<PAGE>
PROSPECTUS
October 1, 1997, revised to August 17, 1998
U.S. Treasury Funds
Money market and bond funds for investors seeking the income potential and
credit safety of securities issued by the U.S. government and its agencies.
<PAGE>
FACTS AT A GLANCE
U.S. Treasury Funds
Investment Goal
Money fund Preservation of capital, liquidity, and, consistent with these
goals, the highest possible income.
Bond funds Highest level of income consistent with each fund's prescribed
investment program.
As with all mutual funds, there is no guarantee these funds will achieve their
goals.
Strategy and Risk/Reward
U.S. Treasury Money Fund Invests exclusively in short-term U.S.
government-backed securities, primarily U.S. Treasuries. The fund's average
maturity will not exceed 90 days.
Risk/Reward Lowest potential risk and reward.
U.S. Treasury Intermediate Fund Invests exclusively in U.S. government-backed
securities, primarily U.S. Treasuries, and investments involving these
securities. The fund's average maturity range is 3 to 7 years.
Risk/Reward Moderate income level and share price fluctuation.
U.S. Treasury Long-Term Fund Invests in U.S. government-backed securities,
primarily U.S. Treasuries, and investments involving these securities. The
fund's average maturity range typically varies between 15 and 20 years, but may
range from 10 to 30 years.
Risk/Reward Highest income and share price fluctuation.
YOUR INVESTMENT IN THE FUNDS IS NEITHER INSURED NOR GUARANTEED BY THE U.S.
GOVERNMENT, AND THERE IS NO ASSURANCE THE MONEY FUND WILL BE ABLE TO MAINTAIN A
STABLE NET ASSET VALUE OF $1.00 PER SHARE.
Investor Profile
Investors who seek the highest level of current income consistent with minimum
credit risk. Investors should consider carefully each fund's risk of share
price declines.
Fees and Charges
100% no load. No fees or charges to buy or sell shares or to reinvest
dividends; no 12b-1 marketing fees; free telephone exchange among T. Rowe Price
funds.
Investment Manager
Founded in 1937 by the late Thomas Rowe Price, Jr., T. Rowe Price Associates,
Inc. ("T. Rowe Price") and its affiliates managed approximately $117 billion
for more than five million individual and institutional investor accounts as of
June 30, 1997.
This prospectus contains information you should know before investing. Please
keep it for future reference. A Statement of Additional Information about the
funds, dated October 1, 1997, has been filed with the Securities and Exchange
Commission and is incorporated by reference in this prospectus. To obtain a
free copy, call 1-800-638-5660.
<PAGE>
T. Rowe Price U.S. Treasury Funds, Inc.
Prospectus
October 1, 1997, revised to August 17, 1998
<TABLE>
CONTENTS
<CAPTION>
<S> <C> <C> <C>
1 ABOUT THE FUNDS
Transaction and Fund Expenses 2
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Financial Highlights 3
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Fund, Market, and Risk Characteristics 6
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2 ABOUT YOUR ACCOUNT
Pricing Shares and Receiving Sale Proceeds 13
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Distributions and Taxes 14
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Transaction Procedures and Special Requirements 16
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3 MORE ABOUT THE FUNDS
Organization and Management 19
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Understanding Performance Information 22
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Investment Policies and Practices 23
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4 INVESTING WITH T. ROWE PRICE
Account Requirements and Transaction Information 28
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Opening a New Account 28
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Purchasing Additional Shares 30
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Exchanging and Redeeming 30
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Shareholder Services 32
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Discount Brokerage 34
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Investment Information 35
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</TABLE>
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
<PAGE>
ABOUT THE FUNDS
1
TRANSACTION AND FUND EXPENSES
----------------------------------------------------------
o Like all T. Rowe Price funds, these funds are 100% no load.
These tables should help you understand the kinds of expenses you will bear
directly or indirectly as a fund shareholder.
Shareholder Transaction Expenses in Table 1 shows that you pay no sales
charges. All the money you invest in a fund goes to work for you, subject to
the fees explained below. Annual Fund Expenses provides an estimate of how
much it will cost to operate each fund for a year, based on 1997 fiscal year
expenses (and any applicable expense limitations). These are costs you pay
indirectly because they are deducted from each fund's total assets before the
daily share price is calculated and before dividends and other distributions
are made. In other words, you will not see these expenses on your account
statement.
<TABLE>
Table 1
<CAPTION>
<S> <C> <C> <C> <C>
Shareholder Transaction Expenses
Money Intermediate Long-Term
Sales charge "load" on
purchases None None None
Sales charge "load" on
reinvested
distributions None None None
Redemption fees None None None
Exchange fees None None None
Annual Fund Expenses Percentage of Fiscal 1997 Average Net Assets
Money Intermediate Long-Term
Management fee 0.33% 0.38% 0.38%/a/
Marketing fees (12b-1) None None None
Total other
(shareholder servicing,
custodial,
auditing, etc.) 0.23% 0.26% 0.42%
Total fund expenses 0.56% 0.64% 0.80%/a/
- -------------------------------------------------------------------------------
</TABLE>
/a/The Long-Term Fund's management fee and total expense ratio would have been
0.38% and 0.80%, respectively, had T. Rowe Price not agreed to reduce
management fees and assume other expenses in accordance with the expense
limitation described below. From March 1, 1995, through May 31, 1997, T. Rowe
Price agreed to waive its fees and bear any expenses to the extent such fees
and expenses would cause the Long-Term Fund's ratio of expenses to average net
assets to exceed 0.80%. Effective June 1, 1997, T. Rowe Price agreed to extend
the expense limitation of 0.80% for a period of two years from June 1, 1997,
through May 31, 1999. Fees waived or expenses paid or assumed under each
agreement are subject to reimbursement to T. Rowe Price by the fund whenever
the fund's expense ratio is below 0.80%; however, no reimbursement will be
made after May 31, 1999 (for the first agreement), or May 31, 2001 (for the
second agreement), or if it would result in the expense ratio exceeding 0.80%.
Note: A $5 fee is charged for wire redemptions under $5,000, subject to change
without notice, and a $10 fee is charged for small accounts when applicable (see
Small Account Fee under Transaction Procedures and Special Requirements).
<PAGE>
ABOUT THE FUNDS 3
The main types of expenses, which all mutual funds may charge against fund
assets, are:
. A management fee The percent of fund assets paid to the funds' investment
manager. Each fund's fee comprises a group fee, 0.33% as of May 31, 1997, and
the Intermediate and Long-Term Funds pay an individual fund fee of 0.05%. The
Money Fund pays only the group fee.
. "Other" administrative expenses Primarily the servicing of shareholder
accounts, such as providing statements and reports, disbursing dividends, and
providing custodial services.
. Marketing or distribution fees An annual charge ("12b-1") to existing
shareholders to defray the cost of selling shares to new shareholders. T.
Rowe Price funds do not levy 12b-1 fees.
For further details on fund expenses, please see Organization and Management.
. Hypothetical example Assume you invest $1,000, the fund returns 5% annually,
expense ratios remain as listed previously, and you close your account at the
end of the time periods shown. Your expenses would be:
<TABLE>
Table 2
<CAPTION>
Hypothetical Fund Expenses
Fund 1 year 3 years 5 years 10 years
<S> <S> <C> <C> <C> <C>
Money $6 $18 $31 $70
Intermediate 7 20 36 80
Long-Term 8 26 44 99
- ---------------------------------------------------------------
</TABLE>
o Table 2 is just an example; actual expenses can be higher or lower than
those shown.
FINANCIAL HIGHLIGHTS
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Table 3, which provides information about each fund's financial history, is
based on a single share outstanding throughout each fiscal year. Each fund's
section of the table is part of the financial statements, which are included
in its annual report and are incorporated by reference in the Statement of
Additional Information (available upon request). The financial statements in
each fund's annual report were audited by Price Waterhouse LLP, the funds'
independent
<PAGE>
T. ROWE PRICE 4
accountants. The financial statements of the U.S. Treasury Intermediate Fund
and the U.S. Treasury Long-Term Fund for the periods presented prior to the
year ended May 31, 1995, were audited by other independent accountants.
<TABLE>
Table 3 Financial Highlights
<CAPTION>
Income From Investment Activities Less Distributions Net Asset Value
Period Net Asset Net Net Realized Total From Net Net Total Net Asset
Ended Value, Investment & Unrealized Investment Investment Realized Distributions Value,
Beginning Income (Loss) Gain (Loss) on Activities Income (Loss) Gain (Loss) End of Period
of Period Investments
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury Money Fund
1988/a/ $ 1.000 $0.054 - $ 0.054 $(0.054) - $(0.054) $ 1.000
1989 1.000 0.066 - 0.066 (0.066) - (0.066) 1.000
1990 1.000 0.080 - 0.080 (0.080) - (0.080) 1.000
1991 1.000 0.070 - 0.070 (0.070) - (0.070) 1.000
1992/a/ 1.000 0.049 - 0.049 (0.049) - (0.049) 1.000
1993 1.000 0.029 - 0.029 (0.029) - (0.029) 1.000
1994 1.000 0.025 - 0.025 (0.025) - (0.025) 1.000
1994/e/ 1.000 0.007 - 0.007 (0.007) - (0.007) 1.000
1995 1.000 0.045 - 0.045 (0.045) - (0.045) 1.000
1996 1.000 0.050 - 0.050 (0.050) - (0.050) 1.000
1997 1.000 0.046 - 0.046 (0.046) - (0.046) 1.000
U.S. Treasury Intermediate Fund
1990/b/ $ 5.00 $0.17/c/ $(0.02) $ 0.15 $(0.17) - $(0.17) $ 4.98
1991 4.98 0.40/c/ 0.12 0.52 (0.40) - (0.40) 5.10
1992/a/ 5.10 0.36/c/ 0.21 0.57 (0.36) $(0.03) (0.39) 5.28
1993 5.28 0.32 0.27 0.59 (0.32) (0.13) (0.45) 5.42
1994 5.42 0.29 (0.09) 0.20 (0.29) (0.01) (0.30) 5.32
1994/e/ 5.32 0.08 (0.19) (0.11) (0.08) (0.02) (0.10) 5.11
1995 5.11 0.31 0.14 0.45 (0.31) - (0.31) 5.25
1996 5.25 0.33 (0.14) 0.19 (0.33) - (0.33) 5.11
1997 5.11 0.31 0.01 0.32 (0.31) - (0.31) 5.12
U.S. Treasury Long-Term Fund
1990/b/ $10.00 $0.35/c/ $(0.21) $ 0.14 $(0.35) - $(0.35) $ 9.79
1991 9.79 0.80/c/ 0.24 1.04 (0.80) - (0.80) 10.03
1992/a/ 10.03 0.78/c/ 0.36 1.14 (0.78) - (0.78) 10.39
1993 10.39 0.70/c/ 0.68 1.38 (0.70) $(0.28) (0.98) 10.79
1994 10.79 0.68/c/ (0.04) 0.64 (0.68) (0.29) (0.97) 10.46
1994/e/ 10.46 0.17/c/ (0.64) (0.47) (0.17) (0.01) (0.18) 9.81
1995 9.81 0.68/c/ 0.73 1.41 (0.68) - (0.68) 10.54
1996 10.54 0.65/f/ (0.52) 0.13 (0.65) - (0.65) 10.02
1997 10.02 0.63 0.15 0.78 (0.63) - (0.63) 10.17
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Footnotes appear on page 5. (continued on next page)
<PAGE>
ABOUT THE FUNDS 5
<TABLE>
Table 3 Financial Highlights (continued)
<CAPTION>
Returns, Ratios, and Supplemental Data
Period Total Return Ratio of Ratio of Net
Ended (Includes Net Assets Expenses to Investment Portfolio
Reinvested ($ Thousands) Average Net Income to Turnover
Distributions) Assets Average Net Rate
Assets
<S> <S> <C> <C> <C> <C> <C>
U.S. Treasury Money Fund
1988/a/ 5.55% $259,618 1.01% 5.49% -
1989 6.85 290,527 0.88 6.65 -
1990/b/ 8.26 361,013 0.85 7.95 -
1991 7.19 578,362 0.75 6.91 -
1992/a/ 5.06 562,664 0.68 4.93 -
1993 2.97 606,153 0.65 2.92 -
1994 2.51 613,583 0.64 2.48 -
1994/e/ 0.73 654,837 0.57/e/ 2.87/e/ -
1995 4.58 719,215 0.56 4.51 -
1996 5.08 760,010 0.53 4.93 -
1997 4.74 821,075 0.56 4.65 -
U.S. Treasury Intermediate Fund
1990/b/ 2.97% $ 10,917 0.80%/cd/ 8.13%/cd/ 194.6%/d/
1991 10.92 68,341 0.80/c/ 7.71/c/ 174.8
1992/a/ 11.54/c/ 123,807 0.80/c/ 6.80/c/ 91.4
1993 11.77 163,480 0.80 5.98 22.8
1994 3.80 175,953 0.79 5.41 20.2
1994/e/ (2.16) 181,231 0.70/e/ 5.78/e/ 45.5/e/
1995 9.29 172,666 0.69 6.19 81.1
1996 3.52 174,176 0.65 6.14 40.7
1997 6.48 180,609 0.64 6.11 57.9
U.S. Treasury Long-Term Fund
1990/b/ 1.28% $ 11,204 0.80%/cd/ 8.23%/cd/ 316.1%/d/
1991 11.21/c/ 43,260 0.80/c/ 8.01/c/ 158.5
1992/a/ 11.86/c/ 52,926 0.80/c/ 7.66/c/ 162.4
1993 14.11/c/ 64,685 0.80/c/ 6.75/c/ 165.4
1994 5.89/c/ 56,632 0.80/c/ 6.17/c/ 59.4
1994/e/ (4.50)/c/ 54,237 0.80/ce/ 6.75/ce/ 246.9/e/
1995 15.24/c/ 65,284 0.80/c/ 7.05/c/ 99.3
1996 1.02/f/ 70,326 0.80/f/ 6.05/f/ 60.1
1997 7.97/f/ 71,263 0.80/f/ 6.22/f/ 67.6
- ------------------------------------------------------------------------------------
</TABLE>
/a /Year ended February 29.
/b/
For the period September 29, 1989 (commencement of operations) to February 28,
1990.
/c/
Excludes expenses in excess of a 0.80% voluntary expense limitation in effect
through February 28, 1997.
/d/ Annualized.
/e/
For the three months ended May 31, 1994. Fiscal year-end changed from February
28 to May 31. All ratios are annualized.
/f/
Excludes expenses in excess of a 0.80% voluntary expense limitation in effect
through May 31, 1999.
<PAGE>
T. ROWE PRICE 6
FUND, MARKET, AND RISK CHARACTERISTICS: WHAT TO EXPECT
----------------------------------------------------------
To help you decide whether the funds are appropriate for you, this section
takes a closer look at their investment objectives and approaches.
<TABLE>
Table 4
<CAPTION>
<S> <C> <C> <C> <C> <C>
Differences Among Funds
Credit-Quality Expected Share Expected Average
Fund Categories Income Price Fluctuation Maturity
Money Highest Lower Stable 90 days or less
Intermediate Highest Moderate More than Money 3 to 7 years
Less than Long-Term
Long-Term Highest Higher High 15 to 20 years
- --------------------------------------------------------------------------------------
</TABLE>
What are the funds' objectives and investment programs?
U.S. Treasury Money Fund
The fund's investment objectives are to maximize stability of capital,
liquidity, and, consistent with these, the highest possible current income.
The fund invests primarily in a portfolio of U.S. Treasury securities, which
will compose at least 80% of total assets. The fund may also include other
securities directly guaranteed by the U.S. government. The fund's
dollar-weighted average maturity will not exceed 90 days. It will not
purchase any security with a maturity of more than 13 months. Its yield will
fluctuate in response to changes in interest rates, but its share price is
managed to remain stable at $1.00. Nevertheless, there is no assurance the
$1.00 price will be maintained. Unlike most bank accounts or certificates of
deposit, the fund is not insured or guaranteed by the U.S. government.
o The U.S. government guarantees the timely payment of interest and principal
on Treasury securities, but does not guarantee the prices of the funds'
shares.
U.S. Treasury Intermediate Fund
The fund's investment objective is a high level of income consistent with
maximum credit protection and moderate fluctuation in principal value. The
fund will invest at least 85% of total assets in U.S. Treasury securities and
investments involving these securities. The remaining assets will be invested
in other securities backed by the full faith and credit of the U.S.
government and investments involving these securities. The fund's
dollar-weighted average maturity is expected to range between three and seven
years. No security will have a remaining effective maturity of more than 10
years from the time of purchase.
<PAGE>
ABOUT THE FUNDS 7
U.S. Treasury Long-Term Fund
The fund's investment objective is the highest level of current income
consistent with maximum credit protection. It will invest at least 85% of
total assets in U.S. Treasury securities and investments involving these
securities. The remaining assets will be invested in other securities backed
by the full faith and credit of the U.S. government and investments involving
these securities. The fund's dollar-weighted average maturity is expected to
vary between 15 and 20 years, but may range from 10 to 30 years.
o The Long-Term Fund has the highest risk/reward profile.
Will the funds' investment portfolios consist entirely of U.S. Treasury
securities?
No, but other investments will either be (i) backed by the full faith and
credit of the U.S. government; (ii) collateralized by such investments; or
(iii) held in shares of an internal money market fund that invests
exclusively in securities backed by the full faith and credit of the U.S.
government. Other U.S. government-backed securities include, but are not
limited to, securities issued by U.S. agencies such as the Government
National Mortgage Association (GNMA). GNMA pools individual home mortgages to
back a certificate or bond, which is sold to investors such as mutual funds.
Interest and principal payments generated by the underlying mortgages are
passed through to investors. The money fund and bond funds may invest up to
20% and 15% of assets, respectively, in these types of securities.
Are securities backed by the U.S. government and its agencies risk-free?
No. While U.S. government-backed securities generally are considered to be of
the highest quality, they are subject to market risk. Therefore, changes in
interest rates will cause the share prices of the U.S. Treasury bond funds to
vary as the prices of individual bonds fluctuate. To manage market risk, the
funds' investment managers adjust the maturity of the portfolios and adjust
the asset mix.
o The Intermediate and Long-Term Funds' share prices will fluctuate with
changing market conditions. When you sell your shares, you may lose money.
What are the most important influences on the bond funds' performance?
Performance (total return) is determined by the change in the fund's share
price and by the income level over a given period. Both components are
affected by changes in interest rates.
Fund share price will generally move in the opposite direction of interest
rates. For example, as interest rates rise, share price will likely decline.
Rising rates provide the opportunity for fund income to increase, but it is
unlikely that the higher income by itself will entirely offset the fall in
price.
<PAGE>
T. ROWE PRICE 8
The maturity and type of securities in the funds' portfolios determine just
how much the share price rises or falls when rates change. Generally, when
rates fall, long-term securities rise more in price than short-term
securities and vice versa. Mortgage-backed securities usually follow this
pattern, but, because of prepayments, would not be expected to rise as much
in price as Treasury bonds.
You will find more information about the types of securities the funds may
own and how they may perform further on in this section and in Section 3.
What are the main risks of investing in these funds?
. Interest rate or market risk The decline in bond prices that may accompany a
rise in the overall level of interest rates (please see Table 5). A sharp and
unexpected rise in interest rates could cause a money fund's price to drop
below one dollar. However, the very short-term securities held in money
market portfolios - a means of achieving an overall fund objective of
principal safety - reduces their potential for price fluctuation.
. Credit risk The chance that any of a fund's holdings will have its credit
rating downgraded or will default (fail to make scheduled interest and
principal payments), potentially reducing the fund's income level and/or
share price. U.S. government-backed securities are of the highest credit
quality, so credit risk for these funds is minimal.
o For further details on the funds' investment programs and risks, please see
the section entitled Investment Policies and Practices.
How does the portfolio manager try to reduce risk?
Consistent with each fund's objective, the portfolio manager actively seeks
to reduce risk and increase total return. Risk management tools include:
. Diversification of assets to reduce the impact of a single holding on the
funds' net asset value.
. Adjustment of fund duration to try to reduce the negative impact of rising
interest rates or take advantage of the benefits of falling rates. (Duration
is a more accurate measure than maturity of a fund's sensitivity to interest
rate changes.)
What are derivatives and can the funds invest in them?
The term derivative is used to describe financial instruments whose value is
derived from an underlying security (e.g., a stock or bond) or a market
benchmark (e.g., an interest rate index). Many types of investments
representing a wide range of potential risks and rewards fall under the
"derivatives" umbrella -from conventional instruments, such as callable
bonds, futures, and options, to more exotic investments, such as stripped
mortgage securities and structured
<PAGE>
ABOUT THE FUNDS 9
notes. While the term derivative only recently became widely known among the
investing public, derivatives have in fact been employed by investment
managers for many years.
Each fund will invest in derivatives only if the expected risks and rewards
are consistent with its objective, policies, and overall risk profile as
described in this prospectus. The money fund does not invest in high-risk,
highly leveraged derivatives. The bond funds limit their use of derivatives
to situations in which they may enable the funds to accomplish the following:
increase yield; hedge against a decline in principal value; invest in
eligible asset classes with greater efficiency and lower cost than is
possible through direct investment; or adjust portfolio duration.
The bond funds will not invest in any high-risk, highly leveraged derivative
instrument that is expected to cause the price volatility of the portfolio to
be meaningfully different from that of an intermediate-term U.S. Treasury
bond for the U.S. Treasury Intermediate Fund or a long-term U.S. Treasury
bond for the U.S. Treasury Long-Term Fund.
Are there any tax benefits to owning shares of a U.S. Treasury fund?
Yes. Monthly dividends paid by the funds from income earned on U.S. Treasury
securities are exempt from state and local taxes in most states. Dividends
derived from the funds' other investments may not be exempt from such taxes.
What are the major differences between money market and bond funds?
. Price Bond funds have fluctuating share prices. Money market funds are
managed to maintain a stable share price.
. Maturity Short- and intermediate-term bond funds have longer average
maturities (from one to 10 years) than money market funds (90 days or less).
Longer-term bond funds have the longest average maturities (10 years or
more).
. Income Short- and intermediate-term bond funds typically offer more income
than money market funds and less income than longer-term bond funds.
You may want to review some fundamentals that apply to all fixed income
investments.
Is a fund's yield fixed or will it vary?
It will vary. The yield is calculated every day by dividing a fund's net
income per share, expressed at annual rates, by the share price. Since both
income and share price will fluctuate, a fund's yield will also vary.
(Although money fund prices are stable, income is variable.)
<PAGE>
T. ROWE PRICE 10
Is a fund's "yield" the same thing as the "total return"?
Not for bond funds. The total return reported for a fund is the result of
reinvested distributions (income and capital gains) and the change in share
price for a given time period. Income is always a positive contributor to
total return and can enhance a rise in share price or serve as an offset to a
drop in share price. Since money funds are managed to maintain a stable share
price, their yield and total return should be the same.
What is "credit quality" and how does it affect a fund's yield?
Credit quality refers to a bond issuer's expected ability to make all
required interest and principal payments in a timely manner. Because highly
rated issuers represent less risk, they can borrow at lower interest rates
than less creditworthy issuers. Therefore, a fund investing in high-quality
securities should have a lower yield than an otherwise comparable fund
investing in lower-credit-quality securities.
What is meant by a bond fund's "maturity"?
Every bond has a stated maturity date when the issuer must repay the bond's
entire principal value to the investor. However, many bonds are "callable,"
meaning their principal can be repaid before their stated maturity dates on
(or after) specified call dates. Bonds are most likely to be called when
interest rates are falling, because the issuer can refinance at a lower rate,
just as a homeowner refinances a mortgage. In such an environment, a bond's
"effective maturity" is usually its nearest call date. For example, the
effective maturity of mortgage-backed bonds is determined by the rate at
which homeowners pay down the principal on the underlying mortgages.
A bond mutual fund has no maturity in the strict sense of the word, but it
does have an average maturity and an average effective maturity. This number
is an average of the stated or effective maturities of the underlying bonds,
with each bond's maturity "weighted" by the percentage of fund assets it
represents. Funds that target effective maturities would use the effective
(rather than stated) maturities of the underlying instruments when computing
the average. Targeting effective maturity provides additional flexibility in
portfolio management but, all else being equal, could result in higher
volatility than a fund targeting a stated maturity or maturity range.
What is meant by a bond fund's "duration"?
Duration is a calculation that seeks to measure the price sensitivity of a
bond or a bond fund to changes in interest rates. It measures bond price
sensitivity to interest rate changes more accurately than maturity because it
takes into account the time value of cash flows generated over the bond's
life. Future interest and principal payments are discounted to reflect their
present value and then are
<PAGE>
ABOUT THE FUNDS 11
multiplied by the number of years they will be received to produce a value
that is expressed in years, i.e., the duration. Effective duration takes into
account call features and sinking fund payments that may shorten a bond's
life.
Since duration can also be computed for bond funds, you can estimate the
effect of interest rates on a fund's share price. Simply multiply the fund's
duration (available for T. Rowe Price bond funds in our shareholder reports)
by an expected change in interest rates. For example, the price of a bond
fund with a duration of five years would be expected to fall approximately 5%
if rates rose by one percentage point.
How is a bond's price affected by changes in interest rates?
When interest rates rise, a bond's price usually falls, and vice versa. In
general, the longer a bond's maturity, the greater the price increase or
decrease in response to a given change in interest rates, as shown in Table
5.
<TABLE>
Table 5
<CAPTION>
How Interest Rates Affect Bond Prices
Price per $1,000 of Bond Face Value if Interest Rates:
Increase Decrease
Bond Maturity Coupon 1 Point 2 Points 1 Point 2 Points
<S> <S> <C> <C> <C> <C> <C>
1
year 5.42% $ 990 $981 $ 1,010 $1,019
5
years 5.90 958 919 1,044 1,090
10
years 6.01 929 864 1,078 1,163
30 6.30 879 780 1,149 1,335
years
- ------------------------------------------------------------------------------------------------
</TABLE>
Coupons reflect yields on Treasury securities as of July 31, 1997. The table may
not be as representative of price changes for mortgage securities because of
prepayments. This is an illustration and does not represent expected yields or
share price changes of any T. Rowe Price fund.
Do money market securities react to changes in interest rates?
Yes. As interest rates change, the prices of money market securities
fluctuate, but changes are usually small because of their very short
maturities. Investments are typically held until maturity in a money fund to
help it maintain a $1.00 share price.
How can I decide which fund is most appropriate for me?
Consider your investment goals, your time horizon for achieving them, and
your tolerance for risk. Use Table 4, which summarizes each fund's main
characteristics, to help choose a fund (or funds) for your particular needs.
For example, only the money fund is designed to provide principal stability,
which makes it a good choice for money you may need for occasional or
unexpected
<PAGE>
T. ROWE PRICE 12
expenses. However, if you are investing for the highest possible income from
a U.S. government portfolio and can tolerate price volatility, you should
consider the longer-term bond funds.
o The fund or funds you select should not be relied upon as a complete
investment program nor be used for short-term trading purposes.
Is there other information I need to review before making a decision?
Be sure to read Investment Policies and Practices in Section 3, which
discusses the principal types of portfolio securities that the fund may
purchase as well as the types of management practices that the fund may use.
<PAGE>
ABOUT YOUR ACCOUNT
2
PRICING SHARES AND RECEIVING SALE PROCEEDS
----------------------------------------------------------
Here are some procedures you should know when investing in a T. Rowe Price
fixed income fund.
How and when shares are priced
Bond and money funds
The share price (also called "net asset value" or NAV per share) for each
fund is calculated at 4 p.m. ET each day the New York Stock Exchange is open
for business. To calculate the NAV, a fund's assets are valued and totaled,
liabilities are subtracted, and the balance, called net assets, is divided by
the number of shares outstanding. Amortized cost is used to value money fund
securities.
o The various ways you can buy, sell, and exchange shares are explained at
the end of this prospectus and on the New Account Form. These procedures
may differ for institutional and employer-sponsored retirement accounts.
How your purchase, sale, or exchange price is determined
If we receive your request in correct form by 4 p.m. ET, your transaction
will be priced at that day's NAV. If we receive it after 4 p.m., it will be
priced at the next business day's NAV.
We cannot accept orders that request a particular day or price for your
transaction or any other special conditions.
Note: The time at which transactions and shares are priced and the time until
which orders are accepted may be changed in case of an emergency or if the
New York Stock Exchange closes at a time other than 4 p.m. ET.
How you can receive the proceeds from a sale
o When filling out the New Account Form, you may wish to give yourself the
widest range of options for receiving proceeds from a sale.
If your request is received by 4 p.m. ET in correct form, proceeds are
usually sent on the next business day. Proceeds can be sent to you by mail or
to your bank account by Automated Clearing House (ACH) transfer or bank wire.
Proceeds sent by ACH transfer should be credited the second day after the
sale. ACH is an automated method of initiating payments from, and receiving
payments in, your financial institution account. ACH is a payment system
supported by over
<PAGE>
T. ROWE PRICE 14
20,000 banks, savings banks, and credit unions, which electronically
exchanges the transactions primarily through the Federal Reserve Banks.
Proceeds sent by bank wire should be credited to your account the next
business day.
Exception: Under certain circumstances and when deemed to be in the fund's
best interests, your proceeds may not be sent for up to five business days
after we receive your sale or exchange request. If you were exchanging into a
bond or money fund, your new investment would not begin to earn dividends
until the sixth business day.
o If for some reason we cannot accept your request to sell shares, we will
contact you.
USEFUL INFORMATION ON DISTRIBUTIONS AND TAXES
----------------------------------------------------------
o All net investment income and realized capital gains are distributed to
shareholders.
Dividends and Other Distributions
Dividend and capital gain distributions are reinvested in additional fund
shares in your account unless you select another option on your New Account
Form. The advantage of reinvesting distributions arises from compounding;
that is, you receive income dividends and capital gain distributions on a
rising number of shares.
Distributions not reinvested are paid by check or transmitted to your bank
account via ACH. If the Post Office cannot deliver your check, or if your
check remains uncashed for six months, the fund reserves the right to
reinvest your distribution check in your account at the NAV on the business
day of the reinvestment and to reinvest all subsequent distributions in
shares of the fund. No interest will accrue on amounts represented by
uncashed distribution or redemption checks.
Income dividends
. Money funds declare income dividends daily to shareholders of record as of
12 noon ET on that day. Wire purchase orders received before 12 noon ET
receive the dividend for that day. Other purchase orders receive the dividend
on the next business day after payment has been received.
. Bond funds declare income dividends daily at 4 p.m. ET to shareholders of
record at that time provided payment has been received on the previous
business day.
. Bond and money funds pay dividends on the first business day of each month.
. Bond and money fund shares will earn dividends through the date of
redemption; also, shares redeemed on a Friday or prior to a holiday will
continue to
<PAGE>
ABOUT YOUR ACCOUNT 15
earn dividends until the next business day. Generally, if you redeem all of
your shares at any time during the month, you will also receive all dividends
earned through the date of redemption in the same check. When you redeem only
a portion of your shares, all dividends accrued on those shares will be
reinvested, or paid in cash, on the next dividend payment date.
Capital gains
o Since money funds are managed to maintain a constant share price, they are
not expected to make capital gain distributions.
. A capital gain or loss is the difference between the purchase and sale price
of a security.
. If the fund has net capital gains for the year (after subtracting any
capital losses), they are usually declared and paid in December to
shareholders of record on a specified date that month. If a second
distribution is necessary, it is usually declared and paid during the first
quarter of the following year.
Tax Information
o You will be sent timely information for your tax filing needs.
You need to be aware of the possible tax consequences when:
. You sell fund shares, including an exchange from one fund to another.
. The fund makes a distribution to your account.
Taxes on fund redemptions
When you sell shares in any fund, you may realize a gain or loss. An exchange
from one fund to another is still a sale for tax purposes.
In January, you will be sent Form 1099-B, indicating the date and amount of
each sale you made in the fund during the prior year. This information will
also be reported to the IRS. For accounts opened new or by exchange in 1983
or later, we will provide you with the gain or loss of the shares you sold
during the year, based on the "average cost" method. This information is not
reported to the IRS, and you do not have to use it. You may calculate the
cost basis using other methods acceptable to the IRS, such as "specific
identification."
To help you maintain accurate records, we send you a confirmation immediately
following each transaction you make (except for systematic purchases and
redemptions) and a year-end statement detailing all your transactions in each
fund account during the year.
Taxes on fund distributions
The following summary does not apply to retirement accounts, such as IRAs,
which are tax-deferred until you withdraw money from them.
<PAGE>
T. ROWE PRICE 16
In January, you will be sent Form 1099-DIV, indicating the tax status of any
dividend and capital gain distribution made to you. This information will
also be reported to the IRS. All distributions made by the fund are taxable
to you for the year in which they were paid. The only exception is that
distributions declared during the last three months of a calendar year and
paid in January are taxed as though they were paid by December 31. You will
be sent any additional information you need to determine your taxes on fund
distributions, such as the portion of your dividend, if any, that may be
exempt from state income taxes.
The tax treatment of a capital gain distribution is determined by how long
the fund held the portfolio securities, not how long you held shares in the
fund. Recent changes in the tax code revised capital gain holding periods for
long-term gains and created a new class of mid-term gains. Short-term (one
year or less) capital gain distributions continue to be taxable at the same
rates as ordinary income. Gains on securities held more than 12 months but
not more than 18 months (mid-term gains) are taxed at the rates formerly
applicable to long-term gains, and gains on securities held for more than 18
months are taxed at a new and lower long-term rate. If you realize a loss on
the sale or exchange of fund shares held six months or less, your short-term
loss recognized is reclassified to long term to the extent of any net capital
gain distribution received.
o Distributions are taxable whether reinvested in additional shares or
received in cash.
Tax effect of buying shares before a capital gain distribution
If you buy shares shortly before or on the "record date" - the date that
establishes you as the person to receive the upcoming distribution - you will
receive a portion of the money you just invested in the form of a taxable
distribution. Therefore, you may also wish to find out the fund's record date
before investing. Of course, the fund's share price may, at any time, reflect
undistributed capital gains or income and unrealized appreciation. When these
amounts are eventually distributed, they are taxable.
TRANSACTION PROCEDURES AND SPECIAL REQUIREMENTS
----------------------------------------------------------
o Following these procedures helps assure timely and accurate transactions.
<PAGE>
ABOUT YOUR ACCOUNT 17
Purchase Conditions
Nonpayment
If your payment is not received or you pay with a check or ACH transfer that
does not clear, your purchase will be canceled. You will be responsible for
any losses or expenses incurred by the fund or transfer agent, and the fund
can redeem shares you own in this or another identically registered T. Rowe
Price fund as reimbursement. The fund and its agents have the right to reject
or cancel any purchase, exchange, or redemption due to nonpayment.
U.S. dollars
All purchases must be paid for in U.S. dollars; checks must be drawn on U.S.
banks.
Sale (Redemption) Conditions
10-day hold
If you sell shares that you just purchased and paid for by check or ACH
transfer, the fund will process your redemption but will generally delay
sending you the proceeds for up to 10 calendar days to allow the check or
transfer to clear. If your redemption request was sent by mail or mailgram,
proceeds will be mailed no later than the seventh calendar day following
receipt unless the check or ACH transfer has not cleared. If, during the
clearing period, we receive a check drawn against your bond or money market
account, it will be returned marked "uncollected." (The 10-day hold does not
apply to the following: purchases paid for by bank wire; cashier's,
certified, or treasurer's checks; or automatic purchases through your
paycheck.)
Telephone, Tele*Access/(R)/, and personal computer transactions
Exchange and redemption services through telephone and Tele*Access are
established automatically when you sign the New Account Form unless you check
the box that states that you do not want these services. Personal computer
transactions must be authorized separately. T. Rowe Price funds use
reasonable procedures (including shareholder identity verification) to
confirm that instructions given by telephone are genuine and are not liable
for acting on these instructions. If these procedures are not followed, it is
the opinion of certain regulatory agencies that the funds may be liable for
any losses that may result from acting on the instructions given. A
confirmation is sent promptly after the telephone transaction. All
conversations are recorded.
Redemptions over $250,000
Large sales can adversely affect a portfolio manager's ability to implement a
fund's investment strategy by causing the premature sale of securities that
would otherwise be held. If, in any 90-day period, you redeem (sell) more
than $250,000, or your sale amounts to more than 1% of fund net assets, the
fund has the right to pay the difference between the redemption amount and
the lesser of the two previously mentioned figures with securities from the
fund.
<PAGE>
T. ROWE PRICE 18
Excessive Trading
o T. Rowe Price may bar excessive traders from purchasing shares.
Frequent trades, involving either substantial fund assets or a substantial
portion of your account or accounts controlled by you, can disrupt management
of the fund and raise its expenses. We define "excessive trading" as
exceeding one purchase and sale involving the same fund within any 120-day
period.
For example, you are in fund A. You can move substantial assets from fund A
to fund B and, within the next 120 days, sell your shares in fund B to return
to fund A or move to fund C.
If you exceed the number of trades described above, you may be barred
indefinitely from further purchases of T. Rowe Price funds.
Three types of transactions are exempt from excessive trading guidelines: 1)
trades solely between money market funds; 2) redemptions that are not part of
exchanges; and 3) systematic purchases or redemptions (see Shareholder
Services).
Keeping Your Account Open
Due to the relatively high cost to a fund of maintaining small accounts, we
ask you to maintain an account balance of at least $1,000. If your balance is
below $1,000 for three months or longer, we have the right to close your
account after giving you 60 days in which to increase your balance.
Small Account Fee
Because of the disproportionately high costs of servicing accounts with low
balances, a $10 fee, paid to T. Rowe Price Services, the funds' transfer
agent, will automatically be deducted from nonretirement accounts with
balances falling below a minimum level. The valuation of accounts and the
deduction are expected to take place during the last five business days of
September. The fee will be deducted from accounts with balances below $2,000,
except for UGMA/ UTMA accounts, for which the limit is $500. The fee will be
waived for any investor whose aggregate T. Rowe Price mutual fund investments
total $25,000 or more. Accounts employing automatic investing (e.g., payroll
deduction, automatic purchase from a bank account, etc.) are also exempt from
the charge. The fee will not apply to IRAs and other retirement plan
accounts. (A separate custodial fee may apply to IRAs and other retirement
plan accounts.)
Signature Guarantees
o A signature guarantee is designed to protect you and the T. Rowe Price
funds from fraud by verifying your signature.
<PAGE>
You may need to have your signature guaranteed in certain situations, such
as:
You may need to have your signature guaranteed in certain situations, such
as:
You may need to have your signature guaranteed in certain situations, such
as:
. Written requests 1) to redeem over $100,000, or 2) to wire redemption
proceeds.
. Remitting redemption proceeds to any person, address, or bank account not on
record.
. Transferring redemption proceeds to a T. Rowe Price fund account with a
different registration (name or ownership) from yours.
. Establishing certain services after the account is opened.
You can obtain a signature guarantee from most banks, savings institutions,
broker-dealers, and other guarantors acceptable to T. Rowe Price. We cannot
accept guarantees from notaries public or organizations that do not provide
reimbursement in the case of fraud.
<PAGE>
T. ROWE PRICE 20
MORE ABOUT THE FUNDS
3
ORGANIZATION AND MANAGEMENT
----------------------------------------------------------
How is the fund organized?
T. Rowe Price U.S. Treasury Funds, Inc. (the "Corporation") was incorporated
in Maryland in 1989 and is a "diversified, open-end investment company," or
mutual fund. The Intermediate Fund and the Long-Term Fund are series of the
Corporation that were established in 1989. The Money Fund series was added in
1990. Mutual funds pool money received from shareholders and invest it to try
to achieve specified objectives.
o Shareholders benefit from T. Rowe Price's 60 years of investment management
experience.
What is meant by "shares"?
As with all mutual funds, investors purchase shares when they put money in a
fund. These shares are part of a fund's authorized capital stock, but share
certificates are not issued.
Each share and fractional share entitles the shareholder to:
. Receive a proportional interest in the fund's income and capital gain
distributions.
. Cast one vote per share on certain fund matters, including the election of
fund directors, changes in fundamental policies, or approval of changes in
the fund's management contract.
Do T. Rowe Price funds have annual shareholder meetings?
The funds are not required to hold annual meetings and, in order to avoid
unnecessary costs to fund shareholders, do not intend to do so except when
certain matters, such as a change in a fund's fundamental policies, are to be
decided. In addition, shareholders representing at least 10% of all eligible
votes may call a special meeting, if they wish, for the purpose of voting on
the removal of any fund director or trustee. If a meeting is held and you
cannot attend, you can vote by proxy. Before the meeting, the fund will send
you proxy materials that explain the issues to be decided and include a
voting card for you to mail back.
<PAGE>
ABOUT YOUR ACCOUNT 21
Who runs the funds?
General Oversight
The Corporation is governed by a Board of Directors that meets regularly to
review the funds' investments, performance, expenses, and other business
affairs. The Board elects the Corporation's officers. The policy of the
Corporation is that a majority of Board members will be independent of T.
Rowe Price.
o All decisions regarding the purchase and sale of fund investments are made
by T. Rowe Price - specifically by each fund's portfolio managers.
Portfolio Management
Each fund has an Investment Advisory Committee whose chairman has day-to-day
responsibility for managing the fund and works with the committee in
developing and executing the fund's investment program. The Investment
Advisory Committees comprise the following members:
. Money Fund Edward A. Wiese, Chairman, Patrice Berchtenbreiter Ely, Brian E.
Burns, Robert P. Campbell, James M. McDonald, Joan R. Potee, and Gwendolyn G.
Wagner. Mr. Wiese has been chairman of the Money Fund's committee since 1990.
He joined T. Rowe Price in 1984 and has been managing investments since 1985.
. Intermediate Fund Peter Van Dyke, Chairman, Connice A. Bavely, Jerome A.
Clark, Heather R. Landon, and Cheryl A. Mickel. Mr. Van Dyke became chairman
of the Intermediate Fund's committee effective May 1, 1998. He has been
managing investments since joining T. Rowe Price in 1985.
. Long-Term Fund Peter Van Dyke, Chairman, Connice A. Bavely, Jerome A. Clark,
Heather R. Landon, and Cheryl A. Mickel. Mr. Van Dyke has been chairman of
the Long-Term Fund's committee since 1990. He has been managing investments
since joining T. Rowe Price in 1985.
Marketing
T. Rowe Price Investment Services, Inc., a wholly owned subsidiary of T. Rowe
Price, distributes (sells) shares of these and all other T. Rowe Price funds.
Shareholder Services
T. Rowe Price Services, Inc., another wholly owned subsidiary, acts as the
funds' transfer and dividend disbursing agent and provides shareholder and
administrative services. Services for certain types of retirement plans are
provided by T. Rowe Price Retirement Plan Services, Inc., also a wholly owned
subsidiary. The address for each is 100 East Pratt St., Baltimore, MD 21202.
<PAGE>
T. ROWE PRICE 22
How are fund expenses determined?
The management agreement spells out the expenses to be paid by each fund. In
addition to the management fee, the funds pay for the following: shareholder
service expenses; custodial, accounting, legal, and audit fees; costs of
preparing and printing prospectuses and reports sent to shareholders;
registration fees and expenses; proxy and annual meeting expenses (if any);
and director/trustee fees and expenses.
The funds paid the expenses shown in Table 6 for the fiscal year ended May
31, 1997.
<TABLE>
Table 6 Services Fees Paid
<CAPTION>
Transfer Agent and
Fund Shareholder Services Subaccounting Services Accounting Services
<S> <S> <C> <C> <C>
Money $514,000 $816,000 $60,000
Intermediate 163,000 77,000 60,000
Long-Term 102,000 16,000 60,000
- --------------------------------------------------------------------------------------
</TABLE>
The Management Fee
This fee has two parts - an "individual fund fee" (discussed under
Transaction and Fund Expenses), which reflects a fund's particular investment
management costs, and a "group fee." The group fee, which is designed to
reflect the benefits of the shared resources of the T. Rowe Price investment
management complex, is calculated daily based on the combined net assets of
all T. Rowe Price funds (except Equity Index, the Spectrum Funds, and any
institutional or private label mutual funds). The group fee schedule (shown
below) is graduated, declining as the asset total rises, so shareholders
benefit from the overall growth in mutual fund assets.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
0.480% First $1 billion 0.360% Next $2 billion 0.310% Next $16 billion
--------------------------
0.450% Next $1 billion 0.350% Next $2 billion 0.305% Next $30 billion
----------------------------------------------------
0.420% Next $1 billion 0.340% Next $5 billion 0.300% Thereafter
----------------------------------------------------
0.390% Next $1 billion 0.330% Next $10 billion
------------------------------------------------------------------------------
0.370% Next $1 billion 0.320% Next $10 billion
</TABLE>
Each fund's portion of the group fee is determined by the ratio of its daily
net assets to the daily net assets of all the T. Rowe Price funds described
previously. Based on combined T. Rowe Price funds' assets of over $71 billion
at June 30, 1997, the group fee was 0.33%.
<PAGE>
MORE ABOUT THE FUNDS 23
UNDERSTANDING PERFORMANCE INFORMATION
----------------------------------------------------------
This section should help you understand the terms used to describe fund
performance. You will come across them in shareholder reports you receive
from us, in our newsletter, The Price Report, in Insights articles, in T.
Rowe Price advertisements, and in the media.
Total Return
This tells you how much an investment in a fund has changed in value over a
given time period. It reflects any net increase or decrease in the share
price and assumes that all dividends and capital gains (if any) paid during
the period were reinvested in additional shares. Including reinvested
distributions means that total return numbers include the effect of
compounding, i.e., you receive income and capital gain distributions on a
rising number of shares.
Advertisements for a fund may include cumulative or compound average annual
total return figures, which may be compared with various indices, other
performance measures, or other mutual funds.
o Total return is the most widely used performance measure. Detailed
performance information is included in each fund's annual and semiannual
shareholder reports and in the quarterly Performance Update, which are all
available without charge.
Cumulative Total Return
This is the actual rate of return on an investment for a specified period. A
cumulative return does not indicate how much the value of the investment may
have fluctuated between the beginning and end of the period specified.
Average Annual Total Return
This is always hypothetical. Working backward from the actual cumulative
return, it tells you what constant year-by-year return would have produced
the actual cumulative return. By smoothing out all the variations in annual
performance, it gives you an idea of the investment's annual contribution to
your portfolio, provided you held it for the entire period in question.
Yield
The current or "dividend" yield on a fund or any investment tells you the
relationship between the investment's current level of annual income and its
price on a particular day. The dividend yield reflects the actual income paid
to shareholders for a given period, annualized, and divided by the funds' net
asset value. For example, a fund providing $5 of annual income per share and
a price of $50 has a current yield of 10%. Yields can be calculated for any
time period.
<PAGE>
T. ROWE PRICE 24
The money fund may advertise a current yield, reflecting the latest seven-day
income annualized, or an "effective" yield, which assumes the income has been
reinvested in the fund.
For the bond funds, the advertised or "SEC" yield is found by determining the
net income per share (as defined by the SEC) earned by the fund during a
30-day base period and dividing this amount by the per share price on the
last day of the base period. The SEC yield may differ from the dividend
yield.
o You will see frequent references to a fund's yield in our reports, in
advertisements, in media stories, and so on.
INVESTMENT POLICIES AND PRACTICES
----------------------------------------------------------
This section takes a detailed look at some of the types of securities the
funds may hold in their portfolios and the various kinds of investment
practices that may be used in day-to-day portfolio management. Each fund's
investment program is subject to further restrictions and risks described in
the Statement of Additional Information.
Shareholder approval is required to substantively change a fund's objective
and certain investment restrictions noted in the following section as
"fundamental policies." The managers also follow certain "operating policies"
which can be changed without shareholder approval. However, significant
changes are discussed with shareholders in fund reports. Each fund adheres to
applicable investment restrictions and policies at the time it makes an
investment. A later change in circumstances will not require the sale of an
investment if it was proper at the time it was made.
The funds' holdings of certain kinds of investments cannot exceed maximum
percentages of total assets, which are set forth in this prospectus. For
instance, the Intermediate and Long-Term Funds are not permitted to invest
more than 10% of total assets in certain stripped mortgage securities, known
as IOs and POs. While these restrictions provide a useful level of detail
about the funds' investment program, investors should not view them as an
accurate gauge of the potential risk of such investments. For example, in a
given period, a 5% investment in IOs and POs could have significantly more of
an impact on the funds' share prices than its weighting in the portfolio. The
net effect of a particular investment depends on its volatility and the size
of its overall return in relation to the performance of all the funds' other
investments.
Changes in the funds' holdings, the funds' performance, and the contribution
of various investments are discussed in the shareholder reports sent to you.
<PAGE>
MORE ABOUT THE FUNDS 25
o Fund managers have considerable leeway in choosing investment strategies
and selecting securities they believe will help the funds achieve their
objectives.
Types of Portfolio Securities
In seeking to meet their investment objectives, the funds may invest in any
type of security or instrument (including certain potentially high-risk
derivatives described in this section in the Intermediate and Long-Term
Funds) whose investment characteristics are consistent with the funds'
investment programs. The following pages describe the principal types of
portfolio securities and investment management practices of the funds.
Bonds
A bond is an interest-bearing security - an IOU - issued by companies or
governmental units. The issuer has a contractual obligation to pay interest
at a stated rate on specific dates and to repay principal (the bond's face
value) on a specified date. An issuer may have the right to redeem or "call"
a bond before maturity, and the investor may have to reinvest the proceeds at
lower market rates.
A bond's annual interest income, set by its coupon rate, is usually fixed for
the life of the bond. Its yield (income as a percent of current price) will
fluctuate to reflect changes in interest rate levels. A bond's price usually
rises when interest rates fall, and vice versa, so its yield stays current.
Certain bonds have interest rates that are adjusted periodically. These
interest rate adjustments tend to minimize fluctuations in the bonds'
principal values. In calculating the money fund's weighted average maturity,
the maturity of these securities may be shortened under certain specified
conditions and in accordance with Rule 2a-7.
In addition to Treasury securities, the funds may make the following
investments:
Other Securities Backed by the Full Faith and Credit of the U.S. Government
The funds may purchase securities of U.S. government agencies and
instrumentalities which are backed by the full faith and credit of the U.S.
government, such as securities of the Government National Mortgage
Association (GNMA), the Federal Housing Administration, the Department of the
General Services Administration, the Maritime Administration, and the Small
Business Administration. The funds will not invest in the securities of any
U.S. government agencies that are not backed by the full faith and credit of
the U.S. government, such as Fannie Mae (FNMA) or Freddie Mac (FHLMC)
securities. No more than 20% of the Money Fund's total assets and no more
than 15% of each of the Intermediate and Long-Term Funds' total assets will
be maintained in these types of non-U.S. Treasury securities. The Money Fund
does not expect to invest in mortgage securities.
<PAGE>
T. ROWE PRICE 26
Fundamental policy The Money Fund must invest at least 80% of its total
assets in U.S. Treasury securities and repurchase agreements thereon.
However, as an operating policy the fund has decided not to invest in
repurchase agreements.
The Intermediate and Long-Term Funds' non-U.S. Treasury investments may
include, but are not limited to, the following types of mortgage securities:
. GNMA Mortgage Securities Mortgage-backed securities are subject to scheduled
and unscheduled principal payments as homeowners pay down or prepay their
mortgages. As these payments are received, they must be reinvested when
interest rates may be higher or lower than on the original mortgage security.
Therefore, these securities are not an effective means of locking in
long-term interest rates. In addition, when interest rates fall, the pace of
mortgage prepayments picks up. These refinanced mortgages are paid off at
face value (par), causing a loss for any investor who may have purchased the
security at a price above par. In such an environment, this risk limits the
potential price appreciation of these securities and can negatively affect
the funds' net asset values. When rates rise, the prices of mortgage-backed
securities can be expected to decline, although historically these securities
have experienced smaller price declines than comparable quality bonds.
. Collateralized Mortgage Obligations (CMOs) CMOs are debt securities that are
fully collateralized by a portfolio of mortgages or mortgage-backed
securities. All interest and principal payments from the underlying mortgages
are passed through to the CMOs in such a way as to create, in most cases,
more definite maturities than is the case with the underlying mortgages. CMOs
may pay fixed or variable rates of interest, and certain CMOs have priority
over others with respect to the receipt of prepayments.
. Stripped Mortgage Securities Stripped mortgage securities (a type of
potentially high-risk derivative) are created by separating the interest and
principal payments generated by a pool of mortgage-backed securities or a CMO
to create additional classes of securities. Generally, one class receives
only interest payments (IOs), and another receives principal payments (POs).
Unlike other mortgage-backed securities and POs, the value of IOs tends to
move in the same direction as interest rates. The funds could use IOs as a
hedge against falling prepayment rates (interest rates are rising) and/or a
bear market environment. POs can be used as a hedge against rising prepayment
rates (interest rates are falling) and/or a bull market environment. IOs and
POs are acutely sensitive to interest rate changes and to the rate of
principal prepayments.
<PAGE>
MORE ABOUT THE FUNDS 27
A rapid or unexpected increase in prepayments can severely depress the price
of IOs, while a rapid or unexpected decrease in prepayments could have the
same effect on POs. These securities are very volatile in price and may have
lower liquidity than most other mortgage-backed securities. Certain
non-stripped CMOs may also exhibit these qualities, especially those that pay
variable rates of interest that adjust inversely with, and more rapidly than,
short-term interest rates. In addition, if interest rates rise rapidly and
prepayment rates slow more than expected, certain CMOs, in addition to losing
value, can exhibit characteristics of longer-term securities and become more
volatile. There is no guarantee the funds' investment in CMOs, IOs, or POs
will be successful, and the funds' total returns could be adversely affected
as a result.
Operating policy Each fund may invest up to 10% of its total assets in
stripped mortgage securities.
Types of Management Practices
Reserve Position (Intermediate and Long-Term Funds)
Each fund will hold a certain portion of its assets in money market
reserves.The funds' reserve position can consist of shares of a T. Rowe Price
internal money market fund that invests exclusively in securities backed by
the full faith and credit of the U.S. government. In addition, the funds may
purchase money market securities backed by the full faith and credit of the
U.S. government, including repurchase agreements collateralized by such
securities. For temporary, defensive purposes, a fund may invest without
limitation in money market reserves. The reserve position provides
flexibility in meeting redemptions, expenses, and the timing of new
investments, and can serve as a short-term defense during periods of unusual
market volatility.
Borrowing Money and Transferring Assets
Each fund can borrow money from banks as a temporary measure for emergency
purposes, to facilitate redemption requests, or for other purposes consistent
with each fund's investment objective and program. Such borrowings may be
collateralized with fund assets, subject to restrictions.
Fundamental policy Borrowings may not exceed 33/1//\\/3/\\% of total fund
assets.
Operating policies Each fund may not transfer as collateral any portfolio
securities except as necessary in connection with permissible borrowings or
investments, and then such transfers may not exceed 33/1//\\/3/\\% of a
fund's total assets. A fund may not purchase additional securities when
borrowings exceed 5% of total assets.
<PAGE>
Lending of Portfolio Securities
Like other mutual funds, the funds may lend securities to broker-dealers,
other institutions, or other persons to earn additional income. The principal
risk is the potential insolvency of the broker-dealer or other borrower. In
this event, a fund could experience delays in recovering its securities and
possibly capital losses.
Like other mutual funds, the funds may lend securities to broker-dealers,
other institutions, or other persons to earn additional income. The principal
risk is the potential insolvency of the broker-dealer or other borrower. In
this event, a fund could experience delays in recovering its securities and
possibly capital losses.
Fundamental policy The value of loaned securities may not exceed
33/1//\\/3/\\% of total fund assets.
When-Issued Securities (Intermediate and Long-Term Funds)
The funds may purchase securities on a when-issued or delayed delivery basis
or may purchase or sell securities on a forward commitment basis. There is no
limit on the funds' investment in these securities. The price of these
securities is fixed at the time of the commitment to buy, but delivery and
payment can take place a month or more later. During the interim period, the
market value of the securities can fluctuate, and no interest accrues to the
purchaser. At the time of delivery, the value of the securities may be more
or less than the purchase or sale price. To the extent a 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 that fund's net asset value than if the fund did not
purchase them.
Portfolio Turnover (Intermediate and Long-Term Funds)
Each fund generally purchases securities with the intention of holding them
for investment; however, when market conditions or other circumstances
warrant, securities may be purchased and sold without regard to the length of
time held. Due to the nature of each fund's investment program, a fund's
portfolio turnover rate may exceed 100%. A high turnover rate may increase
transaction costs and result in additional taxable gains. The funds'
portfolio turnover rates for the previous three fiscal years are shown in
Table 7.
<TABLE>
Table 7
<CAPTION>
Portfolio Turnover Rates
Fund 1995 1996 1997
<S> <C> <C> <C> <C>
Intermediate 81.1% 40.7% 57.9%
Long-Term 99.3 60.1 67.6
- -------------------------------------------------------------
</TABLE>
<PAGE>
MORE ABOUT THE FUNDS 29
INVESTING WITH T. ROWE PRICE
4
ACCOUNT REQUIREMENTS AND TRANSACTION INFORMATION
----------------------------------------------------------
Tax Identification Number
We must have your correct Social Security or corporate tax identification number
on a signed New Account Form or W-9 Form. Otherwise, federal law requires the
funds to withhold a percentage (currently 31%) of your dividends, capital gain
distributions, and redemptions, and may subject you to an IRS fine. If this
information is not received within 60 days after your account is established,
your account may be redeemed, priced at the NAV on the date of redemption.
Always verify your transactions by carefully reviewing the confirmation we send
you. Please report any discrepancies to Shareholder Services promptly.
Employer-Sponsored Retirement Plans and Institutional Accounts T. Rowe Price
Trust Company 1-800-492-7670 1-410-625-6585
Transaction procedures in the following sections may not apply to
employer-sponsored retirement plans and institutional accounts. For procedures
regarding employer-sponsored retirement plans, please call T. Rowe Price Trust
Company or consult your plan administrator. For institutional account
procedures, please call your designated account manager or service
representative.
OPENING A NEW ACCOUNT
----------------------------------------------------------
$2,500 minimum initial investment; $1,000 for retirement plans or gifts or
transfers to minors (UGMA/UTMA) accounts
Account Registration
If you own other T. Rowe Price funds, be sure to register any new account just
like your existing accounts so you can exchange among them easily. (The name and
account type would have to be identical.)
<PAGE>
T. ROWE PRICE 30
By Mail
Please make your check payable to T. Rowe Price Funds (otherwise it will be
returned) and send your check, together with the New Account Form, to the
address on the next page. We do not accept third party checks to open new
accounts, except for IRA Rollover checks that are properly endorsed.
Regular Mail
T. Rowe Price Account Services P.O. Box 17300 Baltimore, MD 21298-9353
Mailgram, Express, Registered, or Certified Mail
T. Rowe Price Account Services 10090 Red Run Blvd. Owings Mills, MD 21117
By Wire
Call Investor Services for an account number and give the following wire
information to your bank:
PNC Bank, N.A. (Pittsburgh) ABA# 043000096 T. Rowe Price [fund name] Account#
1004397951 name of owner(s) and account number
Complete a New Account Form and mail it to one of the appropriate addresses
listed above.
Note: No services will be established and IRS penalty withholding may occur
until a signed New Account Form is received. Also, retirement plans cannot be
opened by wire.
By Exchange
Call Shareholder Services or use Tele*Access or your personal computer (see
Automated Services under Shareholder Services). The new account will have the
same registration as the account from which you are exchanging. Services for the
new account may be carried over by telephone request if preauthorized on the
existing account. For limitations on exchanging, see explanation of Excessive
Trading under Transaction Procedures and Special Requirements.
In Person
Drop off your New Account Form at any location listed on the cover and obtain a
receipt.
<PAGE>
INVESTING WITH T. ROWE PRICE 31
Through a Broker
If you buy or sell T. Rowe Price funds through anyone other than T.Rowe Price,
such as broker-dealers or banks, you may be charged transaction or service fees
by those institutions. No such fees are charged by T. Rowe Price Investment
Services or the T. Rowe Price funds for transactions conducted directly with the
fund.
<PAGE>
T. ROWE PRICE 32
PURCHASING ADDITIONAL SHARES
----------------------------------------------------------
$100 minimum purchase; $50 minimum for retirement plans, Automatic Asset
Builder, and gifts or transfers to minors (UGMA/UTMA) accounts
By ACH Transfer
Use Tele*Access or your personal computer or call Investor Services if you have
established electronic transfers using the ACH network.
By Wire
Call Shareholder Services or use the wire address in Opening a New Account.
By Mail
1. Make your check payable to T. Rowe Price Funds (otherwise it may be
returned).
2. Mail the check to us at the address shown below with either a fund
reinvestment slip or a note indicating the fund you want to buy and your fund
account number.
3. Remember to provide your account number and the fund name on the memo line of
your check.
Regular Mail
T. Rowe Price Funds Account Services P.O. Box 89000 Baltimore, MD 21289-1500
/(For mailgrams, express, registered, or certified mail, see previous /
/section.)/
By Automatic Asset Builder
Fill out the Automatic Asset Builder section on the New Account or Shareholder
Services Form.
EXCHANGING AND REDEEMING SHARES
----------------------------------------------------------
By Phone
Call Shareholder Services
If you find our phones busy during unusually volatile markets, please consider
placing your order by your personal computer, Tele*Access (if you have
previously authorized telephone services), mailgram, or express mail. For
exchange policies, please see Transaction Procedures and Special Requirement s
-Excessive Trading.
<PAGE>
INVESTING WITH T. ROWE PRICE 33
Redemption proceeds can be mailed to your account address, sent by ACH transfer,
or wired to your bank (provided your bank information is already on file). For
charges, see Electronic Transfers - By Wire under Shareholder Services.
By Mail
For each account involved, provide the account name, number, fund name, and
exchange or redemption amount. For exchanges, be sure to indicate any fund you
are exchanging out of and the fund or funds you are exchanging into. Please mail
to the appropriate address below. T. Rowe Price requires the signatures of all
owners exactly as registered, and possibly a signature guarantee (see
Transaction Procedures and Special Requirements - Signature Guarantees).
Regular Mail
For nonretirement and IRA accounts
T. Rowe Price Account Services P.O. Box 89000 Baltimore, MD 21289-0220
For employer-sponsored retirement accounts
T. Rowe Price Trust Company P.O. Box 89000 Baltimore, MD 21289-0300
/(For mailgrams, express, registered, or certified mail, see addresses / /under
Opening a New Account.)/
Redemptions from employer-sponsored retirement accounts must be in writing;
please call T. Rowe Price Trust Company or your plan administrator for
instructions. IRA distributions may be requested in writing or by telephone;
please call Shareholder Services to obtain an IRA Distribution Form or an IRA
Shareholder Services Form to authorize the telephone redemption service.
Rights Reserved by the Fund
The fund and its agents reserve the right to waive or lower investment minimums;
to accept initial purchases by telephone or mailgram; to refuse any purchase
order; to cancel or rescind any purchase or exchange (for example, if an account
has been restricted due to excessive trading or fraud) upon notice to the
shareholder within five business days of the trade or if the written
confirmation has not been received by the shareholder, whichever is sooner; to
<PAGE>
T. ROWE PRICE 34
freeze any account and suspend account services when notice has been received of
a dispute between the registered or beneficial account owners or there is reason
to believe a fraudulent transaction may occur; to otherwise modify the
conditions of purchase and any services at any time; or to act on instructions
believed to be genuine.
SHAREHOLDER SERVICES
----------------------------------------------------------
Shareholder Services 1-800-225-5132 1-410-625-6500 Investor Services
1-800-638-5660 1-410-547-2308
Many services are available to you as a T. Rowe Price shareholder; some you
receive automatically, and others you must authorize on the New Account Form. By
signing up for services on the New Account Form rather than later on, you avoid
having to complete a separate form and obtain a signature guarantee. This
section reviews some of the principal services currently offered. Our Services
Guide contains detailed descriptions of these and other services.
If you are a new T. Rowe Price investor, you will receive a Services Guide with
our Welcome Kit.
Note: Corporate and other institutional accounts require an original or
certified resolution to establish services and to redeem by mail. For more
information, call Investor Services.
Retirement Plans
We offer a wide range of plans for individuals, institutions, and large and
small businesses: IRAs, SIMPLE IRAs, SEP-IRAs, Keoghs (profit sharing, money
purchase pension), 401(k), and 403(b)(7). For information on IRAs, call Investor
Services. For information on all other retirement plans, including our no-load
variable annuity, please call our Trust Company at 1-800-492-7670.
Exchange Service
You can move money from one account to an existing identically registered
account or open a new identically registered account. Remember, exchanges are
purchases and sales for tax purposes. (Exchanges into a state tax-free fund are
limited to investors living in states where the fund is registered.) Some of the
T. Rowe Price funds may impose a redemption fee of
<PAGE>
INVESTING WITH T. ROWE PRICE 35
0.5% to 2% on shares held for less than six months or one year, as specified in
the prospectus. The fee is paid to the fund.
Automated Services Tele*Access 1-800-638-2587 24 hours, 7 days
Tele*Access
24-hour service via toll-free number enables you to (1) access information on
fund yields, prices, distributions, account balances, and your latest
transaction; (2) request checks, prospectuses, services forms, duplicate
statements, and tax forms; and (3) initiate purchase, redemption, and exchange
transactions in your accounts (see Electronic Transfers below).
T. Rowe Price OnLine
24-hour service via dial-up modem provides the same services as Tele*Access but
on a personal computer. Please call Investor Services for an information guide.
After obtaining proper authorization, account transactions may also be conducted
on the Internet.
Plan Account Line 1-800-401-3279
Plan Account Line
This 24-hour service is similar to Tele*Access, but is designed specifically to
meet the needs of retirement plan investors.
Telephone and Walk-In Services
Buy, sell, or exchange shares by calling one of our service representatives or
by visiting one of our investor center locations whose addresses are listed on
the cover.
Electronic Transfers
By ACH
With no charges to pay, you can initiate a purchase or redemption for as little
as $100 or as much as $100,000 between your bank account and fund account using
the ACH network. Enter instructions via Tele*Access or your personal computer,
or call Shareholder Services.
By Wire
Electronic transfers can be conducted via bank wire. There is currently a $5 fee
for wire redemptions under $5,000, and your bank may charge for incoming or
outgoing wire transfers regardless of size.
Checkwriting
(Not available for equity funds, or the High Yield or Emerging Markets Bond
Funds) You may write an unlimited number of free checks on any money market
fund, and most bond funds, with a minimum of $500 per check. Keep in mind,
however, that a check results in a
<PAGE>
redemption; a check written on a bond fund will create a taxable event which you
and we must report to the IRS.
Automatic Investing
($50 minimum) You can invest automatically in several different ways, including:
A u t o m a t i c A s s e t B u i l d e r
Y o u i n s t r u c t u s t o m o v e $ 5 0 o r m o r e f r o m y
our bank account, or you can instruct your employer to send all or a portion of
your paycheck to the fund or funds you designate.
Y o u i n s t r u c t u s t o m o v e $ 5 0 o r m o r e f r o m y
<PAGE>
INVESTING WITH T. ROWE PRICE 37
our bank account, or you can instruct your employer to send all or a portion of
your paycheck to the fund or funds you designate.
Automatic Exchange
You can set up systematic investments from one fund account into another, such
as from a money fund into a stock fund.
DISCOUNT BROKERAGE
----------------------------------------------------------
This additional service gives you the opportunity to easily consolidate all of
your investments with one company. Through our discount brokerage, you can buy
and sell individual securities - stocks, bonds, options, and others - at
commission savings over full-service brokers. We also provide a wide range of
services, including:
To open an account 1-800-638-5660 For existing discount brokerage investors
1-800-225-7720
Automated telephone and on-line services
You can enter trades, access quotes, and review account information 24 hours a
day, seven days a week. Any trades executed through these programs save you an
additional 10% on commissions.
Note: Discount applies to our current commission schedule, subject to our $35
minimum commission.
Investor information
A variety of informative reports, such as our Brokerage Insights series, S&P
Market Month newsletter, and select stock reports can help you better evaluate
economic trends and investment opportunities.
Dividend Reinvestment Service
Virtually all stocks held in customer accounts are eligible for this service -
free of charge.
/Discount Brokerage is a division of //T. Rowe Price// Investment / /Services,
Inc., Member NASD/SIPC./
<PAGE>
T. ROWE PRICE 38
INVESTMENT INFORMATION
----------------------------------------------------------
To help shareholders monitor their current investments and make decisions that
accurately reflect their financial goals, T. Rowe Price offers a wide variety of
information in addition to account statements.
Shareholder Reports
Fund managers' reviews of their strategies and results. If several members of a
household own the same fund, only one fund report is mailed to that address. To
receive additional copies, please call Shareholder Services or write to us at
100 East Pratt Street, Baltimore, Maryland 21202.
The T. Rowe Price Report
A quarterly investment newsletter discussing markets and financial strategies.
Performance Update
A quarterly review of all T. Rowe Price fund results.
Insights
Educational reports on investment strategies and financial markets.
Investment Guides
Asset Mix Worksheet, College Planning Kit, Diversifying Overseas: A T. Rowe
Price Guide to International Investing, How to Choose a Bond Fund, Personal
Strategy Planner, Retirees Financial Guide, Retirement Planning Kit, and Tax
Considerations for Investors.
<PAGE>
INVESTING WITH T. ROWE PRICE 39
To help you achieve your financial goals, T. Rowe Price offers a wide range of
stock, bond, and money market investments, as well as convenient services and
timely, informative reports.
To Open a Mutual Fund Account
Investor Services
1-800-638-5660
1-410-547-2308
For Existing Accounts
Shareholder Services
1-800-225-5132
1-410-625-6500
For Yields, Prices, Account Information, or to Conduct Transactions
Tele*Access/(R)/
1-800-638-2587 24 hours, 7 days
To Open a Discount Brokerage Account
1-800-638-5660
Plan Account Line
1-800-401-3279
For retirement plan
investors
<PAGE>
T. ROWE PRICE 40
Investor Centers
101 East Lombard St.
Baltimore, MD 21202
T. Rowe Price
Financial Center
10090 Red Run Blvd.
Owings Mills, MD 21117
Farragut Square
900 17th Street, N.W.
Washington, D.C. 20006
ARCO Tower
31st Floor
515 South Flower St.
Los Angeles, CA 90071
4200 West Cypress St.
10th Floor
Tampa, FL 33607
Internet Address
www.troweprice.com
<PAGE>
INVESTING WITH T. ROWE PRICE 41
C07-040 8/17/98
<PAGE>
T. ROWE PRICE 42
<PAGE>
INVESTING WITH T. ROWE PRICE 43
<PAGE>
T. ROWE PRICE 44
