PRICE T ROWE HIGH YIELD FUND INC
497, 2000-04-04
Previous: GS TELECOM LTD, 8-K, 2000-04-04
Next: ALLMERICA INVESTMENT TRUST, 485APOS, 2000-04-04






<PAGE>

  STATEMENT OF ADDITIONAL INFORMATION
   The date of this Statement of Additional Information is October 1, 1999,
   revised to March 31, 2000.

         T. ROWE PRICE CORPORATE INCOME FUND, INC.
         T. ROWE PRICE GNMA FUND
         T. ROWE PRICE HIGH YIELD FUND, INC.
              T. Rowe Price High Yield Fund-Advisor Class
         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.
              T. Rowe Price Prime Reserve Fund-PLUS Class
         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,
   1999 (or March 31, 2000, for the T. Rowe Price High Yield Fund-Advisor
   Class), which may be obtained from T. Rowe Price Investment Services, Inc.
   ("Investment Services").

   Each fund's financial statements for the year ended May 31, 1999, and the
   report of independent accountants are included in each fund's Annual Report
   and incorporated by reference into this Statement of Additional Information.

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

   Government Reserve and Reserve Investment Funds are not available for direct
   purchase by members of the public.

                                                                 C22-043 3/31/00
<PAGE>

<TABLE>
<CAPTION>
                              TABLE OF CONTENTS
                              -----------------
                        Page                                             Page
                        ----                                             ----
<S>                     <C>   <C>  <C>                                   <C>
Capital Stock             66       Management of the Funds                 38

- ------------------------------     --------------------------------------------
Code of Ethics            54       Net Asset Value Per Share               61

- ------------------------------     --------------------------------------------
Custodian                 54       Portfolio Management Practices          21

- ------------------------------     --------------------------------------------
Distributor for the       52       Portfolio Transactions                  54
Funds
- ------------------------------     --------------------------------------------
Dividends and             62       Pricing of Securities                   60
Distributions
- ------------------------------     --------------------------------------------
Federal Registration      68       Principal Holders of Securities         47
of Shares
- ------------------------------     --------------------------------------------
Independent               68       Ratings of Commercial Paper             71
Accountants
- ------------------------------     --------------------------------------------
Investment Management     47       Ratings of Corporate Debt Securities    72
Services
- ------------------------------     --------------------------------------------
Investment Objectives      2       Risk Factors                             2
and Policies
- ------------------------------     --------------------------------------------
Investment Performance    64       Services                                52
                                   by Outside Parties
- ------------------------------     --------------------------------------------
Investment Program         7       Tax Status                              62

- ------------------------------     --------------------------------------------
Investment                35       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 each fund's 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>

   All Funds


                                Debt Obligations

   Yields on short-, intermediate-, and long-term debt 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 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.
   Neither event will require a sale of such security by the fund. However, T.
   Rowe Price will consider such event in its determination of whether the fund
   should continue to hold the security. To the extent that the ratings given by
   Moody's or S&P may change as a result of changes in such organizations or
   their rating systems, the fund will attempt to use comparable ratings as
   standards for investments in accordance with the investment policies
   contained in the prospectus. When purchasing unrated securities, T. Rowe
   Price, under the supervision of 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


<PAGE>

   when interest rates decline. Because of their periodic adjustment feature,
   ARMs should be more sensitive to short-term interest rates than long-term
   rates. They should also display less volatility than long-term
   mortgage-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, 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 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


<PAGE>

   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.

   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 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 1999, the democratically elected
   government of Pakistan was overthrown by a military coup. The Russian
   government also defaulted on all its domestic debt. 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 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.

  . 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


<PAGE>

   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") and Global Depository Receipts ("GDRs") traded
   in the United States or on foreign exchanges. 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 most 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


<PAGE>

   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 experience sudden and
   large adjustments in their 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. In 1999, the Brazalian real lost 30% of its value against the U.S.
   dollar. Certain Latin American countries may impose restrictions on 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 each 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.


<PAGE>

   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.

  . 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 and Commercial Notes Short-term promissory notes issued by
   corporations primarily to finance short-term credit needs. Certain notes may
   have floating or variable rates and may contain options, exercisable by
   either the buyer or the seller, that extend or shorten the maturity of the
   note.

  . 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


<PAGE>

   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 ("FHLMC Act"). Freddie Mac Certificates represent a pro-rata interest
   in a group of mortgage loans ("Freddie Mac Certificates") 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 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.


<PAGE>

   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 such 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 tranches 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 and from the structure of
   the deal (priority of the individual tranches). 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--


<PAGE>

   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 or commercial 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. 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.


<PAGE>

  . Adjustable Rate Mortgage Securities ARMs, like fixed rate mortgages, have a
   specified maturity date, and the principal amount of the mortgage is repaid
   over the life of the mortgage. Unlike fixed rate mortgages, the interest rate
   on ARMs is adjusted at regular intervals based on a specified, published
   interest rate "index" such as a Treasury rate index. The new rate is
   determined by adding a specific interest amount, the "margin," to the
   interest rate of the index. Investment in ARM securities allows the fund to
   participate in changing interest rate levels through regular adjustments in
   the coupons of the underlying mortgages, resulting in more variable current
   income and lower price volatility than longer-term fixed rate mortgage
   securities. 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 or
   longer. 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


<PAGE>

   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 prepayments than other Mortgage-Backed Securities. An
   adjustable rate mortgagor has greater incentives to refinance into 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


<PAGE>

   whose right to payments on the asset-backed security is made subordinate to
   the right to such payments of the remaining class or classes. See "Types of
   Credit Support." Second, multiple classes may permit the issuance of
   securities with payment terms, interest rates or other characteristics
   differing both from those of each other and from those of the underlying
   assets. Examples include so-called "strips" (asset-backed securities
   entitling the holder to disproportionate interests with respect to the
   allocation of interest and principal of the assets backing the security), and
   securities with class or classes having characteristics which mimic the
   characteristics of non-asset-backed securities, such as floating interest
   rates (i.e., interest rates which adjust as a specified benchmark changes) or
   scheduled amortization of principal.

   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


<PAGE>

   interest for the benefit of the holders of the Automobile Receivable
   Securities. Therefore, there is the possibility that recoveries on
   repossessed collateral may not, in some cases, be available to support
   payments on the securities. In addition, various state and federal securities
   laws give the motor vehicle owner the right to assert against the holder of
   the owner's Automobile Contract certain defenses such owner would have
   against the seller of the motor vehicle. The assertion of such defenses could
   reduce payments on the Automobile Receivable Securities.

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


<PAGE>

   have no collateral. The loan participations themselves may extend for the
   entire term of the loan or 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.


                        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 can be highly volatile and have no
   voting rights, pay no dividends, and have no rights with respect to the
   assets of the corporation issuing them. Warrants basically are options to
   purchase securities at a specific price valid for a specific period of time.
   They do not represent ownership of


<PAGE>

   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.

   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


<PAGE>

   the value of the Hybrid Instrument. Also, the prices of the Hybrid Instrument
   and the Benchmark or Underlying Asset may not move in the same direction or
   at the same time.

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

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


<PAGE>

   value that approximates its 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 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% (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


<PAGE>

   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 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, amended on November 23, 1999, 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


<PAGE>

   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. 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 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


<PAGE>

   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 June 8, 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 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.


<PAGE>

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

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

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


<PAGE>

   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 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 at


<PAGE>

   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 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.

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

   Stock index futures contracts may be used to provide a hedge for a portion of
   the 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.


<PAGE>

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

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

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

   Trading in Futures Contracts
   A futures contract provides for the future sale by one party and purchase by
   another party of a specified amount of a specific financial instrument (e.g.,
   units of a 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, 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


<PAGE>

   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 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.


<PAGE>

   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
   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.


<PAGE>

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


                    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


<PAGE>

   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 thereon if, with
   respect to positions in futures or options on futures which do not represent
   bona fide hedging, the aggregate initial margin and premiums on such
   positions would exceed 5% of 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 options on securities.
   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.

   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


<PAGE>

   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.

   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 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.


<PAGE>

    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.



 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/\\%


<PAGE>

       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 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


<PAGE>

       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 (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.

       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;


<PAGE>

   (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

   (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 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.


<PAGE>

   All Funds except Personal Strategy Funds


                       Independent Directors/Trustees/(a)/

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

   ANTHONY W. DEERING, 1/28/45, Director, Chairman of the Board, President, and
   Chief Executive Officer, The Rouse Company, real estate developers, Columbia,
   Maryland; Address: 10275 Little Patuxent Parkway, Columbia, Maryland 21044

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

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

   Personal Strategy Funds

   DONALD W. DICK, JR., 1/27/43, Principal, EuroCapital Advisors, LLC, an
   acquisition and management advisory firm; formerly (5/89-6/95) Principal,
   Overseas Partners, Inc., a financial investment firm; formerly  (6/65-3/89)
   Director and Vice President; Consumer Products Division, McCormick & Company,
   Inc., international food processors; Director, Waverly, Inc., Baltimore,
   Maryland; Address: P.O.Box 491, Chilmark, Massacusetts 02535

   DAVID K. FAGIN, 4/9/38, Director, Western Exploration and Development, Ltd.
   (6/97 to present); Director (5/92 to present); formerly: (Chairman (5/92 to
   12/97) and Chief Executive Officer (5/92 to 5/96) of Golden Star Resources
   Ltd.; formerly: President, Chief Operating Officer, and Director, Homestake
   Mining Company; (5/86 to 7/91); Address: 1700 Lincoln Street, Suite 4710,
   Denver, Colorado 80203

   HANNE M. MERRIMAN, 11/16/41, Retail business consultant; Director, Ann Taylor
   Stores Corporation, Central Illinois Public Service Company, Ameren Corp.,
   Finlay Enterprises, Inc., The Rouse Company, State Farm Mutual Automobile
   Insurance Company and USAirways 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 Partner of Sutter Hill Ventures, a venture
   capital limited partnership, providing equity capital to young high
   technology companies throughout the United States; Director, Teltone
   Corporation and InterVentional Technologies 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.


                       Inside Directors/Trustees/Officers

   All Funds

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


<PAGE>

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

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

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

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

   Corporate Income Fund

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

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

   ROBERT M. RUBINO, 8/2/53, President-Vice President, T. Rowe Price

   MARK J. VASELKIV, 7/22/58, Executive Vice President-Vice President, T. Rowe
   Price

   STEVEN G. BROOKS, 8/5/54, Vice President-Vice President, T. Rowe Price;
   Chartered Financial Analyst

   PATRICK S. CASSIDY, 8/27/64, Vice President-Vice President, T. Rowe Price;
   Chartered Financial Analyst

   DEBRA R. DIES, 5/12/71, Vice President-Assistant Vice President, T. Rowe
   Price; formerly employed at J.P. Morgan Securities

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

   VIRGINIA A. STIRLING, 9/5/51, Vice President-Vice President, T. Rowe Price

   THOMAS E. TEWKSBURY, 8/1/61, Vice President-Vice President, T. Rowe Price;
   formerly senior bond trader, Scudder, Stevens & Clark, New York, New York

   THEA N. WILLIAMS, 12/20/61, Vice President-Vice President, T. Rowe Price

   GNMA Fund

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

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

   CONNICE A. BAVELY, 3/5/51, 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, 1/2/68, Executive Vice President-Vice President, T. Rowe
   Price; formerly Assistant Vice President and Government Bond Trader for First
   Chicago NBD Corporation

   ALAN D. LEVENSON, 7/17/58, Vice President-Vice President, T. Rowe Price

   EDMUND M. NOTZON, 10/1/45, Vice President-Managing Director, T. Rowe Price;
   Vice President, T. Rowe Price Trust Company; Chartered Financial Analyst


<PAGE>

   EDWARD T. SCHNEIDER, 9/19/59, Vice President-Vice President, T. Rowe
   PriceHigh Yield Fund

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

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

   MARK J. VASELKIV, 7/22/58, President-Vice President, T. Rowe Price

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

   ANDREW M. BROOKS, 2/16/56, Vice President-Vice President, T. Rowe Price

   PAUL A. KARPERS, 11/14/67, Vice President-Assistant Vice President, T. Rowe
   Price; formerly an Investment Analyst at the Vanguard Group, Philadelphia,
   Pennsylvania

   NATHANIEL S. LEVY, 07/13/62, Vice President-Vice President, T. Rowe Price

   KEVIN P. LOOME, 10/19/67, Vice President-Assistant Vice President, T. Rowe
   Price; formerly a Corporate Finance Analyst for Morgan Stanley in both London
   and New York

   MICHAEL J. MCGONIGLE, 10/14/66, Vice President-Vice President, T. Rowe Price

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

   HUBERT M. STILES, JR., 6/22/47, Vice President-Vice President, T. Rowe Price

   THOMAS E. TEWKSBURY, 8/1/61, Vice President-Vice President, T. Rowe Price;
   formerly senior bond trader, Scudder, Stevens & Clark, New York, New York

   THEA N. WILLIAMS, 12/20/61, Vice President-Vice President, T. Rowe Price

   WALTER P. STUART, 3/27/60, Vice President-Employee, T. Rowe Price

   New Income Fund

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

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

   ROBERT M. RUBINO, 8/2/53, Executive Vice President-Vice President, T. Rowe
   Price

   CONNICE A. BAVELY, 3/5/51, 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, 8/5/54, Vice President-Vice President, T. Rowe Price;
   Chartered Financial Analyst

   PATRICK S. CASSIDY, 8/27/64, Vice President-Vice President, T. Rowe Price;
   Chartered Financial Analyst

   DEBRA R. DIES, 5/12/71, Vice President-Assistant Vice President, T. Rowe
   Price; formerly employed at J.P. Morgan Securities

   VEENA A. KUTLER, 12/22/56, Vice President-Vice President, T. Rowe Price, T.
   Rowe Price Trust Company, and Price-Fleming

   ALAN D. LEVENSON, 7/17/58, Vice President-Vice President, T. Rowe Price

   JAMES M. MCDONALD, 9/29/49, Vice President-Vice President, T. Rowe Price


<PAGE>

   EDMUND M. NOTZON, 10/1/45, Vice President-Managing Director, T. Rowe Price;
   Vice President, T. Rowe Price Trust Company; Chartered Financial Analyst

   JOAN R. POTEE, 11/23/47, Vice President-Vice President, T. Rowe Price

   THEODORE E. ROBSON, 2/10/65, Vice President-Assistant Vice President, T. Rowe
   Price

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

   VIRGINIA A. STIRLING, 9/5/51, Vice President-Vice President, T. Rowe Price

   SUSAN G. TROLL, 8/27/66, Vice President-Vice President and Analyst, T. Rowe
   Price; formerly Vice President at Merrill Lynch Asset Management; Certified
   Public Accountant

   Personal Strategy Funds

  *  JAMES A.C. KENNEDY, 8/17/53, Director-Director and Managing Director, T.
   Rowe Price; Chartered Financial Analyst

  *  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, Director, and Managing Director, T. Rowe Price; Vice President and
   Director, T. Rowe Price Trust Company; Chartered Financial Analyst

   EDMUND M. NOTZON, 10/1/45, President-Managing Director, T. Rowe Price; Vice
   President, T. Rowe Price Trust Company; Chartered Financial Analyst

   STEPHEN W. BOESEL, 12/28/44, Executive Vice President-Managing Director, T.
   Rowe Price

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

   JOHN H. LAPORTE, JR., 7/26/45, Vice President-Director and Managing Director,
   T. Rowe Price; Chartered Financial Analyst

   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

   WILLIAM T. REYNOLDS, 5/26/48, Vice President-Director and 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

   MARK J. VASELKIV, 7/22/58, Vice President-Vice President, T. Rowe Price

   JUDITH B. WARD, 10/12/62, Vice President-Assistant 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

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

   Prime Reserve Fund

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

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

   EDWARD A. WIESE, 4/12/59, President-Vice President, T. Rowe Price and T. Rowe
   Price Trust Company; Chartered Financial Analyst


<PAGE>

   ROBERT P. CAMPBELL, 1/31/56, Executive Vice President-Vice President, T. Rowe
   Price and T. Rowe Price Trust Company

   JAMES M. MCDONALD, 9/29/49, Executive Vice President-Vice President, T. Rowe
   Price

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

   BRIAN E. BURNS, 10/6/60, Vice President-Assistant Vice President, T. Rowe
   Price

   JOAN R. POTEE, 11/23/47, Vice President-Vice President, T. Rowe Price

   ROBERT M. RUBINO, 8/2/53, Vice President-Vice President, T. Rowe Price

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

   SUSAN G. TROLL, 8/27/66, Vice President-Vice President and Analyst, T. Rowe
   Price; formerly Vice President at Merrill Lynch Asset Management; Certified
   Public Accountant

   Reserve Investment Funds

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

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

   EDWARD A. WIESE, 4/12/59, President-Vice President, T. Rowe Price and T. Rowe
   Price Trust Company; Chartered Financial Analyst

   ROBERT P. CAMPBELL, 1/31/56, Executive Vice President-Vice President, T. Rowe
   Price and T. Rowe Price Trust Company

   JAMES M. MCDONALD, 9/29/49, Executive Vice President-Vice President, T. Rowe
   Price

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

   BRIAN E. BURNS, 10/6/60, Vice President-Assistant Vice President, T. Rowe
   Price

   JOAN R. POTEE, 11/23/47, Vice President-Vice President, T. Rowe Price

   ROBERT M. RUBINO, 8/2/53, Vice President-Vice President, T. Rowe Price

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

   Short-Term Bond Fund

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

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

   EDWARD A. WIESE, 4/12/59, President-Vice President, T. Rowe Price and T. Rowe
   Price Trust Company; Chartered Financial Analyst

   CONNICE A. BAVELY, 3/5/51, 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, 8/5/54, Vice President-Vice President, T. Rowe Price;
   Chartered Financial Analyst

   ROBERT P. CAMPBELL, 1/31/56, Vice President-Vice President, T. Rowe Price and
   T. Rowe Price Trust Company


<PAGE>

   PATRICK S. CASSIDY, 8/27/64, Vice President-Vice President, T. Rowe Price;
   Chartered Financial Analyst

   DEBRA R. DIES, 5/12/71, Vice President-Assistant Vice President, T. Rowe
   Price; formerly employed at J.P. Morgan Securities

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

   JAMES M. MCDONALD, 9/29/49, Vice President-Vice President, T. Rowe Price

   CHERYL A. MICKEL, 1/11/67, Vice President-Assistant Vice President, T. Rowe
   Price

   THEODORE E. ROBSON, 2/10/65, Vice President-Assistant Vice President, T. Rowe
   Price

   ROBERT M. RUBINO, 8/2/53, Vice President-Vice President, T. Rowe Price

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

   VIRGINIA A. STIRLING, 9/5/51, Vice President-Vice President, T. Rowe Price

   Short-Term U.S. Government Fund

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

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

   CONNICE A. BAVELY, 3/5/51, 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

   JAMES M. MCDONALD, 9/29/49, Vice President-Vice President, T. Rowe Price

   EDMUND M. NOTZON, 10/1/45, Vice President-Managing Director, T. Rowe Price;
   Vice President, T. Rowe Price Trust Company; Chartered Financial Analyst

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

   DANIEL O. SHACKELFORD, 3/11/58, Vice President-Vice President, T. Rowe Price

   EDWARD A. WIESE, 4/12/59, Vice President-Vice President, T. Rowe Price and T.
   Rowe Price Trust Company; Chartered Financial Analyst

   U.S. Treasury Funds

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

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

   EDWARD A. WIESE, 4/12/59, Executive Vice President-Vice President, T. Rowe
   Price and T. Rowe Price Trust Company; Chartered Financial Analyst

   CONNICE A. BAVELY, 3/5/51, 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, 1/13/53, Vice President-Vice President, T. Rowe
   Price

   BRIAN E. BURNS, 10/6/60, Vice President-Assistant Vice President, T. Rowe
   Price

   ROBERT P. CAMPBELL, 1/31/56, Vice President-Vice President, T. Rowe Price and
   T. Rowe Price Trust Company


<PAGE>

   JEROME A. CLARK, 1/2/61, Vice President-Vice President, T. Rowe Price

   ALAN D. LEVENSON, 7/17/58, Vice President-Vice President, T. Rowe Price

   JAMES M. MCDONALD, 9/29/49, Vice President-Vice President, T. Rowe Price

   CHERYL A. MICKEL, 1/11/67, Vice President-Assistant Vice President, T. Rowe
   Price

   EDMUND M. NOTZON, 10/1/45, Vice President-Managing Director, T. Rowe Price;
   Vice President, T. Rowe Price Trust Company; Chartered Financial Analyst

   JOAN R. POTEE, 11/23/47, Vice President-Vice President, T. Rowe Price

   ROBERT M. RUBINO, 8/2/53, Vice President-Vice President, T. Rowe Price

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


                               Compensation Table

   The funds do not pay pension or retirement benefits to their independent
   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)
- --------                         --------------------------------------------                                  -----------

- -----------------------                                                        --------------------------------------
<S>                              <C>                                           <C>
Corporate Income Fund
Calvin W. Burnett, Ph.D.,                                                                                                     $65
Trustee                                                                $1,476                                                ,000
                                                                                                                              81,
Anthony W. Deering, Trustee                                             1,338                                                 000
F. Pierce Linaweaver, Trustee                                           1,476                                              66,000
John G. Schreiber, Trustee                                              1,476                                              65,500
- -----------------------------------------------------------------------------------------------------------------------------------
GNMA Fund
Calvin W. Burnett, Ph.D.,                                                 $2,                                                 $65
Trustee                                                                   423                                                ,000
                                                                                                                              81,
Anthony W. Deering, Trustee                                             1,677                                                 000
F. Pierce Linaweaver, Trustee                                           2,423                                              66,000
John G. Schreiber, Trustee                                              2,423                                              65,500
- -----------------------------------------------------------------------------------------------------------------------------------
High Yield Fund
Calvin W. Burnett, Ph.D.,                                                                                                     $65
Director                                                               $2,960                                                ,000
                                                                                                                              81,
Anthony W. Deering, Director                                            1,917                                                 000
F. Pierce Linaweaver, Director                                          2,960                                              66,000
John G. Schreiber, Director                                             2,960                                              65,500
- -----------------------------------------------------------------------------------------------------------------------------------
New Income Fund
Calvin W. Burnett, Ph.D.,                                                                                                     $65
Director                                                               $3,334                                                ,000
                                                                                                                              81,
Anthony W. Deering, Director                                            2,065                                                 000
F. Pierce Linaweaver, Director                                          3,334                                              66,000
John G. Schreiber, Director                                             3,334                                              65,500
- -----------------------------------------------------------------------------------------------------------------------------------
Personal Strategy Balanced Fund
Donald W. Dick, Jr., Director                                          $1,150                                             $81,000
David K. Fagin, Director                                                1,256                                              65,000
Hanne M. Merriman, Director                                             1,256                                              65,000
Hubert D. Vos, Director                                                 1,256                                              66,000
Paul M. Wythes, Director                                                1,150                                              80,000
- -----------------------------------------------------------------------------------------------------------------------------------
Personal Strategy Growth Fund
Donald W. Dick, Jr., Director                                          $1,074                                             $81,000
David K. Fagin, Director                                                1,114                                              65,000
Hanne M. Merriman, Director                                             1,114                                              65,000
Hubert D. Vos, Director                                                 1,114                                              66,000
Paul M. Wythes, Director                                                1,074                                              80,000
- -----------------------------------------------------------------------------------------------------------------------------------
Personal Strategy Income Fund
Donald W. Dick, Jr., Director                                          $1,080                                             $81,000
David K. Fagin, Director                                                1,121                                              65,000
Hanne M. Merriman, Director                                             1,121                                              65,000
Hubert D. Vos, Director                                                 1,121                                              66,000
Paul M. Wythes, Director                                                1,080                                              80,000
- -----------------------------------------------------------------------------------------------------------------------------------
Prime Reserve Fund
Calvin W. Burnett, Ph.D.,                                                                                                     $65
Director                                                               $6,312                                                ,000
                                                                                                                              81,
Anthony W. Deering, Director                                            3,109                                                 000
F. Pierce Linaweaver, Director                                          6,312                                              66,000
John G. Schreiber, Director                                             6,312                                              65,500
- -----------------------------------------------------------------------------------------------------------------------------------
Short-Term Bond Fund
Calvin W. Burnett, Ph.D.,                                                                                                     $65
Director                                                               $1,611                                                ,000
                                                                                                                              81,
Anthony W. Deering, Director                                            1,396                                                 000
F. Pierce Linaweaver, Director                                          1,611                                              66,000
John G. Schreiber, Director                                             1,611                                              65,500
- -----------------------------------------------------------------------------------------------------------------------------------
Short-Term U.S. Government Fund
Calvin W. Burnett, Ph.D.,                                                                                                     $65
Director                                                               $1,479                                                ,000
                                                                                                                              81,
Anthony W. Deering, Director                                            1,340                                                 000
F. Pierce Linaweaver, Director                                          1,479                                              66,000
John G. Schreiber, Director                                             1,479                                              65,500
- -----------------------------------------------------------------------------------------------------------------------------------
U.S. Treasury Intermediate Fund
Calvin W. Burnett, Ph.D.,                                                                                                     $65
Director                                                               $1,567                                                ,000
                                                                                                                              81,
Anthony W. Deering, Director                                            1,370                                                 000
F. Pierce Linaweaver, Director                                          1,567                                              66,000
John G. Schreiber, Director                                             1,567                                              65,500
- -----------------------------------------------------------------------------------------------------------------------------------
U.S. Treasury Long-Term Fund
Calvin W. Burnett, Ph.D.,                                                                                                     $65
Director                                                               $1,960                                                ,000
                                                                                                                              81,
Anthony W. Deering, Director                                            1,520                                                 000
F. Pierce Linaweaver, Director                                          1,960                                              66,000
John G. Schreiber, Director                                             1,960                                              65,500
- -----------------------------------------------------------------------------------------------------------------------------------
U.S. Treasury Money Fund
Calvin W. Burnett, Ph.D.,                                                                                                     $65
Director                                                               $1,762                                                ,000
                                                                                                                              81,
Anthony W. Deering, Director                                            1,446                                                 000
F. Pierce Linaweaver, Director                                          1,762                                              66,000
John G. Schreiber, Director                                             1,762                                              65,500
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>




<PAGE>



<PAGE>

 (a) Amounts in this column are based on accrued compensation from June 1,
   1998 to May 31, 1999.

 (b) Amounts in this column are based on compensation received from January
   1, 1999 to December 31, 1998. The T. Rowe Price complex included 88 funds
   as of December 31, 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 January 31, 2000, the following shareholders beneficially owned more
   than 5% of the outstanding shares of the fund:

   Corporate Income Fund: Walnut Street Partners, P.O. Box 6829 c/o Curt Walmer,
   850 N. Wyomissing Blvd., Ste. 200, Wyomissing, Pennsylvania 19610-1764;

   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

   Reserve Investment Fund: 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; Tuna & 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


<PAGE>

   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 next.

   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 of each fund are listed in the following
   chart:


<PAGE>

<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
Prime Reserve Fund-PLUS Class        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                    1999            1998             1997
            ----                    ----            ----             ----
<S>                            <C>             <C>             <C>
Corporate Income                $    71,000             (a)              (a)
GNMA                              5,388,000     $ 4,928,000      $ 4,398,000
High Yield                       10,598,000       9,797,000        8,206,000
New Income                        9,740,000       9,047,000        7,984,000
Personal Strategy Balanced        2,479,000       1,685,000          897,000
Personal Strategy Growth          1,010,000         514,000           92,000
Personal Strategy Income            897,000         206,000           22,000
Prime Reserve                    18,779,000      17,281,000       16,431,000
Prime Reserve Fund-PLUS Class        15,000             (a)               --
Short-Term Bond                   1,423,000       1,478,000        1,795,000
Short-Term U.S. Government          457,000         317,000          250,000
U.S. Treasury Intermediate          931,000         724,000          694,000
U.S. Treasury Long-Term           1,150,000         687,000          276,000
U.S. Treasury Money               2,890,000       2,668,000        2,585,000
- -------------------------------                --------------------------------
</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.

   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.


<PAGE>

<TABLE>
<CAPTION>
         Fund             Limitation Period     Expense Ratio     Reimbursement
         ----             -----------------      Limitation            Date
                                                 ----------            ----
<S>                     <S>                     <C>            <C>
Prime Reserve Fund-      May 1, 1999 -April
PLUS Class (a)          30, 2000                    1.00%       April 30, 2002
                         June 1, 1999 - May
Corporate Income(b)     31, 2001                    0.80        May 31, 2003
High Yield               March 31,
Fund-Advisor Class      2000-December 31, 2001                 December 31, 2003
Personal Strategy        June 1, 1998 - May
Growth(c)               31, 2000                    1.10        May 31, 2002
Personal Strategy        June 1, 1998 -May 31,
Income(d)               2000                        0.90        May 31, 2002
Short-Term U.S.          June 1, 1998 -May 31,      0.70        May 31, 2002
Government(e)           2000
- -----------------------------------------------------------------------------------
</TABLE>


  (a) The Prime Reserve Fund-PLUS Class operated under a 1.00% limitation
     that expired April 30, 1999. The reimbursement period for this
     limitation extends through April 30, 2000.

  (b) The Corporate Income Fund operated under a 0.80% limitation that
     expired May 31, 1999. The reimbursement period for this limitation
     extends through May 31, 2001.

  (c) 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.

  (d) 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.

  (e) 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.


   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.

   Corporate Income Fund

   Pursuant to the current expense limitation, $171,000 of management fees were
   not accrued by the fund for the year ended May 31, 1999. Additionally,
   $149,000 of unaccrued fees and expenses related to a prior period are subject
   to reimbursement through May 31, 2000.

   U.S. Treasury Long-Term Fund

   The fund operated under a 0.80% limitation that expired May 31, 1999. The
   reimbursement period for this limitation extends through May 31, 2001.

   Personal Strategy Balanced Fund

   Pursuant to the previous expense limitation, $62,000 of unaccrued 1997
   management fees were repaid during the year ended May 31, 1999.

   Personal Strategy Growth Fund

   Pursuant to the expense limitation, $77,000 of management fees were not
   accrued by the fund for the year ended May 31, 1999. Additionally, $287,000
   of unaccrued management fees related to a previous expense limitation are
   subject to reimbursement through May 31, 2000.

   Personal Strategy Income Fund

   Pursuant to the expense limitation, $10,000 of management fees were not
   accrued by the fund for the year ended May 31, 1999. Additionally, $238,000
   of unaccrued management fees related to a previous expense limitation are
   subject to reimbursement through May 31, 2000.


<PAGE>

   Short-Term U.S. Government Fund

   Pursuant to the current expense limitation, $92,000 of management fees were
   not accrued by the fund for the year ended May 31, 1998. Additionally,
   $266,000 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, 1999, to T. Rowe Price and its affiliates.

<TABLE>
<CAPTION>
                         Transfer Agent and    Retirement
         Fund           Shareholder Services  Subaccounting   Accounting Services
         ----           --------------------    Services      -------------------
                                                --------
<S>                     <C>                   <C>            <C>
Corporate Income             $   88,000        $   14,000          $ 73,000
GNMA                          1,757,000           235,000           122,875
Government Reserve
Investment                           --                --            61,708
High Yield                    2,401,000           194,000           168,000
New Income                    2,604,000         1,523,000           110,116
Personal Strategy
Balanced                        153,000         1,070,000            74,000
Personal Strategy
Growth                          164,000           386,000            73,000
Personal Strategy
Income                           76,000           394,000            73,000
Prime Reserve                 5,247,000         4,665,000            93,000
Prime Reserve
Fund-PLUS Class                   7,000                --                --
Reserve Investment                9,566                --            61,708
Short-Term Bond                 352,000           260,000           123,000
Short-Term U.S.
Government                      152,000            14,000           103,000
U.S. Treasury
Intermediate                    213,000           137,000            62,417
U.S. Treasury
Long-Term                       575,000            36,000            62,417
U.S. Treasury Money             633,835           542,245            61,708
- ------------------------
</TABLE>




<PAGE>

 SERVICES BY OUTSIDE PARTIES
 -------------------------------------------------------------------------------
   The shares of some fund shareholders are held in omnibus accounts maintained
   by various third parties, including retirement plan sponsors, insurance
   companies, banks and broker-dealers. The fund has adopted an administrative
   fee payment ("AFP") program that authorizes the fund to make payments to
   these third parties. The payments are made for transfer agent, recordkeeping
   and other administrative services provided by, or on behalf of, the third
   parties with respect to such shareholders and the omnibus accounts. Under the
   AFP program, the funds paid the amounts set forth below to various third
   parties in 1999.

<TABLE>
<CAPTION>
<S>                              <C>
High Yield Fund                         $31,006.75
New Income Fund                          41,556.17
Personal Strategy Balanced Fund           3,921.24
Personal Strategy Growth Fund             4,311.22
Personal Strategy Income Fund             1,988.58
Prime Reserve Fund                       16,153.92
U.S. Treasury Intermediate Fund          23,738.44
U.S. Treasury Long-Term Fund              3,075.49
</TABLE>



   The Advisor Class has adopted an Advisor Class administrative fee payment
   program ("Advisor Class AFP") under which various intermediaries, including
   intermediaries receiving 12b-1 payments, may receive payments from the
   Advisor Class in addition to 12b-1 fees for providing various recordkeeping
   and transfer agent type services to the Advisor classes and/or shareholders
   thereof. These services include: mailings of fund prospectuses, reports,
   notices, proxies, and other materials to shareholders; transmission of net
   purchase and redemption orders; maintenance of separate records for
   shareholders reflecting purchases, redemptions, and share balances; mailing
   of shareholder confirmations and periodic statements; and telephone services
   in connection with the above.

   All Funds except Government Reserve Investment and Reserve Investment Funds


 DISTRIBUTOR FOR THE FUNDS
 -------------------------------------------------------------------------------
   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.


<PAGE>

   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.

   High Yield Fund-Advisor Class


                   Distribution and Shareholder Services Plan

   The fund Directors/Trustees adopted a Plan pursuant to Rule 12b-1 on February
   9, 2000 with respect to each Advisor Class. Each Plan provides that the
   Advisor Class may compensate Investment Services or such other persons as the
   fund or Investment Services designates, to finance any or all of the
   distribution, shareholder servicing, maintenance of shareholder accounts,
   and/or other administrative services with respect to Advisor Class shares. It
   is expected that most, if not all, payments under the Plan will be made
   (either directly, or indirectly through Investment Services) to brokers,
   dealers, banks, insurance companies, and intermediaries other than Investment
   Services. Under the Plan, each Advisor Class pays a fee at the annual rate of
   up to 0.25% of that class' average daily net assets. Normally, the full
   amount of the fee is paid to the intermediary on shares sold through that
   intermediary. However, a lesser amount may be paid based on the level of
   services provided. Intermediaries may use the payments for, among other
   purposes, compensating employees engaged in sales and/or shareholder
   servicing of the Advisor Class, as well as for a wide variety of other
   purposes associated with supporting, distributing, and servicing the Advisor
   Class shares. The amount of fees paid by an Advisor Class during any year may
   be more or less than the cost of distribution and other services provided to
   the Advisor Class and its investors. NASD rules limit the amount of annual
   distribution and service fees that may be paid by a mutual fund and impose a
   ceiling on the cumulative distribution fees paid. The Plan complies with
   these rules.

   The Plan requires that Investment Services provide, or cause to be provided,
   to the fund Directors/Trustees for their review a quarterly written report
   identifying the amounts expended by each Advisor Class and the purposes for
   which such expenditures were made.

   Prior to approving the Plan, the fund Directors/Trustees considered various
   factors relating to the implementation of the Plan and determined that there
   is a reasonable likelihood that the Plan will benefit each fund, its Advisor
   Class and the Advisor Class's shareholders. The fund Directors/Trustees noted
   that to the extent the Plan allows a fund to sell Advisor Class shares in
   markets to which it would not otherwise have access, the Plan may result in
   additional sales of fund shares. This may enable a fund to achieve economies
   of scale that could reduce expenses. In addition, certain on-going
   shareholder services may be provided more effectively by intermediaries with
   which shareholders have an existing relationship.

   The Plan continues until March 31, 2001. The Plan is renewable thereafter
   from year to year with respect to each fund, so long as its continuance is
   approved at least annually (1) by the vote of a majority of the fund
   Directors/Trustees and (2) by a vote of the majority of the Rule 12b-1
   Directors/Trustees, cast in person at a meeting called for the purpose of
   voting on such approval. The Plan may not be amended to increase materially
   the amount of fees paid by any Advisor Class thereunder unless such amendment
   is approved by a majority vote of the outstanding shares of such Advisor
   Class and by the fund Directors/Trustees in the


<PAGE>

   manner prescribed by Rule 12b-1 under the 1940 Act. The Plan is terminable
   with respect to an Advisor Class at any time by a vote of a majority of the
   Rule 12b-1 Directors/Trustees or by a majority vote of the outstanding shares
   in the Advisor Class.



 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 1940 Act. The address for The Chase
   Manhattan Bank, N.A., London is Woolgate House, Coleman Street, London, EC2P
   2HD, England.



 CODE OF ETHICS
 -------------------------------------------------------------------------------
   The fund's investment adviser (T. Rowe Price) has a written Code of Ethics
   which requires all Access Persons 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.
   Access Persons 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, Access Persons are prohibited
   from profiting from short-term trading (e.g., purchases and sales involving
   the same security within 60 days). Any person becoming an Access Person must
   file a statement of personal securities holdings within 10 days of this date.
   All Access Persons are required to file an annual statement with respect to
   their personal securities holdings. 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.


<PAGE>

                      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, at competitive commission rates where such rates are
   negotiable. However, under certain conditions, the fund may pay higher
   brokerage commissions in return for brokerage and research services. 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.

   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 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, 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


<PAGE>

   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.


                                  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


<PAGE>

   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.


                                      Other

   For the fiscal years ended May 31, 1999, 1998, and 1997, the fund's engaged
   in portfolio transactions involving broker-dealers in the following amounts:

<TABLE>
<CAPTION>
          Fund                   1999             1998              1997
          ----                   ----             ----              ----
<S>                        <C>               <C>              <C>
Corporate Income           $    148,017,000  $   151,154,000   $   176,025,000
GNMA                          1,928,467,000    3,404,198,000     3,521,560,000
Government Reserve
Investment                  125,867,962,000   46,218,342,000                --
High Yield                    3,133,849,000    5,081,624,000     7,709,749,000
New Income                    3,883,982,000    7,287,233,000     9,166,858,000
Personal Strategy
Balanced                        443,414,000      589,959,000       796,969,000
Personal Strategy Growth        177,166,000      225,909,000       354,770,000
Personal Strategy Income        263,137,000      188,714,000       350,204,000
Prime Reserve                32,055,326,000   64,296,588,000    84,827,266,000
Reserve Investment           82,675,097,000   66,138,193,000                --
Short-Term Bond                 268,240,000    1,113,884,000     3,380,454,000
Short-Term U.S.
Government                      355,887,000      332,928,000       640,894,000
U.S. Treasury
Intermediate                    343,197,000      507,228,000       806,082,000
U.S. Treasury Long-Term         509,554,000      604,802,000       352,705,000
U.S. Treasury Money           4,583,442,000    5,373,760,000     6,115,390,000
- ---------------------------                  ----------------------------------
</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, 1999, 1998, and 1997.


<PAGE>

   With respect to the Corporate Income, High Yield, New Income, Short-Term
   Bond, Personal Strategy Balanced, Personal Strategy Growth, and Personal
   Strategy Income 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,
   1999, 1998, and 1997.

<TABLE>
<CAPTION>
           Fund                  1999            1998             1997
           ----                  ----            ----             ----
<S>                         <C>             <C>             <C>
Corporate Income            $  132,909,000  $  147,537,000   $  174,157,000
High Yield                   2,667,387,000   3,854,884,000    7,056,968,000
New Income                   3,624,940,000   7,223,043,000    9,061,109,000
Personal Strategy Balanced     245,489,000     441,500,000      630,132,000
Personal Strategy Growth        78,262,000     147,604,000      303,598,000
Personal Strategy Income       148,720,000     159,536,000      327,683,000
Short-Term Bond                237,228,000   1,085,314,000    3,372,793,000
- ----------------------------                --------------------------------
</TABLE>


   The following amounts involved trades with brokers acting as agents or
   underwriters for the fiscal years ended May 31, 1999, 1998, and 1997.

<TABLE>
<CAPTION>
           Fund                 1999            1998            1997
           ----                 ----            ----            ----
<S>                         <C>            <C>             <C>
Corporate Income            $ 15,108,000   $    3,617,000   $  1,868,000
High Yield                   466,462,000    1,226,740,000    652,781,000
New Income                   259,042,000       64,189,000    105,749,000
Personal Strategy Balanced   197,925,000      148,459,000        472,000
Personal Strategy Growth      98,904,000       78,305,000         73,000
Personal Strategy Income     114,417,000       29,178,000         81,000
Short-Term Bond               31,012,000       28,570,000      7,661,000
- ----------------------------               -------------------------------
</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, 1999, 1998, and 1997.

<TABLE>
<CAPTION>
           Fund                  1999            1998             1997
           ----                  ----            ----             ----
<S>                         <C>             <C>             <C>
Corporate Income             $    53,000     $    79,000      $    90,000
High Yield                    11,755,000      30,944,000       17,280,000
New Income                     1,041,000         133,000           74,000
Personal Strategy Balanced       281,000         174,000           75,000
Personal Strategy Growth          82,000          46,000           17,000
Personal Strategy Income         134,000          47,000           18,000
Short-Term Bond                  105,000         123,000           23,000
- ----------------------------                --------------------------------
</TABLE>




<PAGE>

   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, 1999, 1998, and 1997, are shown below:

<TABLE>
<CAPTION>
            Fund                    1999            1998             1997
            ----                    ----            ----             ----
<S>                            <C>             <C>             <C>
Corporate Income                     96%             92%              82%
GNMA                                 86              98               98
Government Reserve Investment        78              97              N/A
High Yield                           95              88               83
New Income                           94              95               87
Personal Strategy Balanced           20              21               14
Personal Strategy Growth             29              32               37
Personal Strategy Income             16              39               11
Prime Reserve                        78              87               79
Reserve Investment                   65              77              N/A
Short-Term Bond                      93              85               81
Short-Term U.S. Government          100              95               85
U.S. Treasury Intermediate          100              96               99
U.S. Treasury Long-Term              99             100              100
U.S. Treasury Money                  61              57               71
- -------------------------------                --------------------------------
</TABLE>


   The portfolio turnover rates for the following funds for the fiscal years
   ended May 31, 1999, 1998, and 1997, are as follows:

<TABLE>
<CAPTION>
           Fund                  1999            1998             1997
           ----                  ----            ----             ----
<S>                         <C>             <C>             <C>
Corporate Income                140.8%          146.0%           119.5%
GNMA                             86.7           120.6            115.9
High Yield                       95.6           129.6            111.3
New Income                       94.3           147.3             87.1
Personal Strategy Balanced       34.3            41.5             54.0
Personal Strategy Growth         36.1            33.3             39.6
Personal Strategy Income         48.9            30.9             44.8
Short-Term Bond                  51.6            73.0            103.9
Short-Term U.S. Government      145.3           107.5             82.9
U.S. Treasury Intermediate       61.2           112.8             57.9
U.S. Treasury Long-Term          74.1            80.8             67.6
- ----------------------------                --------------------------------
</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.


<PAGE>

 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.

   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 1940 Act. 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:


<PAGE>

   (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) 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


<PAGE>

   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 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 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 certain funds may be eligible for the
   dividends-received deduction applicable to corporate shareholders. Long-term
   capital gain distributions paid from these funds are never eligible for the
   dividend received deduction. For tax purposes, it does not make any
   difference whether dividends and capital gain distributions are paid in cash
   or in additional shares. Each fund must declare dividends by December 31 of
   each year equal to at least 98% of ordinary income (as of December 31) and
   capital gains (as of October 31) in order to avoid a federal excise tax and
   distribute within 12 months 100% of ordinary income and capital gains as of
   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. In addition to bearing
   their proportionate share of the trust's expenses (management fees and
   operating


<PAGE>

   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.



 YIELD INFORMATION
 -------------------------------------------------------------------------------
   GNMA and Short-Term U.S. Government Funds

   In conformity with regulations of the SEC, 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
   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.
   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 November 30, 1999, were 6.49%
   and 5.69%, 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 November 30, 1999, were 8.13%,
   10.22%, 6.58%, 6.26%, 6.10%, and 6.06%, respectively.


<PAGE>

   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, then multiplied
   by 365 to arrive at the annualized yield for that period. The fund's
   annualized compound yield for such period is compounded by dividing the base
   period return by the number of days in the period, and compounding that
   figure over 365 days.

   The seven-day yields ending November 30, 1999, for the Prime Reserve, and
   U.S. Treasury Money Funds were 5.09% and 4.47%, respectively, and the funds'
   compound yield for the same period were 5.21% and 4.57%, 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
                                1 Yr.   5 Yrs.   10 Yrs.   % Since    Inception
            Fund                Ended    Ended    Ended   Inception     Date
            ----               5/31/99  5/31/99  5/31/99   5/31/99      ----
                               -------  -------  -------   -------
<S>                            <C>      <C>      <C>      <C>        <C>
Corporate Income               -1.21%      --        --     24.35%    10/31/95
GNMA                            3.88    44.08%   115.75%   174.85     11/26/85
High Yield                      2.73    55.93    128.77    303.12     12/31/84
New Income                      1.02    38.95    108.83    729.66     08/31/73
Personal Strategy Balanced      8.37       --        --    104.17     07/29/94
Personal Strategy Growth       10.01       --        --    128.60     07/29/94
Personal Strategy Income        6.43       --        --     82.64     07/29/94
Prime Reserve                   4.82    27.61     63.65    431.48     01/26/76
Prime Reserve Fund-PLUS Class     --       --        --      2.50     11/01/98
Short-Term Bond                 4.23    28.03     80.15    180.43     03/02/84
Short-Term U.S. Government      4.39    31.84        --     42.70     09/30/91
U.S. Treasury Intermediate      4.28    37.66        --     99.08     09/29/89
U.S. Treasury Long-Term         3.06    53.60        --    123.39     09/29/89
U.S. Treasury Money             4.46    26.13     60.03    161.60     06/28/82
- -------------------------------                                      -----------
</TABLE>



<PAGE>

<TABLE>
<CAPTION>
                   Average Annual Compound Rates of Return
                          1 Yr.     5 Yrs.     10 Yrs.    % Since
                          Ended      Ended      Ended    Inception   Inception
         Fund           Unaudited  Unaudited  Unaudited  Unaudited     Date
         ----           11/30/99   11/30/99   11/30/99   11/30/99      ----
                        --------   --------   --------   --------
<S>                     <C>        <C>        <C>        <C>        <C>
Corporate Income         -0.02%        --         --       5.34%     10/31/95
GNMA                      0.88       5.10%      7.60%      7.26      11/26/85
High Yield                2.51       9.78       8.95         --      12/31/84
New Income               -0.39       6.77       6.92       8.39      08/31/73
Personal Strategy
Balanced                  8.23      15.89         --      14.74      07/29/94
Personal Strategy
Growth                   11.04      18.61         --      17.35      07/29/94
Personal Strategy
Income                    5.04      13.25         --      12.23      07/29/94
Prime Reserve             4.66       5.06       4.85       7.36      01/26/76
Short-Term Bond           2.27       5.43       5.67       6.85      03/02/84
Short-Term U.S.
Government                2.16       6.04         --       4.69      09/30/91
U.S. Treasury
Intermediate             -2.11       6.66       6.85         --      09/29/89
U.S. Treasury
Long-Term                -7.49       8.80       7.72         --      09/29/89
U.S. Treasury Money       4.26       4.79       4.62         --      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: (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 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.


<PAGE>

                       No-Load Versus Load and 12b-1 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 T. Rowe Price funds, including the Advisor Classes, are considered to be
   "no-load" funds. They impose no front-end or back-end sales loads. However,
   the Advisor Classes do charge 12b-1 fees. Under applicable National
   Association of Securities Dealers Regulation, Inc. ("NASDR") regulations,
   mutual funds that have no front-end or deferred sales charges and whose total
   asset-based charges for sales related expenses and/or service fees (as
   defined by NASDR) do not exceed 0.25% of average net assets per year may be
   referred to as no-load funds.


                               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.


<PAGE>

   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.

   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 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 nonassessable, except as set forth below. The Trust may be
   terminated (i) upon the sale of its assets to another diversified, open-end
   management investment company, if approved by the vote of the holders of
   two-thirds of the outstanding shares of the Trust, or (ii) upon liquidation
   and distribution of the assets of the Trust, if approved by the vote of the
   holders of a majority of the outstanding shares of the Trust. If not so
   terminated, the Trust will continue indefinitely.

   Under Massachusetts law, shareholders could, under certain circumstances, be
   held personally liable for the obligations of 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>

<TABLE>
<CAPTION>


<S>                                              <C>         <C>      <C>






</TABLE>



<PAGE>

<TABLE>
<CAPTION>
                                           PERSONAL    PERSONAL    PERSONAL
                                           STRATEGY    STRATEGY    STRATEGY
                                           BALANCED    GROWTH      INCOME
                                           --------    ------      ------
<S>                                        <C>         <C>         <C>
Financial Highlights                           2           2           2
                                              3-2
Portfolio of Investments, May 31, 1999         7          3-26        3-26
Statement of Assets and Liabilities, May       2
31, 1999                                       8           27          27
Statement of Operations, year ended            2
May 31, 1999                                   9           28          28
Statement of Changes in Net Assets, years
ended
May 31, 1999 and May 31, 1998                  30          29          29
Notes to Financial Statements, May 31,
1999                                         31-34       30-33       30-34
Report of Independent Accountants              35          34          35
</TABLE>


<TABLE>
<CAPTION>
                                      HIGH YIELD  SHORT-TERM  SHORT-TERM U.S.
                                      ----------  BOND        GOVERNMENT
                                                  ----        ----------
<S>                                   <C>         <C>         <C>
Financial Highlights                      9           8              9
Statement of Net Assets, May 31,
1999                                    10-22        9-13          10-13
Statement of Operations, year ended
May 31, 1999                              23          14            14
Statement of Changes in Net Assets,
years ended
May 31, 1999 and May 31, 1998             24          15            15
Notes to Financial Statements, May
31, 1999                                25-28       16-19          16-19
Report of Independent Accountants         29          20            20
</TABLE>


<TABLE>
<CAPTION>
                                  U.S. TREASURY  U.S. TREASURY  U.S. TREASURY
                                  INTERMEDIATE   LONG-TERM      MONEY
                                  ------------   ---------      -----
<S>                               <C>            <C>            <C>
Financial Highlights                   12             13             11
Statement of Net Assets, May 31,
1999                                  16-18          19-20          14-15
Statement of Operations, year
ended
May 31, 1999                           21             21             21
Statement of Changes in Net
Assets, years ended
May 31, 1999 and May 31, 1998          23             24             22
Notes to Financial Statements,
May 31, 1999                          25-28          25-28          25-28
Report of Independent
Accountants                            29             29             29
</TABLE>


<TABLE>
<CAPTION>
                                                   RESERVE       GOVERNMENT
                                                   INVESTMENT    RESERVE
                                                   ----------    INVESTMENT
                                                                 ----------
<S>                                                <C>           <C>
Financial Highlights                               1             2
Statement of Net Assets, May 31, 1999              3-5           6
Statement of Operations, period from August 25,
1997 (commencement of operations) to May 31, 1999  7             7
Statement of Changes in Net Assets, period from
August 25, 1997 (commencement of operations)
to May 31, 1999                                    8             9
Notes to Financial Statements, May 31, 1999        10-12         10-12
Report of Independent Accountants                  13            13
</TABLE>




<PAGE>

<TABLE>
<CAPTION>
                                                   NEW INCOME
                                                   ----------
<S>                                                <C>
Financial Highlights                                   10
Portfolio of Investments, May 31, 1999                11-17
Statement of Assets and Liabilities, May 31, 1999      18
Statement of Operations, year ended
May 31, 1999                                           19
Statement of Changes in Net Assets, years ended
May 31, 1999 and May 31, 1998                          20
Notes to Financial Statements, May 31, 1999           21-24
Report of Independent Accountants                      25
</TABLE>


<TABLE>
<CAPTION>
                   UNAUDITED SEMIANNUAL REPORT REFERENCES:
                                                  CORPORATE   GNMA     PRIME
                                                  INCOME      ----     RESERVE
                                                  ------               -------
<S>                                               <C>         <C>      <C>
Financial Highlights                                  8          6        8
Statement of Net Assets, November 30, 1999           9-16      7-10     9-18
Statement of Operations, six months ended
November 30, 1999                                     17        11       19
Statement of Changes in Net Assets, six months
ended November 30, 1999 and year ended
May 31, 1999                                          18        12       20
Notes to Financial Statements, November 30, 1999    19-22      13-15    21-23
</TABLE>


<TABLE>
<CAPTION>
                                           PERSONAL    PERSONAL    PERSONAL
                                           STRATEGY    STRATEGY    STRATEGY
                                           BALANCED    GROWTH      INCOME
                                           --------    ------      ------
<S>                                        <C>         <C>         <C>
Financial Highlights                           2           2           2
Portfolio of Investments, November 30,
1999                                          3-27        3-27        3-26
Statement of Assets and Liabilities,
November 30, 1999                              28          28          27
Statement of Operations, six months ended
November 30, 1999                              29          29          28
Statement of Changes in Net Assets, six
months ended November 30, 1999 and year
ended May 31, 1999                             30          30          29
Notes to Financial Statements, November
30, 1999                                     31-34       31-34       30-33
</TABLE>


<TABLE>
<CAPTION>
                                      HIGH YIELD  SHORT-TERM  SHORT-TERM U.S.
                                      ----------  BOND        GOVERNMENT
                                                  ----        ----------
<S>                                   <C>         <C>         <C>
Financial Highlights                      10          9              7
Statement of Net Assets, November
30, 1999                                11-24       10-15          8-11
Statement of Operations, six months
ended
November 30, 1999                         25          16            12
Statement of Changes in Net Assets,
six months ended November 30, 1999
and year ended
May 31, 1999                              26          17            13
Notes to Financial Statements,
November 30, 1999                       27-30       18-20          14-16
</TABLE>




<PAGE>

<TABLE>
<CAPTION>
                                  U.S. TREASURY  U.S. TREASURY  U.S. TREASURY
                                  INTERMEDIATE   LONG-TERM      MONEY
                                  ------------   ---------      -----
<S>                               <C>            <C>            <C>
Financial Highlights                   12             13             11
Statement of Net Assets,
November 30, 1999                     16-18          19-21          14-15
Statement of Operations, six
months ended
November 30, 1999                      22             22             22
Statement of Changes in Net
Assets, six months ended
November 30, 1999 and year ended
May 31, 1999                           24             25             23
Notes to Financial Statements,
November 30, 1999                     26-29          26-29          26-29
</TABLE>


<TABLE>
<CAPTION>
                                                   RESERVE       GOVERNMENT
                                                   INVESTMENT    RESERVE
                                                   ----------    INVESTMENT
                                                                 ----------
<S>                                                <C>           <C>
Financial Highlights                                    1             2
Statement of Net Assets, November 30, 1999             3-6            7
Statement of Operations, six months ended
November 30, 1999                                       8             8
Statement of Changes in Net Assets, six months
ended November 30, 1999 and year ended May 31,
1999                                                    9             10
Notes to Financial Statements, November 30, 1999      11-12         11-12
</TABLE>



<TABLE>
<CAPTION>
                                                        NEW INCOME
                                                        ----------
<S>                                                     <C>
Financial Highlights                                         9
Portfolio of Investments, November 30, 1999                10-17
Statement of Assets and Liabilities, November 30, 1999      18
Statement of Operations, six months ended
November 30, 1999                                           19
Statement of Changes in Net Assets, six months ended
November 30, 1999 and year ended May 31, 1999               20
Notes to Financial Statements, November 30, 1999           21-25
</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
   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


<PAGE>

   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 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.

   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.


<PAGE>

   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.





© 2022 IncJournal is not affiliated with or endorsed by the U.S. Securities and Exchange Commission