will be
   waived for any investor whose T. Rowe Price mutual fund investments total
   $25,000 or more. Accounts employing automatic investing (e.g., payroll
   deduction, automatic purchase from a bank account, etc.) are also exempt from
   the charge. The fee will not apply to IRAs and other retirement plan
   accounts. (A separate custodial fee may apply to IRAs and other retirement
   plan accounts.)
 
 
 Signature Guarantees
 
  . A signature guarantee is designed to protect you and the T. Rowe Price funds
   from fraud by verifying your signature.
 
   You may need to have your signature guaranteed in certain situations, such
   as:
 
  . Written requests 1) to redeem over $100,000, or 2) to wire redemption
   proceeds.
<PAGE>
 
T. ROWE PRICE
  . Remitting redemption proceeds to any person, address, or bank account not on
   record.
 
  . Transferring redemption proceeds to a T. Rowe Price fund account with a
   different registration (name or ownership) from yours.
 
  . Establishing certain services after the account is opened.
 
   You can obtain a signature guarantee from most banks, savings institutions,
   broker-dealers, and other guarantors acceptable to T. Rowe Price. We cannot
   accept guarantees from notaries public or organizations that do not provide
   reimbursement in the case of fraud.
<PAGE>
 
   
ABOUT YOUR ACCOUNT                                
 MORE ABOUT THE FUNDS
                                        3
 
 
 ORGANIZATION AND MANAGEMENT
 ----------------------------------------------------------
 
 How is the fund 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 organized in 1979 as a Maryland
   corporation. The Prime Reserve, New Income, and Equity Income Funds, as well
   as the corporation, registered with the Securities and Exchange Commission
   under the Investment Company Act of 1940 as diversified, open-end investment
   companies, commonly known as "mutual funds."
 
  . Shareholders benefit from T. Rowe Price's 62 years of investment management
   experience.
 
 
 What is meant by "shares"?
 
   As with all mutual funds, investors purchase shares when they put money in a
   fund. These shares are part of a fund's authorized capital stock, but share
   certificates are not issued.
 
   Each share and fractional share entitles the shareholder to:
 
  . Receive a proportional interest in a fund's income and capital gain
   distributions.
 
  . Cast one vote per share on certain fund matters, including the election of
   fund directors or trustees, changes in fundamental policies, or approval of
   changes in the fund's management contract.
 
 
 Do T. Rowe Price funds have annual shareholder meetings?
 
   The fund is not required to hold annual meetings and, to avoid unnecessary
   costs to fund shareholders, does not intend to do so except when certain
   matters, such as a change in its fundamental policies, must be decided. In
   addition, shareholders representing at least 10% of all eligible votes may
   call a special meeting, if they wish, for the purpose of voting on the
   removal of any fund director or trustee. If a meeting is held and you cannot
   attend, you can vote by proxy. Before the meeting, the fund will send you
   proxy materials that explain the issues to be decided and include
   instructions on voting by mail or telephone, or on the Internet.
<PAGE>
 
T. ROWE PRICE
  . All decisions regarding the purchase and sale of fund investments are made
   by T. Rowe Price  -  specifically by the fund's portfolio managers.
 
 
 Who runs the fund?
 
   General Oversight
   The funds are governed by a Board of Directors or Trustees that meets
   regularly to review the funds' 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
   Associates, Inc. (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 the fund's 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, Singapore, Hong Kong, Buenos Aires, and
   Paris. 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 Group Limited (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 a subsidiary of Jardine Fleming. Jardine Fleming is
   owned by Flemings. 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.    
 
  . 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.
 
   Portfolio Management
   The Prime Reserve Fund has an Investment Advisory Committee with the
   following members: Edward A. Wiese, Chairman, Patrice L. Berchtenbreiter Ely,
   Brian E. Burns, Robert P. Campbell, 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.
<PAGE>
 
   
ABOUT YOUR ACCOUNT                                
   The New Income Fund has an Investment Advisory Committee with the following
   members: William T. Reynolds, Chairman, Connice A. Bavely, Steven G. Brooks,
   Heather R. Landon, Alan D Levenson, Edmund M. Notzon, 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. Reynolds became chairman of the fund's
   committee in 1998. He joined T. Rowe Price in 1981 and has been managing
   investments since 1978.
 
   
   The Equity Income Fund has an Investment Advisory Committee with the
   following members: Brian C. Rogers, Chairman, Stephen W. Boesel, Arthur B.
   Cecil III, Giri Devulapally, Richard P. Howard, John D. Linehan, 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 fund's
   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 members of the advisory group
   are: Martin G. Wade, John R. Ford, James B.M. Seddon, Mark C.J.
   Bickford-Smith, and David J.L. Warren.
 
   Martin Wade joined Price-Fleming in 1979 and has 30 years of experience with
   the Fleming Group in research, client service, and investment management.
   (Fleming Group includes Robert Fleming and/or Jardine Fleming.) John Ford
   joined Price-Fleming in 1982 and has 19 years of experience with the Fleming
   Group in research and portfolio management. James Seddon joined Price-Fleming
   in 1987 and has 12 years of portfolio management experience. Mark
   Bickford-Smith joined Price-Fleming in 1995 and has 14 years of experience in
   equity research and portfolio management. David Warren joined Price-Fleming
   in 1983 and has 18 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.
<PAGE>
 
T. ROWE PRICE
   The Management Fee
   This fee has two parts - an "individual fund fee," which reflects a fund's
   particular characteristics, and a "group fee." The group fee, which is
   designed to reflect the benefits of the shared resources of the T. Rowe Price
   investment management complex, is calculated daily based on the combined net
   assets of all T. Rowe Price funds (except the Spectrum Funds, and any
   institutional, index, or private label mutual funds). The group fee schedule
   (shown below) is graduated, declining as the asset total rises, so
   shareholders benefit from the overall growth in mutual fund assets.
 
   
<TABLE>
   Group Fee Schedule
<CAPTION>
    <S>                                                                <C>               <C>                   <C>
 
                                                                       0.334%            First $50 billion/a/
                                                                       ----------------------------------------
                                                                       0.305%            Next $30 billion
                                                                       ----------------------------------------
                                                                       0.300%            Next $40 billion
                                                                       ----------------------------------------
                                                                       0.295%            Thereafter
    ----------------------------------------------------------------------------------------------------------------
</TABLE>
 
    
 
   /a/     Represents a blended group fee rate containing various break points.
 
 
 
   
   The fund's portion of the group fee is determined by the ratio of its daily
   net assets to the daily net assets of all the T. Rowe Price funds described
   previously. Based on combined T. Rowe Price funds' assets of over $89 billion
   at December 31, 1998, the group fee was 0.32%. The individual fund fees are
   as follows: Prime Reserve Fund, 0.05%; New Income Fund, 0.15%; Equity Income
   Fund, 0.25%; and International Stock Fund, 0.35%.    
 
 
 Year 2000 Processing Issue
 
   Many computer programs use two digits rather than four to identify the year.
   These programs, if not adapted, will not correctly handle the change from
   "99" to "00" on January 1, 2000, and will not be able to perform necessary
   functions. The Year 2000 issue affects virtually all companies and
   organizations.
 
   T. Rowe Price and Price-Fleming have implemented steps intended to assure
   that major computer systems and processes are capable of Year 2000
   processing. We are working with third parties to assess the adequacy of their
   compliance efforts and are developing contingency plans intended to assure
   that third-party noncompliance will not materially affect our operations.
 
   Companies, organizations, governmental entities, and markets in which the T.
   Rowe Price funds invest will be affected by the Year 2000 issue, but at this
   time the funds cannot predict the degree of impact. For funds that invest in
   foreign markets, especially emerging markets, it is possible foreign
   companies and markets will not be as prepared for Year 2000 as domestic
   companies and markets. To the extent the effect of Year 2000 is negative, a
   fund's returns could be reduced.
<PAGE>
 
   
MORE ABOUT THE FUNDS                              
  International Stock Fund
 
   Research and Administration
   Certain administrative support is provided by T. Rowe Price, which receives
   from Price-Fleming a fee of 0.15% of the market value of all assets in equity
   accounts, 0.15% of the market value of all assets in active fixed income
   accounts, and 0.035% 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 International Holdings Limited (JFIH), for which each receives from
   Price-Fleming a fee of 0.075% of the market value of all assets in equity
   accounts under Price-Fleming's management. FIM and JFIH also provide research
   and administration support for fixed income accounts for which each receive a
   fee of 0.075% of the market value of all assets in active fixed income
   accounts and 0.175% of such market value in passive fixed income accounts
   under Price-Fleming's management. FIM is a wholly owned subsidiary of
   Flemings. JFIH is a wholly owned subsidiary of Jardine Fleming.
 
 
 
 UNDERSTANDING PERFORMANCE INFORMATION
 ----------------------------------------------------------
   
   This section should help you understand the terms used to describe fund
   performance. You will come across them in shareholder reports you receive
   from us; in our newsletter, The Price Report; in T. Rowe Price
   advertisements; and in the media.    
 
 
 Total Return
 
   This tells you how much an investment in a fund has changed in value over a
   given time period. It reflects any net increase or decrease in the share
   price and assumes that all dividends and capital gains (if any) paid during
   the period were reinvested in additional shares. Therefore, total return
   numbers include the effect of compounding.
 
   Advertisements for a fund may include cumulative or average annual total
   return figures, which may be compared with various indices, other performance
   measures, or other mutual funds.
 
 
 Cumulative Total Return
 
   This is the actual return of an investment for a specified period. A
   cumulative return does not indicate how much the value of the investment may
   have fluctuated during the period. For example, a fund could have a 10-year
   positive cumulative return despite experiencing three negative years during
   that time.
<PAGE>
 
T. ROWE PRICE
 Average Annual Total Return
 
   This is always hypothetical and should not be confused with actual
   year-by-year results. It smooths out all the variations in annual performance
   to tell you what constant year-by-year return would have produced the
   investment's actual cumulative return. This gives you an idea of an
   investment's annual contribution to your portfolio, provided you held it for
   the entire period.
 
 
 Yield
 
   The current or "dividend" yield on a fund or any investment tells you the
   relationship between the investment's current level of annual income and its
   price on a particular day. The dividend yield reflects the actual income paid
   to shareholders for a given period, annualized, and divided by the price at
   the end of the given period. For example, a fund providing $5 of annual
   income per share and a price of $50 has a current yield of 10%. Yields can be
   calculated for any time period.
 
   The advertised or Securities and Exchange Commission (SEC) yield is found by
   determining the net income per share (as defined by the SEC) earned by a fund
   during a 30-day base period and dividing this amount by the per share price
   on the last day of the base period. The SEC yield may differ from the
   dividend yield.
 
   Prime Reserve Fund  The fund may advertise a "current" yield, reflecting the
   latest seven-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
 ----------------------------------------------------------
   This section takes a detailed look at some of the types of securities the
   fund may hold in its portfolio and the various kinds of investment practices
   that may be used in day-to-day portfolio management. The fund's investment
   program is subject to further restrictions and risks described in the
   Statement of Additional Information.
 
   Shareholder approval is required to substantively change the fund's objective
   and certain investment restrictions noted in the following section as
   "fundamental policies." The managers follow certain "operating policies,"
   which can be changed without shareholder approval. However, significant
   changes are discussed with shareholders in fund reports. The fund adheres to
   applicable invest-
<PAGE>
 
   
MORE ABOUT THE FUNDS                              
   ment restrictions and policies at the time it makes an investment. A later
   change in circumstances will not require the sale of an investment if it was
   proper at the time it was made.
 
   The fund's holdings of certain kinds of investments cannot exceed maximum
   percentages of total assets, which are set forth in this prospectus. For
   instance, this fund is not permitted to invest more than 10% of total assets
   in hybrid instruments. While these restrictions provide a useful level of
   detail about the fund's investment program, investors should not view them as
   an accurate gauge of the potential risk of such investments. For example, in
   a given period, a 5% investment in hybrid instruments could have
   significantly more of an impact on the fund's share price than its weighting
   in the portfolio. The net effect of a particular investment depends on its
   volatility and the size of its overall return in relation to the performance
   of all the fund's other investments.
 
   Changes in the fund's holdings, the fund's performance, and the contribution
   of various investments are discussed in the shareholder reports sent to you.
 
  . Fund managers have considerable leeway in choosing investment strategies and
   selecting securities they believe will help the fund achieve its objective.
 
 
 Prime Reserve Fund
 
 
 Types of Portfolio Securities
 
   In seeking to meet its investment objective, the fund may invest in any type
   of short-term security or instrument whose investment characteristics are
   consistent with the fund's investment program. The following pages describe
   the principal types of portfolio securities and investment management
   practices of the fund.
 
   Operating policy Except as may be permitted by Rule 2a-7, 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.
 
   Money Market Securities
   Money market securities are 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 so 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.
<PAGE>
 
T. ROWE PRICE
   Except for adjustable rate instruments, a 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. These interest rate adjustments tend to minimize fluctuations
   in the securities' principal values. When calculating its weighted average
   maturity, the fund may shorten the maturity of these securities in accordance
   with Rule 2a-7.
 
   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. On occasion, the pool of assets
   may also include a swap obligation, which is used to change the cash flows on
   the underlying assets. As an example, a swap may be used to allow floating
   rate assets to back a fixed rate obligation. Credit quality depends primarily
   on the quality of the underlying assets, the level of credit support, if any,
   provided by the issuer, and the credit quality of the swap counterparty, if
   any. 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, the servicing agent, the
   financial institution providing the credit support, or the swap counterparty.
   There is no limit on the fund's investment in these securities.
 
   Foreign Securities
   The fund may invest in certain 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.
 
  . Foreign securities increase the fund's diversification and may enhance
   return, but they involve special risks, especially from developing countries.
 
   Operating policy  The fund may invest without limit in U.S.
   dollar-denominated foreign securities.
<PAGE>
 
   
MORE ABOUT THE FUNDS                              
   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 (and to the extent permitted by the SEC,
   other Price funds) as a temporary measure for emergency purposes, to
   facilitate redemption requests, or for other purposes consistent with the
   fund's investment objective and program. Such borrowings may be
   collateralized with fund assets, subject to restrictions.
 
   Fundamental policy Borrowings may not exceed 33/1//\\/3/\\% of total fund
   assets.
 
   Operating policy The fund may not transfer as collateral any portfolio
   securities except as necessary in connection with permissible borrowings or
   investments, and then such transfers may not exceed 33/1//\\/3/\\% of the
   fund's total assets. The fund may not purchase additional securities when
   borrowings exceed 5% of total assets.
 
   Lending of Portfolio Securities
   Like other mutual funds, the fund may lend securities to broker-dealers,
   other institutions, or other persons to earn additional income. The principal
   risk is the potential insolvency of the broker-dealer or other borrower. In
   this event, the fund could experience delays in recovering its securities and
   possibly capital losses.
 
   Fundamental policy The value of loaned securities may not exceed
   33/1//\\/3/\\% of total fund assets.
 
 
 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 described in this section) whose investment characteristics are
   consistent with the fund's investment program. The following pages describe
   the principal types of portfolio securities and investment management
   practices of the fund.
<PAGE>
 
T. ROWE PRICE
   Fundamental policy The fund will not purchase a security if, as a result,
   with respect to 75% of its total assets, more than 5% of its total assets
   would be invested in securities of a single issuer, or if more than 10% of
   the outstanding voting securities of the issuer would be held by the fund.
   These limitations do not apply to the fund's purchase 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. These
   interest rate adjustments tend to minimize fluctuations in the bonds'
   principal values. The maturity of those securities may be shortened under
   certain specified conditions.
 
   Bonds may be designated as 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.
 
   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.
<PAGE>
 
   
MORE ABOUT THE FUNDS                              
   Convertible Securities and Warrants
   The fund may invest in debt or preferred equity securities convertible into,
   or exchangeable for, equity securities. Traditionally, convertible securities
   have paid dividends or interest at rates higher than common stocks but lower
   than nonconvertible securities. They generally participate in the
   appreciation or depreciation of the underlying stock into which they are
   convertible, but to a lesser degree. In recent years, convertibles have been
   developed which combine higher or lower current income with options and other
   features. Warrants are options to buy a stated number of shares of common
   stock at a specified price anytime during the life of the warrants
   (generally, two or more years).
 
   Operating policy 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.
 
   Foreign Securities
   The fund may invest in foreign securities. These include
   nondollar-denominated securities traded outside of the U.S. and
   dollar-denominated securities of foreign issuers traded in the U.S. (such as
   ADRs). Such investments increase a portfolio's diversification and may
   enhance return, but they also involve some special risks such as exposure to
   potentially adverse local political and economic developments;
   nationalization and exchange controls; potentially lower liquidity and higher
   volatility; possible problems arising from accounting, disclosure,
   settlement, and regulatory practices that differ from U.S. standards; and the
   chance that fluctuations in foreign exchange rates will decrease the
   investment's value (favorable changes can increase its value). These risks
   are heightened for investments in developing countries.
 
   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.
 
   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
<PAGE>
 
T. ROWE PRICE
   in the creditworthiness of the originator, servicing agent, or of the
   financial institution providing the credit support. There is no limit on the
   fund's investment in these 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-backed 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, these 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. In addition, when rates rise and
   prepayments slow, the effective duration of mortgage-backed securities
   extends, resulting in increased volatility.
 
  . There is no limit on the fund's investment in mortgage-backed securities.
 
   Additional mortgage-backed securities in which the fund may invest include:
 
  . 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.
 
  . Stripped Mortgage Securities Stripped mortgage securities (a type of
   potentially high-risk derivative) are created by separating the interest and
   principal payments
<PAGE>
 
   
MORE ABOUT THE FUNDS                              
   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 another receives principal payments (POs). Unlike with
   other mortgage-backed securities and POs, the value of IOs tends to move in
   the same direction as interest rates. The fund can use IOs as a hedge against
   falling prepayment 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 that pay
   variable rates of interest that adjust inversely with, and more rapidly than,
   short-term interest rates. In addition, if interest rates rise rapidly and
   prepayment rates slow more than expected, certain CMOs, in addition to losing
   value, can exhibit characteristics of longer-term securities and become more
   volatile. 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.
 
   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.
<PAGE>
 
T. ROWE PRICE
  . 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.
 
   Deferrable Subordinated Securities
   Recently, securities have been issued which have long maturities and are
   deeply subordinated in the issuer's capital structure. They generally have
   30-year maturities and permit the issuer to defer distributions for up to
   five years. These characteristics give the issuer more financial flexibility
   than is typically the case with traditional bonds. As a result, the
   securities may be viewed as possessing certain "equity-like" features by
   rating agencies and bank regulators. However, the securities are treated as
   debt securities by market participants, and the fund intends to treat them as
   such as well. These securities may offer a mandatory put or remarketing
   option that creates an effective maturity date significantly shorter than the
   stated one. The fund will invest in these securities to the extent their
   yield, credit, and maturity characteristics are consistent with the fund's
   investment objective and program.
 
   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 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 this industry 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.
 
   Operating policy  The fund has no current intention of concentrating in the
   utility industry.
 
   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.
<PAGE>
 
   
MORE ABOUT THE FUNDS                              
 Types of Management Practices
 
   Reserve Position
   The fund will hold a certain portion of its assets in money market reserves.
   The fund's reserve position can consist of shares of one or more T. Rowe
   Price internal money market funds as well as short-term, high-quality U.S.
   and foreign dollar-denominated money market securities, including repurchase
   agreements. For temporary, defensive purposes, the fund may invest without
   limitation in money market reserves. The effect of taking such a position is
   that the fund may not achieve its investment objective. The reserve position
   provides flexibility in meeting redemptions, expenses, and the timing of new
   investments and can serve as a short-term defense during periods of unusual
   market volatility.
 
   Borrowing Money and Transferring Assets
   The fund can borrow money from banks (and to the extent permitted by the SEC,
   other Price funds) as a temporary measure for emergency purposes, to
   facilitate redemption requests, or for other purposes consistent with the
   fund's investment objective and program. Such borrowings may be
   collateralized with fund assets, subject to restrictions.
 
   Fundamental policy Borrowings may not exceed 33/1//\\/3/\\% of total fund
   assets.
 
   Operating policy The fund may not transfer as collateral any portfolio
   securities except as necessary in connection with permissible borrowings or
   investments, and then such transfers may not exceed 33/1//\\/3/\\% of the
   fund's total assets. The fund may not purchase additional securities when
   borrowings exceed 5% of total assets.
 
   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 (where the investor
   purchases the option), or the obligation (where the investor writes (sells)
   the option), to buy or sell an asset at a predetermined price in the future.
   The fund may buy and sell futures and options contracts for any number of
   reasons, including: to manage its exposure to changes in interest rates, bond
   prices, and foreign currencies; as an efficient means of adjusting its
   overall exposure to certain markets; in an effort to enhance income; to
   protect the value of portfolio securities; and to adjust portfolio duration.
   The fund may purchase, sell, or write call and put options on securities,
   financial indices, and foreign currencies.
 
   Futures contracts and options may not always be successful hedges; their
   prices can be highly volatile. Using them could lower the fund's total
   return, and the potential loss from the use of futures can exceed the fund's
   initial investment in such contracts.
<PAGE>
 
T. ROWE PRICE
   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 writes call or put options may not exceed 25% of its
   total assets. The fund will not commit more than 5% of its total assets to
   premiums when purchasing call or put options.
 
   Managing Foreign 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. If the fund were to engage in foreign currency
   transactions, they would be used primarily to protect the fund's foreign
   securities from adverse currency movements relative to the dollar. Such
   transactions involve the risk that anticipated currency movements will not
   occur, and the fund's total return could be reduced.
 
   Operating policy The fund will not commit more than 20% of its total assets
   to forward currency contracts.
 
   Lending of Portfolio Securities
   Like other mutual funds, the fund may lend securities to broker-dealers,
   other institutions, or other persons to earn additional income. The principal
   risk is the potential insolvency of the broker-dealer or other borrower. In
   this event, the fund could experience delays in recovering its securities and
   possibly capital losses.
 
   Fundamental policy The value of loaned securities may not exceed
   33/1//\\/3/\\% of total fund assets.
 
   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 fund's investment 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.
<PAGE>
 
   
MORE ABOUT THE FUNDS                              
   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 rates for
   the fiscal years ended May 31, 1998, 1997, and 1996, were 147.3%, 87.1% and
   35.5%, respectively.
 
 
 Equity 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 described in this section) whose investment characteristics are
   consistent with the fund's investment program. The following pages describe
   various types of portfolio securities and investment management practices of
   the fund.
 
   Fundamental policy  The fund will not purchase a security if, as a result,
   with respect to 75% of its total assets, more than 5% of its total assets
   would be invested in securities of a single issuer, or if more than 10% of
   the voting securities of the issuer would be held by the fund.
 
   The fund invests primarily in common stocks and may, to a lesser degree,
   purchase other types of securities described below.
 
   Common and Preferred Stocks
   Stocks represent shares of ownership in a company. Generally, preferred stock
   has a specified dividend and ranks after bonds and before common stocks in
   its claim on income for dividend payments and on assets should the company be
   liquidated. After other claims are satisfied, common stockholders participate
   in company profits on a pro-rata basis; profits may be paid out in dividends
   or reinvested in the company to help it grow. Increases and decreases in
   earnings are usually reflected in a company's stock price, so common stocks
   generally have the greatest appreciation and depreciation potential of all
   corporate securities. While most preferred stocks pay a dividend, the fund
   may purchase preferred stock where the issuer has omitted, or is in danger of
   omitting, payment of its dividend. Such investments would be made primarily
   for their capital appreciation potential.
 
   Convertible Securities and Warrants
   The fund may invest in debt or preferred equity securities convertible into,
   or exchangeable for, equity securities. Traditionally, convertible securities
   have paid dividends or interest at rates higher than common stocks but lower
   than nonconvertible securities. They generally participate in the
   appreciation or depreciation of the underlying stock into which they are
   convertible, but to a lesser degree. In
<PAGE>
 
T. ROWE PRICE
   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. These include
   nondollar-denominated securities traded outside of the U.S. and
   dollar-denominated securities of foreign issuers traded in the U.S. (such as
   ADRs). Such investments increase a portfolio's diversification and may
   enhance return, but they also involve some special risks, such as exposure to
   potentially adverse local political and economic developments;
   nationalization and exchange controls; potentially lower liquidity and higher
   volatility; possible problems arising from accounting, disclosure,
   settlement, and regulatory practices that differ from U.S. standards; and the
   chance that fluctuations in foreign exchange rates will decrease the
   investment's value (favorable changes can increase its value). These risks
   are heightened for investments in developing countries, and there is no limit
   on the amount of the fund's foreign investments that may be made in such
   countries.
 
   Operating policy  The fund may invest up to 25% of its total assets
   (excluding reserves) in foreign securities.
 
   Fixed Income Securities
   From time to time, 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 those of common stocks. Junk bonds (those rated below BBB or in
   default) are regarded as predominantly speculative with respect to the
   issuer's continuing ability to meet principal and interest payments.
 
   Operating policy  The fund may purchase any type of noninvestment-grade debt
   security (or junk bond) including those in default. The fund will not
   purchase this type of security if immediately after such purchase the fund
   would have more than 10% of its total assets invested in such securities. The
   fund's investments in convertible securities are not subject to this limit.
<PAGE>
 
   
MORE ABOUT THE FUNDS                              
   Hybrid Instruments
   These instruments (a type of potentially high-risk derivative) can combine
   the characteristics of securities, futures, and options. For example, the
   principal amount, redemption, or conversion terms of a security could be
   related to the market price of some commodity, currency, or securities index.
   Such securities may bear interest or pay dividends at below market or even
   relatively nominal rates. Under certain conditions, the redemption value of
   such an investment could be zero.
 
  . Hybrids can have volatile prices and limited liquidity, and their use by the
   fund may not be successful.
 
   Operating policy  The fund may invest up to 10% of its total 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, others may be illiquid, and their sale may involve
   substantial delays and additional costs.
 
   Operating policy  The fund may invest up to 15% of its net assets in illiquid
   securities.
 
   
 Types of Investment Management Practices    
 
   Reserve Position
   The fund will hold a certain portion of its assets in money market reserves.
   The fund's reserve position is expected to consist primarily of shares of one
   or more T. Rowe Price internal money market funds. Short-term, high-quality
   U.S. and foreign dollar-denominated money market securities, including
   repurchase agreements, may also be held. For temporary, defensive purposes,
   the fund may invest without limitation in money market reserves. The effect
   of taking such a position is that the fund may not achieve its investment
   objective. The reserve position provides flexibility in meeting redemptions,
   expenses, and the timing of new investments and can serve as a short-term
   defense during periods of unusual market volatility.
 
   Borrowing Money and Transferring Assets
   The fund can borrow money from banks and other Price funds as a temporary
   measure for emergency purposes, to facilitate redemption requests, or for
   other purposes consistent with the fund's investment objective and program.
   Such borrowings may be collateralized with fund assets, subject to
   restrictions.
 
   Fundamental policy  Borrowings may not exceed 33/1//\\/3/\\% of total fund
   assets.
<PAGE>
 
T. ROWE PRICE
   Operating policy  The fund may not transfer as collateral any portfolio
   securities except as necessary in connection with permissible borrowings or
   investments, and then such transfers may not exceed 33/1//\\/3/\\% of the
   fund's total assets. The fund may not purchase additional securities when
   borrowings exceed 5% of total assets.
 
   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 (where the investor
   purchases the option), or the obligation (where the investor writes (sells)
   the option), to buy or sell an asset at a predetermined price in the future.
   The fund may buy and sell futures and options contracts for any number of
   reasons, including: to manage its exposure to changes in securities prices
   and foreign currencies; as an efficient means of adjusting its overall
   exposure to certain markets; to hedge against a potentially unfavorable
   change in interest rates; in an effort to enhance income; as a cash
   management tool; and to protect the value of portfolio securities; and to
   adjust portfolio duration. The fund may purchase, sell, or write call and put
   options on securities, financial indices, and foreign currencies.    
 
   Futures contracts and options may not always be successful hedges; their
   prices can be highly volatile; using them could lower the fund's total
   return, and the potential loss from the use of futures can exceed the fund's
   initial investment in such contracts.
 
   
   Operating policies  Futures: Initial margin deposits and premiums on options
   used for non-hedging purposes will not exceed 5% of the fund's net asset
   value. Options on securities: The total market value of securities against
   which the fund writes call or put options may not exceed 25% of its total
   assets. The fund will not commit more than 5% of its total assets to premiums
   when purchasing call or put options.    
 
   Managing Foreign Currency Risk
   Investors in foreign securities may "hedge" their exposure to potentially
   unfavorable currency changes by purchasing a contract to exchange one
   currency for another on some future date at a specified exchange rate. In
   certain circumstances, a "proxy currency" may be substituted for the currency
   in which the investment is denominated, a strategy known as "proxy hedging."
   If the fund were to engage in foreign currency transactions, they would be
   used primarily to protect the fund's foreign securities from adverse currency
   movements relative to the dollar. Such transactions involve the risk that
   anticipated currency movements will not occur, and the fund's total return
   could be reduced.
<PAGE>
 
   
MORE ABOUT THE FUNDS                              
   Lending of Portfolio Securities
   Like other mutual funds, the fund may lend securities to broker-dealers,
   other institutions, or other persons to earn additional income. The principal
   risk is the potential insolvency of the broker-dealer or other borrower. In
   this event, the fund could experience delays in recovering its securities and
   possibly capital losses.
 
   Fundamental policy  The value of loaned securities may not exceed
   33/1//\\/3/\\% of total fund assets.
 
   Portfolio Turnover
   The fund will not generally trade in securities for short-term profits, but,
   when circumstances warrant, securities may be purchased and sold without
   regard to the length of time held. A high turnover rate may increase
   transaction costs and result in higher capital gain distributions by the
   fund. The fund's portfolio turnover rates for the fiscal years ending
   December 31, 1998, 1997, and 1996, were 22.6%, 23.9%, and 25.0%,
   respectively.
 
 
 International Stock Fund
 
 
 Types of Portfolio Securities
 
   In seeking to meet its investment objective, the fund may invest in any type
   of security or instrument (including certain potentially high-risk
   derivatives described in this section) whose investment characteristics are
   consistent with the fund's investment program. The following pages describe
   various types of portfolio securities and investment management practices of
   the fund.
 
   Fundamental policy  The fund will not purchase a security if, as a result,
   with respect to 75% of its total assets, more than 5% of its total assets
   would be invested in securities of a single issuer, or if more than 10% of
   the voting securities of the issuer would be held by the fund.
 
   The fund invests primarily in common stocks and may, to a lesser degree,
   purchase other types of securities described below.
 
   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
<PAGE>
 
T. ROWE PRICE
   stock where the issuer has omitted, or is in danger of omitting, payment of
   its dividend. Such investments would be made primarily for their capital
   appreciation potential.
 
   Convertible Securities and Warrants
   The fund may invest in debt or preferred equity securities convertible into,
   or exchangeable for, equity securities. Traditionally, convertible securities
   have paid dividends or interest at rates higher than common stocks but lower
   than nonconvertible securities. They generally participate in the
   appreciation or depreciation of the underlying stock into which they are
   convertible, but to a lesser degree. In recent years, convertibles have been
   developed which combine higher or lower current income with options and other
   features. Warrants are options to buy a stated number of shares of common
   stock at a specified price anytime during the life of the warrants
   (generally, two or more years).
 
   Fixed Income Securities
   The fund may invest in any type of investment-grade security. Such securities
   would be purchased in companies that 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.
 
   Hybrid Instruments
   These instruments (a type of potentially high-risk derivative) can combine
   the characteristics of securities, futures, and options. For example, the
   principal amount, redemption, or conversion terms of a security could be
   related to the market price of some commodity, currency, or securities index.
   Such securities may bear interest or pay dividends at below market or even
   relatively nominal rates. Under certain conditions, the redemption value of
   such an investment could be zero.
 
  . Hybrids can have volatile prices and limited liquidity, and their use by the
   fund may not be successful.
 
   Operating policy  The fund may invest up to 10% of its total 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, others may be illiquid, and their sale may involve
   substantial delays and additional costs.
 
   Operating policy  The fund may invest up to 15% of its net assets in illiquid
   securities.
<PAGE>
 
   
MORE ABOUT THE FUNDS                              
 Types of Management Practices
 
   Reserve Position
   The fund will hold a certain portion of its assets in money market reserves.
   The fund's reserve position is expected to consist primarily of shares of one
   or more T. Rowe Price internal money market funds. Short-term, high-quality
   U.S. and foreign dollar-denominated money market securities, including
   repurchase agreements, may also be held. For temporary, defensive purposes,
   the fund may invest without limitation in money market reserves. The effect
   of taking such a position is that the fund may not achieve its investment
   objective. The reserve position provides flexibility in meeting redemptions,
   expenses, and the timing of new investments and can serve as a short-term
   defense during periods of unusual market volatility.
 
   Borrowing Money and Transferring Assets
   The fund can borrow money from banks and other Price funds as a temporary
   measure for emergency purposes, to facilitate redemption requests, or for
   other purposes consistent with the fund's investment objective and program.
   Such borrowings may be collateralized with fund assets, subject to
   restrictions.
 
   Fundamental policy  Borrowings may not exceed 33/1//\\/3/\\% of total fund
   assets.
 
   Operating policy  The fund may not transfer as collateral any portfolio
   securities except as necessary in connection with permissible borrowings or
   investments, and then such transfers may not exceed 33/1//\\/3/\\% of the
   fund's total assets. The fund may not purchase additional securities when
   borrowings exceed 5% of total assets.
 
   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 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
<PAGE>
 
T. ROWE PRICE
   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 the 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 emerging markets 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
   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 (where the investor
   purchases the option), or the obligation (where the investor writes (sells)
   the option), to buy or sell an asset at a predetermined price in the future.
   The fund may buy and sell futures and options contracts for any number of
   reasons, including: to manage its exposure to changes in securities prices
   and foreign currencies; as an efficient means of adjusting its overall
   exposure to certain markets; in an effort to enhance income; as a cash
   management tool; and to protect the value of portfolio securities. The fund
   may purchase, sell, or write call and put options on securities, financial
   indices, and foreign currencies.
 
   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 writes call or put options may not exceed 25% of its
   total assets. The fund will not commit more than 5% of its total assets to
   premiums when purchasing call or put options.
 
   Tax Consequences of Hedging
   Under applicable tax law, the fund may be required to limit its 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
<PAGE>
 
   
MORE ABOUT THE FUNDS                              
   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 fund could experience delays in recovering its securities and
   possibly capital losses.
 
   Fundamental policy  The value of loaned securities may not exceed
   33/1//\\/3/\\% of total fund assets.
 
   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. A high
   turnover rate may increase transaction costs and result in higher capital
   gain distributions by the fund. The fund's portfolio turnover rates for the
   fiscal years ended October 31, 1998, 1997, and 1996 were 12.2%, 15.8%, and
   11.6%, respectively.
 
 
 
 FINANCIAL HIGHLIGHTS
 ----------------------------------------------------------
   
   Table 10, which provides information about each fund's financial history, is
   based on a single share outstanding throughout each fiscal year. The table is
   part of each fund's financial statements, which are included in its annual
   report and are incorporated by reference into the Statement of Additional
   Information (available upon request). The total returns in the table
   represent the rate that an investor would have earned or lost on an
   investment in the fund (assuming reinvestment of all dividends and
   distributions). The financial statements in each annual report were audited
   by the fund's independent accountants, PricewaterhouseCoopers LLP.    
<PAGE>
 
T. ROWE PRICE
 Prime Reserve Fund
 
<TABLE>
 Table 10  Financial Highlights
<CAPTION>
                                                             Year ended May 31
                                     Three months
                         Year ended     ended
                          2/28/94    5/31/94/ a/    1995      1996      1997      1998
 -----------------------------------------------------------------------------------------------
 <S>                     <C>         <C>           <C>       <C>       <C>       <C>       <C>
 
  Net asset value,
  beginning of period     $ 1.000     $ 1.000      $ 1.000   $ 1.000   $ 1.000   $ 1.000
  Income From Investment Operations
  Net investment income     0.026       0.008        0.047     0.051     0.048     0.050
                         ------------------------------------------------------------------
  Net gains or losses
  on securities (both
  realized and                 --          --           --        --        --        --
  unrealized)
                         ------------------------------------------------------------------
  Total from investment
  operations                 .026        .008         .047      .051      .048      .050
  Less Distributions
  Dividends (from net      (0.026)     (0.008)      (0.047)   (0.051)   (0.048)   (0.050)
  investment income)
                         ------------------------------------------------------------------
  Distributions (from          --          --           --        --        --        --
  capital gains)
                         ------------------------------------------------------------------
  Returns of capital           --          --           --        --        --        --
                         ------------------------------------------------------------------
  Total distributions       (.026)      (.008)       (.047)    (.051)    (.048)    (.050)
                         ------------------------------------------------------------------
  Net asset value,        $ 1.000     $ 1.000      $ 1.000   $ 1.000   $ 1.000   $ 1.000
  end of period
                         ------------------------------------------------------------------
  Total return               2.60%       0.76%        4.85%     5.25%     4.92%     5.16%
  Ratios/Supplemental Data
  Net assets, end of      $ 3,379     $ 3,627      $ 3,841   $ 4,011   $ 4,561   $ 4,889
  period (in millions)
                         ------------------------------------------------------------------
  Ratio of expenses to       0.74%       0.73% /b/    0.67%     0.66%     0.64%     0.63%
  average net assets
                         ------------------------------------------------------------------
  Ratio of net
  investment income to
  average                    2.56%       3.02% /b/    4.76%     5.07%     4.83%     5.06%
  net assets
 -----------------------------------------------------------------------------------------------
</TABLE>
 
 
 /a/ The fund's fiscal year-end was changed to May 31.
 
 /b/                                 Annualized.
<PAGE>
 
   
MORE ABOUT THE FUNDS                              
 New Income Fund
 
<TABLE>
 Table 10  Financial Highlights (continued)
<CAPTION>
                                                           Year ended May 31
                                     Three months
                         Year ended     ended
                          2/28/94    5/31/94/ a/    1995     1996     1997     1998
 -------------------------------------------------------------------------------------------
 <S>                     <C>         <C>           <C>      <C>      <C>      <C>      <C>
 
  Net asset value,
  beginning of period     $ 9.24      $ 9.12       $ 8.65   $ 8.97   $ 8.70   $ 8.77
  Income From Investment Operations
  Net investment income     0.54        0.14         0.58     0.60     0.58     0.57
                         --------------------------------------------------------------
  Net gains or losses
  on securities (both
  realized and             (0.05)      (0.40)        0.34    (0.27)    0.07     0.36
  unrealized)
                         --------------------------------------------------------------
  Total from investment
  operations                0.49       (0.26)        0.92     0.33     0.65     0.93
  Less Distributions
  Dividends (from net      (0.54)      (0.14)       (0.58)   (0.60)   (0.58)   (0.57)
  investment income)
                         --------------------------------------------------------------
  Distributions            (0.07)      (0.07)       (0.02)       -        -    (0.04)
  (from capital gains)
                         --------------------------------------------------------------
  Returns of capital                                             -        -
                         --------------------------------------------------------------
  Total distributions      (0.61)      (0.21)       (0.60)   (0.60)   (0.58)   (0.61)
                         --------------------------------------------------------------
  Net asset value,        $ 9.12      $ 8.65       $ 8.97   $ 8.70   $ 8.77   $ 9.09
  end of period
                         --------------------------------------------------------------
  Total return              5.36%      (2.84)%      11.13%    3.70%    7.70%   10.84%
  Ratios/Supplemental Data
  Net assets, end of      $1,458      $1,375       $1,566   $1,634   $1,711   $2,076
  period (in millions)
                         --------------------------------------------------------------
  Ratio of expenses to      0.82%       0.80% /b/    0.78%    0.75%    0.74%    0.71%
  average net assets
                         --------------------------------------------------------------
  Ratio of net
  investment income to
  average                   5.77%       6.43% /b/    6.95%    6.66%    6.65%    6.31%
  net assets
                         --------------------------------------------------------------
  Portfolio turnover        58.3%       91.5% /b/    54.1%    35.5%    87.1%   147.3%
  rate
 -------------------------------------------------------------------------------------------
</TABLE>
 
 
 /a/ The fund's fiscal year-end was changed to May 31.
 
 /b/                                 Annualized.
<PAGE>
 
 Equity Income Fund
 
<TABLE>
 Table 10  Financial Highlights (continued)
<CAPTION>
                                              Year ended December 31
                            1994         1995         1996         1997          1998
 ------------------------------------------------------------------------------------------------
 <S>                     <C>          <C>          <C>          <C>           <C>           <C>
 
  Net asset value,
  beginning of period    $    16.65   $    15.98   $    20.01   $     22.54   $     26.07
  Income From Investment Operations
  Net investment income        0.60         0.66         0.64          0.66          0.61
                         -------------------------------------------------------------------
  Net gains or losses
  on securities (both
  realized and                 0.13         4.56         3.38          5.67          1.74
  unrealized)
                         -------------------------------------------------------------------
  Total from investment
  operations                   0.73         5.22         4.02          6.33          2.35
  Less Distributions
  Dividends (from net         (0.59)       (0.65)       (0.65)        (0.66)        (0.61)
  investment income)
                         -------------------------------------------------------------------
  Distributions (from         (0.81)       (0.54)       (0.84)        (2.14)        (1.49)
  capital gains)
                         -------------------------------------------------------------------
  Returns of capital             --           --           --            --            --
                         -------------------------------------------------------------------
  Total distributions         (1.40)       (1.19)       (1.49)        (2.80)        (2.10)
                         -------------------------------------------------------------------
  Net asset value,       $    15.98   $    20.01   $    22.54   $     26.07   $     26.32
  end of period
                         -------------------------------------------------------------------
  Total return                 4.53%       33.35%       20.40%        28.82%         9.23%
  Ratios/Supplemental Data
  Net assets, end of     $3,203,851   $5,214,778   $7,818,134   $12,771,185   $13,495,050
  period (in thousands)
                         -------------------------------------------------------------------
  Ratio of expenses to         0.88%        0.85%        0.81%         0.79%         0.77%
  average net assets
                         -------------------------------------------------------------------
  Ratio of net income          3.63%        3.69%        3.08%         2.67%         2.26%
  to average net assets
                         -------------------------------------------------------------------
  Portfolio turnover           36.3%        21.4%        25.0%         23.9%         22.6%
  rate
 ------------------------------------------------------------------------------------------------
</TABLE>
 
 
<PAGE>
 
   
MORE ABOUT THE FUNDS                              
 International Stock Fund
 
<TABLE>
 Table 10  Financial Highlights (continued)
<CAPTION>
                                           Year ended October 31
                             1994     1995     1996     1997      1998
 ------------------------------------------------------------------------------
 <S>                        <C>      <C>      <C>      <C>       <C>      <C>
 
  Net asset value,
  beginning of period       $11.74   $12.84   $12.09   $ 13.47   $14.14
  Income From Investment Operations
  Net investment income       0.09     0.18     0.19      0.19     0.23
                            ----------------------------------------------
  Net gains or losses on
  securities (both            1.30    (0.19)    1.57      0.86     0.77
  realized and unrealized)
                            ----------------------------------------------
  Total from investment
  operations                  1.39    (0.01)    1.76      1.05     1.00
  Less Distributions
  Dividends (from net        (0.09)   (0.12)   (0.18)    (0.18)   (0.20)
  investment income)
                            ----------------------------------------------
  Distributions (from        (0.20)   (0.62)   (0.20)    (0.20)   (0.55)
  capital gains)
                            ----------------------------------------------
  Returns of capital            --       --       --        --       --
                            ----------------------------------------------
  Total distributions        (0.29)   (0.74)   (0.38)    (0.38)   (0.75)
                            ----------------------------------------------
  Net asset value,          $12.84   $12.09   $13.47   $ 14.14   $14.39
  end of period
                            ----------------------------------------------
  Total return/a/            12.03%    0.38%   14.87%     7.90%    7.48%
  Ratios/Supplemental Data
  Net assets, end of        $6,206   $6,386   $8,776   $10,005   $9,537
  period (in millions)
                            ----------------------------------------------
  Ratio of expenses to        0.96%    0.91%    0.88%     0.85%    0.85%
  average net assets
                            ----------------------------------------------
  Ratio of net income to      1.11%    1.56%    1.58%     1.33%    1.50%
  average net assets
                            ----------------------------------------------
  Portfolio turnover rate     22.9%    17.8%    11.6%     15.8%    12.2%
 ------------------------------------------------------------------------------
</TABLE>
 
 
 /a/Total return reflects the rate that an investor would have earned on an
  investment in the fund during each period, assuming reinvestment of all
  distributions.
<PAGE>
 
T. ROWE PRICE
 INVESTING WITH T. ROWE PRICE
                                        4
 
 
 ACCOUNT REQUIREMENTS AND TRANSACTION INFORMATION
 ----------------------------------------------------------
Tax Identification Number
We must have your correct Social Security or corporate tax identification number
on a signed New Account Form or W-9 Form. Otherwise, federal law requires the
funds to withhold a percentage (currently 31%) of your dividends, capital gain
distributions, and redemptions, and may subject you to an IRS fine. If this
information is not received within 60 days after your account is established,
your account may be redeemed, priced at the NAV on the date of redemption.
 
Always verify your transactions by carefully reviewing the confirmation we send
you. Please report any discrepancies to Shareholder Services promptly.
 
Employer-Sponsored Retirement Plans and Institutional Accounts T. Rowe Price
Trust Company 1-800-492-7670
Transaction procedures in the following sections may not apply to
employer-sponsored retirement plans and institutional accounts. For procedures
regarding employer-sponsored retirement plans, please call T. Rowe Price Trust
Company or consult your plan administrator. For institutional account
procedures, please call your designated account manager or service
representative.
 
 
 
 OPENING A NEW ACCOUNT
 ----------------------------------------------------------
$2,500 minimum initial investment; $1,000 for retirement plans or gifts or
transfers to minors (UGMA/UTMA) accounts
 
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.)
<PAGE>
 
   
INVESTING WITH T. ROWE PRICE                      
By Mail
Please make your check payable to T. Rowe Price Funds (otherwise it will be
returned) and send your check, together with the New Account Form, to the
appropriate address in the next paragraph. We do not accept third-party checks
to open new accounts, except for IRA Rollover checks that are properly endorsed.
 
Mail via United States Postal Service
T. Rowe Price Account Services P.O. Box 17300 Baltimore, MD 21297-1300
 
Mail via private carriers/overnight services
T. Rowe Price Account Services 10090 Red Run Blvd. Owings Mills, MD 21117-4842
 
By Wire
Call Investor Services for an account number and give the following wire
information to your bank:
 
Receiving Bank:  PNC Bank, N.A. (Pittsburgh) Receiving Bank ABA#:  043000096
Beneficiary:  T. Rowe Price [fund name] Beneficiary Account:  1004397951
Originator to Beneficiary Information (OBI):  name of owner(s) and account
number
 
Complete a New Account Form and mail it to one of the appropriate addresses
listed previously.
 
Note: No services will be established and IRS penalty withholding may occur
until a signed New Account Form is received. Also, retirement plan accounts and
IRAs cannot be opened by wire.
 
By Exchange
Call Shareholder Services or use Tele*Access or your personal computer (see
Automated Services under Information About Your Services). The new account will
have the same registration as the account from which you are exchanging.
Services for the new account may be carried over by telephone request if
preauthorized on the existing account. For limitations on exchanging, see
explanation of Excessive Trading under Transaction Procedures and Special
Requirements.
<PAGE>
 
T. ROWE PRICE
In Person
Drop off your New Account Form at any location listed on the back cover and
obtain a receipt.
 
 
 
 PURCHASING ADDITIONAL SHARES
 ----------------------------------------------------------
$100 minimum purchase; $50 minimum for retirement plans, Automatic Asset
Builder, and gifts or transfers to minors (UGMA/UTMA) accounts
 
By ACH Transfer
Use Tele*Access or your personal computer or call Investor Services if you have
established electronic transfers using the ACH network.
 
By Wire
Call Shareholder Services or use the wire address listed in Opening a New
Account.
 
By Mail
1. Make your check payable to T. Rowe Price Funds (otherwise it may be
 returned).
 
2. Mail the check to us at the following address with either a fund reinvestment
 slip or a note indicating the fund you want to buy and your fund account
 number.
 
3. Remember to provide your account number and the fund name on the memo line of
 your check.
 
Mail via United States Postal Service
T. Rowe Price Funds Account Services P.O. Box 17300 Baltimore, MD 21297-1300
 
/(For //mail via private carriers and overnight services//, see previous /
/section.)/
 
By Automatic Asset Builder
Fill out the Automatic Asset Builder section on the New Account or Shareholder
Services Form.
 
 
 
 EXCHANGING AND REDEEMING SHARES
 ----------------------------------------------------------
Exchange Service
You can move money from one account to an existing identically registered
account or open a new identically registered account. Remember, exchanges are
<PAGE>
 
   
INVESTING WITH T. ROWE PRICE                      
purchases and sales for tax purposes. (Exchanges into a state tax-free fund are
limited to investors living in states where the fund is registered.)
 
Redemptions
Redemption proceeds can be mailed to your account address, sent by ACH transfer
to your bank, or wired to your bank (provided your bank information is already
on file). For charges, see Electronic Transfers - By Wire under Information
About Your Services.
 
Some of the T. Rowe Price funds may impose a redemption fee of 0.5% to 2% on
shares held for less than six months or one year, as specified in the
prospectus. The fee is paid to the fund.
 
By Phone
Call Shareholder Services
If you find our phones busy during unusually volatile markets, please consider
placing your order by your personal computer, Tele*Access (if you have
previously authorized telephone services), mailgram, or express mail. For
exchange policies, please see Transaction Procedures and Special Requirements -
Excessive Trading.
 
By Mail
For each account involved, provide the account name, number, fund name, and
exchange or redemption amount. For exchanges, be sure to indicate any fund you
are exchanging out of and the fund or funds you are exchanging into. T. Rowe
Price requires the signatures of all owners exactly as registered, and possibly
a signature guarantee (see Transaction Procedures and Special Requirements -
Signature Guarantees). Please use the appropriate address below:
 
Mail via United States Postal Service
For nonretirement and IRA accounts
T. Rowe Price Account Services P.O. Box 17302 Baltimore, MD 21297-1302
 
For employer-sponsored retirement accounts
T. Rowe Price Trust Company P.O. Box 17479 Baltimore, MD 21297-1479
 
/(For// //mail via private carriers and overnight services//, see the
//addresses / /listed in the //Opening a New Account section.)/
<PAGE>
 
T. ROWE PRICE
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 following rights: (1) to waive or lower
investment minimums; (2) to accept initial purchases by telephone or mailgram;
(3) to refuse any purchase or exchange order; (4) to cancel or rescind any
purchase or exchange order (including, but not limited to, orders deemed to
result in excessive trading, market timing, fraud, or 5% ownership) upon notice
to the shareholder within five business days of the trade or if the written
confirmation has not been received by the shareholder, whichever is sooner; (5)
to freeze any account and suspend account services when notice has been received
of a dispute between the registered or beneficial account owners or there is
reason to believe a fraudulent transaction may occur; (6) to otherwise modify
the conditions of purchase and any services at any time; or (7) to act on
instructions believed to be genuine. These actions will be taken when, in the
sole discretion of management, they are deemed to be in the best interest of the
fund.
 
In an effort to protect the fund from the possible adverse effects of a
substantial redemption in a large account, as a matter of general policy, no
shareholder or group of shareholders controlled by the same person or group of
persons will knowingly be permitted to purchase in excess of 5% of the
outstanding shares of the fund, except upon approval of the fund's management.
<PAGE>
 
   
INVESTING WITH T. ROWE PRICE                      
 INFORMATION ABOUT YOUR SERVICES
 ----------------------------------------------------------
Shareholder Services 1-800-225-5132 Investor Services 1-800-638-5660
Many services are available to you as a T. Rowe Price shareholder; some you
receive automatically, and others you must authorize or request on the New
Account Form. By signing up for services on the New Account Form rather than
later on, you avoid having to complete a separate form and obtain a signature
guarantee. This section discusses some of the services currently offered. Our
Services Guide, which we mail to all new shareholders, contains detailed
descriptions of these and other services.
 
Note: Corporate and other institutional accounts require an original or
certified resolution to establish services and to redeem by mail. For more
information, call Investor Services.
 
Retirement Plans
We offer a wide range of plans for individuals, institutions, and large and
small businesses: Traditional IRAs, Roth IRAs, SIMPLE IRAs, SEP-IRAs, Keoghs
(profit sharing, money purchase pension), 401(k), and 403(b)(7). For information
on IRAs, call Investor Services. For information on all other retirement plans,
including our no-load variable annuity, please call our Trust Company at
1-800-492-7670.
 
Automated Services Tele*Access 1-800-638-2587 24 hours, 7 days
Tele*Access
24-hour service via toll-free number enables you to (1) access information on
fund yields, prices, distributions, account balances, and your latest
transaction; (2) request checks, prospectuses, services forms, duplicate
statements, and tax forms; and (3) initiate purchase, redemption, and exchange
transactions in your accounts (see Electronic Transfers in this section).
 
Web Address www.troweprice.com
After obtaining proper authorization, account transactions may also be conducted
through our Web site on the Internet. If you subscribe to America Online/(R)/,
you can access our Web site via keyword "T. Rowe Price" and conduct transactions
in your account.
 
Plan Account Line 1-800-401-3279
Plan Account Line
This 24-hour service is similar to Tele*Access but is designed specifically to
meet the needs of retirement plan investors.
<PAGE>
 
T. ROWE PRICE
Telephone and Walk-In Services
Buy, sell, or exchange shares by calling one of our service representatives or
by visiting one of our investor center locations whose addresses are listed on
the back cover.
 
Electronic Transfers
By ACH
With no charges to pay, you can initiate a purchase or redemption for as little
as $100 or as much as $100,000 between your bank account and fund account using
the ACH network. Enter instructions via Tele*Access or your personal computer,
or call Shareholder Services.
 
By Wire
Electronic transfers can be conducted via bank wire. There is currently a $5 fee
for wire redemptions under $5,000, and your bank may charge for incoming or
outgoing wire transfers regardless of size.
 
Checkwriting
(Not available for equity funds, or the High Yield or Emerging Markets Bond
Funds) You may write an unlimited number of free checks on any money market
fund, and most bond funds, with a minimum of $500 per check. Keep in mind,
however, that a check results in a redemption; a check written on a bond fund
will create a taxable event which you and we must report to the IRS.
 
Automatic Investing
($50 minimum) You can invest automatically in several different ways, including:
 
Automatic Asset Builder
You instruct us to move $50 or more from your bank account, or you can instruct
your employer to send all or a portion of your paycheck to the fund or funds you
designate.
 
Automatic Exchange
You can set up systematic investments from one fund account into another, such
as from a money fund into a stock fund.
<PAGE>
 
   
INVESTING WITH T. ROWE PRICE                      
 T. ROWE PRICE BROKERAGE
 ----------------------------------------------------------
To open an account 1-800-638-5660 For existing brokerage investors
1-800-225-7720
This service gives you the opportunity to consolidate all of your investments
with one company. Investments available through our brokerage service include
stocks, options, bonds, and others  at commission savings over full-service
brokers. We also provide a wide range of services, including:
 
Automated telephone and computer services
You can enter stock and option orders, access quotes, and review account
information around the clock by phone with Tele-Trader or via the Internet with
Internet-Trader. Any trades executed through Tele-Trader save you an additional
10% on commissions. You will save 20% on commissions for stock trades and 10% on
option trades when you use Internet-Trader. All trades are subject to a $35
minimum commission except stock trades placed through Internet-Trader, which are
subject to a $29.95 minimum commission.
 
Investor information
A variety of informative reports, such as our Brokerage Insights series and S&P
Market Month newsletter, as well as access to on-line research tools can help
you better evaluate economic trends and investment opportunities.
 
Dividend Reinvestment Service
Virtually all stocks held in customer accounts are eligible for this free
service. If you elect to participate in this service, the cash dividends from
your eligible securities will automatically be reinvested in additional shares
of the same securities free of charge. Dividend payments must be $10.00 or
greater to qualify for reinvestment. Most securities listed on national
securities exchanges or on Nasdaq are eligible for this service.
 
/T. Rowe Price// Brokerage is a division of //T. Rowe Price// Investment /
/Services, Inc., Member NASD/SIPC./
<PAGE>
 
T. ROWE PRICE
 INVESTMENT INFORMATION
 ----------------------------------------------------------
To help shareholders monitor their current investments and make decisions that
accurately reflect their financial goals, T. Rowe Price offers a wide variety of
information in addition to account statements. Most of this information is also
available on our Web site at www.troweprice.com.
 
Shareholder Reports
Fund managers' reviews of their strategies and performance. If several members
of a household own the same fund, only one fund report is mailed to that
address. To receive additional copies, please call Shareholder Services or write
to us at 100 East Pratt Street, Baltimore, Maryland 21202.
 
The T. Rowe Price Report
A quarterly investment newsletter discussing markets and financial strategies.
 
Performance Update
A quarterly review of all T. Rowe Price fund results.
 
Insights
Educational reports on investment strategies and financial markets.
 
Investment Guides
Asset Mix Worksheet, College Planning Kit, Diversifying Overseas: A T. Rowe
Price Guide to International Investing, Managing Your Retirement Distribution,
Personal Strategy Planner, Retirees Financial Guide, Retirement Planning Kit,
and Tax Considerations for Investors.
<PAGE>
 
   
INVESTING WITH T. ROWE PRICE                      
<PAGE>
 
   
To help you achieve your financial goals, T. Rowe Price offers a wide range of
stock, bond, and money market investments, as well as convenient services and
informative reports.    
   
 For retirement plan investors 1-800-401-3279    
   
 100 East Pratt St. Baltimore, MD 21202    
   
A Statement of Additional Information about the fund has been filed with the
Securities and Exchange Commission and is incorporated by reference into this
prospectus. Further information about the fund's investments, including a review
of market conditions and the manager's recent strategies and their impact on
performance, is available in the annual and semiannual shareholder reports. To
Fund reports and Statements of Additional Information are also available from
the Securities and Exchange Commission by calling 1-800-SEC-0330 or by writing
the SEC's Public Reference Section, Washington, D.C. 20549-6009 (you will be
charged a duplicating fee); by visiting the SEC's public reference room; or by
consulting the SEC's Web site at www.sec.gov.    
   
1940 Act File Nos. 811-2603; 811-2396; 811-4400; 811-2958    
   
LOGO    
   
C00-040 5/1/99    

 

<PAGE>
 
 STATEMENT OF ADDITIONAL INFORMATION
   The date of this Statement of Additional Information is October 1, 1998.
 
 
 
         T. ROWE PRICE CORPORATE INCOME FUND, INC.
         T. ROWE PRICE GNMA FUND
         T. ROWE PRICE HIGH YIELD FUND, INC.
         T. ROWE PRICE NEW INCOME FUND, INC.
         T. ROWE PRICE PERSONAL STRATEGY FUNDS, INC.
              T. Rowe Price Personal Strategy Balanced Fund
             T. Rowe Price Personal Strategy Growth Fund
              T. Rowe Price Personal Strategy Income Fund
         T. ROWE PRICE PRIME RESERVE FUND, INC.
         RESERVE INVESTMENT FUNDS, INC.
              Government Reserve Investment Fund
              Reserve Investment Fund
         T. ROWE PRICE SHORT-TERM BOND FUND, INC.
         T. ROWE PRICE SHORT-TERM U.S. GOVERNMENT FUND, INC.
                                       and
         T. ROWE PRICE U.S. TREASURY FUNDS, INC.
             U.S. Treasury Intermediate Fund
              U.S. Treasury Long-Term Fund
             U.S. Treasury Money Fund
          ___________________________________________________________________
 
   Mailing Address:
   T. Rowe Price Investment Services, Inc.
   100 East Pratt Street
   Baltimore, Maryland 21202
   1-800-638-5660
 
   This Statement of Additional Information is not a prospectus but should be
   read in conjunction with the appropriate Fund prospectus dated October 1,
   1998, which may be obtained from T. Rowe Price Investment Services, Inc.
 
   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.
 
   Government Reserve and Reserve Investment Funds are not available for direct
   purchase by members of the public.
 
                                                                 C22-043 10/1/98
<PAGE>
 
<TABLE>
<CAPTION>
                              TABLE OF CONTENTS
                              -----------------
                        Page                                             Page
                        ----                                             ----
<S>                     <C>   <S>  <C>                                   <C>
Capital Stock             66       Management of the Funds                 39
- ------------------------------     --------------------------------------------
Code of Ethics            54       Net Asset Value Per Share               61
- ------------------------------     --------------------------------------------
Custodian                 53       Portfolio Management Practices          21
- ------------------------------     --------------------------------------------
Distributor for the       53       Portfolio Transactions                  54
Funds
- ------------------------------     --------------------------------------------
Dividends and             62       Pricing of Securities                   59
Distributions
- ------------------------------     --------------------------------------------
Federal Registration      67       Principal Holders of Securities         48
of Shares
- ------------------------------     --------------------------------------------
Independent               68       Ratings of Commercial Paper             69
Accountants
- ------------------------------     --------------------------------------------
Investment Management     49       Ratings of Corporate Debt Securities    70
Services
- ------------------------------     --------------------------------------------
Investment Objectives      2       Risk Factors                             2
and Policies
- ------------------------------     --------------------------------------------
Investment Performance    64       Shareholder Services                    54
- ------------------------------     --------------------------------------------
Investment Program         7       Tax Status                              62
- ------------------------------     --------------------------------------------
Investment                36       Yield Information                       63
Restrictions
- ------------------------------     --------------------------------------------
Legal Counsel             68
 
- ------------------------------     --------------------------------------------
</TABLE>
 
 
 
 
 
 INVESTMENT OBJECTIVES AND POLICIES
 -------------------------------------------------------------------------------
   The following information supplements the discussion of each Fund's
   investment objectives and policies discussed in the Funds' prospectus.
 
   The Funds will not make a material change in their investment objectives
   without obtaining shareholder approval. Unless otherwise specified, the
   investment programs and restrictions of the Funds are not fundamental
   policies. Each Fund's operating policies are subject to change by each Board
   of Directors/ Trustees without shareholder approval. However, shareholders
   will be notified of a material change in an operating policy. Each Fund's
   fundamental policies may not be changed without the approval of at least a
   majority of the outstanding shares of the Fund or, if it is less, 67% of the
   shares represented at a meeting of shareholders at which the holders of 50%
   or more of the shares are represented.
 
   Throughout this Statement of Additional Information, "the Fund" is intended
   to refer to each Fund listed on the cover page, unless otherwise indicated.
 
 
 
 RISK FACTORS
 -------------------------------------------------------------------------------
   Reference is also made to the sections entitled "Types of Securities" and
   "Portfolio Management Practices" for discussions of the risks associated with
   the investments and practices described therein as they apply to the Fund.
 
   All Funds
 
 
                                Debt Obligations
 
   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, 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
 
 
<PAGE>
 
   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 debt securities, and a decline in interest rates will
   generally increase the value of portfolio debt securities. The ability of the
   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.
   Although the 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 its investment objective.
 
   After purchase by the 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 Government Reserve Investment; Prime Reserve; Reserve Investment; and
   U.S. Treasury Money Funds, the procedures set forth in Rule 2a-7, under the
   Investment Company Act of 1940 (the "1940 Act"), 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 Investors Service,
   Inc. ("Moody's") or Standard & Poor's Corporation ("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 the
   Fund's Board of Directors/Trustees, determines whether the unrated security
   is of a quality comparable to that which the Fund is allowed to purchase.
 
   Government Reserve Investment, Prime Reserve, Reserve Investment, and U.S.
   Treasury Money Funds
 
   There can be no assurance that the Fund will achieve its investment objective
   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.
 
   All Funds except Government Reserve Investment, Prime Reserve, Reserve
   Investment, and U.S. Treasury Money Funds
 
   Because of its investment policy, the Fund may or may not be suitable or
   appropriate for all investors. The Fund is not a money market fund and is not
   an appropriate investment for those whose primary objective is principal
   stability. The value of the portfolio securities of the Fund will fluctuate
   based upon market conditions. Although the Fund seeks 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 Fund will achieve
   its investment objective.
 
   Mortgage-backed 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-backed 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 prepayments 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 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
 
 
<PAGE>
 
   mortgage-backed 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.
 
   Corporate Income, High Yield, New Income, Personal Strategy, and Short-Term
   Bond Funds
 
   Risk Factors of Foreign Investing There are special risks in foreign
   investing. Certain of these risks are inherent in any mutual fund while
   others relate more to the countries in which the Fund will invest. Many of
   the risks are more pronounced for investments in developing or emerging
   market countries, such as many of the countries of Asia, Latin America,
   Eastern Europe, Russia, Africa 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.
 
  . Political and Economic Factors Individual foreign economies of certain
   countries 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 1994-1995,
   the Mexican peso plunged in value setting off a severe crisis in the Mexican
   economy. Asia is still coming to terms with its own crisis and recessionary
   conditions sparked off by widespread currency weakness in late 1997. 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 and hostile relations 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 Fund invests 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 Fund's assets denominated in that currency. Such changes will
   also affect the Fund's 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 Fund's
   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 limit at times and preclude investment
   in certain of such countries and increase the cost and expenses of the Fund.
   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, 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.
 
 
<PAGE>
 
  . Market Characteristics It is contemplated that most foreign 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.
   Investments in certain markets may be made through ADRs traded in the United
   States. Foreign stock markets are generally not as developed or efficient as,
   and more volatile than, those in the United States. While growing in volume,
   they usually have substantially less volume than U.S. markets and the Fund's
   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. Commissions
   on foreign stocks are generally higher than commissions on United States
   exchanges, and while there is an increasing number of overseas stock markets
   that have adopted a system of negotiated rates, a number are still subject to
   an established schedule of minimum commission rates. 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 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 the Fund.
 
  . Investment Funds The Fund 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. The Fund's investment in these funds
   is subject to the provisions of the 1940 Act. If the Fund invests in such
   investment funds, the Fund's shareholders will bear not only their
   proportionate share of the expenses of the Fund (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 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 is often 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 Fund's foreign
   portfolio securities may be subject to foreign withholding taxes, thus
   reducing the net amount of income available for distribution to the Fund's
   shareholders.
 
  . 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 country's national interest. Further, the governments in such countries
   may require governmental or quasi-governmental authorities to act as
   custodian of the 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
 
 
<PAGE>
 
   uncertainties to investment in Eastern Europe and Russia. The 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.
 
  . Latin America
 
   Inflation Most Latin American countries have experienced, at one time or
   another, severe and persistent levels of inflation, including, in some cases,
   hyperinflation. This has, in turn, led to high interest rates, extreme
   measures by governments to keep inflation in check, and a generally
   debilitating effect on economic growth. Although inflation in many countries
   has lessened, there is no guarantee it will remain at lower levels.
 
   Political Instability The political history of certain Latin American
   countries has been characterized by political uncertainty, intervention by
   the military in civilian and economic spheres, and political corruption. Such
   developments, if they were to reoccur, could reverse favorable trends toward
   market and economic reform, privatization, and removal of trade barriers, and
   result in significant disruption in securities markets.
 
   Foreign Currency Certain Latin American countries may have managed currencies
   which are maintained at artificial levels to the U. S. dollar rather than at
   levels determined by the market. This type of system can lead to sudden and
   large adjustments in the currency which, in turn, can have a disruptive and
   negative effect on foreign investors. For example, in late 1994 the value of
   the Mexican peso lost more than one-third of its value relative to the
   dollar. Certain Latin American countries also restrict the free conversion of
   their currency into foreign currencies, including the U.S. dollar. There is
   no significant foreign exchange market for many currencies and it would, as a
   result, be difficult for the Fund to engage in foreign currency transactions
   designed to protect the value of the Fund's interests in securities
   denominated in such currencies.
 
   Sovereign Debt A number of Latin American countries are among the largest
   debtors of developing countries. There have been moratoria on, and
   reschedulings of, repayment with respect to these debts. Such events can
   restrict the flexibility of these debtor nations in the international markets
   and result in the imposition of onerous conditions on their economies.
 
   Corporate Income, High Yield, and Personal Strategy Funds
 
   Special Risks of Investing in Junk Bonds The following special considerations
   are additional risk factors associated with the Fund's investments in
   lower-rated debt securities.
 
  . Youth and Growth of the Lower-Rated Debt Securities Market The market for
   lower-rated debt securities is relatively new and its growth has paralleled a
   long economic expansion. Past experience may not, therefore, provide an
   accurate indication of future performance of this market, particularly during
   periods of economic recession. An economic downturn or increase in interest
   rates is likely to have a greater negative effect on this market, the value
   of lower-rated debt securities in the Fund's portfolio, the Fund's net asset
   value and the ability of the bonds' issuers to repay principal and interest,
   meet projected business goals and obtain additional financing than on
   higher-rated securities. These circumstances also may result in a higher
   incidence of defaults than with respect to higher-rated securities. An
   investment in this Fund is more speculative than investment in shares of a
   fund which invests only in higher-rated debt securities.
 
  . Sensitivity to Interest Rate and Economic Changes Prices of lower-rated debt
   securities may be more sensitive to adverse economic changes or corporate
   developments than higher-rated investments. Debt securities with longer
   maturities, which may have higher yields, may increase or decrease in value
   more than debt securities with shorter maturities. Market prices of
   lower-rated debt securities structured as zero coupon or pay-in-kind
   securities are affected to a greater extent by interest rate changes and may
   be more volatile than securities which pay interest periodically and in cash.
   Where it deems it appropriate and in the best interests of Fund shareholders,
   the Fund may incur additional expenses to seek recovery on a debt security on
   which the issuer has defaulted and to pursue litigation to protect the
   interests of security holders of its portfolio companies.
 
  . Liquidity and Valuation Because the market for lower-rated securities may be
   thinner and less active than for higher-rated securities, there may be market
   price volatility for these securities and limited liquidity in the resale
   market. Nonrated securities are usually not as attractive to as many buyers
   as rated securities are, a factor which may make nonrated securities less
   marketable. These factors may have the effect of limiting the
 
 
<PAGE>
 
   availability of the securities for purchase by the Fund and may also limit
   the ability of the Fund to sell such securities at their fair value either to
   meet redemption requests or in response to changes in the economy or the
   financial markets.
 
   Adverse publicity and investor perceptions, whether or not based on
   fundamental analysis, may decrease the values and liquidity of lower-rated
   debt securities, especially in a thinly traded market. To the extent the Fund
   owns or may acquire illiquid or restricted lower-rated securities, these
   securities may involve special registration responsibilities, liabilities and
   costs, and liquidity and valuation difficulties. Changes in values of debt
   securities which the Fund owns will affect its net asset value per share. If
   market quotations are not readily available for the Fund's lower-rated or
   nonrated securities, these securities will be valued by a method that the
   Fund's Board of Directors believes accurately reflects fair value. Judgment
   plays a greater role in valuing lower-rated debt securities than with respect
   to securities for which more external sources of quotations and last sale
   information are available.
 
  . Taxation Special tax considerations are associated with investing in
   lower-rated debt securities structured as zero coupon or pay-in-kind
   securities. The Fund accrues income on these securities prior to the receipt
   of cash payments. The Fund must distribute substantially all of its income to
   its shareholders to qualify for pass-through treatment under the tax laws and
   may, therefore, have to dispose of its portfolio securities to satisfy
   distribution requirements.
 
 
 
 INVESTMENT PROGRAM
 -------------------------------------------------------------------------------
 
                               Types of Securities
 
   Set forth below is additional information about certain of the investments
   described in the Fund's prospectus.
 
 
                                 Debt Securities
 
   Fixed income securities in which the Fund may invest include, but are not
   limited to, those described below.
 
   All Funds
 
  . 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; 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.
 
   The GNMA, U.S. Treasury Money, Intermediate, and Long-Term Funds and GRIF may
   only invest in these securities if they are supported by the full faith and
   credit of the U.S. government.
 
   All Funds except GNMA, Government Reserve Investment, U.S. Treasury Money,
   Intermediate, and Long-Term Funds
 
  . Bank Obligations Certificates of deposit, bankers' acceptances, and other
   short-term debt obligations. Certificates of deposit are short-term
   obligations of commercial banks. A bankers' acceptance is a time draft drawn
   on a commercial bank by a borrower, usually in connection with international
   commercial transactions. Certificates of deposit may have fixed or variable
   rates. The Fund may invest in U.S. banks, foreign branches of U.S. banks,
   U.S. branches of foreign banks, and foreign branches of foreign banks.
 
 
<PAGE>
 
  . Corporate Debt Securities Outstanding nonconvertible corporate debt
   securities (e.g., bonds and debentures) which have one year or less remaining
   to maturity. 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,
   province, instrumentality, 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.
 
   All Funds except Government Reserve Investment, Prime Reserve, Reserve
   Investment, and U.S. Treasury Money Funds
 
 
                           Mortgage-Related Securities
 
   Mortgage-related securities in which the Fund may invest include, but are not
   limited to, those described below. The GNMA, U.S. Treasury Intermediate and
   U.S. Treasury Long-Term Funds may only invest in these securities to the
   extent they are backed by the full faith and credit of the U.S. government.
 
  . 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 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
 
 
<PAGE>
 
   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.
 
  . 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 it 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
   Certificates are not supported by the full faith and credit of the U.S.
   government; rather, Farmer Mac may borrow 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 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 in
   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).
 
 
<PAGE>
 
   Monthly distributions of interest, as contrasted to semiannual 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.
 
  . 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 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.
 
   In recent years, new types of CMO structures have evolved. These include
   floating rate CMOs, planned amortization classes, accrual bonds and CMO
   residuals. These newer structures affect the amount and timing of principal
   and interest received by each tranche from the underlying collateral. Under
   certain of these new 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.
 
  . 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.
 
  . 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.
 
 
<PAGE>
 
  . 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.
 
  . Stripped Mortgage-Backed Securities These instruments are a type of
   potentially high-risk derivative. They 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 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. For example, 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 fully recoup
   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 ("SEC") 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 nongovernment-issued IOs and POs
   not backed by fixed or adjustable rate mortgages as illiquid unless and until
   the SEC staff modifies its position.
 
  . Adjustable Rate Mortgage Securities ("ARMs") 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
 
 
<PAGE>
 
   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
   maximum increases and decreases are typically referred to as "caps" and
   "floors," respectively.
 
   A number of factors affect the performance of the COFI and may cause the COFI
   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 COFI will necessarily move in the same direction or at the
   same rate as prevailing interest rates. Furthermore, any movement in the COFI
   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 COFI. To the extent that the COFI 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 COFI 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 COFI than mortgage loans which adjust in accordance with
   other indices.
 
   LIBOR, 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
   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. Several
   characteristics of ARMs may make them more susceptible to
 
 
<PAGE>
 
   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.
 
   All Funds except GNMA, Government Reserve Investment, U.S. Treasury Money,
   Intermediate, and Long-Term Funds
 
 
                             Asset-Backed Securities
 
   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 as pass-through certificates or collateralized
   obligations.
 
   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
 
 
<PAGE>
 
   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.
 
   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 "external credit
   enhancement", through various means of structuring the transaction "internal
   credit enhancement" 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 "over collateralized" (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. Depending upon the type of assets securitized, historical
   information on credit risk and prepayment rates may be limited or even
   unavailable. 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 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
 
 
<PAGE>
 
   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 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 account 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 Asset-backed securities backed by assets other than those
   described above, including, but not limited to, small-business loans and
   accounts receivable, equipment leases, commercial real estate loans, boat
   loans and manufacturing housing loans. 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 Funds may invest in
   these securities.
 
   High Yield Fund
 
 
                     Collateralized Bond or Loan Obligations
 
   Collateralized Bond Obligations ("CBOs") are bonds collateralized by
   corporate bonds and Collateralized Loan Obligations ("CLOs") are bonds
   collateralized by bank loans. CBOs and CLOs are structured into tranches, and
   payments are allocated such that each tranche has a predictable cash flow
   stream and average life. CBOs are fairly recent entrants to the fixed income
   market. Most CBOs issue to date have been collateralized by high yield bonds
   or loans, with heavy credit enhancement.
 
 
                       Loan Participations and Assignments
 
   Loan participations and assignments (collectively "participations") will
   typically be participating interests in loans made by a syndicate of banks,
   represented by an agent bank which has negotiated and structured the loan, to
   corporate borrowers to finance internal growth, mergers, acquisitions, stock
   repurchases, leveraged buy-outs and other corporate activities. Such loans
   may also have been made to governmental borrowers, especially governments of
   developing countries which is referred to as Loans to Developing Countries
   debt ("LDC debt"). LDC debt will involve the risk that the governmental
   entity responsible for the repayment of the debt may be unable or unwilling
   to do so when due. The loans underlying such participations may be secured or
   unsecured, and the Fund may invest in loans collateralized by mortgages on
   real property or which have no collateral. The loan participations themselves
   may extend for the entire term of the loan or
 
 
<PAGE>
 
   may extend only for short "strips" that correspond to a quarterly or monthly
   floating rate interest period on the underlying loan. Thus, a term or
   revolving credit that extends for several years may be subdivided into
   shorter periods.
 
   The loan participations in which the Fund will invest will also vary in legal
   structure. Occasionally, lenders assign to another institution both the
   lender's rights and obligations under a credit agreement. Since this type of
   assignment relieves the original lender of its obligations, it is called a
   novation. More typically, a lender assigns only its right to receive payments
   of principal and interest under a promissory note, credit agreement or
   similar document. A true assignment shifts to the assignee the direct
   debtor-creditor relationship with the underlying borrower. Alternatively, a
   lender may assign only part of its rights to receive payments pursuant to the
   underlying instrument or loan agreement. Such partial assignments, which are
   more accurately characterized as "participating interests," do not shift the
   debtor-creditor relationship to the assignee, who must rely on the original
   lending institution to collect sums due and to otherwise enforce its rights
   against the agent bank which administers the loan or against the underlying
   borrower.
 
   There may not be a recognizable, liquid public market for loan
   participations. To the extent this is the case, the Fund would consider the
   loan participation as illiquid and subject to the Fund's restriction on
   investing no more than 15% of its net assets in illiquid securities.
 
   Where required by applicable SEC positions, the Fund will treat both the
   corporate borrower and the bank selling the participation interest as an
   issuer for purposes of its fundamental investment restriction on
   diversification.
 
   Various service fees received by the Fund from loan participations, may be
   treated as non-interest income depending on the nature of the fee
   (commitment, takedown, commission, service or loan origination). To the
   extent the service fees are not interest income, they will not qualify as
   income under Section 851(b) of the Code. Thus the sum of such fees plus any
   other non-qualifying income earned by the Fund cannot exceed 10% of total
   income.
 
 
                                  Trade Claims
 
   Trade claims are non-securitized rights of payment arising from obligations
   other than borrowed funds. Trade claims typically arise when, in the ordinary
   course of business, vendors and suppliers extend credit to a company by
   offering payment terms. Generally, when a company files for bankruptcy
   protection, payments on these trade claims cease and the claims are subject
   to compromise along with the other debts of the company. Trade claims
   typically are bought and sold at a discount reflecting the degree of
   uncertainty with respect to the timing and extent of recovery. In addition to
   the risks otherwise associated with low-quality obligations, trade claims
   have other risks, including the possibility that the amount of the claim may
   be disputed by the obligor.
 
   Over the last few years a market for the trade claims of bankrupt companies
   has developed. Many vendors are either unwilling or lack the resources to
   hold their claim through the extended bankruptcy process with an uncertain
   outcome and timing. Some vendors are also aggressive in establishing reserves
   against these receivables, so that the sale of the claim at a discount may
   not result in the recognition of a loss.
 
   Trade claims can represent an attractive investment opportunity because these
   claims typically are priced at a discount to comparable public securities.
   This discount is a reflection of both a less liquid market, a smaller
   universe of potential buyers and the risks peculiar to trade claim investing.
   It is not unusual for trade claims to be priced at a discount to public
   securities that have an equal or lower priority claim.
 
   As noted above, investing in trade claims does carry some unique risks which
   include:
 
  . Establishing the Amount of the Claim Frequently, the supplier's estimate of
   its receivable will differ from the customer's estimate of its payable.
   Resolution of these differences can result in a reduction in the amount of
   the claim. This risk can be reduced by only purchasing scheduled claims
   (claims already listed as liabilities by the debtor) and seeking
   representations from the seller.
 
 
<PAGE>
 
  . Defenses to Claims The debtor has a variety of defenses that can be asserted
   under the bankruptcy code against any claim. Trade claims are subject to
   these defenses, the most common of which for trade claims relates to
   preference payments. (Preference payments are all payments made by the debtor
   during the 90 days prior to the filing. These payments are presumed to have
   benefited the receiving creditor at the expense of the other creditors. The
   receiving creditor may be required to return the payment unless it can show
   the payments were received in the ordinary course of business.) While none of
   these defenses can result in any additional liability of the purchaser of the
   trade claim, they can reduce or wipe out the entire purchased claim. This
   risk can be reduced by seeking representations and indemnification from the
   seller.
 
  . Documentation/Indemnification Each trade claim purchased requires
   documentation that must be negotiated between the buyer and seller. This
   documentation is extremely important since it can protect the purchaser from
   losses such as those described above. Legal expenses in negotiating a
   purchase agreement can be fairly high. Additionally, it is important to note
   that the value of an indemnification depends on the seller's credit.
 
  . Volatile Pricing Due to Illiquid Market There are only a handful of brokers
   for trade claims and the quoted price of these claims can be volatile.
   Generally, it is expected that Trade Claims would be considered illiquid
   investments.
 
  . No Current Yield/Ultimate Recovery Trade claims are almost never entitled to
   earn interest. As a result, the return on such an investment is very
   sensitive to the length of the bankruptcy, which is uncertain. Although not
   unique to trade claims, it is worth noting that the ultimate recovery on the
   claim is uncertain and there is no way to calculate a conventional yield to
   maturity on this investment. Additionally, the exit for this investment is a
   plan of reorganization which may include the distribution of new securities.
   These securities may be as illiquid as the original trade claim investment.
 
  . Tax Issue Although the issue is not free from doubt, it is likely that Trade
   Claims would be treated as non-securities investments. As a result, any gains
   would be considered "non-qualifying" under the Code. The Fund may have up to
   10% of its gross income (including capital gains) derived from non-qualifying
   sources.
 
   High Yield and Personal Strategy Funds
 
 
                        Zero Coupon and Pay-in-Kind Bonds
 
   A zero coupon security has no cash coupon payments. Instead, the issuer sells
   the security at a substantial discount from its maturity value. The interest
   received by the investor from holding this security to maturity is the
   difference between the maturity value and the purchase price. The advantage
   to the investor is that reinvestment risk of the income received during the
   life of the bond is eliminated. However, zero-coupon bonds, like other bonds,
   retain interest rate and credit risk and usually display more price
   volatility than those securities that pay a cash coupon.
 
   Pay-in-Kind ("PIK") Instruments are securities that pay interest in either
   cash or additional securities, at the issuer's option, for a specified
   period. PIKs, like zero coupon bonds, are designed to give an issuer
   flexibility in managing cash flow. PIK bonds can be either senior or
   subordinated debt and trade flat (i.e., without accrued interest). The price
   of PIK bonds is expected to reflect the market value of the underlying debt
   plus an amount representing accrued interest since the last payment. PIK's
   are usually less volatile than zero coupon bonds, but more volatile than cash
   pay securities.
 
   For federal income tax purposes, these types of bonds will require the
   recognition of gross income each year even though no cash may be paid to the
   Fund until the maturity or call date of the bond. The Fund will nonetheless
   be required to distribute substantially all of this gross income each year to
   comply with the Internal Revenue Code, and such distributions could reduce
   the amount of cash available for investment by the Fund.
 
   High Yield, New Income, and Personal Strategy Funds
 
 
                                    Warrants
 
   The Fund may acquire 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
 
 
<PAGE>
 
   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.
 
   Corporate Income, High Yield, New Income, Personal Strategy, Short-Term Bond,
   and Short-Term U.S. Government Funds
 
 
                               Hybrid Instruments
 
   Hybrid Instruments (a type of potentially high-risk derivative) have been
   developed and combine the elements of futures contracts or options with those
   of debt, preferred equity, or a depository instrument (hereinafter "Hybrid
   Instruments"). Generally, a Hybrid Instrument will be a debt security,
   preferred stock, depository share, trust certificate, certificate of deposit,
   or other evidence of indebtedness on which a portion of or all interest
   payments, and/or the principal or stated amount payable at maturity,
   redemption, or retirement, is determined by reference to prices, changes in
   prices, or differences between prices, of securities, currencies,
   intangibles, goods, articles, or commodities (collectively "Underlying
   Assets") or by another objective index, economic factor, or other measure,
   such as interest rates, currency exchange rates, commodity indices, and
   securities indices (collectively "Benchmarks"). Thus, Hybrid Instruments may
   take a variety of forms, including, but not limited to, debt instruments with
   interest or principal payments or redemption terms determined by reference to
   the value of a currency or commodity or securities index at a future point in
   time, preferred stock with dividend rates determined by reference to the
   value of a currency, or convertible securities with the conversion terms
   related to a particular commodity.
 
   Hybrid Instruments can be an efficient means of creating exposure to a
   particular market, or segment of a market, with the objective of enhancing
   total return. For example, a Fund may wish to take advantage of expected
   declines in interest rates in several European countries, but avoid the
   transaction costs associated with buying and currency-hedging the foreign
   bond positions. One solution would be to purchase a U.S. dollar-denominated
   Hybrid Instrument whose redemption price is linked to the average three-year
   interest rate in a designated group of countries. The redemption price
   formula would provide for payoffs of greater than par if the average interest
   rate was lower than a specified level, and payoffs of less than par if rates
   were above the specified level. Furthermore, the Fund could limit the
   downside risk of the security by establishing a minimum redemption price so
   that the principal paid at maturity could not be below a predetermined
   minimum level if interest rates were to rise significantly. The purpose of
   this arrangement, known as a structured security with an embedded put option,
   would be to give the Fund the desired European bond exposure while avoiding
   currency risk, limiting downside market risk, and lowering transactions
   costs. Of course, there is no guarantee that the strategy will be successful,
   and the Fund could lose money if, for example, interest rates do not move as
   anticipated or credit problems develop with the issuer of the Hybrid.
 
   The risks of investing in Hybrid Instruments reflect a combination of the
   risks of investing in securities, options, futures and currencies. Thus, an
   investment in a Hybrid Instrument may entail significant risks that are not
   associated with a similar investment in a traditional debt instrument that
   has a fixed principal amount, is denominated in U.S. dollars, or bears
   interest either at a fixed rate or a floating rate determined by reference to
   a common, nationally published benchmark. The risks of a particular Hybrid
   Instrument will, of course, depend upon the terms of the instrument, but may
   include, without limitation, the possibility of significant changes in the
   Benchmarks or the prices of Underlying Assets to which the instrument is
   linked. Such risks generally depend upon factors which are unrelated to the
   operations or credit quality of the issuer of the Hybrid Instrument and which
   may not be readily foreseen by the purchaser, such as economic and political
   events, the supply and demand for the Underlying Assets, and interest rate
   movements. In recent years, various Benchmarks and prices for Underlying
   Assets have been highly volatile, and such volatility may be expected in the
   future. Reference is also made to the discussion of futures, options, and
   forward contracts herein for a discussion of the risks associated with such
   investments.
 
 
<PAGE>
 
   Hybrid Instruments are potentially more volatile and carry greater market
   risks than traditional debt instruments. Depending on the structure of the
   particular Hybrid Instrument, changes in a Benchmark may be magnified by the
   terms of the Hybrid Instrument and have an even more dramatic and substantial
   effect upon the value of the Hybrid Instrument. Also, the prices of the
   Hybrid Instrument and the Benchmark or Underlying Asset may not move in the
   same direction or at the same time.
 
   Hybrid Instruments may bear interest or pay preferred dividends at below
   market (or even relatively nominal) rates. Alternatively, Hybrid Instruments
   may bear interest at above market rates but bear an increased risk of
   principal loss (or gain). The latter scenario may result if "leverage" is
   used to structure the Hybrid Instrument. Leverage risk occurs when the Hybrid
   Instrument is structured so that a given change in a Benchmark or Underlying
   Asset is multiplied to produce a greater value change in the Hybrid
   Instrument, thereby magnifying the risk of loss as well as the potential for
   gain.
 
   Hybrid Instruments may also carry liquidity risk since the instruments are
   often "customized" to meet the portfolio needs of a particular investor, and
   therefore, the number of investors that are willing and able to buy such
   instruments in the secondary market may be smaller than that for more
   traditional debt securities. In addition, because the purchase and sale of
   Hybrid Instruments could take place in an over-the-counter market without the
   guarantee of a central clearing organization or in a transaction between the
   Fund and the issuer of the Hybrid Instrument, the creditworthiness of the
   counter party of issuer of the Hybrid Instrument would be an additional risk
   factor which the Fund would have to consider and monitor. Hybrid Instruments
   also may not be subject to regulation of the Commodities Futures Trading
   Commission ("CFTC"), which generally regulates the trading of commodity
   futures by U.S. persons, the SEC, which regulates the offer and sale of
   securities by and to U.S. persons, or any other governmental regulatory
   authority.
 
   The various risks discussed above, particularly the market risk of such
   instruments, may in turn cause significant fluctuations in the net asset
   value of the Fund. Accordingly, the Fund will limit its investments in Hybrid
   Instruments to 10% of total assets. However, because of their volatility, it
   is possible that the Fund's investment in Hybrid Instruments will account for
   more than 10% of the Fund's return (positive or negative).
 
   All Funds
 
 
             When-Issued Securities and Forward Commitment Contracts
 
   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 When-Issueds, but may be substantially longer for Forwards.
   During the period between purchase and settlement, no payment is made by the
   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, liquid, high-grade debt securities, or
   other suitable cover as permitted by the SEC 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.
 
 
                      Additional Adjustable Rate Securities
 
   Certain securities may be issued with adjustable interest rates that are
   reset periodically by predetermined 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.
 
 
<PAGE>
 
   Generally, as interest rates decrease or increase, the potential for capital
   appreciation or depreciation on these securities is less than for fixed-rate
   obligations. These securities may take the following forms:
 
   Variable Rate Securities Variable rate instruments are those whose terms
   provide for the adjustment of their interest rates on set dates and which,
   upon such adjustment, can reasonably be expected to have a market value that
   approximates it par value. A variable rate instrument, the principal amount
   of which is scheduled to be paid in 397 days or less, is deemed to have a
   maturity equal to the period remaining until the next readjustment of the
   interest 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 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.
 
   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.
 
   Corporate Income, High Yield, New Income, Personal Strategy, Prime Reserve,
   Reserve Investment, Short-Term Bond, and Short-Term U.S. Government 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, the Fund may be obligated to pay all or part of the registration
   expenses, and a considerable period may elapse between the time of the
   decision to sell and the time the Fund may be permitted to sell a security
   under an effective registration statement. If, during such a period, adverse
   market conditions were to develop, the Fund might obtain a less favorable
   price than prevailed when it decided to sell. Restricted securities will be
   priced at fair value as determined in accordance with procedures prescribed
   by the Fund's Board of Directors/Trustees. If, through the appreciation of
   illiquid securities or the depreciation of liquid securities, the Fund should
   be in a position where more than 15% (10% for Government Reserve Investment;
   Prime Reserve; Reserve Investment; and U.S. Treasury Money Funds) of the
   value of its net assets is invested in illiquid assets, including restricted
   securities, the Fund will take appropriate steps to protect liquidity.
 
   Notwithstanding the above, the Fund may purchase securities which, while
   privately placed, are eligible for purchase and sale under Rule 144A under
   the 1933 Act. This rule permits certain qualified institutional buyers, such
   as the Fund, to trade in privately placed securities even though such
   securities are not registered under the 1933 Act. T. Rowe Price, under the
   supervision of the Fund's Board of Directors/Trustees, will consider whether
   securities purchased under Rule 144A are illiquid and thus subject to the
   Fund's restriction of investing no more than 15% (10% for Government Reserve
   Investment; Prime Reserve; Reserve Investment; and U.S. Treasury Money Funds)
   of its net assets in illiquid securities. A determination of whether a Rule
   144A security is liquid or not is a question of fact. In making this
   determination, T. Rowe Price will consider the trading markets for the
   specific security taking into account the unregistered nature of a Rule 144A
   security. In addition, T. Rowe Price could consider the (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
 
 
<PAGE>
 
   soliciting offers, and the mechanics of transfer). The liquidity of Rule 144A
   securities would be monitored and, if as a result of changed conditions it is
   determined that a Rule 144A security is no longer liquid, the Fund's holdings
   of illiquid securities would be reviewed to determine what, if any, steps are
   required to assure that the Fund does not invest more than 15% (10% for
   Government Reserve Investment; Prime Reserve; Reserve Investment; and U.S.
   Treasury Money Funds) of its net assets in illiquid securities. Investing in
   Rule 144A securities could have the effect of increasing the amount of the
   Fund's assets invested in illiquid securities if qualified institutional
   buyers are unwilling to purchase such securities.
 
   New Income and Short-Term Bond Funds
 
 
                             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 S&P'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 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 Restrictions").
 
 
 
 PORTFOLIO MANAGEMENT PRACTICES
 -------------------------------------------------------------------------------
 
                         Lending of Portfolio Securities
 
   Securities loans are made to broker-dealers or institutional investors or
   other persons, pursuant to agreements requiring that the loans be
   continuously secured by collateral at least equal at all times to the value
   of the securities lent, marked to market on a daily basis. The collateral
   received will consist of cash, U.S. government securities, letters of credit
   or such other collateral as may be permitted under its investment program.
   While the securities are being lent, the Fund will continue to receive the
   equivalent of the interest or dividends paid by the issuer on the securities,
   as well as interest on the investment of the collateral or a fee from the
   borrower. The Fund has a right to call each loan and obtain the securities,
   within such period of time which coincides with the normal settlement period
   for purchases and sales of such securities in the respective markets. The
   Fund will not have the right to vote on securities while they are being lent,
   but it will call a loan in anticipation of any important vote. The risks in
   lending portfolio securities, as with other extensions of secured credit,
   consist of possible delay in receiving additional collateral or in the
   recovery of the securities or possible loss of rights in the collateral
   should the borrower fail financially. Loans will only be
 
 
<PAGE>
 
   made to firms deemed by T. Rowe Price to be of good standing and will not be
   made unless, in the judgment of T. Rowe Price, the consideration to be earned
   from such loans would justify the risk.
 
 
                             Other Lending/Borrowing
 
   Subject to approval by the SEC, the Fund may make loans to, or borrow funds
   from, other mutual funds sponsored or advised by T. Rowe Price or Rowe
   Price-Fleming International, Inc. ("Price-Fleming"), (collectively, "Price
   Funds").
 
 
                              Repurchase Agreements
 
   The Fund may enter into a repurchase agreement through which an investor
   (such as the Fund) purchases a security (known as the "underlying security")
   from a well-established securities dealer or a bank that is a member of the
   Federal Reserve System. Any such dealer or bank will be on T. Rowe Price's
   approved list. At that time, the bank or securities dealer agrees to
   repurchase the underlying security at the same price, plus specified
   interest. Repurchase agreements are generally for a short period of time,
   often less than a week. Repurchase agreements which do not provide for
   payment within seven days will be treated as illiquid securities. The Fund
   will only enter into repurchase agreements where (i) (A) Prime Reserve, U.S.
   Treasury Money, Government Reserve Investment, and Reserve Investment
   Funds--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, (B) GNMA, High Yield, New Income, Personal
   Strategy, Short-Term Bond, Short-Term U.S. Government, and U.S. Treasury
   Intermediate and Long-Term Funds--the underlying securities are of the type
   (excluding maturity limitations) which the Fund's investment guidelines would
   allow it to purchase directly; (ii) the market value of the underlying
   security, including interest accrued, will be 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, the Fund
   could experience both delays in liquidating the underlying security and
   losses, including: (a) possible decline in the value of the underlying
   security during the period while the Fund seeks to enforce its rights
   thereto; (b) possible subnormal levels of income and lack of access to income
   during this period; and (c) expenses of enforcing its rights.
 
 
                          Reverse Repurchase Agreements
 
   Although the Fund has no current intention of engaging in reverse repurchase
   agreements, the Fund reserves the right to do so. Reverse repurchase
   agreements are ordinary repurchase agreements in which a Fund is the seller
   of, rather than the investor in, securities, and agrees to repurchase them at
   an agreed upon time and price. Use of a reverse repurchase agreement may be
   preferable to a regular sale and later repurchase of the securities because
   it avoids certain market risks and transaction costs. A reverse repurchase
   agreement may be viewed as a type of borrowing by the Fund, subject to
   Investment Restriction (1). (See "Investment Restrictions").
 
 
                              Money Market Reserves
 
   It is expected that the Fund will invest its cash reserves primarily in one
   or more money market funds established for the exclusive use of the T. Rowe
   Price family of mutual funds and other clients of T. Rowe Price and
   Price-Fleming. Currently, two such money market funds are in
   operation-Reserve Investment Fund ("RIF") and Government Reserve Investment
   Fund ("GRF"), each a series of the Reserve Investment Funds, Inc. (The Prime
   Reserve and U.S. Treasury Money Funds will not purchase shares of either
   Fund, and the GNMA and U.S. Treasury Intermediate and U.S. Treasury Long-Term
   Funds can only purchase shares of GRF.) Additional series may be created in
   the future. These funds were created and operate under an Exemptive Order
   issued by the Securities and Exchange Commission (Investment Company Act
   Release No. IC-22770, July 29, 1997).
 
 
<PAGE>
 
   Both funds must comply with the requirements of Rule 2a-7 under the 1940 Act
   governing money market funds. The RIF invests at least 95% of its total
   assets in prime money market instruments receiving the highest credit rating.
   The GRF invests primarily in a portfolio of U.S. government-backed
   securities, primarily U.S. Treasuries, and repurchase agreements thereon.
 
   The RIF and GRF provide a very efficient means of managing the cash reserves
   of the Fund. While neither RIF or GRF pay an advisory fee to the Investment
   Manager, they will incur other expenses. However, the RIF and GRF are
   expected by T. Rowe Price to operate at very low expense ratios. The Fund
   will only invest in RIF or GRF to the extent it is consistent with its
   objective and program.
 
   Neither fund is insured or guaranteed by the U.S. government, and there is no
   assurance they will maintain a stable net asset value of $1.00 per share.
 
   High Yield Fund
 
 
                                   Short Sales
 
   The Fund may make short sales for hedging purposes to protect the Fund
   against companies whose credit is deteriorating. Short sales are transactions
   in which the Fund sells a security it does not own in anticipation of a
   decline in the market value of that security. The Fund's short sales would be
   limited to situations where the Fund owns a debt security of a company and
   would sell short the common or preferred stock or another debt security at a
   different level of the capital structure of the same company. No securities
   will be sold short if, after the effect is given to any such short sale, the
   total market value of all securities sold short would exceed 2% of the value
   of the Fund's net assets.
 
   To complete a short sale transaction, the Fund must borrow the security to
   make delivery to the buyer. The Fund then is obligated to replace the
   security borrowed by purchasing it at the market price at the time of
   replacement. The price at such time may be more or less than the price at
   which the security was sold by the Fund. Until the security is replaced, the
   Fund is required to pay to the lender amounts equal to any dividends or
   interest which accrue during the period of the loan. To borrow the security,
   the Fund also may be required to pay a premium, which would increase the cost
   of the security sold. The proceeds of the short sale will be retained by the
   broker, to the extent necessary to meet margin requirements, until the short
   position is closed out.
 
   Until the Fund replaces a borrowed security in connection with a short sale,
   the Fund will: (a) maintain daily a segregated account, containing cash, U.S.
   government securities or other suitable cover as permitted by the SEC, at
   such a level that (i) the amount deposited in the account plus the amount
   deposited with the broker as collateral will equal the current value of the
   security sold short and (ii) the amount deposited in the segregated account
   plus the amount deposited with the broker as collateral will not be less than
   the market value of the security at the time its was sold short; or (b)
   otherwise cover its short position.
 
   The Fund will incur a loss as a result of the short sale if the price of the
   security sold short increases between the date of the short sale and the date
   on which the Fund replaces the borrowed security. The Fund will realize a
   gain if the security sold short declines in price between those dates. This
   result is the opposite of what one would expect from a cash purchase of a
   long position in a security. The amount of any gain will be decreased, and
   the amount of any loss increased, by the amount of any premium, dividends or
   interest the Fund may be required to pay in connection with a short sale. Any
   gain or loss on the security sold short would be separate from a gain or loss
   on the Fund security being hedged by the short sale.
 
   The Taxpayer Relief Act of 1997 requires a mutual fund to recognize gain upon
   entering into a constructive sale of stock, a partnership interest, or
   certain debt positions occurring after August 5, 1997. A constructive sale is
   deemed to occur if the Fund enters into a short sale, an offsetting notional
   principal contract, or a futures or forward contract which is substantially
   identical to the appreciated position. Some of the transactions in which the
   Fund is permitted to invest may cause certain appreciated positions in
   securities held by the Fund to qualify as a "constructive sale," in which
   case it would be treated as sold and the resulting gain subjected to tax or,
   in the case of a mutual fund, distributed to shareholders. If this were to
   occur, the Fund would be required to distribute such gains even though it
   would receive no cash until the later sale of
 
 
<PAGE>
 
   the security. Such distributions could reduce the amount of cash available
   for investment by the Fund. Because these rules do not apply to "straight"
   debt transactions, it is not anticipated that they will have a significant
   impact on the Fund; however, the effect cannot be determined until the
   issuance of clarifying regulations.
 
   All Funds except Government Reserve Investment, Prime Reserve, Reserve
   Investment, and U.S. Treasury Money Funds
 
 
                                     Options
 
   Options are a type of potentially high-risk derivative.
 
 
                          Writing Covered Call Options
 
   The Fund may write (sell) American or European style "covered" call options
   and purchase options to close out options previously written by the Fund. In
   writing covered call options, the Fund expects to generate additional premium
   income which should serve to enhance the Fund's total return and reduce the
   effect of any price decline of the security or currency involved in the
   option. Covered call options will generally be written on securities or
   currencies which, in T. Rowe Price's opinion, are not expected to have any
   major price increases or moves in the near future but which, over the long
   term, are deemed to be attractive investments for the Fund.
 
   A call option gives the holder (buyer) the "right to purchase" a security or
   currency at a specified price (the exercise price) at expiration of the
   option (European style) or at any time until a certain date (the expiration
   date) (American style). So long as the obligation of the writer of a call
   option continues, he may be assigned an exercise notice by the broker-dealer
   through whom such option was sold, requiring him to deliver the underlying
   security or currency against payment of the exercise price. This obligation
   terminates upon the expiration of the call option, or such earlier time at
   which the writer effects a closing purchase transaction by repurchasing an
   option identical to that previously sold. To secure his obligation to deliver
   the underlying security or currency in the case of a call option, a writer is
   required to deposit in escrow the underlying security or currency or other
   assets in accordance with the rules of a clearing corporation.
 
   The Fund will write only covered call options. This means that the 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, other liquid high-grade debt
   obligations, or other suitable cover as permitted by the SEC having a value
   equal to the fluctuating market value of the optioned securities or
   currencies.
 
   Portfolio securities or currencies on which call options may be written will
   be purchased solely on the basis of investment considerations consistent with
   the Fund's investment objective. The writing of covered call options is a
   conservative investment technique believed to involve relatively little risk
   (in contrast to the writing of naked or uncovered options, which the Fund
   will not do), but capable of enhancing the Fund's total return. When writing
   a covered call option, a Fund, in return for the premium, gives up the
   opportunity for profit from a price increase in the underlying security or
   currency above the exercise price, but conversely retains the risk of loss
   should the price of the security or currency decline. Unlike one who owns
   securities or currencies not subject to an option, the Fund has no control
   over when it may be required to sell the underlying securities or currencies,
   since it may be assigned an exercise notice at any time prior to the
   expiration of its obligation as a writer. If a call option which the Fund has
   written expires, the Fund will realize a gain in the amount of the premium;
   however, such gain may be offset by a decline in the market value of the
   underlying security or currency during the option period. If the call option
   is exercised, the Fund will realize a gain or loss from the sale of the
   underlying security or currency. The Fund does not consider a security or
   currency covered by a call to be "pledged" as that term is used in the Fund's
   policy which limits the pledging or mortgaging of its assets.
 
   The premium received is the market value of an option. The premium the Fund
   will receive from writing a call option will reflect, among other things, the
   current market price of the underlying security or currency,
 
 
<PAGE>
 
   the relationship of the exercise price to such market price, the historical
   price volatility of the underlying security or currency, and the length of
   the option period. Once the decision to write a call option has been made, T.
   Rowe Price, in determining whether a particular call option should be written
   on a particular security or currency, will consider the reasonableness of the
   anticipated premium and the likelihood that a liquid secondary market will
   exist for those options. The premium received by the Fund for writing covered
   call options will be recorded as a liability of the Fund. This liability will
   be adjusted daily to the option's current market value, which will be the
   latest sale price at the time at which the net asset value per share of the
   Fund is computed (close of the New York Stock Exchange), or, in the absence
   of such sale, the latest asked price. The option will be terminated upon
   expiration of the option, the purchase of an identical option in a closing
   transaction, or delivery of the underlying security or currency upon the
   exercise of the option.
 
   Closing transactions will be effected in order to realize a profit on an
   outstanding call option, to prevent an underlying security or currency from
   being called, or, to permit the sale of the underlying security or currency.
   Furthermore, effecting a closing transaction will permit the Fund to write
   another call option on the underlying security or currency with either a
   different exercise price or expiration date or both. If the Fund desires to
   sell a particular security or currency from its portfolio on which it has
   written a call option, or purchased a put option, it will seek to effect a
   closing transaction prior to, or concurrently with, the sale of the security
   or currency. There is, of course, no assurance that the Fund will be able to
   effect such closing transactions at favorable prices. If the Fund cannot
   enter into such a transaction, it may be required to hold a security or
   currency that it might otherwise have sold. When the Fund writes a covered
   call option, it runs the risk of not being able to participate in the
   appreciation of the underlying securities or currencies above the exercise
   price, as well as the risk of being required to hold on to securities or
   currencies that are depreciating in value. This could result in higher
   transaction costs. The Fund will pay transaction costs in connection with the
   writing of options to close out previously written options. Such transaction
   costs are normally higher than those applicable to purchases and sales of
   portfolio securities.
 
   Call options written by the Fund will normally have expiration dates of less
   than nine months from the date written. The exercise price of the options may
   be below, equal to, or above the current market values of the underlying
   securities or currencies at the time the options are written. From time to
   time, the Fund may purchase an underlying security or currency for delivery
   in accordance with an exercise notice of a call option assigned to it, rather
   than delivering such security or currency from its portfolio. In such cases,
   additional costs may be incurred.
 
   The Fund will realize a profit or loss from a closing purchase transaction if
   the cost of the transaction is less or more than the premium received from
   the writing of the option. Because increases in the market price of a call
   option will generally reflect increases in the market price of the underlying
   security or currency, any loss resulting from the repurchase of a call option
   is likely to be offset in whole or in part by appreciation of the underlying
   security or currency owned by the Fund.
 
   The Fund will not write a covered call option if, as a result, the aggregate
   market value of all portfolio securities or currencies covering written call
   or put options exceeds 25% of the market value of the Fund's net assets. In
   calculating the 25% limit, the Fund will offset, against the value of assets
   covering written calls and puts, the value of purchased calls and puts on
   identical securities or currencies with identical maturity dates.
 
 
                           Writing Covered Put Options
 
   The Fund may write American or European style covered put options and
   purchase options to close out options previously written by the Fund. A put
   option gives the purchaser of the option the right to sell, and the writer
   (seller) has the obligation to buy, the underlying security or currency at
   the exercise price during the option period (American style) or at the
   expiration of the option (European style). So long as the obligation of the
   writer continues, he may be assigned an exercise notice by the broker-dealer
   through whom such option was sold, requiring him to make payment to the
   exercise price against delivery of the underlying security or currency. The
   operation of put options in other respects, including their related risks and
   rewards, is substantially identical to that of call options.
 
 
<PAGE>
 
   The Fund would write put options only on a covered basis, which means that
   the Fund would maintain in a segregated account cash, U.S. government
   securities, other liquid high-grade debt obligations, or other suitable cover
   as determined by the SEC, in an amount not less than the exercise price or
   the Fund will own an option to sell the underlying security or currency
   subject to the option having an exercise price equal to or greater than the
   exercise price of the "covered" option at all times while the put option is
   outstanding. (The rules of a clearing corporation currently require that such
   assets be deposited in escrow to secure payment of the exercise price.)
 
   The Fund would generally write covered put options in circumstances where T.
   Rowe Price wishes to purchase the underlying security or currency for the
   Fund's portfolio at a price lower than the current market price of the
   security or currency. In such event the Fund would write a put option at an
   exercise price which, reduced by the premium received on the option, reflects
   the lower price it is willing to pay. Since the Fund would also receive
   interest on debt securities or currencies maintained to cover the exercise
   price of the option, this technique could be used to enhance current return
   during periods of market uncertainty. The risk in such a transaction would be
   that the market price of the underlying security or currency would decline
   below the exercise price less the premiums received. Such a decline could be
   substantial and result in a significant loss to the Fund. In addition, the
   Fund, because it does not own the specific securities or currencies which it
   may be required to purchase in exercise of the put, cannot benefit from
   appreciation, if any, with respect to such specific securities or currencies.
 
   The Fund will not write a covered put option if, as a result, the aggregate
   market value of all portfolio securities or currencies covering put or call
   options exceeds 25% of the market value of the Fund's net assets. In
   calculating the 25% limit, the Fund will offset, against the value of assets
   covering written puts and calls, the value of purchased puts and calls on
   identical securities or currencies with identical maturity dates.
 
 
                             Purchasing Put Options
 
   The Fund may purchase American or European style put options. As the holder
   of a put option, the Fund has the right to sell the underlying security or
   currency at the exercise price at any time during the option period (American
   style) or at the expiration of the option (European style). The Fund may
   enter into closing sale transactions with respect to such options, exercise
   them or permit them to expire. The Fund may purchase put options for
   defensive purposes in order to protect against an anticipated decline in the
   value of its securities or currencies. An example of such use of put options
   is provided next.
 
   The Fund may purchase a put option on an underlying security or currency (a
   "protective put") owned by the Fund as a defensive technique in order to
   protect against an anticipated decline in the value of the security or
   currency. Such hedge protection is provided only during the life of the put
   option when the Fund, as the holder of the put option, is able to sell the
   underlying security or currency at the put exercise price regardless of any
   decline in the underlying security's market price or currency's exchange
   value. For example, a put option may be purchased in order to protect
   unrealized appreciation of a security or currency where T. Rowe Price deems
   it desirable to continue to hold the security or currency because of tax
   considerations. The premium paid for the put option and any transaction costs
   would reduce any capital gain otherwise available for distribution when the
   security or currency is eventually sold.
 
   The Fund may also purchase put options at a time when the Fund does not own
   the underlying security or currency. By purchasing put options on a security
   or currency it does not own, the Fund seeks to benefit from a decline in the
   market price of the underlying security or currency. If the put option is not
   sold when it has remaining value, and if the market price of the underlying
   security or currency remains equal to or greater than the exercise price
   during the life of the put option, the Fund will lose its entire investment
   in the put option. In order for the purchase of a put option to be
   profitable, the market price of the underlying security or currency must
   decline sufficiently below the exercise price to cover the premium and
   transaction costs, unless the put option is sold in a closing sale
   transaction.
 
   The Fund will not commit more than 5% of its assets to premiums when
   purchasing put and call options. The premium paid by the Fund when purchasing
   a put option will be recorded as an asset of the Fund. This asset will be
   adjusted daily to the option's current market value, which will be the latest
   sale price at the time
 
 
<PAGE>
 
   at which the net asset value per share of the Fund is computed (close of New
   York Stock Exchange), or, in the absence of such sale, the latest bid price.
   This asset will be terminated upon expiration of the option, the selling
   (writing) of an identical option in a closing transaction, or the delivery of
   the underlying security or currency upon the exercise of the option.
 
 
                             Purchasing Call Options
 
   The Fund may purchase American or European style call options. As the holder
   of a call option, the Fund has the right to purchase the underlying security
   or currency at the exercise price at any time during the option period
   (American style) or at the expiration of the option (European style). The
   Fund may enter into closing sale transactions with respect to such options,
   exercise them or permit them to expire. The Fund may purchase call options
   for the purpose of increasing its current return or avoiding tax consequences
   which could reduce its current return. The Fund may also purchase call
   options in order to acquire the underlying securities or currencies. Examples
   of such uses of call options are provided next.
 
   Call options may be purchased by the Fund for the purpose of acquiring the
   underlying securities or currencies for its portfolio. Utilized in this
   fashion, the purchase of call options enables the Fund to acquire the
   securities or currencies at the exercise price of the call option plus the
   premium paid. At times the net cost of acquiring securities or currencies in
   this manner may be less than the cost of acquiring the securities or
   currencies directly. This technique may also be useful to the Fund in
   purchasing a large block of securities or currencies that would be more
   difficult to acquire by direct market purchases. So long as it holds such a
   call option rather than the underlying security or currency itself, the Fund
   is partially protected from any unexpected decline in the market price of the
   underlying security or currency and in such event could allow the call option
   to expire, incurring a loss only to the extent of the premium paid for the
   option.
 
   The Fund will not commit more than 5% of its assets to premiums when
   purchasing call and put options. The Fund may also purchase call options on
   underlying securities or currencies it owns in order to protect unrealized
   gains on call options previously written by it. A call option would be
   purchased for this purpose where tax considerations make it inadvisable to
   realize such gains through a closing purchase transaction. Call options may
   also be purchased at times to avoid realizing losses.
 
 
                        Dealer (Over-the-Counter) Options
 
   The Fund may engage in transactions involving dealer options. Certain risks
   are specific to dealer options. While the Fund would look to a clearing
   corporation to exercise exchange-traded options, if the Fund were to purchase
   a dealer option, it would rely on the dealer from whom it purchased the
   option to perform if the option were exercised. Failure by the dealer to do
   so would result in the loss of the premium paid by the Fund as well as loss
   of the expected benefit of the transaction.
 
   Exchange-traded options generally have a continuous liquid market while
   dealer options have none. Consequently, the Fund will generally be able to
   realize the value of a dealer option it has purchased only by exercising it
   or reselling it to the dealer who issued it. Similarly, when the Fund writes
   a dealer option, it generally will be able to close out the option prior to
   its expiration only by entering into a closing purchase transaction with the
   dealer to which the Fund originally wrote the option. While the Fund will
   seek to enter into dealer options only with dealers who will agree to and
   which are expected to be capable of entering into closing transactions with
   the Fund, there can be no assurance that the Fund will be able to liquidate a
   dealer option at a favorable price at any time prior to expiration. Until the
   Fund, as a covered dealer call option writer, is able to effect a closing
   purchase transaction, it will not be able to liquidate securities (or other
   assets) or currencies used as cover until the option expires or is exercised.
   In the event of insolvency of the contra party, the Fund may be unable to
   liquidate a dealer option. With respect to options written by the Fund, the
   inability to enter into a closing transaction may result in material losses
   to the Fund. For example, since the Fund must maintain a secured position
   with respect to any call option on a security it writes, the Fund may not
   sell the assets which it has segregated to secure the position while it is
   obligated under the option. This requirement may impair a Fund's ability to
   sell portfolio securities or currencies at a time when such sale might be
   advantageous.
 
 
<PAGE>
 
   The Staff of the SEC has taken the position that purchased dealer options and
   the assets used to secure the written dealer options are illiquid securities.
   The Fund may treat the cover used for written OTC options as liquid if the
   dealer agrees that the Fund may repurchase the OTC option it has written for
   a maximum price to be calculated by a predetermined formula. In such cases,
   the OTC option would be considered illiquid only to the extent the maximum
   repurchase price under the formula exceeds the intrinsic value of the option.
 
   High Yield Fund
 
 
                           Spread Option Transactions
 
   The Fund may purchase from and sell to securities dealers covered spread
   options. Such covered spread options are not presently exchange listed or
   traded. The purchase of a spread option gives the Fund the right to put, or
   sell, a security that it owns at a fixed dollar spread or fixed yield spread
   in relationship to another security that the Fund does not own, but which is
   used as a benchmark. The risk to the Fund in purchasing covered spread
   options is the cost of the premium paid for the spread options and any
   transaction costs. In addition, there is no assurance that closing
   transactions will be available. The purchase of spread options will be used
   to protect the Fund against adverse changes in prevailing credit quality
   spreads, i.e., the yield spread between high-quality and lower-quality
   securities. Such protection is only provided during the life of the spread
   option. The security covering the spread option will be maintained in a
   segregated account by the Fund's custodian. The Fund does not consider a
   security covered by a spread option to be "pledged" as that term is used in
   the Fund's policy limiting the pledging or mortgaging of its assets. The Fund
   may also buy and sell uncovered spread options. Such options would be used
   for the same purposes and be subject to similar risks as covered spread
   options. However, in an uncovered spread option, the Fund would not own
   either of the securities involved in the spread.
 
   All Funds except Government Reserve Investment, Prime Reserve, Reserve
   Investment, and U.S. Treasury Money Funds
 
 
                                Futures Contracts
 
   Futures contracts are a type of potentially high-risk derivative.
 
   Transactions in Futures
 
   The Fund 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 Fund's portfolio, as a cash management tool, or as an efficient way for
   T. Rowe Price to implement either an increase or decrease in portfolio market
   exposure in response to changing market conditions. The Fund may purchase or
   sell futures contracts with respect to any stock index. Nevertheless, to
   hedge the Fund's portfolio successfully, the Fund must sell futures contacts
   with respect to indices or subindices whose movements will have a significant
   correlation with movements in the prices of the Fund's portfolio securities.
 
   Interest rate or currency futures contracts may be used as a hedge against
   changes in prevailing levels of interest rates or currency exchange rates in
   order to establish more definitely the effective return on securities or
   currencies held or intended to be acquired by the Fund. In this regard, the
   Fund could sell interest rate or currency futures as an offset against the
   effect of expected increases in interest rates or currency exchange rates and
   purchase such futures as an offset against the effect of expected declines in
   interest rates or currency exchange rates.
 
   The Fund will enter into futures contracts which are traded on national or
   foreign futures exchanges, and are standardized as to maturity date and
   underlying financial instrument. Futures exchanges and trading in the United
   States are regulated under the Commodity Exchange Act by the CFTC. Futures
   are traded in 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 the Fund's objectives in these
   areas.
 
 
<PAGE>
 
   Regulatory Limitations
   The Fund will engage in futures contracts and options thereon only for bona
   fide hedging, yield enhancement, and risk management purposes, in each case
   in accordance with rules and regulations of the CFTC.
 
   The Fund 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
   premium paid on those 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 instances involving the purchase of futures contracts or the writing of
   call or put options thereon by the Fund, an amount of cash, U.S. government
   securities, other liquid, high-grade debt obligations, or other suitable
   cover as permitted by the SEC, equal to the market value of the futures
   contracts and options thereon (less any related margin deposits), will be
   identified by the Fund to cover the position, or alternative cover (such as
   owning an offsetting position) will be employed. Assets used as cover or held
   in an identified account cannot be sold while the position in the
   corresponding option or future is open, unless they are replaced with similar
   assets. As a result, the commitment of a large portion of a Fund's assets to
   cover or identified accounts could impede portfolio management or the Fund's
   ability to meet redemption requests or other current obligations.
 
   If the CFTC or other regulatory authorities adopt different (including less
   stringent) or additional restrictions, the Fund would comply with such new
   restrictions.
 
   Trading in Futures Contracts
   A futures contract provides for the future sale by one party and purchase by
   another party of a specified amount of a specific financial instrument (e.g.,
   units of a debt security) for a specified price, date, time and place
   designated at the time the contract is made. Brokerage fees are incurred when
   a futures contract is bought or sold and margin deposits must be maintained.
   Entering into a contract to buy is commonly referred to as buying or
   purchasing a contract or holding a long position. Entering into a contract to
   sell is commonly referred to as selling a contract or holding a short
   position.
 
   Unlike when the Fund purchases or sells a security, no price would be paid or
   received by the Fund upon the purchase or sale of a futures contract. Upon
   entering into a futures contract, and to maintain the Fund's open positions
   in futures contracts, the Fund would be required to deposit with its
   custodian in a segregated account in the name of the futures broker an amount
   of cash, U.S. government securities, suitable money market instruments,
   liquid, high-grade debt securities, or other suitable cover as determined by
   the SEC, 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 positions in the futures contract more
   or less valuable, a process known as "marking to market." The Fund expects to
   earn interest income on its margin deposits.
 
 
<PAGE>
 
   Although certain futures contracts, by their terms, require actual future
   delivery of and payment for the underlying instruments, in practice most
   futures contracts are usually closed out before the delivery date. Closing
   out an open futures contract purchase or sale is effected by entering into an
   offsetting futures contract sale or purchase, respectively, for the same
   aggregate amount of the identical securities and the same delivery date. If
   the offsetting purchase price is less than the original sale price, the Fund
   realizes a gain; if it is more, the Fund realizes a loss. Conversely, if the
   offsetting sale price is more than the original purchase price, the Fund
   realizes a gain; if it is less, the Fund realizes a loss. The transaction
   costs must also be included in these calculations. There can be no assurance,
   however, that the Fund will be able to enter into an offsetting transaction
   with respect to a particular futures contract at a particular time. If the
   Fund is not able to enter into an offsetting transaction, the Fund will
   continue to be required to maintain the margin deposits on the futures
   contract.
 
   As an example of an offsetting transaction in which the underlying instrument
   is not delivered, the contractual obligations arising from the sale of one
   contract of September Treasury Bills on an exchange may be fulfilled at any
   time before delivery of the contract is required (i.e., on a specified date
   in September, the "delivery month") by the purchase of one contract of
   September Treasury Bills on the same exchange. In such instance, the
   difference between the price at which the futures contract was sold and the
   price paid for the offsetting purchase, after allowance for transaction
   costs, represents the profit or loss to the Fund.
 
   For example, the S&P's 500 Stock Index is made up of 500 selected common
   stocks, most of which are listed on the New York Stock Exchange. The S&P 500
   Index assigns relative weightings to the common stocks included in the Index,
   and the Index fluctuates with changes in the market values of those common
   stocks. In the case of futures contracts on the S&P 500 Index, the contracts
   are to buy or sell 250 units. Thus, if the value of the S&P 500 Index were
   $150, one contract would be worth $37,500 (250 units x $150). The stock index
   futures contract specifies that no delivery of the actual stocks making up
   the index will take place. Instead, settlement in cash occurs. Over the life
   of the contract, the gain or loss realized by the Fund will equal the
   difference between the purchase (or sale) price of the contract and the price
   at which the contract is terminated. For example, if the Fund enters into a
   futures contract to buy 250 units of the S&P 500 Index at a specified future
   date at a contract price of $150 and the S&P 500 Index is at $154 on that
   future date, the Fund will gain $1,000 (250 units x gain of $4). If the Fund
   enters into a futures contract to sell 250 units of the stock index at a
   specified future date at a contract price of $150 and the S&P 500 Index is at
   $152 on that future date, the Fund will lose $500 (250 units x loss of $2).
 
 
               Special Risks of Transactions in Futures Contracts
 
  . Volatility and Leverage The prices of futures contracts are volatile and are
   influenced, among other things, by actual and anticipated changes in the
   market and interest rates, which in turn are affected by fiscal and monetary
   policies and national and international political and economic events.
 
   Most United States futures exchanges limit the amount of fluctuation
   permitted in futures contract prices during a single trading day. The daily
   limit establishes the maximum amount that the price of a futures contract may
   vary either up or down from the previous day's settlement price at the end of
   a trading session. Once the daily limit has been reached in a particular type
   of futures contract, no trades may be made on that day at a price beyond that
   limit. The daily limit governs only price movement during a particular
   trading day and therefore does not limit potential losses, because the limit
   may prevent the liquidation of unfavorable positions. Futures contract prices
   have occasionally moved to the daily limit for several consecutive trading
   days with little or no trading, thereby preventing prompt liquidation of
   futures positions and subjecting some futures traders to substantial losses.
 
   Margin deposits required on futures trading are low. As a result, a
   relatively small price movement in a futures contract may result in immediate
   and substantial loss, as well as gain, to the investor. For example, if at
   the time of purchase, 10% of the value of the futures contract is deposited
   as margin, a subsequent 10% decrease in the value of the futures contract
   would result in a total loss of the margin deposit, before any deduction for
   the transaction costs, if the account were then closed out. A 15% decrease
   would result in a loss equal to 150% of the original margin deposit, if the
   contract were closed out. Thus, a purchase or sale of a
 
 
<PAGE>
 
   futures contract may result in losses in excess of the amount invested in the
   futures contract. However, the Fund would presumably have sustained
   comparable losses if, instead of the futures contract, it had invested in the
   underlying financial instrument and sold it after decline. Furthermore, in
   the case of a futures contract purchase, in order to be certain that the 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 The Fund may elect to close some or all of its futures positions
   at any time prior to their expiration. The Fund would do so to reduce
   exposure represented by long futures positions or short futures positions.
   The Fund may close its positions by taking opposite positions which would
   operate to terminate the Fund's position in the futures contracts. Final
   determinations of variation margin would then be made, additional cash would
   be required to be paid by or released to the Fund, and the Fund would realize
   a loss or a gain.
 
   Futures contracts may be closed out only on the exchange or board of trade
   where the contracts were initially traded. Although the Fund intends to
   purchase or sell futures contracts only on exchanges or boards of trade where
   there appears to be an active market, there is no assurance that a liquid
   market on an exchange or board of trade will exist for any particular
   contract at any particular time. In such event, it might not be possible to
   close a futures contract, and in the event of adverse price movements, the
   Fund would continue to be required to make daily cash payments of variation
   margin. However, in the event futures contracts have been used to hedge the
   underlying instruments, the Fund would continue to hold the underlying
   instruments subject to the hedge until the futures contracts could be
   terminated. In such circumstances, an increase in the price of underlying
   instruments, if any, might partially or completely offset losses on the
   futures contract. However, as described next, there is no guarantee that the
   price of the underlying instruments will, in fact, correlate with the price
   movements in the futures contract and thus provide an offset to losses on a
   futures contract.
 
  . Hedging Risk A decision of whether, when, and how to hedge involves skill
   and judgment, and even a well-conceived hedge may be unsuccessful to some
   degree because of unexpected market behavior, market or interest rate trends.
   There are several risks in connection with the use by the Fund of futures
   contracts as a hedging device. One risk arises because of the imperfect
   correlation between movements in the prices of the futures contracts and
   movements in the prices of the underlying instruments which are the subject
   of the hedge. T. Rowe Price will, however, attempt to reduce this risk by
   entering into futures contracts whose movements, in its judgment, will have a
   significant correlation with movements in the prices of the Fund's underlying
   instruments sought to be hedged.
 
   Successful use of futures contracts by the Fund for hedging purposes is also
   subject to T. Rowe Price's ability to correctly predict movements in the
   direction of the market. It is possible that, when the Fund has sold futures
   to hedge its portfolio against a decline in the market, the index, indices,
   or instruments underlying futures might advance and the value of the
   underlying instruments held in the Fund's portfolio might decline. If this
   were to occur, the Fund would lose money on the futures and also would
   experience a decline in value in its underlying instruments. However, while
   this might occur to a certain degree, T. Rowe Price believes that over time
   the value of the Fund's portfolio will tend to move in the same direction as
   the market indices used to hedge the portfolio. It is also possible that, if
   the Fund were to hedge against the possibility of a decline in the market
   (adversely affecting the underlying instruments held in its portfolio) and
   prices instead increased, the Fund would lose part or all of the benefit of
   increased value of those underlying instruments that it has hedged, because
   it would have offsetting losses in its futures positions. In addition, in
   such situations, if the Fund had insufficient cash, it might have to sell
   underlying instruments to meet daily variation margin requirements. Such
   sales of underlying instruments might be, but would not necessarily be, at
   increased prices (which would reflect the rising market). The Fund might have
   to sell underlying instruments at a time when it would be disadvantageous to
   do so.
 
   In addition to the possibility that there might be an imperfect correlation,
   or no correlation at all, between price movements in the futures contracts
   and the portion of the portfolio being hedged, the price movements of futures
   contracts might not correlate perfectly with price movements in the
   underlying instruments due to certain market distortions. First, all
   participants in the futures market are subject to margin deposit and
 
 
<PAGE>
 
   maintenance requirements. Rather than meeting additional margin deposit
   requirements, investors might close futures contracts through offsetting
   transactions, which could distort the normal relationship between the
   underlying instruments and futures markets. Second, the margin requirements
   in the futures market are less onerous than margin requirements in the
   securities markets and, as a result, the futures market might attract more
   speculators than the securities markets do. Increased participation by
   speculators in the futures market might also cause temporary price
   distortions. Due to the possibility of price distortion in the futures market
   and also because of imperfect correlation between price movements in the
   underlying instruments and movements in the prices of futures contracts, even
   a correct forecast of general market trends by T. Rowe Price might not result
   in a successful hedging transaction over a very short time period.
 
 
                          Options on Futures Contracts
 
   The Fund may purchase and sell options on the same types of futures in which
   it may invest.
 
   Options (another type of potentially high-risk derivative) on futures are
   similar to options on underlying instruments except that options on futures
   give the purchaser the right, in return for the premium paid, to assume a
   position in a futures contract (a long position if the option is a call and a
   short position if the option is a put), rather than to purchase or sell the
   futures contract, at a specified exercise price at any time during the period
   of the option. Upon exercise of the option, the delivery of the futures
   position by the writer of the option to the holder of the option will be
   accompanied by the delivery of the accumulated balance in the writer's
   futures margin account which represents the amount by which the market price
   of the futures contract, at exercise, exceeds (in the case of a call) or is
   less than (in the case of a put) the exercise price of the option on the
   futures contract. Purchasers of options who fail to exercise their options
   prior to the exercise date suffer a loss of the premium paid.
 
   As an alternative to writing or purchasing call and put options on interest
   rate futures, the Fund may write or purchase call and put options on
   financial indices. 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 Fund 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
   nondiscriminatory manner.
 
 
          Special Risks of Transactions in Options on Futures Contracts
 
   The risks described under "Special Risks in Transactions on Futures
   Contracts" are substantially the same as the risks of using options on
   futures. In addition, where the Fund seeks to close out an option position by
   writing or buying an offsetting option covering the same index, underlying
   instrument or contract and having the same exercise price and expiration
   date, its ability to establish and close out positions on such options will
   be subject to the maintenance of a liquid secondary market. Reasons for the
   absence of a liquid secondary market on an exchange include the following:
   (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.
 
 
<PAGE>
 
                    Additional Futures and Options Contracts
 
   Although the Fund has no current intention of engaging in futures or options
   transactions other than those described above, it reserves the right to do
   so. Such futures and options trading might involve risks which differ from
   those involved in the futures and options described above.
 
 
                           Foreign Futures and Options
 
   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 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, when the Fund trades foreign
   futures or foreign options contracts, it 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 CFTC and arbitration proceedings provided by the National Futures
   Association or any domestic futures exchange. In particular, funds received
   from the Fund 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 the Fund's order is placed and the time it is liquidated,
   offset or exercised.
 
   U.S. Treasury Intermediate and Long-Term Funds
 
 
     Limitations on Futures and Options for Intermediate and Long-Term Funds
 
   The Funds will not purchase a futures contract or option theron 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 the Fund's net asset value. In addition, neither
   of the Funds will enter into a futures transaction if it would be obligated
   to purchase or deliver under outstanding open futures contracts amounts which
   would exceed 15% of the Fund's total assets.
 
   A Fund will not write a covered call option if, as a result, the aggregate
   market value of all portfolio securities covering call options or subject to
   delivery under put options exceeds 15% of the market value of the Fund's
   total assets.
 
   A Fund will not write a covered put option if, as a result, the aggregate
   market value of all portfolio securities subject to such put options or
   covering call options exceeds 15% of the market value of the Fund's total
   assets.
 
   The Funds have no current intention of investing in futures and options.
   However, they reserve the right to do so in the future and could be subject
   to the following limitations: a Fund may invest up to 15% of its total assets
   in premiums on put options and 15% of its total assets in premiums on call
   options. The total amount of a Fund's total assets invested in futures and
   options will not exceed 15% of the Fund's total assets.
 
   Corporate Income, High Yield, New Income, Personal Strategy, and Short-Term
   Bond 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.
 
 
<PAGE>
 
   The Fund 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 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. By entering into a forward contract for
   the purchase or sale, for a fixed amount of dollars, of the amount of foreign
   currency involved in the underlying security transactions, the 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 believes that one currency 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 the Fund's
   portfolio securities denominated in such foreign currency. Alternatively,
   where appropriate, the 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 parties will be incorporated into the longer term
   investment decisions made with regard to overall diversification strategies.
   However, T. Rowe Price believes that it is important to have the flexibility
   to enter into such forward contracts when it determines that the best
   interests of the Fund will be served.
 
   Third, the 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 in U.S. dollars but the
   dollar component would be transformed into a foreign currency through a
   forward contract.
 
   The Fund may enter into forward contacts for any other purpose consistent
   with the Fund's investment objective and program. However, the Fund will not
   enter into a forward contract, or maintain exposure to any such contract(s),
   if the amount of foreign currency required to be delivered thereunder would
   exceed the Fund's holdings of liquid, high-grade debt securities, currency
   available for cover of the forward contract(s) or other suitable cover as
   permitted by the SEC. In determining the amount to be delivered under a
   contract, the Fund may net offsetting positions.
 
   At the maturity of a forward contract, the Fund may 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 the 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 the 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 the 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, the
   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.
 
 
<PAGE>
 
   The Fund's dealing in forward foreign currency exchange contracts will
   generally be limited to the transactions described above. However, the Fund
   reserves the right to enter into forward foreign currency contracts for
   different purposes and under different circumstances. Of course, the 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. 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 the 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
   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
   the 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 Fund may enter into certain options, futures, and forward foreign
   exchange contracts, including options and futures on currencies, which will
   be treated as Section 1256 contracts or straddles.
 
   Transactions that are considered Section 1256 contracts will be considered to
   have been closed at the end of the Fund's fiscal year and any gains or losses
   will be recognized for tax purposes at that time. Such gains or losses from
   the normal closing or settlement of such transactions will be characterized
   as 60% long-term capital gain (taxable at a maximum rate of 20%) or loss and
   40% short-term capital gain or loss regardless of the holding period of the
   instrument (ordinary income or loss for foreign exchange contracts). The Fund
   will be required to distribute net gains on such transactions to shareholders
   even though it may not have closed the transaction and received cash to pay
   such distributions.
 
   Options, futures and forward foreign exchange contracts, including options
   and futures on currencies, which offset a foreign dollar denominated bond or
   currency position may be considered straddles for tax purposes, in which case
   a loss on any position in a straddle will be subject to deferral to the
   extent of unrealized gain in an offsetting position. The holding period of
   the securities or currencies comprising the straddle will be deemed not to
   begin until the straddle is terminated. The holding period of the security
   offsetting an "in-the-money qualified covered call" option on an equity
   security will not include the period of time the option is outstanding.
 
   Losses on written covered calls and purchased puts on securities, excluding
   certain "qualified covered call" options on equity securities, may be
   long-term capital losses, if the security covering the option was held for
   more than 12 months prior to the writing of the option.
 
   In order for the Fund to continue to qualify for federal income tax treatment
   as a regulated investment company, at least 90% of its gross income for a
   taxable year must be derived from qualifying income, i.e., dividends,
   interest, income derived from loans of securities, and gains from the sale of
   securities or currencies. Tax regulations could be issued limiting the extent
   that net gain realized from option, futures or foreign forward exchange
   contracts on currencies is qualifying income for purposes of the 90%
   requirement.
 
   As a result of the "Taxpayer Relief Act of 1997," entering into certain
   options, futures contracts, or forward contracts may result in the
   "constructive sale" of offsetting stocks or debt securities of the Fund. See
   "Portfolio Management Practices-Short Sales" for further discussion.
 
 
<PAGE>
 
 INVESTMENT RESTRICTIONS
 -------------------------------------------------------------------------------
   Fundamental policies may not be changed without the approval of the lesser of
   (1) 67% of the Fund's shares present at a meeting of shareholders if the
   holders of more than 50% of the outstanding shares are present in person or
   by proxy or (2) more than 50% of a Fund's outstanding shares. Other
   restrictions in the form of operating policies are subject to change by the
   Fund's Board of Directors/Trustees without shareholder approval. Any
   investment restriction which involves a maximum percentage of securities or
   assets shall not be considered to be violated unless an excess over the
   percentage occurs immediately after, and is caused by, an acquisition of
   securities or assets of, or borrowings by, the Fund. Calculation of the
   Fund's total assets for compliance with any of the following fundamental or
   operating policies or any other investment restrictions set forth in the
   Fund's prospectus or Statement of Additional Information will not include
   cash collateral held in connection with securities lending activities.
 
 
                              Fundamental Policies
 
   As a matter of fundamental policy, the Fund may not:
 
   (1) Borrowing Borrow money except that the Fund may (i) borrow for
       non-leveraging, temporary or emergency purposes; and (ii) engage in
       reverse repurchase agreements and make other investments or engage in
       other transactions, which may involve a borrowing, in a manner consistent
       with the Fund's investment objective and program, provided that the
       combination of (i) and (ii) shall not exceed 33/1//\\/3/\\% of the value
       of the Fund's total assets (including the amount borrowed) less
       liabilities (other than borrowings) or such other percentage permitted by
       law. Any borrowings which come to exceed this amount will be reduced in
       accordance with applicable law. The Fund may borrow from banks, other
       Price Funds, or other persons to the extent permitted by applicable law;
 
   (2) Commodities Purchase or sell physical commodities; except that the Fund
       (other than the Prime Reserve, U.S. Treasury Money, Government Reserve
       Investment, and Reserve Investment Funds) may enter into futures
       contracts and options thereon;
 
   (3) (a)
       Industry Concentration (All Funds except High Yield, New Income, Prime
       Reserve, Reserve Investment, and Short-Term Bond Funds) 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;
 
       (b)
       Industry Concentration (High Yield 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 normally concentrate 25% or more of its assets in
       securities of the banking industry when the Fund's position in issues
       maturing in one year or less equals 35% or more of the Fund's total
       assets;
 
        (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,
       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;
 
       (d)
       Industry Concentration (Prime Reserve and Reserve Investment Funds)
       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
 
       (e)
       Industry Concentration (Short-Term Bond 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
 
 
<PAGE>
 
       having their principal business activities in the same industry;
       provided, however, that the Fund will normally invest more than 25% of
       its total assets in the securities of the banking industry including, but
       not limited to, bank certificates of deposit and bankers' acceptances
       when the Fund's position in issues maturing in one year or less equals
       35% or more of the Fund's total assets; provided, further, 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, electric utility,
       telephone utility, and petroleum industries under certain circumstances;
 
   (4) Loans Make loans, although the Fund may (i) lend portfolio securities and
       participate in an interfund lending program with other Price Funds
       provided that no such loan may be made if, as a result, the aggregate of
       such loans would exceed 33/1//\\/3/\\% of the value of the Fund's total
       assets; (ii) purchase money market securities and enter into repurchase
       agreements; and (iii) acquire publicly distributed or privately placed
       debt securities and purchase debt;
 
   (5) Percent Limit on Assets Invested in Any One Issuer Purchase a security
       if, as a result, with respect to 75% of the value of its total assets,
       more than 5% of the value of the Fund's total assets would be invested in
       the securities of a single issuer, except securities issued or guaranteed
       by the U.S. government or any of its agencies or instrumentalities;
 
   (6) Percent Limit on Share Ownership of Any One Issuer Purchase a security
       if, as a result, with respect to 75% of the value of the Fund's total
       assets, more than 10% of the outstanding voting securities of any issuer
       would be held by the Fund (other than obligations issued or guaranteed by
       the U.S. government, its agencies or instrumentalities);
 
   (7) Real Estate Purchase or sell real estate, including limited partnership
       interests therein, unless acquired as a result of ownership of securities
       or other instruments (but this shall not prevent the Fund from investing
       in securities or other instruments backed by real estate or securities of
       companies engaged in the real estate business);
 
   (8) Senior Securities Issue senior securities except in compliance with the
       1940 Act; or
 
   (9) Underwriting Underwrite securities issued by other persons, except to the
       extent that the Fund may be deemed to be an underwriter within the
       meaning of the 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), the Fund will not
       borrow from or lend to any other Price Fund (defined as any other mutual
       fund managed by or for which T. Rowe Price or Price-Fleming acts as
       adviser) unless each Fund applies for and receives an exemptive order
       from the SEC or the SEC issues rules permitting such transactions. There
       is no assurance the SEC would grant any order requested by the Fund or
       promulgate any rules allowing the transactions.
 
       With respect to investment restriction (1), the Government Reserve
       Investment, Prime Reserve, Reserve Investment, and U.S. Treasury Money
       Funds have no current intention of engaging in any borrowing
       transactions.
 
       With respect to investment restriction (2), the Fund does not consider
       currency contracts or hybrid investments to be commodities.
 
       For purposes of investment restriction (3), U.S., state or local
       governments, or related agencies or instrumentalities, are not considered
       an industry. Industries are determined by reference to the
       classifications of industries set forth in the Fund's semiannual and
       annual reports. It is the position of the Staff of the SEC that foreign
       governments are industries for purposes of this restriction.
 
 
<PAGE>
 
       For purposes of investment restriction (4), the Fund will consider the
       acquisition of a debt security to include the execution of a note or
       other evidence of an extension of credit with a term of more than nine
       months.
 
       For purposes of investment restriction (5), the Fund 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, the Fund may not:
 
   (1) Borrowing Purchase additional securities when money borrowed exceeds 5%
       of its total assets;
 
   (2) Control of Portfolio Companies Invest in companies for the purpose of
       exercising management or control;
 
   (3) (a)
       Equity Securities (All Funds except High Yield and New Income Funds)
       Purchase any equity security or security convertible into an equity
       security except as set forth in its prospectus and operating policy on
       investment companies;
 
       (b)
       Equity Securities (High Yield Fund) Invest more than 20% of the Fund's
       total assets in equity securities (including up to 5% in warrants);
 
       (c)
       Equity Securities (New Income Fund) Invest more than 25% of the Fund's
       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 options would exceed 5% of the Fund's net asset value;
 
   (5) Illiquid Securities Purchase illiquid securities if, as a result, more
       than 15% (10% for the Government Reserve Investment, Prime Reserve,
       Reserve Investment, and U.S. Treasury Money Funds) of its net assets
       would be invested in such securities;
 
   (6) Investment Companies Purchase securities of open-end or closed-end
       investment companies except (i) in compliance with the 1940 Act; (ii)
       securities of the Reserve Investment or Government Reserve Investment
       Funds; or (iii) in the case of the Government Reserve Investment, Prime
       Reserve, Reserve Investment, and U.S. Treasury Money Funds, only
       securities of other money market funds;
 
   (7) Margin Purchase securities on margin, except (i) for use of short-term
       credit necessary for clearance of purchases of portfolio securities and
       (ii) it may make margin deposits in connection with futures contracts or
       other permissible investments;
 
   (8) Mortgaging Mortgage, pledge, hypothecate or, in any manner, transfer any
       security owned by the Fund as security for indebtedness except as may be
       necessary in connection with permissible borrowings or investments and
       then such mortgaging, pledging or hypothecating may not exceed
       33/1//\\/3/\\% of the Fund's total assets at the time of borrowing or
       investment;
 
   (9) Oil and Gas Programs Purchase participations or other direct interests
       in, or enter into leases with respect to oil, gas, or other mineral
       exploration or development programs if, as a result thereof, more than 5%
       of the value of the total assets of the Fund would be invested in such
       programs;
 
   (10) Options, etc. Invest in puts, calls, straddles, spreads, or any
       combination thereof, except to the extent permitted by the prospectus and
       Statement of Additional Information;
 
   (11) (a) Short Sales (All Funds except High Yield Fund) Effect short sales of
       securities;
 
       (b)
       Short Sales (High Yield Fund) Effect short sales of securities, other
       than as set forth in its prospectus and Statement of Additional
       Information; or
 
 
<PAGE>
 
   (12) Warrants Invest in warrants if, as a result thereof, more than 10% of
       the value of the net assets of the Fund would be invested in warrants.
 
   Personal Strategy Funds
 
   Notwithstanding anything in the above fundamental and operating restrictions
   to the contrary, the Fund may invest all of its assets in a single investment
   company or a series thereof in connection with a "master-feeder" arrangement.
   Such an investment would be made where the Fund (a "Feeder"), and one or more
   other Funds with the same investment objective and program as the Fund,
   sought to accomplish its investment objective and program by investing all of
   its assets in the shares of another investment company (the "Master"). The
   Master would, in turn, have the same investment objective and program as the
   Fund. The Fund would invest in this manner in an effort to achieve the
   economies of scale associated with having a Master fund make investments in
   portfolio companies on behalf of a number of Feeder funds.
 
 
 
 MANAGEMENT OF THE FUNDS
 -------------------------------------------------------------------------------
   The officers and directors/trustees of the Fund are listed below. Unless
   otherwise noted, the address of each is 100 East Pratt Street, Baltimore,
   Maryland 21202. Except as indicated, each has been an employee of T. Rowe
   Price for more than five years. In the list below, the Fund's
   directors/trustees who are considered "interested persons" of T. Rowe Price
   as defined under Section 2(a)(19) of the Investment Company Act of 1940 are
   noted with an asterisk (*). These directors/trustees are referred to as
   inside directors by virtue of their officership, directorship, and/or
   employment with T. Rowe Price.
 
   All Funds except Personal Strategy Funds
 
 
                         Independent Directors/Trustees
 
   CALVIN W. BURNETT, PH.D., President, Coppin State College; Director, Maryland
   Chamber of Commerce and Provident Bank of Maryland; Former President,
   Baltimore Area Council Boy Scouts of America; Vice President, Board of
   Directors, The Walters Art Gallery; Address: 2500 West North Avenue,
   Baltimore, Maryland 21216
 
   ANTHONY W. DEERING, Director, Chairman of the Board, President and Chief
   Operating Officer, The Rouse Company, real estate developers, Columbia,
   Maryland; Advisory Director, Kleinwort, Benson (North America) Corporation, a
   registered broker-dealer; Address: 10275 Little Patuxent Parkway, Columbia,
   Maryland 21044
 
   F. PIERCE LINAWEAVER, President, F. Pierce Linaweaver & Associates, Inc.;
   Consulting Environmental & Civil Engineer(s); formerly Executive Vice
   President, EA Engineering, Science, and Technology, Inc., and President, EA
   Engineering, Inc., Baltimore, Maryland; Address: Green Spring Station, 2360
   West Joppa Road, Suite 224, Lutherville, Maryland 21093
 
   JOHN G. SCHREIBER, President, Schreiber Investments, Inc., a real estate
   investment company; Director, AMLI Residential Properties Trust and Urban
   Shopping Centers, Inc.; Partner, Blackstone Real Estate Partners, L.P.;
   Director and formerly Executive Vice President, JMB Realty Corporation, a
   national real estate investment manager and developer; Address: 1115 East
   Illinois Road, Lake Forest, Illinois 60045
 
   Personal Strategy Funds
 
   DONALD W. DICK, JR., Principal, EuroCapital Advisors, LLC, an acquisition and
   management advisory firm; formerly (5/89-6/95) Principal, Overseas Partners,
   Inc., a financial investment firm; formerly (6/65-3/89) Director and Vice
   President; Consumer Products Division, McCormick & Company, Inc.,
   international food processors; Director, Waverly, Inc., Baltimore, Maryland;
   Address: P.O. Box 491, Chilmark, MA 02535-0491
 
   DAVID K. FAGIN, Chairman and Chief Executive Officer, Western Exploration and
   Development, Ltd.; Director Golden Star Resources Ltd. and Miranda Mining
   Development Corporation; formerly (1986-7/91)
 
 
<PAGE>
 
   President, Chief Operating Officer and Director, Homestake Mining Company;
   Address: 1660 Lincoln Street, Suite 3000, Denver, Colorado 80264-3001
 
   HANNE M. MERRIMAN, Retail business consultant; formerly President and Chief
   Operating Officer (1991-92), Nan Duskin, Inc., a women's specialty store,
   Director (1984-90) and Chairman (1989-90) Federal Reserve Bank of Richmond,
   and President and Chief Executive Officer (1988-89), Honeybee, Inc., a
   division of Spiegel, Inc.; Director, Central Illinois Public Service Company,
   CIPSCO Incorporated, Finlay Enterprises, Inc., The Rouse Company, State Farm
   Mutual Automobile Insurance Company and USAir Group, Inc.; Address: 3201 New
   Mexico Avenue, N.W., Suite 350, Washington, D.C. 20016
 
   HUBERT D. VOS, President, Stonington Capital Corporation, a private
   investment company; Address: 1231 State Street, Suite 247, Santa Barbara,
   California 93190-0409
 
   PAUL M. WYTHES, Founding General Partner, Sutter Hill Ventures, a venture
   capital limited partnership, providing equity capital to young high
   technology companies throughout the United States; Director, Teltone
   Corporation, Interventional Technologies Inc. and Stuart Medical, Inc.;
   Address: 755 Page Mill Road, Suite A200, Palo Alto, California 94304-1005
 
 
                       Inside Directors/Trustees/Officers
 
   All Funds
 
 
 
  *  JAMES S. RIEPE, Director/Trustee and Vice President -Vice Chairman of the
   Board and Managing Director, T. Rowe Price; Chairman of the Board, T. Rowe
   Price Investment Services, Inc., T. Rowe Price Services, Inc., T. Rowe Price
   Retirement Plan Services, Inc., and T. Rowe Price Trust Company; Director,
   Price-Fleming and General Re Corporation
 
   HENRY H. HOPKINS, Vice President-Vice President, Price-Fleming and T. Rowe
   Price Retirement Plan Services, Inc.; Director and Managing Director, T. Rowe
   Price; Vice President and Director, T. Rowe Price Investment Services, Inc.,
   T. Rowe Price Services, Inc. and T. Rowe Price Trust Company
 
   PATRICIA S. LIPPERT, 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
 
   INGRID I. VORDEMBERGE, Assistant Vice President-Employee, T. Rowe Price
 
   Corporate Income Fund
 
 
 
  *  WILLIAM T. REYNOLDS, Chairman of the Board -Managing Director, T. Rowe
   Price; Chartered Financial Analyst
 
 
 
  *  M. DAVID TESTA, Director -Chairman of the Board, Price-Fleming; Vice
   Chairman of the Board, Chief Investment Officer, and Managing Director, T.
   Rowe Price; Vice President and Director, T. Rowe Price Trust Company;
   Chartered Financial Analyst
 
 
 
   PETER VAN DYKE, President -Managing Director, T. Rowe Price; Vice President,
   Price-Fleming, T. Rowe Price Trust Company, and T. Rowe Price Retirement Plan
   Services, Inc., Chartered Investment Counselor
 
 
 
   ROBERT M. RUBINO, Executive Vice President -Vice President, T. Rowe Price
 
 
 
   MARK J. VASELKIV, Executive Vice President -Vice President, T. Rowe Price
 
 
 
   STEVEN G. BROOKS, Vice President -Vice President, T. Rowe Price; Chartered
   Financial Analyst
 
 
 
   PATRICK S. CASSIDY, Vice President -Vice President, T. Rowe Price; Chartered
   Financial Analyst
 
 
 
   DEBRA R. DIES, Vice President -Credit Analyst, T. Rowe Price; formerly
   employed at J.P. Morgan Securities
 
 
<PAGE>
 
 
 
   HEATHER R. LANDON, Vice President -Vice President, T. Rowe Price and T. Rowe
   Price Trust Company
 
 
 
   EDWARD T. SCHNEIDER, Vice President -Vice President, T. Rowe Price
 
 
 
   CHARLES P. SMITH, Vice President -Managing Director, T. Rowe Price; Vice
   President, Price-Fleming
 
 
 
   VIRGINIA A. STIRLING, Vice President -Vice President, T. Rowe Price
 
 
 
   THOMAS E. TEWKSBURY, Vice President -Vice President, T. Rowe Price; formerly
   senior bond trader, Scudder, Stevens & Clark, New York, New York
 
 
 
   THEA N. WILLIAMS, Vice President -Vice President, T. Rowe Price
 
   GNMA Fund
 
 
 
  *  WILLIAM T. REYNOLDS, Trustee -Managing Director, T. Rowe Price; Chartered
   Financial Analyst
 
 
 
  *  M. DAVID TESTA, Trustee -Chairman of the Board, Price-Fleming; Vice
   Chairman of the Board, Chief Investment Officer, and Managing Director, T.
   Rowe Price; Vice President and Director, T. Rowe Price Trust Company;
   Chartered Financial Analyst
 
 
 
   PETER VAN DYKE, President -Managing Director, T. Rowe Price; Vice President,
   Price-Fleming, T. Rowe Price Trust Company, and T. Rowe Price Retirement Plan
   Services, Inc., Chartered Investment Counselor
 
 
 
   CONNICE A. BAVELY, Vice President -Vice President and Senior Portfolio
   Manager, T. Rowe Price; formerly founding partner and Senior Vice President
   of Atlantic Asset Management Partners, LLC; Special Partner and Portfolio
   Manager at Weiss Peck and Greer
 
 
 
   DEBORAH L. BOYER, Vice President -Assistant Vice President, T. Rowe Price;
   formerly Assistant Vice President and Government Bond Trader for First
   Chicago NBD Corporation
 
 
 
   HEATHER R. LANDON, Vice President -Vice President, T. Rowe Price and T. Rowe
   Price Trust Company
 
 
 
   EDMUND M. NOTZON, Vice President -Managing Director, T. Rowe Price; Vice
   President, T. Rowe Price Trust Company; Chartered Financial Analyst
 
 
 
   EDWARD T. SCHNEIDER, Vice President -Vice President, T. Rowe Price
 
 
 
   CHARLES P. SMITH, Vice President -Managing Director, T. Rowe Price; Vice
   President, Price-Fleming
 
   Government Reserve Investment and Reserve Investment Funds
 
 
 
  *  WILLIAM T. REYNOLDS, Chairman of the Board -Managing Director, T. Rowe
   Price; Chartered Financial Analyst
 
 
 
  *  M. DAVID TESTA, Director -Chairman of the Board, Price-Fleming; Vice
   Chairman of the Board, Chief Investment Officer, and Managing Director, T.
   Rowe Price; Vice President and Director, T. Rowe Price Trust Company;
   Chartered Financial Analyst
 
 
 
   EDWARD A. WIESE, President -Vice President, T. Rowe Price; Chartered
   Financial Analyst
 
 
 
   ROBERT P. CAMPBELL, Executive Vice President -Vice President, T. Rowe Price
   and Price-Fleming
 
 
 
   JAMES M. MCDONALD, Executive Vice President -Vice President, T. Rowe Price
 
 
 
   PATRICE BERCHTENBREITER ELY, Vice President -Vice President, T. Rowe Price
 
 
 
   BRIAN E. BURNS, Vice President -Assistant Vice President, T. Rowe Price
 
 
 
   JOAN R. POTEE, Vice President -Vice President, T. Rowe Price
 
 
 
   ROBERT M. RUBINO, Vice President -Vice President, T. Rowe Price
 
 
 
   EDWARD T. SCHNEIDER, Vice President -Vice President, T. Rowe Price
 
 
<PAGE>
 
 
 
   PETER VAN DYKE, Vice President -Managing Director, T. Rowe Price; Vice
   President, Price-Fleming, T. Rowe Price Trust Company, and T. Rowe Price
   Retirement Plan Services, Inc., Chartered Investment Counselor
 
 
 
   GWENDOLYN G. WAGNER, Vice President -Vice President and Economist, T. Rowe
   Price; Chartered Financial Analyst
 
   High Yield Fund
 
 
 
  *  WILLIAM T. REYNOLDS, Chairman of the Board -Managing Director, T. Rowe
   Price; Chartered Financial Analyst
 
 
 
  *  M. DAVID TESTA, Director -Chairman of the Board, Price-Fleming; Vice
   Chairman of the Board, Chief Investment Officer, and Managing Director, T.
   Rowe Price; Vice President and Director, T. Rowe Price Trust Company;
   Chartered Financial Analyst
 
 
 
   MARK J. VASELKIV, President -Vice President, T. Rowe Price
 
 
 
   JANET G. ALBRIGHT, Vice President -Vice President, T. Rowe Price
 
 
 
   ANDREW M. BROOKS, Vice President -Vice President, T. Rowe Price
 
 
 
   PAUL A. KARPERS, Vice President -Employee, T. Rowe Price; formerly an
   Investment Analyst at the Vanguard Group, Philadelphia, Pennsylvania
 
 
 
   NATHANIEL S. LEVY, Vice President -Vice President, T. Rowe Price
 
 
 
   KEVIN P. LOOME, Vice President -Employee, T. Rowe Price; formerly a Corporate
   Finance Analyst for Morgan Stanley in both London and New York
 
 
 
   MICHAEL J. MCGONIGLE, Vice President -Assistant Vice President, T. Rowe Price
 
 
 
   EDWARD T. SCHNEIDER, Vice President -Vice President, T. Rowe Price
 
 
 
   HUBERT M. STILES, JR., Vice President -Vice President, T. Rowe Price
 
 
 
   THOMAS E. TEWKSBURY, Vice President -Vice President, T. Rowe Price; formerly
   senior bond trader, Scudder, Stevens & Clark, New York, New York
 
 
 
   PETER VAN DYKE, Vice President -Managing Director, T. Rowe Price; Vice
   President, Price-Fleming, T. Rowe Price Trust Company, and T. Rowe Price
   Retirement Plan Services, Inc., Chartered Investment Counselor
 
 
 
   THEA N. WILLIAMS, Vice President -Vice President, T. Rowe Price
 
   New Income Fund
 
 
 
  *  WILLIAM T. REYNOLDS, Chairman of the Board -Managing Director, T. Rowe
   Price; Chartered Financial Analyst
 
 
 
  *  M. DAVID TESTA, Director -Chairman of the Board, Price-Fleming; Vice
   Chairman of the Board, Chief Investment Officer, and Managing Director, T.
   Rowe Price; Vice President and Director, T. Rowe Price Trust Company;
   Chartered Financial Analyst
 
 
 
   CHARLES P. SMITH, President -Managing Director, T. Rowe Price; Vice
   President, Price-Fleming
 
 
 
   ROBERT M. RUBINO, Executive Vice President -Vice President, T. Rowe Price
 
 
 
   CONNICE A. BAVELY, Vice President -Vice President and Senior Portfolio
   Manager, T. Rowe Price; formerly founding partner and Senior Vice President
   of Atlantic Asset Management Partners, LLC; Special Partner and Portfolio
   Manager at Weiss Peck and Greer
 
 
 
   STEVEN G. BROOKS, Vice President -Vice President, T. Rowe Price; Chartered
   Financial Analyst
 
 
 
   PATRICK S. CASSIDY, Vice President -Vice President, T. Rowe Price; Chartered
   Financial Analyst
 
 
 
   DEBRA R. DIES, Vice President -Credit Analyst, T. Rowe Price; formerly
   employed at J.P. Morgan Securities
 
 
<PAGE>
 
 
 
   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 -Managing Director, T. Rowe Price; Vice
   President, T. Rowe Price Trust Company; Chartered Financial Analyst
 
 
 
   JOAN R. POTEE, Vice President -Vice President, T. Rowe Price
 
 
 
   THEODORE E. ROBSON, Vice President -Assistant Vice President, T. Rowe Price
 
 
 
   EDWARD T. SCHNEIDER, Vice President -Vice President, T. Rowe Price
 
 
 
   VIRGINIA A. STIRLING, Vice President -Vice President, T. Rowe Price
 
 
 
   SUSAN G. TROLL, Vice President -Vice President and Analyst, T. Rowe Price;
   formerly Vice President at Merrill Lynch Asset Management; Certified Public
   Accountant
 
 
 
   PETER VAN DYKE, Vice President -Managing Director, T. Rowe Price; Vice
   President, Price-Fleming, T. Rowe Price Trust Company, and T. Rowe Price
   Retirement Plan Services, Inc., Chartered Investment Counselor
 
 
 
   GWENDOLYN G. WAGNER, Vice President -Vice President and Economist, T. Rowe
   Price; Chartered Financial Analyst
 
   Personal Strategy Balanced, Growth, and Income Funds
 
 
 
  *  JAMES A.C. KENNEDY III, Director -Managing Director, T. Rowe Price;
   Chartered Financial Analyst
 
 
 
  *  M. DAVID TESTA, Chairman of the Board -Chairman of the Board,
   Price-Fleming; Vice Chairman of the Board, Chief Investment Officer, and
   Managing Director, T. Rowe Price; Vice President and Director, T. Rowe Price
   Trust Company; Chartered Financial Analyst
 
 
 
   PETER VAN DYKE, President -Managing Director, T. Rowe Price; Vice President,
   Price-Fleming, T. Rowe Price Trust Company, and T. Rowe Price Retirement Plan
   Services, Inc., Chartered Investment Counselor
 
 
 
   STEPHEN W. BOESEL, Executive Vice President -Managing Director, T. Rowe Price
 
 
 
   EDMUND M. NOTZON, Executive Vice President -Managing Director, T. Rowe Price;
   Vice President, T. Rowe Price Trust Company; Chartered Financial Analyst
 
 
 
   LARRY J. PUGLIA, Executive Vice President -Vice President, T. Rowe Price;
   Chartered Financial Analyst
 
 
 
   HEATHER R. LANDON, Vice President -Vice President, T. Rowe Price and T. Rowe
   Price Trust Company
 
 
 
   JOHN H. LAPORTE, JR., Vice President -Managing Director, T. Rowe Price;
   Chartered Financial Analyst
 
 
 
   DONALD J. PETERS, Vice President -Vice President, T. Rowe Price
 
 
 
   WILLIAM T. REYNOLDS, Vice President -Managing Director, T. Rowe Price;
   Chartered Financial Analyst
 
 
 
   BRIAN C. ROGERS, Vice President -Director and Managing Director, T. Rowe
   Price; Chartered Financial Analyst
 
 
 
   MARK J. VASELKIV, Vice President -Vice President, T. Rowe Price
 
 
 
   JUDITH B. WARD, Vice President -Employee, T. Rowe Price
 
 
 
   RICHARD T. WHITNEY, Vice President -Managing Director, T. Rowe Price and T.
   Rowe Price Trust Company; Chartered Financial Analyst
 
   J. JEFFREY LANG, Assistant Vice President-Assistant Vice President, T. Rowe
   Price
 
 
 
   MARY C. MUNOZ, Vice President -Assistant Vice President, T. Rowe Price
 
 
<PAGE>
 
   Prime Reserve Fund
 
 
 
  *  WILLIAM T. REYNOLDS, Chairman of the Board -Managing Director, T. Rowe
   Price; Chartered Financial Analyst
 
 
 
  *  M. DAVID TESTA, Director -Chairman of the Board, Price-Fleming; Vice
   Chairman of the Board, Chief Investment Officer, and Managing Director, T.
   Rowe Price; Vice President and Director, T. Rowe Price Trust Company;
   Chartered Financial Analyst
 
 
 
   EDWARD A. WIESE, President -Vice President, T. Rowe Price; Chartered
   Financial Analyst
 
 
 
   ROBERT P. CAMPBELL, Executive Vice President -Vice President, T. Rowe Price
   and Price-Fleming
 
 
 
   JAMES M. MCDONALD, Executive Vice President -Vice President, T. Rowe Price
 
 
 
   PATRICE BERCHTENBREITER ELY, Vice President -Vice President, T. Rowe Price
 
 
 
   BRIAN E. BURNS, Vice President -Assistant Vice President, T. Rowe Price
 
 
 
   JOAN R. POTEE, Vice President -Vice President, T. Rowe Price
 
 
 
   ROBERT M. RUBINO, Vice President -Vice President, T. Rowe Price
 
 
 
   EDWARD T. SCHNEIDER, Vice President -Vice President, T. Rowe Price
 
 
 
   SUSAN G. TROLL, Vice President -Vice President and Analyst, T. Rowe Price;
   formerly Vice President at Merrill Lynch Asset Management; Certified Public
   Accountant
 
 
 
   PETER VAN DYKE, Vice President -Managing Director, T. Rowe Price; Vice
   President, Price-Fleming, T. Rowe Price Trust Company, and T. Rowe Price
   Retirement Plan Services, Inc., Chartered Investment Counselor
 
 
 
   GWENDOLYN G. WAGNER, Vice President -Vice President and Economist, T. Rowe
   Price; Chartered Financial Analyst
 
   Short-Term Bond Fund
 
 
 
  *  WILLIAM T. REYNOLDS, Chairman of the Board -Managing Director, T. Rowe
   Price; Chartered Financial Analyst
 
 
 
  *  M. DAVID TESTA, Director -Chairman of the Board, Price-Fleming; Vice
   Chairman of the Board, Chief Investment Officer, and Managing Director, T.
   Rowe Price; Vice President and Director, T. Rowe Price Trust Company;
   Chartered Financial Analyst
 
 
 
   EDWARD A. WIESE, President -Vice President, T. Rowe Price; Chartered
   Financial Analyst
 
 
 
   CONNICE A. BAVELY, Vice President -Vice President and Senior Portfolio
   Manager, T. Rowe Price; formerly founding partner and Senior Vice President
   of Atlantic Asset Management Partners, LLC; Special Partner and Portfolio
   Manager at Weiss Peck and Greer
 
 
 
   STEVEN G. BROOKS, Vice President -Vice President, T. Rowe Price; Chartered
   Financial Analyst
 
 
 
   ROBERT P. CAMPBELL, Vice President -Vice President, T. Rowe Price and
   Price-Fleming
 
 
 
   PATRICK S. CASSIDY, Vice President -Vice President, T. Rowe Price; Chartered
   Financial Analyst
 
 
 
   DEBRA R. DIES, Vice President -Credit Analyst, T. Rowe Price; formerly
   employed at J.P. Morgan Securities
 
 
 
   CHARLES B. HILL, Vice President -Vice President, T. Rowe Price
 
 
 
   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
 
 
 
   CHERYL A. MICKEL, Vice President -Assistant Vice President, T. Rowe Price
 
 
 
   THEODORE E. ROBSON, Vice President -Assistant Vice President, T. Rowe Price
 
 
<PAGE>
 
 
 
   ROBERT M. RUBINO, Vice President -Vice President, T. Rowe Price
 
 
 
   EDWARD T. SCHNEIDER, Vice President -Vice President, T. Rowe Price
 
 
 
   CHARLES P. SMITH, Vice President -Managing Director, T. Rowe Price; Vice
   President, Price-Fleming
 
 
 
   VIRGINIA A. STIRLING, Vice President -Vice President, T. Rowe Price
 
 
 
   PETER VAN DYKE, Vice President -Managing Director, T. Rowe Price; Vice
   President, Price-Fleming, T. Rowe Price Trust Company, and T. Rowe Price
   Retirement Plan Services, Inc., Chartered Investment Counselor
 
 
 
   GWENDOLYN G. WAGNER, Vice President -Vice President and Economist, T. Rowe
   Price; Chartered Financial Analyst
 
   Short-Term U.S. Government Fund
 
 
 
  *  WILLIAM T. REYNOLDS, Chairman of the Board -Managing Director, T. Rowe
   Price; Chartered Financial Analyst
 
 
 
  *  M. DAVID TESTA, Director -Chairman of the Board, Price-Fleming; Vice
   Chairman of the Board, Chief Investment Officer, and Managing Director, T.
   Rowe Price; Vice President and Director, T. Rowe Price Trust Company;
   Chartered Financial Analyst
 
 
 
   PETER VAN DYKE, President -Managing Director, T. Rowe Price; Vice President,
   Price-Fleming, T. Rowe Price Trust Company, and T. Rowe Price Retirement Plan
   Services, Inc., Chartered Investment Counselor
 
 
 
   HEATHER R. LANDON, Executive 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 -Managing Director, T. Rowe Price; Vice
   President, T. Rowe Price Trust Company; Chartered Financial Analyst
 
 
 
   EDWARD T. SCHNEIDER, Vice President -Vice President, T. Rowe Price
 
 
 
   CHARLES P. SMITH, Vice President -Managing Director, T. Rowe Price; Vice
   President, Price-Fleming
 
 
 
   GWENDOLYN G. WAGNER, Vice President -Vice President and Economist, T. Rowe
   Price; Chartered Financial Analyst
 
   U.S. Treasury Intermediate, Long-Term, and Money Funds
 
 
 
  *  WILLIAM T. REYNOLDS, Director -Managing Director, T. Rowe Price; Chartered
   Financial Analyst
 
 
 
  *  M. DAVID TESTA, Director -Chairman of the Board, Price-Fleming; Vice
   Chairman of the Board, Chief Investment Officer, and Managing Director, T.
   Rowe Price; Vice President and Director, T. Rowe Price Trust Company;
   Chartered Financial Analyst
 
 
 
   PETER VAN DYKE, President -Managing Director, T. Rowe Price; Vice President,
   Price-Fleming, T. Rowe Price Trust Company, and T. Rowe Price Retirement Plan
   Services, Inc., Chartered Investment Counselor
 
 
 
   CHARLES P. SMITH, Executive Vice President -Managing Director, T. Rowe Price;
   Vice President, Price-Fleming
 
 
 
   EDWARD A. WIESE, Executive Vice President -Vice President, T. Rowe Price;
   Chartered Financial Analyst
 
 
 
   CONNICE A. BAVELY, Vice President -Vice President and Senior Portfolio
   Manager, T. Rowe Price; formerly founding partner and Senior Vice President
   of Atlantic Asset Management Partners, LLC; Special Partner and Portfolio
   Manager at Weiss Peck and Greer
 
 
 
   PATRICE BERCHTENBREITER ELY, Vice President -Vice President, T. Rowe Price
 
 
 
   BRIAN E. BURNS, Vice President -Assistant Vice President, T. Rowe Price
 
 
<PAGE>
 
 
 
   ROBERT P. CAMPBELL, Vice President -Vice President, T. Rowe Price and
   Price-Fleming
 
 
 
   JEROME A. CLARK, Vice President -Vice President, T. Rowe Price
 
 
 
   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
 
 
 
   CHERYL A. MICKEL, Vice President -Assistant Vice President, T. Rowe Price
 
 
 
   EDMUND M. NOTZON, Vice President -Managing Director, T. Rowe Price; Vice
   President, T. Rowe Price Trust Company; Chartered Financial Analyst
 
 
 
   JOAN R. POTEE, Vice President -Vice President, T. Rowe Price
 
 
 
   ROBERT M. RUBINO, Vice President -Vice President, T. Rowe Price
 
 
 
   EDWARD T. SCHNEIDER, Vice President -Vice President, T. Rowe Price
 
 
 
   GWENDOLYN G. WAGNER, Vice President -Vice President and Economist, T. Rowe
   Price; Chartered Financial Analyst
 
 
                               Compensation Table
 
   The Funds do not pay pension or retirement benefits to their officers or
   directors/trustees. Also, any director/ trustee of a Fund who is an officer
   or employee of T. Rowe Price or Price-Fleming does not receive any
   remuneration from the Fund.
 
<TABLE>
<CAPTION>
Name of Person,                    Aggregate Compensation from Fund(a)          Total Compensation from Fund and Fund Complex Paid
Position                                                       -------          to Directors/ Trustees(b)
- --------------------------------                                                              -----------
- -----------------------------------------------------------------------
                                   -----------------------------------------------------------------------------------
                                                                                ---------------------------------------------------
<S>                                <S>                                          <S>
GNMA Fund
Robert P. Black, Trustee(c)                                        $2,752                                              $65,000
Calvin W. Burnett, Ph.D., Trustee                                   2,752                                               65,000
Anthony W. Deering, Trustee                                         1,694                                               81,000
F. Pierce Linaweaver, Trustee                                       2,752                                               66,000
John G. Schreiber, Trustee                                          2,752                                               65,000
- -----------------------------------------------------------------------------------------------------------------------------------
High Yield Fund
Robert P. Black, Director(c)                                       $3,630                                              $65,000
Calvin W. Burnett, Ph.D.,
Director                                                            3,630                                               65,000
Anthony W. Deering, Director                                        2,037                                               81,000
F. Pierce Linaweaver, Director                                      3,630                                               66,000
John G. Schreiber, Director                                         3,630                                               65,000
- -----------------------------------------------------------------------------------------------------------------------------------
New Income Fund
Robert P. Black, Director(c)                                       $4,205                                              $65,000
Calvin W. Burnett, Ph.D.,
Director                                                            4,205                                               65,000
Anthony W. Deering, Director                                        2,265                                               81,000
F. Pierce Linaweaver, Director                                      4,205                                               66,000
John G. Schreiber, Director                                         4,205                                               65,000
- -----------------------------------------------------------------------------------------------------------------------------------
Personal Strategy Balanced Fund
Donald W. Dick, Jr., Director                                      $1,126                                              $81,000
David K. Fagin, Director                                            1,220                                               65,000
Hanne M. Merriman, Director                                         1,220                                               65,000
Hubert D. Vos, Director                                             1,220                                               66,000
Paul M. Wythes, Director                                            1,126                                               80,000
- -----------------------------------------------------------------------------------------------------------------------------------
Personal Strategy Growth Fund
Donald W. Dick, Jr., Director                                      $1,049                                              $81,000
David K. Fagin, Director                                            1,084                                               65,000
Hanne M. Merriman, Director                                         1,084                                               65,000
Hubert D. Vos, Director                                             1,084                                               66,000
Paul M. Wythes, Director                                            1,049                                               80,000
- -----------------------------------------------------------------------------------------------------------------------------------
Personal Strategy Income Fund
Donald W. Dick, Jr., Director                                      $1,037                                              $81,000
David K. Fagin, Director                                            1,059                                               65,000
Hanne M. Merriman, Director                                         1,059                                               65,000
Hubert D. Vos, Director                                             1,059                                               66,000
Paul M. Wythes, Director                                            1,037                                               80,000
- -----------------------------------------------------------------------------------------------------------------------------------
Prime Reserve Fund
Robert P. Black, Director(c)                                       $8,713                                              $65,000
Calvin W. Burnett, Ph.D.,
Director                                                            8,713                                               65,000
Anthony W. Deering, Director                                        4,057                                               81,000
F. Pierce Linaweaver, Director                                      8,713                                               66,000
John G. Schreiber, Director                                         8,713                                               65,000
- -----------------------------------------------------------------------------------------------------------------------------------
Short-Term Bond Fund
Robert P. Black, Director(c)                                       $1,611                                              $65,000
Calvin W. Burnett, Ph.D.,
Director                                                            1,611                                               65,000
Anthony W. Deering, Director                                        1,240                                               81,000
F. Pierce Linaweaver, Director                                      1,611                                               66,000
John G. Schreiber, Director                                         1,611                                               65,000
- -----------------------------------------------------------------------------------------------------------------------------------
Short-Term U.S. Government Fund
Robert P. Black, Director(c)                                       $1,140                                              $65,000
Calvin W. Burnett, Ph.D.,
Director                                                            1,140                                               65,000
Anthony W. Deering, Director                                        1,340                                               81,000
F. Pierce Linaweaver, Director                                      1,140                                               66,000
John G. Schreiber, Director                                         1,140                                               65,000
- -----------------------------------------------------------------------------------------------------------------------------------
U.S. Treasury Intermediate Fund
Robert P. Black, Director(c)                                       $1,124                                              $65,000
Calvin W. Burnett, Ph.D.,
Director                                                            1,124                                               65,000
Anthony W. Deering, Director                                        1,292                                               81,000
F. Pierce Linaweaver, Director                                      1,124                                               66,000
John G. Schreiber, Director                                         1,124                                               65,000
- -----------------------------------------------------------------------------------------------------------------------------------
U.S. Treasury Long-Term Fund
Robert P. Black, Director(c)                                       $1,559                                              $65,000
Calvin W. Burnett, Ph.D.,
Director                                                            1,559                                               65,000
Anthony W. Deering, Director                                        2,412                                               81,000
F. Pierce Linaweaver, Director                                      1,559                                               66,000
John G. Schreiber, Director                                         1,559                                               65,000
- -----------------------------------------------------------------------------------------------------------------------------------
U.S. Treasury Money Fund
Robert P. Black, Director(c)                                       $1,157                                              $65,000
Calvin W. Burnett, Ph.D.,
Director                                                            1,157                                               65,000
Anthony W. Deering, Director                                        1,383                                               81,000
F. Pierce Linaweaver, Director                                      1,157                                               66,000
John G. Schreiber, Director                                         1,157                                               65,000
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
 
 
 
 
<PAGE>
 
 
 
<PAGE>
 
 (a) Amounts in this column are based on accrued compensation from June 1,
   1997 to May 31, 1998.
 
 (b) Amounts in this column are based on compensation received from January
   1, 1997, to December 31, 1997. The T. Rowe Price complex included 84 funds
   as of December 31, 1997.
 
 (c) Mr. Black retired from his position with the Funds in April 1998.
 
   Note: Government Reserve Investment and Reserve Investments Funds will not
 incur director's fees.
 
   All Funds
 
   The 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 Funds in
   the intervals between meetings of the Board, except the powers prohibited by
   statute from being delegated.
 
 
 
 PRINCIPAL HOLDERS OF SECURITIES
 -------------------------------------------------------------------------------
   As of the date of the prospectus, the officers and directors/trustees of the
   Fund, as a group, owned less than 1% of the outstanding shares of the Fund.
 
   As of June 30, 1998, the following shareholders beneficially owned more than
   5% of the outstanding shares of:
 
   GNMA, High Yield, New Income, and U.S. Treasury Long-Term Funds: Yachtcrew &
   Co., T. Rowe Price Associates, Inc., 100 East Pratt Street, Baltimore,
   Maryland 21202;
 
   Government Reserve Investment Fund: Barnaclesail, c/o T. Rowe Price
   Associates, Inc., 100 East Pratt Street, Baltimore, Maryland 21202;
   Bridgesail & Co., c/o T. Rowe Price Associates, Inc., 100 East Pratt Street,
   Baltimore, Maryland 21202
 
 
<PAGE>
 
   Reserve Investment Fund: Drakkar & Co., c/o T. Rowe Price Associates, Inc.,
   100 East Pratt Street, Baltimore, Maryland 21202; Eye & Co., c/o T. Rowe
   Price Associates, Inc., 100 East Pratt Street, Baltimore, Maryland 21202;
   Taskforce & Co., c/o T. Rowe Price Associates, Inc., 100 East Pratt Street,
   Baltimore, Maryland 21202; Shorebird & Co., c/o T. Rowe Price Associates,
   Inc., 100 East Pratt Street, Baltimore, Maryland 21202;
 
   U.S. Treasury Intermediate Fund: First American Trust Co., Managed Omnibus,
   421 N Main Street, Santa Ana, California 92701-4699.
 
 
 
 INVESTMENT MANAGEMENT SERVICES
 -------------------------------------------------------------------------------
   Services
   Under the Management Agreement, T. Rowe Price provides the Fund with
   discretionary investment services. Specifically, T. Rowe Price is responsible
   for supervising and directing the investments of the Fund in accordance with
   the Fund's investment objectives, program, and restrictions as provided in
   its prospectus and this Statement of Additional Information. T. Rowe Price is
   also responsible for effecting all security transactions on behalf of the
   Fund, including the negotiation of commissions and the allocation of
   principal business and portfolio brokerage. In addition to these services, T.
   Rowe Price provides the Fund with certain corporate administrative services,
   including: maintaining the Fund's corporate existence and corporate records;
   registering and qualifying Fund shares under federal laws; monitoring the
   financial, accounting, and administrative functions of the Fund; maintaining
   liaison with the agents employed by the Fund such as the Fund's custodian and
   transfer agent; assisting the Fund in the coordination of such agents'
   activities; and permitting T. Rowe Price's employees to serve as officers,
   directors/trustees, and committee members of the Fund without cost to the
   Fund.
 
   The Management Agreement also provides that T. Rowe Price, its
   directors/trustees, officers, employees, and certain other persons performing
   specific functions for the Fund will only be liable to the Fund for losses
   resulting from willful misfeasance, bad faith, gross negligence, or reckless
   disregard of duty.
 
   All Funds except Government Reserve Investment and Reserve Investment Funds
 
   Management Fee
   The Fund pays T. Rowe Price 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 T. Rowe Price 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 Price 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:
<TABLE>
 Price Funds' Annual Group Base Fee Rate for Each Level of
                          Assets
<CAPTION>
<S>                                                      <C>     <C>               <C>     <C>               <C>     <C>
                                                         0.480%  First $1 billion  0.360%  Next $2 billion   0.310%  Next $16
                                                                                                                     billion
                                                         ---------------------------------------------------------------------------
                                                         0.450%  Next $1 billion   0.350%  Next $2 billion   0.305%  Next $30
                                                                                                                     billion
                                                         ---------------------------------------------------------------------------
                                                         0.420%  Next $1 billion   0.340%  Next $5 billion   0.300%  Thereafter
                                                         ---------------------------------------------------------------------------
                                                         0.390%  Next $1 billion   0.330%  Next $10 billion
                                                         ---------------------------------------------------------------------------
                                                         0.370%  Next $1 billion   0.320%  Next $10 billion
</TABLE>
 
   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 the T. Rowe Price Spectrum Funds, and any institutional, index, or
   private label mutual funds). For the purpose of calculating the Daily Price
   Funds' Group Fee
 
 
<PAGE>
 
   Accrual for any particular day, the net assets of each Price Fund are
   determined in accordance with the Funds' 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 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 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. The individual fund fees of each Fund are listed in the following
   chart:
<TABLE>
<CAPTION>
<S>                                                                        <C>
Corporate Income Fund                                                          0.15%
GNMA Fund                                                                      0.15%
High Yield Fund                                                                0.30%
New Income Fund                                                                0.15%
Personal Strategy Balanced Fund                                                0.25%
Personal Strategy Growth Fund                                                  0.30%
Personal Strategy Income Fund                                                  0.15%
Prime Reserve Fund                                                             0.05%
Short-Term Bond Fund                                                           0.10%
Short-Term U.S. Government Fund                                                0.10%
U.S. Treasury Intermediate Fund                                                0.05%
U.S. Treasury Long-Term Fund                                                   0.05%
U.S. Treasury Money Fund                                                       0.00%
</TABLE>
 
 
 
 
   The following chart sets forth the total management fees, if any, paid to T.
   Rowe Price by each Fund, during the last three years:
<TABLE>
<CAPTION>
                       Fund                              1998          1997           1996
                       ----                              ----          ----           ----
<S>                                                  <C>           <C>           <C>
Corporate Income                                             (a)           (a)            (a)
GNMA                                                 $ 4,928,000   $ 4,398,000    $ 4,223,000
High Yield                                             9,797,000     8,206,000      7,752,000
New Income                                             9,047,000     7,984,000      7,886,000
Personal Strategy Balanced                             1,685,000       897,000        150,000
Personal Strategy Growth                                 514,000        92,000            (a)
Personal Strategy Income                                 206,000        22,000            (a)
Prime Reserve                                         17,281,000    16,431,000     15,320,000
Short-Term Bond                                        1,478,000     1,795,000      2,099,000
Short-Term U.S. Government                               317,000       250,000        281,000
U.S. Treasury Intermediate                               724,000       694,000        684,000
U.S. Treasury Long-Term                                  687,000       276,000        240,000
U.S. Treasury Money                                    2,668,000     2,585,000      2,507,000
- -----------------------------------------------------------------------------------------------
</TABLE>
 
 
  (a) Due to the Fund's expense limitation in effect at that time, no
     management fee was paid by the Fund to T. Rowe Price.
 
 
 
   Limitation on Fund Expenses
   The Management Agreement between the Fund and T. Rowe Price provides that the
   Fund will bear all expenses of its operations not specifically assumed by T.
   Rowe Price.
 
 
<PAGE>
 
   The following chart sets forth expense ratio limitations and the periods for
   which they are effective. For each, T. Rowe Price has agreed to bear any Fund
   expenses which would cause the Fund's ratio of expenses to average net assets
   to exceed the indicated percentage limitations. The expenses borne by T. Rowe
   Price are subject to reimbursement by the Fund through the indicated
   reimbursement date, provided no reimbursement will be made if it would result
   in the Fund's expense ratio exceeding its applicable limitation.
 
<TABLE>
<CAPTION>
                                                                                          Expense     Reimbursement
                             Fund                                  Limitation Period      -------     -------------
                             ----                                  -----------------       Ratio          Date
- -----------------------------------------------------------------------------------------  -----          ----
                                                                                         Limitation
                                                                                         ----------
                                                                                         ---------------------------
<S>                                                             <S>                      <S>         <S>
                                                                June 1, 1997 - May 31,
Corporate Income(a)                                             1999                     0.80%       May 31, 2001
                                                                June 1, 1998 - May 31,
Personal Strategy Growth(b)                                     2000                     1.10%       May 31, 2000
                                                                June 1, 1998 - May 31,
Personal Strategy Income(c)                                     2000                     0.95%       May 31, 2000
                                                                June 1, 1998 - May 31,
Short-Term U.S. Government(d)                                   2000                     0.70%       May 31, 2000
U.S. Treasury Long-Term(e)                                      June 1, 1997 - May 31,   0.80%       May 31, 2001
                                                                1999
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
 
 
 (a) The Corporate Income Fund operated under a 0.80% limitation that
   expired May 31, 1997. The reimbursement period for this limitation
   extends through May 31, 1999.
 
 (b) The Personal Strategy Growth Fund previously operated under a 1.10%
   limitation that expired May 31, 1998. The reimbursement period for this
   limitation extends through May 31, 2000.
 
 (c) The Personal Strategy Income Fund previously operated under a 0.95%
   limitation that expired May 31, 1998. The reimbursement period for this
   limitation extends through May 31, 2000.
 
 (d) The Short-Term U.S. Government Fund previously operated under a 0.70%
   limitation that expired May 31, 1998. The reimbursement period for this
   limitation extends through May 31, 2000.
 
 (e) The Long-Term Fund operated under a 0.80% limitation that expired May
   31, 1997. The reimbursement period for this limitation extends through
   May 31, 1999.
 
 
 
   Each of the above-referenced Fund's Management Agreement also provides that
   one or more additional expense limitations periods (of the same or different
   time periods) may be implemented after the expiration of the current expense
   limitation, and that with respect to any such additional limitation period,
   the Fund may reimburse T. Rowe Price, provided the reimbursement does not
   result in the Fund's aggregate expenses exceeding the additional expense
   limitation.
 
   Pursuant to the Corporate Income Fund's current expense limitation, $148,000
   of management fees were not accrued by the Fund for the year ended May 31,
   1998, and $1,000 of other expenses were borne by the manager. Additionally,
   $261,000 of unaccrued fees and expenses related to a prior period are subject
   to reimbursement through May 31, 1999.
 
   Pursuant to the U.S. Treasury Long-Term Fund's previous expense limitation,
   $22,000 of unaccrued 1996-1997 management fees were repaid during the year
   ended May 31, 1998.
 
   Pursuant to the Personal Strategy Balanced Fund's previous expense
   limitation, $62,000 of unaccrued management fees related to a previous
   expense limitation are subject to reimbursement through May 31, 2000.
 
   Pursuant to the Personal Strategy Growth Fund's previous expense limitation,
   $110,000 of management fees were not accrued by the Fund for the year ended
   May 31, 1998. Additionally, $177,000 of unaccrued management fees related to
   a previous expense limitation are subject to reimbursement through May 31,
   2000. Additionally, $137,000 of management fees and $188,000 of expenses from
   a previous limitation were permanently waived.
 
   Pursuant to the Personal Strategy Income Fund's previous expense limitation,
   $97,000 of management fees were not accrued by the Fund for the year ended
   May 31, 1998. Additionally, $141,000 of unaccrued management fees related to
   a previous expense limitation are subject to reimbursement through May 31,
   2000. Additionally, $163,000 of management fees and $123,000 of expenses from
   a previous limitation were permanently waived.
 
 
<PAGE>
 
   Pursuant to the Short-Term U.S. Government Fund's current expense limitation,
   $111,000 of management fees were not accrued by the Fund for the year ended
   May 31, 1998. Additionally, $155,000 of unaccrued management fees remain
   subject to reimbursement through May 31, 2000.
 
   GNMA, High Yield, New Income, Short-Term Bond, and U.S. Treasury Long-Term
   Funds
 
   T. Rowe Price Spectrum Fund, Inc.
   The Funds listed above are a party to a Special Servicing Agreement
   ("Agreement") between and among T. Rowe Price Spectrum Fund, Inc. ("Spectrum
   Fund"), T. Rowe Price, and various other T. Rowe Price funds which, along
   with the Fund, 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.
 
   Management Fee
   Government Reserve Investment and Reserve Investment Funds
 
   Neither Fund pays T. Rowe Price an investment management fee.
 
   Management Related Services
   As noted above, the Management Agreement spells out the expenses to be paid
   by the Fund. In addition to the Management Fee, the 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.
 
   T. Rowe Price Services, Inc., a wholly owned subsidiary of T. Rowe Price,
   acts as the Fund's 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. Additionally, T. Rowe Price, under a separate
   agreement with the Funds, provides accounting services to the Funds.
 
   The Funds paid the expenses shown in the following table for the fiscal year
   ended May 31, 1998, to T. Rowe Price and its affiliates.
<TABLE>
<CAPTION>
                                                         Transfer Agent and    Retirement      Accounting
                         Fund                           Shareholder Services  Subaccounting     Services
                         ----                           --------------------    Services        --------
                                                                                --------
<S>                                                     <C>                   <C>            <C>
Corporate Income                                             $   47,000                --       $ 71,000
GNMA                                                          1,471,000        $  195,000        121,000
Government Reserve Investment                                        --                --         45,000
High Yield                                                    1,966,000           169,000        166,000
New Income                                                    2,112,000         1,368,000        107,000
Personal Strategy Balanced                                      103,000           643,000         71,000
Personal Strategy Growth                                        110,000           178,000         71,000
Personal Strategy Income                                         48,000           105,000         71,000
Prime Reserve                                                 4,913,000         3,785,000         85,000
- ------------------------------------------------------------------------------------------------------------
Reserve Investment                                                1,000                --         45,000
Short-Term Bond                                                 351,000           251,000        121,000
Short-Term U.S. Government                                      111,000            11,000        101,000
U.S. Treasury Intermediate                                      157,000            70,000         61,000
U.S. Treasury Long-Term                                         300,000            17,000         61,000
U.S. Treasury Money                                             522,000           528,000         61,000
- ------------------------------------------------------------------------------------------------------------
</TABLE>
 
 
 
 
<PAGE>
 
 
 
   All Funds except Government Reserve Investment and Reserve Investment Funds
 
 
 DISTRIBUTOR FOR THE 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 Fund's 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 the
   Fund's shares is continuous.
 
   Investment Services is located at the same address as the Fund and T. Rowe
   Price-100 East Pratt Street, Baltimore, Maryland 21202.
 
   Investment Services serves as distributor to the Fund pursuant to an
   Underwriting Agreement ("Underwriting Agreement"), which provides that the
   Fund will pay all fees and expenses in connection with: necessary state
   filings; preparing, setting in type, 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 the Fund. Investment Services' expenses are paid by
   T. Rowe Price.
 
   Investment Services acts as the agent of the Fund in connection with the sale
   of its shares in the various states 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 Fund.
 
 
 
 CUSTODIAN
 -------------------------------------------------------------------------------
   State Street Bank and Trust Company is the custodian for the Fund's U.S.
   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. State Street Bank's main office is at 225 Franklin Street,
   Boston, Massachusetts 02110.
 
   The Fund (other than GNMA, Prime Reserve, U.S. Treasury Intermediate,
   Long-Term, Money, Government Reserve Investment, and Reserve Investment
   Funds) has 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 in
   accordance with regulations under the Investment Company Act of 1940. The
   address for The Chase Manhattan Bank, N.A., London is Woolgate House, Coleman
   Street, London, EC2P 2HD, England.
 
 
<PAGE>
 
 SHAREHOLDER SERVICES
 -------------------------------------------------------------------------------
   T. Rowe Price Services, Inc., another wholly owned subsidiary, acts as the
   Fund's 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.
 
   The Fund from time to time may enter into agreements with outside parties
   through which shareholders hold Fund shares. The shares would be held by such
   parties in omnibus accounts. The agreements would provide for payments by the
   Fund to the outside party for shareholder services provided to shareholders
   in the omnibus accounts.
 
 
 
 CODE OF ETHICS
 -------------------------------------------------------------------------------
   The Fund's investment adviser (T. Rowe Price) has a written Code of Ethics
   which requires all employees to obtain prior clearance before engaging in
   personal securities transactions. In addition, all employees must report
   their personal securities transactions within 10 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 seven calendar days prior to the date
   of the proposed transaction; or the security is subject to internal trading
   restrictions. In addition, employees are prohibited from profiting from
   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 Fund 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.
   The 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 Fund (except to the extent it purchases
   equity securities (High Yield, New Income, and Personal Strategy Funds
   only)). 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 Fund.
 
 
                      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
 
 
<PAGE>
 
   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 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. T. Rowe Price may receive
   research services in connection with brokerage transactions, including
   designations in a fixed price offerings.
 
 
 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 Fund. 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.
 
 
       Descriptions 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 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
 
 
<PAGE>
 
   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 or net prices 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.
 
 
                         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 or 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 or dealers and make judgments as to the level of
   business which would recognize such services. In addition, brokers or 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 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.
 
   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.
 
   Some of T. Rowe Price's other clients have investment objectives and programs
   similar to those of the Fund. T. Rowe Price 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
 
 
<PAGE>
 
   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.
 
   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.
 
 
                                      Other
 
   For the fiscal years ended May 31, 1998, 1997, and 1996, the Fund's engaged
   in portfolio transactions involving broker-dealers in the following amounts:
<TABLE>
<CAPTION>
                                   Fund                                          1998             1997              1996
                                   ----                                          ----             ----              ----
<S>                                                                         <C>              <C>              <C>
Corporate Income                                                            $   151,154,000  $   176,025,000   $    47,773,000
GNMA                                                                          3,404,198,000    3,521,560,000     2,878,094,000
Government Reserve Investment                                                46,218,342,000               --                --
High Yield                                                                    5,081,624,000    7,709,749,000     8,397,015,000
New Income                                                                    7,287,233,000    9,166,858,000     5,290,374,000
Personal Strategy Balanced                                                      589,959,000      796,969,000       554,041,000
Personal Strategy Growth                                                        225,909,000      354,770,000       128,451,000
Personal Strategy Income                                                        188,714,000      350,204,000       230,017,000
Prime Reserve                                                                64,296,588,000   84,827,266,000    52,505,379,000
Reserve Investment Fund                                                      66,138,193,000               --                --
Short-Term Bond                                                               1,113,884,000    3,380,454,000     4,596,925,000
Short-Term U.S. Government                                                      332,928,000      640,894,000       646,520,000
U.S. Treasury Intermediate                                                      507,228,000      806,082,000       215,529,000
U.S. Treasury Long-Term                                                         604,802,000      352,705,000       149,585,000
U.S. Treasury Money                                                           5,373,760,000    6,115,390,000     5,834,599,000
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
 
 
 
 
   With respect to the GNMA, Government Reserve, Prime Reserve, Reserve
   Investment, Short-Term U.S. Government, U.S. Treasury Intermediate, Long-Term
   and Money Funds, the entire amount for each of these years represented
   principal transactions as to which the Funds have no knowledge of the profits
   or losses realized by the respective broker-dealers for the fiscal years
   ended May 31, 1998, 1997, and 1996.
 
   With respect to the Corporate Income, High Yield, New Income, Short-Term
   Bond, Personal Strategy Income, Personal Strategy Growth, and Personal
   Strategy Balanced Funds, the following amounts consisted of principal
   transactions as to which the Funds have no knowledge of the profits or losses
   realized by the respective broker-dealers for the fiscal years ended May 31,
   1998, 1997, and 1996.
 
 
<PAGE>
 
<TABLE>
<CAPTION>
           Fund                  1998            1997             1996
           ----                  ----            ----             ----
<S>                         <C>             <C>             <C>
Corporate Income            $  147,537,000  $  174,157,000   $   46,566,000
High Yield                   3,854,884,000   7,056,968,000    7,702,492,000
New Income                   7,223,043,000   9,061,109,000    5,273,923,000
Personal Strategy Balanced     441,500,000     630,132,000      479,660,000
Personal Strategy Growth       147,604,000     303,598,000      111,536,000
Personal Strategy Income       159,536,000     327,683,000      220,100,000
Short-Term Bond              1,085,314,000   3,372,793,000    4,590,728,000
- ----------------------------------------------------------------------------
</TABLE>
 
 
 
 
 
   The following amounts involved trades with brokers acting as agents or
   underwriters for the fiscal years ended May 31, 1998, 1997, and 1996.
<TABLE>
<CAPTION>
                               Fund                                       1998           1997           1996
                               ----                                       ----           ----           ----
<S>                                                                  <C>             <C>           <C>
Corporate Income                                                     $    3,617,000  $  1,868,000   $  1,207,000
High Yield                                                            1,226,740,000   652,781,000    694,523,000
New Income                                                               64,189,000   105,749,000     16,451,000
Personal Strategy Balanced                                              148,459,000   166,836,000     74,381,000
Personal Strategy Growth                                                 78,305,000    51,173,000     16,915,000
Personal Strategy Income                                                 29,178,000    22,521,000      9,917,000
Short-Term Bond                                                          28,570,000     7,661,000      6,197,000
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
 
 
 
 
   The amounts shown below involved trades with brokers acting as agents or
   underwriters, in which such brokers received total commissions, including
   discounts received in connection with underwritings for the fiscal years
   ended May 31, 1998, 1997, and 1996.
<TABLE>
<CAPTION>
              Fund                     1998           1997            1996
              ----                     ----           ----            ----
<S>                                <C>            <C>            <C>
Corporate Income                    $    79,000    $    90,000     $    34,000
High Yield                           30,944,000     17,280,000      15,925,000
New Income                              133,000         74,000          61,000
Personal Strategy Balanced              174,000         75,000         334,000
Personal Strategy Growth                 46,000         17,000         124,000
Personal Strategy Income                 47,000         18,000         136,000
Short-Term Bond                         123,000         23,000          21,000
- --------------------------------------------------------------------------------
</TABLE>
 
 
 
 
   The percentage of total portfolio transactions, placed with firms which
   provided research, statistical, or other services to T. Rowe Price in
   connection with the management of the Funds, or in some cases, to the Funds
   for the fiscal years ended May 31, 1998, 1997, and 1996, are shown below:
<TABLE>
<CAPTION>
                                 Fund                                        1998           1997            1996
                                 ----                                        ----           ----            ----
<S>                                                                      <C>            <C>            <C>
Corporate Income                                                              92%            82%             66%
GNMA                                                                          98             98              99
Government Reserve Investment                                                 97            N/A             N/A
High Yield                                                                    88             83              85
New Income                                                                    95             87              71
Personal Strategy Balanced                                                    21             14              36
- ----------------------------------------------------------------------------------------------------------------------
Personal Strategy Growth                                                      32             37              46
Personal Strategy Income                                                      39             11              46
Prime Reserve                                                                 87             79              72
Reserve Investment                                                            77            N/A             N/A
Short-Term Bond                                                               85             81              64
Short-Term U.S. Government                                                    95             85              68
U.S. Treasury Intermediate                                                    96             99              94
U.S. Treasury Long-Term                                                      100            100              96
U.S. Treasury Money                                                           57             71              56
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
 
 
 
 
<PAGE>
 
 
 
   The portfolio turnover rates for the following Funds for the fiscal years
   ended May 31, 1998, 1997, and 1996, are as follows:
<TABLE>
<CAPTION>
                      Fund                            1998            1997           1996
                      ----                            ----            ----           ----
<S>                                                <C>           <C>             <C>
Corporate Income                                      146.0%         119.5%           70.5%
GNMA                                                  120.6          115.9           113.6
High Yield                                            129.6          111.3           100.1
New Income                                            147.3           87.1            35.5
Personal Strategy Balanced                             41.5           54.0            47.7
Personal Strategy Growth                               33.3           39.6            39.5
Personal Strategy Income                               30.9           44.8            34.1
Short-Term Bond                                        73.0          103.9           118.7
Short-Term U.S. Government                            107.5           82.9           152.8
U.S. Treasury Intermediate                            112.8           57.9            40.7
U.S. Treasury Long-Term                                80.8           67.6            60.1
- -----------------------------------------------------------------------------------------------
</TABLE>
 
 
 
 
   Government Reserve Investment, Prime Reserve, Reserve Investment, and U.S.
   Treasury Money Funds
 
   The Fund, in pursuing its objectives, may engage in short-term trading to
   take advantage of market variations. The Fund will seek to protect principal,
   improve liquidity of its securities, or enhance yield by purchasing and
   selling securities based upon existing or anticipated market discrepancies.
 
 
 
 PRICING OF SECURITIES
 -------------------------------------------------------------------------------
   Corporate Income, GNMA, High Yield, New Income, Personal Strategy, Short-Term
   Bond, Short-Term U.S. Government, U.S. Treasury Intermediate, and Long-Term
   Funds
 
   Debt 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 a 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. The Personal Strategy Funds
   value short-term debt securities at their cost in local currency which, when
   combined with accrued interest, approximates fair value.
 
 
<PAGE>
 
   There are a number of pricing services available, and the Board of
   Directors/Trustees, on the basis of an ongoing evaluation of these services,
   may use or may discontinue the use of any pricing service in whole or part.
 
   Corporate Income, High Yield, New Income, and Personal Strategy Funds
 
   Equity securities listed or regularly traded on a securities exchange are
   valued at the last quoted sales price at the time the valuations are made. A
   security that is listed or traded on more than one exchange is valued at the
   quotation on the exchange determined to be the primary market for such
   security. Listed securities not traded on a particular day and securities
   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.
 
   Investments in mutual funds are valued at the closing net asset value per
   share of the mutual fund on the day of valuation.
 
   Government Reserve Investment, Prime Reserve, Reserve Investment, and U.S.
   Treasury Money Funds
 
   Securities are valued at amortized cost.
 
   Corporate Income, High Yield, New Income, Personal Strategy, and Short-Term
   Bond Funds
 
   For the purposes of determining the Fund's net asset value per share, the
   U.S. dollar value of all assets and liabilities initially expressed in
   foreign currencies is determined by using the mean of the bid and offer
   prices of such currencies against U.S. dollars quoted by a major bank.
 
   All Funds
 
   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.
 
   Government Reserve Investment, Prime Reserve, Reserve Investment, and U.S.
   Treasury Money Funds
 
 
         Maintenance of Money Fund's Net Asset Value Per Share at $1.00
 
   It is the policy of the Fund to attempt to maintain a net asset value of
   $1.00 per share by using the amortized cost method of valuation permitted by
   Rule 2a-7 under the Investment Company Act of 1940. Under this method,
   securities are valued by reference to the Fund's acquisition cost as adjusted
   for amortization of premium or accumulation of discount rather than by
   reference to their market value. Under Rule 2a-7:
 
   (a) The Board of Directors must establish written procedures reasonably
       designed, taking into account current market conditions and the Fund's
       investment objectives, to stabilize the Fund's net asset value per share,
       as computed for the purpose of distribution, redemption and repurchase,
       at a single value;
 
   (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, 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 net asset value per
       share under the amortized cost method; and (ii)
 
 
<PAGE>
 
       the Fund will continue to use the amortized cost method only so long as
       the Board of Directors believes that it fairly reflects the market based
       net asset value per share.
 
   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 Reserve and Reserve Investment Funds
 
   Prime Money Market Securities Defined
   Prime money market securities are those which are described as First Tier
   Securities under Rule 2a-7 of the 1940 Act. 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 Director.
 
   All Funds
 
 
 NET ASSET VALUE PER SHARE
 -------------------------------------------------------------------------------
   The purchase and redemption price of the Fund's shares is equal to the Fund's
   net asset value per share or share price. The Fund determines its net asset
   value per share by subtracting its 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 the Fund is normally
   calculated as of the close of trading on the New York Stock Exchange ("NYSE")
   every day the NYSE is open for trading. The NYSE is closed on the following
   days: New Year's Day, Dr. Martin Luther King, Jr. Holiday, Presidents' Day,
   Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day, and
   Christmas Day.
 
   Determination of net asset value (and the offering, sale redemption and
   repurchase of shares) for the 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 the Fund of securities owned by it is
   not reasonably practicable or it is not reasonably practicable for the Fund
   fairly to determine the value of its net assets, or (d) during which a
   governmental body having jurisdiction over the Fund may by order permit such
   a suspension for the protection of the 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.
 
 
<PAGE>
 
 DIVIDENDS AND DISTRIBUTIONS
 -------------------------------------------------------------------------------
   Unless you elect otherwise, the Fund's annual capital gain distribution, if
   any, will be reinvested 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
 -------------------------------------------------------------------------------
   The Fund intends to qualify as a "regulated investment company" under
   Subchapter M of the Code.
 
   Dividends paid by certain Funds may be eligible for the dividends-received
   deduction applicable to corporate shareholders. For tax purposes, it does not
   make any difference whether dividends and capital gain distributions are paid
   in cash or in additional shares. The 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 December 31 to avoid a federal income tax.
 
   At the time of your purchase, the Fund's net asset value may reflect
   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 as a capital gain
   distribution. For federal income tax purposes, the Fund is permitted to carry
   forward its net realized capital losses, if any, for eight years and realize
   net capital gains up to the amount of such losses without being required to
   pay taxes on, or distribute, such gains.
 
   If, in any taxable year, the 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, if any, without
   deduction for dividends or other distributions to shareholders; and (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).
 
 
                        Taxation of Foreign Shareholders
 
   The Code provides that dividends from net income 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 by the
   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.
 
   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. Such trusts have been the
   only or primary way to invest in certain countries. 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 were distributed to shareholders.
 
   To avoid such tax and interest, the Fund intends 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; deductions for losses are allowable only to the
   extent of any gains resulting from these deemed sales for prior taxable
   years. Such gains and losses will be
 
 
<PAGE>
 
   treated as ordinary income for tax purposes. The Fund will be required to
   distribute any resulting income 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 ordinary income dividend paid by the Fund will be
   increased. If the result is a loss, the income dividend paid by the Fund will
   be decreased, or to the extent such dividend has already been paid, it 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.
 
 
 
 YIELD INFORMATION
 -------------------------------------------------------------------------------
   GNMA and Short-Term U.S. Government Funds
 
   In conformity with regulations of the Securities and Exchange Commission, an
   income factor is calculated for each security in the portfolio based upon the
   security's coupon rate. The income factors are then adjusted for any gains or
   losses which have resulted from prepayments of principal during the period.
   The income factors are then totalled for all securities in the portfolio.
   Next, expenses of the Fund for the period, net of expected reimbursements,
   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 yields of the GNMA and Short-Term U.S. Government Funds calculated under
   the above-described method for the month ended May 31, 1998, were 6.36% and
   5.76%, respectively.
 
   Corporate Income, High Yield, New Income, Short-Term Bond, U.S. Treasury
   Intermediate, and Long-Term Funds
 
   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 regulations of the SEC. The income factors are
   then totaled for all securities in the portfolio. Next, expenses of the Fund
   for the period, net of expected reimbursements, 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.
   If applicable, a taxable-equivalent yield is calculated by dividing this
   yield by one minus the effective federal, state, and/or city or local income
   tax rates. 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 yields of the Corporate Income, High Yield, New Income, Short-Term Bond,
   Intermediate, and Long-Term Treasury Funds calculated under the
   above-described method for the month ended May 31, 1998, were 7.66%, 8.19%,
   6.29%, 5.52%, 5.29%, and 5.35%, respectively.
 
   Government Reserve Investment, Prime Reserve, Reserve Investment, and U.S.
   Treasury Money Funds
 
   The 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 than multiplied
   by 365 to arrive at the annualized yield for that period. The
 
 
<PAGE>
 
   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 yields ending May 31, 1998, for the Prime Reserve, and U.S.
   Treasury Money Funds were 5.03% and 4.80%, respectively, and the Funds'
   compound yield for the same period were 5.16 and 4.91%, respectively.
 
   All Funds
 
 
 INVESTMENT PERFORMANCE
 -------------------------------------------------------------------------------
 
                            Total Return Performance
 
   The 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 the 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 gain dividends. The
   results shown are historical and should not be considered indicative of the
   future performance of the Fund. Each average annual compound rate of return
   is derived from the cumulative performance of the Fund over the time period
   specified. The annual compound rate of return for the Fund over any other
   period of time will vary from the average.
 
<TABLE>
<CAPTION>
                          Cumulative Performance Percentage Change
         Fund           1 Yr. Ended  5 Yrs. Ended  10 Yrs. Ended  % Since Incep-    Inception
         ----           -----------  ------------  -------------  --------------    ---------
- ------------------------  5/31/98      5/31/98        5/31/98     tion to 5/31/98     Date
                          -------      -------        -------     ---------------     ----
                        ----------------------------------------------------------------------
<S>                     <C>          <C>           <C>            <C>              <S>
Corporate Income          13.96%           --             --           25.87%      10/31/95
GNMA                       9.97         37.67%        125.57%         164.57       11/26/85
High Yield                14.51         55.03         147.80          292.39       12/31/84
New Income                10.84         39.47         125.38          721.27       08/31/73
Personal Strategy
Balanced                  19.15            --             --           88.41       07/29/94
Personal Strategy
Growth                    22.02            --             --          107.81       07/29/94
Personal Strategy
Income                    16.61            --             --           71.89       07/29/94
Prime Reserve              5.16         25.07          69.09          407.06       01/26/76
Short-Term Bond            6.87         24.50          85.08          169.06       03/02/84
Short-Term U.S.
Government                 6.71         27.97             --           36.70       09/30/91
U.S. Treasury
Intermediate               9.58         32.93             --           90.91       09/29/89
U.S. Treasury
Long-Term                 18.58         48.91             --          116.76       09/29/89
U.S. Treasury Money        4.91         23.91          64.86          150.42       06/28/82
- ----------------------------------------------------------------------------------------------
</TABLE>
 
 
 
 
<PAGE>
 
 
<TABLE>
<CAPTION>
                          Average Annual Compound Rates of Return
         Fund           1 Yr. Ended  5 Yrs. Ended  10 Yrs. Ended  % Since Incep-    Inception
         ----           -----------  ------------  -------------  --------------    ---------
- ------------------------  5/31/98      5/31/98        5/31/98     tion to 5/31/98     Date
                          -------      -------        -------     ---------------     ----
                        ----------------------------------------------------------------------
<S>                     <C>          <C>           <C>            <C>              <S>
Corporate Income          13.96%          --             --            9.32%       10/31/95
GNMA                       9.97         6.60%          8.47%           8.09        11/26/85
High Yield                14.51         9.21           9.50           10.73        12/31/84
New Income                10.84         6.88           8.47            8.88        08/31/73
Personal Strategy
Balanced                  19.15           --             --           17.94        07/29/94
Personal Strategy
Growth                    22.02           --             --           20.99        07/29/94
Personal Strategy
Income                    16.61           --             --           15.15        07/29/94
Prime Reserve              5.16         4.58           5.39            7.54        01/26/76
Short-Term Bond            6.87         4.48           6.35            7.19        03/02/84
Short-Term U.S.
Government                 6.71         5.06             --            4.80        09/30/91
U.S. Treasury
Intermediate               9.58         5.86             --            7.74        09/29/89
U.S. Treasury
Long-Term                 18.58         8.29             --            9.33        09/29/89
U.S. Treasury Money        4.91         4.38           5.13            5.93        06/28/82
- ----------------------------------------------------------------------------------------------
</TABLE>
 
 
 
 
                         Outside Sources of Information
 
   From time to time, in reports and promotional literature: (1) the Fund's
   total return performance, ranking, or any other measure of the Fund's
   performance may be compared to any one or combination of the following: (i) a
   broadbased index; (ii) other groups of mutual funds, including T. Rowe Price
   Funds, tracked by independent research firms ranking entities, or financial
   publications; (iii) indices of securities comparable to those in which the
   Fund invests; (2) the Consumer Price Index (or any other measure for
   inflation, government statistics, such as GNP may be used to illustrate
   investment attributes of the Fund or the general economic, business,
   investment, or financial environment in which the Fund operates; (3) various
   financial, economic and market statistics developed by brokers, dealers and
   other persons may be used to illustrate aspects of the Fund's performance;
   (4) the effect of tax-deferred compounding on the Fund's investment returns,
   or on returns in general in both qualified and nonqualified retirement plans
   or any other tax advantage product, may be illustrated by graphs, charts,
   etc.; and (5) the sectors or industries in which the Fund invests may be
   compared to relevant indices or surveys in order to evaluate the Fund's
   historical performance or current or potential value with respect to the
   particular industry or sector.
 
 
                               Other Publications
 
   From time to time, in newsletters and other publications issued by Investment
   Services, T. Rowe Price mutual fund portfolio managers may discuss economic,
   financial and political developments in the U.S. and abroad and how these
   conditions have affected or may affect securities prices or the Fund;
   individual securities within the Fund's portfolio; and their philosophy
   regarding the selection of individual stocks, including why specific stocks
   have been added, removed or excluded from the Fund's portfolio.
 
 
                           Other Features and Benefits
 
   The Fund is a member of the T. Rowe Price family of Funds and may help
   investors achieve various long-term investment goals, which include, but are
   not limited to, 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 Investment Services may be made available.
 
 
<PAGE>
 
                               Redemptions in Kind
 
   In the unlikely event a shareholder were to receive an in kind redemption of
   portfolio securities of the Fund, brokerage fees could be incurred by the
   shareholder in a 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.
 
   All Funds except GNMA Fund
 
 
 CAPITAL STOCK
 -------------------------------------------------------------------------------
   The 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 or series, each class or
   series 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. The shares of any such additional classes or series
   might therefore differ from the shares of the present class and series of
   capital stock and from each other as to preferences, conversions 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 or series in various characteristics. The 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 that the Fund has authorized to issue
   without shareholder approval.
 
   Except to the extent that the 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 to vote as a class by the holders of the capital stock or of
   another affected class or classes.
 
   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 Fund, a special meeting of
   shareholders of the 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. The 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.
 
 
<PAGE>
 
   GNMA Fund
 
 
                             Description of the 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 1940 Act as diversified, open-end
   investment companies, commonly known as "mutual fund."
 
   The Declaration of Trust permits the Board of Trustees to issue an unlimited
   number of full and fractional shares of a single class. The Declaration of
   Trust also provides that the 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 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 1940 Act, holders of record of not less than two-thirds
   of the outstanding shares of the 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 Declaration 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 nonassesable, 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 the Fund. However, the
   Declaration of Trust disclaims shareholder liability for acts or obligations
   of the 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 Declaration of Trust provides 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 the Fund
   paying such liability will be entitled to reimbursement from the general
   assets of the Fund. The Trustees intend to conduct the operations of the Fund
   is such a way so as to avoid, as far as possible, ultimate liability of the
   shareholders for liabilities of such Fund.
 
 
 
 FEDERAL REGISTRATION OF SHARES
 -------------------------------------------------------------------------------
   The Fund's shares (except for Government Reserve and Reserve Investment
   Funds) are registered for sale under the Securities Act of 1933. Registration
   of the Fund's shares is not required under any state law, but the Fund is
   required to make certain filings with and pay fees to the states in order to
   sell its shares in the states.
 
 
<PAGE>
 
 LEGAL COUNSEL
 -------------------------------------------------------------------------------
   Swidler Berlin Shereff Friedman, LLP, whose address is 919 Third Avenue, New
   York, New York 10022-9998, is legal counsel to the Fund.
 
 
 
 INDEPENDENT ACCOUNTANTS
 -------------------------------------------------------------------------------
   PricewaterhouseCoopers LLP, 250 West Pratt Street, 21st Floor, Baltimore,
   Maryland 21201, are the independent accountants to the Funds.
 
   The financial statements of the Funds for the year ended May 31, 1998, and
   the report of independent accountants are included in each Fund's Annual
   Report for the year ended May 31, 1998. A copy of each Annual Report
   accompanies this Statement of Additional Information. The following financial
   statements and the report of independent accountants appearing in each Annual
   Report for the year ended May 31, 1998, are incorporated into this Statement
   of Additional Information by reference:
 
<TABLE>
<CAPTION>
                          ANNUAL REPORT REFERENCES:
                                         CORPORATE    GNMA   NEW      PRIME
                                         INCOME FUND  FUND   INCOME   RESERVE
                                         -----------  ----   FUND     FUND
                                                             ----     ----
<S>                                      <S>          <S>    <S>      <S>
Report of Independent Accountants            20        15      23        21
Statement of Net Assets, May 31, 1998       9-13       7-9    9-16      8-16
Statement of Operations, year ended
May 31, 1998                                 14        10      17        17
Statement of Changes in Net Assets,
years ended
May 31, 1998 and May 31, 1997                15        11      18        18
Notes to Financial Statements, May 31,
1998                                        16-19     12-14   19-22     19-20
Financial Highlights                          8         6       8         7
</TABLE>
 
 
 
<TABLE>
<CAPTION>
                                      PERSONAL       PERSONAL     PERSONAL
                                      STRATEGY       STRATEGY     STRATEGY
                                      BALANCED FUND  GROWTH FUND  INCOME FUND
                                      -------------  -----------  -----------
<S>                                   <S>            <S>          <S>
Report of Independent Accountants          31            29            28
Portfolio of Investments, May 31,
1998                                      3-22          3-21          3-20
Statement of Assets and Liabilities,
May 31, 1998                               23            22            21
Statement of Operations, year ended
May 31, 1998                               24            23            22
Statement of Changes in Net Assets,
years ended
May 31, 1998 and May 31, 1997              25            24            23
Notes to Financial Statements, May
31, 1998                                  26-30         25-28         24-27
Financial Highlights                        2             2             2
</TABLE>
 
 
 
 
 
<PAGE>
 
 
<TABLE>
<CAPTION>
                                    HIGH YIELD   SHORT-TERM  SHORT-TERM U.S.
                                    FUND         BOND FUND   GOVERNMENT FUND
                                    ----         ---------   ---------------
<S>                                 <C>          <C>         <C>
Report of Independent Accountants       29           20              16
Statement of Net Assets, May 31,
1998                                   9-21         8-13            7-10
Statement of Operations, year
ended
May 31, 1998                            22           14              11
Statement of Changes in Net
Assets, years ended
May 31, 1998 and May 31, 1997           23           15              12
Notes to Financial Statements, May
31, 1998                               24-27       16-19           13-15
Financial Highlights                     8           7               6
</TABLE>
 
 
 
 
<TABLE>
<CAPTION>
                             U.S. TREASURY      U.S. TREASURY   U.S. TREASURY
                             INTERMEDIATE FUND  LONG-TERM FUND  MONEY FUND
                             -----------------  --------------  ----------
<S>                          <C>                <C>             <C>
Report of Independent
Accountants                         27                27              27
Statement of Net Assets,
May 31, 1998                       14-16            17-18             13
Statement of Operations,
year ended
May 31, 1998                        19                19              19
Statement of Changes in Net
Assets, years
ended May 31, 1998 and May
31, 1997                            21                22              20
Notes to Financial
Statements, May 31, 1998           23-26            23-26            23-26
Financial Highlights                11                12              10
</TABLE>
 
 
 
 
<TABLE>
<CAPTION>
                                            RESERVE           GOVERNMENT
                                            INVESTMENT FUND   RESERVE
                                            ---------------   INVESTMENT FUND
                                                              ---------------
<S>                                         <C>               <C>
Report of Independent Accountants                  13               13
Statement of Net Assets, May 31, 1998             3-6                7
Statement of Operations, period from
August 25, 1997 (commencement of
operations) to May 31, 1998                        8                 8
Statement of Changes in Net Assets, period
from August 25, 1997 (commencement of
operations)
to May 31, 1998                                    9                 9
Notes to Financial Statements, May 31,
1998                                             10-12             10-12
Financial Highlights                               1                 2
</TABLE>
 
 
 
 
 
 RATINGS OF COMMERCIAL PAPER
 -------------------------------------------------------------------------------
   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 rating 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 result of
 
 
<PAGE>
 
   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 IBCA, 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.    
 
   Government Reserve Investment, Prime Reserve, and Reserve Investment Funds
 
 
 RATINGS OF CORPORATE DEBT SECURITIES
 -------------------------------------------------------------------------------
 
                   Moody's Investors Services, Inc. (Moody's)
 
   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 know 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 characteristics
   and in fact have speculative characteristics as well.
 
   Ba-Bonds rated Ba are judged to have speculative elements: their futures
   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 the characteristics of a desirable investment.
   Assurance of interest and principal payments or of 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-Bonds rated C represent the lowest-rated, and have extremely poor prospects
   of attaining investment standing.
 
 
                       Standard & Poor's Corporation (S&P)
 
   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.
 
 
<PAGE>
 
   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, C-Bonds rated BB, B, CCC, and CC are regarded on balance, as
   predominantly speculative with respect to the issuer's capacity to pay
   interest and repay principal. 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 IBCA, 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 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.
 
   A-Bonds rated A are considered to be investment grade and of high credit
   quality. The obligor's ability to pay interest and repay principal is
   considered to be strong, but may be more vulnerable to adverse changes in
   economic conditions and circumstances than bonds with higher ratings.
 
   BBB-Bonds rated BBB are considered to be investment grade and of satisfactory
   credit quality. The obligor's ability to pay interest and repay principal is
   considered to be adequate. Adverse changes in economic conditions ad
   circumstances, however, are more likely to have adverse impact on these
   bonds, and therefore impair timely payment. The likelihood that the ratings
   of these bonds will fall below investment grade is higher than for bonds with
   higher ratings.
 
   BB, B, CCC, CC, and C are regarded on balance as predominantly speculative
   with respect to the issuer's capacity to repay interest and repay principal
   in accordance with the terms of the obligation for bond issues not in
   default. BB indicates the lowest degree of speculation and C the highest
   degree of speculation. The rating takes into consideration special features
   of the issue, its relationship to other obligations of the issuer, and the
   current and prospective financial condition and operating performance of the
   issuer.
 
 


 
         
<PAGE>
 
 STATEMENT OF ADDITIONAL INFORMATION
   The date of this Statement of Additional Information is May 1, 1999.
 
 
 
         T. ROWE PRICE BALANCED FUND, INC.
         T. ROWE PRICE BLUE CHIP GROWTH FUND, INC.
         T. ROWE PRICE CAPITAL APPRECIATION FUND
         T. ROWE PRICE CAPITAL OPPORTUNITY FUND, INC.
         T. ROWE PRICE DIVERSIFIED SMALL-CAP GROWTH FUND, INC.
         T. ROWE PRICE DIVIDEND GROWTH FUND, INC.
         T. ROWE PRICE EQUITY INCOME FUND
         T. ROWE PRICE FINANCIAL SERVICES FUND, INC.
         T. ROWE PRICE GROWTH & INCOME FUND, INC.
         T. ROWE PRICE GROWTH STOCK FUND, INC.
         T. ROWE PRICE HEALTH SCIENCES FUND, INC.
         T. ROWE PRICE INDEX TRUST, INC.
              T. Rowe Price Equity Index 500 Fund
              T. Rowe Price Extended Equity Market Index Fund
              T. Rowe Price Total Equity Market Index Fund
         T. ROWE PRICE MEDIA & TELECOMMUNICATIONS FUND, INC.
         T. ROWE PRICE MID-CAP GROWTH FUND, INC.
         T. ROWE PRICE MID-CAP VALUE FUND, INC.
         T. ROWE PRICE NEW AMERICA GROWTH FUND
         T. ROWE PRICE NEW ERA FUND, INC.
         T. ROWE PRICE NEW HORIZONS FUND, INC.
         T. ROWE PRICE REAL ESTATE FUND, INC.
         T. ROWE PRICE SCIENCE & TECHNOLOGY FUND, INC.
         T. ROWE PRICE SMALL-CAP STOCK FUND, INC.
         T. ROWE PRICE SMALL-CAP VALUE FUND, INC.
         T. ROWE PRICE VALUE FUND, INC.
                                       and
         INSTITUTIONAL EQUITY FUNDS, INC.
              Mid-Cap Equity Growth Fund
 
______________________________________________________________________________
 
 
   Mailing Address:
   T. Rowe Price Investment Services, Inc.
   100 East Pratt Street
   Baltimore, Maryland 21202
   1-800-638-5660
 
   
   This Statement of Additional Information is not a prospectus but should be
   read in conjunction with the appropriate Fund prospectus dated May 1, 1999,
   which may be obtained from T. Rowe Price Investment Services, Inc.
   ("Investment Services").
 
   Each Fund's financial statements for the year ended December 31, 1998, and
   the report of independent accountants are included in each Fund's Annual
   Report and incorporated by reference into this Statement of Additional
   Information.    
 
   If you would like a prospectus or an annual or semiannual shareholder report
   for a Fund of which you are not a shareholder, please call 1-800-638-5660. A
   prospectus with more complete information, including management fees and
   expenses, will be sent to you. Please read it carefully.
 
                                                                  C20-043 5/1/99
<PAGE>
 
   
<TABLE>
<CAPTION>
                              TABLE OF CONTENTS
                              -----------------
                            Page                                         Page
                            ----                                         ----
<S>                         <C>   <C>  <S>                               <C>
Capital Stock                 65       Legal Counsel                         67
- ----------------------------------     ----------------------------------------
Code of Ethics                53       Management of the Funds               28
- ----------------------------------     ----------------------------------------
Custodian                     53       Net Asset Value Per Share             60
- ----------------------------------     ----------------------------------------
Distributor for the Funds     52       Organization of the Funds             66
- ----------------------------------     ----------------------------------------
Dividends and                 60       Portfolio Management Practices        14
Distributions
- ----------------------------------     ----------------------------------------
Federal Registration of       67       Portfolio Transactions                54
Shares
- ----------------------------------     ----------------------------------------
Independent Accountants       67       Pricing of Securities                 59
- ----------------------------------     ----------------------------------------
Investment Management         47       Principal Holders of Securities       46
Services
- ----------------------------------     ----------------------------------------
Investment Objectives and      2       Ratings of Corporate Debt             70
Policies                               Securities
- ----------------------------------     ----------------------------------------
Investment Performance        61       Risk Factors                           2
- ----------------------------------     ----------------------------------------
Investment Program             5       Shareholder Services by Outside       53
                                       Parties
- ----------------------------------     ----------------------------------------
Investment Restrictions       26       Tax Status                            60
- ----------------------------------     ----------------------------------------
</TABLE>
 
    
 
 
 
 
 INVESTMENT OBJECTIVES AND POLICIES
 -------------------------------------------------------------------------------
   The following information supplements the discussion of each Fund's
   investment objectives and policies discussed in the Funds' prospectus.
 
   The Funds will not make a material change in their investment objectives
   without obtaining shareholder approval. Unless otherwise specified, the
   investment programs and restrictions of the Funds are not fundamental
   policies. Each Fund's operating policies are subject to change by each Board
   of Directors/ Trustees without shareholder approval. However, shareholders
   will be notified of a material change in an operating policy. Each Fund's
   fundamental policies may not be changed without the approval of at least a
   majority of the outstanding shares of the Fund or, if it is less, 67% of the
   shares represented at a meeting of shareholders at which the holders of 50%
   or more of the shares are represented. References to the following are as
   indicated:
 
                  Investment Company Act of 1940 ("1940 Act")
                  Securities and Exchange Commission ("SEC")
                  T. Rowe Price Associates, Inc. ("T. Rowe Price")
                  Moody's Investors Service, Inc. ("Moody's")
                  Standard & Poor's Corporation ("S&P")
                  Internal Revenue Code of 1986 ("Code")
   
                  Rowe Price-Fleming International, Inc. ("Price-Fleming")    
 
   Throughout this Statement of Additional Information, "the Fund" is intended
   to refer to each Fund listed on the cover page, unless otherwise indicated.
 
 
 
 RISK FACTORS
 -------------------------------------------------------------------------------
   Reference is also made to the sections entitled "Types of Securities" and
   "Portfolio Management Practices" for discussions of the risks associated with
   the investments and practices described therein as they apply to the Fund.
 
 
<PAGE>
 
   Because of its investment policy, the Fund may or may not be suitable or
   appropriate for all investors. The Fund is not a money market fund and is not
   an appropriate investment for those whose primary objective is principal
   stability. The Fund will normally have substantially all (for the Balanced
   Fund 50-70% and for the Capital Appreciation Fund at least 50%) of its assets
   in equity securities (e.g., common stocks). This portion of the Fund's assets
   will be subject to all of the risks of investing in the stock market. There
   is risk in every investment. The value of the portfolio securities of the
   Fund will fluctuate based upon market conditions. Although the Fund seeks 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
   Fund will achieve its investment objective.
 
   Foreign Securities (All Funds other than Equity Index 500, Extended Equity
   Market, and Total Equity Market Funds)
   The 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 mutual fund while
   others relate more to the countries in which the Fund will invest.
 
  . Political and Economic Factors Individual foreign economies of certain
   countries 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 1994-1995,
   the Mexican peso plunged in value setting off a severe crisis in the Mexican
   economy. Asia is still coming to terms with its own crisis and recessionary
   conditions sparked off by widespread currency weakness in late 1997. In 1998,
   there was substantial turmoil in markets throughout the world. 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 and hostile relations 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 Fund invests 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 Fund's assets denominated in that currency. Such changes will
   also affect the Fund's 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 Fund's
   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 limit at times and preclude investment
   in certain of such countries and increase the cost and expenses of the Fund.
   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, 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. In 1998, the
   government of Malaysia imposed currency controls which effectively made it
   impossible for foreign investors to convert Malaysian ringgits to foreign
   currencies.
 
 
<PAGE>
 
   
  . Market Characteristics It is contemplated that most foreign securities will
   be purchased in over-the-counter markets or on securities 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.
   Investments in certain markets may be made through American Depository
   Receipts ("ADRs") traded in the United States. Foreign securities markets are
   generally not as developed or efficient as, and more volatile than, those in
   the United States. While growing in volume, they usually have substantially
   less volume than U.S. markets and the Fund's portfolio securities may be less
   liquid and subject to more rapid and erratic price movements than securities
   of comparable U.S. companies. Securities may trade at price/earnings
   multiples higher than comparable United States securities and such levels may
   not be sustainable. Commissions on foreign securities are generally higher
   than commissions on United States exchanges, and while there is an increasing
   number of overseas securities markets that have adopted a system of
   negotiated rates, a number are still subject to an established schedule of
   minimum commission rates. There is generally less government supervision and
   regulation of foreign securities 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 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 the Fund.    
 
  . Investment Funds The Fund 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. The Fund's investment in these funds
   is subject to the provisions of the 1940 Act. If the Fund invests in such
   investment funds, the Fund's shareholders will bear not only their
   proportionate share of the expenses of the Fund (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 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 is often 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 Fund's foreign
   portfolio securities may be subject to foreign withholding taxes, thus
   reducing the net amount of income available for distribution to the Fund's
   shareholders.
 
  . 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. The collapse of the ruble from its crawling peg
   exchange rate against the U.S. dollar has set back the path of reform for
   several years. 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 country's national
   interest. Further, the governments in such countries may require governmental
   or quasi-governmental authorities to act as custodian of the Fund's assets
   invested in such
 
 
<PAGE>
 
   countries, and these authorities may not qualify as a foreign custodian under
   the 1940 Act 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. The 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.
 
  . Latin America
 
   Inflation Most Latin American countries have experienced, at one time or
   another, severe and persistent levels of inflation, including, in some cases,
   hyperinflation. This has, in turn, led to high interest rates, extreme
   measures by governments to keep inflation in check, and a generally
   debilitating effect on economic growth. Although inflation in many countries
   has lessened, there is no guarantee it will remain at lower levels.
 
   Political Instability The political history of certain Latin American
   countries has been characterized by political uncertainty, intervention by
   the military in civilian and economic spheres, and political corruption. Such
   developments, if they were to reoccur, could reverse favorable trends toward
   market and economic reform, privatization, and removal of trade barriers, and
   result in significant disruption in securities markets.
 
   Foreign Currency Certain Latin American countries may have managed currencies
   which are maintained at artificial levels to the U. S. dollar rather than at
   levels determined by the market. This type of system can lead to sudden and
   large adjustments in the currency which, in turn, can have a disruptive and
   negative effect on foreign investors. For example, in late 1994 the value of
   the Mexican peso lost more than one-third of its value relative to the
   dollar. Certain Latin American countries also restrict the free conversion of
   their currency into foreign currencies, including the U.S. dollar. There is
   no significant foreign exchange market for many currencies and it would, as a
   result, be difficult for the Fund to engage in foreign currency transactions
   designed to protect the value of the Fund's interests in securities
   denominated in such currencies.
 
   Sovereign Debt A number of Latin American countries are among the largest
   debtors of developing countries. There have been moratoria on, and
   reschedulings of, repayment with respect to these debts. Such events can
   restrict the flexibility of these debtor nations in the international markets
   and result in the imposition of onerous conditions on their economies.
 
 
 
 INVESTMENT PROGRAM
 -------------------------------------------------------------------------------
 
                               Types of Securities
 
   Set forth below is additional information about certain of the investments
   described in the Fund's prospectus.
 
 
                               Hybrid Instruments
 
   Hybrid Instruments (a type of potentially high-risk derivative) have been
   developed and combine the elements of futures contracts or options with those
   of debt, preferred equity, or a depository instrument (hereinafter "Hybrid
   Instruments"). Generally, a Hybrid Instrument will be a debt security,
   preferred stock, depository share, trust certificate, certificate of deposit,
   or other evidence of indebtedness on which a portion of or all interest
   payments, and/or the principal or stated amount payable at maturity,
   redemption, or retirement, is determined by reference to prices, changes in
   prices, or differences between prices, of securities, currencies,
   intangibles, goods, articles, or commodities (collectively "Underlying
   Assets") or by another objective index, economic factor, or other measure,
   such as interest rates, currency exchange rates, commodity indices, and
   securities indices (collectively "Benchmarks"). Thus, Hybrid Instruments may
   take a variety of forms, including, but not limited to, debt instruments with
   interest or principal payments or redemption terms determined by reference to
   the value of a currency or commodity or securities index at a future point in
   time, preferred stock with dividend rates determined by reference to the
   value of a currency, or convertible securities with the conversion terms
   related to a particular commodity.
 
 
<PAGE>
 
   Hybrid Instruments can be an efficient means of creating exposure to a
   particular market, or segment of a market, with the objective of enhancing
   total return. For example, a Fund may wish to take advantage of expected
   declines in interest rates in several European countries, but avoid the
   transaction costs associated with buying and currency-hedging the foreign
   bond positions. One solution would be to purchase a U.S. dollar-denominated
   Hybrid Instrument whose redemption price is linked to the average three-year
   interest rate in a designated group of countries. The redemption price
   formula would provide for payoffs of greater than par if the average interest
   rate was lower than a specified level, and payoffs of less than par if rates
   were above the specified level. Furthermore, the Fund could limit the
   downside risk of the security by establishing a minimum redemption price so
   that the principal paid at maturity could not be below a predetermined
   minimum level if interest rates were to rise significantly. The purpose of
   this arrangement, known as a structured security with an embedded put option,
   would be to give the Fund the desired European bond exposure while avoiding
   currency risk, limiting downside market risk, and lowering transactions
   costs. Of course, there is no guarantee that the strategy will be successful,
   and the Fund could lose money if, for example, interest rates do not move as
   anticipated or credit problems develop with the issuer of the Hybrid.
 
   The risks of investing in Hybrid Instruments reflect a combination of the
   risks of investing in securities, options, futures and currencies. Thus, an
   investment in a Hybrid Instrument may entail significant risks that are not
   associated with a similar investment in a traditional debt instrument that
   has a fixed principal amount, is denominated in U.S. dollars, or bears
   interest either at a fixed rate or a floating rate determined by reference to
   a common, nationally published benchmark. The risks of a particular Hybrid
   Instrument will, of course, depend upon the terms of the instrument, but may
   include, without limitation, the possibility of significant changes in the
   Benchmarks or the prices of Underlying Assets to which the instrument is
   linked. Such risks generally depend upon factors which are unrelated to the
   operations or credit quality of the issuer of the Hybrid Instrument and which
   may not be readily foreseen by the purchaser, such as economic and political
   events, the supply and demand for the Underlying Assets, and interest rate
   movements. In recent years, various Benchmarks and prices for Underlying
   Assets have been highly volatile, and such volatility may be expected in the
   future. Reference is also made to the discussion of futures, options, and
   forward contracts herein for a discussion of the risks associated with such
   investments.
 
   Hybrid Instruments are potentially more volatile and carry greater market
   risks than traditional debt instruments. Depending on the structure of the
   particular Hybrid Instrument, changes in a Benchmark may be magnified by the
   terms of the Hybrid Instrument and have an even more dramatic and substantial
   effect upon the value of the Hybrid Instrument. Also, the prices of the
   Hybrid Instrument and the Benchmark or Underlying Asset may not move in the
   same direction or at the same time.
 
   Hybrid Instruments may bear interest or pay preferred dividends at below
   market (or even relatively nominal) rates. Alternatively, Hybrid Instruments
   may bear interest at above market rates but bear an increased risk of
   principal loss (or gain). The latter scenario may result if "leverage" is
   used to structure the Hybrid Instrument. Leverage risk occurs when the Hybrid
   Instrument is structured so that a given change in a Benchmark or Underlying
   Asset is multiplied to produce a greater value change in the Hybrid
   Instrument, thereby magnifying the risk of loss as well as the potential for
   gain.
 
   Hybrid Instruments may also carry liquidity risk since the instruments are
   often "customized" to meet the portfolio needs of a particular investor, and
   therefore, the number of investors that are willing and able to buy such
   instruments in the secondary market may be smaller than that for more
   traditional debt securities. In addition, because the purchase and sale of
   Hybrid Instruments could take place in an over-the-counter market without the
   guarantee of a central clearing organization or in a transaction between the
   Fund and the issuer of the Hybrid Instrument, the creditworthiness of the
   counter party of issuer of the Hybrid Instrument would be an additional risk
   factor which the Fund would have to consider and monitor. Hybrid Instruments
   also may not be subject to regulation of the Commodities Futures Trading
   Commission ("CFTC"), which generally regulates the trading of commodity
   futures by U.S. persons, the SEC, which regulates the offer and sale of
   securities by and to U.S. persons, or any other governmental regulatory
   authority.
 
   The various risks discussed above, particularly the market risk of such
   instruments, may in turn cause significant fluctuations in the net asset
   value of the Fund. Accordingly, the Fund will limit its investments in
 
 
<PAGE>
 
   Hybrid Instruments to 10% of total assets. However, because of their
   volatility, it is possible that the Fund's investment in Hybrid Instruments
   will account for more than 10% of the Fund's return (positive or negative).
 
 
                        Illiquid or Restricted Securities
 
   Restricted securities may be sold only in privately negotiated transactions
   or in a public offering with respect to which a registration statement is in
   effect under the Securities Act of 1933 (the "1933 Act"). Where registration
   is required, the Fund may be obligated to pay all or part of the registration
   expenses, and a considerable period may elapse between the time of the
   decision to sell and the time the Fund may be permitted to sell a security
   under an effective registration statement. If, during such a period, adverse
   market conditions were to develop, the Fund might obtain a less favorable
   price than prevailed when it decided to sell. Restricted securities will be
   priced at fair value as determined in accordance with procedures prescribed
   by the Fund's Board of Directors/Trustees. If, through the appreciation of
   illiquid securities or the depreciation of liquid securities, the Fund should
   be in a position where more than 15% of the value of its net assets is
   invested in illiquid assets, including restricted securities, the Fund will
   take appropriate steps to protect liquidity.
 
   Notwithstanding the above, the Fund may purchase securities which, while
   privately placed, are eligible for purchase and sale under Rule 144A under
   the 1933 Act. This rule permits certain qualified institutional buyers, such
   as the Fund, to trade in privately placed securities even though such
   securities are not registered under the 1933 Act. T. Rowe Price, under the
   supervision of the Fund's Board of Directors/Trustees, will consider whether
   securities purchased under Rule 144A are illiquid and thus subject to the
   Fund's restriction of investing no more than 15% of its net assets in
   illiquid securities. A determination of whether a Rule 144A security is
   liquid or not is a question of fact. In making this determination, T. Rowe
   Price will consider the trading markets for the specific security taking into
   account the unregistered nature of a Rule 144A security. In addition, T. Rowe
   Price could consider the following: (1) frequency of trades and quotes; (2)
   number of dealers and potential purchases; (3) dealer undertakings to make a
   market; and (4) the nature of the security and of marketplace trades (e.g.,
   the time needed to dispose of the security, the method of soliciting offers,
   and the mechanics of transfer). The liquidity of Rule 144A securities would
   be monitored and, if as a result of changed conditions it is determined that
   a Rule 144A security is no longer liquid, the Fund's holdings of illiquid
   securities would be reviewed to determine what, if any, steps are required to
   assure that the Fund does not invest more than 15% of its net assets in
   illiquid securities. Investing in Rule 144A securities could have the effect
   of increasing the amount of the Fund's assets invested in illiquid securities
   if qualified institutional buyers are unwilling to purchase such securities.
 
 
                                    Warrants
 
   The Fund may acquire warrants. Warrants 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.
 
 
                                 Debt Securities
 
   Balanced, Blue Chip Growth, Capital Appreciation, Capital Opportunity,
   Dividend Growth, Equity Income, Financial Services, Growth & Income, Health
   Sciences, Media & Telecommunications, Mid-Cap Value, New Era, Real Estate,
   Small-Cap Stock, Small-Cap Value, and Value Funds
 
   Debt Obligations Although a majority of the 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, the size of a particular
   offering, the maturity of the obligation, and the credit quality and rating
   of the issuer. Debt securities with longer maturities tend to have higher
   yields and are generally subject to
 
 
<PAGE>
 
   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 the 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 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 the 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 its
   investment objective.
 
   After purchase by the Fund, a debt security may cease to be rated or its
   rating may be reduced below the minimum required for purchase by the Fund.
   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.
 
   Special Risks of High-Yield Investing The Fund may invest in low-quality
   bonds commonly referred to as "junk bonds." Junk bonds are regarded as
   predominantly speculative with respect to the issuer's continuing ability to
   meet principal and interest payments. Because investment in low- and
   lower-medium-quality bonds involves greater investment risk, to the extent
   the Fund invests in such bonds, achievement of its investment objective will
   be more dependent on T. Rowe Price's credit analysis than would be the case
   if the Fund were investing in higher-quality bonds. High-yield bonds may be
   more susceptible to real or perceived adverse economic conditions than
   investment-grade bonds. A projection of an economic downturn, or higher
   interest rates, for example, could cause a decline in high-yield bond prices
   because the advent of such events could lessen the ability of highly
   leveraged issuers to make principal and interest payments on their debt
   securities. In addition, the secondary trading market for high-yield bonds
   may be less liquid than the market for higher-grade bonds, which can
   adversely affect the ability of a Fund to dispose of its portfolio
   securities. Bonds for which there is only a "thin" market can be more
   difficult to value inasmuch as objective pricing data may be less available
   and judgment may play a greater role in the valuation process.
 
   Fixed income securities in which the Fund 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; the remainder
   are supported only by the credit of the instrumentality, which may or may not
   include the right of the issuer to borrow from the Treasury.
 
  . Bank Obligations Certificates of deposit, bankers' acceptances, and other
   short-term debt obligations. Certificates of deposit are short-term
   obligations of commercial banks. A bankers' acceptance is a time draft drawn
   on a commercial bank by a borrower, usually in connection with international
   commercial transactions. Certificates of deposit may have fixed or variable
   rates. The Fund may invest in U.S. banks, foreign branches of U.S. banks,
   U.S. branches of foreign banks, and foreign branches of foreign banks.
 
 
<PAGE>
 
  . Short-Term Corporate Debt Securities Outstanding nonconvertible corporate
   debt securities (e.g., bonds and debentures) which have one year or less
   remaining to maturity. 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,
   province, instrumentality, 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.
 
 
             When-Issued Securities and Forward Commitment Contracts
 
   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 When-Issueds, but may be substantially longer for Forwards.
   During the period between purchase and settlement, no payment is made by the
   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, liquid, high-grade debt securities, or
   other suitable cover as permitted by the SEC 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.
 
 
                           Mortgage-Related Securities
 
   Balanced and Real Estate Funds
 
   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 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
 
 
<PAGE>
 
   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.
 
  . 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") 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 it 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 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
   Certificates are not supported by the full faith and credit of the U.S.
   government; rather, Farmer Mac may borrow 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 recessions and rising
 
 
<PAGE>
 
   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 in 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 semiannual 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.
 
  . 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 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.
 
   In recent years, new types of CMO structures have evolved. These include
   floating rate CMOs, planned amortization classes, accrual bonds and CMO
   residuals. These newer structures affect the amount and timing of principal
   and interest received by each tranche from the underlying collateral. Under
   certain of these new 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.
 
 
<PAGE>
 
  . 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.
 
  . 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.
 
  . Stripped Mortgage-Backed Securities These instruments are a type of
   potentially high-risk derivative. They 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 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 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. For example, 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 fully recoup
   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 SEC 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.    
 
 
<PAGE>
 
   
   Under the staff's position, the determination of whether a particular
   government-issued IO or PO backed by fixed rate mortgages is liquid 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 nongovernment-issued IOs and POs not backed by fixed or adjustable rate
   mortgages as illiquid unless and until the SEC staff modifies its position.
    
 
 
                             Asset-Backed Securities
 
   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 as pass-through certificates or collateralized
   obligations.
 
   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.
 
 
                            Real Estate and REIT Risk
 
   Primarily Real Estate Fund (but also any other Fund investing in REITs)
   Investors in the Fund may experience many of the same risks involved with
   investing in real estate directly. These risks include: declines in real
   estate values, risks related to local or general economic conditions,
   particularly lack of demand, overbuilding and increased competition,
   increases in property taxes and operating expenses, changes in zoning laws,
   heavy cash flow dependency, possible lack of availability of mortgage funds,
   obsolescence, losses due to natural disasters, condemnation of properties,
   regulatory limitations on rents and fluctuations in rental income, variations
   in market rental rates, and possible environmental liabilities. Real Estate
   Investment Trusts ("REITs") may own real estate properties (Equity REITs) and
   be subject to these risks directly, or may make or purchase mortgages
   (Mortgage REITs) and be subject to these risks indirectly through underlying
   construction, development, and long-term mortgage loans that may default or
   have payment problems.
 
   Equity REITs can be affected by rising interest rates that may cause
   investors to demand a high annual yield from future distributions which, in
   turn, could decrease the market prices for the REITs. In addition, rising
   interest rates also increase the costs of obtaining financing for real estate
   projects. Since many real estate
 
 
<PAGE>
 
   projects are dependent upon receiving financing, this could cause the value
   of the Equity REITs in which the Fund invests to decline.
 
   Mortgage REITs may hold mortgages that the mortgagors elect to prepay during
   periods of declining interest rates which may diminish the yield on such
   REITs. In addition, borrowers may not be able to repay mortgages when due
   which could have a negative effect on the Fund.
 
   Some REITs have relatively small market capitalizations which could increase
   their volatility. REITs tend to be dependent upon specialized management
   skills and have limited diversification so they are subject to risks inherent
   in operating and financing a limited number of properties. In addition, when
   the Fund invests in REITs, a shareholder will bear his proportionate share of
   fund expenses and, indirectly bear similar expenses of the REITs. REITs
   depend generally on their ability to generate cash flow to make distributions
   to shareholders. In addition, both equity and mortgage REITs are subject to
   the risks of failing to qualify for tax-free status of income under the Code
   or failing to maintain exemption from the 1940 Act.
 
 
 
 PORTFOLIO MANAGEMENT PRACTICES
 -------------------------------------------------------------------------------
 
                         Lending of Portfolio Securities
 
   Securities loans are made to broker-dealers or institutional investors or
   other persons, pursuant to agreements requiring that the loans be
   continuously secured by collateral at least equal at all times to the value
   of the securities lent, marked to market on a daily basis. The collateral
   received will consist of cash, U.S. government securities, letters of credit
   or such other collateral as may be permitted under its investment program.
   While the securities are being lent, the Fund will continue to receive the
   equivalent of the interest or dividends paid by the issuer on the securities,
   as well as interest on the investment of the collateral or a fee from the
   borrower. The Fund has a right to call each loan and obtain the securities,
   within such period of time which coincides with the normal settlement period
   for purchases and sales of such securities in the respective markets. The
   Fund will not have the right to vote on securities while they are being lent,
   but it will call a loan in anticipation of any important vote. The risks in
   lending portfolio securities, as with other extensions of secured credit,
   consist of possible delay in receiving additional collateral or in the
   recovery of the securities or possible loss of rights in the collateral
   should the borrower fail financially. Loans will only be made to firms deemed
   by T. Rowe Price to be of good standing and will not be made unless, in the
   judgment of T. Rowe Price, the consideration to be earned from such loans
   would justify the risk.
 
 
                         Interfund Borrowing and Lending
 
   The Fund is a party to an exemptive order received from the SEC on December
   8, 1998, that permits it to borrow money from and/or lend money to other
   funds in the T. Rowe Price complex ("Price Funds"). All loans are set at an
   interest rate between the rate charged on overnight repurchase agreements and
   short-term bank loans. All loans are subject to numerous conditions designed
   to ensure fair and equitable treatment of all participating funds. The
   program is subject to the oversight and periodic review of the Boards of
   Directors of the Price Funds.
 
 
                              Repurchase Agreements
 
   The Fund may enter into a repurchase agreement through which an investor
   (such as the Fund) purchases a security (known as the "underlying security")
   from a well-established securities dealer or a bank that is a member of the
   Federal Reserve System. Any such dealer or bank will be on T. Rowe Price's
   approved list and have a credit rating with respect to its short-term debt of
   at least A1 by S&P, P1 by Moody's, or the equivalent rating by T. Rowe Price.
   At that time, the bank or securities dealer agrees to repurchase the
   underlying security at the same price, plus specified interest. Repurchase
   agreements are generally for a short period of time, often less than a week.
   Repurchase agreements which do not provide for payment within seven days will
   be treated as illiquid securities. The Fund will only enter into repurchase
   agreements where (1) the underlying securities are of the type (excluding
   maturity limitations) which the Fund's investment guidelines would allow it
   to purchase directly, (2) the market value of the underlying security,
   including interest
 
 
<PAGE>
 
   accrued, will be at all times equal to or exceed the value of the repurchase
   agreement, and (3) payment for the underlying security is made only upon
   physical delivery or evidence of book-entry transfer to the account of the
   custodian or a bank acting as agent. In the event of a bankruptcy or other
   default of a seller of a repurchase agreement, the Fund could experience both
   delays in liquidating the underlying security and losses, including: (a)
   possible decline in the value of the underlying security during the period
   while the Fund seeks to enforce its rights thereto; (b) possible subnormal
   levels of income and lack of access to income during this period; and (c)
   expenses of enforcing its rights.
 
 
                          Reverse Repurchase Agreements
 
   Although the Fund has no current intention of engaging in reverse repurchase
   agreements, the Fund reserves the right to do so. Reverse repurchase
   agreements are ordinary repurchase agreements in which a Fund is the seller
   of, rather than the investor in, securities, and agrees to repurchase them at
   an agreed upon time and price. Use of a reverse repurchase agreement may be
   preferable to a regular sale and later repurchase of the securities because
   it avoids certain market risks and transaction costs. A reverse repurchase
   agreement may be viewed as a type of borrowing by the Fund, subject to
   Investment Restriction (1). (See "Investment Restrictions.")
 
 
                              Money Market Reserves
 
   It is expected that the Fund will invest its cash reserves primarily in one
   or more money market funds established for the exclusive use of the T. Rowe
   Price family of mutual funds and other clients of T. Rowe Price and
   Price-Fleming. Currently, two such money market funds are in
   operation-Reserve Investment Fund ("RIF") and Government Reserve Investment
   Fund ("GRF"), each a series of the Reserve Investment Funds, Inc. Additional
   series may be created in the future. These funds were created and operate
   under an Exemptive Order issued by the SEC (Investment Company Act Release
   No. IC-22770, July 29, 1997).
 
   Both funds must comply with the requirements of Rule 2a-7 under the 1940 Act
   governing money market funds. The RIF invests at least 95% of its total
   assets in prime money market instruments receiving the highest credit rating.
   The GRF invests primarily in a portfolio of U.S. government-backed
   securities, primarily U.S. Treasuries, and repurchase agreements thereon.
 
   The RIF and GRF provide a very efficient means of managing the cash reserves
   of the Fund. While neither RIF or GRF pay an advisory fee to the Investment
   Manager, they will incur other expenses. However, the RIF and GRF are
   expected by T. Rowe Price to operate at very low expense ratios. The Fund
   will only invest in RIF or GRF to the extent it is consistent with its
   objective and program.
 
   Neither fund is insured or guaranteed by the U.S. government, and there is no
   assurance they will maintain a stable net asset value of $1.00 per share.
 
   All Funds except Equity Index 500, Extended Equity Market Index, and Total
   Equity Market Index Funds
 
 
                                     Options
 
   Options are a type of potentially high-risk derivative.
 
 
                          Writing Covered Call Options
 
   The Fund may write (sell) American or European style "covered" call options
   and purchase options to close out options previously written by the Fund. In
   writing covered call options, the Fund expects to generate additional premium
   income which should serve to enhance the Fund's total return and reduce the
   effect of any price decline of the security or currency involved in the
   option. Covered call options will generally be written on securities or
   currencies which, in T. Rowe Price's opinion, are not expected to have any
   major price increases or moves in the near future but which, over the long
   term, are deemed to be attractive investments for the Fund.
 
   A call option gives the holder (buyer) the "right to purchase" a security or
   currency at a specified price (the exercise price) at expiration of the
   option (European style) or at any time until a certain date (the expiration
   date) (American style). So long as the obligation of the writer of a call
   option continues, he may be assigned
 
 
<PAGE>
 
   an exercise notice by the broker-dealer through whom such option was sold,
   requiring him to deliver the underlying security or currency against payment
   of the exercise price. This obligation terminates upon the expiration of the
   call option, or such earlier time at which the writer effects a closing
   purchase transaction by repurchasing an option identical to that previously
   sold. To secure his obligation to deliver the underlying security or currency
   in the case of a call option, a writer is required to deposit in escrow the
   underlying security or currency or other assets in accordance with the rules
   of a clearing corporation.
 
   
   The Fund generally will write only covered call options. This means that the
   Fund will either own the security or currency subject to the option or an
   option to purchase the same underlying security or currency, having an
   exercise price equal to or less than the exercise price of the "covered"
   option. From time to time, the Fund will write a call option that is not
   covered as indicated above but where the Fund will establish and maintain
   with its custodian for the term of the option, an account consisting of cash,
   U.S. government securities, other liquid high-grade debt obligations, or
   other suitable cover as permitted by the SEC having a value equal to the
   fluctuating market value of the optioned securities or currencies. While such
   an option would be "covered" with sufficient collateral to satisfy SEC
   prohibitions on issuing senior securities, this type of strategy would expose
   the Fund to the risks of writing uncovered options.
 
   Portfolio securities or currencies on which call options may be written will
   be purchased solely on the basis of investment considerations consistent with
   the Fund's investment objective. The writing of covered call options is a
   conservative investment technique believed to involve relatively little risk
   (in contrast to the writing of naked or uncovered options, which the Fund
   generally will not do), but capable of enhancing the Fund's total return.
   When writing a covered call option, a Fund, in return for the premium, gives
   up the opportunity for profit from a price increase in the underlying
   security or currency above the exercise price, but conversely retains the
   risk of loss should the price of the security or currency decline. Unlike one
   who owns securities or currencies not subject to an option, the Fund has no
   control over when it may be required to sell the underlying securities or
   currencies, since it may be assigned an exercise notice at any time prior to
   the expiration of its obligation as a writer. If a call option which the Fund
   has written expires, the Fund will realize a gain in the amount of the
   premium; however, such gain may be offset by a decline in the market value of
   the underlying security or currency during the option period. If the call
   option is exercised, the Fund will realize a gain or loss from the sale of
   the underlying security or currency. The Fund does not consider a security or
   currency covered by a call to be "pledged" as that term is used in the Fund's
   policy which limits the pledging or mortgaging of its assets. If the Fund
   writes an uncovered option as described above, it will bear the risk of
   having to purchase the security subject to the option at a price higher than
   the exercise price of the option. As the price of a security could appreciate
   substantially, the Fund's loss could be significant.    
 
   The premium received is the market value of an option. The premium the Fund
   will receive from writing a call option will reflect, among other things, the
   current market price of the underlying security or currency, the relationship
   of the exercise price to such market price, the historical price volatility
   of the underlying security or currency, and the length of the option period.
   Once the decision to write a call option has been made, T. Rowe Price, in
   determining whether a particular call option should be written on a
   particular security or currency, will consider the reasonableness of the
   anticipated premium and the likelihood that a liquid secondary market will
   exist for those options. The premium received by the Fund for writing covered
   call options will be recorded as a liability of the Fund. This liability will
   be adjusted daily to the option's current market value, which will be the
   latest sale price at the time at which the net asset value per share of the
   Fund is computed (close of the New York Stock Exchange), or, in the absence
   of such sale, the latest asked price. The option will be terminated upon
   expiration of the option, the purchase of an identical option in a closing
   transaction, or delivery of the underlying security or currency upon the
   exercise of the option.
 
   Closing transactions will be effected in order to realize a profit on an
   outstanding call option, to prevent an underlying security or currency from
   being called, or, to permit the sale of the underlying security or currency.
   Furthermore, effecting a closing transaction will permit the Fund to write
   another call option on the underlying security or currency with either a
   different exercise price or expiration date or both. If the Fund desires to
   sell a particular security or currency from its portfolio on which it has
   written a call option, or purchased a put option, it will seek to effect a
   closing transaction prior to, or concurrently with, the sale of the security
   or currency. There is, of course, no assurance that the Fund will be able to
   effect such closing
 
 
<PAGE>
 
   transactions at favorable prices. If the Fund cannot enter into such a
   transaction, it may be required to hold a security or currency that it might
   otherwise have sold. When the Fund writes a covered call option, it runs the
   risk of not being able to participate in the appreciation of the underlying
   securities or currencies above the exercise price, as well as the risk of
   being required to hold on to securities or currencies that are depreciating
   in value. This could result in higher transaction costs. The Fund will pay
   transaction costs in connection with the writing of options to close out
   previously written options. Such transaction costs are normally higher than
   those applicable to purchases and sales of portfolio securities.
 
   Call options written by the Fund will normally have expiration dates of less
   than nine months from the date written. The exercise price of the options may
   be below, equal to, or above the current market values of the underlying
   securities or currencies at the time the options are written. From time to
   time, the Fund may purchase an underlying security or currency for delivery
   in accordance with an exercise notice of a call option assigned to it, rather
   than delivering such security or currency from its portfolio. In such cases,
   additional costs may be incurred.
 
   The Fund will realize a profit or loss from a closing purchase transaction if
   the cost of the transaction is less or more than the premium received from
   the writing of the option. Because increases in the market price of a call
   option will generally reflect increases in the market price of the underlying
   security or currency, any loss resulting from the repurchase of a call option
   is likely to be offset in whole or in part by appreciation of the underlying
   security or currency owned by the Fund.
 
   The Fund will not write a covered call option if, as a result, the aggregate
   market value of all portfolio securities or currencies covering written call
   or put options exceeds 25% of the market value of the Fund's net assets. In
   calculating the 25% limit, the Fund will offset, against the value of assets
   covering written calls and puts, the value of purchased calls and puts on
   identical securities or currencies with identical maturity dates.
 
 
                           Writing Covered Put Options
 
   The Fund may write American or European style covered put options and
   purchase options to close out options previously written by the Fund. A put
   option gives the purchaser of the option the right to sell, and the writer
   (seller) has the obligation to buy, the underlying security or currency at
   the exercise price during the option period (American style) or at the
   expiration of the option (European style). So long as the obligation of the
   writer continues, he may be assigned an exercise notice by the broker-dealer
   through whom such option was sold, requiring him to make payment to the
   exercise price against delivery of the underlying security or currency. The
   operation of put options in other respects, including their related risks and
   rewards, is substantially identical to that of call options.
 
   The Fund would write put options only on a covered basis, which means that
   the Fund would maintain in a segregated account cash, U.S. government
   securities, other liquid high-grade debt obligations, or other suitable cover
   as determined by the SEC, in an amount not less than the exercise price or
   the Fund will own an option to sell the underlying security or currency
   subject to the option having an exercise price equal to or greater than the
   exercise price of the "covered" option at all times while the put option is
   outstanding. (The rules of a clearing corporation currently require that such
   assets be deposited in escrow to secure payment of the exercise price.)
 
   The Fund would generally write covered put options in circumstances where T.
   Rowe Price wishes to purchase the underlying security or currency for the
   Fund's portfolio at a price lower than the current market price of the
   security or currency. In such event the Fund would write a put option at an
   exercise price which, reduced by the premium received on the option, reflects
   the lower price it is willing to pay. Since the Fund would also receive
   interest on debt securities or currencies maintained to cover the exercise
   price of the option, this technique could be used to enhance current return
   during periods of market uncertainty. The risk in such a transaction would be
   that the market price of the underlying security or currency would decline
   below the exercise price less the premiums received. Such a decline could be
   substantial and result in a significant loss to the Fund. In addition, the
   Fund, because it does not own the specific securities or currencies which it
   may be required to purchase in exercise of the put, cannot benefit from
   appreciation, if any, with respect to such specific securities or currencies.
 
 
<PAGE>
 
   The Fund will not write a covered put option if, as a result, the aggregate
   market value of all portfolio securities or currencies covering put or call
   options exceeds 25% of the market value of the Fund's net assets. In
   calculating the 25% limit, the Fund will offset, against the value of assets
   covering written puts and calls, the value of purchased puts and calls on
   identical securities or currencies with identical maturity dates.
 
 
                             Purchasing Put Options
 
   The Fund may purchase American or European style put options. As the holder
   of a put option, the Fund has the right to sell the underlying security or
   currency at the exercise price at any time during the option period (American
   style) or at the expiration of the option (European style). The Fund may
   enter into closing sale transactions with respect to such options, exercise
   them or permit them to expire. The Fund may purchase put options for
   defensive purposes in order to protect against an anticipated decline in the
   value of its securities or currencies. An example of such use of put options
   is provided next.
 
   The Fund may purchase a put option on an underlying security or currency (a
   "protective put") owned by the Fund as a defensive technique in order to
   protect against an anticipated decline in the value of the security or
   currency. Such hedge protection is provided only during the life of the put
   option when the Fund, as the holder of the put option, is able to sell the
   underlying security or currency at the put exercise price regardless of any
   decline in the underlying security's market price or currency's exchange
   value. For example, a put option may be purchased in order to protect
   unrealized appreciation of a security or currency where T. Rowe Price deems
   it desirable to continue to hold the security or currency because of tax
   considerations. The premium paid for the put option and any transaction costs
   would reduce any capital gain otherwise available for distribution when the
   security or currency is eventually sold.
 
   The Fund may also purchase put options at a time when the Fund does not own
   the underlying security or currency. By purchasing put options on a security
   or currency it does not own, the Fund seeks to benefit from a decline in the
   market price of the underlying security or currency. If the put option is not
   sold when it has remaining value, and if the market price of the underlying
   security or currency remains equal to or greater than the exercise price
   during the life of the put option, the Fund will lose its entire investment
   in the put option. In order for the purchase of a put option to be
   profitable, the market price of the underlying security or currency must
   decline sufficiently below the exercise price to cover the premium and
   transaction costs, unless the put option is sold in a closing sale
   transaction.
 
   The Fund will not commit more than 5% of its assets to premiums when
   purchasing put and call options. The premium paid by the Fund when purchasing
   a put option will be recorded as an asset of the Fund. This asset will be
   adjusted daily to the option's current market value, which will be the latest
   sale price at the time at which the net asset value per share of the Fund is
   computed (close of New York Stock Exchange), or, in the absence of such sale,
   the latest bid price. This asset will be terminated upon expiration of the
   option, the selling (writing) of an identical option in a closing
   transaction, or the delivery of the underlying security or currency upon the
   exercise of the option.
 
 
                             Purchasing Call Options
 
   The Fund may purchase American or European style call options. As the holder
   of a call option, the Fund has the right to purchase the underlying security
   or currency at the exercise price at any time during the option period
   (American style) or at the expiration of the option (European style). The
   Fund may enter into closing sale transactions with respect to such options,
   exercise them or permit them to expire. The Fund may purchase call options
   for the purpose of increasing its current return or avoiding tax consequences
   which could reduce its current return. The Fund may also purchase call
   options in order to acquire the underlying securities or currencies. Examples
   of such uses of call options are provided next.
 
   Call options may be purchased by the Fund for the purpose of acquiring the
   underlying securities or currencies for its portfolio. Utilized in this
   fashion, the purchase of call options enables the Fund to acquire the
   securities or currencies at the exercise price of the call option plus the
   premium paid. At times the net cost of acquiring securities or currencies in
   this manner may be less than the cost of acquiring the securities or
   currencies directly. This technique may also be useful to the Fund in
   purchasing a large block of securities or currencies that would be more
   difficult to acquire by direct market purchases. So long as it holds such a
   call
 
 
<PAGE>
 
   option rather than the underlying security or currency itself, the Fund is
   partially protected from any unexpected decline in the market price of the
   underlying security or currency and in such event could allow the call option
   to expire, incurring a loss only to the extent of the premium paid for the
   option.
 
   The Fund will not commit more than 5% of its assets to premiums when
   purchasing call and put options. The Fund may also purchase call options on
   underlying securities or currencies it owns in order to protect unrealized
   gains on call options previously written by it. A call option would be
   purchased for this purpose where tax considerations make it inadvisable to
   realize such gains through a closing purchase transaction. Call options may
   also be purchased at times to avoid realizing losses.
 
 
                        Dealer (Over-the-Counter) Options
 
   The Fund may engage in transactions involving dealer options. Certain risks
   are specific to dealer options. While the Fund would look to a clearing
   corporation to exercise exchange-traded options, if the Fund were to purchase
   a dealer option, it would rely on the dealer from whom it purchased the
   option to perform if the option were exercised. Failure by the dealer to do
   so would result in the loss of the premium paid by the Fund as well as loss
   of the expected benefit of the transaction.
 
   Exchange-traded options generally have a continuous liquid market while
   dealer options have none. Consequently, the Fund will generally be able to
   realize the value of a dealer option it has purchased only by exercising it
   or reselling it to the dealer who issued it. Similarly, when the Fund writes
   a dealer option, it generally will be able to close out the option prior to
   its expiration only by entering into a closing purchase transaction with the
   dealer to which the Fund originally wrote the option. While the Fund will
   seek to enter into dealer options only with dealers who will agree to and
   which are expected to be capable of entering into closing transactions with
   the Fund, there can be no assurance that the Fund will be able to liquidate a
   dealer option at a favorable price at any time prior to expiration. Until the
   Fund, as a covered dealer call option writer, is able to effect a closing
   purchase transaction, it will not be able to liquidate securities (or other
   assets) or currencies used as cover until the option expires or is exercised.
   In the event of insolvency of the contra party, the Fund may be unable to
   liquidate a dealer option. With respect to options written by the Fund, the
   inability to enter into a closing transaction may result in material losses
   to the Fund. For example, since the Fund must maintain a secured position
   with respect to any call option on a security it writes, the Fund may not
   sell the assets which it has segregated to secure the position while it is
   obligated under the option. This requirement may impair a Fund's ability to
   sell portfolio securities or currencies at a time when such sale might be
   advantageous.
 
   The Staff of the SEC has taken the position that purchased dealer options and
   the assets used to secure the written dealer options are illiquid securities.
   The Fund may treat the cover used for written Over-the-Counter ("OTC")
   options as liquid if the dealer agrees that the Fund may repurchase the OTC
   option it has written for a maximum price to be calculated by a predetermined
   formula. In such cases, the OTC option would be considered illiquid only to
   the extent the maximum repurchase price under the formula exceeds the
   intrinsic value of the option.
 
   (Equity Index 500, Extended Equity Market Index, and Total Equity Market
   Index Funds)
 
 
                                     Options
 
   Options are a type of potentially high-risk derivative.
 
   The only option activity the Funds currently may engage in is the purchase of
   S&P 500 call options for the Equity Index 500 Fund, or the purchases of call
   options on any indices that may be consistent with the investment programs
   for the Extended Equity Market Index and Total Equity Market Index Funds.
   Such activity is subject to the same risks described above under "Purchasing
   Call Options." However, the Funds reserve the right to engage in other
   options activity.
 
 
<PAGE>
 
   All Funds
 
 
                                Futures Contracts
 
   Futures contracts are a type of potentially high-risk derivative.
 
   Transactions in Futures
 
   The Fund may enter into futures contracts including stock index, interest
   rate, and currency futures ("futures" or "futures contracts").
 
   The New Era Fund may also enter into futures contracts on commodities related
   to the types of companies in which it invests, such as oil and gold futures.
   The Equity Index 500, Extended Equity Market Index, and Total Equity Market
   Index Funds may only enter into stock index futures which are appropriate for
   their investment programs to provide an efficient means of maintaining
   liquidity while being invested in the market, to facilitate trading, or to
   reduce transaction costs. They will not use futures for hedging purposes.
   Otherwise the nature of such futures and the regulatory limitations and risks
   to which they are subject are the same as those described below.
 
   Stock index futures contracts may be used to provide a hedge for a portion of
   the Fund's portfolio, as a cash management tool, or as an efficient way for
   T. Rowe Price to implement either an increase or decrease in portfolio market
   exposure in response to changing market conditions. The Fund may purchase or
   sell futures contracts with respect to any stock index. Nevertheless, to
   hedge the Fund's portfolio successfully, the Fund must sell futures contacts
   with respect to indices or subindices whose movements will have a significant
   correlation with movements in the prices of the Fund's portfolio securities.
 
   Interest rate or currency futures contracts may be used as a hedge against
   changes in prevailing levels of interest rates or currency exchange rates in
   order to establish more definitely the effective return on securities or
   currencies held or intended to be acquired by the Fund. In this regard, the
   Fund could sell interest rate or currency futures as an offset against the
   effect of expected increases in interest rates or currency exchange rates and
   purchase such futures as an offset against the effect of expected declines in
   interest rates or currency exchange rates.
 
   The Fund will enter into futures contracts which are traded on national or
   foreign futures exchanges, and are standardized as to maturity date and
   underlying financial instrument. Futures exchanges and trading in the United
   States are regulated under the Commodity Exchange Act by the CFTC. Although
   techniques other than the sale and purchase of futures contracts could be
   used for the above-referenced purposes, futures contracts offer an effective
   and relatively low cost means of implementing the Fund's objectives in these
   areas.
 
   Regulatory Limitations
   If the Fund purchases or sells futures contracts or related options which do
   not qualify as bona fide hedging under applicable CFTC rules, the aggregate
   initial margin deposits and premium required to establish those positions
   cannot exceed 5% of the liquidation value of the Fund after taking into
   account unrealized profits and unrealized losses on any such contracts it has
   entered into; provided, however, that in the case of an option that is
   in-the-money at the time of purchase, the in-the-money amount may be excluded
   in calculating the 5% limitation. For purposes of this policy, options on
   futures contracts and foreign currency options traded on a commodities
   exchange will be considered "related options." This policy may be modified by
   the Board of Directors/Trustees without a shareholder vote and does not limit
   the percentage of the Fund's assets at risk to 5%.
 
   In instances involving the purchase of futures contracts or the writing of
   call or put options thereon by the Fund, an amount of cash, liquid assets, or
   other suitable cover as permitted by the SEC, equal to the market value of
   the futures contracts and options thereon (less any related margin deposits),
   will be identified by the Fund to cover the position, or alternative cover
   (such as owning an offsetting position) will be employed. Assets used as
   cover or held in an identified account cannot be sold while the position in
   the corresponding option or future is open, unless they are replaced with
   similar assets. As a result, the commitment of a large portion of a Fund's
   assets to cover or identified accounts could impede portfolio management or
   the Fund's ability to meet redemption requests or other current obligations.
 
 
<PAGE>
 
   If the CFTC or other regulatory authorities adopt different (including less
   stringent) or additional restrictions, the Fund would comply with such new
   restrictions.
 
   Trading in Futures Contracts
   A futures contract provides for the future sale by one party and purchase by
   another party of a specified amount of a specific financial instrument (e.g.,
   units of a stock index) for a specified price, date, time and place
   designated at the time the contract is made. Brokerage fees are incurred when
   a futures contract is bought or sold and margin deposits must be maintained.
   Entering into a contract to buy is commonly referred to as buying or
   purchasing a contract or holding a long position. Entering into a contract to
   sell is commonly referred to as selling a contract or holding a short
   position.
 
   Unlike when the Fund purchases or sells a security, no price would be paid or
   received by the Fund upon the purchase or sale of a futures contract. Upon
   entering into a futures contract, and to maintain the Fund's open positions
   in futures contracts, the Fund would be required to deposit with its
   custodian in a segregated account in the name of the futures broker an amount
   of cash, or liquid assets known as "initial margin." The margin required for
   a particular futures contract is set by the exchange on which the contract is
   traded, and may be significantly modified from time to time by the exchange
   during the term of the contract. Futures contracts are customarily purchased
   and sold on margins that may range upward from less than 5% of the value of
   the contract being traded.
 
   If the price of an open futures contract changes (by increase in the case of
   a sale or by decrease in the case of a purchase) so that the loss on the
   futures contract reaches a point at which the margin on deposit does not
   satisfy margin requirements, the broker will require an increase in the
   margin. However, if the value of a position increases because of favorable
   price changes in the futures contract so that the margin deposit exceeds the
   required margin, the broker will pay the excess to the Fund.
 
   These subsequent payments, called "variation margin," to and from the futures
   broker, are made on a daily basis as the price of the underlying assets
   fluctuate, making the long and short positions in the futures contract more
   or less valuable, a process known as "marking to market."
 
   Although certain futures contracts, by their terms, require actual future
   delivery of and payment for the underlying instruments, in practice most
   futures contracts are usually closed out before the delivery date. Closing
   out an open futures contract purchase or sale is effected by entering into an
   offsetting futures contract sale or purchase, respectively, for the same
   aggregate amount of the identical securities and the same delivery date. If
   the offsetting purchase price is less than the original sale price, the Fund
   realizes a gain; if it is more, the Fund realizes a loss. Conversely, if the
   offsetting sale price is more than the original purchase price, the Fund
   realizes a gain; if it is less, the Fund realizes a loss. The transaction
   costs must also be included in these calculations. There can be no assurance,
   however, that the Fund will be able to enter into an offsetting transaction
   with respect to a particular futures contract at a particular time. If the
   Fund is not able to enter into an offsetting transaction, the Fund will
   continue to be required to maintain the margin deposits on the futures
   contract.
 
   For example, the S&P's 500 Stock Index is made up of 500 selected common
   stocks, most of which are listed on the New York Stock Exchange. The S&P 500
   Index assigns relative weightings to the common stocks included in the Index,
   and the Index fluctuates with changes in the market values of those common
   stocks. In the case of futures contracts on the S&P 500 Index, the contracts
   are to buy or sell 250 units. Thus, if the value of the S&P 500 Index were
   $150, one contract would be worth $37,500 (250 units x $150). The stock index
   futures contract specifies that no delivery of the actual stocks making up
   the index will take place. Instead, settlement in cash occurs. Over the life
   of the contract, the gain or loss realized by the Fund will equal the
   difference between the purchase (or sale) price of the contract and the price
   at which the contract is terminated. For example, if the Fund enters into a
   futures contract to buy 250 units of the S&P 500 Index at a specified future
   date at a contract price of $150 and the S&P 500 Index is at $154 on that
   future date, the Fund will gain $1,000 (250 units x gain of $4). If the Fund
   enters into a futures contract to sell 250 units of the stock index at a
   specified future date at a contract price of $150 and the S&P 500 Index is at
   $152 on that future date, the Fund will lose $500 (250 units x loss of $2).
 
 
<PAGE>
 
               Special Risks of Transactions in Futures Contracts
 
  . Volatility and Leverage The prices of futures contracts are volatile and are
   influenced, among other things, by actual and anticipated changes in the
   market and interest rates, which in turn are affected by fiscal and monetary
   policies and national and international political and economic events.
 
   Most United States futures exchanges limit the amount of fluctuation
   permitted in futures contract prices during a single trading day. The daily
   limit establishes the maximum amount that the price of a futures contract may
   vary either up or down from the previous day's settlement price at the end of
   a trading session. Once the daily limit has been reached in a particular type
   of futures contract, no trades may be made on that day at a price beyond that
   limit. The daily limit governs only price movement during a particular
   trading day and therefore does not limit potential losses, because the limit
   may prevent the liquidation of unfavorable positions. Futures contract prices
   have occasionally moved to the daily limit for several consecutive trading
   days with little or no trading, thereby preventing prompt liquidation of
   futures positions and subjecting some futures traders to substantial losses.
 
   Margin deposits required on futures trading are low. As a result, a
   relatively small price movement in a futures contract may result in immediate
   and substantial loss, as well as gain, to the investor. For example, if at
   the time of purchase, 10% of the value of the futures contract is deposited
   as margin, a subsequent 10% decrease in the value of the futures contract
   would result in a total loss of the margin deposit, before any deduction for
   the transaction costs, if the account were then closed out. A 15% decrease
   would result in a loss equal to 150% of the original margin deposit, if the
   contract were closed out. Thus, a purchase or sale of a futures contract may
   result in losses in excess of the amount invested in the futures contract.
 
  . Liquidity The Fund may elect to close some or all of its futures positions
   at any time prior to their expiration. The Fund would do so to reduce
   exposure represented by long futures positions or short futures positions.
   The Fund may close its positions by taking opposite positions which would
   operate to terminate the Fund's position in the futures contracts. Final
   determinations of variation margin would then be made, additional cash would
   be required to be paid by or released to the Fund, and the Fund would realize
   a loss or a gain.
 
   Futures contracts may be closed out only on the exchange or board of trade
   where the contracts were initially traded. Although the Fund intends to
   purchase or sell futures contracts only on exchanges or boards of trade where
   there appears to be an active market, there is no assurance that a liquid
   market on an exchange or board of trade will exist for any particular
   contract at any particular time. In such event, it might not be possible to
   close a futures contract, and in the event of adverse price movements, the
   Fund would continue to be required to make daily cash payments of variation
   margin. However, in the event futures contracts have been used to hedge the
   underlying instruments, the Fund would continue to hold the underlying
   instruments subject to the hedge until the futures contracts could be
   terminated. In such circumstances, an increase in the price of underlying
   instruments, if any, might partially or completely offset losses on the
   futures contract. However, as described next, there is no guarantee that the
   price of the underlying instruments will, in fact, correlate with the price
   movements in the futures contract and thus provide an offset to losses on a
   futures contract.
 
  . Hedging Risk A decision of whether, when, and how to hedge involves skill
   and judgment, and even a well-conceived hedge may be unsuccessful to some
   degree because of unexpected market behavior, market or interest rate trends.
   There are several risks in connection with the use by the Fund of futures
   contracts as a hedging device. One risk arises because of the imperfect
   correlation between movements in the prices of the futures contracts and
   movements in the prices of the underlying instruments which are the subject
   of the hedge. T. Rowe Price will, however, attempt to reduce this risk by
   entering into futures contracts whose movements, in its judgment, will have a
   significant correlation with movements in the prices of the Fund's underlying
   instruments sought to be hedged.
 
   Successful use of futures contracts by the Fund for hedging purposes is also
   subject to T. Rowe Price's ability to correctly predict movements in the
   direction of the market. It is possible that, when the Fund has sold futures
   to hedge its portfolio against a decline in the market, the index, indices,
   or instruments underlying futures might advance and the value of the
   underlying instruments held in the Fund's portfolio might decline.
 
 
<PAGE>
 
   If this were to occur, the Fund would lose money on the futures and also
   would experience a decline in value in its underlying instruments. However,
   while this might occur to a certain degree, T. Rowe Price believes that over
   time the value of the Fund's portfolio will tend to move in the same
   direction as the market indices used to hedge the portfolio. It is also
   possible that, if the Fund were to hedge against the possibility of a decline
   in the market (adversely affecting the underlying instruments held in its
   portfolio) and prices instead increased, the Fund would lose part or all of
   the benefit of increased value of those underlying instruments that it has
   hedged, because it would have offsetting losses in its futures positions. In
   addition, in such situations, if the Fund had insufficient cash, it might
   have to sell underlying instruments to meet daily variation margin
   requirements. Such sales of underlying instruments might be, but would not
   necessarily be, at increased prices (which would reflect the rising market).
   The Fund might have to sell underlying instruments at a time when it would be
   disadvantageous to do so.
 
   In addition to the possibility that there might be an imperfect correlation,
   or no correlation at all, between price movements in the futures contracts
   and the portion of the portfolio being hedged, the price movements of futures
   contracts might not correlate perfectly with price movements in the
   underlying instruments due to certain market distortions. First, all
   participants in the futures market are subject to margin deposit and
   maintenance requirements. Rather than meeting additional margin deposit
   requirements, investors might close futures contracts through offsetting
   transactions, which could distort the normal relationship between the
   underlying instruments and futures markets. Second, the margin requirements
   in the futures market are less onerous than margin requirements in the
   securities markets and, as a result, the futures market might attract more
   speculators than the securities markets do. Increased participation by
   speculators in the futures market might also cause temporary price
   distortions. Due to the possibility of price distortion in the futures market
   and also because of imperfect correlation between price movements in the
   underlying instruments and movements in the prices of futures contracts, even
   a correct forecast of general market trends by T. Rowe Price might not result
   in a successful hedging transaction over a very short time period.
 
 
                          Options on Futures Contracts
 
   The Fund may purchase and sell options on the same types of futures in which
   it may invest.
 
   Options (another type of potentially high-risk derivative) on futures are
   similar to options on underlying instruments except that options on futures
   give the purchaser the right, in return for the premium paid, to assume a
   position in a futures contract (a long position if the option is a call and a
   short position if the option is a put), rather than to purchase or sell the
   futures contract, at a specified exercise price at any time during the period
   of the option. Upon exercise of the option, the delivery of the futures
   position by the writer of the option to the holder of the option will be
   accompanied by the delivery of the accumulated balance in the writer's
   futures margin account which represents the amount by which the market price
   of the futures contract, at exercise, exceeds (in the case of a call) or is
   less than (in the case of a put) the exercise price of the option on the
   futures contract. Purchasers of options who fail to exercise their options
   prior to the exercise date suffer a loss of the premium paid.
 
   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
   financial indices. 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 Fund 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
   nondiscriminatory manner.
 
 
          Special Risks of Transactions in Options on Futures Contracts
 
   The risks described under "Special Risks in Transactions on Futures
   Contracts" are substantially the same as the risks of using options on
   futures. If the Fund were to write an option on a futures contract, it would
   be required to deposit and maintain initial and variation margin in the same
   manner as a regular futures contract. In addition, where the Fund seeks to
   close out an option position by writing or buying an offsetting option
   covering the same index, underlying instrument or contract and having the
   same exercise price and expiration date, its ability to establish and close
   out positions on such options will be subject to the
 
 
<PAGE>
 
   maintenance of a liquid secondary market. Reasons for the absence of a liquid
   secondary market on an exchange include the following: (1) there may be
   insufficient trading interest in certain options; (2) restrictions may be
   imposed by an exchange on opening transactions or closing transactions or
   both; (3) trading halts, suspensions or other restrictions may be imposed
   with respect to particular classes or series of options, or underlying
   instruments; (4) unusual or unforeseen circumstances may interrupt normal
   operations on an exchange; (5) the facilities of an exchange or a clearing
   corporation may not at all times be adequate to handle current trading
   volume; or (6) one or more exchanges could, for economic or other reasons,
   decide or be compelled at some future date to discontinue the trading of
   options (or a particular class or series of options), in which event the
   secondary market on that exchange (or in the class or series of options)
   would cease to exist, although outstanding options on the exchange that had
   been issued by a clearing corporation as a result of trades on that exchange
   would continue to be exercisable in accordance with their terms. There is no
   assurance that higher than anticipated trading activity or other unforeseen
   events might not, at times, render certain of the facilities of any of the
   clearing corporations inadequate, and thereby result in the institution by an
   exchange of special procedures which may interfere with the timely execution
   of customers' orders.
 
 
                    Additional Futures and Options Contracts
 
   Although the Fund has no current intention of engaging in futures or options
   transactions other than those described above, it reserves the right to do
   so. Such futures and options trading might involve risks which differ from
   those involved in the futures and options described above.
 
 
                           Foreign Futures and Options
 
   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 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, when the Fund trades foreign
   futures or foreign options contracts, it 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 CFTC and arbitration proceedings provided by the National Futures
   Association or any domestic futures exchange. In particular, funds received
   from the Fund 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 the Fund's order is placed and the time it is liquidated,
   offset or exercised.
 
   All Funds except Equity Index 500, Extended Equity Market Index, and Total
   Equity Market Index 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 Fund 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:
 
 
<PAGE>
 
   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. By entering into a forward contract for
   the purchase or sale, for a fixed amount of dollars, of the amount of foreign
   currency involved in the underlying security transactions, the 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 believes that one currency 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 the Fund's
   portfolio securities denominated in such foreign currency. Alternatively,
   where appropriate, the 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 parties will be incorporated into the longer term
   investment decisions made with regard to overall diversification strategies.
   However, T. Rowe Price believes that it is important to have the flexibility
   to enter into such forward contracts when it determines that the best
   interests of the Fund will be served.
 
   The Fund may enter into forward contacts for any other purpose consistent
   with the Fund's investment objective and program. However, the Fund will not
   enter into a forward contract, or maintain exposure to any such contract(s),
   if the amount of foreign currency required to be delivered thereunder would
   exceed the Fund's holdings of liquid, high-grade debt securities, currency
   available for cover of the forward contract(s) or other suitable cover as
   permitted by the SEC. In determining the amount to be delivered under a
   contract, the Fund may net offsetting positions.
 
   At the maturity of a forward contract, the Fund may 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 the 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 the 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 the 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, the
   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.
 
   The Fund's dealing in forward foreign currency exchange contracts will
   generally be limited to the transactions described above. However, the Fund
   reserves the right to enter into forward foreign currency contracts for
   different purposes and under different circumstances. Of course, the 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. 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.
 
 
<PAGE>
 
   
   Although the 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 there are costs
   associated with currency conversion. Although foreign exchange dealers do not
   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
   the 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
 
   Options, futures and forward foreign exchange contracts, including options
   and futures on currencies, which offset a foreign dollar denominated bond or
   currency position may be considered straddles for tax purposes, in which case
   a loss on any position in a straddle will be subject to deferral to the
   extent of unrealized gain in an offsetting position. The holding period of
   the securities or currencies comprising the straddle will be deemed not to
   begin until the straddle is terminated. The holding period of the security
   offsetting an "in-the-money qualified covered call" option on an equity
   security will not include the period of time the option is outstanding.
 
   Losses on written covered calls and purchased puts on securities, excluding
   certain "qualified covered call" options on equity securities, may be
   long-term capital losses, if the security covering the option was held for
   more than 12 months prior to the writing of the option.
 
   In order for the Fund to continue to qualify for federal income tax treatment
   as a regulated investment company, at least 90% of its gross income for a
   taxable year must be derived from qualifying income, i.e., dividends,
   interest, income derived from loans of securities, and gains from the sale of
   securities or currencies. Tax regulations could be issued limiting the extent
   that net gain realized from option, futures or foreign forward exchange
   contracts on currencies is qualifying income for purposes of the 90%
   requirement.
 
   As a result of the "Taxpayer Relief Act of 1997," entering into certain
   options, futures contracts, or forward contracts may result in the
   "constructive sale" of offsetting stocks or debt securities of the Fund.
 
 
 
 INVESTMENT RESTRICTIONS
 -------------------------------------------------------------------------------
   Fundamental policies may not be changed without the approval of the lesser of
   (1) 67% of the Fund's shares present at a meeting of shareholders if the
   holders of more than 50% of the outstanding shares are present in person or
   by proxy or (2) more than 50% of a Fund's outstanding shares. Other
   restrictions in the form of operating policies are subject to change by the
   Fund's Board of Directors/Trustees without shareholder approval. Any
   investment restriction which involves a maximum percentage of securities or
   assets shall not be considered to be violated unless an excess over the
   percentage occurs immediately after, and is caused by, an acquisition of
   securities or assets of, or borrowings by, the Fund. Calculation of the
   Fund's total assets for compliance with any of the following fundamental or
   operating policies or any other investment restrictions set forth in the
   Fund's prospectus or Statement of Additional Information will not include
   cash collateral held in connection with securities lending activities.
 
 
                              Fundamental Policies
 
   As a matter of fundamental policy, the Fund may not:
 
   (1) Borrowing Borrow money except that the Fund may (i) borrow for
       non-leveraging, temporary or emergency purposes; and (ii) engage in
       reverse repurchase agreements and make other investments or engage in
       other transactions, which may involve a borrowing, in a manner consistent
       with the Fund's investment objective and program, provided that the
       combination of (i) and (ii) shall not exceed 33/1//\\/3/\\% of the value
       of the Fund's total assets (including the amount borrowed) less
       liabilities (other than borrowings) or such other percentage permitted by
       law. Any borrowings which come to exceed this amount will be reduced in
       accordance with applicable law. The Fund may borrow from banks, other
       Price Funds, or other persons to the extent permitted by applicable law;
 
 
<PAGE>
 
   (2) Commodities Purchase or sell physical commodities; except that it may
       enter into futures contracts and options thereon;
 
   (3) (a)
       Industry Concentration (All Funds except Health Sciences, Financial
       Services, and Real Estate Funds) 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;
 
       (b)
       Industry Concentration (Health Sciences, Financial Services, and Real
       Estate Funds) 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 (i) the Health Sciences Fund will
       invest more than 25% of its total assets in the health sciences industry
       as defined in the Fund's prospectus; (ii) the Financial Services Fund
       will invest more than 25% of its total assets in the financial services
       industry as defined in the Fund's prospectus; (iii) the Real Estate Fund
       will invest more than 25% of its total assets in the real estate industry
       as defined in the Fund's prospectus.
 
   (4) Loans Make loans, although the Fund may (i) lend portfolio securities and
       participate in an interfund lending program with other Price Funds
       provided that no such loan may be made if, as a result, the aggregate of
       such loans would exceed 33/1//\\/3/\\% of the value of the Fund's total
       assets; (ii) purchase money market securities and enter into repurchase
       agreements; and (iii) acquire publicly distributed or privately placed
       debt securities and purchase debt;
 
   
   (5) Percent Limit on Assets Invested in Any One Issuer Purchase a security
       if, as a result, with respect to 75% of the value of its total assets,
       more than 5% of the value of the Fund's total assets would be invested in
       the securities of a single issuer, except securities issued or guaranteed
       by the U.S. government or any of its agencies or instrumentalities;
 
   (6) Percent Limit on Share Ownership of Any One Issuer Purchase a security
       if, as a result, with respect to 75% of the value of the Fund's total
       assets, more than 10% of the outstanding voting securities of any issuer
       would be held by the Fund (other than obligations issued or guaranteed by
       the U.S. government, its agencies or instrumentalities);    
 
   (7) Real Estate Purchase or sell real estate, including limited partnership
       interests therein, unless acquired as a result of ownership of securities
       or other instruments (but this shall not prevent the Fund from investing
       in securities or other instruments backed by real estate or securities of
       companies engaged in the real estate business);
 
   (8) Senior Securities Issue senior securities except in compliance with the
       1940 Act; or
 
   (9) Underwriting Underwrite securities issued by other persons, except to the
       extent that the Fund may be deemed to be an underwriter within the
       meaning of the 1933 Act in connection with the purchase and sale of its
       portfolio securities in the ordinary course of pursuing its investment
       program.
 
 
                                      NOTES
 
       The following Notes should be read in connection with the above-described
       fundamental policies. The Notes are not fundamental policies.
 
       With respect to investment restriction (2), the Fund does not consider
       currency contracts or hybrid investments to be commodities.
 
       For purposes of investment restriction (3), U.S., state or local
       governments, or related agencies or instrumentalities, are not considered
       an industry. Industries are determined by reference to the
       classifications of industries set forth in the Fund's semiannual and
       annual reports. It is the position of the Staff of the SEC that foreign
       governments are industries for purposes of this restriction.
 
       For purposes of investment restriction (4), the Fund will consider the
       acquisition of a debt security to include the execution of a note or
       other evidence of an extension of credit with a term of more than nine
       months.
 
 
<PAGE>
 
                               Operating Policies
 
   As a matter of operating policy, the Fund may not:
 
   (1) Borrowing Purchase additional securities when money borrowed exceeds 5%
       of its total assets;
 
   (2) Control of Portfolio Companies Invest in companies for the purpose of
       exercising management or control;
 
   (3) Futures Contracts Purchase a futures contract or an option thereon, if,
       with respect to positions in futures or options on futures which do not
       represent bona fide hedging, the aggregate initial margin and premiums on
       such options would exceed 5% of the Fund's net asset value;
 
   (4) Illiquid Securities Purchase illiquid securities if, as a result, more
       than 15% of its net assets would be invested in such securities;
 
   (5) Investment Companies Purchase securities of open-end or closed-end
       investment companies except (i) in compliance with the 1940 Act; or (ii)
       securities of the Reserve Investment or Government Reserve Investment
       Funds;
 
   (6) 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;
 
   (7) Mortgaging Mortgage, pledge, hypothecate or, in any manner, transfer any
       security owned by the Fund as security for indebtedness except as may be
       necessary in connection with permissible borrowings or investments and
       then such mortgaging, pledging or hypothecating may not exceed
       33/1//\\/3/\\% of the Fund's total assets at the time of borrowing or
       investment;
 
   (8) Oil and Gas Programs Purchase participations or other direct interests
       in, or enter into leases with respect to oil, gas, or other mineral
       exploration or development programs if, as a result thereof, more than 5%
       of the value of the total assets of the Fund would be invested in such
       programs;
 
   (9) 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;
 
   (10) Short Sales Effect short sales of securities; or
 
   (11) Warrants Invest in warrants if, as a result thereof, more than 210% of
       the value of the net assets of the Fund would be invested in warrants.
 
   For Blue Chip Growth, Capital Opportunity, Diversified Small-Cap Growth,
   Financial Services, Health Sciences, Media & Telecommunications, Mid-Cap
   Value, Real Estate, and Value Funds:
 
   Notwithstanding anything in the above fundamental and operating restrictions
   to the contrary, the Fund may invest all of its assets in a single investment
   company or a series thereof in connection with a "master-feeder" arrangement.
   Such an investment would be made where the Fund (a "Feeder"), and one or more
   other Funds with the same investment objective and program as the Fund,
   sought to accomplish its investment objective and program by investing all of
   its assets in the shares of another investment company (the "Master"). The
   Master would, in turn, have the same investment objective and program as the
   Fund. The Fund would invest in this manner in an effort to achieve the
   economies of scale associated with having a Master fund make investments in
   portfolio companies on behalf of a number of Feeder funds.
 
 
 
 MANAGEMENT OF THE FUNDS
 -------------------------------------------------------------------------------
   The officers and directors/trustees of the Fund are listed below. Unless
   otherwise noted, the address of each is 100 East Pratt Street, Baltimore,
   Maryland 21202. Except as indicated, each has been an employee of T. Rowe
   Price for more than five years. In the list below, the Fund's
   directors/trustees who are considered "interested
 
 
<PAGE>
 
   persons" of T. Rowe Price as defined under Section 2(a)(19) of the 1940 Act
   are noted with an asterisk (*). These directors/trustees are referred to as
   inside directors by virtue of their officership, directorship, and/or
   employment with T. Rowe Price.
 
   All Funds
 
 
                       Independent Directors/Trustees/(a)/
 
   DONALD W. DICK, JR., 1/27/43, Principal, EuroCapital Advisors, LLC, an
   acquisition and management advisory firm; formerly (5/89-6/95) Principal,
   Overseas Partners, Inc., a financial investment firm; formerly  (6/65-3/89)
   Director and Vice President; Consumer Products Division, McCormick & Company,
   Inc., international food processors; Director, Waverly, Inc., Baltimore,
   Maryland; Address: 925 Cleveland Street, #177, Greenville, South Carolina
   29601
 
   
   DAVID K. FAGIN, 4/9/38, Chairman and Chief Executive Officer, Western
   Exploration and Development, Ltd.; Director Golden Star Resources Ltd. and
   Miranda Mining Development Corporation; formerly (7/91-     9/97) Chairman,
   Chief Executive Officer, Golden Star Resources Ltd.; (1986-7/91) President,
   Chief Operating Officer and Director, Homestake Mining Company; Address: 1700
   Lincoln Street, Suite 4710, Denver, Colorado 80203    
 
   HANNE M. MERRIMAN, 11/16/41, Retail business consultant; formerly President
   and Chief Operating Officer (1991-92), Nan Duskin, Inc., a women's specialty
   store, Director (1984-90) and Chairman (1989-90) Federal Reserve Bank of
   Richmond, and President and Chief Executive Officer (1988-89), Honeybee,
   Inc., a division of Spiegel, Inc.; Director, Central Illinois Public Service
   Company, CIPSCO Incorporated, Finlay Enterprises, Inc., The Rouse Company,
   State Farm Mutual Automobile Insurance Company and USAir Group, Inc.;
   Address: 3201 New Mexico Avenue, N.W., Suite 350, Washington, D.C. 20016
 
   
   HUBERT D. VOS, 8/2/33, Owner/President, Stonington Capital Corporation, a
   private investment company; Address: 1114 State Street, Suite 247, P.O. Box
   90409, Santa Barbara, California 93190-0409    
 
   PAUL M. WYTHES, 6/23/33, Founding General Partner, Sutter Hill Ventures, a
   venture capital limited partnership, providing equity capital to young high
   technology companies throughout the United States; Director, Teltone
   Corporation, Interventional Technologies Inc. and Stuart Medical, Inc.;
   Address: 755 Page Mill Road, Suite A200, Palo Alto, California 94304-1005
 
   
  (a) Unless otherwise indicated, the Independent Directors/Trustees have been
     at their respective companies for at least five years.    
 
 
                                    Officers
 
   HENRY H. HOPKINS, 12/23/42, Vice President-Vice President, Price-Fleming and
   T. Rowe Price Retirement Plan Services, Inc.; Director and Managing Director,
   T. Rowe Price; Vice President and Director, T. Rowe Price Investment
   Services, Inc., T. Rowe Price Services, Inc. and T. Rowe Price Trust Company
 
   PATRICIA S. LIPPERT, 1/12/53, Secretary-Assistant Vice President, T. Rowe
   Price and T. Rowe Price Investment Services, Inc.
 
   CARMEN F. DEYESU, 8/1/41, Treasurer-Vice President, T. Rowe Price, T. Rowe
   Price Services, Inc., and T. Rowe Price Trust Company
 
   
   DAVID S. MIDDLETON, 1/18/56, Controller-Vice President, T. Rowe Price and T.
   Rowe Price Trust Company
 
   J. JEFFREY LANG, 1/10/62, Assistant Vice President-Assistant Vice President,
   T. Rowe Price; Vice President, T. Rowe Price Trust Company    
 
   INGRID I. VORDEMBERGE, 9/27/35, Assistant Vice President-Employee, T. Rowe
   Price
 
   Balanced Fund
 
   
 
 
  *  JAMES A.C. KENNEDY, 8/17/53, Director and Vice President -Director and
   Managing Director, T. Rowe Price; Chartered Financial Analyst    
 
 
<PAGE>
 
 
   
 
  *  JAMES S. RIEPE, 6/25/43, Chairman of the Board -Vice Chairman of the Board,
   Managing Director, and Director, T. Rowe Price; Chairman of the Board, T.
   Rowe Price Investment Services, Inc., T. Rowe Price Services, Inc., and T.
   Rowe Price Retirement Plan Services, Inc.; Chairman of the Board, President,
   and Trust Officer, T. Rowe Price Trust Company; Director, Price-Fleming and
   General Re Corporation    
 
 
   
 
  *  M. DAVID TESTA, 4/22/44, Director and Vice President -Chairman of the Board
   and Director, Price-Fleming; Vice Chairman of the Board, Chief Investment
   Officer, and Managing Director, T. Rowe Price; Vice President and Director,
   T. Rowe Price Trust Company; Chartered Financial Analyst    
 
 
   
 
   RICHARD T. WHITNEY, 5/7/58, President -Managing Director, T. Rowe Price; Vice
   President, Price-Fleming and T. Rowe Price Trust Company; Chartered Financial
   Analyst
 
 
 
   STEPHEN W. BOESEL, 12/28/44, Vice President -Managing Director, T. Rowe
   Price; Vice President, T. Rowe Price Trust Company and T. Rowe Price
   Retirement Plan Services, Inc.    
 
 
 
   ANDREW M. BROOKS, 2/16/56, Vice President -Vice President, T. Rowe Price
 
 
   
 
   RAYMOND A. MILLS, PHD, 12/3/60, Vice President -Assistant Vice President, T.
   Rowe Price; formerly a Principal Systems Engineer at TASC, Inc.
 
 
 
   EDMUND M. NOTZON, 10/1/45, Vice President -Managing Director, T. Rowe Price;
   Vice President, T. Rowe Price Trust Company; Chartered Financial Analyst    
 
 
 
   DONALD J. PETERS, 7/3/59, Vice President -Vice President, T. Rowe Price;
   formerly portfolio manager, Geewax Terker and Company
 
   
 
 
   MARK J. VASELKIV, 7/22/58, Vice President -Vice President, T. Rowe Price    
 
   Blue Chip Growth Fund
 
   
 
 
  *  JAMES A.C. KENNEDY, 8/17/53, Director -Director and Managing Director, T.
   Rowe Price; Chartered Financial Analyst    
 
 
   
 
  *  JAMES S. RIEPE, 6/25/43, Director and Vice President -Vice Chairman of the
   Board, Managing Director, and Director, T. Rowe Price; Chairman of the Board,
   T. Rowe Price Investment Services, Inc., T. Rowe Price Services, Inc., and T.
   Rowe Price Retirement Plan Services, Inc.; Chairman of the Board, President,
   and Trust Officer, T. Rowe Price Trust Company; Director, Price-Fleming and
   General Re Corporation    
 
 
   
 
  *  M. DAVID TESTA, 4/22/44, Director -Chairman of the Board and Director,
   Price-Fleming; Vice Chairman of the Board, Chief Investment Officer, and
   Managing Director, T. Rowe Price; Vice President and Director, T. Rowe Price
   Trust Company; Chartered Financial Analyst    
 
 
 
   LARRY J. PUGLIA, 8/25/60, President -Managing Director, T. Rowe Price;
   Chartered Financial Analyst
 
 
 
   BRIAN W.H. BERGHUIS, 12/12/58, Vice President -Managing Director, T. Rowe
   Price; Chartered Financial Analyst
 
 
 
   STEPHANIE C. CLANCY, 12/19/64, Vice President -Vice President, T. Rowe Price
 
 
 
   ROBERT N. GENSLER, 10/18/57, Vice President -Vice President, T. Rowe Price
 
 
 
   JILL L. HAUSER, 6/23/58, Vice President -Vice President, T. Rowe Price
 
 
   
 
   SEEMA R. HINGORANI, 1/21/69, Vice President -Assistant Vice President, T.
   Rowe Price; formerly Associate Equity Analyst, Donaldson, Lufkin & Jenrehe
    
 
 
   
 
   THOMAS J. HUBER, 9/23/66, Vice President -Vice President, T. Rowe Price;
   formerly a Corporate Banking Officer with NationsBank; Chartered Financial
   Analyst    
 
 
   
 
   STEPHEN C. JANSEN, 12/12/68, Vice President -Assistant Vice President, T.
   Rowe Price; formerly an Investment Analyst at Schroder & Co.    
 
 
   
 
   KRIS H. JENNER, M.D., 2/5/62, Vice President -Vice President, T. Rowe Price;
   formerly with the Laboratory of Biological Cancer, The Brigham & Women's
   Hospital, Harvard Medical School    
 
 
<PAGE>
 
 
   
 
   ROBERT W. SHARPS, 6/10/71, Vice President -Assistant Vice President, T. Rowe
   Price; formerly Senior Consultant, KPMG Peat Marwick; Chartered Financial
   Analyst    
 
 
 
   ROBERT W. SMITH, 4/11/61, Vice President -Managing Director, T. Rowe Price;
   Vice President, Price-Fleming
 
 
 
   WILLIAM J. STROMBERG, 3/10/60, Vice President -Managing Director, T. Rowe
   Price; Chartered Financial Analyst
 
   Capital Appreciation Fund
 
   
 
 
  *  JAMES A.C. KENNEDY, 8/17/53, Trustee -Director and Managing Director, T.
   Rowe Price; Chartered Financial Analyst    
 
 
   
 
  *  JAMES S. RIEPE, 6/25/43, Trustee and Vice President -Vice Chairman of the
   Board, Managing Director, and Director, T. Rowe Price; Chairman of the Board,
   T. Rowe Price Investment Services, Inc., T. Rowe Price Services, Inc., and T.
   Rowe Price Retirement Plan Services, Inc.; Chairman of the Board, President,
   and Trust Officer, T. Rowe Price Trust Company; Director, Price-Fleming and
   General Re Corporation    
 
 
   
 
  *  M. DAVID TESTA, 4/22/44, Chairman of the Board -Chairman of the Board and
   Director, Price-Fleming; Vice Chairman of the Board, Chief Investment
   Officer, and Managing Director, T. Rowe Price; Vice President and Director,
   T. Rowe Price Trust Company; Chartered Financial Analyst    
 
 
 
   RICHARD P. HOWARD, 9/16/46, President -Vice President, T. Rowe Price;
   Chartered Financial Analyst
 
 
 
   ARTHUR B. CECIL III, 9/15/42, Vice President -Vice President, T. Rowe Price;
   Chartered Financial Analyst
 
 
 
   STEPHANIE C. CLANCY, 12/19/64, Vice President -Vice President, T. Rowe Price
 
 
 
   CHARLES A. MORRIS, 1/3/63, Vice President -Managing Director, T. Rowe Price;
   Chartered Financial Analyst
 
 
 
   CHARLES M. OBER, 4/20/50, Vice President -Vice President, T. Rowe Price;
   Chartered Financial Analyst
 
 
   
 
   BRIAN C. ROGERS, 6/27/55, Vice President -Director and Managing Director, T.
   Rowe Price; Vice President, T. Rowe Price Trust Company; Chartered Financial
   Analyst    
 
   Capital Opportunity Fund
 
 
 
  *  JOHN H. LAPORTE, JR., 7/26/45, Director and President -Director and
   Managing Director, T. Rowe Price; Chartered Financial Analyst
 
 
   
 
  *  JAMES S. RIEPE, 6/25/43, Director and Vice President -Vice Chairman of the
   Board, Managing Director, and Director, T. Rowe Price; Chairman of the Board,
   T. Rowe Price Investment Services, Inc., T. Rowe Price Services, Inc., and T.
   Rowe Price Retirement Plan Services, Inc.; Chairman of the Board, President,
   and Trust Officer, T. Rowe Price Trust Company; Director, Price-Fleming and
   General Re Corporation    
 
 
   
 
  *  M. DAVID TESTA, 4/22/44, Director -Chairman of the Board and Director,
   Price-Fleming; Vice Chairman of the Board, Chief Investment Officer, and
   Managing Director, T. Rowe Price; Vice President and Director, T. Rowe Price
   Trust Company; Chartered Financial Analyst    
 
 
 
   JOHN F. WAKEMAN, 11/25/62, Executive Vice President -Vice President, T. Rowe
   Price
 
 
 
   MARC L. BAYLIN, 11/17/67, Vice President -Vice President, T. Rowe Price;
   formerly financial analyst, Rausher Pierce Refsnes; Chartered Financial
   Analyst
 
 
 
   BRIAN W.H. BERGHUIS, 12/12/58, Vice President -Managing Director, T. Rowe
   Price; Chartered Financial Analyst
 
 
 
   STEPHANIE C. CLANCY, 12/19/64, Vice President -Vice President, T. Rowe Price
 
 
 
   LARRY J. PUGLIA, 8/25/60, Vice President -Managing Director, T. Rowe Price;
   Chartered Financial Analyst
 
 
   
 
   ROBERT W. SHARPS, 6/10/71, Vice President -Assistant Vice President, T. Rowe
   Price; formerly Senior Consultant, KPMG Peat Marwick; Chartered Financial
   Analyst    
 
 
 
   BRIAN D. STANSKY, 10/14/63, Vice President -Vice President, T. Rowe Price;
   Chartered Financial Analyst
 
 
<PAGE>
 
   Diversified Small-Cap Growth Fund
 
 
 
  *  JOHN H. LAPORTE, JR., 7/26/45, Director and Vice President -Director and
   Managing Director, T. Rowe Price; Chartered Financial Analyst
 
 
   
 
  *  JAMES S. RIEPE, 6/25/43, Director and Vice President -Vice Chairman of the
   Board, Managing Director, and Director, T. Rowe Price; Chairman of the Board,
   T. Rowe Price Investment Services, Inc., T. Rowe Price Services, Inc., and T.
   Rowe Price Retirement Plan Services, Inc.; Chairman of the Board, President,
   and Trust Officer, T. Rowe Price Trust Company; Director, Price-Fleming and
   General Re Corporation    
 
 
   
 
  *  M. DAVID TESTA, 4/22/44, Director -Chairman of the Board and Director,
   Price-Fleming; Vice Chairman of the Board, Chief Investment Officer, and
   Managing Director, T. Rowe Price; Vice President and Director, T. Rowe Price
   Trust Company; Chartered Financial Analyst    
 
 
   
 
   RICHARD T. WHITNEY, 5/7/58, President -Managing Director, T. Rowe Price; Vice
   President, Price-Fleming and T. Rowe Price Trust Company; Chartered Financial
   Analyst    
 
 
 
   MARC L. BAYLIN, 11/17/67, Vice President -Vice President, T. Rowe Price;
   formerly financial analyst, Rausher Pierce Refsnes; Chartered Financial
   Analyst
 
 
 
   KRISTEN F. CULP, 9/28/62, Vice President -Vice President, T. Rowe Price and
   T. Rowe Price Trust Company
 
 
 
   DONALD J. PETERS, 7/3/59, Vice President -Vice President, T. Rowe Price;
   formerly portfolio manager, Geewax Terker and Company
 
 
   
 
   PAUL J. WOJCIK, 11/28/70, Vice President -Assistant Vice President, T. Rowe
   Price; formerly Senior Programmer/Analyst, Fidelity Investments; Chartered
   Financial Analyst    
 
   Dividend Growth Fund
 
   
 
 
  *  JAMES A.C. KENNEDY, 8/17/53, Director -Director and Managing Director, T.
   Rowe Price; Chartered Financial Analyst    
 
 
   
 
  *  JAMES S. RIEPE, 6/25/43, Director and Vice President -Vice Chairman of the
   Board, Managing Director, and Director, T. Rowe Price; Chairman of the Board,
   T. Rowe Price Investment Services, Inc., T. Rowe Price Services, Inc., and T.
   Rowe Price Retirement Plan Services, Inc.; Chairman of the Board, President,
   and Trust Officer, T. Rowe Price Trust Company; Director, Price-Fleming and
   General Re Corporation    
 
 
   
 
  *  M. DAVID TESTA, 4/22/44, Director -Chairman of the Board and Director,
   Price-Fleming; Vice Chairman of the Board, Chief Investment Officer, and
   Managing Director, T. Rowe Price; Vice President and Director, T. Rowe Price
   Trust Company; Chartered Financial Analyst    
 
 
 
   WILLIAM J. STROMBERG, 3/10/60, President -Managing Director, T. Rowe Price;
   Chartered Financial Analyst
 
 
   
 
   BRIAN C. ROGERS, 6/27/55, Executive Vice President -Director and Managing
   Director, T. Rowe Price; Vice President, T. Rowe Price Trust Company;
   Chartered Financial Analyst    
 
 
 
   ARTHUR B. CECIL III, 9/15/42, Vice President -Vice President, T. Rowe Price;
   Chartered Financial Analyst
 
 
 
   STEPHANIE C. CLANCY, 12/19/64, Vice President -Vice President, T. Rowe Price
 
 
   
 
   MICHAEL W. HOLTON, 9/25/68, Vice President -Vice President, T. Rowe Price;
   formerly Research Analyst at Bowles, Hollowell, Conner and Company; Chartered
   Financial Analyst    
 
 
   
 
   THOMAS J. HUBER, 9/23/66, Vice President -Vice President, T. Rowe Price;
   formerly a Corporate Banking Officer with NationsBank; Chartered Financial
   Analyst    
 
 
 
   DAVID M. LEE, 11/13/62, Vice President -Vice President, T. Rowe Price;
   Chartered Financial Analyst; formerly Marketing Representative at IBM
 
 
 
   DONALD J. PETERS, 7/3/59, Vice President -Vice President, T. Rowe Price;
   formerly portfolio manager, Geewax Terker and Company
 
 
 
   LARRY J. PUGLIA, 8/25/60, Vice President -Managing Director, T. Rowe Price;
   Chartered Financial Analyst
 
 
 
   DAVID J. WALLACK, 7/2/60, Vice President -Vice President, T. Rowe Price
 
 
<PAGE>
 
   Equity Income Fund
 
   
 
 
  *  JAMES A.C. KENNEDY, 8/17/53, Trustee -Director and Managing Director, T.
   Rowe Price; Chartered Financial Analyst    
 
 
   
 
  *  JAMES S. RIEPE, 6/25/43, Trustee and Vice President -Vice Chairman of the
   Board, Managing Director, and Director, T. Rowe Price; Chairman of the Board,
   T. Rowe Price Investment Services, Inc., T. Rowe Price Services, Inc., and T.
   Rowe Price Retirement Plan Services, Inc.; Chairman of the Board, President,
   and Trust Officer, T. Rowe Price Trust Company; Director, Price-Fleming and
   General Re Corporation    
 
 
   
 
  *  M. DAVID TESTA, 4/22/44, Trustee -Chairman of the Board and Director,
   Price-Fleming; Vice Chairman of the Board, Chief Investment Officer, and
   Managing Director, T. Rowe Price; Vice President and Director, T. Rowe Price
   Trust Company; Chartered Financial Analyst    
 
 
   
 
   BRIAN C. ROGERS, 6/27/55, President -Director and Managing Director, T. Rowe
   Price; Vice President, T. Rowe Price Trust Company; Chartered Financial
   Analyst
 
 
 
   STEPHEN W. BOESEL, 12/28/44, Vice President -Managing Director, T. Rowe
   Price; Vice President, T. Rowe Price Trust Company and T. Rowe Price
   Retirement Plan Services, Inc.    
 
 
 
   ANDREW M. BROOKS, 2/16/56, Vice President -Vice President, T. Rowe Price
 
 
 
   ARTHUR B. CECIL III, 9/15/42, Vice President -Vice President, T. Rowe Price;
   Chartered Financial Analyst
 
 
 
   GIRI DEVULAPALLY, 11/18/67, Vice President -Employee, T. Rowe Price; formerly
   Senior Consultant, Anderson Consulting
 
 
 
   RICHARD P. HOWARD, 9/16/46, Vice President -Vice President, T. Rowe Price;
   Chartered Financial Analyst
 
 
 
   WILLIAM J. STROMBERG, 3/10/60, Vice President -Managing Director, T. Rowe
   Price; Chartered Financial Analyst
 
   
 
 
   MARK J. VASELKIV, 7/22/58, Vice President -Vice President, T. Rowe Price    
 
   Equity Index 500, Extended Equity Market Index, and Total Market Index Funds
 
   
 
 
  *  JAMES A.C. KENNEDY, 8/17/53, Director -Director and Managing Director, T.
   Rowe Price; Chartered Financial Analyst    
 
 
   
 
  *  JAMES S. RIEPE, 6/25/43, Director and Vice President -Vice Chairman of the
   Board, Managing Director, and Director, T. Rowe Price; Chairman of the Board,
   T. Rowe Price Investment Services, Inc., T. Rowe Price Services, Inc., and T.
   Rowe Price Retirement Plan Services, Inc.; Chairman of the Board, President,
   and Trust Officer, T. Rowe Price Trust Company; Director, Price-Fleming and
   General Re Corporation    
 
 
   
 
  *  M. DAVID TESTA, 4/22/44, Director -Chairman of the Board and Director,
   Price-Fleming; Vice Chairman of the Board, Chief Investment Officer, and
   Managing Director, T. Rowe Price; Vice President and Director, T. Rowe Price
   Trust Company; Chartered Financial Analyst    
 
 
   
 
   RICHARD T. WHITNEY, 5/7/58, President -Managing Director, T. Rowe Price; Vice
   President, Price-Fleming and T. Rowe Price Trust Company; Chartered Financial
   Analyst    
 
 
 
   KRISTEN F. CULP, 9/28/62, Executive Vice President -Vice President, T. Rowe
   Price and T. Rowe Price Trust Company
 
 
 
   STEPHANIE C. CLANCY, 12/19/64, Vice President -Vice President, T. Rowe Price
 
 
 
   WENDY R. DIFFENBAUGH, 10/2/53, Vice President -Assistant Vice President, T.
   Rowe Price
 
 
   
 
   RAYMOND A. MILLS, PHD, 12/3/60, Vice President -Assistant Vice President, T.
   Rowe Price; formerly a Principal Systems Engineer at TASC, Inc.    
 
 
 
   MARY C. MUNOZ, 12/2/62, Vice President -Assistant Vice President, T. Rowe
   Price
 
 
 
   DONALD J. PETERS, 7/3/59, Vice President -Vice President, T. Rowe Price;
   formerly portfolio manager, Geewax Terker and Company
 
 
<PAGE>
 
 
   
 
   PAUL J. WOJCIK, 11/28/70, Vice President -Assistant Vice President, T. Rowe
   Price; formerly Senior Programmer/Analyst, Fidelity Investments; Chartered
   Financial Analyst    
 
   Financial Services Fund
 
   
 
 
  *  JAMES A.C. KENNEDY, 8/17/53, Director -Director and Managing Director, T.
   Rowe Price; Chartered Financial Analyst    
 
 
   
 
  *  JAMES S. RIEPE, 6/25/43, Director and Vice President -Vice Chairman of the
   Board, Managing Director, and Director, T. Rowe Price; Chairman of the Board,
   T. Rowe Price Investment Services, Inc., T. Rowe Price Services, Inc., and T.
   Rowe Price Retirement Plan Services, Inc.; Chairman of the Board, President,
   and Trust Officer, T. Rowe Price Trust Company; Director, Price-Fleming and
   General Re Corporation    
 
 
   
 
  *  M. DAVID TESTA, 4/22/44, Chairman of the Board -Chairman of the Board and
   Director, Price-Fleming; Vice Chairman of the Board, Chief Investment
   Officer, and Managing Director, T. Rowe Price; Vice President and Director,
   T. Rowe Price Trust Company; Chartered Financial Analyst    
 
 
 
   LARRY J. PUGLIA, 8/25/60, President -Managing Director, T. Rowe Price;
   Chartered Financial Analyst
 
   
 
 
   STEPHEN W. BOESEL, 12/28/44, Vice President -Managing Director, T. Rowe
   Price; Vice President, T. Rowe Price Trust Company and T. Rowe Price
   Retirement Plan Services, Inc.    
 
 
   
 
   ANNA M. DOPKIN, 9/5/67, Vice President -Assistant Vice President, T. Rowe
   Price; formerly 1996-1991, Analyst, Goldman Sachs; Chartered Financial
   Analyst    
 
 
 
   ROBERT N. GENSLER, 10/18/57, Vice President -Vice President, T. Rowe Price
 
 
 
   ROBERT J. MARCOTTE, 3/6/62, Vice President -Vice President, T. Rowe Price
 
 
   
 
   ROBERT W. SHARPS, 6/10/71, Vice President -Assistant Vice President, T. Rowe
   Price; formerly Senior Consultant, KPMG Peat Marwick; Chartered Financial
   Analyst    
 
 
 
   WILLIAM J. STROMBERG, 3/10/60, Vice President -Managing Director, T. Rowe
   Price; Chartered Financial Analyst
 
 
 
   SUSAN J. KLEIN, 4/18/50, Assistant Vice President -Employee, T. Rowe Price
 
   Growth & Income Fund
 
   
 
 
  *  JAMES A.C. KENNEDY, 8/17/53, Director -Director and Managing Director, T.
   Rowe Price; Chartered Financial Analyst    
 
 
   
 
  *  JAMES S. RIEPE, 6/25/43, Chairman of the Board -Vice Chairman of the Board,
   Managing Director, and Director, T. Rowe Price; Chairman of the Board, T.
   Rowe Price Investment Services, Inc., T. Rowe Price Services, Inc., and T.
   Rowe Price Retirement Plan Services, Inc.; Chairman of the Board, President,
   and Trust Officer, T. Rowe Price Trust Company; Director, Price-Fleming and
   General Re Corporation    
 
 
   
 
  *  M. DAVID TESTA, 4/22/44, Director -Chairman of the Board and Director,
   Price-Fleming; Vice Chairman of the Board, Chief Investment Officer, and
   Managing Director, T. Rowe Price; Vice President and Director, T. Rowe Price
   Trust Company; Chartered Financial Analyst
 
 
 
   STEPHEN W. BOESEL, 12/28/44, President -Managing Director, T. Rowe Price;
   Vice President, T. Rowe Price Trust Company and T. Rowe Price Retirement Plan
   Services, Inc.    
 
 
 
   ANDREW M. BROOKS, 2/16/56, Vice President -Vice President, T. Rowe Price
 
 
 
   ARTHUR B. CECIL III, 9/15/42, Vice President -Vice President, T. Rowe Price;
   Chartered Financial Analyst
 
 
 
   KARA M. CHESEBY, 10/9/63, Vice President -Vice President, T. Rowe Price;
   formerly Vice President, Legg Mason Wood Walker; Chartered Financial Analysis
 
 
 
   DAVID M. LEE, 11/13/62, Vice President -Vice President, T. Rowe Price;
   Chartered Financial Analyst; formerly Marketing Representative at IBM
 
 
<PAGE>
 
 
 
   GREGORY A. MCCRICKARD, 10/19/58, Vice President -Managing Director, T. Rowe
   Price; Vice President, T. Rowe Price Trust Company; Chartered Financial
   Analyst
 
 
 
   LARRY J. PUGLIA, 8/25/60, Vice President -Managing Director, T. Rowe Price;
   Chartered Financial Analyst
 
 
   
 
   BRIAN C. ROGERS, 6/27/55, Vice President -Director and Managing Director, T.
   Rowe Price; Vice President, T. Rowe Price Trust Company; Chartered Financial
   Analyst    
 
 
 
   ROBERT W. SMITH, 4/11/61, Vice President -Managing Director, T. Rowe Price;
   Vice President, Price-Fleming
 
   
 
 
   MARK J. VASELKIV, 7/22/58, Vice President -Vice President, T. Rowe Price    
 
 
 
   DAVID J. WALLACK, 7/2/60, Vice President -Vice President, T. Rowe Price
 
 
   
 
   RICHARD T. WHITNEY, 5/7/58, Vice President -Managing Director, T. Rowe Price;
   Vice President, Price-Fleming and T. Rowe Price Trust Company; Chartered
   Financial Analyst    
 
   Growth Stock Fund
 
   
 
 
  *  JAMES A.C. KENNEDY, 8/17/53, Director and Vice President -Director and
   Managing Director, T. Rowe Price; Chartered Financial Analyst    
 
 
   
 
  *  JAMES S. RIEPE, 6/25/43, Director and Vice President -Vice Chairman of the
   Board, Managing Director, and Director, T. Rowe Price; Chairman of the Board,
   T. Rowe Price Investment Services, Inc., T. Rowe Price Services, Inc., and T.
   Rowe Price Retirement Plan Services, Inc.; Chairman of the Board, President,
   and Trust Officer, T. Rowe Price Trust Company; Director, Price-Fleming and
   General Re Corporation    
 
 
   
 
  *  M. DAVID TESTA, 4/22/44, Chairman of the Board -Chairman of the Board and
   Director, Price-Fleming; Vice Chairman of the Board, Chief Investment
   Officer, and Managing Director, T. Rowe Price; Vice President and Director,
   T. Rowe Price Trust Company; Chartered Financial Analyst    
 
 
 
   ROBERT W. SMITH, 4/11/61, President -Managing Director, T. Rowe Price; Vice
   President, Price-Fleming
 
 
 
   BRIAN W.H. BERGHUIS, 12/12/58, Vice President -Managing Director, T. Rowe
   Price; Chartered Financial Analyst
 
 
 
   ROBERT N. GENSLER, 10/18/57, Vice President -Vice President, T. Rowe Price
 
 
 
   JILL L. HAUSER, 6/23/58, Vice President -Vice President, T. Rowe Price
 
 
   
 
   THOMAS J. HUBER, 9/23/66, Vice President -Vice President, T. Rowe Price;
   formerly a Corporate Banking Officer with NationsBank; Chartered Financial
   Analyst    
 
 
 
   CHARLES A. MORRIS, 1/3/63, Vice President -Managing Director, T. Rowe Price;
   Chartered Financial Analyst
 
 
 
   D. JAMES PREY III, 11/26/59, Vice President -Vice President, T. Rowe Price
 
 
 
   LARRY J. PUGLIA, 8/25/60, Vice President -Managing Director, T. Rowe Price;
   Chartered Financial Analyst
 
 
 
   CAROL G. BARTHA, 1/4/42, Assistant Vice President -Employee, T. Rowe Price
 
   Health Sciences Fund
 
 
 
  *  JOHN H. LAPORTE, JR., 7/26/45, Director and President -Director and
   Managing Director, T. Rowe Price; Chartered Financial Analyst
 
 
   
 
  *  JAMES S. RIEPE, 6/25/43, Director and Vice President -Vice Chairman of the
   Board, Managing Director, and Director, T. Rowe Price; Chairman of the Board,
   T. Rowe Price Investment Services, Inc., T. Rowe Price Services, Inc., and T.
   Rowe Price Retirement Plan Services, Inc.; Chairman of the Board, President,
   and Trust Officer, T. Rowe Price Trust Company; Director, Price-Fleming and
   General Re Corporation    
 
 
   
 
  *  M. DAVID TESTA, 4/22/44, Director -Chairman of the Board and Director,
   Price-Fleming; Vice Chairman of the Board, Chief Investment Officer, and
   Managing Director, T. Rowe Price; Vice President and Director, T. Rowe Price
   Trust Company; Chartered Financial Analyst    
 
 
<PAGE>
 
 
 
   BRIAN D. STANSKY, 10/14/63, Executive Vice President -Vice President, T. Rowe
   Price; Chartered Financial Analyst
 
 
   
 
   KRIS H. JENNER, M.D., 2/5/62, Vice President -Vice President, T. Rowe Price;
   formerly with the Laboratory of Biological Cancer, The Brigham & Women's
   Hospital, Harvard Medical School    
 
 
 
   CHARLES A. MORRIS, 1/3/63, Vice President -Managing Director, T. Rowe Price;
   Chartered Financial Analyst
 
 
 
   CHARLES G. PEPIN, 4/23/66, Vice President -Vice President, T. Rowe Price
 
 
 
   D. JAMES PREY III, 11/26/59, Vice President -Vice President, T. Rowe Price
 
 
 
   DARRELL M. RILEY, 2/18/58, Vice President -Vice President, T. Rowe Price
 
 
   
 
   BRIAN C. ROGERS, 6/27/55, Vice President -Director and Managing Director, T.
   Rowe Price; Vice President, T. Rowe Price Trust Company; Chartered Financial
   Analyst    
 
   Media & Telecommunications Fund
 
 
   
 
  *  JAMES S. RIEPE, 6/25/43, Chairman of the Board -Vice Chairman of the Board,
   Managing Director, and Director, T. Rowe Price; Chairman of the Board, T.
   Rowe Price Investment Services, Inc., T. Rowe Price Services, Inc., and T.
   Rowe Price Retirement Plan Services, Inc.; Chairman of the Board, President,
   and Trust Officer, T. Rowe Price Trust Company; Director, Price-Fleming and
   General Re Corporation    
 
 
   
 
  *  M. DAVID TESTA, 4/22/44, Director -Chairman of the Board and Director,
   Price-Fleming; Vice Chairman of the Board, Chief Investment Officer, and
   Managing Director, T. Rowe Price; Vice President and Director, T. Rowe Price
   Trust Company; Chartered Financial Analyst    
 
 
 
   BRIAN D. STANSKY, 10/14/63, President -Vice President, T. Rowe Price;
   Chartered Financial Analyst
 
 
 
   CHARLES A. MORRIS, 1/3/63, Executive Vice President -Managing Director, T.
   Rowe Price; Chartered Financial Analyst
 
 
 
   ROBERT N. GENSLER, 10/18/57, Vice President -Vice President, T. Rowe Price
 
 
   
 
   SEEMA R. HINGORANI, 1/21/69, Vice President -Assistant Vice President, T.
   Rowe Price; formerly Associate Equity Analyst, Donaldson, Lufkin & Jenrehe
    
 
 
 
   D. JAMES PREY III, 11/26/59, Vice President -Vice President, T. Rowe Price
 
 
 
   JOHN F. WAKEMAN, 11/25/62, Vice President -Vice President, T. Rowe Price
 
   Mid-Cap Equity Growth Fund
 
   
 
 
  *  JAMES A.C. KENNEDY, 8/17/53, Director -Director and Managing Director, T.
   Rowe Price; Chartered Financial Analyst    
 
 
   
 
  *  JAMES S. RIEPE, 6/25/43, Chairman of the Board -Vice Chairman of the Board,
   Managing Director, and Director, T. Rowe Price; Chairman of the Board, T.
   Rowe Price Investment Services, Inc., T. Rowe Price Services, Inc., and T.
   Rowe Price Retirement Plan Services, Inc.; Chairman of the Board, President,
   and Trust Officer, T. Rowe Price Trust Company; Director, Price-Fleming and
   General Re Corporation    
 
 
   
 
  *  M. DAVID TESTA, 4/22/44, Director and President -Chairman of the Board and
   Director, Price-Fleming; Vice Chairman of the Board, Chief Investment
   Officer, and Managing Director, T. Rowe Price; Vice President and Director,
   T. Rowe Price Trust Company; Chartered Financial Analyst    
 
 
 
   BRIAN W.H. BERGHUIS, 12/12/58, Executive Vice President -Managing Director,
   T. Rowe Price; Chartered Financial Analyst
 
 
 
   MARC L. BAYLIN, 11/17/67, Vice President -Vice President, T. Rowe Price;
   formerly financial analyst, Rausher Pierce Refsnes; Chartered Financial
   Analyst
 
 
   
 
   ANNA M. DOPKIN, 9/5/67, Vice President -Assistant Vice President, T. Rowe
   Price; formerly 1996-1991, Analyst, Goldman Sachs; Chartered Financial
   Analyst    
 
 
<PAGE>
 
 
 
   ROBERT N. GENSLER, 10/18/57, Vice President -Vice President, T. Rowe Price
 
 
   
 
   THOMAS J. HUBER, 9/23/66, Vice President -Vice President, T. Rowe Price;
   formerly a Corporate Banking Officer with NationsBank; Chartered Financial
   Analyst    
 
 
 
   ROBERT J. MARCOTTE, 3/6/62, Vice President -Vice President, T. Rowe Price
 
 
 
   CHARLES A. MORRIS, 1/3/63, Vice President -Managing Director, T. Rowe Price;
   Chartered Financial Analyst
 
 
 
   JOHN F. WAKEMAN, 11/25/62, Vice President -Vice President, T. Rowe Price
 
   Mid-Cap Growth Fund
 
   
 
 
  *  JAMES A.C. KENNEDY, 8/17/53, Director -Director and Managing Director, T.
   Rowe Price; Chartered Financial Analyst    
 
 
 
  *  JOHN H. LAPORTE, JR., 7/26/45, Director -Director and Managing Director, T.
   Rowe Price; Chartered Financial Analyst
 
 
   
 
  *  JAMES S. RIEPE, 6/25/43, Chairman of the Board -Vice Chairman of the Board,
   Managing Director, and Director, T. Rowe Price; Chairman of the Board, T.
   Rowe Price Investment Services, Inc., T. Rowe Price Services, Inc., and T.
   Rowe Price Retirement Plan Services, Inc.; Chairman of the Board, President,
   and Trust Officer, T. Rowe Price Trust Company; Director, Price-Fleming and
   General Re Corporation    
 
 
 
   BRIAN W.H. BERGHUIS, 12/12/58, President -Managing Director, T. Rowe Price;
   Chartered Financial Analyst
 
 
 
   MARC L. BAYLIN, 11/17/67, Vice President -Vice President, T. Rowe Price;
   formerly financial analyst, Rausher Pierce Refsnes; Chartered Financial
   Analyst
 
 
   
 
   ANNA M. DOPKIN, 9/5/67, Vice President -Assistant Vice President, T. Rowe
   Price; formerly 1996-1991, Analyst, Goldman Sachs; Chartered Financial
   Analyst    
 
 
 
   ROBERT N. GENSLER, 10/18/57, Vice President -Vice President, T. Rowe Price
 
 
   
 
   THOMAS J. HUBER, 9/23/66, Vice President -Vice President, T. Rowe Price;
   formerly a Corporate Banking Officer with NationsBank; Chartered Financial
   Analyst    
 
 
 
   ROBERT J. MARCOTTE, 3/6/62, Vice President -Vice President, T. Rowe Price
 
 
 
   CHARLES A. MORRIS, 1/3/63, Vice President -Managing Director, T. Rowe Price;
   Chartered Financial Analyst
 
 
 
   JOHN F. WAKEMAN, 11/25/62, Vice President -Vice President, T. Rowe Price
 
   Mid-Cap Value Fund
 
   
 
 
  *  JAMES A.C. KENNEDY, 8/17/53, Director and Vice President -Director and
   Managing Director, T. Rowe Price; Chartered Financial Analyst    
 
 
   
 
  *  JAMES S. RIEPE, 6/25/43, Director and Vice President -Vice Chairman of the
   Board, Managing Director, and Director, T. Rowe Price; Chairman of the Board,
   T. Rowe Price Investment Services, Inc., T. Rowe Price Services, Inc., and T.
   Rowe Price Retirement Plan Services, Inc.; Chairman of the Board, President,
   and Trust Officer, T. Rowe Price Trust Company; Director, Price-Fleming and
   General Re Corporation    
 
 
   
 
  *  M. DAVID TESTA, 4/22/44, Director -Chairman of the Board and Director,
   Price-Fleming; Vice Chairman of the Board, Chief Investment Officer, and
   Managing Director, T. Rowe Price; Vice President and Director, T. Rowe Price
   Trust Company; Chartered Financial Analyst    
 
 
 
   GREGORY A. MCCRICKARD, 10/19/58, President -Managing Director, T. Rowe Price;
   Vice President, T. Rowe Price Trust Company; Chartered Financial Analyst
 
 
 
   PRESTON G. ATHEY, 7/17/49, Vice President -Managing Director, T. Rowe Price;
   Vice President, T. Rowe Price Trust Company; Chartered Financial Analyst
 
 
 
   HUGH M. EVANS III, 5/17/66, Vice President -Vice President, T. Rowe Price;
   Chartered Financial Analyst
 
 
 
   MARCY L. FISHER, 8/5/59, Vice President -Vice President, T. Rowe Price
 
 
<PAGE>
 
 
   
 
   BRIAN C. ROGERS, 6/27/55, Vice President -Director and Managing Director, T.
   Rowe Price; Vice President, T. Rowe Price Trust Company; Chartered Financial
   Analyst    
 
 
   
 
   LAUREN A. ROMEO, 9/20/67, Vice President -Assistant Vice President, T. Rowe
   Price; Chartered Financial Analyst    
 
 
 
   DAVID J. WALLACK, 7/2/60, Vice President -Vice President, T. Rowe Price
 
   New America Growth Fund
 
 
 
  *  JOHN H. LAPORTE, JR., 7/26/45, Trustee and President -Director and Managing
   Director, T. Rowe Price; Chartered Financial Analyst
 
 
   
 
  *  JAMES S. RIEPE, 6/25/43, Trustee and Vice President -Vice Chairman of the
   Board, Managing Director, and Director, T. Rowe Price; Chairman of the Board,
   T. Rowe Price Investment Services, Inc., T. Rowe Price Services, Inc., and T.
   Rowe Price Retirement Plan Services, Inc.; Chairman of the Board, President,
   and Trust Officer, T. Rowe Price Trust Company; Director, Price-Fleming and
   General Re Corporation    
 
 
   
 
  *  M. DAVID TESTA, 4/22/44, Trustee -Chairman of the Board and Director,
   Price-Fleming; Vice Chairman of the Board, Chief Investment Officer, and
   Managing Director, T. Rowe Price; Vice President and Director, T. Rowe Price
   Trust Company; Chartered Financial Analyst    
 
 
 
   BRIAN W.H. BERGHUIS, 12/12/58, Executive Vice President -Managing Director,
   T. Rowe Price; Chartered Financial Analyst
 
 
 
   MARC L. BAYLIN, 11/17/67, Vice President -Vice President, T. Rowe Price;
   formerly financial analyst, Rausher Pierce Refsnes; Chartered Financial
   Analyst
 
 
 
   KARA M. CHESEBY, 10/9/63, Vice President -Vice President, T. Rowe Price;
   formerly Vice President, Legg Mason Wood Walker; Chartered Financial Analysis
 
 
 
   ROBERT N. GENSLER, 10/18/57, Vice President -Vice President, T. Rowe Price
 
 
   
 
   SEEMA R. HINGORANI, 1/21/69, Vice President -Assistant Vice President, T.
   Rowe Price; formerly Associate Equity Analyst, Donaldson, Lufkin & Jenrehe
    
 
 
   
 
   THOMAS J. HUBER, 9/23/66, Vice President -Vice President, T. Rowe Price;
   formerly a Corporate Banking Officer with NationsBank; Chartered Financial
   Analyst    
 
 
 
   CHARLES G. PEPIN, 4/23/66, Vice President -Vice President, T. Rowe Price
 
 
 
   BRIAN D. STANSKY, 10/14/63, Vice President -Vice President, T. Rowe Price;
   Chartered Financial Analyst
 
 
 
   JOHN F. WAKEMAN, 11/25/62, Vice President -Vice President, T. Rowe Price
 
   New Era Fund
 
   
 
 
  *  JAMES A.C. KENNEDY, 8/17/53, Director and Vice President -Director and
   Managing Director, T. Rowe Price; Chartered Financial Analyst    
 
 
   
 
  *  JAMES S. RIEPE, 6/25/43, Director and Vice President -Vice Chairman of the
   Board, Managing Director, and Director, T. Rowe Price; Chairman of the Board,
   T. Rowe Price Investment Services, Inc., T. Rowe Price Services, Inc., and T.
   Rowe Price Retirement Plan Services, Inc.; Chairman of the Board, President,
   and Trust Officer, T. Rowe Price Trust Company; Director, Price-Fleming and
   General Re Corporation    
 
 
   
 
  *  M. DAVID TESTA, 4/22/44, Director -Chairman of the Board and Director,
   Price-Fleming; Vice Chairman of the Board, Chief Investment Officer, and
   Managing Director, T. Rowe Price; Vice President and Director, T. Rowe Price
   Trust Company; Chartered Financial Analyst    
 
 
 
   CHARLES M. OBER, 4/20/50, President -Vice President, T. Rowe Price; Chartered
   Financial Analyst
 
 
 
   DAVID J. WALLACK, 7/2/60, Executive Vice President -Vice President, T. Rowe
   Price
 
 
 
   HUGH M. EVANS III, 5/17/66, Vice President -Vice President, T. Rowe Price;
   Chartered Financial Analyst
 
 
 
   RICHARD P. HOWARD, 9/16/46, Vice President -Vice President, T. Rowe Price;
   Chartered Financial Analyst
 
 
<PAGE>
 
 
 
   DAVID M. LEE, 11/13/62, Vice President -Vice President, T. Rowe Price;
   Chartered Financial Analyst; formerly Marketing Representative at IBM
 
 
 
   ROBERT J. MARCOTTE, 3/6/62, Vice President -Vice President, T. Rowe Price
 
 
   
 
   GEORGE A. ROCHE, 7/6/41, Vice President -President, Director, Chairman of the
   Board, and Managing Director, T. Rowe Price; Director, Price-Fleming and T.
   Rowe Price Retirement Plan Services, Inc.    
 
   New Horizons Fund
 
 
 
  *  JOHN H. LAPORTE, JR., 7/26/45, Director and President -Director and
   Managing Director, T. Rowe Price; Chartered Financial Analyst
 
 
   
 
  *  JAMES S. RIEPE, 6/25/43, Director and Vice President -Vice Chairman of the
   Board, Managing Director, and Director, T. Rowe Price; Chairman of the Board,
   T. Rowe Price Investment Services, Inc., T. Rowe Price Services, Inc., and T.
   Rowe Price Retirement Plan Services, Inc.; Chairman of the Board, President,
   and Trust Officer, T. Rowe Price Trust Company; Director, Price-Fleming and
   General Re Corporation    
 
 
   
 
  *  M. DAVID TESTA, 4/22/44, Director -Chairman of the Board and Director,
   Price-Fleming; Vice Chairman of the Board, Chief Investment Officer, and
   Managing Director, T. Rowe Price; Vice President and Director, T. Rowe Price
   Trust Company; Chartered Financial Analyst    
 
 
 
   PRESTON G. ATHEY, 7/17/49, Vice President -Managing Director, T. Rowe Price;
   Vice President, T. Rowe Price Trust Company; Chartered Financial Analyst
 
 
 
   MARC L. BAYLIN, 11/17/67, Vice President -Vice President, T. Rowe Price;
   formerly financial analyst, Rausher Pierce Refsnes; Chartered Financial
   Analyst
 
 
 
   BRIAN W.H. BERGHUIS, 12/12/58, Vice President -Managing Director, T. Rowe
   Price; Chartered Financial Analyst
 
 
   
 
   ANNA M. DOPKIN, 9/5/67, Vice President -Assistant Vice President, T. Rowe
   Price; formerly 1996-1991, Analyst, Goldman Sachs; Chartered Financial
   Analyst    
 
 
 
   MARCY L. FISHER, 8/5/59, Vice President -Vice President, T. Rowe Price
 
 
 
   ROBERT N. GENSLER, 10/18/57, Vice President -Vice President, T. Rowe Price
 
 
 
   JILL L. HAUSER, 6/23/58, Vice President -Vice President, T. Rowe Price
 
 
   
 
   THOMAS J. HUBER, 9/23/66, Vice President -Vice President, T. Rowe Price;
   formerly a Corporate Banking Officer with NationsBank; Chartered Financial
   Analyst    
 
 
   
 
   KRIS H. JENNER, M.D., 2/5/62, Vice President -Vice President, T. Rowe Price;
   formerly with the Laboratory of Biological Cancer, The Brigham & Women's
   Hospital, Harvard Medical School    
 
 
   
 
   JOSEPH M. MILANO, 9/14/72, Vice President -Assistant Vice President, T. Rowe
   Price; formerly 1996-1994 Research Assistant, Brookings Institution    
 
 
 
   CHARLES A. MORRIS, 1/3/63, Vice President -Managing Director, T. Rowe Price;
   Chartered Financial Analyst
 
 
 
   CHARLES G. PEPIN, 4/23/66, Vice President -Vice President, T. Rowe Price
 
 
 
   DARRELL M. RILEY, 2/18/58, Vice President -Vice President, T. Rowe Price
 
 
 
   MARK R. SCHLARBAUM, 12/23/69, Vice President -Vice President, T. Rowe Price
 
 
   
 
   MICHAEL F. SOLA, 7/21/69, Vice President -Vice President, T. Rowe Price;
   formerly Systems Analyst/ Programmer at SRA Corporation; Chartered Financial
   Analyst    
 
 
 
   BRIAN D. STANSKY, 10/14/63, Vice President -Vice President, T. Rowe Price;
   Chartered Financial Analyst
 
 
 
   JOHN F. WAKEMAN, 11/25/62, Vice President -Vice President, T. Rowe Price
 
 
 
   FRANCIES W. HAWKS, 2/2/44, Assistant Vice President -Assistant Vice
   President, T. Rowe Price
 
 
<PAGE>
 
   Real Estate Fund
 
   
 
 
  *  JAMES A.C. KENNEDY, 8/17/53, Director and Vice President -Director and
   Managing Director, T. Rowe Price; Chartered Financial Analyst    
 
 
   
 
  *  JAMES S. RIEPE, 6/25/43, Director and Vice President -Vice Chairman of the
   Board, Managing Director, and Director, T. Rowe Price; Chairman of the Board,
   T. Rowe Price Investment Services, Inc., T. Rowe Price Services, Inc., and T.
   Rowe Price Retirement Plan Services, Inc.; Chairman of the Board, President,
   and Trust Officer, T. Rowe Price Trust Company; Director, Price-Fleming and
   General Re Corporation    
 
 
   
 
  *  M. DAVID TESTA, 4/22/44, Director -Chairman of the Board and Director,
   Price-Fleming; Vice Chairman of the Board, Chief Investment Officer, and
   Managing Director, T. Rowe Price; Vice President and Director, T. Rowe Price
   Trust Company; Chartered Financial Analyst    
 
 
 
   WILLIAM J. STROMBERG, 3/10/60, President -Managing Director, T. Rowe Price;
   Chartered Financial Analyst
 
 
 
   DAVID M. LEE, 11/13/62, Executive Vice President -Vice President, T. Rowe
   Price; Chartered Financial Analyst; formerly Marketing Representative at IBM
 
   
 
 
   STEPHEN W. BOESEL, 12/28/44, Vice President -Managing Director, T. Rowe
   Price; Vice President, T. Rowe Price Trust Company and T. Rowe Price
   Retirement Plan Services, Inc.    
 
 
   
 
   ANNA M. DOPKIN, 9/5/67, Vice President -Assistant Vice President, T. Rowe
   Price; formerly 1996-1991, Analyst, Goldman Sachs; Chartered Financial
   Analyst    
 
 
 
   CHARLES M. OBER, 4/20/50, Vice President -Vice President, T. Rowe Price;
   Chartered Financial Analyst
 
 
   
 
   BRIAN C. ROGERS, 6/27/55, Vice President -Director and Managing Director, T.
   Rowe Price; Vice President, T. Rowe Price Trust Company; Chartered Financial
   Analyst    
 
   Science & Technology Fund
 
 
 
  *  JOHN H. LAPORTE, JR., 7/26/45, Chairman of the Board -Director and Managing
   Director, T. Rowe Price; Chartered Financial Analyst
 
 
   
 
  *  JAMES S. RIEPE, 6/25/43, Director and Vice President -Vice Chairman of the
   Board, Managing Director, and Director, T. Rowe Price; Chairman of the Board,
   T. Rowe Price Investment Services, Inc., T. Rowe Price Services, Inc., and T.
   Rowe Price Retirement Plan Services, Inc.; Chairman of the Board, President,
   and Trust Officer, T. Rowe Price Trust Company; Director, Price-Fleming and
   General Re Corporation    
 
 
   
 
  *  M. DAVID TESTA, 4/22/44, Director -Chairman of the Board and Director,
   Price-Fleming; Vice Chairman of the Board, Chief Investment Officer, and
   Managing Director, T. Rowe Price; Vice President and Director, T. Rowe Price
   Trust Company; Chartered Financial Analyst    
 
 
 
   CHARLES A. MORRIS, 1/3/63, President -Managing Director, T. Rowe Price;
   Chartered Financial Analyst
 
 
 
   MARC L. BAYLIN, 11/17/67, Vice President -Vice President, T. Rowe Price;
   formerly financial analyst, Rausher Pierce Refsnes; Chartered Financial
   Analyst
 
 
 
   MARCY L. FISHER, 8/5/59, Vice President -Vice President, T. Rowe Price
 
 
 
   ROBERT N. GENSLER, 10/18/57, Vice President -Vice President, T. Rowe Price
 
 
   
 
   STEPHEN C. JANSEN, 12/12/68, Vice President -Assistant Vice President, T.
   Rowe Price; formerly an Investment Analyst at Schroder & Co.    
 
 
 
   JILL L. HAUSER, 6/23/58, Vice President -Vice President, T. Rowe Price
 
 
 
   D. JAMES PREY III, 11/26/59, Vice President -Vice President, T. Rowe Price
 
 
   
 
   MICHAEL F. SOLA, 7/21/69, Vice President -Vice President, T. Rowe Price;
   formerly Systems Analyst/ Programmer at SRA Corporation; Chartered Financial
   Analyst    
 
 
 
   BRIAN D. STANSKY, 10/14/63, Vice President -Vice President, T. Rowe Price;
   Chartered Financial Analyst
 
 
<PAGE>
 
   Small-Cap Stock Fund
 
 
 
  *  JOHN H. LAPORTE, JR., 7/26/45, Chairman of the Board -Director and Managing
   Director, T. Rowe Price; Chartered Financial Analyst
 
 
   
 
  *  JAMES S. RIEPE, 6/25/43, Director and Vice President -Vice Chairman of the
   Board, Managing Director, and Director, T. Rowe Price; Chairman of the Board,
   T. Rowe Price Investment Services, Inc., T. Rowe Price Services, Inc., and T.
   Rowe Price Retirement Plan Services, Inc.; Chairman of the Board, President,
   and Trust Officer, T. Rowe Price Trust Company; Director, Price-Fleming and
   General Re Corporation    
 
 
   
 
  *  M. DAVID TESTA, 4/22/44, Director -Chairman of the Board and Director,
   Price-Fleming; Vice Chairman of the Board, Chief Investment Officer, and
   Managing Director, T. Rowe Price; Vice President and Director, T. Rowe Price
   Trust Company; Chartered Financial Analyst    
 
 
 
   GREGORY A. MCCRICKARD, 10/19/58, President -Managing Director, T. Rowe Price;
   Vice President, T. Rowe Price Trust Company; Chartered Financial Analyst
 
 
 
   PRESTON G. ATHEY, 7/17/49, Vice President -Managing Director, T. Rowe Price;
   Vice President, T. Rowe Price Trust Company; Chartered Financial Analyst
 
 
 
   HUGH M. EVANS III, 5/17/66, Vice President -Vice President, T. Rowe Price;
   Chartered Financial Analyst
 
 
 
   MARCY L. FISHER, 8/5/59, Vice President -Vice President, T. Rowe Price
 
   
 
 
   JAMES A.C. KENNEDY, 8/17/53, Vice President -Director and Managing Director,
   T. Rowe Price; Chartered Financial Analyst    
 
 
   
 
   JOSEPH M. MILANO, 9/14/72, Vice President -Assistant Vice President, T. Rowe
   Price; formerly 1996-1994 Research Assistant, Brookings Institution    
 
 
 
   CHARLES G. PEPIN, 4/23/66, Vice President -Vice President, T. Rowe Price
 
 
   
 
   LAUREN A. ROMEO, 9/20/67, Vice President -Assistant Vice President, T. Rowe
   Price; Chartered Financial Analyst    
 
 
 
   BRIAN D. STANSKY, 10/14/63, Vice President -Vice President, T. Rowe Price;
   Chartered Financial Analyst
 
 
   
 
   RICHARD T. WHITNEY, 5/7/58, Vice President -Managing Director, T. Rowe Price;
   Vice President, Price-Fleming and T. Rowe Price Trust Company; Chartered
   Financial Analyst    
 
   Small-Cap Value Fund
 
 
 
  *  JOHN H. LAPORTE, JR., 7/26/45, Chairman of the Board -Director and Managing
   Director, T. Rowe Price; Chartered Financial Analyst
 
 
   
 
  *  JAMES S. RIEPE, 6/25/43, Director and Vice President -Vice Chairman of the
   Board, Managing Director, and Director, T. Rowe Price; Chairman of the Board,
   T. Rowe Price Investment Services, Inc., T. Rowe Price Services, Inc., and T.
   Rowe Price Retirement Plan Services, Inc.; Chairman of the Board, President,
   and Trust Officer, T. Rowe Price Trust Company; Director, Price-Fleming and
   General Re Corporation    
 
 
   
 
  *  M. DAVID TESTA, 4/22/44, Director -Chairman of the Board and Director,
   Price-Fleming; Vice Chairman of the Board, Chief Investment Officer, and
   Managing Director, T. Rowe Price; Vice President and Director, T. Rowe Price
   Trust Company; Chartered Financial Analyst    
 
 
 
   PRESTON G. ATHEY, 7/17/49, President -Managing Director, T. Rowe Price; Vice
   President, T. Rowe Price Trust Company; Chartered Financial Analyst
 
 
 
   HUGH M. EVANS III, 5/17/66, Vice President -Vice President, T. Rowe Price;
   Chartered Financial Analyst
 
 
 
   ROBERT J. MARCOTTE, 3/6/62, Vice President -Vice President, T. Rowe Price
 
 
 
   GREGORY A. MCCRICKARD, 10/19/58, Vice President -Managing Director, T. Rowe
   Price; Vice President, T. Rowe Price Trust Company; Chartered Financial
   Analyst
 
 
<PAGE>
 
 
   
 
   JOSEPH M. MILANO, 9/14/72, Vice President -Assistant Vice President, T. Rowe
   Price; formerly 1996-1994 Research Assistant, Brookings Institution    
 
 
   
 
   LAUREN A. ROMEO, 9/20/67, Vice President -Assistant Vice President, T. Rowe
   Price; Chartered Financial Analyst    
 
 
 
   FRANCIES W. HAWKS, 2/2/44, Assistant Vice President -Assistant Vice
   President, T. Rowe Price
 
   Value Fund
 
   
 
 
  *  JAMES A.C. KENNEDY, 8/17/53, Director -Director and Managing Director, T.
   Rowe Price; Chartered Financial Analyst    
 
 
   
 
  *  JAMES S. RIEPE, 6/25/43, Director and Vice President -Vice Chairman of the
   Board, Managing Director, and Director, T. Rowe Price; Chairman of the Board,
   T. Rowe Price Investment Services, Inc., T. Rowe Price Services, Inc., and T.
   Rowe Price Retirement Plan Services, Inc.; Chairman of the Board, President,
   and Trust Officer, T. Rowe Price Trust Company; Director, Price-Fleming and
   General Re Corporation    
 
 
   
 
  *  M. DAVID TESTA, 4/22/44, Director -Chairman of the Board and Director,
   Price-Fleming; Vice Chairman of the Board, Chief Investment Officer, and
   Managing Director, T. Rowe Price; Vice President and Director, T. Rowe Price
   Trust Company; Chartered Financial Analyst    
 
 
   
 
   BRIAN C. ROGERS, 6/27/55, President -Director and Managing Director, T. Rowe
   Price; Vice President, T. Rowe Price Trust Company; Chartered Financial
   Analyst
 
 
 
   STEPHEN W. BOESEL, 12/28/44, Vice President -Managing Director, T. Rowe
   Price; Vice President, T. Rowe Price Trust Company and T. Rowe Price
   Retirement Plan Services, Inc.    
 
 
 
   KARA M. CHESEBY, 10/9/63, Vice President -Vice President, T. Rowe Price;
   formerly Vice President, Legg Mason Wood Walker; Chartered Financial Analysis
 
 
 
   STEPHANIE C. CLANCY, 12/19/64, Vice President -Vice President, T. Rowe Price
 
 
 
   RICHARD P. HOWARD, 9/16/46, Vice President -Vice President, T. Rowe Price;
   Chartered Financial Analyst
 
 
 
   ROBERT W. SMITH, 4/11/61, Vice President -Managing Director, T. Rowe Price;
   Vice President, Price-Fleming
 
 
 
   DAVID J. WALLACK, 7/2/60, Vice President -Vice President, T. Rowe Price
 
 
                               Compensation Table
 
   The Funds do not pay pension or retirement benefits to their officers or
   directors/trustees. Also, any director/ trustee of a Fund who is an officer
   or employee of T. Rowe Price or Price-Fleming does not receive any
   remuneration from the Fund.
 
<TABLE>
<CAPTION>
Name of Person,                   Aggregate Compensation from                   Total Compensation from Fund and
Position                          Fund(a)                                       Fund Complex Paid to Directors/ Trustees(b)
- --------------------------------  --------------------------------------------                                  -----------
- --------------------------------------------------------------------------------
                                                                                --------------------------------------
                                                                                ----------------------------------------------------
<C>                               <S>                                           <S>
Balanced Fund
Donald W. Dick, Jr., Director                                      $1,529                                               $82,000
David K. Fagin, Director                                            1,919                                                65,000
Hanne M. Merriman, Director                                         1,919                                                65,000
Hubert D. Vos, Director                                             1,919                                                66,000
Paul M. Wythes, Director                                            1,529                                                80,000
- ------------------------------------------------------------------------------------------------------------------------------------
Blue Chip Growth Fund
Donald W. Dick, Jr., Director                                      $2,119                                               $82,000
David K. Fagin, Director                                            2,956                                                65,000
Hanne M. Merriman, Director                                         2,956                                                65,000
Hubert D. Vos, Director                                             2,956                                                66,000
Paul M. Wythes, Director                                            2,119                                                80,000
- ------------------------------------------------------------------------------------------------------------------------------------
Capital Appreciation Fund
Donald W. Dick, Jr., Director                                      $1,396                                               $82,000
David K. Fagin, Director                                            1,690                                                65,000
Hanne M. Merriman, Director                                         1,690                                                65,000
Hubert D. Vos, Director                                             1,690                                                66,000
Paul M. Wythes, Director                                            1,396                                                80,000
- ------------------------------------------------------------------------------------------------------------------------------------
Capital Opportunity Fund
Donald W. Dick, Jr., Director                                      $1,057                                               $82,000
David K. Fagin, Director                                            1,089                                                65,000
Hanne M. Merriman, Director                                         1,089                                                65,000
Hubert D. Vos, Director                                             1,089                                                66,000
Paul M. Wythes, Director                                            1,057                                                80,000
- ------------------------------------------------------------------------------------------------------------------------------------
Diversified Small-Cap Growth Fund
Donald W. Dick, Jr., Director                                      $1,040                                               $82,000
David K. Fagin, Director                                            1,057                                                65,000
Hanne M. Merriman, Director                                         1,057                                                65,000
Hubert D. Vos, Director                                             1,057                                                66,000
Paul M. Wythes, Director                                            1,037                                                80,000
- ------------------------------------------------------------------------------------------------------------------------------------
Dividend Growth Fund
Donald W. Dick, Jr., Director                                      $1,378                                               $82,000
David K. Fagin, Director                                            1,657                                                65,000
Hanne M. Merriman, Director                                         1,657                                                65,000
Hubert D. Vos, Director                                             1,657                                                66,000
Paul M. Wythes, Director                                            1,378                                                80,000
- ------------------------------------------------------------------------------------------------------------------------------------
Equity Income Fund
Donald W. Dick, Jr., Trustee                                       $5,901                                               $82,000
David K. Fagin, Trustee                                             9,017                                                65,000
Hanne M. Merriman, Trustee                                          9,017                                                65,000
Hubert D. Vos, Trustee                                              9,017                                                66,000
Paul M. Wythes, Trustee                                             5,901                                                80,000
- ------------------------------------------------------------------------------------------------------------------------------------
Equity Index 500 Fund
Donald W. Dick, Jr., Director                                      $1,908                                               $82,000
David K. Fagin, Director                                            2,584                                                65,000
Hanne M. Merriman, Director                                         2,584                                                65,000
Hubert D. Vos, Director                                             2,584                                                66,000
Paul M. Wythes, Director                                            1,908                                                80,000
- ------------------------------------------------------------------------------------------------------------------------------------
Extended Equity Market Index Fund
Donald W. Dick, Jr., Director                                        $914                                               $82,000
David K. Fagin, Director                                              920                                                65,000
Hanne M. Merriman, Director                                           920                                                65,000
Hubert D. Vos, Director                                               920                                                66,000
Paul M. Wythes, Director                                              914                                                80,000
- ------------------------------------------------------------------------------------------------------------------------------------
Financial Services Fund
Donald W. Dick, Jr., Director                                      $1,037                                               $82,000
David K. Fagin, Director                                            1,049                                                65,000
Hanne M. Merriman, Director                                         1,049                                                65,000
Hubert D. Vos, Director                                             1,049                                                66,000
Paul M. Wythes, Director                                            1,037                                                80,000
- ------------------------------------------------------------------------------------------------------------------------------------
Growth & Income Fund
Donald W. Dick, Jr., Director                                      $2,298                                               $82,000
David K. Fagin, Director                                            3,276                                                65,000
Hanne M. Merriman, Director                                         3,276                                                65,000
Hubert D. Vos, Director                                             3,276                                                66,000
Paul M. Wythes, Director                                            2,298                                                80,000
- ------------------------------------------------------------------------------------------------------------------------------------
Growth Stock Fund
Donald W. Dick, Jr., Director                                      $2,609                                               $82,000
David K. Fagin, Director                                            3,825                                                65,000
Hanne M. Merriman, Director                                         3,825                                                65,000
Hubert D. Vos, Director                                             3,825                                                66,000
Paul M. Wythes, Director                                            2,609                                                80,000
- ------------------------------------------------------------------------------------------------------------------------------------
Health Sciences Fund
Donald W. Dick, Jr., Director                                      $1,025                                               $82,000
David K. Fagin, Director                                            1,037                                                65,000
Hanne M. Merriman, Director                                         1,037                                                65,000
Hubert D. Vos, Director                                             1,037                                                66,000
Paul M. Wythes, Director                                            1,025                                                80,000
- ------------------------------------------------------------------------------------------------------------------------------------
Media & Telecommunications Fund
Donald W. Dick, Jr., Director                                      $1,044                                               $82,000
David K. Fagin, Director                                            1,045                                                65,000
Hanne M. Merriman, Director                                         1,045                                                65,000
Hubert D. Vos, Director                                             1,045                                                66,000
Paul M. Wythes, Director                                            1,044                                                80,000
- ------------------------------------------------------------------------------------------------------------------------------------
Mid-Cap Equity Growth Fund
Donald W. Dick, Jr., Director                                      $1,095                                               $82,000
David K. Fagin, Director                                            1,157                                                65,000
Hanne M. Merriman, Director                                         1,157                                                65,000
Hubert D. Vos, Director                                             1,157                                                66,000
Paul M. Wythes, Director                                            1,095                                                80,000
- ------------------------------------------------------------------------------------------------------------------------------------
Mid-Cap Growth Fund
Donald W. Dick, Jr., Director                                      $1,874                                               $82,000
David K. Fagin, Director                                            2,525                                                65,000
Hanne M. Merriman, Director                                         2,525                                                65,000
Hubert D. Vos, Director                                             2,525                                                66,000
Paul M. Wythes, Director                                            1,874                                                80,000
- ------------------------------------------------------------------------------------------------------------------------------------
Mid-Cap Value Fund
Donald W. Dick, Jr., Director                                      $1,046                                               $82,000
David K. Fagin, Director                                            1,073                                                65,000
Hanne M. Merriman, Director                                         1,073                                                65,000
Hubert D. Vos, Director                                             1,073                                                66,000
Paul M. Wythes, Director                                            1,046                                                80,000
- ------------------------------------------------------------------------------------------------------------------------------------
New America Growth Fund
Donald W. Dick, Jr., Trustee                                       $1,694                                               $82,000
David K. Fagin, Trustee                                             2,211                                                65,000
Hanne M. Merriman, Trustee                                          2,211                                                65,000
Hubert D. Vos, Trustee                                              2,211                                                66,000
Paul M. Wythes, Trustee                                             1,694                                                80,000
- ------------------------------------------------------------------------------------------------------------------------------------
New Era Fund
Donald W. Dick, Jr., Director                                      $1,481                                               $82,000
David K. Fagin, Director                                            1,840                                                65,000
Hanne M. Merriman, Director                                         1,840                                                65,000
Hubert D. Vos, Director                                             1,840                                                66,000
Paul M. Wythes, Director                                            1,481                                                80,000
- ------------------------------------------------------------------------------------------------------------------------------------
New Horizons Fund
Donald W. Dick, Jr., Director                                      $2,829                                               $82,000
David K. Fagin, Director                                            4,216                                                65,000
Hanne M. Merriman, Director                                         4,216                                                65,000
Hubert D. Vos, Director                                             4,216                                                66,000
Paul M. Wythes, Director                                            2,829                                                80,000
- ------------------------------------------------------------------------------------------------------------------------------------
Real Estate Fund
Donald W. Dick, Jr., Director                                      $1,023                                               $82,000
David K. Fagin, Director                                            1,032                                                65,000
Hanne M. Merriman, Director                                         1,032                                                65,000
Hubert D. Vos, Director                                             1,032                                                66,000
Paul M. Wythes, Director                                            1,023                                                80,000
- ------------------------------------------------------------------------------------------------------------------------------------
Science & Technology Fund
Donald W. Dick, Jr., Director                                      $2,323                                               $82,000
David K. Fagin, Director                                            3,321                                                65,000
Hanne M. Merriman, Director                                         3,321                                                65,000
Hubert D. Vos, Director                                             3,321                                                66,000
Paul M. Wythes, Director                                            2,323                                                80,000
- ------------------------------------------------------------------------------------------------------------------------------------
Small-Cap Stock Fund
Donald W. Dick, Jr., Director                                      $1,369                                               $82,000
David K. Fagin, Director                                            1,638                                                65,000
Hanne M. Merriman, Director                                         1,638                                                65,000
Hubert D. Vos, Director                                             1,638                                                66,000
Paul M. Wythes, Director                                            1,369                                                80,000
- ------------------------------------------------------------------------------------------------------------------------------------
Small-Cap Value Fund
Donald W. Dick, Jr., Director                                      $1,722                                               $82,000
David K. Fagin, Director                                            2,266                                                65,000
Hanne M. Merriman, Director                                         2,266                                                65,000
Hubert D. Vos, Director                                             2,266                                                66,000
Paul M. Wythes, Director                                            1,722                                                80,000
- ------------------------------------------------------------------------------------------------------------------------------------
Total Market Equity Index Fund
Donald W. Dick, Jr., Director                                        $920                                               $82,000
David K. Fagin, Director                                              927                                                65,000
Hanne M. Merriman, Director                                           927                                                65,000
Hubert D. Vos, Director                                               927                                                66,000
Paul M. Wythes, Director                                              920                                                80,000
- ------------------------------------------------------------------------------------------------------------------------------------
Value Fund
Donald W. Dick, Jr., Director                                      $1,282                                               $82,000
David K. Fagin, Director                                            1,489                                                65,000
Hanne M. Merriman, Director                                         1,489                                                65,000
Hubert D. Vos, Director                                             1,489                                                66,000
Paul M. Wythes, Director                                            1,282                                                80,000
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
 
 
 
 
<PAGE>
 
 
 
<PAGE>
 
 
 
<PAGE>
 
 
 
<PAGE>
 
 (a) Amounts in this column are based on accrued compensation for calendar
   year 1998.
 
   
 (b) Amounts in this column are based on compensation received from January
   1, 1998, to December 31, 1998. The T. Rowe Price complex included 87 funds
   as of December 31, 1998.    
 
 
 
   All Funds
 
   The 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 Funds in
   the intervals between meetings of the Board, except the powers prohibited by
   statute from being delegated.
 
 
 
 PRINCIPAL HOLDERS OF SECURITIES
 -------------------------------------------------------------------------------
   As of the date of the prospectus, the officers and directors/trustees of the
   Fund, as a group, owned less than 1% of the outstanding shares of the Fund.
 
   
   As of April 1, 1999, the following shareholders beneficially owned more than
   5% of the outstanding shares of the Fund:
 
   Balanced Fund: T. Rowe Price Retirement Plan Services Inc., Fred Meyer Inc.
   401k Sav Plan Fred Plan #105054, New Business Group Conv Asset #68, P.O. Box
   17215, Baltimore, Maryland 21297-1215;    
 
 
<PAGE>
 
   
   Blue Chip Growth Fund: T. Rowe Price Retirement Plan Services TR Blue Chip
   Growth Fund, Attn.: Asset Reconciliations, P.O. Box 17215, Baltimore,
   Maryland 21297-1215; Fidelity Investments Institutional Operations Co., FIIOC
   as Agent for Merck & Co. Inc. #83169, 100 Magellan Way (KW1C), Covington,
   Kentucky 41015-1999;
 
   Financial Services Fund: T. Rowe Price Retirement Plan Services Inc., New
   Business Group for #117, P.O. Box 17215, Baltimore, Maryland 21297-1215;
 
   Health Sciences Fund: T. Rowe Price Retirement Plan Services Inc. Co. Omnibus
   Plan #Omni Plan Installation Team for #114, P.O. Box 17215, Baltimore,
   Maryland 21297-1215;
 
   Mid-Cap Equity Growth Fund: Atlantic Trust Company NA, Attn.: Nominee
   Account, 100 Federal Street, 37th Floor, Boston, Massachusetts 02110-1802; St
   Joe Co. Salaried Pension Plan, 1650 Prudential Drive, Ste. 400, Jacksonville,
   Florida 32207-8166; Pell Rudman Trust Co. NA, Nominee Acct., Attn.: Mutual
   Funds, 100 Federal St., 37th Fl., Boston Massachusetts 02110-1802; Roland &
   Company c/o Mercantile Bank of St. Louis Trust Securities Unit 17-1, P.O. Box
   387, St. Louis, Missouri 63166-0387; Trustmark National Bank TR FBO Various
   Accounts-RR 248 Capital St., Jackson, Mississippi 39201-2503;
 
   New Horizons Fund: The City of New York Deferred Compensation Plan, IRC
   Section 457 Plan, 40 Rector St., 3rd Fl., New York, New York 10006-1705;
 
   Small-Cap Stock Fund: Sigler & Co. C F Smithsonian Int. Wellington Trust Co.
   RD 79866-77, Chase Manhattan Bank, Attn.: Hazel Drinkard, 770 Broadway, 10th
   Fl., New York, New York 10003-9522;    
 
   Blue Chip Growth, Growth & Income, Growth Stock, Mid-Cap Value, New Era, and
   New Horizons Funds: Pirateline & Co., FBO Spectrum Growth Fund Acct., Attn.:
   Mark White, State Street Bank & Trust Co., 1776 Heritage Drive-4W, North
   Quincy, Massachusetts 02171-2197;
 
   
   Dividend Growth, Mid-Cap Growth, New Era, Science & Technology, Small-Cap
   Stock, and Value Funds: Charles Schwab & Co. Inc., Reinvest. Account, Attn.:
   Mutual Fund Dept., 101 Montgomery St., San Francisco, California 94104-4122;
 
   Growth & Income and Science & Technology Funds: Manulife Financial USA, 200
   Bloor St East NT3, Toronto, Ontario Canada M4WIE5, Attn.: Rosie Chuck,
   Pension Accounting.    
 
 
 
 INVESTMENT MANAGEMENT SERVICES
 -------------------------------------------------------------------------------
   Services
   Under the Management Agreement, T. Rowe Price provides the Fund with
   discretionary investment services. Specifically, T. Rowe Price is responsible
   for supervising and directing the investments of the Fund in accordance with
   the Fund's investment objectives, program, and restrictions as provided in
   its prospectus and this Statement of Additional Information. T. Rowe Price is
   also responsible for effecting all security transactions on behalf of the
   Fund, including the negotiation of commissions and the allocation of
   principal business and portfolio brokerage. In addition to these services, T.
   Rowe Price provides the Fund with certain corporate administrative services,
   including: maintaining the Fund's corporate existence and corporate records;
   registering and qualifying Fund shares under federal laws; monitoring the
   financial, accounting, and administrative functions of the Fund; maintaining
   liaison with the agents employed by the Fund such as the Fund's custodian and
   transfer agent; assisting the Fund in the coordination of such agents'
   activities; and permitting T. Rowe Price's employees to serve as officers,
   directors/trustees, and committee members of the Fund without cost to the
   Fund.
 
   The Management Agreement also provides that T. Rowe Price, its
   directors/trustees, officers, employees, and certain other persons performing
   specific functions for the Fund will only be liable to the Fund for losses
   resulting from willful misfeasance, bad faith, gross negligence, or reckless
   disregard of duty.
 
 
<PAGE>
 
   All Funds except Equity Index 500, Extended Equity Market Index, Total Equity
   Market Index, and Mid-Cap Equity Growth Funds
 
   Management Fee
   The Fund pays T. Rowe Price 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 T. Rowe Price 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 Price 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:
   
<TABLE>
 Price Funds' Annual Group Base Fee Rate for Each Level of
                          Assets
<CAPTION>
<S>                                                      <C>     <C>               <C>     <C>               <C>     <C>
                                                         0.480%  First $1 billion  0.360%  Next $2 billion   0.310%  Next $16
                                                                                                                     billion
                                                         ---------------------------------------------------------------------------
                                                         0.450%  Next $1 billion   0.350%  Next $2 billion   0.305%  Next $30
                                                                                                                     billion
                                                         ---------------------------------------------------------------------------
                                                         0.420%  Next $1 billion   0.340%  Next $5 billion   0.300%  Next $40
                                                                                                                     billion
                                                         ---------------------------------------------------------------------------
                                                         0.390%  Next $1 billion   0.330%  Next $10 billion  0.295%  Thereafter
                                                         ---------------------------------------------------------------------------
                                                         0.370%  Next $1 billion   0.320%  Next $10 billion
</TABLE>
    
 
 
 
   For the purpose of calculating the Group Fee, the Price Funds include all the
   mutual funds distributed by Investment Services, (excluding the T. Rowe Price
   Spectrum Funds, and any institutional, index, 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 Funds' 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 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 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. The individual fund fees are listed in the following chart:
   
<TABLE>
<CAPTION>
<S>                                                                  <C>
Balanced Fund                                                              0.15%
Blue Chip Growth Fund                                                      0.30%
Capital Appreciation Fund                                                  0.30%
Capital Opportunity Fund                                                   0.35%
Diversified Small-Cap Growth Fund                                          0.35%
Dividend Growth Fund                                                       0.20%
Equity Income Fund                                                         0.25%
Financial Services Fund                                                    0.35%
Growth & Income Fund                                                       0.25%
Growth Stock Fund                                                          0.25%
Health Sciences Fund                                                       0.35%
Media & Telecommunications Fund                                            0.35%
Mid-Cap Growth Fund                                                        0.35%
Mid-Cap Value Fund                                                         0.35%
New America Growth Fund                                                    0.35%
New Era Fund                                                               0.25%
New Horizons Fund                                                          0.35%
Real Estate Fund                                                           0.30%
Small-Cap Stock Fund                                                       0.45%
Science & Technology Fund                                                  0.35%
Small-Cap Value Fund                                                       0.35%
Value Fund                                                                 0.35%
</TABLE>
 
    
 
 
 
<PAGE>
 
   The following chart sets forth the total management fees, if any, paid to T.
   Rowe Price by each Fund, during the last three years:
<TABLE>
<CAPTION>
                       Fund                               1998            1997             1996
                       ----                               ----            ----             ----
<S>                                                  <C>             <C>             <C>
Balanced                                              $ 6,809,000     $ 5,317,000      $ 3,765,000
Blue Chip Growth                                       19,869,000       8,706,000        1,924,000
Capital Appreciation                                    3,939,000       3,861,000        4,218,000
Capital Opportunity                                       991,000         899,000          890,000
Diversified Small-Cap Growth                              325,000          81,000              (a)
Dividend Growth                                         5,482,000       2,659,000          754,000
Equity Income                                          77,394,000      60,406,000       37,762,000
Equity Index 500                                        4,169,000       2,516,000          925,000
Extended Equity Market Index                                    0             (a)              (a)
Financial Services                                      1,582,000         636,000              (b)
Growth & Income                                        20,258,000      17,390,000       12,048,000
Growth Stock                                           25,573,000      22,078,000       17,848,000
Health Sciences                                         1,926,000       1,811,000          750,000
Media & Telecommunications ( c)                         1,301,000       1,783,000        3,056,000
Mid-Cap Equity Growth                                     633,000         117,000              (b)
Mid-Cap Growth                                         16,692,000       8,533,000        4,390,000
Mid-Cap Value                                           1,596,000         728,000           22,000
New America Growth                                     12,703,000      10,541,000        8,648,000
New Era                                                 7,211,000       9,144,000        7,559,000
New Horizons                                           33,743,000      31,439,000       25,875,000
Real Estate                                                   (b)             (b)              (a)
Science & Technology                                   24,865,000      24,246,000       19,792,000
Small-Cap Stock                                         7,791,000       4,405,000        2,619,000
Small-Cap Value                                        13,021,000      11,594,000        8,187,000
Total Equity Market Index                                       0             (a)              (a)
Value                                                   5,176,000       2,597,000          748,000
- -----------------------------------------------------------------------------------------------------
</TABLE>
 
 
  (a) Prior to commencement of operations.
 
  (b) Due to each Fund's expense limitation in effect at that time, no
     management fees were paid by the Funds to T. Rowe Price.
 
  (c) Fees listed were paid under this Fund's previous management
     agreement, prior to becoming an open-end mutual fund.
 
 
 
   The Management Agreement between the Fund and T. Rowe Price provides that the
   Fund will bear all expenses of its operations not specifically assumed by T.
   Rowe Price.
 
 
<PAGE>
 
   For Capital Opportunity, Diversified Small-Cap Growth, Dividend Growth,
   Equity Index 500, Financial Services, Health Sciences, Mid-Cap Equity Growth,
   Mid-Cap Value, Real Estate, and Value Funds
 
   The following chart sets forth expense ratio limitations and the periods for
   which they are effective. For each, T. Rowe Price has agreed to bear any Fund
   expenses which would cause the Fund's ratio of expenses to average net assets
   to exceed the indicated percentage limitations. The expenses borne by T. Rowe
   Price are subject to reimbursement by the Fund through the indicated
   reimbursement date, provided no reimbursement will be made if it would result
   in the Fund's expense ratio exceeding its applicable limitation.
 
<TABLE>
<CAPTION>
                                                                                         Expense       Reimbursement
                             Fund                                 Limitation Period      -------       -------------
                             ----                                 -----------------       Ratio            Date
                                                                                          -----            ----
                                                                                        Limitation
                                                                                        ----------
<S>                                                             <S>                     <C>         <S>
                                                                January 1, 1999 -
Diversified Small-Cap Growth(a)                                 December 31, 2000         1.25%     December 31, 2002
                                                                January 1, 1998 -
Equity Index 500(b)                                             December 31, 1999         0.40%     December 31, 2001
                                                                September 30, 1996 -
Financial Services                                              December 31, 1998         1.25%     December 31, 2000
                                                                December 31, 1995 -
Health Sciences                                                 December 31, 1997         1.35%     December 31, 1999
                                                                July 31, 1996 -
Mid-Cap Equity Growth                                           December 31, 1997         0.85%     December 31, 1999
                                                                June 28, 1996 -
Mid-Cap Value                                                   December 31, 1997         1.25%     December 31, 1999
Real Estate                                                     October 31, 1997 -        1.00%     December 31, 2001
                                                                December 31, 1999
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
 
 
 (a) The Diversified Small-Cap Growth Fund previously operated under a
   1.25% limitation that expired December 31, 1998. The reimbursement
   period for this limitation extends through December 31, 2000.
 
 (b) The Equity Index 500 Fund previously operated under a 0.40% limitation
   that expired December 31, 1997. The reimbursement period for this
   limitation extends through December 31, 1999.
 
 
 
   Each of the above-referenced Fund's Management Agreement also provides that
   one or more additional expense limitations periods (of the same or different
   time periods) may be implemented after the expiration of the current expense
   limitation, and that with respect to any such additional limitation period,
   the Fund may reimburse T. Rowe Price, provided the reimbursement does not
   result in the Fund's aggregate expenses exceeding the additional expense
   limitation.
 
   
   Pursuant to Capital Opportunity Fund's expense limitation that expired on
   December 31, 1996, $72,000 of previously unaccrued management fees and
   expenses were repaid for the year ended December 31, 1998. Additionally,
   $22,000 of management fees were permanently waived as of December 31, 1998.
 
   Pursuant to the Diversified Small-Cap Growth Fund's current expense
   limitation, $146,000 of management fees were not accrued for the year ended
   December 31, 1998.    
 
   Pursuant to the Equity Index 500 Fund's previous expenses limitation,
   $283,000 of management fees were not accrued by the Fund for the year ended
   December 31, 1997. Additionally, $370,000 of unaccrued 1996 management fees
   are subject to reimbursement through December 31, 1999.
 
   Pursuant to the Financial Services Fund's current expense limitation, $24,000
   of management fees were not accrued by the Fund for the year ended December
   31, 1997 and $26,000 of unaccrued fees and expenses are subject to
   reimbursement through December 31, 2000.
 
   
   Pursuant to the Mid-Cap Equity Growth Fund's current expense limitation,
   $84,000 of previously unaccrued management fees were repaid by the Fund for
   the year ended December 31, 1998, and $32,000 remains unaccrued from prior
   periods and subject to reimbursement through December 31, 1999.    
 
   Pursuant to the Mid-Cap Value Fund's current expense limitation, $71,000 of
   previously unaccrued management fees were repaid by the Fund for the year
   ended December 31, 1997 and $7,000 remains subject to reimbursement through
   December 31, 1999.
 
 
<PAGE>
 
   Pursuant to the Real Estate Fund's current expense limitation, $5,000 of
   management fees were not accrued by the Fund for the year ended December 31,
   1997, and $18,000 of other expenses were borne by the Manager.
 
 
                                 Management Fee
 
   Equity Index 500 Fund
   The Fund pays T. Rowe Price an annual investment management fee in monthly
   installments of 0.20% of the average daily net asset value of the Fund.
 
   Extended Equity Market Index and Total Equity Market Index Funds
   Each Fund pays T. Rowe Price an annual all-inclusive fee in monthly
   installments of 0.40% of the average daily net assets of the Fund.
 
   Mid-Cap Equity Growth Fund
   The Fund pays T. Rowe Price an annual investment management fee in monthly
   installments of 0.60% of the average daily net asset value of the Fund.
 
   Blue Chip Growth, Equity Income, Growth & Income, Growth Stock, Mid-Cap
   Value, New Era, and New Horizons Funds
 
   T. Rowe Price Spectrum Fund, Inc.
   The Funds listed above are a party to a Special Servicing Agreement
   ("Agreement") between and among T. Rowe Price Spectrum Fund, Inc. ("Spectrum
   Fund"), T. Rowe Price, and various other T. Rowe Price funds which, along
   with the Fund, are funds in which Spectrum Fund invests (collectively all
   such funds "Underlying Price Funds").
 
   Each 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.
 
   
   Management Related Services
   As noted above, the Management Agreement spells out the expenses to be paid
   by the Fund. In addition to the Management Fee, the 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.
 
   T. Rowe Price Services, Inc., a wholly owned subsidiary of T. Rowe Price,
   acts as the Fund's 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. Additionally, T. Rowe Price, under a separate
   agreement with the Funds, provides accounting services to the Funds.
 
   The Funds paid the expenses shown in the following table for the fiscal year
   ended December 31, 1998, to T. Rowe Price and its affiliates.    
 
 
<PAGE>
 
<TABLE>
<CAPTION>
                             Transfer Agent and     Retirement     Accounting
           Fund             Shareholder Services  Subaccounting     Services
           ----             --------------------     Services       --------
                                                     --------
<S>                         <C>                   <C>             <C>
Balanced                        $   536,000        $ 2,857,000      $ 94,000
Blue Chip Growth                  4,052,000          2,953,000        62,000
Capital Appreciation                780,000          1,150,000        87,000
Capital Opportunity                 290,000             23,000        62,000
Diversified Small-Cap
Growth                              246,000                  -        62,000
Dividend Growth                   1,411,248            171,000        67,000
Equity Income                    10,397,000         11,031,000        87,000
Equity Index 500                  1,568,000          2,766,000        63,000
Extended Equity Market
Index                                35,000                  -        55,000
Financial Services                  530,000             77,000        62,000
Growth & Income                   3,062,000          2,502,000        87,000
Growth Stock                      2,868,000          2,853,000       108,000
Health Sciences                     743,000             69,000        62,000
Media & Telecommunications          354,000              5,000        62,000
Mid-Cap Equity Growth                 8,000                  -        62,000
Mid-Cap Growth                    2,348,000          1,589,000        62,000
Mid-Cap Value                       557,000             18,000        62,000
New America Growth                1,421,000          2,655,000        72,000
New Era                           1,279,000            240,000        74,000
New Horizons                      3,798,000          4,300,000        97,000
Real Estate                         127,000                  -        62,000
Science & Technology              5,076,000          2,136,000        72,000
Small-Cap Stock                   1,342,000            142,000        87,000
Small-Cap Value                   1,404,000          1,593,000        62,000
Total Equity Market Index            72,000                  -        55,000
Value                             1,157,000            327,000        62,000
</TABLE>
 
 
 
   All Funds
 
 
 DISTRIBUTOR FOR THE FUNDS
 -------------------------------------------------------------------------------
   Investment Services, a Maryland corporation formed in 1980 as a wholly owned
   subsidiary of T. Rowe Price, serves as Fund's 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 the Fund's shares is continuous.
 
   Investment Services is located at the same address as the Fund and T. Rowe
   Price-100 East Pratt Street, Baltimore, Maryland 21202.
 
   Investment Services serves as distributor to the Fund pursuant to an
   Underwriting Agreement ("Underwriting Agreement"), which provides that the
   Fund will pay all fees and expenses in connection with: necessary state
   filings; preparing, setting in type, 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'
 
 
<PAGE>
 
   federal and state registrations as a broker-dealer; and offering and selling
   shares, except for those fees and expenses specifically assumed by the Fund.
   Investment Services' expenses are paid by T. Rowe Price.
 
   Investment Services acts as the agent of the Fund in connection with the sale
   of its shares in the various states 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 Fund.
 
   All Funds
 
 
 CUSTODIAN
 -------------------------------------------------------------------------------
   State Street Bank and Trust Company is the custodian for the Fund's U.S.
   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. State Street Bank's main office is at 225 Franklin Street,
   Boston, Massachusetts 02110.
 
   The Fund (other than Equity Index 500, Extended Equity Market Index, and
   Total Equity Market Index Funds) has 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 in accordance with regulations under the 1940 Act. The
   address for The Chase Manhattan Bank, N.A., London is Woolgate House, Coleman
   Street, London, EC2P 2HD, England.
 
 
   
 SHAREHOLDER SERVICES BY OUTSIDE PARTIES
 -------------------------------------------------------------------------------
   The Fund from time to time may enter into agreements with outside parties
   through which shareholders hold Fund shares. The shares would be held by such
   parties in omnibus accounts. The agreements would provide for payments by the
   Fund to the outside party for shareholder services provided to shareholders
   in the omnibus accounts.    
 
 
 
 CODE OF ETHICS
 -------------------------------------------------------------------------------
   The Fund's investment adviser (T. Rowe Price) has a written Code of Ethics
   which requires all employees to obtain prior clearance before engaging in
   personal securities transactions. In addition, all employees must report
   their personal securities transactions within 10 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 seven calendar days prior to the date
   of the proposed transaction; or the security is subject to internal trading
   restrictions. In addition, employees are prohibited from profiting from
   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.
 
 
<PAGE>
 
 PORTFOLIO TRANSACTIONS
 -------------------------------------------------------------------------------
   Investment or Brokerage Discretion
   Decisions with respect to the purchase and sale of portfolio securities on
   behalf of the Fund 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.
 
 
                      How Brokers and Dealers Are Selected
 
   Equity Securities
   
   In purchasing and selling equity 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, their expertise in
   particular markets 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 services.    
 
   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 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. T. Rowe Price may receive
   research services in connection with brokerage transactions, including
   designations in a fixed price offerings.
 
 
 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 Fund. In evaluating the reasonableness of commission rates,
   T. Rowe Price considers: (a) historical commission rates; (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.    
 
 
       Descriptions 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,
 
 
<PAGE>
 
   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 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 or net prices 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.
 
 
                         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 or 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 or dealers and make judgments as to the level of
   business which would recognize such services. In addition, brokers or 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 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.
 
 
<PAGE>
 
                                  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.
 
   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.
 
   Some of T. Rowe Price's other clients have investment objectives and programs
   similar to those of the Fund. T. Rowe Price 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 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.
 
   
   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.    
 
 
                            Trade Allocation Policies
 
   T. Rowe Price has developed written trade allocation guidelines for its
   Equity, Municipal, and Taxable Fixed Income Trading Desks. Generally, when
   the amount of securities available in a public offering or the secondary
   market is insufficient to satisfy the volume or price requirements for the
   participating client portfolios, the guidelines require a pro-rata allocation
   based upon the amounts initially requested by each portfolio manager. In
   allocating trades made on combined basis, the Trading Desks seek to achieve
   the same net unit price of the securities for each participating client.
   Because a pro-rata allocation may not always adequately accommodate all facts
   and circumstances, the guidelines provide for exceptions to allocate trades
   on an adjusted, pro-rata basis. Examples of where adjustments may be made
   include: (i) reallocations to recognize the efforts of a portfolio manager in
   negotiating a transaction or a private placement; (ii) reallocations to
   eliminate deminimis positions; (iii) priority for accounts with specialized
   investment policies and objectives; and (iv) reallocations in light of a
   participating portfolio's characteristics (e.g., industry or issuer
   concentration, duration, and credit exposure).
 
 
                  Transactions With Related Brokers and Dealers
 
   
   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, from time to time, T. Rowe Price may place orders for the
   Fund's portfolio transactions with broker-dealer affiliates of Robert Fleming
   Holdings Limited ("Robert Fleming" or "Flemings"), an affiliate of
   Price-Fleming. Robert Fleming, through Copthall    
 
 
<PAGE>
 
   
   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 owned by Robert Fleming.    
 
   The Board of Directors/Trustees of the Fund 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.
   Other affiliates of Robert Fleming Holding and JFG also may be used. Although
   it does not believe that the Fund's use of these brokers would be subject to
   Section 17(e) of the 1940 Act, the Board of Directors/Trustees of the Fund
   has agreed that the procedures set forth in Rule 17e-1 under that Act will be
   followed when using such brokers.
 
 
                                      Other
 
   For the years 1998, 1997, and 1996, the total brokerage commissions paid by
   each Fund, including the discounts received by securities dealers in
   connection with underwritings, and the percentage of these commissions paid
   to firms which provided research, statistical, or other services to T. Rowe
   Price in connection with the management of each Fund, or, in some cases, to
   each Fund, was as shown below.
 
   
<TABLE>
<CAPTION>
                                     1998                1997                1996
            Fund              Commissions   %     Commissions   %     Commissions    %
            ----              -----------   -     -----------   -     -----------    -
<S>                           <C>          <C>    <C>          <C>    <C>          <C>
Balanced                      $1,050,595    4.6%  $ 1,276,793   9.7%  $   292,325   13.0%
Blue Chip Growth               5,418,392   43.0%    2,567,926  54.2%      748,661   34.6%
Capital Appreciation           1,630,383   45.7%    1,734,274  35.4%      886,009   46.6%
Capital Opportunity              355,413   32.6%      506,307  43.4%      764,518   38.7%
Diversified Small-Cap Growth      94,322    0.5%      107,676     0           (a)    (a)
Dividend Growth                1,936,978   59.4%    1,620,702  42.3%      478,131   28.6%
Equity Income                  6,883,655   35.2%    8,137,149  59.3%    6,912,071   59.2%
Equity Index 500                 258,633    0.5%      150,827   0.0%       37,146    0.0%
Extended Equity Market Index      27,382    0.2%          (a)   (a)           (a)    (a)
Financial Services               756,976    2.0%      839,766   3.2%       60,862      0
Growth & Income                2,272,536   28.4%    2,971,378  29.1%    1,874,214   42.7%
Growth Stock                   8,459,575   42.0%    5,523,460  53.9%    5,630,241   48.7%
Health Sciences                  333,803   54.8%    1,040,908  31.2%    1,488,623   20.4%
Media & Telecommunications       740,649    9.1%      357,871  26.8%    1,659,735   15.0%
Mid-Cap Equity Growth            255,381   29.4%      140,756  21.9%       24,079   12.0%
Mid-Cap Growth                 5,757,447   34.8%    4,686,813  32.3%    3,149,050   27.9%
Mid-Cap Value                    391,302   46.7%      364,072  36.4%       92,359   17.0%
New America Growth             4,150,396   14.2%    3,220,413  26.6%    1,344,080   31.6%
New Era                        1,871,968   57.9%    3,029,701  43.0%    2,500,868   45.2%
New Horizons                   8,448,650    5.0%   10,028,310  10.3%   15,900,960    6.5%
Real Estate                      162,606   13.8%       35,421   0.8%          (a)    (a)
Science & Technology           4,348,665   31.3%    4,421,394  33.3%    5,713,825   39.1%
Small-Cap Stock                1,829,514   20.7%    1,742,106   8.3%    1,044,665    5.5%
Small-Cap Value                1,488,300   32.1%    2,503,146  19.1%    1,289,012   31.8%
Total Market Equity Index         28,271    0.2%          (a)   (a)           (a)    (a)
Value                          1,876,931   75.7%    1,200,103  66.0%      780,033   57.4%
- ------------------------------------------------------------------------------------------
</TABLE>
 
    
 
 (a) Prior to commencement of operations.
 
 
 
 
<PAGE>
 
   On December 31, 1998, the Balanced Fund held common stock of J.P. Morgan with
   a value of $2,257,000. The Fund also held a bond of Lehman Brothers Holding,
   with a value of $1,625,000. The Fund also held a GMAC MTN valued at $81,000.
   In 1997, J.P. Morgan, Lehman Brothers Holding, and GMAC were among the Fund's
   regular brokers or dealers as defined in Rule 10b-1 under the 1940 Act.
 
   On December 31, 1998, the Blue Chip Growth Fund held common stock of Chase
   Manhattan with a value of $21,900,000, and a Morgan Stanley MTN valued at
   $5,005,000. In 1997, Chase Manhattan and Morgan Stanley were among the Fund's
   regular brokers or dealers as defined in Rule 10b-1 under the 1940 Act.
 
   On December 31, 1998, the Equity Income Fund held common stock of the
   following regular brokers or dealers of the Fund: Bankers Trust -
   $106,816,000; Chase Manhattan - $109,500,000; J.P. Morgan - $101,588,000; and
   Morgan Stanley (MTN) - $36,035,000. In 1997, Bankers Trust, Chase Manhattan,
   J.P. Morgan, and Morgan Stanley were among the Fund's regular brokers or
   dealers as defined in Rule 10b-1 under the 1940 Act.
 
   On December 31, 1998, the Equity Index 500 Fund held common stock of the
   following regular brokers or dealers of the Fund: Bankers Trust - $2,742,000;
   Citicorp - $14,318,000; Chase Manhattan - $11,498,000; J.P. Morgan -
   $4,961,000; and Merrill Lynch - $6,041,000. In 1997, Bankers Trust, Citicorp,
   Chase Manhattan, J.P. Morgan, and Merrill Lynch were among the Fund's regular
   brokers or dealers as defined in Rule 10b-1 under the 1940 Act.
 
   On December 31, 1998, the Financial Services Fund held common stock of the
   following regular brokers or dealers of the Fund: Chase Manhattan -
   $3,832,000; First Chicago NBD - $1,670,000; Morgan Stanley - $1,035,000; and
   Nations Bank Montgomery - $2,372,000. In 1997, Chase Manhattan, First Chicago
   NBD, Morgan Stanley, and NationsBank Montgomery were among the Fund's regular
   brokers or dealers as defined in Rule 10b-1 under the 1940 Act.
 
   On December 31, 1998, the Growth and Income Fund held common stock or the
   following regular brokers or dealers of the Fund: Chase Manhattan -
   $49,275,000; and Citicorp - $31,176,000. In 1997, Chase Manhattan and
   Citicorp were among the Fund's regular brokers or dealers as defined in Rule
   10b-1 under the 1940 Act.
 
   On December 31, 1998, the Growth Stock Fund held common stock of Mellon Bank
   valued at $19,703,000. In 1997, Mellon Bank was among the Fund's regular
   brokers or dealers as defined in Rule 10b-1 under the 1940 Act.
 
   On December 31, 1998, the Growth & Income and Small-Cap Value Funds held
   Morgan Stanley Group MTN, both valued at $10,010,000, respectively. In 1997,
   The Morgan Stanley Group was among the Funds' regular brokers or dealers as
   defined in Rule 10b-1 under the 1940 Act.
 
   The portfolio turnover rate for each Fund for the years ended 1998, 1997, and
   1996, was as follows:
   
<TABLE>
<CAPTION>
            Fund                  1998           1997          1996
            ----                  ----           ----          ----
<S>                           <C>            <C>            <C>
Balanced                          12.5%          15.5%          22.3%
Blue Chip Growth                  34.5%          23.7%          26.3%
Capital Appreciation              52.6%          48.3%          44.2%
Capital Opportunity               73.8%          85.0%         107.3%
Diversified Small-Cap Growth      39.8%          13.4%           (b)
Dividend Growth                   37.3%          39.1%          43.1%
Equity Income                     22.6%          23.9%          25.0%
Equity Index 500                   4.7%           0.7%           1.3%
Extended Equity Market Index      28.7%           (b)            (b)
Financial Services                46.8%          46.0%           5.6%(a)
Growth & Income                   20.5%          15.7%          13.5%
Growth Stock                      54.8%          40.9%          49.0%
- ---------------------------------------------------------------------------
Health Sciences                   85.7%         104.4%         133.1%
Media & Telecommunications        48.9%          38.6%         102.9%
Mid-Cap Equity Growth             52.8%          41.0%          31.3%(a)
Mid-Cap Growth                    46.7%          42.6%          38.1%
Mid-Cap Value                     32.0%          16.0%           3.9%(a)
New America Growth                45.6%          43.2%          36.7%
New Era                           23.1%          27.5%          28.6%
New Horizons                      41.2%          45.2%          41.4%
Real Estate                       56.8%           8.4%           (b)
Science & Technology             108.9%         133.9%         125.6%
Small-Cap Stock                   25.9%          22.9%          31.1%
Small-Cap Value                   17.3%          14.6%          15.2%
Total Equity Market Index          1.9%           (b)            (b)
Value                             72.1%          67.2%          68.0%
- ---------------------------------------------------------------------------
</TABLE>
 
    
 
 
 
<PAGE>
 
    (a) Annualized.
    (b) Prior to commencement of operations.
 
 
   All Funds
 
 
 PRICING OF SECURITIES
 -------------------------------------------------------------------------------
   Equity securities listed or regularly traded on a securities exchange are
   valued at the last quoted sales price at the time the valuations are made. A
   security that is listed or traded on more than one exchange is valued at the
   quotation on the exchange determined to be the primary market for such
   security. Listed securities not traded on a particular day and securities
   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 amortized cost in local
   currency which, when combined with accrued interest, approximates fair value.
 
   Investments in mutual funds are valued at the closing net asset value per
   share of the mutual fund on the day of valuation. In the absence of a last
   sale price, purchased and written options are valued at the mean of the
   latest bid and asked prices, respectively.
 
   For the purposes of determining the Fund's net asset value per share, the
   U.S. dollar value of all assets and liabilities initially expressed in
   foreign currencies is determined by using 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.
 
 
<PAGE>
 
   All Funds
 
 
 NET ASSET VALUE PER SHARE
 -------------------------------------------------------------------------------
   The purchase and redemption price of the Fund's shares is equal to the Fund's
   net asset value per share or share price. The Fund determines its net asset
   value per share by subtracting its 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 the Fund is normally
   calculated as of the close of trading on the New York Stock Exchange ("NYSE")
   every day the NYSE is open for trading. The NYSE is closed on the following
   days: New Year's Day, Dr. Martin Luther King, Jr. Holiday, Presidents' Day,
   Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day, and
   Christmas Day.
 
   Determination of net asset value (and the offering, sale redemption and
   repurchase of shares) for the 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 the Fund of securities owned by it is
   not reasonably practicable or it is not reasonably practicable for the Fund
   fairly to determine the value of its net assets, or (d) during which a
   governmental body having jurisdiction over the Fund may by order permit such
   a suspension for the protection of the Fund's shareholders; provided that
   applicable rules and regulations of the SEC (or any succeeding governmental
   authority) shall govern as to whether the conditions prescribed in (b), (c),
   or (d) exist.
 
 
 
 DIVIDENDS AND DISTRIBUTIONS
 -------------------------------------------------------------------------------
   
   Unless you elect otherwise, the Fund's capital gain distributions, final
   quarterly dividend (Balanced, Dividend Growth, Equity Income, Equity Index
   500, Growth & Income, Mid-Cap Value, Real Estate, Total Equity Market Index,
   and Value Funds) and annual dividend (other funds), if any, will be
   reinvested on the reinvestment date using the NAV per share of that date. The
   reinvestment date normally precedes the payment date by one day, although the
   exact timing is subject to change and can be as great as 10 days.    
 
 
 
 TAX STATUS
 -------------------------------------------------------------------------------
   The Fund intends to qualify as a "regulated investment company" under
   Subchapter M of the Code.
 
   A portion of the dividends paid by the Fund may be eligible for the
   dividends-received deduction for corporate shareholders. For tax purposes, it
   does not make any difference whether dividends and capital gain distributions
   are paid in cash or in additional shares. The 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 December 31 to avoid a federal income tax.
 
   At the time of your purchase, the Fund's net asset value may reflect
   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 as a capital gain
   distribution. For federal income tax purposes, the Fund is permitted to carry
   forward its net realized capital losses, if any, for eight years and realize
   net capital gains up to the amount of such losses without being required to
   pay taxes on, or distribute, such gains.
 
   If, in any taxable year, the 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, if any, without
   deduction for dividends or other distributions to shareholders; and (ii) the
   Fund's distributions to the extent
 
 
<PAGE>
 
   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).
 
 
                        Taxation of Foreign Shareholders
 
   The Code provides that dividends from net income 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 by the
   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.
 
   All Funds except Equity Index 500, Extended Equity Market Index, and Total
   Equity Market Index Funds
 
   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. 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.
 
   To avoid such tax and interest, 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; deductions for losses are allowable only to the extent
   of any gains resulting from these deemed sales for prior taxable years. Such
   gains and losses will be treated as ordinary income. The Fund will be
   required to distribute any resulting income 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 ordinary income dividend paid by the Fund will be
   increased. If the result is a loss, the income dividend paid by the Fund will
   be decreased, or to the extent such dividend has already been paid, it 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.
 
   All Funds
 
 
 INVESTMENT PERFORMANCE
 -------------------------------------------------------------------------------
 
                            Total Return Performance
 
   The 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 the 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 gain dividends. The
   results shown are historical and should not be considered indicative of the
   future performance of the Fund. Each average annual compound rate of return
   is derived from the cumulative performance of the Fund over the time period
   specified. The annual compound rate of return for the Fund over any other
   period of time will vary from the average.
 
 
<PAGE>
 
 
   
<TABLE>
<CAPTION>
                   Cumulative Performance Percentage Change
                         1 Yr.     5 Yrs.     10 Yrs.     % Since     Inception
                         -----     ------     -------     -------     ---------
                         Ended      Ended      Ended     Inception      Date
                         -----      -----      -----     ---------      ----
                        12/31/98  12/31/98    12/31/98    12/31/98
                        --------  --------    --------    --------
<S>                     <C>       <C>        <C>         <C>         <S>
S & P 500                28.57%    193.88%    479.58%        --       --
Dow Jones Industrial
Average                  18.13     173.37     461.09         --       --
CPI                       1.86      12.69      36.35         --       --
 
Balanced Fund            15.97      93.34     272.43     39,476.74%   12/31/39
Blue Chip Growth Fund    28.84     191.85      --           233.66    06/30/93
Capital Appreciation
Fund                      5.77      82.67     236.86        368.43    06/30/86
Capital Opportunity
Fund                     14.70      --         --           137.12    11/30/94
Diversified Small-Cap
Growth Fund               3.58      --         --            10.94    06/30/97
Dividend Growth Fund     15.04     153.83      --           203.08    12/30/92
Equity Income Fund        9.23     136.14     311.08        657.46    10/31/85
Equity Index 500Fund     28.31     189.73      --           340.45    03/30/90
Financial Services
Fund                     11.55      --         --            78.91    09/30/96
Growth & Income Fund      9.96     123.11     305.26        775.45    12/21/82
Growth Stock Fund        27.41     159.31     410.12     27,314.35    04/11/50
Health Sciences Fund     22.37      --         --            85.22    12/29/95
Media &
Telecommunications
Fund(a)                  35.14     150.08      --           143.62    10/13/93
Mid-Cap Equity Growth
Fund                     21.45      --         --            66.93    07/31/96
Mid-Cap Growth Fund      22.00     154.76      --           300.52    06/30/92
Mid-Cap Value Fund        1.39      --         --            49.88    06/28/96
New America Growth
Fund                     17.89     128.88     481.06        745.27    09/30/85
New Era Fund             -9.88      57.81     141.73      1,699.80    01/20/69
New Horizons Fund         6.25     112.81     398.70      7,747.35    06/03/60
Real Estate Fund        -14.86      --         --            -8.20    10/31/97
Science & Technology
Fund                     42.35     197.84     876.95        791.98    09/30/87
Small-Cap Stock Fund     -3.46     101.67     257.15     29,036.31    06/01/56
Small-Cap Value Fund    -12.47      77.88     272.68        258.45    06/30/88
Value Fund                6.85      --         --           155.90    09/30/94
- --------------------------------------------------------------------------------
</TABLE>
 
    
 
 
 (a) Figures based on performance as a closed-end investment company traded
   on the New York Stock Exchange.
 
 
<PAGE>
 
 
   
<TABLE>
<CAPTION>
                   Average Annual Compound Rates of Return
                         1 Yr.     5 Yrs.     10 Yrs.     % Since    Inception
                         -----     ------     -------     -------    ---------
                         Ended      Ended      Ended     Inception     Date
                         -----      -----      -----     ---------     ----
                        12/31/98  12/31/98    12/31/98   12/31/98
                        --------  --------    --------   --------
<S>                     <C>       <C>        <C>         <C>        <S>
S & P 500                28.57%    24.06%      19.21%     --             --
Dow Jones Industrial
Average                  18.13     22.28       18.82      --             --
CPI                       1.86      2.42        3.15      --             --
 
Balanced Fund            15.97     14.09       14.05      10.67%     12/31/39
Blue Chip Growth Fund    28.84     23.89       --         24.48      06/30/93
Capital Appreciation
Fund                      5.77     12.81       12.91      13.15      06/30/86
Capital Opportunity
Fund                     14.70     --          --         23.54      11/30/94
Diversified Small-Cap
Growth Fund               3.58     --          --          7.14      06/30/97
Dividend Growth Fund     15.04     20.48       --         20.29      12/30/92
Equity Income Fund        9.23     18.75       15.18      16.62      10/31/85
Equity Index 500 Fund    28.31     23.71       --         18.45      03/30/90
Financial Services
Fund                     11.55     --          --         29.48      09/30/96
Growth & Income Fund      9.96     17.41       15.02      14.50      12/21/82
Growth Stock Fund        27.41     20.99       17.70      12.21      04/11/50
Health Sciences Fund     22.37     --          --         22.76      12/29/95
Media &
Telecommunications
Fund(a)                  35.14     20.12       --         18.62      10/13/93
Mid-Cap Equity Growth
Fund                     21.45     --          --         23.60      07/31/96
Mid-Cap Growth Fund      22.00     20.57       --         23.79      06/30/92
Mid-Cap Value Fund        1.39     --          --         17.49      06/28/96
New America Growth
Fund                     17.89     18.01       19.24      17.48      09/30/85
New Era Fund             -9.88      9.55        9.23      10.13      01/20/69
New Horizons Fund         6.25     16.31       17.43      11.97      06/03/60
Real Estate Fund        -14.86     --          --         -7.07      10/31/97
Science & Technology
Fund                     42.35     24.39       25.60      21.47      09/30/87
Small-Cap Stock Fund     -3.46     15.06       13.58      14.25      06/01/56
Small-Cap Value Fund    -12.47     12.21       14.06      12.92      06/30/88
Value Fund                6.85     --          --         24.73      09/30/94
- -------------------------------------------------------------------------------
</TABLE>
 
    
 
 
 (a) Figures based on performance as a closed-end investment company traded
   on the New York Stock Exchange.
 
 
 
 
                         Outside Sources of Information
 
   From time to time, in reports and promotional literature: (1) the Fund's
   total return performance, ranking, or any other measure of the Fund's
   performance may be compared to any one or combination of the following: (a) a
   broad-based index; (b) other groups of mutual funds, including T. Rowe Price
   Funds, tracked by independent research firms ranking entities, or financial
   publications; (c) indices of securities comparable to those in which the Fund
   invests; (2) the Consumer Price Index (or any other measure for inflation,
   government statistics, such as GNP may be used to illustrate investment
   attributes of the Fund or the general economic, business, investment, or
   financial environment in which the Fund operates; (3) various financial,
   economic and market statistics developed by brokers, dealers and other
   persons may be used to illustrate
 
 
<PAGE>
 
   aspects of the Fund's performance; (4) the effect of tax-deferred compounding
   on the Fund's investment returns, or on returns in general in both qualified
   and nonqualified retirement plans or any other tax advantage product, may be
   illustrated by graphs, charts, etc.; and (5) the sectors or industries in
   which the Fund invests may be compared to relevant indices or surveys in
   order to evaluate the Fund's historical performance or current or potential
   value with respect to the particular industry or sector.
 
 
                               Other Publications
 
   From time to time, in newsletters and other publications issued by Investment
   Services, T. Rowe Price mutual fund portfolio managers may discuss economic,
   financial and political developments in the U.S. and abroad and how these
   conditions have affected or may affect securities prices or the Fund;
   individual securities within the Fund's portfolio; and their philosophy
   regarding the selection of individual stocks, including why specific stocks
   have been added, removed or excluded from the Fund's portfolio.
 
 
                           Other Features and Benefits
 
   The Fund is a member of the T. Rowe Price family of Funds and may help
   investors achieve various long-term investment goals, which include, but are
   not limited to, 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 and/or Investment Services may be made available.
 
 
                       No-Load Versus Load and 12b-1 Funds
 
   Unlike the T. Rowe Price funds, many mutual funds charge sales fees to
   investors or use fund assets to finance distribution activities. These fees
   are in addition to the normal advisory fees and expenses charged by all
   mutual funds. There are several types of fees charged which vary in magnitude
   and which may often be used in combination. A sales charge (or "load") can be
   charged at the time the fund is purchased (front-end load) or at the time of
   redemption (back-end load). Front-end loads are charged on the total amount
   invested. Back-end loads or "redemption fees" are charged either on the
   amount originally invested or on the amount redeemed. 12b-1 plans allow for
   the payment of marketing and sales expenses from fund assets. These expenses
   are usually computed daily as a fixed percentage of assets.
 
   The Fund is a no-load fund which imposes no sales charges or 12b-1 fees.
   No-load funds are generally sold directly to the public without the use of
   commissioned sales representatives. This means that 100% of your purchase is
   invested for you.
 
 
                               Redemptions in Kind
 
   In the unlikely event a shareholder were to receive an in kind redemption of
   portfolio securities of the Fund, brokerage fees could be incurred by the
   shareholder in a 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.
 
   Balanced Fund
 
   On August 31, 1992, the T. Rowe Price Balanced Fund acquired substantially
   all of the assets of the Axe-Houghton Fund B, a series of Axe-Houghton Funds,
   Inc. As a result of this acquisition, the SEC requires that the historical
   performance information of the Balanced Fund be based on the performance of
   Fund B. Therefore, all performance information of the Balanced Fund prior to
   September 1, 1992, reflects the performance of Fund B and investment managers
   other than T. Rowe Price. Performance information after August 31, 1992,
   reflects the combined assets of the Balanced Fund and Fund B.
 
 
<PAGE>
 
   Media & Telecommunications Fund
 
   On July 28, 1997, the Fund converted its status from a closed-end fund to an
   open-end mutual fund. Prior to the conversion the Fund was known as New Age
   Media Fund, Inc.
 
   Small-Cap Stock Fund
 
   Effective May 1, 1997, the Fund's name was changed from the T. Rowe Price OTC
   Fund to the T. Rowe Price Small-Cap Stock Fund.
 
   Equity Index 500 Fund
 
   Effective January 30, 1998, the Fund's name was changed from T. Rowe Price
   Equity Index Fund to the T. Rowe Price Equity Index 500 Fund.
 
   All Funds except Capital Appreciation, Equity Income and New America Growth
   Funds
 
 
 CAPITAL STOCK
 -------------------------------------------------------------------------------
   The Fund's Charter authorizes the Board of Directors/Trustees to classify and
   reclassify any and all shares which are then unissued, including unissued
   shares of capital stock into any number of classes or series, each class or
   series 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. The shares of any such additional classes or series
   might therefore differ from the shares of the present class and series of
   capital stock and from each other as to preferences, conversions 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 or series in various characteristics. The Board of Directors/Trustees
   may increase or decrease the aggregate number of shares of stock or the
   number of shares of stock of any class or series that the Fund has authorized
   to issue without shareholder approval.
 
   Except to the extent that the Fund's Board of Directors/Trustees 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 to vote as a class by the
   holders of the capital stock or of another affected class or classes.
 
   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/trustees (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/trustees
   unless and until such time as less than a majority of the directors/ trustees
   holding office have been elected by shareholders, at which time the
   directors/trustees then in office will call a shareholders' meeting for the
   election of directors/trustees. Except as set forth above, the directors/
   trustees shall continue to hold office and may appoint successor
   directors/trustees. Voting rights are not cumulative, so that the holders of
   more than 50% of the shares voting in the election of directors/trustees can,
   if they choose to do so, elect all the directors/trustees of the Fund, in
   which event the holders of the remaining shares will be unable to elect any
   person as a director/trustee. As set forth in the By-Laws of the Fund, a
   special meeting of shareholders of the 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. The Fund,
   however, will otherwise assist the shareholders
 
 
<PAGE>
 
   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 1940
   Act.
 
   Capital Appreciation, Equity Income, and New America Growth Funds
 
 
 ORGANIZATION OF THE FUNDS
 -------------------------------------------------------------------------------
   
   For tax and business reasons, the Funds were organized as Massachusetts
   Business Trusts, and are registered with the SEC under the 1940 Act as
   diversified, open-end investment companies, commonly known as "mutual fund."
    
 
   The Declaration of Trust permits the Board of Trustees to issue an unlimited
   number of full and fractional shares of a single class. The Declaration of
   Trust also provides that the 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 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 1940 Act, holders of record of not less than two-thirds
   of the outstanding shares of the 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 Declaration 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 nonassesable, 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 the Fund. However, the
   Declaration of Trust disclaims shareholder liability for acts or obligations
   of the 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 Declaration of Trust provides 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 the Fund
   paying such liability will be entitled to reimbursement from the general
   assets of the Fund. The Trustees intend to conduct the operations of the Fund
   is such a way so as to avoid, as far as possible, ultimate liability of the
   shareholders for liabilities of such Fund.
 
 
<PAGE>
 
   All Funds
 
 
 FEDERAL REGISTRATION OF SHARES
 -------------------------------------------------------------------------------
   The Fund's shares are registered for sale under the 1933 Act. Registration of
   the Fund's shares is not required under any state law, but the Fund is
   required to make certain filings with and pay fees to the states in order to
   sell its shares in the states.
 
 
 
 LEGAL COUNSEL
 -------------------------------------------------------------------------------
   Swidler Berlin Shereff Friedman, LLP, whose address is 919 Third Avenue, New
   York, New York 10022-9998, is legal counsel to the Fund.
 
 
 
 INDEPENDENT ACCOUNTANTS
 -------------------------------------------------------------------------------
   PricewaterhouseCoopers LLP, 250 West Pratt Street, 21st Floor, Baltimore,
   Maryland 21201, are the independent accountants to the Funds.
 
   The financial statements of the Funds for the year ended December 31, 1998,
   and the report of independent accountants are included in the Fund's Annual
   Report for the year ended December 31, 1998. The audited financial statements
   of T. Rowe Price Extended Equity Market Index Fund, Inc., and T. Rowe Price
   Total Equity Market Index Fund, Inc., for the period January 30,1998
   (commencement of operations) to December 31, 1998, are included in their
   Annual Reports for the period ended December 31, 1998. 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 Report for the year ended December 31, 1998, are incorporated into
   this Statement of Additional Information by reference:
 
   
<TABLE>
<CAPTION>
                          ANNUAL REPORT REFERENCES:
 
                                CAPITAL       EQUITY     NEW AMERICA  NEW ERA
                                APPRECIATION  INDEX 500  GROWTH       -------
                                ------------  ---------  ------
<S>                             <C>           <C>        <C>          <C>
Report of Independent
Accountants                          27          28          20         21
Statement of Net Assets,
December 31, 1998                  13-20        3-21        11-14      11-15
Statement of Operations, year
ended
December 31, 1998                    21          22          15         16
Statement of Changes in Net
Assets, years ended
December 31, 1998 and December
31, 1997                             22          23          16         17
Notes to Financial Statements,
December 31, 1998                  23-26        24-27       17-19      18-20
Financial Highlights                 12           2          10         10
</TABLE>
 
    
 
 
 
<PAGE>
 
   
<TABLE>
<CAPTION>
                                     SMALL-CAP  MEDIA &           DIVIDEND  EQUITY
                                     STOCK      TELECOMMUNICATIONSGROWTH    INCOME
                                     -----               ---------------    ------
<S>                                  <C>        <C>               <C>       <C>
Report of Independent Accountants       27             19            23        24
Statement of Net Assets, December
31, 1998                               12-21         11-13         10-17     10-17
Statement of Operations, year ended
December 31, 1998                       22             14            18        18
Statement of Changes in Net Assets,
years ended
December 31, 1998 and December 31,
1997                                    23             15            19        19
Notes to Financial Statements,
December 31, 1998                      24-26         16-18         20-22     20-23
Financial Highlights                    11             10            9         9
</TABLE>
 
    
 
 
   
<TABLE>
<CAPTION>
                                   VALUE    CAPITAL      FINANCIAL   MID-CAP
                                   -----    OPPORTUNITY  SERVICES    VALUE
                                            -----------  --------    -----
<S>                                <C>      <C>          <C>         <C>
Report of Independent Accountants    21         22           20          24
Statement of Net Assets, December
31, 1998                            9-15       12-16       12-14       11-17
Statement of Operations, year
ended
December 31, 1998                    16         17           15          18
Statement of Changes in Net
Assets, years ended
December 31, 1998 and December
31, 1997                             17         18           16          19
Notes to Financial Statements,
December 31, 1998                   18-20      19-21       17-19       20-23
Financial Highlights                  8         11           11          10
</TABLE>
 
    
 
 
   
<TABLE>
<CAPTION>
                                  SCIENCE &   BLUE CHIP   GROWTH &   HEALTH
                                  TECHNOLOGY  GROWTH      INCOME     SCIENCES
                                  ----------  ------      ------     --------
<S>                               <C>         <C>         <C>        <C>
Report of Independent                                                   2
Accountants                           20          27         23         0
Statement of Net Assets,
December 31, 1998                   11-14       13-20       9-16      11-14
Statement of Operations, year
ended
December 31, 1998                     15          21         17         15
Statement of Changes in Net
Assets, years ended
December 31, 1998 and December
31, 1997                              16          22         18         16
Notes to Financial Statements,
December 31, 1998                   17-19       23-26       19-22     17-19
Financial Highlights                  10          12          8         10
</TABLE>
 
    
 
 
   
<TABLE>
<CAPTION>
                                       BALANCED  NEW       GROWTH    MID-CAP
                                       --------  HORIZONS  STOCK     GROWTH
                                                 --------  -----     ------
<S>                                    <C>       <C>       <C>       <C>
                                                    3
Report of Independent Accountants         48        0         24        24
                                                    1
                                                    1
Portfolio of Investments, December                  -
31, 1998                                11-40       22      11-17     12-17
Statement of Assets and Liabilities,                2
December 31, 1998                         41        3         18        18
Statement of Operations, year ended                 2
December 31, 1998                         42        4         19        19
Statement of Changes in Net Assets,
years ended
December 31, 1998 and December 31,                  2
1997                                      43        5         20        20
Notes to Financial Statements,                     26-
December 31, 1998                       44-47       29      21-23     21-23
                                                    1
Financial Highlights                      10        0         10        11
</TABLE>
 
    
 
 
 
 
<PAGE>
 
   
    
   
<TABLE>
<CAPTION>
                                                       MID-CAP
                                                       EQUITY GROWTH
                                                       -------------
<S>                                                    <C>
Report of Independent Accountants                           15
Statement of Net Assets, December 31, 1998                 8-10
Statement of Operations, year ended December 31, 1998       11
Statement of Changes in Net Assets, years ended
December 31, 1998 and December 31, 1997                     12
Notes to Financial Statements, December 31, 1998           13-14
Financial Highlights                                         7
</TABLE>
 
    
 
 
<TABLE>
<CAPTION>
                                                        SMALL-CAP
                                                        VALUE
                                                        -----
<S>                                                     <C>
Report of Independent Accountants                           28
Portfolio of Investments, December 31, 1998               11-21
Statement of Assets and Liabilities, December 31, 1998      22
Statement of Operations, year ended December 31, 1998       23
Statement of Changes in Net Assets, years ended
December 31, 1998 and December 31, 1997                     24
Notes to Financial Statements, December 31, 1998          25-27
Financial Highlights                                        10
</TABLE>
 
 
 
   
<TABLE>
<CAPTION>
                                                       DIVERSIFIED
                                                       SMALL-CAP
                                                       GROWTH
                                                       ------
<S>                                                    <C>
Report of Independent Accountants                           28
Statement of Net Assets, year ended December 31, 1998     11-22
Statement of Operations, year ended December 31, 1998       23
Statement of Changes in Net Assets, years ended
December 31, 1998 and June 20, 1997 (commencement of
operations) to December 31, 1998                            24
Notes to Financial Statements, December 31, 1998          25-27
Financial Highlights                                        10
</TABLE>
 
    
 
 
   
<TABLE>
<CAPTION>
                                                       REAL ESTATE
                                                       -----------
<S>                                                    <C>
Report of Independent Accountants                          18
Statement of Net Assets, year ended December 31, 1998     10-12
Statement of Operations, year ended December 31, 1998      13
Statement of Changes in Net Assets, years ended
December 31, 1998 and October 31, 1997 (commencement
of operations) to December 31, 1998                        14
Notes to Financial Statements, December 31, 1998          15-17
Financial Highlights                                        9
</TABLE>
 
    
 
 
 
 
<PAGE>
 
   
<TABLE>
<CAPTION>
                                                        EXTENDED EQUITY
                                                        MARKET INDEX
                                                        ------------
<S>                                                     <C>
Report of Independent Accountants                              42
Portfolio of Investments, December 31, 1998                   3-35
Statement of Assets and Liabilities, December 31, 1998         36
Statement of Operations, January 30, 1998
(commencement of operations) to December 31, 1998              37
Statement of Changes in Net Assets, January 30, 1998
(commencement of operations) to December 31, 1998              38
Notes to Financial Statements, December 31, 1998             39-41
Financial Highlights                                           2
</TABLE>
 
    
 
 
   
<TABLE>
<CAPTION>
                                                       TOTAL MARKET
                                                       EQUITY INDEX
                                                       ------------
<S>                                                    <C>
Report of Independent Accountants                            38
Statement of Net Assets, December 31, 1998                  3-32
Statement of Operations, January 30, 1998
(commencement of operations) to December 31, 1998            33
Statement of Changes in Net Assets, January 30, 1998
(commencement of operations) to December 31, 1998            34
Notes to Financial Statements, December 31, 1998           35-37
Financial Highlights                                         2
</TABLE>
 
    
 
 
 
 
 RATINGS OF CORPORATE DEBT SECURITIES
 -------------------------------------------------------------------------------
   
                       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 know 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 characteristics
   and in fact have speculative characteristics as well.
 
   Ba-Bonds rated Ba are judged to have speculative elements: their futures
   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 the characteristics of a desirable investment.
   Assurance of interest and principal payments or of maintenance of other terms
   of the contract over any long period of time may be small.
 
 
<PAGE>
 
   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-Bonds rated C represent the lowest-rated, and have extremely poor prospects
   of 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, C-Bonds rated BB, B, CCC, and CC are regarded on balance, as
   predominantly speculative with respect to the issuer's capacity to pay
   interest and repay principal. 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 IBCA, 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 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.
 
   A-Bonds rated A are considered to be investment grade and of high credit
   quality. The obligor's ability to pay interest and repay principal is
   considered to be strong, but may be more vulnerable to adverse changes in
   economic conditions and circumstances than bonds with higher ratings.
 
   BBB-Bonds rated BBB are considered to be investment grade and of satisfactory
   credit quality. The obligor's ability to pay interest and repay principal is
   considered to be adequate. Adverse changes in economic conditions ad
   circumstances, however, are more likely to have adverse impact on these
   bonds, and therefore impair timely payment. The likelihood that the ratings
   of these bonds will fall below investment grade is higher than for bonds with
   higher ratings.
 
   BB, B, CCC, CC, and C are regarded on balance as predominantly speculative
   with respect to the issuer's capacity to repay interest and repay principal
   in accordance with the terms of the obligation for bond issues
 
 
<PAGE>
 
   not in default. BB indicates the lowest degree of speculation and C the
   highest degree of speculation. The rating takes into consideration special
   features of the issue, its relationship to other obligations of the issuer,
   and the current and prospective financial condition and operating performance
   of the issuer.
 
 

 
         
<PAGE>
 
 STATEMENT OF ADDITIONAL INFORMATION
   The date of this Statement of Additional Information is March 1, 1999.
 
 
 
         T. ROWE PRICE INTERNATIONAL FUNDS, INC.
              International Stock Fund
              International Discovery Fund
              International Growth & Income Fund
              European Stock Fund
              Japan Fund
              New Asia Fund
              Latin America Fund
              Emerging Markets Stock Fund
              Global Stock Fund
                                       and
         INSTITUTIONAL INTERNATIONAL FUNDS, INC.
              Foreign Equity Fund
 
______________________________________________________________________________
 
   Mailing Address:
   T. Rowe Price Investment Services, Inc.
   100 East Pratt Street
   Baltimore, Maryland 21202
   1-800-638-5660
 
   This Statement of Additional Information is not a prospectus but should be
   read in conjunction with the appropriate Fund prospectus dated March 1, 1999,
   which may be obtained from T. Rowe Price Investment Services, Inc.
   ("Investment Services").
 
   Each Fund's financial statements for the year ended October 31, 1998, and the
   report of independent accountants are included in each Fund's Annual Report
   and incorporated by reference into this Statement of Additional Information.
 
   If you would like a prospectus or an annual or semiannual shareholder report
   for a Fund of which you are not a shareholder, please call 1-800-638-5660. A
   prospectus with more complete information, including management fees and
   expenses, will be sent to you. Please read it carefully.
 
                                                                  C01-043 3/1/99
<PAGE>
 
<TABLE>
<CAPTION>
                              TABLE OF CONTENTS
                              -----------------
                                Page                                     Page
                                ----                                     ----
<S>                             <S>   <C>  <S>                           <S>
Capital Stock                     41       Investment Restrictions           20
- --------------------------------------     ------------------------------------
Code of Ethics                    30       Legal Counsel                     43
- --------------------------------------     ------------------------------------
Custodian                         30       Management of the Funds           22
- --------------------------------------     ------------------------------------
Distributor for the Funds         29       Net Asset Value Per Share         37
- --------------------------------------     ------------------------------------
Dividends and Distributions       38       Portfolio Management               9
                                           Practices
- --------------------------------------     ------------------------------------
Federal Registration of Shares    43       Portfolio Transactions            30
- --------------------------------------     ------------------------------------
Independent Accountants           43       Pricing of Securities             37
- --------------------------------------     ------------------------------------
Investment Management Services    26       Principal Holders of              26
                                           Securities
- --------------------------------------     ------------------------------------
Investment Objectives and          2       Risk Factors                       2
Policies
- --------------------------------------     ------------------------------------
Investment Performance            39       Shareholder Services              30
- --------------------------------------     ------------------------------------
Investment Program                 6       Tax Status                        38
- --------------------------------------     ------------------------------------
</TABLE>
 
 
 
 
 
 INVESTMENT OBJECTIVES AND POLICIES
 -------------------------------------------------------------------------------
   The following information supplements the discussion of each Fund's
   investment objectives and policies discussed in the Funds' prospectus.
 
   The Funds will not make a material change in their investment objectives
   without obtaining shareholder approval. Unless otherwise specified, the
   investment programs and restrictions of the Funds are not fundamental
   policies. Each Fund's operating policies are subject to change by each Board
   of Directors without shareholder approval. However, shareholders will be
   notified of a material change in an operating policy. Each Fund's fundamental
   policies may not be changed without the approval of at least a majority of
   the outstanding shares of the Fund or, if it is less, 67% of the shares
   represented at a meeting of shareholders at which the holders of 50% or more
   of the shares are represented. References to the following are as indicated:
 
                  Investment Company Act of 1940 ("1940 Act")
                  Securities and Exchange Commission ("SEC")
                  T. Rowe Price Associates, Inc. ("T. Rowe Price")
                  Moody's Investors Service, Inc. ("Moody's")
                  Standard & Poor's Corporation ("S&P")
                  Internal Revenue Code of 1986 ("Code")
 
   Throughout this Statement of Additional Information, "the Fund" is intended
   to refer to each Fund listed on the cover page, unless otherwise indicated.
 
 
 
 RISK FACTORS
 -------------------------------------------------------------------------------
   All Funds
 
   The Funds' investment manager, Rowe Price-Fleming International, Inc.
   ("Price-Fleming"), one of America's largest managers of no-load international
   mutual fund assets, regularly analyzes a broad range of international equity
   and fixed income markets in order to assess the degree or risk and level of
   return that can be expected
 
 
<PAGE>
 
   from each market. Of course, there can be no assurance that Price-Fleming's
   forecasts of expected return will be reflected in the actual returns achieved
   by the Funds.
 
   Each Fund's share price will fluctuate with market, economic and foreign
   exchange conditions, and your investment may be worth more or less when
   redeemed than when purchased. The Funds should not be relied upon as a
   complete investment program, nor used to play short-term swings in the stock
   or foreign exchange markets. The Funds are subject to risks unique to
   international investing. See discussion under "Risk Factors of Foreign
   Investing" below. Further, there is no assurance that the favorable trends
   discussed below will continue, and the Funds cannot guarantee they will
   achieve their objectives.
 
   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 Fund will invest.
   Many of the risks are more pronounced for investments in developing or
   emerging market countries, such as many of the countries of Asia, Latin
   America, Eastern Europe, Russia, Africa, 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 Investors should understand that all investments have a risk factor.
   There can be no guarantee against loss resulting from an investment in the
   Funds, and there can be no assurance that the Funds' investment policies will
   be successful, or that its investment objectives will be attained. The Funds
   are designed for individual and institutional investors seeking to diversify
   beyond the United States in actively researched and managed portfolios, and
   are intended for long-term investors who can accept the risks entailed when
   investing in foreign securities.
 
  . Political and Economic Factors Individual foreign economies of certain
   countries 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 1994-1995,
   the Mexican peso plunged in value setting off a severe crisis in the Mexican
   economy. Asia is still coming to terms with its own crisis and recessionary
   conditions sparked off by widespread currency weakness in late 1997. In 1998,
   there was substantial turmoil in markets throughout the world. 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 and hostile relations 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 Fund invests 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 Fund's assets denominated in that currency. Such changes will
   also affect the Fund's 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 Fund's
   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 limit at times and preclude investment
   in certain of such countries and increase the cost and expenses of the Fund.
   Investments by foreign investors are subject to a variety of restrictions in
   many developing countries. These restrictions may
 
 
<PAGE>
 
   take the form of prior governmental approval, 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. In 1998, the
   government of Malaysia imposed currency controls which effectively made it
   impossible for foreign investors to convert Malaysian ringgits to foreign
   currencies.
 
  . Market Characteristics It is contemplated that most foreign 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.
   Investments in certain markets may be made through American Depository
   Receipts ("ADRs") traded in the United States. Foreign stock markets are
   generally not as developed or efficient as, and more volatile than, those in
   the United States. While growing in volume, they usually have substantially
   less volume than U.S. markets and the Fund's 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. Commissions on foreign stocks are generally higher than
   commissions on United States exchanges, and while there is an increasing
   number of overseas stock markets that have adopted a system of negotiated
   rates, a number are still subject to an established schedule of minimum
   commission rates. 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
   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 the Fund.
 
  . Investment Funds The Fund 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. The Fund's investment in these funds
   is subject to the provisions of the 1940 Act. If the Fund invests in such
   investment funds, the Fund's shareholders will bear not only their
   proportionate share of the expenses of the Fund (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 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 is often 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 Fund's foreign
   portfolio securities may be subject to foreign withholding taxes, thus
   reducing the net amount of income available for distribution to the Fund's
   shareholders.
 
  . 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.
 
  . Small Companies Small companies may have less experienced management and
   fewer management resources than larger firms. A smaller company may have
   greater difficulty obtaining access to capital markets, and may pay more for
   the capital it obtains. In addition, smaller companies are more likely to be
   involved in fewer market segments, making them more vulnerable to any
   downturn in a given segment. Some of these factors may also apply, to a
   lesser extent, to medium size companies.
 
 
<PAGE>
 
  . 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. The collapse of the ruble from its crawling peg
   exchange rate against the U.S. dollar has set back the path of reform for
   several years. 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 country's national
   interest. Further, the governments in such countries may require governmental
   or quasi-governmental authorities to act as custodian of the Fund's assets
   invested in such countries, and these authorities may not qualify as a
   foreign custodian under the 1940 Act 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. The 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.
 
  . Latin America
 
   Inflation Most Latin American countries have experienced, at one time or
   another, severe and persistent levels of inflation, including, in some cases,
   hyperinflation. This has, in turn, led to high interest rates, extreme
   measures by governments to keep inflation in check, and a generally
   debilitating effect on economic growth. Although inflation in many countries
   has lessened, there is no guarantee it will remain at lower levels.
 
   Political Instability The political history of certain Latin American
   countries has been characterized by political uncertainty, intervention by
   the military in civilian and economic spheres, and political corruption. Such
   developments, if they were to reoccur, could reverse favorable trends toward
   market and economic reform, privatization, and removal of trade barriers, and
   result in significant disruption in securities markets.
 
   Foreign Currency Certain Latin American countries may have managed currencies
   which are maintained at artificial levels to the U. S. dollar rather than at
   levels determined by the market. This type of system can lead to sudden and
   large adjustments in the currency which, in turn, can have a disruptive and
   negative effect on foreign investors. For example, in late 1994 the value of
   the Mexican peso lost more than one-third of its value relative to the
   dollar. Certain Latin American countries also restrict the free conversion of
   their currency into foreign currencies, including the U.S. dollar. There is
   no significant foreign exchange market for many currencies and it would, as a
   result, be difficult for the Fund to engage in foreign currency transactions
   designed to protect the value of the Fund's interests in securities
   denominated in such currencies.
 
   Sovereign Debt A number of Latin American countries are among the largest
   debtors of developing countries. There have been moratoria on, and
   reschedulings of, repayment with respect to these debts. Such events can
   restrict the flexibility of these debtor nations in the international markets
   and result in the imposition of onerous conditions on their economies.
 
  . Japan
 
   The Japan Fund's concentration of its investments in Japan means the Fund
   will be more dependent on the investment considerations discussed above and
   may be more volatile than a fund which is broadly diversified geographically.
   To the extent any of the other funds also invest in Japan, such investments
   will be subject to these same factors. Additional factors relating to Japan
   include the following:
 
   Japan has experienced earthquakes and tidal waves of varying degrees of
   severity, and the risks of such phenomena, and damage resulting therefrom,
   continue to exist. Japan also has one of the world's highest
 
 
<PAGE>
 
   population densities. A significant percentage of the total population of
   Japan is concentrated in the metropolitan areas of Tokyo, Osaka and Nagoya.
 
   
   Economy The Japanese economy has languished for much of the 1990's. Lack of
   effective governmental action in the areas of tax reform to reduce high tax
   rates, banking regulation to address enormous amounts of bad debt, and
   economic reforms to attempt to stimulate spending are among the factors cited
   as possible causes of Japan's economic problems. The yen has had a history of
   unpredictable and volatile movements against the dollar; a weakening yen
   hurts U.S. investors holding yen denominated securities. Finally, the
   Japanese stock market has experienced wild swings in value and has often been
   considered significantly overvalued.    
 
   Energy Japan has historically depended on oil for most of its energy
   requirements. Almost all of its oil is imported, the majority from the Middle
   East. In the past, oil prices have had a major impact on the domestic
   economy, but more recently Japan has worked to reduce its dependence on oil
   by encouraging energy conservation and use of alternative fuels. In addition,
   a restructuring of industry, with emphasis shifting from basic industries to
   processing and assembly type industries, has contributed to the reduction of
   oil consumption. However, there is no guarantee this favorable trend will
   continue.
 
   Foreign Trade Overseas trade is important to Japan's economy. Japan has few
   natural resources and must export to pay for its imports of these basic
   requirements. Because of the concentration of Japanese exports in highly
   visible products such as automobiles, machine tools and semiconductors and
   the large trade surpluses ensuing therefrom, Japan has had difficult
   relations with its trading partners, particularly the U.S. It is possible
   that trade sanctions or other protectionist measures could impact Japan
   adversely in both the short- and long-term.
 
  . Asia (ex-Japan)
 
   Political Instability The political history of certain Asian countries has
   been characterized by political uncertainty, intervention by the military in
   civilian and economic spheres, and political corruption. Such developments,
   if they continue to occur, could reverse favorable trends toward market and
   economic reform, privatization and removal of trade barriers and result in
   significant disruption in securities markets.
 
   Foreign Currency Certain Asian countries may have managed currencies which
   are maintained at artificial levels to the U.S. dollar rather than at levels
   determined by the market. This type of system can lead to sudden and large
   adjustments in the currency which, in turn, can have a disruptive and
   negative effect on foreign investors. For example, in 1997 the Thai baht lost
   46.75% of its value against the U.S. dollar. Certain Asian countries also may
   restrict the free conversion of their currency into foreign currencies,
   including the U.S. dollar. There is no significant foreign exchange market
   for certain currencies and it would, as a result, be difficult for the Fund
   to engage in foreign currency transactions designed to protect the value of
   the Fund's interests in securities denominated in such currencies.
 
   Debt A number of Asian companies are highly dependent on foreign loans for
   their operation. In 1997, several Asian countries were forced to negotiate
   loans from the International Monetary Fund ("IMF") and others that impose
   strict repayment term schedules and require significant economic and
   financial restructuring.
 
 
 
 INVESTMENT PROGRAM
 -------------------------------------------------------------------------------
 
                               Types of Securities
 
   Set forth below is additional information about certain of the investments
   described in the Fund's prospectus.
 
 
                               Hybrid Instruments
 
   Hybrid Instruments (a type of potentially high-risk derivative) have been
   developed and combine the elements of futures contracts or options with those
   of debt, preferred equity, or a depository instrument (hereinafter "Hybrid
   Instruments"). Generally, a Hybrid Instrument will be a debt security,
   preferred stock,
 
 
<PAGE>
 
   depository share, trust certificate, certificate of deposit, or other
   evidence of indebtedness on which a portion of or all interest payments,
   and/or the principal or stated amount payable at maturity, redemption, or
   retirement, is determined by reference to prices, changes in prices, or
   differences between prices, of securities, currencies, intangibles, goods,
   articles, or commodities (collectively "Underlying Assets") or by another
   objective index, economic factor, or other measure, such as interest rates,
   currency exchange rates, commodity indices, and securities indices
   (collectively "Benchmarks"). Thus, Hybrid Instruments may take a variety of
   forms, including, but not limited to, debt instruments with interest or
   principal payments or redemption terms determined by reference to the value
   of a currency or commodity or securities index at a future point in time,
   preferred stock with dividend rates determined by reference to the value of a
   currency, or convertible securities with the conversion terms related to a
   particular commodity.
 
   Hybrid Instruments can be an efficient means of creating exposure to a
   particular market, or segment of a market, with the objective of enhancing
   total return. For example, a Fund may wish to take advantage of expected
   declines in interest rates in several European countries, but avoid the
   transaction costs associated with buying and currency-hedging the foreign
   bond positions. One solution would be to purchase a U.S. dollar-denominated
   Hybrid Instrument whose redemption price is linked to the average three-year
   interest rate in a designated group of countries. The redemption price
   formula would provide for payoffs of greater than par if the average interest
   rate was lower than a specified level, and payoffs of less than par if rates
   were above the specified level. Furthermore, the Fund could limit the
   downside risk of the security by establishing a minimum redemption price so
   that the principal paid at maturity could not be below a predetermined
   minimum level if interest rates were to rise significantly. The purpose of
   this arrangement, known as a structured security with an embedded put option,
   would be to give the Fund the desired European bond exposure while avoiding
   currency risk, limiting downside market risk, and lowering transactions
   costs. Of course, there is no guarantee that the strategy will be successful,
   and the Fund could lose money if, for example, interest rates do not move as
   anticipated or credit problems develop with the issuer of the Hybrid.
 
   The risks of investing in Hybrid Instruments reflect a combination of the
   risks of investing in securities, options, futures and currencies. Thus, an
   investment in a Hybrid Instrument may entail significant risks that are not
   associated with a similar investment in a traditional debt instrument that
   has a fixed principal amount, is denominated in U.S. dollars, or bears
   interest either at a fixed rate or a floating rate determined by reference to
   a common, nationally published benchmark. The risks of a particular Hybrid
   Instrument will, of course, depend upon the terms of the instrument, but may
   include, without limitation, the possibility of significant changes in the
   Benchmarks or the prices of Underlying Assets to which the instrument is
   linked. Such risks generally depend upon factors which are unrelated to the
   operations or credit quality of the issuer of the Hybrid Instrument and which
   may not be readily foreseen by the purchaser, such as economic and political
   events, the supply and demand for the Underlying Assets, and interest rate
   movements. In recent years, various Benchmarks and prices for Underlying
   Assets have been highly volatile, and such volatility may be expected in the
   future. Reference is also made to the discussion of futures, options, and
   forward contracts herein for a discussion of the risks associated with such
   investments.
 
   Hybrid Instruments are potentially more volatile and carry greater market
   risks than traditional debt instruments. Depending on the structure of the
   particular Hybrid Instrument, changes in a Benchmark may be magnified by the
   terms of the Hybrid Instrument and have an even more dramatic and substantial
   effect upon the value of the Hybrid Instrument. Also, the prices of the
   Hybrid Instrument and the Benchmark or Underlying Asset may not move in the
   same direction or at the same time.
 
   Hybrid Instruments may bear interest or pay preferred dividends at below
   market (or even relatively nominal) rates. Alternatively, Hybrid Instruments
   may bear interest at above market rates but bear an increased risk of
   principal loss (or gain). The latter scenario may result if "leverage" is
   used to structure the Hybrid Instrument. Leverage risk occurs when the Hybrid
   Instrument is structured so that a given change in a Benchmark or Underlying
   Asset is multiplied to produce a greater value change in the Hybrid
   Instrument, thereby magnifying the risk of loss as well as the potential for
   gain.
 
   Hybrid Instruments may also carry liquidity risk since the instruments are
   often "customized" to meet the portfolio needs of a particular investor, and
   therefore, the number of investors that are willing and able to buy
 
 
<PAGE>
 
   such instruments in the secondary market may be smaller than that for more
   traditional debt securities. In addition, because the purchase and sale of
   Hybrid Instruments could take place in an over-the-counter market without the
   guarantee of a central clearing organization or in a transaction between the
   Fund and the issuer of the Hybrid Instrument, the creditworthiness of the
   counter party of issuer of the Hybrid Instrument would be an additional risk
   factor which the Fund would have to consider and monitor. Hybrid Instruments
   also may not be subject to regulation of the Commodities Futures Trading
   Commission ("CFTC"), which generally regulates the trading of commodity
   futures by U.S. persons, the SEC, which regulates the offer and sale of
   securities by and to U.S. persons, or any other governmental regulatory
   authority.
 
 
                        Illiquid or Restricted Securities
 
   Restricted securities may be sold only in privately negotiated transactions
   or in a public offering with respect to which a registration statement is in
   effect under the Securities Act of 1933 (the "1933 Act"). Where registration
   is required, the Fund may be obligated to pay all or part of the registration
   expenses, and a considerable period may elapse between the time of the
   decision to sell and the time the Fund may be permitted to sell a security
   under an effective registration statement. If, during such a period, adverse
   market conditions were to develop, the Fund might obtain a less favorable
   price than prevailed when it decided to sell. Restricted securities will be
   priced at fair value as determined in accordance with procedures prescribed
   by the Fund's Board of Directors. If, through the appreciation of illiquid
   securities or the depreciation of liquid securities, the Fund should be in a
   position where more than 15% of the value of its net assets is invested in
   illiquid assets, including restricted securities, the Fund will take
   appropriate steps to protect liquidity.
 
   Notwithstanding the above, the Fund may purchase securities which, while
   privately placed, are eligible for purchase and sale under Rule 144A under
   the 1933 Act. This rule permits certain qualified institutional buyers, such
   as the Fund, to trade in privately placed securities even though such
   securities are not registered under the 1933 Act. Price-Fleming, under the
   supervision of the Fund's Board of Directors, will consider whether
   securities purchased under Rule 144A are illiquid and thus subject to the
   Fund's restriction of investing no more than 15% of its net assets in
   illiquid securities. A determination of whether a Rule 144A security is
   liquid or not is a question of fact. In making this determination,
   Price-Fleming will consider the trading markets for the specific security
   taking into account the unregistered nature of a Rule 144A security. In
   addition, Price-Fleming could consider the following: (1) frequency of trades
   and quotes; (2) number of dealers and potential purchases; (3) dealer
   undertakings to make a market; and (4) the nature of the security and of
   marketplace trades (e.g., the time needed to dispose of the security, the
   method of soliciting offers, and the mechanics of transfer). The liquidity of
   Rule 144A securities would be monitored and, if as a result of changed
   conditions it is determined that a Rule 144A security is no longer liquid,
   the Fund's holdings of illiquid securities would be reviewed to determine
   what, if any, steps are required to assure that the Fund does not invest more
   than 15% of its net assets in illiquid securities. Investing in Rule 144A
   securities could have the effect of increasing the amount of the Fund's
   assets invested in illiquid securities if qualified institutional buyers are
   unwilling to purchase such securities.
 
 
                                    Warrants
 
   The Fund may acquire warrants. Warrants 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.
 
   There are, of course, other types of securities that are, or may become
   available, which are similar to the foregoing and the Funds may invest in
   these securities.
 
 
<PAGE>
 
 PORTFOLIO MANAGEMENT PRACTICES
 -------------------------------------------------------------------------------
   All Funds except Foreign Equity Fund
 
 
                         Lending of Portfolio Securities
 
   Securities loans are made to broker-dealers or institutional investors or
   other persons, pursuant to agreements requiring that the loans be
   continuously secured by collateral at least equal at all times to the value
   of the securities lent, marked to market on a daily basis. The collateral
   received will consist of cash, U.S. government securities, letters of credit
   or such other collateral as may be permitted under its investment program.
   While the securities are being lent, the Fund will continue to receive the
   equivalent of the interest or dividends paid by the issuer on the securities,
   as well as interest on the investment of the collateral or a fee from the
   borrower. The Fund has a right to call each loan and obtain the securities,
   within such period of time which coincides with the normal settlement period
   for purchases and sales of such securities in the respective markets. The
   Fund will not have the right to vote on securities while they are being lent,
   but it will call a loan in anticipation of any important vote. The risks in
   lending portfolio securities, as with other extensions of secured credit,
   consist of possible delay in receiving additional collateral or in the
   recovery of the securities or possible loss of rights in the collateral
   should the borrower fail financially. Loans will only be made to firms deemed
   by Price-Fleming to be of good standing and will not be made unless, in the
   judgment of Price-Fleming, the consideration to be earned from such loans
   would justify the risk.
 
   All Funds
 
 
                         Interfund Borrowing and Lending
 
   The Fund is a party to an exemptive order received from the SEC on December
   8, 1998, that permits it to borrow money from and/or lend money to other
   funds in the T. Rowe Price complex ("Price Funds"). All loans are set at an
   interest rate between the rate charged on overnight repurchase agreements and
   short-term bank loans. All loans are subject to numerous conditions designed
   to ensure fair and equitable treatment of all participating funds. The
   program is subject to the oversight and periodic review of the Boards of
   Directors of the Price Funds.
 
 
                              Repurchase Agreements
 
   The Fund may enter into a repurchase agreement through which an investor
   (such as the Fund) purchases a security (known as the "underlying security")
   from a well-established securities dealer or a bank that is a member of the
   Federal Reserve System. Any such dealer or bank will be on T. Rowe Price's
   approved list and have a credit rating with respect to its short-term debt of
   at least A1 by S&P, P1 by Moody's, or the equivalent rating by T. Rowe Price.
   At that time, the bank or securities dealer agrees to repurchase the
   underlying security at the same price, plus specified interest. Repurchase
   agreements are generally for a short period of time, often less than a week.
   Repurchase agreements which do not provide for payment within seven days will
   be treated as illiquid securities. The Fund will only enter into repurchase
   agreements where (1) the underlying securities are of the type (excluding
   maturity limitations) which the Fund's investment guidelines would allow it
   to purchase directly, (2) the market value of the underlying security,
   including interest accrued, will be at all times equal to or exceed the value
   of the repurchase agreement, and (3) payment for the underlying security is
   made only upon physical delivery or evidence of book-entry transfer to the
   account of the custodian or a bank acting as agent. In the event of a
   bankruptcy or other default of a seller of a repurchase agreement, the Fund
   could experience both delays in liquidating the underlying security and
   losses, including: (a) possible decline in the value of the underlying
   security during the period while the Fund seeks to enforce its rights
   thereto; (b) possible subnormal levels of income and lack of access to income
   during this period; and (c) expenses of enforcing its rights.
 
 
                              Money Market Reserves
 
   It is expected that the Fund will invest its cash reserves primarily in one
   or more money market funds established for the exclusive use of the T. Rowe
   Price family of mutual funds and other clients of T. Rowe Price and
   Price-Fleming. Currently, two such money market funds are in
   operation-Reserve Investment Fund
 
 
<PAGE>
 
   ("RIF") and Government Reserve Investment Fund ("GRF"), each a series of the
   Reserve Investment Funds, Inc. Additional series may be created in the
   future. These funds were created and operate under an Exemptive Order issued
   by the SEC (Investment Company Act Release No. IC-22770, July 29, 1997).
 
   Both funds must comply with the requirements of Rule 2a-7 under the 1940 Act
   governing money market funds. The RIF invests at least 95% of its total
   assets in prime money market instruments receiving the highest credit rating.
   The GRF invests primarily in a portfolio of U.S. government-backed
   securities, primarily U.S. Treasuries, and repurchase agreements thereon.
 
   The RIF and GRF provide a very efficient means of managing the cash reserves
   of the Fund. While neither RIF or GRF pay an advisory fee to the Investment
   Manager, they will incur other expenses. However, the RIF and GRF are
   expected by T. Rowe Price to operate at very low expense ratios. The Fund
   will only invest in RIF or GRF to the extent it is consistent with its
   objective and program.
 
   Neither fund is insured or guaranteed by the U.S. government, and there is no
   assurance they will maintain a stable net asset value of $1.00 per share.
 
 
                                     Options
 
   Options are a type of potentially high-risk derivative.
 
 
                          Writing Covered Call Options
 
   The Fund may write (sell) American or European style "covered" call options
   and purchase options to close out options previously written by the Fund. In
   writing covered call options, the Fund expects to generate additional premium
   income which should serve to enhance the Fund's total return and reduce the
   effect of any price decline of the security or currency involved in the
   option. Covered call options will generally be written on securities or
   currencies which, in 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 the Fund.
 
   A call option gives the holder (buyer) the "right to purchase" a security or
   currency at a specified price (the exercise price) at expiration of the
   option (European style) or at any time until a certain date (the expiration
   date) (American style). So long as the obligation of the writer of a call
   option continues, he may be assigned an exercise notice by the broker-dealer
   through whom such option was sold, requiring him to deliver the underlying
   security or currency against payment of the exercise price. This obligation
   terminates upon the expiration of the call option, or such earlier time at
   which the writer effects a closing purchase transaction by repurchasing an
   option identical to that previously sold. To secure his obligation to deliver
   the underlying security or currency in the case of a call option, a writer is
   required to deposit in escrow the underlying security or currency or other
   assets in accordance with the rules of a clearing corporation.
 
   The Fund will write only covered call options. This means that the 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, other liquid high-grade debt
   obligations, or other suitable cover as permitted by the SEC having a value
   equal to the fluctuating market value of the optioned securities or
   currencies.
 
   Portfolio securities or currencies on which call options may be written will
   be purchased solely on the basis of investment considerations consistent with
   the Fund's investment objective. The writing of covered call options is a
   conservative investment technique believed to involve relatively little risk
   (in contrast to the writing of naked or uncovered options, which the Fund
   will not do), but capable of enhancing the Fund's total return. When writing
   a covered call option, a Fund, in return for the premium, gives up the
   opportunity for profit from a price increase in the underlying security or
   currency above the exercise price, but conversely retains the risk of loss
   should the price of the security or currency decline. Unlike one who owns
   securities or currencies not subject to an option, the Fund has no control
   over when it may be required to sell the underlying securities or currencies,
   since it may be assigned an exercise notice at any time prior to the
   expiration of its obligation as a writer. If a call option which the Fund has
   written expires, the Fund will
 
 
<PAGE>
 
   realize a gain in the amount of the premium; however, such gain may be offset
   by a decline in the market value of the underlying security or currency
   during the option period. If the call option is exercised, the Fund will
   realize a gain or loss from the sale of the underlying security or currency.
   The Fund does not consider a security or currency covered by a call to be
   "pledged" as that term is used in the Fund's policy which limits the pledging
   or mortgaging of its assets.
 
   The premium received is the market value of an option. The premium the Fund
   will receive from writing a call option will reflect, among other things, the
   current market price of the underlying security or currency, the relationship
   of the exercise price to such market price, the historical price volatility
   of the underlying security or currency, and the length of the option period.
   Once the decision to write a call option has been made, 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 the Fund for writing covered
   call options will be recorded as a liability of the Fund. This liability will
   be adjusted daily to the option's current market value, which will be the
   latest sale price at the time at which the net asset value per share of the
   Fund is computed (close of the New York Stock Exchange), or, in the absence
   of such sale, the latest asked price. The option will be terminated upon
   expiration of the option, the purchase of an identical option in a closing
   transaction, or delivery of the underlying security or currency upon the
   exercise of the option.
 
   Closing transactions will be effected in order to realize a profit on an
   outstanding call option, to prevent an underlying security or currency from
   being called, or, to permit the sale of the underlying security or currency.
   Furthermore, effecting a closing transaction will permit the Fund to write
   another call option on the underlying security or currency with either a
   different exercise price or expiration date or both. If the Fund desires to
   sell a particular security or currency from its portfolio on which it has
   written a call option, or purchased a put option, it will seek to effect a
   closing transaction prior to, or concurrently with, the sale of the security
   or currency. There is, of course, no assurance that the Fund will be able to
   effect such closing transactions at favorable prices. If the Fund cannot
   enter into such a transaction, it may be required to hold a security or
   currency that it might otherwise have sold. When the Fund writes a covered
   call option, it runs the risk of not being able to participate in the
   appreciation of the underlying securities or currencies above the exercise
   price, as well as the risk of being required to hold on to securities or
   currencies that are depreciating in value. This could result in higher
   transaction costs. The Fund will pay transaction costs in connection with the
   writing of options to close out previously written options. Such transaction
   costs are normally higher than those applicable to purchases and sales of
   portfolio securities.
 
   Call options written by the Fund will normally have expiration dates of less
   than nine months from the date written. The exercise price of the options may
   be below, equal to, or above the current market values of the underlying
   securities or currencies at the time the options are written. From time to
   time, the Fund may purchase an underlying security or currency for delivery
   in accordance with an exercise notice of a call option assigned to it, rather
   than delivering such security or currency from its portfolio. In such cases,
   additional costs may be incurred.
 
   The Fund will realize a profit or loss from a closing purchase transaction if
   the cost of the transaction is less or more than the premium received from
   the writing of the option. Because increases in the market price of a call
   option will generally reflect increases in the market price of the underlying
   security or currency, any loss resulting from the repurchase of a call option
   is likely to be offset in whole or in part by appreciation of the underlying
   security or currency owned by the Fund.
 
   The Fund will not write a covered call option if, as a result, the aggregate
   market value of all portfolio securities or currencies covering written call
   or put options exceeds 25% of the market value of the Fund's net assets. In
   calculating the 25% limit, the Fund will offset, against the value of assets
   covering written calls and puts, the value of purchased calls and puts on
   identical securities or currencies with identical maturity dates.
 
 
                           Writing Covered Put Options
 
   The Fund may write American or European style covered put options and
   purchase options to close out options previously written by the Fund. A put
   option gives the purchaser of the option the right to sell, and
 
 
<PAGE>
 
   the writer (seller) has the obligation to buy, the underlying security or
   currency at the exercise price during the option period (American style) or
   at the expiration of the option (European style). So long as the obligation
   of the writer continues, he may be assigned an exercise notice by the
   broker-dealer through whom such option was sold, requiring him to make
   payment to the exercise price against delivery of the underlying security or
   currency. The operation of put options in other respects, including their
   related risks and rewards, is substantially identical to that of call
   options.
 
   The Fund would write put options only on a covered basis, which means that
   the Fund would maintain in a segregated account cash, U.S. government
   securities, other liquid high-grade debt obligations, or other suitable cover
   as determined by the SEC, in an amount not less than the exercise price or
   the Fund will own an option to sell the underlying security or currency
   subject to the option having an exercise price equal to or greater than the
   exercise price of the "covered" option at all times while the put option is
   outstanding. (The rules of a clearing corporation currently require that such
   assets be deposited in escrow to secure payment of the exercise price.)
 
   The Fund would generally write covered put options in circumstances where
   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 the Fund would write a put option at an
   exercise price which, reduced by the premium received on the option, reflects
   the lower price it is willing to pay. Since the Fund would also receive
   interest on debt securities or currencies maintained to cover the exercise
   price of the option, this technique could be used to enhance current return
   during periods of market uncertainty. The risk in such a transaction would be
   that the market price of the underlying security or currency would decline
   below the exercise price less the premiums received. Such a decline could be
   substantial and result in a significant loss to the Fund. In addition, the
   Fund, because it does not own the specific securities or currencies which it
   may be required to purchase in exercise of the put, cannot benefit from
   appreciation, if any, with respect to such specific securities or currencies.
 
   The Fund will not write a covered put option if, as a result, the aggregate
   market value of all portfolio securities or currencies covering put or call
   options exceeds 25% of the market value of the Fund's net assets. In
   calculating the 25% limit, the Fund will offset, against the value of assets
   covering written puts and calls, the value of purchased puts and calls on
   identical securities or currencies with identical maturity dates.
 
 
                             Purchasing Put Options
 
   The Fund may purchase American or European style put options. As the holder
   of a put option, the Fund has the right to sell the underlying security or
   currency at the exercise price at any time during the option period (American
   style) or at the expiration of the option (European style). The Fund may
   enter into closing sale transactions with respect to such options, exercise
   them or permit them to expire. The Fund may purchase put options for
   defensive purposes in order to protect against an anticipated decline in the
   value of its securities or currencies. An example of such use of put options
   is provided next.
 
   The Fund may purchase a put option on an underlying security or currency (a
   "protective put") owned by the Fund as a defensive technique in order to
   protect against an anticipated decline in the value of the security or
   currency. Such hedge protection is provided only during the life of the put
   option when the Fund, as the holder of the put option, is able to sell the
   underlying security or currency at the put exercise price regardless of any
   decline in the underlying security's market price or currency's exchange
   value. For example, a put option may be purchased in order to protect
   unrealized appreciation of a security or currency where T. Rowe Price deems
   it desirable to continue to hold the security or currency because of tax
   considerations. The premium paid for the put option and any transaction costs
   would reduce any capital gain otherwise available for distribution when the
   security or currency is eventually sold.
 
   The Fund may also purchase put options at a time when the Fund does not own
   the underlying security or currency. By purchasing put options on a security
   or currency it does not own, the Fund seeks to benefit from a decline in the
   market price of the underlying security or currency. If the put option is not
   sold when it has remaining value, and if the market price of the underlying
   security or currency remains equal to or greater than the exercise price
   during the life of the put option, the Fund will lose its entire investment
   in the put
 
 
<PAGE>
 
   option. In order for the purchase of a put option to be profitable, the
   market price of the underlying security or currency must decline sufficiently
   below the exercise price to cover the premium and transaction costs, unless
   the put option is sold in a closing sale transaction.
 
   The Fund will not commit more than 5% of its assets to premiums when
   purchasing put and call options. The premium paid by the Fund when purchasing
   a put option will be recorded as an asset of the Fund. This asset will be
   adjusted daily to the option's current market value, which will be the latest
   sale price at the time at which the net asset value per share of the Fund is
   computed (close of New York Stock Exchange), or, in the absence of such sale,
   the latest bid price. This asset will be terminated upon expiration of the
   option, the selling (writing) of an identical option in a closing
   transaction, or the delivery of the underlying security or currency upon the
   exercise of the option.
 
 
                             Purchasing Call Options
 
   The Fund may purchase American or European style call options. As the holder
   of a call option, the Fund has the right to purchase the underlying security
   or currency at the exercise price at any time during the option period
   (American style) or at the expiration of the option (European style). The
   Fund may enter into closing sale transactions with respect to such options,
   exercise them or permit them to expire. The Fund may purchase call options
   for the purpose of increasing its current return or avoiding tax consequences
   which could reduce its current return. The Fund may also purchase call
   options in order to acquire the underlying securities or currencies. Examples
   of such uses of call options are provided next.
 
   Call options may be purchased by the Fund for the purpose of acquiring the
   underlying securities or currencies for its portfolio. Utilized in this
   fashion, the purchase of call options enables the Fund to acquire the
   securities or currencies at the exercise price of the call option plus the
   premium paid. At times the net cost of acquiring securities or currencies in
   this manner may be less than the cost of acquiring the securities or
   currencies directly. This technique may also be useful to the Fund in
   purchasing a large block of securities or currencies that would be more
   difficult to acquire by direct market purchases. So long as it holds such a
   call option rather than the underlying security or currency itself, the Fund
   is partially protected from any unexpected decline in the market price of the
   underlying security or currency and in such event could allow the call option
   to expire, incurring a loss only to the extent of the premium paid for the
   option.
 
   The Fund will not commit more than 5% of its assets to premiums when
   purchasing call and put options. The Fund may also purchase call options on
   underlying securities or currencies it owns in order to protect unrealized
   gains on call options previously written by it. A call option would be
   purchased for this purpose where tax considerations make it inadvisable to
   realize such gains through a closing purchase transaction. Call options may
   also be purchased at times to avoid realizing losses.
 
 
                        Dealer (Over-the-Counter) Options
 
   The Fund may engage in transactions involving dealer options. Certain risks
   are specific to dealer options. While the Fund would look to a clearing
   corporation to exercise exchange-traded options, if the Fund were to purchase
   a dealer option, it would rely on the dealer from whom it purchased the
   option to perform if the option were exercised. Failure by the dealer to do
   so would result in the loss of the premium paid by the Fund as well as loss
   of the expected benefit of the transaction.
 
   Exchange-traded options generally have a continuous liquid market while
   dealer options have none. Consequently, the Fund will generally be able to
   realize the value of a dealer option it has purchased only by exercising it
   or reselling it to the dealer who issued it. Similarly, when the Fund writes
   a dealer option, it generally will be able to close out the option prior to
   its expiration only by entering into a closing purchase transaction with the
   dealer to which the Fund originally wrote the option. While the Fund will
   seek to enter into dealer options only with dealers who will agree to and
   which are expected to be capable of entering into closing transactions with
   the Fund, there can be no assurance that the Fund will be able to liquidate a
   dealer option at a favorable price at any time prior to expiration. Until the
   Fund, as a covered dealer call option writer, is able to effect a closing
   purchase transaction, it will not be able to liquidate securities (or other
   assets) or currencies used as cover until the option expires or is exercised.
   In the event of insolvency of the contra party, the Fund may be unable to
   liquidate a dealer option. With respect to options written by the Fund, the
 
 
<PAGE>
 
   inability to enter into a closing transaction may result in material losses
   to the Fund. For example, since the Fund must maintain a secured position
   with respect to any call option on a security it writes, the Fund may not
   sell the assets which it has segregated to secure the position while it is
   obligated under the option. This requirement may impair a Fund's ability to
   sell portfolio securities or currencies at a time when such sale might be
   advantageous.
 
   The Staff of the SEC has taken the position that purchased dealer options and
   the assets used to secure the written dealer options are illiquid securities.
   The Fund may treat the cover used for written Over-the-Counter ("OTC")
   options as liquid if the dealer agrees that the Fund may repurchase the OTC
   option it has written for a maximum price to be calculated by a predetermined
   formula. In such cases, the OTC option would be considered illiquid only to
   the extent the maximum repurchase price under the formula exceeds the
   intrinsic value of the option.
 
 
                                Futures Contracts
 
   Futures contracts are a type of potentially high-risk derivative.
 
   Transactions in Futures
 
   The Fund may enter into futures contracts including stock index, interest
   rate, and currency futures ("futures" or "futures contracts") for hedging,
   yield or return enhancement, and risk management purposes.
 
   Stock index futures contracts may be used to provide a hedge for a portion of
   the Fund's portfolio, as a cash management tool, or as an efficient way for
   Price-Fleming to implement either an increase or decrease in portfolio market
   exposure in response to changing market conditions. The Fund may purchase or
   sell futures contracts with respect to any stock index. Nevertheless, to
   hedge the Fund's portfolio successfully, the Fund must sell futures contacts
   with respect to indices or subindices whose movements will have a significant
   correlation with movements in the prices of the Fund's portfolio securities.
 
   Interest rate or currency futures contracts may be used as a hedge against
   changes in prevailing levels of interest rates or currency exchange rates in
   order to establish more definitely the effective return on securities or
   currencies held or intended to be acquired by the Fund. In this regard, the
   Fund could sell interest rate or currency futures as an offset against the
   effect of expected increases in interest rates or currency exchange rates and
   purchase such futures as an offset against the effect of expected declines in
   interest rates or currency exchange rates.
 
   The Fund will enter into futures contracts which are traded on national or
   foreign futures exchanges, and are standardized as to maturity date and
   underlying financial instrument. Futures exchanges and trading in the United
   States are regulated under the Commodity Exchange Act by the CFTC. Although
   techniques other than the sale and purchase of futures contracts could be
   used for the above-referenced purposes, futures contracts offer an effective
   and relatively low cost means of implementing the Fund's objectives in these
   areas.
 
   Regulatory Limitations
   If the Fund purchases or sells futures contracts or related options which do
   not qualify as bona fide hedging under applicable CFTC rules, the aggregate
   initial margin deposits and premium required to establish those positions
   cannot exceed 5% of the liquidation value of the Fund after taking into
   account unrealized profits and unrealized losses on any such contracts it has
   entered into; provided, however, that in the case of an option that is
   in-the-money at the time of purchase, the in-the-money amount may be excluded
   in calculating the 5% limitation. For purposes of this policy, options on
   futures contracts and foreign currency options traded on a commodities
   exchange will be considered "related options." This policy may be modified by
   the Board of Directors without a shareholder vote and does not limit the
   percentage of the Fund's assets at risk to 5%.
 
   In instances involving the purchase of futures contracts or the writing of
   call or put options thereon by the Fund, an amount of cash, liquid assets, or
   other suitable cover as permitted by the SEC, equal to the market value of
   the futures contracts and options thereon (less any related margin deposits),
   will be identified by the
 
 
<PAGE>
 
   Fund to cover the position, or alternative cover (such as owning an
   offsetting position) will be employed. Assets used as cover or held in an
   identified account cannot be sold while the position in the corresponding
   option or future is open, unless they are replaced with similar assets. As a
   result, the commitment of a large portion of a Fund's assets to cover or
   identified accounts could impede portfolio management or the Fund's ability
   to meet redemption requests or other current obligations.
 
   If the CFTC or other regulatory authorities adopt different (including less
   stringent) or additional restrictions, the Fund would comply with such new
   restrictions.
 
   Trading in Futures Contracts
   A futures contract provides for the future sale by one party and purchase by
   another party of a specified amount of a specific financial instrument (e.g.,
   units of a stock index) for a specified price, date, time and place
   designated at the time the contract is made. Brokerage fees are incurred when
   a futures contract is bought or sold and margin deposits must be maintained.
   Entering into a contract to buy is commonly referred to as buying or
   purchasing a contract or holding a long position. Entering into a contract to
   sell is commonly referred to as selling a contract or holding a short
   position.
 
   Unlike when the Fund purchases or sells a security, no price would be paid or
   received by the Fund upon the purchase or sale of a futures contract. Upon
   entering into a futures contract, and to maintain the Fund's open positions
   in futures contracts, the Fund would be required to deposit with its
   custodian in a segregated account in the name of the futures broker an amount
   of cash, or liquid assets known as "initial margin." The margin required for
   a particular futures contract is set by the exchange on which the contract is
   traded, and may be significantly modified from time to time by the exchange
   during the term of the contract. Futures contracts are customarily purchased
   and sold on margins that may range upward from less than 5% of the value of
   the contract being traded.
 
   If the price of an open futures contract changes (by increase in the case of
   a sale or by decrease in the case of a purchase) so that the loss on the
   futures contract reaches a point at which the margin on deposit does not
   satisfy margin requirements, the broker will require an increase in the
   margin. However, if the value of a position increases because of favorable
   price changes in the futures contract so that the margin deposit exceeds the
   required margin, the broker will pay the excess to the Fund.
 
   These subsequent payments, called "variation margin," to and from the futures
   broker, are made on a daily basis as the price of the underlying assets
   fluctuate, making the long and short positions in the futures contract more
   or less valuable, a process known as "marking to market."
 
   Although certain futures contracts, by their terms, require actual future
   delivery of and payment for the underlying instruments, in practice most
   futures contracts are usually closed out before the delivery date. Closing
   out an open futures contract purchase or sale is effected by entering into an
   offsetting futures contract sale or purchase, respectively, for the same
   aggregate amount of the identical securities and the same delivery date. If
   the offsetting purchase price is less than the original sale price, the Fund
   realizes a gain; if it is more, the Fund realizes a loss. Conversely, if the
   offsetting sale price is more than the original purchase price, the Fund
   realizes a gain; if it is less, the Fund realizes a loss. The transaction
   costs must also be included in these calculations. There can be no assurance,
   however, that the Fund will be able to enter into an offsetting transaction
   with respect to a particular futures contract at a particular time. If the
   Fund is not able to enter into an offsetting transaction, the Fund will
   continue to be required to maintain the margin deposits on the futures
   contract.
 
   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 (as adjusted by a
   multiplier) at the time the stock index futures contract expires.
 
 
<PAGE>
 
               Special Risks of Transactions in Futures Contracts
 
  . Volatility and Leverage The prices of futures contracts are volatile and are
   influenced, among other things, by actual and anticipated changes in the
   market and interest rates, which in turn are affected by fiscal and monetary
   policies and national and international political and economic events.
 
   Most United States futures exchanges limit the amount of fluctuation
   permitted in futures contract prices during a single trading day. The daily
   limit establishes the maximum amount that the price of a futures contract may
   vary either up or down from the previous day's settlement price at the end of
   a trading session. Once the daily limit has been reached in a particular type
   of futures contract, no trades may be made on that day at a price beyond that
   limit. The daily limit governs only price movement during a particular
   trading day and therefore does not limit potential losses, because the limit
   may prevent the liquidation of unfavorable positions. Futures contract prices
   have occasionally moved to the daily limit for several consecutive trading
   days with little or no trading, thereby preventing prompt liquidation of
   futures positions and subjecting some futures traders to substantial losses.
 
   Margin deposits required on futures trading are low. As a result, a
   relatively small price movement in a futures contract may result in immediate
   and substantial loss, as well as gain, to the investor. For example, if at
   the time of purchase, 10% of the value of the futures contract is deposited
   as margin, a subsequent 10% decrease in the value of the futures contract
   would result in a total loss of the margin deposit, before any deduction for
   the transaction costs, if the account were then closed out. A 15% decrease
   would result in a loss equal to 150% of the original margin deposit, if the
   contract were closed out. Thus, a purchase or sale of a futures contract may
   result in losses in excess of the amount invested in the futures contract.
 
  . Liquidity The Fund may elect to close some or all of its futures positions
   at any time prior to their expiration. The Fund would do so to reduce
   exposure represented by long futures positions or short futures positions.
   The Fund may close its positions by taking opposite positions which would
   operate to terminate the Fund's position in the futures contracts. Final
   determinations of variation margin would then be made, additional cash would
   be required to be paid by or released to the Fund, and the Fund would realize
   a loss or a gain.
 
   Futures contracts may be closed out only on the exchange or board of trade
   where the contracts were initially traded. Although the Fund intends to
   purchase or sell futures contracts only on exchanges or boards of trade where
   there appears to be an active market, there is no assurance that a liquid
   market on an exchange or board of trade will exist for any particular
   contract at any particular time. In such event, it might not be possible to
   close a futures contract, and in the event of adverse price movements, the
   Fund would continue to be required to make daily cash payments of variation
   margin. However, in the event futures contracts have been used to hedge the
   underlying instruments, the Fund would continue to hold the underlying
   instruments subject to the hedge until the futures contracts could be
   terminated. In such circumstances, an increase in the price of underlying
   instruments, if any, might partially or completely offset losses on the
   futures contract. However, as described next, there is no guarantee that the
   price of the underlying instruments will, in fact, correlate with the price
   movements in the futures contract and thus provide an offset to losses on a
   futures contract.
 
  . Hedging Risk A decision of whether, when, and how to hedge involves skill
   and judgment, and even a well-conceived hedge may be unsuccessful to some
   degree because of unexpected market behavior, market or interest rate trends.
   There are several risks in connection with the use by the Fund of futures
   contracts as a hedging device. One risk arises because of the imperfect
   correlation between movements in the prices of the futures contracts and
   movements in the prices of the underlying instruments which are the subject
   of the hedge. 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 Fund for hedging purposes is also
   subject to Price-Fleming's ability to correctly predict movements in the
   direction of the market. It is possible that, when the Fund has sold futures
   to hedge its portfolio against a decline in the market, the index, indices,
   or instruments underlying futures might advance and the value of the
   underlying instruments held in the Fund's portfolio might decline.
 
 
<PAGE>
 
   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, Price-Fleming believes that over
   time the value of the Fund's portfolio will tend to move in the same
   direction as the market indices used to hedge the portfolio. It is also
   possible that, if the Fund were to hedge against the possibility of a decline
   in the market (adversely affecting the underlying instruments held in its
   portfolio) and prices instead increased, the Fund would lose part or all of
   the benefit of increased value of those underlying instruments that it has
   hedged, because it would have offsetting losses in its futures positions. In
   addition, in such situations, if the Fund had insufficient cash, it might
   have to sell underlying instruments to meet daily variation margin
   requirements. Such sales of underlying instruments might be, but would not
   necessarily be, at increased prices (which would reflect the rising market).
   The Fund might have to sell underlying instruments at a time when it would be
   disadvantageous to do so.
 
   In addition to the possibility that there might be an imperfect correlation,
   or no correlation at all, between price movements in the futures contracts
   and the portion of the portfolio being hedged, the price movements of futures
   contracts might not correlate perfectly with price movements in the
   underlying instruments due to certain market distortions. First, all
   participants in the futures market are subject to margin deposit and
   maintenance requirements. Rather than meeting additional margin deposit
   requirements, investors might close futures contracts through offsetting
   transactions, which could distort the normal relationship between the
   underlying instruments and futures markets. Second, the margin requirements
   in the futures market are less onerous than margin requirements in the
   securities markets and, as a result, the futures market might attract more
   speculators than the securities markets do. Increased participation by
   speculators in the futures market might also cause temporary price
   distortions. Due to the possibility of price distortion in the futures market
   and also because of imperfect correlation between price movements in the
   underlying instruments and movements in the prices of futures contracts, even
   a correct forecast of general market trends by Price-Fleming might not result
   in a successful hedging transaction over a very short time period.
 
 
                          Options on Futures Contracts
 
   The Fund may purchase and sell options on the same types of futures in which
   it may invest.
 
   Options (another type of potentially high-risk derivative) on futures are
   similar to options on underlying instruments except that options on futures
   give the purchaser the right, in return for the premium paid, to assume a
   position in a futures contract (a long position if the option is a call and a
   short position if the option is a put), rather than to purchase or sell the
   futures contract, at a specified exercise price at any time during the period
   of the option. Upon exercise of the option, the delivery of the futures
   position by the writer of the option to the holder of the option will be
   accompanied by the delivery of the accumulated balance in the writer's
   futures margin account which represents the amount by which the market price
   of the futures contract, at exercise, exceeds (in the case of a call) or is
   less than (in the case of a put) the exercise price of the option on the
   futures contract. Purchasers of options who fail to exercise their options
   prior to the exercise date suffer a loss of the premium paid.
 
   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
   financial indices. 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 Fund 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
   nondiscriminatory manner.
 
 
          Special Risks of Transactions in Options on Futures Contracts
 
   The risks described under "Special Risks in Transactions on Futures
   Contracts" are substantially the same as the risks of using options on
   futures. If the Fund were to write an option on a futures contract, it would
   be required to deposit and maintain initial and variation margin in the same
   manner as a regular futures contract. In addition, where the Fund seeks to
   close out an option position by writing or buying an offsetting option
   covering the same index, underlying instrument or contract and having the
   same exercise price and expiration date, its ability to establish and close
   out positions on such options will be subject to the
 
 
<PAGE>
 
   maintenance of a liquid secondary market. Reasons for the absence of a liquid
   secondary market on an exchange include the following: (1) there may be
   insufficient trading interest in certain options; (2) restrictions may be
   imposed by an exchange on opening transactions or closing transactions or
   both; (3) trading halts, suspensions or other restrictions may be imposed
   with respect to particular classes or series of options, or underlying
   instruments; (4) unusual or unforeseen circumstances may interrupt normal
   operations on an exchange; (5) the facilities of an exchange or a clearing
   corporation may not at all times be adequate to handle current trading
   volume; or (6) one or more exchanges could, for economic or other reasons,
   decide or be compelled at some future date to discontinue the trading of
   options (or a particular class or series of options), in which event the
   secondary market on that exchange (or in the class or series of options)
   would cease to exist, although outstanding options on the exchange that had
   been issued by a clearing corporation as a result of trades on that exchange
   would continue to be exercisable in accordance with their terms. There is no
   assurance that higher than anticipated trading activity or other unforeseen
   events might not, at times, render certain of the facilities of any of the
   clearing corporations inadequate, and thereby result in the institution by an
   exchange of special procedures which may interfere with the timely execution
   of customers' orders.
 
 
                    Additional Futures and Options Contracts
 
   Although the Fund has no current intention of engaging in futures or options
   transactions other than those described above, it reserves the right to do
   so. Such futures and options trading might involve risks which differ from
   those involved in the futures and options described above.
 
 
                           Foreign Futures and Options
 
   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 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, when the Fund trades foreign
   futures or foreign options contracts, it 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 CFTC and arbitration proceedings provided by the National Futures
   Association or any domestic futures exchange. In particular, funds received
   from the Fund 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 the Fund's order is placed and the time it is liquidated,
   offset or exercised.
 
 
                          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 Fund 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 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. By entering into a forward contract for
 
 
<PAGE>
 
   the purchase or sale, for a fixed amount of dollars, of the amount of foreign
   currency involved in the underlying security transactions, the 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 Price-Fleming believes that one currency 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 the Fund's
   portfolio securities denominated in such foreign currency. Alternatively,
   where appropriate, the 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 parties will be incorporated into the longer term
   investment decisions made with regard to overall diversification strategies.
   However, Price-Fleming believes that it is important to have the flexibility
   to enter into such forward contracts when it determines that the best
   interests of the Fund will be served.
 
   The Fund may enter into forward contacts for any other purpose consistent
   with the Fund's investment objective and program. However, the Fund will not
   enter into a forward contract, or maintain exposure to any such contract(s),
   if the amount of foreign currency required to be delivered thereunder would
   exceed the Fund's holdings of liquid, high-grade debt securities, currency
   available for cover of the forward contract(s) or other suitable cover as
   permitted by the SEC. In determining the amount to be delivered under a
   contract, the Fund may net offsetting positions.
 
   At the maturity of a forward contract, the Fund may 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 the 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 the 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 the 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, the
   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.
 
   The Fund's dealing in forward foreign currency exchange contracts will
   generally be limited to the transactions described above. However, the Fund
   reserves the right to enter into forward foreign currency contracts for
   different purposes and under different circumstances. Of course, the 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 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.
 
 
<PAGE>
 
   Although the 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
   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
   the 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
 
   Options, futures and forward foreign exchange contracts, including options
   and futures on currencies, which offset a foreign dollar denominated bond or
   currency position may be considered straddles for tax purposes, in which case
   a loss on any position in a straddle will be subject to deferral to the
   extent of unrealized gain in an offsetting position. The holding period of
   the securities or currencies comprising the straddle will be deemed not to
   begin until the straddle is terminated. The holding period of the security
   offsetting an "in-the-money qualified covered call" option on an equity
   security will not include the period of time the option is outstanding.
 
   Losses on written covered calls and purchased puts on securities, excluding
   certain "qualified covered call" options on equity securities, may be
   long-term capital losses, if the security covering the option was held for
   more than 12 months prior to the writing of the option.
 
   In order for the Fund to continue to qualify for federal income tax treatment
   as a regulated investment company, at least 90% of its gross income for a
   taxable year must be derived from qualifying income, i.e., dividends,
   interest, income derived from loans of securities, and gains from the sale of
   securities or currencies. Tax regulations could be issued limiting the extent
   that net gain realized from option, futures or foreign forward exchange
   contracts on currencies is qualifying income for purposes of the 90%
   requirement.
 
   As a result of the "Taxpayer Relief Act of 1997," entering into certain
   options, futures contracts, or forward contracts may result in the
   "constructive sale" of offsetting stocks or debt securities of the Fund.
 
 
 
 INVESTMENT RESTRICTIONS
 -------------------------------------------------------------------------------
   Fundamental policies may not be changed without the approval of the lesser of
   (1) 67% of the Fund's shares present at a meeting of shareholders if the
   holders of more than 50% of the outstanding shares are present in person or
   by proxy or (2) more than 50% of a Fund's outstanding shares. Other
   restrictions in the form of operating policies are subject to change by the
   Fund's Board of Directors 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, the Fund. Calculation of the Fund's total assets for
   compliance with any of the following fundamental or operating policies or any
   other investment restrictions set forth in the Fund's prospectus or Statement
   of Additional Information will not include cash collateral held in connection
   with securities lending activities.
 
 
                              Fundamental Policies
 
   As a matter of fundamental policy, the Fund may not:
 
   (1) Borrowing Borrow money except that the Fund may (i) borrow for
       non-leveraging, temporary or emergency purposes; and (ii) engage in
       reverse repurchase agreements and make other investments or engage in
       other transactions, which may involve a borrowing, in a manner consistent
       with the Fund's investment objective and program, provided that the
       combination of (i) and (ii) shall not exceed 33/1//\\/3/\\% of the value
       of the Fund's total assets (including the amount borrowed) less
       liabilities (other than borrowings) or such other percentage permitted by
       law. Any borrowings which come to exceed this amount will be reduced in
       accordance with applicable law. The Fund may borrow from banks, other
       Price Funds, or other persons to the extent permitted by applicable law;
 
 
<PAGE>
 
   (2) Commodities Purchase or sell physical commodities; except that it may
       enter into futures contracts and options thereon;
 
   (3) Industry Concentration Purchase the securities of any issuer if, as a
       result, more than 25% of the value of the Fund's total assets would be
       invested in the securities of issuers having their principal business
       activities in the same industry;
 
   All Funds except Foreign Equity Fund
 
   (4) Loans Make loans, although the Fund may (i) lend portfolio securities and
       participate in an interfund lending program with other Price Funds
       provided that no such loan may be made if, as a result, the aggregate of
       such loans would exceed 33/1//\\/3/\\% of the value of the Fund's total
       assets; (ii) purchase money market securities and enter into repurchase
       agreements; and (iii) acquire publicly distributed or privately placed
       debt securities and purchase debt;
 
   All Funds except Latin America Fund
 
   (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 the Fund's total assets would be invested in
       the securities of a single issuer, except securities issued or guaranteed
       by the U.S. government or any of its agencies or instrumentalities;
 
   (6) Percent Limit on Share Ownership of Any One Issuer Purchase a security
       if, as a result, with respect to 75% of the value of a Fund's total
       assets, more than 10% of the outstanding voting securities of any issuer
       would be held by the Fund (other than obligations issued or guaranteed by
       the U.S. government, its agencies or instrumentalities);
 
   All Funds
 
   (7) Real Estate Purchase or sell real estate, including limited partnership
       interests therein, unless acquired as a result of ownership of securities
       or other instruments (but this shall not prevent the Fund from investing
       in securities or other instruments backed by real estate or securities of
       companies engaged in the real estate business);
 
   (8) Senior Securities Issue senior securities except in compliance with the
       1940 Act; or
 
   (9) Underwriting Underwrite securities issued by other persons, except to the
       extent that the Fund may be deemed to be an underwriter within the
       meaning of the 1933 Act in connection with the purchase and sale of its
       portfolio securities in the ordinary course of pursuing its investment
       program.
 
 
                                      NOTES
 
       The following Notes should be read in connection with the above-described
       fundamental policies. The Notes are not fundamental policies.
 
       With respect to investment restriction (2), the Fund does not consider
       currency contracts or hybrid investments to be commodities.
 
       For purposes of investment restriction (3), U.S., state or local
       governments, or related agencies or instrumentalities, are not considered
       an industry. Industries are determined by reference to the
       classifications of industries set forth in the Fund's semiannual and
       annual reports. It is the position of the Staff of the SEC that foreign
       governments are industries for purposes of this restriction.
 
       For purposes of investment restriction (4), the Fund will consider the
       acquisition of a debt security to include the execution of a note or
       other evidence of an extension of credit with a term of more than nine
       months.
 
 
<PAGE>
 
                               Operating Policies
 
   As a matter of operating policy, the Fund may not:
 
   (1) Borrowing Purchase additional securities when money borrowed exceeds 5%
       of its total assets;
 
   (2) Control of Portfolio Companies Invest in companies for the purpose of
       exercising management or control;
 
   (3) Futures Contracts Purchase a futures contract or an option thereon, if,
       with respect to positions in futures or options on futures which do not
       represent bona fide hedging, the aggregate initial margin and premiums on
       such options would exceed 5% of the Fund's net asset value;
 
   (4) Illiquid Securities Purchase illiquid securities if, as a result, more
       than 15% of its net assets would be invested in such securities;
 
   (5) Investment Companies Purchase securities of open-end or closed-end
       investment companies except (i) in compliance with the 1940 Act; or (ii)
       securities of the Reserve Investment or Government Reserve Investment
       Funds;
 
   (6) 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;
 
   (7) Mortgaging Mortgage, pledge, hypothecate or, in any manner, transfer any
       security owned by the Fund as security for indebtedness except as may be
       necessary in connection with permissible borrowings or investments and
       then such mortgaging, pledging or hypothecating may not exceed
       33/1//\\/3/\\% of the Fund's total assets at the time of borrowing or
       investment;
 
   (8) Oil and Gas Programs Purchase participations or other direct interests
       in, or enter into leases with respect to oil, gas, or other mineral
       exploration or development programs if, as a result thereof, more than 5%
       of the value of the total assets of the Fund would be invested in such
       programs;
 
   (9) 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;
 
   (10) Short Sales Effect short sales of securities; or
 
   (11) Warrants Invest in warrants if, as a result thereof, more than 10% of
       the value of the net assets of the Fund would be invested in warrants.
 
   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. Each 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 THE FUNDS
 -------------------------------------------------------------------------------
   The officers and directors of the Fund are listed below. Unless otherwise
   noted, the address of each is 100 East Pratt Street, Baltimore, Maryland
   21202. Except as indicated, each has been an employee of T. Rowe Price for
   more than five years. In the list below, the Fund's directors who are
   considered "interested persons" of T. Rowe Price as defined under Section
   2(a)(19) of the 1940 Act are noted with an asterisk (*). These directors are
   referred to as inside directors by virtue of their officership, directorship,
   and/or employment with T. Rowe Price.
 
 
<PAGE>
 
                              Independent Directors
 
   ANTHONY W. DEERING, 1/28/45, Director, Chairman of the Board, President and
   Chief Operating Officer, The Rouse Company, real estate developers, Columbia,
   Maryland; Advisory Director, Kleinwort, Benson (North America) Corporation, a
   registered broker-dealer; Address: 10275 Little Patuxent Parkway, Columbia,
   Maryland 21044
 
   DONALD W. DICK, JR., 1/27/43, Principal, EuroCapital Advisors, LLC, an
   acquisition and management advisory firm; formerly (5/89-6/95) Principal,
   Overseas Partners, Inc., a financial investment firm; formerly  (6/65-3/89)
   Director and Vice President; Consumer Products Division, McCormick & Company,
   Inc., international food processors; Director, Waverly, Inc., Baltimore,
   Maryland; Address: 925 Cleveland Street, #177, Greenville, South Carolina
   29601
 
   PAUL M. WYTHES, 6/23/33, Founding General Partner, Sutter Hill Ventures, a
   venture capital limited partnership, providing equity capital to young high
   technology companies throughout the United States; Director, Teltone
   Corporation, Interventional Technologies Inc. and Stuart Medical, Inc.;
   Address: 755 Page Mill Road, Suite A200, Palo Alto, California 94304-1005
 
 
                            Inside Directors/Officers
 
 
 
  *  M. DAVID TESTA, 4/22/44, Chairman of the Board -Chairman of the Board,
   Price-Fleming; Vice Chairman of the Board, Chief Investment Officer, and
   Managing Director, T. Rowe Price; Vice President and Director, T. Rowe Price
   Trust Company; Chartered Financial Analyst
 
 
 
  *  MARTIN G. WADE, 2/16/43, Director and President -President, Director, Chief
   Investment Officer Price-Fleming; Director, Robert Fleming Holdings Limited;
   Director, Robert Fleming Asset Management; Address: 25 Copthall Avenue,
   London, EC2R 7DR, England
 
 
 
  /a/ PETER B. ASKEW, 5/10/53, Executive Vice President -Executive Vice
   President, Price-Fleming
 
 
 
  /ab/ JOHN R. FORD, 11/25/57, Executive Vice President -Executive Vice
   President, Price-Fleming; Chartered Financial Analyst
 
 
 
  /ab/ DAVID J.L. WARREN, 4/14/57, Executive Vice President -Executive Vice
   President, Price-Fleming
 
 
 
  /a/ CHRISTOPHER D. ALDERSON, 3/29/62, Vice President -Vice President,
   Price-Fleming
 
 
 
   MARK C.J. BICKFORD-SMITH, 4/30/62, Vice President -Vice President and
   portfolio manager of Price-Fleming; formerly a Director and portfolio manager
   of Jardine Fleming Investment Management
 
 
 
  /a/ ROBERT P. CAMPBELL, 1/31/56, Vice President -Vice President, T. Rowe Price
   and Price-Fleming
 
 
 
  /a/ MICHAEL J. CONELIUS, 6/16/64, Vice President -Assistant Vice President, T.
   Rowe Price
 
 
 
  /a/ FRANCES DYDASCO, 5/8/66, Vice President -Vice President and portfolio
   manager of Price-Fleming (Singapore); formerly (1994-1996) an Investment
   Manager at LGT Asset Management Ltd. (Hong Kong); and (1993-1994) with East
   Asia Hamon Asset (Hong Kong)
 
 
 
  /a/ MARK J.T. EDWARDS, 10/27/57, Vice President -Vice President, Price-Fleming
 
 
 
  /ab/ JOHN R. FORD, 11/25/57, Vice President -Executive Vice President,
   Price-Fleming; Chartered Financial Analyst
 
   HENRY H. HOPKINS, 12/23/42, Vice President-Vice President, Price-Fleming and
   T. Rowe Price Retirement Plan Services, Inc.; Director and Managing Director,
   T. Rowe Price; Vice President and Director, T. Rowe Price Investment
   Services, Inc., T. Rowe Price Services, Inc. and T. Rowe Price Trust Company
 
 
 
  /a/ IAN J. MACDONALD, 1/7/62, Vice President -Vice President, Price-Fleming;
   formerly (1997-1992) Senior Fund Manager at Mercury Asset Management (Japan)
 
 
 
   GEORGE A. MURNAGHAN, 5/1/56, Vice President -Managing Director, T. Rowe
   Price; Vice President, Price-Fleming, T. Rowe Price Trust Company, and T.
   Rowe Price Investment Services, Inc.
 
 
<PAGE>
 
 
 
  /a/ ROBERT A. REVEL-CHION, 3/9/65, Vice President -Vice President,
   Price-Fleming; formerly (1997-1994) portfolio manager, Jardine Fleming (Hong
   Kong), and (1987-1993) Assistant Investment Manager, Nestle Rewntree Pension
   Trust
 
 
 
   JAMES S. RIEPE, 6/25/43, Vice President -Vice Chairman of the Board and
   Managing Director, T. Rowe Price; Chairman of the Board, T. Rowe Price
   Investment Services, Inc., T. Rowe Price Services, Inc., T. Rowe Price
   Retirement Plan Services, Inc., and T. Rowe Price Trust Company; Director,
   Price-Fleming and General Re Corporation
 
 
 
  /a/ CHRISTOPHER ROTHERY, 5/26/63, Vice President -Vice President,
   Price-Fleming
 
 
 
  /b/ R. TODD RUPPERT, 5/7/56, Vice President -Managing Director, T. Rowe Price;
   Vice President, T. Rowe Price Trust Company and T. Rowe Price Retirement Plan
   Services, Inc.
 
 
 
   JAMES B.M. SEDDON, 6/17/64, Vice President -Vice President, Price-Fleming
 
 
 
  /a/ BENEDICT R.F. THOMAS, 8/27/64, Vice President -Vice President,
   Price-Fleming; Chartered Financial Analyst
 
 
 
  /a/ JUSTIN THOMSON, 1/14/68, Vice President -(1998 to present) Small Cap
   Co-Ordinator, Price-Fleming; formerly (1991-1998) Portfolio Manager; G. T.
   Capital/Invesco
 
 
 
  /ab/ DAVID J.L. WARREN, 4/14/57, Vice President -Executive Vice President,
   Price-Fleming
 
 
 
   WILLIAM F. WENDLER II, 3/14/62, Vice President -Vice President, T. Rowe
   Price, Price-Fleming, and T. Rowe Price Investment Services, Inc.
 
 
 
  /a/ RICHARD T. WHITNEY, 5/7/58, Vice President -Managing Director, T. Rowe
   Price and T. Rowe Price Trust Company; Chartered Financial Analyst
 
 
 
   EDWARD A. WIESE, 4/12/59, Vice President -Vice President, T. Rowe Price,
   Price-Fleming, and T. Rowe Price Trust Company
 
   PATRICIA S. LIPPERT, 1/12/53, Secretary-Assistant Vice President, T. Rowe
   Price and T. Rowe Price Investment Services, Inc.
 
   CARMEN F. DEYESU, 8/1/41, Treasurer-Vice President, T. Rowe Price, T. Rowe
   Price Services, Inc., and T. Rowe Price Trust Company
 
   DAVID S. MIDDLETON, 1/18/56, Controller-Vice President, T. Rowe Price, T.
   Rowe Price Services, Inc., and T. Rowe Price Trust Company
 
  /a/ ANN B. CRANMER, 3/23/47, Assistant Vice President-Vice President,
   Price-Fleming
 
   ROGER L. FIERY III, 2/10/59, Assistant Vice President-Vice President,
   Price-Fleming and T. Rowe Price
 
  /a/ LEAH P. HOLMES, 2/11/44, Assistant Vice President-Vice President,
   Price-Fleming; Assistant Vice President, T. Rowe Price
 
   INGRID I. VORDEMBERGE, 9/27/35, Assistant Vice President-Employee, T. Rowe
   Price
 
 (a) Messrs. Askew, Ford, and Warren are Executive Vice Presidents of the
   International Funds only. Messrs. Alderson, Campbell, Revel-Chion,
   Conelius, Dydasco, Edwards, Macdonald, Rothery, Seddon, Thomas, Thomson,
   and Whitney are Vice Presidents of the International Funds only. Mmes.
   Cranmer and Holmes are Assistant Vice Presidents of the International
   Funds only.
 
 (b) Messrs. Ford, Ruppert, and Warren are Vice Presidents of the Foreign Equity
   Fund.
 
 
                               Compensation Table
 
   The Funds do not pay pension or retirement benefits to their officers or
   directors. Also, any director of a Fund who is an officer or employee of T.
   Rowe Price or Price-Fleming does not receive any remuneration from the Fund.
 
 
<PAGE>
 
 
<TABLE>
<CAPTION>
Name of Person,                         Aggregate Compensation from                   Total Compensation from Fund and
Position                                Fund(a)                                       Fund Complex Paid to Directors(b)
- --------------------------------------  --------------------------------------------  ---------------------------------
- --------------------------------------------------------------------------------------------------------------------------
<S>                                     <C>                                           <C>
International Stock Fund
Anthony W. Deering, Director                                                  $6,994                             $81,000
Donald W. Dick, Director                                                       5,437                              81,000
Paul M. Wythes, Director                                                       5,521                              80,000
- --------------------------------------------------------------------------------------------------------------------------
 
International Discovery Fund
Anthony W. Deering, Director                                                  $1,821                             $81,000
Donald W. Dick, Director                                                       1,784                              81,000
Paul M. Wythes, Director                                                       1,784                              80,000
- --------------------------------------------------------------------------------------------------------------------------
European Stock Fund
Anthony W. Deering, Director                                                  $2,328                             $81,000
Donald W. Dick, Director                                                       2,156                              81,000
Paul M. Wythes, Director                                                       2,156                              80,000
- --------------------------------------------------------------------------------------------------------------------------
Japan Fund
Anthony W. Deering, Director                                                  $1,780                             $81,000
Donald W. Dick, Director                                                       1,754                              81,000
Paul M. Wythes, Director                                                       1,754                              80,000
- --------------------------------------------------------------------------------------------------------------------------
New Asia Fund
Anthony W. Deering, Director                                                  $2,096                             $81,000
Donald W. Dick, Director                                                       1,971                              81,000
Paul M. Wythes, Director                                                       1,971                              80,000
- --------------------------------------------------------------------------------------------------------------------------
Latin America Fund
Anthony W. Deering, Director                                                  $1,892                             $81,000
Donald W. Dick, Director                                                       1,825                              81,000
Paul M. Wythes, Director                                                       1,817                              80,000
- --------------------------------------------------------------------------------------------------------------------------
Emerging Markets Stock Fund
Anthony W. Deering, Director                                                  $1,753                             $81,000
Donald W. Dick, Director                                                       1,737                              81,000
Paul M. Wythes, Director                                                       1,737                              80,000
- --------------------------------------------------------------------------------------------------------------------------
Global Stock Fund
Anthony W. Deering, Director                                                  $1,814                             $81,000
Donald W. Dick, Director                                                       1,779                              81,000
Paul M. Wythes, Director                                                       1,779                              80,000
- --------------------------------------------------------------------------------------------------------------------------
Foreign Equity Fund
Anthony W. Deering, Director                                                  $3,456                             $81,000
Donald W. Dick, Director                                                       2,950                              81,000
Paul M. Wythes, Director                                                       2,950                              80,000
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
 
 
 
 (a) Amounts in this column are based on accrued compensation from November
   1, 1997 to October 31, 1998.
 
   
 (b) Amounts in this column are based on compensation received from January
   1, 1998, to December 31, 1998. The T. Rowe Price complex included 87 funds
   as of December 31, 1998.    
 
 
 
 
<PAGE>
 
   All Funds
 
   The Fund's Executive Committee, consisting of the Fund's interested
   directors, has been authorized by its respective Board of Directors to
   exercise all powers of the Board to manage the Funds in the intervals between
   meetings of the Board, except the powers prohibited by statute from being
   delegated.
 
 
 
 PRINCIPAL HOLDERS OF SECURITIES
 -------------------------------------------------------------------------------
   As of the date of the prospectus, the officers and directors of the Fund, as
   a group, owned less than 1% of the outstanding shares of the Fund.
 
   As of January 29, 1999, the following shareholders beneficially owned more
   than 5% of the outstanding shares of:
 
   International Stock, New Asia, Japan and European Stock Funds, respectively:
   Charles Schwab & Co. Inc., Reinvestment Account, Attn.: Mutual Fund Dept.,
   101 West Montgomery Street, San Francisco, California 94104-4122.
 
   International Stock: Pirateline & Co., T. Rowe Price Associates, Attn.: Fund
   Accounting Dept., 100 East Pratt Street, Baltimore, Maryland 21201-1009.
 
   Japan Fund: National-Financial Services for the Exclusive Benefit of our
   Customers, 200 Liberty, One Financial Center, 4th Floor, New York, New York
   10281-1003.
 
   Foreign Equity Fund: PACO, c/o Mutual Funds Unit #38615, P.O. Box 3577, Los
   Angeles, California 90051-1577.
 
 
 
 INVESTMENT MANAGEMENT SERVICES
 -------------------------------------------------------------------------------
   Services
   Under the Management Agreement, Price-Fleming provides the Fund with
   discretionary investment services. Specifically, Price-Fleming is responsible
   for supervising and directing the investments of the Fund in accordance with
   the Fund's investment objectives, program, and restrictions as provided in
   its prospectus and this Statement of Additional Information. Price-Fleming is
   also responsible for effecting all security transactions on behalf of the
   Fund, including the negotiation of commissions and the allocation of
   principal business and portfolio brokerage. In addition to these services,
   Price-Fleming provides the Fund with certain corporate administrative
   services, including: maintaining the Fund's corporate existence and corporate
   records; registering and qualifying Fund shares under federal laws;
   monitoring the financial, accounting, and administrative functions of the
   Fund; maintaining liaison with the agents employed by the Fund such as the
   Fund's custodian and transfer agent; assisting the Fund in the coordination
   of such agents' activities; and permitting Price-Fleming's employees to serve
   as officers, directors, and committee members of the Fund without cost to the
   Fund.
 
   The Management Agreement also provides that Price-Fleming, its directors,
   officers, employees, and certain other persons performing specific functions
   for the Fund will only be liable to the Fund for losses resulting from
   willful misfeasance, bad faith, gross negligence, or reckless disregard of
   duty.
 
   Under the Management Agreement, Price-Fleming is permitted to utilize the
   services or facilities of others to provide it or the Funds 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 Funds.
 
 
<PAGE>
 
   Certain administrative support is provided by T. Rowe Price, which receives
   from Price-Fleming a fee of 0.15% of the market value of all assets in equity
   accounts, 0.15% of the market value of all assets in active fixed income
   accounts, and 0.035% 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 International Holdings Limited (JFIH), for which each receives from
   Price-Fleming a fee of 0.075% of the market value of all assets in equity
   accounts under Price-Fleming's management. FIM and JFIH also provide research
   and administration support for fixed income accounts for which each receive a
   fee of 0.075% of the market value of all assets in active fixed income
   accounts and 0.175% of such market value in passive fixed income accounts
   under Price-Fleming's management. FIM is a wholly owned subsidiary of
   Flemings. JFIH is a wholly owned subsidiary of Jardine Fleming.
 
   All Funds except Foreign Equity Fund
 
   Management Fee
   The Fund pays 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 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 Price 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:
<TABLE>
 Price Funds' Annual Group Base Fee Rate for Each Level of
                          Assets
<CAPTION>
<S>                                                      <C>     <C>               <C>     <C>               <C>     <C>
                                                         0.480%  First $1 billion  0.360%  Next $2 billion   0.310%  Next $16
                                                                                                                     billion
                                                         ---------------------------------------------------------------------------
                                                         0.450%  Next $1 billion   0.350%  Next $2 billion   0.305%  Next $30
                                                                                                                     billion
                                                         ---------------------------------------------------------------------------
                                                         0.420%  Next $1 billion   0.340%  Next $5 billion   0.300%  Thereafter
                                                         ---------------------------------------------------------------------------
                                                         0.390%  Next $1 billion   0.330%  Next $10 billion
                                                         ---------------------------------------------------------------------------
                                                         0.370%  Next $1 billion   0.320%  Next $10 billion
</TABLE>
 
 
 
   For the purpose of calculating the Group Fee, the Price Funds include all the
   mutual funds distributed by Investment Services, (excluding the T. Rowe Price
   Spectrum Funds, and any institutional, index, 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 Funds' 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 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 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. The individual fund fees are listed in the following chart:
 
 
<PAGE>
 
<TABLE>
<CAPTION>
<S>                                 <C>
International Stock Fund                    0.35%
International Discovery Fund                0.75
International Growth & Income Fund
European Stock Fund                         0.50
Japan Fund                                  0.50
New Asia Fund                               0.50
Latin America Fund                          0.75
Emerging Markets Stock Fund                 0.75
Global Stock Fund                           0.35
</TABLE>
 
 
 
   The following chart sets forth the total management fees if any, paid to
   Price-Fleming by the Funds, during the last three years:
<TABLE>
<CAPTION>
                         Fund                                1998            1997             1996
                         ----                                ----            ----             ----
<S>                                                     <C>             <C>             <C>
                                                                $67,67
                                                                     7
International Stock                                               ,000     $67,678,000     $52,565,000
International Discovery                                      2,476,000       3,313,000       3,538,000
Japan                                                        1,261,000       1,444,000       1,730,000
European Stock                                              10,502,000       7,315,000       5,007,000
New Asia                                                     5,779,000      15,273,000      17,871,000
Latin America                                                3,530,000       3,989,000       2,096,000
Emerging Markets Stock                                       1,092,000       1,402,000         349,000
Global Stock                                                    81,000           5,000          --
- --------------------------------------------------------------------------------------------------------
</TABLE>
 
 
   Foreign Equity Fund
   For its services to the Fund under the Management Agreement, Price-Fleming is
   paid an annual fee, in monthly installments, based on the Fund's average
   daily net assets at the rate of 0.70%. For the fiscal years 1998, 1997, and
   1996, Price-Fleming received from the Fund management fees totaling
   $23,624,000, $20,250,000, and $13,871,000, respectively.
 
   Limitation on Fund Expenses
   The Management Agreement between each Fund and Price-Fleming provides that
   each Fund will bear all expenses of its operations not specifically assumed
   by Price-Fleming. Set forth in the prospectus are details of various expense
   limitations agreed to by Price-Fleming and the Funds.
 
   T. Rowe Price Spectrum Fund, Inc.
   The Funds are parties to Special Servicing Agreements ("Agreement") between
   and among T. Rowe Price Spectrum Fund, Inc. ("Spectrum Fund"), T. Rowe Price,
   Price-Fleming, 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 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.
 
 
<PAGE>
 
   Management Related Services
   As noted above, the Management Agreement spells out the expenses to be paid
   by the Fund. In addition to the Management Fee, the 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 fees and expenses.
 
   T. Rowe Price Services, Inc., a wholly owned subsidiary of T. Rowe Price,
   acts as the Fund's 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. Additionally, T. Rowe Price, under a separate
   agreement with the Funds, provides accounting services to the Funds.
 
   The Funds paid the expenses shown in the following table for the fiscal year
   ended October 31, 1998, to T. Rowe Price and its affiliates.
<TABLE>
<CAPTION>
                                                             Transfer Agent and    Retirement     Accounting
                           Fund                             Shareholder Services  Subaccounting    Services
                           ----                             --------------------    Services       --------
                                                                                    --------
<S>                                                         <C>                   <C>            <C>
International Stock                                              $6,776,000        $3,662,000      $167,000
International Discovery                                             439,000            10,000       128,000
Japan                                                               326,000             3,000       103,000
European Stock                                                    1,462,000           123,000       107,000
New Asia                                                          1,947,000           104,000       117,000
Latin America                                                       762,000            73,000       113,000
Emerging Markets Stock                                              304,000            11,000       103,000
Global Stock                                                        109,000             2,000       103,000
Foreign Equity                                                       28,000                --       108,000
</TABLE>
 
 
 
 
 DISTRIBUTOR FOR THE FUNDS
 -------------------------------------------------------------------------------
   Investment Services, a Maryland corporation formed in 1980 as a wholly owned
   subsidiary of T. Rowe Price, serves as Fund's 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 the Fund's shares is continuous.
 
   Investment Services is located at the same address as the Fund and T. Rowe
   Price-100 East Pratt Street, Baltimore, Maryland 21202.
 
   Investment Services serves as distributor to the Fund pursuant to an
   Underwriting Agreement ("Underwriting Agreement"), which provides that the
   Fund will pay all fees and expenses in connection with: necessary state
   filings; preparing, setting in type, 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 the Fund. Investment Services' expenses are paid by
   T. Rowe Price.
 
   Investment Services acts as the agent of the Fund in connection with the sale
   of its shares in the various states 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 Fund.
 
 
<PAGE>
 
 CUSTODIAN
 -------------------------------------------------------------------------------
   State Street Bank and Trust Company is the custodian for the Fund's U.S.
   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. State Street Bank's main office is at 225 Franklin Street,
   Boston, Massachusetts 02110.
 
   The Fund has 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
   in accordance with regulations under the 1940 Act. The address for The Chase
   Manhattan Bank, N.A., London is Woolgate House, Coleman Street, London, EC2P
   2HD, England.
 
 
 
 SHAREHOLDER SERVICES
 -------------------------------------------------------------------------------
   T. Rowe Price Services, Inc., another wholly owned subsidiary, acts as the
   Fund's 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
   and both subsidiaries are paid fees for their services.
 
   The Fund from time to time may enter into agreements with outside parties
   through which shareholders hold Fund shares. The shares would be held by such
   parties in omnibus accounts. The agreements would provide for payments by the
   Fund to the outside party for shareholder services provided to shareholders
   in the omnibus accounts.
 
 
 
 CODE OF ETHICS
 -------------------------------------------------------------------------------
   The Fund's investment adviser (Price-Fleming) has a written Code of Ethics
   which requires all employees to obtain prior clearance before engaging in
   personal securities transactions. Transactions must be executed within three
   business days of their clearance. In addition, all employees must report
   their personal securities transactions within 10 days after the end of the
   calendar quarter. 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; or the security is
   subject to internal trading restrictions. In addition, employees are
   prohibited from profiting from 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 Fund are made by Price-Fleming. Price-Fleming is also
   responsible for implementing these decisions, including the negotiation of
   commissions and the allocation of portfolio brokerage and principal business.
 
 
<PAGE>
 
                      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 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,
   Price-Fleming 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, their expertise in particular markets and
   brokerage and research services provided by them. 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, or research
   or brokerage services.
 
   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.
 
   Fixed Income Securities
   For fixed income securities, it is expected that purchases and sales will
   ordinarily be transacted with the issuer, the 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 through 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 Funds 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 a 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 a Fund's portfolio is likely to be invested. Price-Fleming cannot
   readily determine the extent to which commissions charged by brokers reflect
   the value
 
 
<PAGE>
 
   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 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 brokers-dealers that 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 a particular Fund will not necessarily be used by
   Price-Fleming exclusively in connection with the management of that 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-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.
 
   None of the Funds allocates 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 ("Jardine Matheson"). Subject
   to regulatory approvals, Flemings
 
 
<PAGE>
 
   expects to acquire Jardine Matheson's half interest in Jardine Fleming during
   the first half of 1999. Upon completion of this transaction, Flemings will
   own 100% of Jardine Fleming. 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 a 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 Funds 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 Securities Limited
   ("JFS"), RF&Co., Robert Fleming, Inc. (a New York brokerage firm), Ord
   Minnett, Stockbrokers Botswana Ltd, and Fleming Martin.
 
   The above-referenced authorization was made in accordance with Section 17(e)
   of the 1940 Act and Rule 17e-1 thereunder which require the Funds'
   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. 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 Funds. 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 a Fund to seek to
   take advantage of them.
 
   
   The following tables present information on affiliated brokers. Column 1
   represents the total dollar amount of brokerage commissions paid to the
   broker. The dollar amount of brokerage commissions paid for the two previous
   fiscal year ends are also listed as marked. The second column represents the
   percentage that the commissions paid to the affiliated broker represent the
   aggregate brokerage commissions paid by the Fund. The third column shows the
   percentage that the dollar amount of transactions involving the payment of
   commissions effected through the affiliated broker represents the aggregate
   dollar amount of brokerage transactions.    
 
   The following amounts and percentages were paid to JFS during the year 1998:
   
<TABLE>
<CAPTION>
                                                                            Total Brokerage  Percent of Brokerage  Percent of Dollar
                                   Fund                                     ---------------  --------------------  -----------------
                                   ----                                       Commissions    Commissions Paid to       Amount of
                                                                              -----------    -------------------       ---------
                                                                                              Affiliated Brokers     Transactions
                                                                                              ------------------     ------------
                                                                                                                       Involving
                                                                                                                       ---------
                                                                                                                      Affiliated
                                                                                                                      ----------
                                                                                                                        Brokers
                                                                                                                        -------
<S>                                                                         <C>              <C>                   <C>
International Stock                                                             $38,393              0.53%               0.88%
International Discovery                                                          48,484             10.41                7.18
European Stock                                                                       --             --                   --
Japan                                                                            25,876              5.58                6.43
New Asia                                                                             --             --                   --
Foreign Equity                                                                   31,284              1.24                1.90
Latin America                                                                        --             --                   --
Emerging Markets Stock                                                           17,268              5.33                3.69
Global Stock                                                                         81              0.10                0.18
</TABLE>
 
    
 
 
 
 
<PAGE>
 
   The following brokerage commission amounts were paid to JFS during the years
   1997 and 1996:
<TABLE>
<CAPTION>
         Fund                  1997               1996
         ----                  ----               ----
<S>                      <C>               <C>
International Stock         $  228,000         $  295,800
International Discovery        180,995            204,812
European Stock                      --                 --
Japan                          127,117            141,333
New Asia                     1,051,831          1,342,379
Foreign Equity                  70,010             93,205
Latin America                       --                 --
Emerging Markets Stock          69,648              7,924
Global Stock                       206                710
</TABLE>
 
 
 
 
   The following amounts and percentages were paid to RF&Co during the year
   1998:
   
<TABLE>
<CAPTION>
                                                                        Total Brokerage  Percent of Brokerage    Percent of Dollar
                                 Fund                                   ---------------  --------------------    -----------------
                                 ----                                     Commissions    Commissions Paid to         Amount of
                                                                          -----------    -------------------         ---------
                                                                                          Affiliated Brokers       Transactions
                                                                                          ------------------       ------------
                                                                                                               Involving Affiliated
                                                                                                               --------------------
                                                                                                                      Brokers
                                                                                                                      -------
<S>                                                                     <C>              <C>                   <C>
International Stock                                                        $409,044              5.63%                 6.60%
International Discovery                                                      17,219              3.70                  4.53
European Stock                                                              104,784              5.98                  6.62
Japan                                                                            --             --                    --
New Asia                                                                         --             --                    --
Foreign Equity                                                              141,877              5.62                  6.68
Latin America                                                               281,701             43.27                 42.65
Emerging Markets Stock                                                       38,476             11.89                 12.28
Global Stock                                                                    812              0.98                  1.03
</TABLE>
 
    
 
 
 
   The following brokerage commission amounts were paid to RF&Co during the
   years 1997 and 1996:
<TABLE>
<CAPTION>
         Fund                  1997               1996
         ----                  ----               ----
<S>                      <C>               <C>
International Stock          $317,208           $439,567
International Discovery        22,867             35,075
European Stock                 51,846             34,646
Japan                           6,478                733
New Asia                           --                 --
Foreign Equity                 96,488             86,928
Latin America                  95,295             28,793
Emerging Markets Stock         27,548              7,519
Global Stock                      402                731
</TABLE>
 
 
 
 
 
<PAGE>
 
   The following amounts and percentages were paid to Ord Minnett during the
   year 1998:
   
<TABLE>
<CAPTION>
                        Total Brokerage  Percent of Brokerage        Percent of Dollar
         Fund           ---------------  --------------------        -----------------
         ----             Commissions    Commissions Paid to       Amount of Transactions
                          -----------    -------------------       ----------------------
                                          Affiliated Brokers    Involving Affiliated Brokers
                                          ------------------    ----------------------------
<S>                     <C>              <C>                   <C>
International Stock         $50,801             0.70%                      0.68%
International
Discovery                     3,441             0.74                       0.62
European Stock                   --             --                         --
Japan                            --             --                         --
New Asia                         --             --                         --
Foreign Equity               23,040             0.91                       0.70
Latin America                    --             --                         --
Emerging Markets Stock           --             --                         --
Global Stock                     72             0.09                       0.06
</TABLE>
 
    
 
 
 
   The following brokerage commission amounts were paid to Ord Minnett during
   the years 1997 and 1996:
<TABLE>
<CAPTION>
         Fund                  1997               1996
         ----                  ----               ----
<S>                      <C>               <C>
International Stock          $43,327            $60,141
International Discovery       17,775             11,317
European Stock                   358                 --
Japan                             --                 --
New Asia                          --              6,202
Foreign Equity                14,063             20,544
Latin America                     --                 --
Emerging Markets Stock            --                 --
Global Stock                     131                 32
</TABLE>
 
 
 
 
   The following amounts and percentages were paid to Fleming Martin during the
   year 1998:
   
<TABLE>
<CAPTION>
                        Total Brokerage  Percent of Brokerage        Percent of Dollar
         Fund           ---------------  --------------------        -----------------
         ----             Commissions    Commissions Paid to       Amount of Transactions
                          -----------    -------------------       ----------------------
                                          Affiliated Brokers    Involving Affiliated Brokers
                                          ------------------    ----------------------------
<S>                     <C>              <C>                   <C>
International Stock              --               --                         --
International
Discovery                        --               --                         --
European Stock                   --               --                         --
Japan                            --               --                         --
New Asia                         --               --                         --
Foreign Equity                   --               --                         --
Latin America                    --               --                         --
Emerging Markets Stock      $22,542               7%                         6%
Global Stock                     --               --                         --
</TABLE>
 
    
 
   In accordance with the written procedures adopted pursuant to Rule 17e-1, the
   independent directors of each Fund reviewed the 1998 transactions with
   affiliated brokers and determined that such transactions resulted in an
   economic advantage to the Funds either in the form of lower execution costs
   or otherwise.
 
 
<PAGE>
 
                                      Other
 
   The amounts shown below involved trades with brokers acting as agents or
   underwriters, in which such brokers received total commissions, including
   discounts received in connection with underwritings for the fiscal years
   ended 1998, 1997, and 1996:
<TABLE>
<CAPTION>
          Fund                  1998            1997             1996
          ----                  ----            ----             ----
<S>                        <C>             <C>             <C>
International Stock          $7,269,954      $9,102,292       $7,100,046
International Discovery         465,793       1,526,634        1,278,239
European Stock                1,752,000       1,016,985          595,811
Japan                           463,374         440,701          474,365
New Asia                      2,635,426       7,978,905        5,383,653
Foreign Equity                2,524,406       3,506,559        2,052,024
Latin America                   651,009         927,301          362,820
Emerging Markets Stock          323,787         780,941          382,407
Global Stock                     82,781          61,979           50,058
</TABLE>
 
 
 
 
   The percentage of total portfolio transactions, placed with firms which
   provided research, statistical, or other services to T. Rowe Price in
   connection with the management of the Funds, or in some cases, to the Funds
   for the fiscal year ended 1998, 1997, and 1996, are shown below:
<TABLE>
<CAPTION>
                             Fund                                    1998            1997             1996
                             ----                                    ----            ----             ----
<S>                                                             <C>             <C>             <C>
International Stock                                                  93%             94%              89%
International Discovery                                              85              83               80
European Stock                                                       94              95               94
Japan                                                                94              70               70
New Asia                                                             83              87               75
Foreign Equity                                                       92              95               92
Latin America                                                        57              90               92
Emerging Markets Stock                                               72              87               75
Global Stock                                                         99              99               97
</TABLE>
 
 
 
 
   The portfolio turnover rate for each Fund for the fiscal years ended 1998,
   1997, and 1996, was as follows:
<TABLE>
<CAPTION>
            Fund                    1998            1997             1996
            ----                    ----            ----             ----
<S>                            <C>             <C>             <C>
International Stock                12.2%           15.8%           11.6%
International Discovery            34.2            72.7            52.0
European Stock                     26.8            17.5            14.1
Japan                              66.9            32.3            29.8
New Asia                           68.1            41.8            42.0
Foreign Equity                     18.6            15.9            13.8
Latin America                      19.0            32.7            22.0
Emerging Markets Stock             54.5            84.3            41.7
Global Stock                       47.1            41.8            50.0(a)
- -------------------------------------------------------------------------------
</TABLE>
 
 
  (a) From the commencement of operations December 29, 1995, to October 31,
     1996.
 
 
<PAGE>
 
 PRICING OF SECURITIES
 -------------------------------------------------------------------------------
   Equity securities are valued at the last quoted sales price at the time the
   valuations are made. A security that is listed or traded on more than one
   exchange is valued at the quotation on the exchange determined to be the
   primary market for such security.
 
   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 amortized cost in local
   currency which, when combined with accrued interest, approximates fair value.
 
   For the purposes of determining the Fund's net asset value per share, the
   U.S. dollar value of all assets and liabilities initially expressed in
   foreign currencies is determined by using 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.
 
   Trading in the portfolio securities of each Fund may take place in various
   foreign markets on certain days (such as Saturday) when the Funds are not
   open for business and do not calculate their net asset values. In addition,
   trading in a Fund's portfolio securities may not occur on days when the Fund
   is open.
 
 
 
 NET ASSET VALUE PER SHARE
 -------------------------------------------------------------------------------
   The purchase and redemption price of the Fund's shares is equal to the Fund's
   net asset value per share or share price. The Fund determines its net asset
   value per share by subtracting its 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 the Fund, other than the
   Japan 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
   per share of the Japan Fund is calculated as of the close of trading on the
   NYSE each day the NYSE and the Tokyo Stock Exchange ("TSE") are both open.
   The NYSE is closed on the following days: New Year's Day, Dr. Martin Luther
   King, Jr. Holiday, Presidents' Day, Good Friday, Memorial Day, Independence
   Day, Labor Day, Thanksgiving Day, and Christmas Day. The TSE is scheduled to
   be closed on the following weekdays in 1999: January 1, 15; February 11;
   March 22; April 29; May 3, 4, 5; July 20; September 15, 23; October 11;
   November 3, 23; and December 23, as well as the following weekdays in 2000:
   In 2000 - January 3; February 11; March 20; May 3, 4, and 5; July 20;
   September 15; October 10; and November 3 and 23. If the TSE closes on any
   additional or different dates, the Japan Fund will be closed on such dates.
 
   Determination of net asset value (and the offering, sale redemption and
   repurchase of shares) for the Fund may be suspended at times (a) during which
   the NYSE is closed, other than customary weekend and holiday closings, or in
   the case of the Japan Fund, either the NYSE or TSE is closed, (b) during
   which trading on the NYSE is restricted, (c) during which an emergency exists
   as a result of which disposal by the Fund of securities owned by it is not
   reasonably practicable or it is not reasonably practicable for the Fund
   fairly to determine the value of its net assets, or (d) during which a
   governmental body having jurisdiction over the Fund may by order permit such
   a suspension for the protection of the Fund's shareholders; provided that
   applicable rules and regulations of the SEC (or any succeeding governmental
   authority) shall govern as to whether the conditions prescribed in (b), (c),
   or (d) exist.
 
 
<PAGE>
 
 DIVIDENDS AND DISTRIBUTIONS
 -------------------------------------------------------------------------------
   Unless you elect otherwise, dividends and capital gain distributions, if any,
   will be reinvested 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
 -------------------------------------------------------------------------------
   The Fund intends to qualify as a "regulated investment company" under
   Subchapter M of the Code.
 
   Dividends and distributions paid by the Fund (other than Global Stock 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. Income dividends paid by the Global Stock
   Fund are eligible for the dividends-received deduction for corporate
   shareholders, only to the extent the Global Stock Fund's income consists of
   dividends paid by United States Corporations. Capital gain distributions paid
   from this Fund is 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. The 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 December 31 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
   fluctuation, are taxable as ordinary income. If the net effect of these
   transactions is a gain, the ordinary income dividend paid by the Fund will be
   increased. If the result is a loss, the income dividend paid by the Fund will
   be decreased, or to the extent such dividend has already been paid a portion
   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, the Fund's net asset value may reflect
   undistributed income, 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, the Fund is permitted to carry forward its net realized capital
   losses, if any, for eight years and realize net capital gains up to the
   amount of such losses without being required to pay taxes on, or distribute
   such gains.
 
   Income received by the Fund from sources within various foreign countries may
   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 any foreign income
   taxes paid by the Fund. Pursuant to this election, shareholders will be
   required to: (1) include in gross income, even though not actually received,
   their respective pro rata share of foreign taxes paid by the Fund; (2) treat
   their pro rata share of foreign taxes as paid by them; and (3) 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 a 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 (1) the foreign taxes paid,
   and (2) 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.
 
 
<PAGE>
 
   If, in any taxable year, the Fund should not qualify as a regulated
   investment company under the Code: (1) 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; (2) 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 the Fund may qualify for the 70% deduction for dividends
   received by corporations; and (3) foreign tax credits would not "pass
   through" to shareholders.
 
 
                        Taxation of Foreign Shareholders
 
   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 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 by the 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.
 
 
                      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.
 
   To avoid such tax and interest, 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; deductions for losses are allowable only to the extent
   of any gains resulting from these deemed sales for prior taxable years. Such
   gains and losses will be treated as ordinary income. The Fund will be
   required to distribute any resulting income even though it has not sold the
   security and received cash to pay such distributions.
 
 
 
 INVESTMENT PERFORMANCE
 -------------------------------------------------------------------------------
 
                            Total Return Performance
 
   The 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 the 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 gain dividends. The
   results shown are historical and should not be considered indicative of the
   future performance of the Fund. Each average annual compound rate of return
   is derived from the cumulative performance of the Fund over the time period
   specified. The annual compound rate of return for the Fund over any other
   period of time will vary from the average.
 
 
<PAGE>
 
 
<TABLE>
<CAPTION>
                  Cumulative Performance Percentage Change
                            1 Yr.     5 Yrs.   10 Yrs.    % Since    Inception
                            -----     ------   -------    -------    ---------
                            Ended     Ended     Ended    Inception     Date
                            -----     -----     -----    ---------     ----
                           10/31/98  10/31/98  10/31/98  10/31/98
                           --------  --------  --------  --------
<S>                        <C>       <C>       <C>       <C>        <S>
S&P 500                     21.99%   162.66%   418.26%     --           --
Dow Jones Industrial
Average                     17.49    161.36    431.87      --           --
CPI                          1.42     12.49     36.36      --           --
Lipper International
Funds                        4.07     41.60    133.99      --           --
 
International Stock Fund     7.48     49.82    155.56     999.75%    05/09/80
International Discovery
Fund                         5.40      2.38     --         77.70     12/30/88
European Stock Fund         20.12    126.16     --        169.57     02/28/90
Japan Fund                 -15.68    -31.87     --        -21.11     12/30/91
Latin America Fund         -23.93     --        --        -25.08     12/29/93
New Asia Fund              -15.97    -41.03     --         23.93     09/28/90
Emerging Markets Stock
Fund                       -27.31     --        --        -17.02     03/31/95
Global Stock Fund           12.89     --        --         49.89     12/29/95
Foreign Equity Fund          7.65     50.38     --        116.73     09/07/89
- -------------------------------------------------------------------------------
</TABLE>
 
 
 
 
<TABLE>
<CAPTION>
                   Average Annual Compound Rates of Return
                            1 Yr.     5 Yrs.   10 Yrs.    % Since    Inception
                            -----     ------   -------    -------    ---------
                            Ended     Ended     Ended    Inception     Date
                            -----     -----     -----    ---------     ----
                           10/31/98  10/31/98  10/31/98  10/31/98
                           --------  --------  --------  --------
<S>                        <C>       <C>       <C>       <C>        <S>
S&P 500                     21.99%    21.31%    17.88%    --            --
Dow Jones Industrial
Average                     17.49     21.18     18.19     --            --
CPI                          1.42      2.38      3.15     --            --
Lipper International
Funds                        4.07      7.02      8.53     --            --
 
International Stock Fund     7.48      8.42      9.84     13.86%     05/09/80
International Discovery
Fund                        -5.40      0.47     --         6.02      12/30/88
European Stock Fund         20.12     17.73     --        12.11      02/28/90
Japan Fund                 -15.68     -7.39     --        -3.41      12/30/91
Latin America Fund         -23.93     --        --        -5.79      12/29/93
New Asia Fund              -15.97    -10.02     --         2.69      09/28/90
Emerging Markets Stock
Fund                       -27.31     --        --        -5.07      03/31/95
Global Stock Fund           12.89     --        --        15.32      12/29/95
Foreign Equity Fund          7.65      8.50     --         8.82      09/07/89
- -------------------------------------------------------------------------------
</TABLE>
 
 
 
 
                         Outside Sources of Information
 
   From time to time, in reports and promotional literature: (1) the Fund's
   total return performance, ranking, or any other measure of the Fund's
   performance may be compared to any one or combination of the following: (a) a
   broad-based index; (b) other groups of mutual funds, including T. Rowe Price
   Funds, tracked by independent research firms ranking entities, or financial
   publications; (c) indices of securities comparable to those in which the Fund
   invests; (2) the Consumer Price Index (or any other measure for inflation,
 
 
<PAGE>
 
   government statistics, such as GNP may be used to illustrate investment
   attributes of the Fund or the general economic, business, investment, or
   financial environment in which the Fund operates; (3) various financial,
   economic and market statistics developed by brokers, dealers and other
   persons may be used to illustrate aspects of the Fund's performance; (4) the
   effect of tax-deferred compounding on the Fund's investment returns, or on
   returns in general in both qualified and nonqualified retirement plans or any
   other tax advantage product, may be illustrated by graphs, charts, etc.; and
   (5) the sectors or industries in which the Fund invests may be compared to
   relevant indices or surveys in order to evaluate the Fund's historical
   performance or current or potential value with respect to the particular
   industry or sector.
 
 
                               Other Publications
 
   From time to time, in newsletters and other publications issued by Investment
   Services, T. Rowe Price mutual fund portfolio managers may discuss economic,
   financial and political developments in the U.S. and abroad and how these
   conditions have affected or may affect securities prices or the Fund;
   individual securities within the Fund's portfolio; and their philosophy
   regarding the selection of individual stocks, including why specific stocks
   have been added, removed or excluded from the Fund's portfolio.
 
 
                           Other Features and Benefits
 
   The Fund is a member of the T. Rowe Price family of Funds and may help
   investors achieve various long-term investment goals, which include, but are
   not limited to, 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 and/or Investment Services may be made available.
 
 
                       No-Load Versus Load and 12b-1 Funds
 
   Unlike the T. Rowe Price funds, many mutual funds charge sales fees to
   investors or use fund assets to finance distribution activities. These fees
   are in addition to the normal advisory fees and expenses charged by all
   mutual funds. There are several types of fees charged which vary in magnitude
   and which may often be used in combination. A sales charge (or "load") can be
   charged at the time the fund is purchased (front-end load) or at the time of
   redemption (back-end load). Front-end loads are charged on the total amount
   invested. Back-end loads or "redemption fees" are charged either on the
   amount originally invested or on the amount redeemed. 12b-1 plans allow for
   the payment of marketing and sales expenses from fund assets. These expenses
   are usually computed daily as a fixed percentage of assets.
 
   The Fund is a no-load fund which imposes no sales charges or 12b-1 fees.
   No-load funds are generally sold directly to the public without the use of
   commissioned sales representatives. This means that 100% of your purchase is
   invested for you.
 
 
                               Redemptions in Kind
 
   In the unlikely event a shareholder were to receive an in kind redemption of
   portfolio securities of the Fund, brokerage fees could be incurred by the
   shareholder in a 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.
 
 
 
 CAPITAL STOCK
 -------------------------------------------------------------------------------
   The T. Rowe Price International Funds, Inc. (the "International Corporation")
   is a Maryland corporation. The Institutional International Funds, Inc. (the
   "Institutional Corporation") was organized in 1989, as a
 
 
<PAGE>
 
   Maryland corporation. Each Corporation is registered with the SEC under the
   1940 Act as a diversified, open-end investment company, commonly known as a
   "mutual fund."
 
   Currently, the International Corporation consists of the following 12 series,
   each representing a separate class of shares and having different objectives
   and investment policies. The 12 series are as follows: International Stock
   Fund, International Bond Fund, International Discovery Fund, European Stock
   Fund, New Asia Fund, Global Bond Fund, Japan Fund, Latin America Fund,
   Emerging Markets Bond Fund, Emerging Markets Stock Fund, Global Stock Fund,
   and International Growth & Income Fund. Effective May 1, 1998, the T. Rowe
   Price Global Government Bond Fund changed its name to the T. Rowe Price
   Global Bond Fund. (The bond funds are described in a separate Statement of
   Additional Information.) Currently, the Institutional Corporation consists of
   one series, the Foreign Equity Fund. Each Charter also provides that the
   Board of Directors may issue additional series of shares.
 
   The 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 or series, each class or
   series 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. The shares of any such additional classes or series
   might therefore differ from the shares of the present class and series of
   capital stock and from each other as to preferences, conversions 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 or series in various characteristics. The 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 that the Fund has authorized to issue
   without shareholder approval.
 
   Each share of each series 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 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 the Fund, a special meeting of
   shareholders of the 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. The 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 1940 Act.
 
 
<PAGE>
 
 FEDERAL REGISTRATION OF SHARES
 -------------------------------------------------------------------------------
   The Fund's shares are registered for sale under the 1933 Act. Registration of
   the Fund's shares is not required under any state law, but the Fund is
   required to make certain filings with and pay fees to the states in order to
   sell its shares in the states.
 
 
 
 LEGAL COUNSEL
 -------------------------------------------------------------------------------
   Swidler Berlin Shereff Friedman, LLP, whose address is 919 Third Avenue, New
   York, New York 10022-9998, is legal counsel to the Fund.
 
 
 
 INDEPENDENT ACCOUNTANTS
 -------------------------------------------------------------------------------
   PricewaterhouseCoopers LLP, 250 West Pratt Street, 21st Floor, Baltimore,
   Maryland 21201, are the independent accountants to the Funds.
 
   The financial statements of the Funds for the year ended October 31, 1998,
   and the report of independent accountants are included in each Fund's Annual
   Report for the year ended October 31, 1998. A copy of each Annual Report
   accompanies this Statement of Additional Information. The following financial
   statements and the report of independent accountants appearing in each Annual
   Report for the year ended October 31, 1998, are incorporated into this
   Statement of Additional Information by reference:
 
<TABLE>
<CAPTION>
                          ANNUAL REPORT REFERENCES:
 
                                       INTERNATIONAL  INTERNATIONAL  EUROPEAN
                                       STOCK          DISCOVERY      STOCK
                                       -----          ---------      -----
<C>                                    <S>            <S>            <S>
Report of Independent Accountants           34             27            27
Portfolio of Investments, October 31,
1998                                       14-26          11-19        12-19
Statement of Assets and Liabilities,
October 31, 1998                            27             20            20
Statement of Operations, year ended
October 31, 1998                            28             21            21
Statement of Changes in Net Assets,
years ended
October 31, 1998 and October 31, 1997       29             22            22
Notes to Financial Statements,
October 31, 1998                           30-33          23-26        23-26
Financial Highlights                        13             10            11
</TABLE>
 
 
 
<TABLE>
<CAPTION>
                                              LATIN    NEW ASIA    JAPAN
                                              AMERICA  --------    -----
                                              -------
<C>                                           <S>      <S>         <S>
Report of Independent Accountants               22         21           24
Portfolio of Investments, October 31, 1998     12-14     10-13        13-16
Statement of Assets and Liabilities, October
31, 1998                                        15         14           17
Statement of Operations, year ended October
31, 1998                                        16         15           18
Statement of Changes in Net Assets, years
ended
October 31, 1998 and October 31, 1997           17         16           19
Notes to Financial Statements, October 31,
1998                                           18-21     17-20        20-23
Financial Highlights                            11         9            12
</TABLE>
 
 
 
 
 
<PAGE>
 
 
<TABLE>
<CAPTION>
                                         EMERGING       GLOBAL STOCK  FOREIGN
                                         MARKETS STOCK  ------------  EQUITY
                                         -------------                ------
<S>                                      <S>            <S>           <C>
Report of Independent Accountants             24             36         20
Statement of Net Assets, October 31,
1998                                         11-17         15-29       10-15
Statement of Operations, year ended
October 31, 1998                              18             30         16
Statement of Changes in Net Assets,
years ended
October 31, 1998 and October 31, 1997         19             31         17
Notes to Financial Statements, October
31, 1998                                     20-23         32-35       18-19
Financial Highlights                          10             14          9
</TABLE>
 
 
 
 
 



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