T ROWE PRICE SUMMIT FUNDS INC, 497, 1999-05-18

T ROWE PRICE SUMMIT FUNDS INC
497, 1999-05-18

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STATEMENT OF ADDITIONAL INFORMATION

The date of this Statement of Additional Information is March 1, 1999,
revised to May 13, 1999.

T. ROWE PRICE SUMMIT FUNDS, INC.
T. Rowe Price Summit Cash Reserves Fund
T. Rowe Price Summit Limited-Term Bond Fund
T. Rowe Price Summit GNMA Fund
T. ROWE PRICE SUMMIT MUNICIPAL FUNDS, INC.
T. Rowe Price Summit Municipal Money Market Fund
T. Rowe Price Summit Municipal Intermediate-Term Fund
T. Rowe Price Summit Municipal Income Fund

______________________________________________________________________________

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

This Statement of Additional Information is not a prospectus but should be
read in conjunction with the appropriate Fund prospectus dated March 1, 1999,
revised to May 13, 1999, which may be obtained from T. Rowe Price Investment
Services, Inc. ("Investment Services").

Each Fund's financial statements for the year ended October 31, 1998, and the
report of independent accountants are included in each Fund's Annual Report
and incorporated by reference into this Statement of Additional Information.

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

C09-042 5/13/99
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TABLE OF CONTENTS
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Page Page
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<S> <C> <C> <C> <C>
Capital Stock 60 Portfolio Management Practices 24
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Code of Ethics 48 Portfolio Transactions 49
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Custodian 48 Pricing of Securities 53
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Distributor for the Funds 47 Principal Holders of Securities 46
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Dividends and 55 Ratings of Commercial Paper 62
Distributions
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Federal Registration of 61 Ratings of Corporate Debt 63
Shares Securities
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Independent Accountants 61 Ratings of Municipal Debt 64
Securities
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Investment Management 46 Ratings of Municipal Notes and 66
Services Variable Rate Securities
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Investment Objectives and 2 Risk Factors for Summit Income 3
Policies Funds
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Investment Performance 58 Risk Factors for Summit 5
Municipal Funds
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Investment Program 8 Shareholder Services 48
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Investment Restrictions 40 Tax-Exempt vs. Taxable Yields 58
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Legal Counsel 61 Tax Status 55
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Management of the Funds 42 Yield Information 56
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Net Asset Value Per Share 54
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INVESTMENT OBJECTIVES AND POLICIES
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The following information supplements the discussion of each Fund's
investment objectives and policies discussed in the Funds' prospectus.

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

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

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

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RISK FACTORS FOR SUMMIT INCOME FUNDS
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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.

Cash Reserves Fund

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

There can be no assurance that the Fund will achieve its investment
objectives or be able to maintain its net asset value per share at $1.00. The
price of the Fund is not guaranteed or insured, and its yield is not fixed.
While the Fund invests in high-grade money market instruments, investment in
the Fund is not without risk even if all portfolio instruments are paid in
full at maturity. 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.

Limited-Term Bond Fund

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. There is risk in all investment. The Fund is designed for the
investor who seeks to participate in a diversified portfolio of short- and
intermediate-term investment grade bonds and other debt securities (up to 10%
of which may be below investment grade) which provide a higher rate of income
than a money market fund and less risk of capital fluctuation than a
portfolio of long-term debt securities. 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 these results.

GNMA Fund

The Fund may or may not be suitable or appropriate for all investors. The
Fund is designed for investors seeking the highest current income and credit
protection available from investment in securities which are backed by the
full faith and credit of the U.S. government and other securities rated
within the highest two credit categories established by a nationally
recognized public rating agency, or, if unrated, of equivalent quality as
determined by T. Rowe Price. Consistent with a long-term financial investment
approach, investors in the Fund should not rely on the Fund for their
short-term financial needs. 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 these results.

Because they consist of underlying mortgages, GNMA securities may not be an
effective means of "locking in" long-term interest rates due to the need for
the Fund to reinvest scheduled and unscheduled principal payments. 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 and adversely affect the return to the Fund.
Conversely, in a rising interest rate environment such prepayments can be
reinvested at higher prevailing

<PAGE>

interest rates which will reduce the potential effect of capital depreciation
to which bonds are subject when interest rates rise. In addition, prepayments
of mortgage securities purchased at a premium (or discount) will cause such
securities to be paid off at par, resulting in a loss (gain) to the Fund. T.
Rowe Price will actively manage the Fund's portfolio in an attempt to reduce
the risk associated with investment in mortgage-backed securities.

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.
For the Money Funds, the procedures set forth in Rule 2a-7, under the 1940
Act, may require the prompt sale of any such security. For the other Funds,
neither event 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, determines
whether the unrated security is of a quality comparable to that which the
Fund is allowed to purchase.

Securities backed by the full faith and credit of the United States (for
example, GNMA and U.S. Treasury securities) are generally considered to be
among the most, if not the most, creditworthy investments available. While
the U.S. government has honored its credit obligations continuously for the
last 200 years, political events in 1995 and 1996, at times, called into
question whether the United States would default on its obligations. Such an
event would be unprecedented and there is no way to predict its results on
the securities markets or the Funds. However, it is very likely default by
the U.S. would result in losses to the Funds.

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

The market value of adjustable rate mortgage securities ("ARMs"), like other
U.S. government securities, will generally vary inversely with changes in
market interest rates, declining when interest rates rise and rising when
interest rates decline. Because of their periodic adjustment feature, ARMs
should be more sensitive to short-term interest rates than long-term rates.
They should also display less volatility than long-term

<PAGE>

mortgage-backed securities. Thus, while having less risk of a decline during
periods of rapidly rising rates, ARMs may also have less potential for
capital appreciation than other investments of comparable maturities.
Interest rate caps on mortgages underlying ARM securities may prevent income
on the ARM from increasing to prevailing interest rate levels and cause the
securities to decline in value. In addition, to the extent ARMs are purchased
at a premium, mortgage foreclosures and unscheduled principal prepayments may
result in some loss of the holders' principal investment to the extent of the
premium paid. On the other hand, if ARMs are purchased at a discount, both a
scheduled payment of principal and an unscheduled prepayment of principal
will increase current and total returns and will accelerate the recognition
of income which when distributed to shareholders will be taxable as ordinary
income.

Limited-Term Bond Fund

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

RISK FACTORS FOR SUMMIT MUNICIPAL FUNDS
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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.

Municipal Securities

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

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

<PAGE>

municipal securities have traditionally not been subject to regulation by, or
registration with, the SEC, although there have been proposals which would
provide for regulation in the future.

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

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

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

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

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

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

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

Municipal Money Market Fund

<PAGE>

The price stability and liquidity of the Money Fund may not be equal to that
of a taxable money market fund which exclusively invests in short-term
taxable money market securities. The taxable money market is a broader and
more liquid market with a greater number of investors, issuers, and market
makers than the short-term municipal securities market. The weighted average
maturity of the fund varies: the shorter the average maturity of a portfolio,
the less its price will be impacted by interest rate fluctuations.

Intermediate and Income Funds

Because of their investment policies, the Intermediate and Income Funds may
not be suitable or appropriate for all investors. The Funds are designed for
investors who wish to invest in long-term funds for income, and who would
benefit, because of their tax bracket, from receiving income that is exempt
from federal income taxes. The Intermediate and Income Funds' investment
programs permit the purchase of investment-grade securities that do not meet
the high-quality standards of the Money Funds. Since investors generally
perceive that there are greater risks associated with investment in
lower-quality securities, the yield from such securities normally exceeds
those obtainable from higher-quality securities. In addition, the principal
value of long term lower-rated securities generally will fluctuate more
widely than higher-quality securities. Lower-quality investments entail a
higher risk of default--that is, the nonpayment of interest and principal by
the issuer than higher-quality investments. The value of the portfolio
securities of the Intermediate and Income Funds will fluctuate based upon
market conditions. Although these Funds seek to reduce credit risk by
investing in a diversified portfolio, such diversification does not eliminate
all risk. These Funds are also not intended to provide a vehicle for
short-term trading purposes.

Debt Obligations

<PAGE>

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

INVESTMENT PROGRAM
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All Summit Income Funds

Types of Securities

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

Adjustable Rate Securities

Generally, the maturity of a security 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. However, 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. In accordance with Rule
2a-7 under the 1940 Act. 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 A variable rate instrument is one whose terms
provide for the adjustment of its interest rate on set dates and which, upon
each adjustment until the final maturity of the instrument or the period
remaining until the principal amount can be recovered through demand, can
reasonably be expected to have a market value which approximates its
amortized cost. A variable rate instrument, the principal amount of which is
scheduled to be paid in 397 calendar days or less, is deemed to have a
maturity equal to the earlier 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. A variable rate instrument the
principal amount of which is scheduled to be paid in more than 397 calendar
days and which is subject to a demand feature which entitles the purchaser to
receive the principal amount of the underlying security or securities, either
(i) at any time upon notice of no more than 30 days, or (ii) at specified
intervals not exceeding 397 calendar days and upon no more than 30 days'
notice ("Demand Feature"), 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. A government security that is a variable rate security where the
variable rate is readjusted no less frequently than every 762 calendar days
is deemed to have a maturity equal to the period remaining until the next
readjustment of the interest rate.

. Floating Rate Securities A floating rate security provides for the
adjustment of its interest rates whenever a specified interest rate changes
and which, at any time until the final maturity of the instrument or the
period remaining until the principal amount can be recovered through demand,
can reasonably be expected to have a market value that approximates its
amortized cost. A floating rate security, the principal amount of which must
unconditionally be paid in 397 calendar days or less is deemed to have a
maturity of one day. A floating rate security, the principal amount of which
is scheduled to be paid in more than 397 calendar days, that is

<PAGE>

subject to a Demand Feature is deemed to have a maturity equal to the period
remaining until the principal amount can be recovered through demand. A
government security that is a floating rate security is deemed to have a
remaining maturity of one day.

. 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.

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.

Money Market Securities

The money market securities that the Funds may invest in are generally
limited to those described below.

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

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

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

. Short-Term Corporate Debt Securities Outstanding nonconvertible corporate
debt securities (e.g., bonds and debentures) which have one year or less
remaining to maturity. Corporate notes may have fixed, variable, or floating
rates.

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

<PAGE>

. Foreign Government Securities Issued or guaranteed by a foreign government,
province, instrumentality, political subdivision, or similar unit thereof.
However, the Cash Reserves Fund will only purchase these securities if they
are payable in U.S. dollars.

. 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.

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

. First Tier Money Market Securities Defined At least 95% of the Cash Reserves
Fund's total assets will be maintained in first tier money market securities.
First tier 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 pursuant to written guidelines established in accordance
with Rule 2a-7 under the 1940 Act under the supervision of the Fund's Board
of Directors.

Asset-Backed Securities

Each fund may invest a portion of its assets in debt obligations known as
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.

<PAGE>

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

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,

<PAGE>

although most Automobile Contracts grant a security interest in the motor
vehicle being financed, in most states the security interest in a motor
vehicle must be noted on the certificate of title to create an enforceable
security interest against competing claims of other parties. Due to the large
number of vehicles involved, however, the certificate of title to each
vehicle financed, pursuant to the Automobile Contracts underlying the
Automobile Receivable Security, usually is not amended to reflect the
assignment of the seller's security interest for the benefit of the holders
of the Automobile Receivable Securities. Therefore, there is the possibility
that recoveries on repossessed collateral may not, in some cases, be
available to support payments on the securities. In addition, various state
and federal securities laws give the motor vehicle owner the right to assert
against the holder of the owner's Automobile Contract certain defenses such
owner would have against the seller of the motor vehicle. The assertion of
such defenses could reduce payments on the Automobile Receivable Securities.

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

Illiquid or Restricted Securities

Restricted securities may be sold only in privately negotiated transactions
or in a public offering with respect to which a registration statement is in
effect under the Securities Act of 1933 (the "1933 Act"). Where registration
is required, the Fund may be obligated to pay all or part of the registration
expenses, and a considerable period may elapse between the time of the
decision to sell and the time the Fund may be permitted to sell a security
under an effective registration statement. If, during such a period, adverse
market conditions were to develop, the Fund might obtain a less favorable
price than prevailed when it decided to sell. Restricted securities will be
priced at fair value as determined in accordance with procedures prescribed
by the Fund's Board of Directors. If, through the appreciation of illiquid
securities or the depreciation of liquid securities, the Fund should be in a
position where more than 15% (10% for Cash Reserves) of the value of its net
assets is invested in illiquid assets, including restricted securities, the
Fund will take appropriate steps to protect liquidity.

<PAGE>

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, 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 Cash Reserves) 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 Cash Reserves) of its net assets
in illiquid securities. Investing in Rule 144A securities could have the
effect of increasing the amount of the Fund's assets invested in illiquid
securities if qualified institutional buyers are unwilling to purchase such
securities.

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.

Mortgage-Related Securities

Limited-Term Bond and GNMA Funds

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

. Mortgage-Backed Securities Mortgage-backed securities are securities
representing an interest in a pool of mortgages. The mortgages may be of a
variety of types, including adjustable rate, conventional 30-year fixed rate,
graduated payment, and 15-year. Principal and interest payments made on the
mortgages in the underlying mortgage pool are passed through to the Fund.
This is in contrast to traditional bonds where principal is normally paid
back at maturity in a lump sum. Unscheduled prepayments of principal shorten
the securities' weighted average life and may lower their total return. (When
a mortgage in the underlying mortgage pool is prepaid, an unscheduled
principal prepayment is passed through to the Fund. This principal is
returned to the Fund at par. As a result, if a mortgage security were trading
at a premium, its total return would be lowered by prepayments, and if a
mortgage security were trading at a discount, its total return would be
increased by prepayments.) The value of these securities also may change
because of changes in the market's perception of the creditworthiness of the
federal agency that issued them. In addition, the mortgage securities market
in general may be adversely affected by changes in governmental regulation or
tax policies.

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

<PAGE>

issues mortgage-backed securities (FHLMC Gold PCS) which also guarantee
timely payment of monthly principal reductions.

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

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

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

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

As discussed above, prepayments on the underlying mortgages and their effect
upon the rate of return of a mortgage-backed security, is the principal
investment risk for a purchaser of such securities, like the Fund. Over time,
any pool of mortgages will experience prepayments due to a variety of
factors, including (1) sales of the underlying homes (including
foreclosures), (2) refinancings of the underlying mortgages, and (3)
increased amortization by the mortgagee. These factors, in turn, depend upon
general economic factors, such as level of interest rates and economic
growth. Thus, investors normally expect prepayment rates to increase during
periods of strong economic growth or declining interest rates, and to
decrease in recessions and rising interest rate environments. Accordingly,
the life of the mortgage-backed security is likely to be substantially
shorter than the stated maturity of the mortgages in the underlying pool.
Because of such variation in prepayment rates, it is not possible to predict
the life of a particular mortgage-backed security, but FHA statistics
indicate that 25- to 30-year single family dwelling mortgages have an average
life of approximately 12 years. The majority of Ginnie Mae Certificates are
backed by mortgages of this type, and, accordingly, the generally accepted
practice treats Ginnie Mae Certificates as 30-year securities which prepay in
full in the 12th year. FNMA and Freddie Mac Certificates may have differing
prepayment characteristics.

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

<PAGE>

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

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

. Collateralized Mortgage Obligations (CMOs) CMOs are bonds that are
collateralized by whole loan mortgages or mortgage pass-through securities.
The bonds issued in a CMO deal are divided into groups, and each group of
bonds is referred to as a "tranche." Under the traditional CMO structure, the
cash flows generated by the mortgages or mortgage pass-through securities in
the collateral pool are used to first pay interest and then pay principal to
the CMO bondholders. The bonds issued under a CMO structure are retired
sequentially as opposed to the pro-rata return of principal found in
traditional pass-through obligations. Subject to the various provisions of
individual CMO issues, the cash flow generated by the underlying collateral
(to the extent it exceeds the amount required to pay the stated interest) is
used to retire the bonds. Under the CMO structure, the repayment of principal
among the different tranches is prioritized in accordance with the terms of
the particular CMO issuance. The "fastest-pay" tranche of bonds, as specified
in the prospectus for the issuance, would initially receive all principal
payments. When that tranche of bonds is retired, the next tranche, or
tranches, in the sequence, as specified in the prospectus, receive all of the
principal payments until they are retired. The sequential retirement of bond
groups continues until the last tranche, or group of bonds, is retired.
Accordingly, the CMO structure allows the issuer to use cash flows of long
maturity, monthly-pay collateral to formulate securities with short,
intermediate and long final maturities and expected average lives.

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

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

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

. Multi-Class Residential Mortgage Securities Such securities represent
interests in pools of mortgage loans to residential home buyers made by
commercial banks, savings and loan associations or other financial
institutions. Unlike GNMA, FNMA and FHLMC securities, the payment of
principal and interest on Multi-Class Residential Mortgage Securities is not
guaranteed by the U.S. government or any of its agencies. Accordingly, yields
on Multi-Class Residential Mortgage Securities have been historically higher
than the yields on U.S. government mortgage securities. However, the risk of
loss due to default on such instruments is higher since they are not
guaranteed by the U.S. government or its agencies. Additionally, pools of
such

<PAGE>

securities may be divided into senior or subordinated segments. Although
subordinated mortgage securities may have a higher yield than senior mortgage
securities, the risk of loss of principal is greater because losses on the
underlying mortgage loans must be borne by persons holding subordinated
securities before those holding senior mortgage securities.

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

. Stripped Mortgage-Backed Securities These instruments are a type of
potentially high-risk derivative. They represent interests in a pool of
mortgages, the cash flow of which has been separated into its interest and
principal components. "IOs" (interest only securities) receive the interest
portion of the cash flow while "POs" (principal only securities) receive the
principal portion. IOs and POs are usually structured as tranches of a CMO.
Stripped Mortgage-Backed Securities may be issued by U.S. government agencies
or by private issuers similar to those described above with respect to CMOs
and privately issued mortgage-backed certificates. As interest rates rise and
fall, the value of IOs tends to move in the same direction as interest rates.
The value of the other mortgage-backed securities described herein, like
other debt instruments, will tend to move in the opposite direction compared
to interest rates. Under the Code, POs may generate taxable income from the
current accrual of original issue discount, without a corresponding
distribution of cash to the Fund.

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

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

. Adjustable Rate Mortgage Securities ARMs, 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

<PAGE>

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

. Characteristics of Adjustable Rate Mortgage Securities The interest rates
paid on the mortgages underlying ARM securities are reset at regular
intervals by adding an interest rate margin to a specified interest rate
index. There are three main categories of indices: those based on U.S.
Treasury securities such as the constant maturity treasury rate (CMT); those
derived from a calculated measure such as a cost of funds index (COFI) or a
moving average of mortgage rates; and those based on certain actively traded
or prominent short-term rates such as the LIBOR. Some indices, such as the
one-year constant maturity Treasury rate, closely mirror changes in interest
rate levels. Others, such as COFI, tend to lag behind changes in market rate
levels but reset monthly, thus tending to be somewhat less volatile. Such a
delay in adjusting to changes in interest rates may cause securities owned by
the fund to increase or decrease in value, particularly during periods
between interest adjustment dates.

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

Mortgage securities generally have a maximum maturity of up to 30 years.
However due to the adjustable rate feature of ARM securities, their prices
are considered to have volatility characteristics which approximate the
average period of time until the next adjustment of the interest rate. As a
result, the principal volatility of ARM securities may be more comparable to
short- and intermediate-term securities than to longer term fixed rate
mortgage securities. Prepayments however, will increase their principal
volatility. See also the discussion of Mortgage-Backed Securities.

. 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.

Limited-Term Bond and GNMA 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,

<PAGE>

including, but not limited to, debt instruments with interest or principal
payments or redemption terms determined by reference to the value of a
currency or commodity or securities index at a future point in time,
preferred stock with dividend rates determined by reference to the value of a
currency, or convertible securities with the conversion terms related to a
particular commodity.

Hybrid Instruments can be an efficient means of creating exposure to a
particular market, or segment of a market, with the objective of enhancing
total return. For example, a Fund may wish to take advantage of expected
declines in interest rates in several European countries, but avoid the
transaction costs associated with buying and currency-hedging the foreign
bond positions. One solution would be to purchase a U.S. dollar-denominated
Hybrid Instrument whose redemption price is linked to the average three-year
interest rate in a designated group of countries. The redemption price
formula would provide for payoffs of greater than par if the average interest
rate was lower than a specified level, and payoffs of less than par if rates
were above the specified level. Furthermore, the Fund could limit the
downside risk of the security by establishing a minimum redemption price so
that the principal paid at maturity could not be below a predetermined
minimum level if interest rates were to rise significantly. The purpose of
this arrangement, known as a structured security with an embedded put option,
would be to give the Fund the desired European bond exposure while avoiding
currency risk, limiting downside market risk, and lowering transactions
costs. Of course, there is no guarantee that the strategy will be successful,
and the Fund could lose money if, for example, interest rates do not move as
anticipated or credit problems develop with the issuer of the Hybrid.

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

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

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

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

<PAGE>

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 Summit Municipal Funds

Types of Securities

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

Municipal Securities

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

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

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

Municipal Notes

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

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

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

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

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

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

. General Obligation Bonds Issuers of general obligation bonds include states,
counties, cities, towns, and special districts. The proceeds of these
obligations are used to Fund a wide range of public projects, including
construction or improvement of schools, public buildings, highways and roads,
and general projects not supported by user fees or specifically identified
revenues. The basic security behind general obligation bonds

<PAGE>

is the issuer's pledge of its full faith and credit and taxing power for the
payment of principal and interest. The taxes that can be levied for the
payment of debt service may be limited or unlimited as to the rate or amount
of special assessments. In many cases voter approval is required before an
issuer may sell this type of bond.

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

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

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

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

. Pre-refunded/Escrowed to Maturity Bonds Certain municipal bonds have been
refunded with a later bond issue from the same issuer. The proceeds from the
later issue are used to defease the original issue. In many cases the
original issue cannot be redeemed or repaid until the first call date or
original maturity date. In these cases, the refunding bond proceeds typically
are used to buy U.S. Treasury securities that are held in an escrow account
until the original call date or maturity date. The original bonds then become
"pre-refunded" or "escrowed to maturity" and are considered as high-quality
investments. While still tax-exempt, the security is the proceeds of the
escrow account. To the extent permitted by the SEC and the Internal Revenue
Service, a Fund's investment in such securities refunded with U.S. Treasury
securities will, for purposes of diversification rules applicable to the
Fund, be considered as an investment in the U. S. Treasury securities.

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

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

. Industrial Development Bonds Industrial development bonds are considered
Municipal Bonds if the interest paid is exempt from federal income tax. They
are issued by or on behalf of public authorities to raise money to finance
various privately operated facilities for business and manufacturing,
housing, sports, and pollution control. These bonds are also used to finance
public facilities such as airports, mass transit systems, ports, and parking.
The payment of the principal and interest on such bonds is dependent solely
on the ability of the

<PAGE>

facility's user to meet its financial obligations and the pledge, if any, of
real and personal property so financed as security for such payment.

Adjustable Rate Securities

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

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

<PAGE>

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

When-Issued Securities

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

Investment in Taxable Money Market Securities

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

<PAGE>

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

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

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

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

Intermediate and Income Funds

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

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

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

An embedded interest rate cap allows the bondholder to receive payments
whenever short-term rates rise above a level established at the time of
purchase. They normally are used to hedge against rising short-term interest
rates. Both instruments may be volatile and of limited liquidity, and their
use may adversely affect the Fund's total return. Each Fund will not invest
more than 5% of its total assets in these instruments.

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

For the purpose of the Funds' investment restrictions, the identification of
the "issuer" of municipal securities which are not general obligation bonds
is made by the Funds' investment manager, T. Rowe Price, on the basis of the
characteristics of the obligation as described above, the most significant of
which is the source of Funds for the payment of principal and interest on
such securities.

<PAGE>

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.

Intermediate and Income Funds

Forwards

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

PORTFOLIO MANAGEMENT PRACTICES
-------------------------------------------------------------------------------
All Funds

Lending of Portfolio Securities

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

Interfund Borrowing and Lending

The Fund is a party to an exemptive order received from the SEC on December
8, 1998, that permits it to borrow money from and/or lend money to other
funds in the T. Rowe Price complex ("Price Funds"). All loans are set at an
interest rate between the rate charged on overnight repurchase agreements and
short-term bank loans. All loans are subject to numerous conditions designed
to ensure fair and equitable treatment of all participating funds. The
program is subject to the oversight and periodic review of the Boards of
Directors of the Price Funds.

Repurchase Agreements

Each Fund may enter into repurchase agreements through which investors (such
as the Fund) purchases a security (the "underlying security") from a
well-established securities dealer or a bank which 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. Each

<PAGE>

Fund will only enter into repurchase agreements where (i) (A) Cash Reserves
-------------
Fund--the underlying securities are either U.S. government securities or
----
securities that, at the time the repurchase agreement is entered into, are
rated in the highest rating category by the requisite number of NRSROs (as
required by Rule 2a-7 under the 1940 Act) and otherwise are of the type
(excluding maturity limitations) which the Fund's investment guidelines would
allow it to purchase directly (however, the underlying securities will either
be U.S. government securities or securities which, at the time the repurchase
agreement is entered into, are rated in the highest rating category by public
rating agencies), (B) Limited-Term and GNMA Funds--the underlying securities
---------------------------
are of the type (excluding maturity limitations) which each Fund's investment
guidelines would allow it to purchase directly, (ii) the market value of the
underlying security, including interest accrued, will be at all times equal
to or exceed the value of the repurchase agreement, and (iii) payment for the
underlying security is made only upon physical delivery or evidence of
book-entry transfer to the account of the custodian or a bank acting as
agent. In the event of a bankruptcy or other default of a seller of a
repurchase agreement, a Fund could experience both delays in liquidating the
underlying security and losses, including: (a) possible decline in the value
of the underlying security during the period while the Fund seeks to enforce
its rights thereto; (b) possible subnormal levels of income and lack of
access to income during this period; and (c) expenses of enforcing its
rights.

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.")

Limited-Term Bond and GNMA Funds

Money Market Reserves

It is expected that the Fund will invest its cash reserves primarily in one
or more money market funds established for the exclusive use of the T. Rowe
Price family of mutual funds and other clients of T. Rowe Price and
Price-Fleming. Currently, two such money market funds are in
operation-Reserve Investment Fund ("RIF") and Government Reserve Investment
Fund ("GRF"), each a series of the Reserve Investment Funds, Inc. Additional
series may be created in the future. These funds were created and operate
under an Exemptive Order issued by the SEC (Investment Company Act Release
No. IC-22770, July 29, 1997).

Both funds must comply with the requirements of Rule 2a-7 under the 1940 Act
governing money market funds. The RIF invests at least 95% of its total
assets in prime money market instruments receiving the highest credit rating.
The GRF invests primarily in a portfolio of U.S. government-backed
securities, primarily U.S. Treasuries, and repurchase agreements thereon.

The RIF and GRF provide a very efficient means of managing the cash reserves
of the Fund. While neither RIF or GRF pay an advisory fee to the Investment
Manager, they will incur other expenses. However, the RIF and GRF are
expected by T. Rowe Price to operate at very low expense ratios. The Fund
will only invest in RIF or GRF to the extent it is consistent with its
objective and program.

Neither fund is insured or guaranteed by the U.S. government, and there is no
assurance they will maintain a stable net asset value of $1.00 per share.

<PAGE>

Options

Options are a type of potentially high-risk derivative.

Limited-Term Bond and GNMA Funds

Writing Covered Call Options

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

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

The Fund will write only covered call options. This means that the Fund will
own the security or currency subject to the option or an option to purchase
the same underlying security or currency, having an exercise price equal to
or less than the exercise price of the "covered" option, or will establish
and maintain with its custodian for the term of the option, an account
consisting of cash, U.S. government securities, other liquid high-grade debt
obligations, or other suitable cover as permitted by the SEC having a value
equal to the fluctuating market value of the optioned securities or
currencies.

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

The premium received is the market value of an option. The premium the Fund
will receive from writing a call option will reflect, among other things, the
current market price of the underlying security or currency, 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

<PAGE>

market value, which will be the latest sale price at the time at which the
net asset value per share of the Fund is computed (close of the New York
Stock Exchange), or, in the absence of such sale, the latest asked price. The
option will be terminated upon expiration of the option, the purchase of an
identical option in a closing transaction, or delivery of the underlying
security or currency upon the exercise of the option.

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

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

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

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

Writing Covered Put Options

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

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

<PAGE>

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

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

Purchasing Put Options

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

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

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

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

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

<PAGE>

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

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

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

Dealer (Over-the-Counter) Options

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

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

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

<PAGE>

Intermediate and Income Funds

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

Interest Rate Transactions

Limited-Term Bond and GNMA Funds

The Funds may enter into various interest rate transactions such as interest
rate swaps and the purchase or sale of interest rate caps and floors, to
preserve a return or spread on a particular investment or portion of its
portfolio, to create synthetic securities, or to structure transactions
designed for other non-speculative purposes.

Interest rate swaps involve the exchange by the Funds with third parties of
its respective commitments to pay or receive interest, e.g., an exchange of
floating rate payments for fixed rate payments. The purchase of an interest
rate cap entitles the purchaser, to the extent that a specified index exceeds
a predetermined interest rate, to receive payments of interest on a
contractually based principal amount from the party selling the interest rate
cap. The purchase of an interest rate floor entitles the purchaser, to the
extent that a specified index falls below a predetermined interest rate, to
receive payments of interest on a contractually based principal amount from
the party selling the interest rate floor. In circumstances in which T. Rowe
Price anticipates that interest rates will decline, the Funds might, for
example, enter into an interest rate swap as the floating rate payor. In the
case where the Funds purchase such an interest rate swap, if the floating
rate payments fell below the level of the fixed rate payment set in the swap
agreement, the Funds counterparties would pay the Funds' amounts equal to
interest computed at the difference between the fixed and floating rates over
the national principal amount. Such payments would offset or partially offset
the decrease in the payments the Funds would receive in respect of floating
rate assets being hedged. In the case of purchasing an interest rate floor,
if interest rates declined below the floor rate, the Funds would receive
payments from the counterparties which would wholly or partially offset the
decrease in the payments they would receive in respect of the financial
instruments being hedged.

The Funds will usually enter into interest rate swaps on a net basis, i.e.,
the two payment streams are netted out, with the Funds receiving or paying,
as the case may be, only the net amount of the two payments. The net amount
of the excess, if any, of the Funds' obligations over its entitlements with
respect to each interest rate swap will be accrued on a daily basis and an
amount of cash or high-quality liquid securities having an aggregate net
asset value at least equal to the accrued excess will be maintained in an
account by the Funds' custodian. If the Funds enter into an interest rate
swap on other than a net basis, the Funds would maintain an account in the
full amount accrued on a daily basis of the Funds' obligations with respect
to the swap. To the extent the Funds sells (i.e., writes) caps and floors, it
will maintain in an account cash or high-quality liquid debt securities
having an aggregate net asset value at least equal to the full amount,
accrued on a daily basis, of the Funds' obligations with respect to any caps
or floors. The Funds will not enter into any interest rate swap, cap or floor
transaction unless the unsecured senior debt or the claims paying ability of
the counterparty thereto is rated at least A by S&P. T. Rowe Price will
monitor the creditworthiness of counterparties on an ongoing basis. If there
is a default by the other parties to such a transaction, the Fund will have
contractual remedies pursuant to the agreements related to the transaction.

The swap market has grown substantially in recent years with a large number
of banks and investment banking firms acting both as principals and as agents
utilizing standardized swap documentation. T. Rowe Price has determined that,
as a result, the swap market has become relative liquid. The Funds may enter
into interest rate swaps only with respect to positions held in its
portfolio. Interest rate swaps do not involve the delivery of securities or
other underlying assets or principal. Accordingly, the risk of loss with
respect to interest rate swaps is limited to the net amount of interest
payments that the Funds are contractually obligated to make. If the other
parties to interest rate swaps default, the Funds' risk of loss consists of
the net amount of interest payments that the Funds are contractually entitled
to receive. Since interest rate swaps are individually negotiated, the Funds
expects to achieve an acceptable degree of correlation between its right to
receive

<PAGE>

interest on loan interests and its right and obligation to receive and pay
interest pursuant to interest rate swaps.

The aggregate purchase price of caps and floor held by the Funds may not
exceed 10% of the Funds' total assets. The Funds may sell (i.e., write) caps
and floors without limitation, subject to the account coverage requirement
described above.

Futures Contracts

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

Transactions in Futures

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

Limited-Term Bond and GNMA Funds

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.

Intermediate and Income Funds

The Fund may enter into futures contracts. Interest rate futures contracts
may be used as a hedge against changes in prevailing levels of interest rates
in order to establish more definitely the effective return on securities held
or intended to be acquired by the Fund. The Fund could sell interest rate
futures as an offset against the effect of expected increases in interest
rates and purchase such futures as an offset against the effect of expected
declines in interest rates. Futures can also be used as an efficient means of
regulating a Fund's exposure to the market.

The Fund will enter into futures contracts which are traded on national
futures exchanges and are standardized as to maturity date and underlying
financial instrument. A public market exists in futures contracts covering
various taxable fixed income securities as well as municipal bonds. 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.

All Funds (other than the Money Funds)

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

<PAGE>

Board of Directors without a shareholder vote and does not limit the
percentage of the Fund's assets at risk to 5%.

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

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

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

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

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

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

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

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

<PAGE>

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.

Intermediate and Income Funds

It is possible that the Fund's hedging activities will occur primarily
through the use of municipal bond index futures contracts since the
uniqueness of that index contract should better correlate with the Fund's
portfolio and thereby be more effective. However, there may be times when it
is deemed in the best interest of shareholders to engage in the use of
Treasury bond futures, and the Fund reserves the right to use Treasury bond
futures at any time. Use of these futures could occur, as an example, when
both the Treasury bond contract and municipal bond index futures contract are
correlating well with municipal bond prices, but the Treasury bond contract
is trading at a more advantageous price making the hedge less expensive with
the Treasury bond contract than would be obtained with the municipal bond
index futures contract. The Fund's activity in futures contracts generally
will be limited to municipal bond index futures contracts and Treasury bond
and note contracts.

All Funds (other than the Money Funds)

Special Risks of Transactions in Futures Contracts

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

Most United States futures exchanges limit the amount of fluctuation
permitted in futures contract prices during a single trading day. The daily
limit establishes the maximum amount that the price of a futures contract may
vary either up or down from the previous day's settlement price at the end of
a trading session. Once the daily limit has been reached in a particular type
of futures contract, no trades may be made on that day at a price beyond that
limit. The daily limit governs only price movement during a particular
trading day and therefore does not limit potential losses, because the limit
may prevent the liquidation of unfavorable positions. Futures contract prices
have occasionally moved to the daily limit for several consecutive trading
days with little or no trading, thereby preventing prompt liquidation of
futures positions and subjecting some futures traders to substantial losses.

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

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

Futures contracts may be closed out only on the exchange or board of trade
where the contracts were initially traded. Although the Fund intends to
purchase or sell futures contracts only on exchanges or boards of trade where
there appears to be an active market, there is no assurance that a liquid
market on an exchange or board of trade will exist for any particular
contract at any particular time. In such event, it might not be possible to
close a futures contract, and in the event of adverse price movements, the
Fund would continue to be required to make daily cash payments of variation
margin. However, in the event futures contracts have been used to hedge the
underlying instruments, the Fund would continue to hold the underlying
instruments

<PAGE>

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.

Limited-Term Bond and GNMA Funds

Options on Futures Contracts

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

<PAGE>

option to the holder of the option will be accompanied by the delivery of the
accumulated balance in the writer's futures margin account which represents
the amount by which the market price of the futures contract, at exercise,
exceeds (in the case of a call) or is less than (in the case of a put) the
exercise price of the option on the futures contract. Purchasers of options
who fail to exercise their options prior to the exercise date suffer a loss
of the premium paid.

As an alternative to writing or purchasing call and put options on stock
index futures, the Fund may write or purchase call and put options on
financial indices. Such options would be used in a manner similar to the use
of options on futures contracts. From time to time, a single order to
purchase or sell futures contracts (or options thereon) may be made on behalf
of the Fund and other T. Rowe Price Funds. Such aggregated orders would be
allocated among the Funds and the other T. Rowe Price Funds in a fair and
nondiscriminatory manner.

Intermediate and Income Funds

Options on Futures Contracts

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

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

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

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

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

<PAGE>

All Funds (other than the Money Funds)

Special Risks of Transactions in Options on Futures Contracts

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

In the event no such market exists for a particular contract in which the
Fund maintains a position, in the case of a written option, the Fund would
have to wait to sell the underlying securities or futures positions until the
option expires or is exercised. The Fund would be required to maintain margin
deposits on payments until the contract is closed. Options on futures are
treated for accounting purposes in the same way as the analogous option on
securities are treated.

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

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

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

<PAGE>

Additional Futures and Options Contracts

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

Limited-Term Bond Fund

Foreign Futures and Options

Participation in foreign futures and foreign options transactions involves
the execution and clearing of trades on or subject to the rules of a foreign
board of trade. Neither the National Futures Association nor any domestic
exchange regulates activities of any foreign boards of trade, including the
execution, delivery and clearing of transactions, or has the power to compel
enforcement of the rules of a foreign board of trade or any applicable
foreign law. This is true even if the exchange is formally linked to a
domestic market so that a position taken on the market may be liquidated by a
transaction on another market. Moreover, such laws or regulations will vary
depending on the foreign country in which the foreign futures or foreign
options transaction occurs. For these reasons, when the Fund trades foreign
futures or foreign options contracts, it may not be afforded certain of the
protective measures provided by the Commodity Exchange Act, the CFTC's
regulations and the rules of the National Futures Association and any
domestic exchange, including the right to use reparations proceedings before
the CFTC and arbitration proceedings provided by the National Futures
Association or any domestic futures exchange. In particular, funds received
from the Fund for foreign futures or foreign options transactions may not be
provided the same protections as funds received in respect of transactions on
United States futures exchanges. In addition, the price of any foreign
futures or foreign options contract and, therefore, the potential profit and
loss thereon may be affected by any variance in the foreign exchange rate
between the time the Fund's order is placed and the time it is liquidated,
offset or exercised.

Foreign Currency Transactions

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

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

First, when the Fund enters into a contract for the purchase or sale of a
security denominated in a foreign currency, it may desire to "lock in" the
U.S. dollar price of the security. By entering into a forward contract for
the purchase or sale, for a fixed amount of dollars, of the amount of foreign
currency involved in the underlying security transactions, the Fund will be
able to protect itself against a possible loss resulting from an adverse
change in the relationship between the U.S. dollar and the subject foreign
currency during the period between the date the security is purchased or sold
and the date on which payment is made or received.

Second, when T. Rowe Price believes that one currency may experience a
substantial movement against another currency, including the U.S. dollar, it
may enter into a forward contract to sell or buy the amount of the former
foreign currency, approximating the value of some or all of the Fund's
portfolio securities denominated in such foreign currency. Alternatively,
where appropriate, the Fund may hedge all or part of its foreign currency
exposure through the use of a basket of currencies or a proxy currency where
such currency or currencies act as an effective proxy for other currencies.
In such a case, the Fund may enter into a forward contract where the amount
of the foreign currency to be sold exceeds the value of the securities
denominated in such currency. The use of this basket hedging technique may be
more efficient and economical than entering into separate forward contracts
for each currency held in the Fund. The precise matching of the forward
contract amounts and the value of the securities involved will not generally
be possible since the future value of such securities in foreign currencies
will change as a consequence of market movements in the

<PAGE>

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 investors should be aware
of the costs of currency conversion. Although foreign exchange dealers do not
charge a fee for conversion, they do realize a profit based on the difference
(the "spread") between the prices at which they are buying and selling
various currencies. Thus, a dealer may offer to sell a foreign currency to
the Fund at one rate, while offering a lesser rate of exchange should the
Fund desire to resell that currency to the dealer.

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

Limited-Term Bond and GNMA Funds

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

<PAGE>

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.

Intermediate and Income Funds

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

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

<PAGE>

All Funds

INVESTMENT RESTRICTIONS
-------------------------------------------------------------------------------
Fundamental policies may not be changed without the approval of the lesser of
(1) 67% of the Fund's shares present at a meeting of shareholders if the
holders of more than 50% of the outstanding shares are present in person or
by proxy or (2) more than 50% of a Fund's outstanding shares. Other
restrictions in the form of operating policies are subject to change by the
Fund's Board of Directors without shareholder approval. Any investment
restriction which involves a maximum percentage of securities or assets shall
not be considered to be violated unless an excess over the percentage occurs
immediately after, and is caused by, an acquisition of securities or assets
of, or borrowings by, the Fund. Calculation of the Fund's total assets for
compliance with any of the following fundamental or operating policies or any
other investment restrictions set forth in the Fund's prospectus or Statement
of Additional Information will not include cash collateral held in connection
with securities lending activities.

Fundamental Policies

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

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

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

(3) Industry Concentration Purchase the securities of any issuer if, as a
result, more than 25% of the value of the Fund's total assets would be
invested in the securities of issuers having their principal business
activities in the same industry provided that for the Cash Reserves Fund
this policy does not apply to securities of the banking industry
including, but not limited to, certificates of deposit and bankers'
acceptances;

(4) Loans Make loans, although 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;

<PAGE>

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

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

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

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

(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; or

All Summit Municipal Funds

(10) Equity Securities Purchase equity securities, or securities convertible
into equity securities.

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 Cash Reserves and the
Municipal Money Market 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.

All Summit Municipal Funds

For purposes of investment restriction (5), the Fund will treat bonds
which are refunded with escrowed U.S. government securities as U.S.
government securities.

All Funds

Operating Policies

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

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

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

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

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

<PAGE>

(5) 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 Money Funds, only securities of other
money market funds;

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

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

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

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

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

(11) Warrants Invest in warrants if, as a result thereof, more than 10% (for
the Summit Income Funds) or 2% (for the Summit Municipal Funds) of the
value of the net assets of the Fund would be invested in warrants.

NOTES

With respect to investment restriction (5), the Funds have no current
intention of purchasing the securities of other investment companies.
Duplicate fees could result from any such purchases.

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

<PAGE>

All Funds

Independent Directors

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

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

F. PIERCE LINAWEAVER, 8/22/34, President, F. Pierce Linaweaver & Associates,
Inc.; Consulting Environmental & Civil Engineer(s); formerly 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, 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

Inside Directors/Officers

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

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

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

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

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

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

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

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

All Summit Income Funds

EDWARD A. WIESE, 4/12/59, President -Vice President, T. Rowe Price,
Price-Fleming, and T. Rowe Price Trust Company

CONNICE A. BAVELY, 3/5/51, Executive 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

<PAGE>

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

DEBORAH L. BOYER, 1/2/68, Vice President -Assistant Vice President, T. Rowe
Price; formerly Assistant Vice President and Government Bond Trader for First
Chicago NBD Corporation

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

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 Price-Fleming

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

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

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

HEATHER R. LANDON, 7/8/54, Vice President -Vice President, T. Rowe Price and
T. Rowe Price Trust Company

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

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

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

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

GWENDOLYN G. WAGNER, 4/12/57, Vice President -Vice President and Economist,
T. Rowe Price; Chartered Financial Analyst

All Summit Municipal Funds

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

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

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

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

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

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

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

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

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

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

<PAGE>

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

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

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

Compensation Table

The Funds do not pay pension or retirement benefits to their officers or
directors. Also, any director of a Fund who is an officer or employee of T.
Rowe Price or Price-Fleming does not receive any remuneration from the Fund.

<TABLE>
<CAPTION>
Name of Person, Aggregate Compensation from Fund(a) Total Compensation from Fund and
Position ------- Fund Complex Paid to Directors(b)
- -------------------------------------- ---------------------------------
------------------------------------
<S> <C> <C>
Cash Reserves Fund
$
Robert P. Black, Director 1,486 $65,000
Calvin W. Burnett, Ph.D., Director 3,050 65,000
Anthony W. Deering, Director 1,871 81,000
F. Pierce Linaweaver, Director 3,050 66,000
John G. Schreiber, Director 3,050 65,000
- -------------------------------------------------------------------------------------------------------------------------
Limited-Term Bond Fund
Robert P. Black, Director $600 $65,000
Calvin W. Burnett, Ph.D., Director 1,169 65,000
Anthony W. Deering, Director 1,145 81,000
F. Pierce Linaweaver, Director 1,169 66,000
John G. Schreiber, Director 1,169 65,000
- -------------------------------------------------------------------------------------------------------------------------
GNMA Fund
Robert P. Black, Director $602 $65,000
Calvin W. Burnett, Ph.D., Director 1,174 65,000
Anthony W. Deering, Director 1,144 81,000
F. Pierce Linaweaver, Director 1,174 66,000
John G. Schreiber, Director 1,174 65,000
- -------------------------------------------------------------------------------------------------------------------------
Municipal Money Market Fund
Robert P. Black, Director $708 $65,000
Calvin W. Burnett, Ph.D., Director 1,324 65,000
Anthony W. Deering, Director 1,210 81,000
F. Pierce Linaweaver, Director 1,324 66,000
John G. Schreiber, Director 1,324 65,000
- -------------------------------------------------------------------------------------------------------------------------
Municipal Intermediate-Term Fund
Robert P. Black, Director $624 $65,000
Calvin W. Burnett, Ph.D., Director 1,206 65,000
Anthony W. Deering, Director 1,157 81,000
F. Pierce Linaweaver, Director 1,206 66,000
John G. Schreiber, Director 1,206 65,000
- -------------------------------------------------------------------------------------------------------------------------
Municipal Income Fund
Robert P. Black, Director $609 $65,000
Calvin W. Burnett, Ph.D., Director 1,186 65,000
Anthony W. Deering, Director 1,149 81,000
F. Pierce Linaweaver, Director 1,186 66,000
John G. Schreiber, Director 1,186 65,000
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>

<PAGE>

(a) Amounts in this column are based on accrued compensation from November
1, 1997 to October 31, 1998.

(b) Amounts in this column are based on compensation received from January
1, 1998, to December 31, 1998. The T. Rowe Price complex included 87 funds
as of December 31, 1998.

All Funds

The Fund's Executive Committee, consisting of the Fund's interested
directors, has been authorized by its respective Board of Directors to
exercise all powers of the Board to manage the Funds in the intervals between
meetings of the Board, except the powers prohibited by statute from being
delegated.

PRINCIPAL HOLDERS OF SECURITIES
-------------------------------------------------------------------------------
As of the date of the prospectus, the officers and directors of the Fund, as
a group, owned less than 1% of the outstanding shares of the Fund.

As of January 29, 1999, no shareholder beneficially owned more than 5% of the
outstanding shares of the Fund.

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

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

<PAGE>

Management Fee
Each Fund pays T. Rowe Price an annual all-inclusive fee (the "Fee") as
follows:
<TABLE>
<CAPTION>
<S> <C>
Cash Reserves 0.45%
Limited-Term Bond 0.55
GNMA 0.60
Municipal Money Market 0.45
Municipal Intermediate 0.50
Municipal Income 0.50
</TABLE>

The Fee is paid monthly to T. Rowe Price on the first business day of the
next succeeding calendar month and is the sum of the Daily Fee accruals for
each month. The Daily 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 appropriate Fee and multiplying this product by the net assets of
the Fund for that day, as 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 Management Agreement between each Fund and T. Rowe Price provides that T.
Rowe Price will pay all expenses of each Fund's operations, except interest,
taxes, brokerage commissions, and other charges incident to the purchase,
sale or lending of the Fund's portfolio securities, directors' fees and
expenses (including counsel fees and expenses) and such non-recurring or
extraordinary expenses that may arise, including the costs of actions, suits
or proceedings to which the Fund is a party and the expenses the Fund may
incur as a result of its obligation to provide indemnification to its
officers, directors and agents. However, the Board of Directors for the Funds
reserves the right to impose additional fees against shareholder accounts to
defray expenses which would otherwise be paid by T. Rowe Price under the
management agreement. The Board does not anticipate levying such charges;
such a fee, if charged, may be retained by the Fund or paid to T. Rowe Price.

The following chart sets forth the total management fees, if any, paid to T.
Rowe Price by each Fund during the last three years:
<TABLE>
<CAPTION>
Fund 1998 1997 1996
---- ---- ---- ----
<S> <C> <C> <C>
Cash Reserves $5,366,000 $4,707,000 $2,670,000
Limited-Term Bond 10,000 149,000 144,000
GNMA 47,000 161,000 138,000
Municipal Money Market 485,000 520,000 379,000
Municipal Intermediate 127,000 185,000 127,000
Municipal Income 47,000 103,000 68,000
</TABLE>

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

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

Investment Services serves as distributor to the Fund pursuant to an
Underwriting Agreement ("Underwriting Agreement"), which provides that the
Fund will pay all fees and expenses in connection

<PAGE>

with: necessary state filings; preparing, setting in type, printing, and
mailing its prospectuses and reports to shareholders; and issuing its shares,
including expenses of confirming purchase orders.

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

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

CUSTODIAN
-------------------------------------------------------------------------------
State Street Bank and Trust Company is the custodian for the Fund's
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, or any central depository system allowed by federal law. In
addition, the Summit Municipal Funds are authorized to maintain certain of
its securities, in particular, variable rate demand note, in uncertificated
form, in the proprietary deposit systems of various dealers in municipal
securities. State Street Bank and the Limited-Term Fund have entered into a
Custodian Agreement with The Chase Manhattan Bank, N.A., London, pursuant to
which portfolio securities which are purchased outside the United States are
maintained in the custody of various foreign branches of The Chase Manhattan
Bank and such other custodians, including foreign banks and foreign
securities depositories as are approved by the Fund's Board of Directors in
accordance with regulations under the 1940 Act. The Bank's main office is at
225 Franklin Street, Boston, Massachusetts 02110. The address for The Chase
Manhattan Bank, N.A., London is Woolgate House, Coleman Street, London, EC2P
2HD, England.

All Funds

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

The Fund from time to time may enter into agreements with outside parties
through which shareholders hold Fund shares. The shares would be held by such
parties in omnibus accounts. The agreements would provide for payments by the
Fund to the outside party for shareholder services provided to shareholders
in the omnibus accounts.

CODE OF ETHICS
-------------------------------------------------------------------------------
The Fund's investment adviser (T. Rowe Price) has a written Code of Ethics
which requires all employees to obtain prior clearance before engaging in
personal securities transactions. In addition, all employees must report
their personal securities transactions within 10 days of their execution.
Employees will not be permitted to effect transactions in a security: if
there are pending client orders in the security; the security has been
purchased or sold by a client within seven calendar days; the security is
being considered for purchase for a

<PAGE>

client; or the security is subject to internal trading restrictions. In
addition, employees are prohibited from profiting from short-term trading
(e.g., purchases and sales involving the same security within 60 days). Any
material violation of the Code of Ethics is reported to the Board of the
Fund. The Board also reviews the administration of the Code of Ethics on an
annual basis.

PORTFOLIO TRANSACTIONS
-------------------------------------------------------------------------------
Investment or Brokerage Discretion
Decisions with respect to the purchase and sale of portfolio securities on
behalf of the Fund are made by 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. However, it is included because T. Rowe
Price does manage a significant number of common stock portfolios which do
engage in agency transactions and pay commissions and because some research
and services resulting from the payment of such commissions may benefit the
Fund.

How Brokers and Dealers Are Selected

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

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

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

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

Descriptions of Research Services Received From Brokers and Dealers

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

<PAGE>

academicians and government representatives. In some cases, research services
are generated by third parties but are provided to T. Rowe Price by or
through broker-dealers.

Research services received from brokers and dealers are supplemental to T.
Rowe Price's own research effort and, when utilized, are subject to internal
analysis before being incorporated by T. Rowe Price into its investment
process. As a practical matter, it would not be possible for T. Rowe Price's
Equity Research Division to generate all of the information presently
provided by brokers and dealers. T. Rowe Price pays cash for certain research
services received from external sources. T. Rowe Price also allocates
brokerage for research services which are available for cash. While receipt
of research services from brokerage firms has not reduced T. Rowe Price's
normal research activities, the expenses of T. Rowe Price could be materially
increased if it attempted to generate such additional information through its
own staff. To the extent that research services of value are provided by
brokers or dealers, T. Rowe Price may be relieved of expenses which it might
otherwise bear.

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

Commissions to Brokers Who Furnish Research Services

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

Internal Allocation Procedures

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

Each year, T. Rowe Price assesses the contribution of the brokerage and
research services provided by brokers or dealers, and attempts to allocate a
portion of its brokerage business in response to these assessments. Research
analysts, counselors, various investment committees, and the Trading
Department each seek to evaluate the brokerage and research services they
receive from brokers or dealers and make judgments as to the level of
business which would recognize such services. In addition, brokers or dealers
sometimes suggest a level of business they would like to receive in return
for the various brokerage and research services they provide. Actual
brokerage received by any firm may be less than the suggested allocations but
can, and often does, exceed the suggestions, because the total business is
allocated on the basis of all the considerations

<PAGE>

described above. In no case is a broker or dealer excluded from receiving
business from T. Rowe Price because it has not been identified as providing
research services.

Miscellaneous

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

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

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

Some of T. Rowe Price's other clients have investment objectives and programs
similar to those of the Fund. T. Rowe Price may occasionally make
recommendations to other clients which result in their purchasing or selling
securities simultaneously with the Fund. As a result, the demand for
securities being purchased or the 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.

Limited-Term Bond Fund

Transactions With Related Brokers and Dealers

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

<PAGE>

The Board of Directors of the Fund has authorized T. Rowe Price to utilize
certain affiliates of Robert Fleming and JFG in the capacity of broker in
connection with the execution of the Fund's portfolio transactions. Other
affiliates of Robert Fleming Holding and JFG also may be used. Although it
does not believe that the Fund's use of these brokers would be subject to
Section 17(e) of the 1940 Act, the Board of Directors of the Fund has agreed
that the procedures set forth in Rule 17e-1 under that Act will be followed
when using such brokers.

The above-referenced authorization was made in accordance with Section 17(e)
of the 1940 Act and Rule 17e-1 thereunder which require the Funds'
independent Directors to approve the procedures under which brokerage
allocation to affiliates is to be made and to monitor such allocations on a
continuing basis. It is not expected that any portion of the commissions,
fees, brokerage, or similar payments received by the affiliates of Robert
Fleming in such transactions will be recaptured by the Funds.

Other

The Funds engaged in portfolio transactions involving broker-dealers in the
following amounts for the fiscal years ended October 31, 1998, 1997, and 1996
are:
<TABLE>
<CAPTION>
Fund 1998 1997 1996
---- ---- ---- ----
<S> <C> <C> <C>
Cash Reserves $13,039,528,000 $10,202,905,000 $8,713,465,000
Limited-Term Bond 40,310,000 226,508,000 316,943,000
GNMA 76,167,000 194,894,000 132,397,000
Municipal Money Market 758,579,000 549,381,000 462,623,000
Municipal Intermediate 142,492,000 126,762,000 93,274,000
Municipal Income 176,797,000 61,353,000 45,122,000
</TABLE>

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 October 31, 1998, 1997, and 1996
are:
<TABLE>
<CAPTION>
Fund 1998 1997 1996
---- ---- ---- ----
<S> <C> <C> <C>
Cash Reserves $13,039,528,000 $10,202,905,000 $8,713,465,000
Limited-Term Bond 37,838,000 225,918,000 316,368,000
GNMA 76,167,000 194,894,000 132,397,000
Municipal Money Market 750,702,000 549,381,000 462,623,000
Municipal Intermediate 128,977,000 114,808,000 86,347,000
Municipal Income 142,293,000 50,664,000 37,486,000
</TABLE>

The following amounts involved trades with brokers acting as agents or
underwriters for the fiscal years ended October 31, 1998, 1997, and 1996 are:
<TABLE>
<CAPTION>
Fund 1998 1997 1996
---- ---- ---- ----
<S> <C> <C> <C>
Cash Reserves -- -- --
Limited-Term Bond $ 2,472,000 $ 590,000 $ 575,000
GNMA -- -- --
Municipal Money Market 7,877,000 -- --
Municipal Intermediate 13,515,000 11,954,000 6,927,000
Municipal Income 34,504,000 10,689,000 7,636,000
</TABLE>

<PAGE>

The following amounts 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 October 31, 1998, 1997, and 1996 are:
<TABLE>
<CAPTION>
Fund 1998 1997 1996
---- ---- ---- ----
<S> <C> <C> <C>
Cash Reserves -- -- --
Limited-Term Bond $ 12,000 $ 2,000 $ 3,000
GNMA -- -- --
Municipal Money Market -- -- --
Municipal Intermediate 87,000 29,000 40,000
Municipal Income 199,000 50,000 51,000
</TABLE>

The percentage of total portfolio transactions placed with firms which
provided research, statistical, or other services to T. Rowe Price in
connection with the management of the Fund, or in some cases, to the Fund for
the fiscal years ended October 31, 1998, 1997, and 1996 are:
<TABLE>
<CAPTION>
Fund 1998 1997 1996
---- ---- ---- ----
<S> <C> <C> <C>
Cash Reserves 87% 83% 95%
Limited-Term Bond 88 59 78
GNMA 98 65 84
Municipal Money Market -- -- --
Municipal Intermediate -- -- --
Municipal Income -- -- --
</TABLE>

The portfolio turnover rates for the Fund (if applicable) for the fiscal
years ended October 31, 1998, 1997, and 1996 were:
<TABLE>
<CAPTION>
Fund 1998 1997 1996
---- ---- ---- ----
<S> <C> <C> <C>
Limited-Term Bond 52.0% 74.5% 116.1%
GNMA 83.8 111.8 136.1
Municipal Intermediate 22.2 53.8 72.9
Municipal Income 48.1 35.7 56.7
</TABLE>

PRICING OF SECURITIES
-------------------------------------------------------------------------------
All Funds except Cash Reserves and Municipal Money Market Funds

Fixed income securities are generally traded in the over-the-counter market.
Investments in securities with remaining maturities of one year or more 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. Investments in mutual funds are valued at the closing net asset
value per share of the mutual fund on the day of valuation. (For the
Limited-Term and GNMA Funds) 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.

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

<PAGE>

Securities or other assets for which the above valuation procedures are
deemed not to reflect fair value will be appraised at prices deemed best to
reflect their fair value. Such determinations will be made in good faith by
or under the supervision of officers of each Fund as authorized by the Board
of Directors.

Limited-Term Bond Fund

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.

Cash Reserves and Municipal Money Market Funds
Securities are valued at amortized cost.

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:

(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.

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

<PAGE>

number of shares outstanding. The net asset value per share of the Fund is
normally calculated as of the close of trading on the New York Stock Exchange
("NYSE") every day the NYSE is open for trading. The NYSE is closed on the
following days: New Year's Day, Dr. Martin Luther King, Jr. Holiday,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day, and Christmas Day.

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

DIVIDENDS AND DISTRIBUTIONS
-------------------------------------------------------------------------------
Unless you elect otherwise, dividends and capital gain distributions, if any,
will be reinvested on the reinvestment date using the NAV per share of that
date. The reinvestment date normally precedes the payment date by about 10
days, although the exact timing is subject to change.

TAX STATUS
-------------------------------------------------------------------------------
The Fund intends to qualify as a "regulated investment company" under
Subchapter M of the Code.

All Summit Income Funds

A portion of the dividends paid by the Fund may be eligible for the
dividends-received deduction for corporate shareholders. For tax purposes, it
does not make any difference whether dividends and capital gain distributions
are paid in cash or in additional shares. The Fund must declare dividends by
December 31 of each year equal to at least 98% of ordinary income (as of
December 31) and capital gains (as of October 31) in order to avoid a federal
excise tax and distribute within 12 months 100% of ordinary income and
capital gains as of December 31 to avoid a federal income tax.

All Summit Municipal Funds

Generally, dividends paid by the Funds are not eligible for the
dividends-received deduction applicable to corporate shareholders. For tax
purposes, it does not make any difference whether dividends and capital gain
distributions are paid in cash or in additional shares. Each Fund must
declare dividends equal to at least 90% of net tax-exempt income (as of its
year-end) to permit pass-through of tax-exempt income to shareholders, and
98% of capital gains (as of October 31) in order to avoid a federal excise
tax, and 100% of capital gains (as of its tax year-end) to avoid federal
income tax.

All Funds

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

<PAGE>

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.

Limited-Term Bond Fund

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.

To the extent the Limited-Term Bond Fund invests in foreign securities, the
following would apply:

Passive Foreign Investment Companies

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

To avoid such tax and interest, the Fund intends to treat these securities as
sold on the last day of its fiscal year and recognize any gains for tax
purposes at that time; deductions for losses are allowable only to the extent
of any gains resulting from these deemed sales for prior taxable years. Such
gains and losses will be treated as ordinary income. The Fund will be
required to distribute any resulting income even though it has not sold the
security and received cash to pay such distributions.

YIELD INFORMATION
-------------------------------------------------------------------------------
Cash Reserves and Municipal Money Market Funds
The Fund's current and historical yield for a period is calculated by
dividing the net change in value of an account (including all dividends
accrued and dividends reinvested in additional shares) by the account value
at the beginning of the period to obtain the base period return. This base
period return is divided by the number of days in the period than multiplied
by 365 to arrive at the annualized yield for that period. The 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.

Limited-Term Bond, Municipal Intermediate-Term, and Municipal Income 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

<PAGE>

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.

GNMA Fund

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

The yield of each Fund calculated under the above-described methods for the
month ended October 31, 1998, was:
<TABLE>
<CAPTION>
Fund Yield
---- -----
<S> <C>
Cash Reserves 5.16% (7-day yield)
Limited-Term Bond 5.31
GNMA 5.83
Municipal Money Market 2.93 (7-day yield)
Municipal Intermediate 3.92
Municipal Income 4.41
</TABLE>

The taxable equivalent yields for the municipal Funds for the same period
based on federal income tax brackets of 28% and 31% are shown below:
<TABLE>
<CAPTION>
Federal Income Tax Bracket
Fund -28%-------------------31%
---- --- ---
<S> <C> <C>
Municipal Money Market 4.07% 4.25%
Municipal Intermediate 5.44 5.68
Municipal Income 6.13 6.39
</TABLE>

<PAGE>

All Summit Municipal Funds

TAX-EXEMPT VS. TAXABLE YIELDS
-------------------------------------------------------------------------------
From time to time, a Fund may also illustrate the effect of tax-equivalent
yields using information such as that set forth below:

<TABLE>
<CAPTION>
Your Taxable Income(1999)(a) A Tax-Exempt Yield Of:(c)
2% 3% 4% 5% 6%
Federal Tax Is Equivalent to a
Joint Return Single Return Rates(b) Taxable Yield of:
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$
25,
7
51
-$
6
2
,4
5
$43,051-$104,050 0 28.0% 2.78 4.17 5.56 6.94 8.33
6
2
,4
5
1
-
1
30
,
25
104,051-158,550 0 31.0 2.90 4.35 5.80 7.25 8.70
1
30
,
25
1
-
2
83
,
1
158,551-283,150 50 36.0 3.13 4.69 6.25 7.81 9.38
2
8
3
,
1
51
283,151 and above and above 39.6 3.31 4.97 6.62 8.28 9.93
A Tax-Exempt Yield Of:
Your Taxable Income(1999)(a)
1
7 8 9 0
% % % %
Federal Tax Is Equivalent to a
Joint Return Single Return Rates(b) Taxable Yield of:

- -----------------------------------------------------------------------------------------------
$
25,
7
51
-$
6
2
,4
5
$43,051-$104,050 0 28.0% 9.72 11.11 12.50 13.89
6
2
,4
5
1
-
1
30
,
25
104,051-158,550 0 31.0 10.14 11.59 13.04 14.49
1
30
,
25
1
-
2
83
,
1
158,551-283,150 50 36.0 10.94 12.50 14.06 15.63
2
8
3
,
1
283,151 and above 51 39.6 11.59 13.25 14.90 16.56
and above
- -----------------------------------------------------------------------------------------------
</TABLE>

(a) Net amount subject to federal income tax after deductions and
exemptions.

(b) Marginal rates may vary depending on family size and nature and amount of
itemized deductions.

INVESTMENT PERFORMANCE
-------------------------------------------------------------------------------

Total Return Performance

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

<PAGE>

<TABLE>
<CAPTION>
Cumulative Performance Percentage Change
1 Yr. 3 Yrs. % Since Inception
Fund ----- ------ ------- ---------
---- Ended Ended Inception Date
----- ----- --------- ----
10/31/98 10/31/98 10/31/98
-------- -------- --------
<S> <C> <C> <C> <S>
Cash Reserves 5.35% 16.76% 27.84% 10/29/93
Limited-Term Bond 7.97 21.56 29.57 10/29/93
GNMA 7.10 23.32 39.97 10/29/93
Municipal Money Market 3.27 10.26 16.84 10/29/93
Municipal Intermediate 6.89 21.42 35.50 10/29/93
Municipal Income 8.44 28.31 40.71 10/29/93
- ----------------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
Average Annual Compound Rates of Return
1 Yr. 3 Yrs. % Since Inception
Fund ----- ------ ------- ---------
---- Ended Ended Inception Date
----- ----- --------- ----
10/31/98 10/31/98 10/31/98
-------- -------- --------
<S> <C> <C> <C> <S>
Cash Reserves 5.35% 5.30% 5.03% 10/29/93
Limited-Term Bond 7.97 6.72 5.31 10/29/93
GNMA 7.10 7.24 6.95 10/29/93
Municipal Money Market 3.27 3.31 3.16 10/29/93
Municipal Intermediate 6.89 6.68 6.26 10/29/93
Municipal Income 8.44 8.66 7.06 10/29/93
- ----------------------------------------------------------------------
</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.

<PAGE>

Other Features and Benefits

The Fund is a member of the T. Rowe Price family of Funds and may help
investors achieve various long-term investment goals, which include, but are
not limited to, investing money for retirement, saving for a down payment on
a home, or paying college costs. To explain how the Fund could be used to
assist investors in planning for these goals and to illustrate basic
principles of investing, various worksheets and guides prepared by T. Rowe
Price and/or Investment Services may be made available.

No-Load Versus Load and 12b-1 Funds

Unlike the T. Rowe Price funds, many mutual funds charge sales fees to
investors or use fund assets to finance distribution activities. These fees
are in addition to the normal advisory fees and expenses charged by all
mutual funds. There are several types of fees charged which vary in magnitude
and which may often be used in combination. A sales charge (or "load") can be
charged at the time the fund is purchased (front-end load) or at the time of
redemption (back-end load). Front-end loads are charged on the total amount
invested. Back-end loads or "redemption fees" are charged either on the
amount originally invested or on the amount redeemed. 12b-1 plans allow for
the payment of marketing and sales expenses from fund assets. These expenses
are usually computed daily as a fixed percentage of assets.

The Fund is a no-load fund which imposes no sales charges or 12b-1 fees.
No-load funds are generally sold directly to the public without the use of
commissioned sales representatives. This means that 100% of your purchase is
invested for you.

Redemptions in Kind

In the unlikely event a shareholder were to receive an in kind redemption of
portfolio securities of the Fund, brokerage fees could be incurred by the
shareholder in a subsequent sale of such securities.

Issuance of Fund Shares for Securities

Transactions involving issuance of Fund shares for securities or assets other
than cash will be limited to (1) bona fide reorganizations; (2) statutory
mergers; or (3) other acquisitions of portfolio securities that: (a) meet the
investment objective and policies of the Fund; (b) are acquired for
investment and not for resale except in accordance with applicable law; (c)
have a value that is readily ascertainable via listing on or trading in a
recognized United States or international exchange or market; and (d) are not
illiquid.

CAPITAL STOCK
-------------------------------------------------------------------------------
The 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,

<PAGE>

might be altered or eliminated, or the class might be combined with another
class or classes, by action approved by the vote of the holders of a majority
of all the shares of all classes entitled to be voted on the proposal,
without any additional right to vote as a class by the holders of the capital
stock or of another affected class or classes.

Shareholders are entitled to one vote for each full share held (and
fractional votes for fractional shares held) and will vote in the election of
or removal of directors (to the extent hereinafter provided) and on other
matters submitted to the vote of shareholders. There will normally be no
meetings of shareholders for the purpose of electing directors unless and
until such time as less than a majority of the directors holding office have
been elected by shareholders, at which time the directors then in office will
call a shareholders' meeting for the election of directors. Except as set
forth above, the directors shall continue to hold office and may appoint
successor directors. Voting rights are not cumulative, so that the holders of
more than 50% of the shares voting in the election of directors can, if they
choose to do so, elect all the directors of the Fund, in which event the
holders of the remaining shares will be unable to elect any person as a
director. As set forth in the By-Laws of the Fund, a special meeting of
shareholders of the Fund shall be called by the Secretary of the Fund on the
written request of shareholders entitled to cast at least 10% of all the
votes of the Fund entitled to be cast at such meeting. Shareholders
requesting such a meeting must pay to the Fund the reasonably estimated costs
of preparing and mailing the notice of the meeting. The Fund, however, will
otherwise assist the shareholders seeking to hold the special meeting in
communicating to the other shareholders of the Fund to the extent required by
Section 16(c) of the 1940 Act.

FEDERAL REGISTRATION OF SHARES
-------------------------------------------------------------------------------
The Fund's shares are registered for sale under the 1933 Act. Registration of
the Fund's shares is not required under any state law, but the Fund is
required to make certain filings with and pay fees to the states in order to
sell its shares in the states.

LEGAL COUNSEL
-------------------------------------------------------------------------------
Swidler Berlin Shereff Friedman, LLP, whose address is 919 Third Avenue, New
York, New York 10022-9998, is legal counsel to the Fund.

INDEPENDENT ACCOUNTANTS
-------------------------------------------------------------------------------
PricewaterhouseCoopers LLP, 250 West Pratt Street, 21st Floor, Baltimore,
Maryland 21201, are the independent accountants to the Funds.

The financial statements of the Funds for the year ended October 31, 1998,
and the report of independent accountants are included in each Fund's Annual
Report for the year ended October 31, 1998. A copy of each Annual Report
accompanies this Statement of Additional Information. The following financial
statements and the report of independent accountants appearing in each Annual
Report for the year ended October 31, 1998, are incorporated into this
Statement of Additional Information by reference:

<PAGE>

<TABLE>
<CAPTION>
ANNUAL REPORT REFERENCES:

CASH LIMITED-TERMGNMA
RESERVES --------
-------- BOND
----
<S> <C> <C> <C>
Report of Independent Accountants 41 41 41
Statement of Net Assets, October 31, 1998 17-23 24-29 30-32
Statement of Operations, year ended
October 31, 1998 33 33 33
Statement of Changes in Net Assets, years
ended
October 31, 1998 and October 31, 1997 34 35 36
Notes to Financial Statements, October
31, 1998 37-40 37-40 37-40
Financial Highlights 14 15 16
</TABLE>

<TABLE>
<CAPTION>
MONEY MARKET INTERMEDIATE INCOME
------------ ------------ ------
<S> <C> <C> <C>
Report of Independent Accountants 56 56 56
Statement of Net Assets, October 31,
1998 18-27 28-37 38-50
Statement of Operations, year ended
October 31, 1998 51 51 51
Statement of Changes in Net Assets,
years ended
October 31, 1998 and October 31, 1997 52 52 52
Notes to Financial Statements, October
31, 1998 53-55 53-55 53-55
Financial Highlights 15 16 17
</TABLE>

RATINGS OF COMMERCIAL PAPER
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All Summit Income Funds

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 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.

<PAGE>

All Summit Municipal Funds

Moody's Investors Services, Inc. P-1 superior capacity for repayment. P-2
strong capacity for repayment. P-3 acceptable capacity for repayment of
short-term promissory obligations.

Standard & Poor's Corporation A-1 highest category, degree of safety
regarding timely payment is strong. Those issues determined to possess
extremely strong safety characteristics are denoted with a plus sign (+)
designation. A-2 satisfactory capacity to pay principal and interest. A-3
adequate capacity for timely payment, but are vulnerable to adverse effects
of changes in circumstances than higher-rated issues. B and C speculative
capacity to pay principal and interest.

Fitch IBCA, Inc. F-1+ exceptionally strong credit quality, strongest degree
of assurance for timely payment. F-1 very strong credit quality. F-2 good
credit quality, having a satisfactory degree of assurance for timely payment.
F-3 fair credit quality, assurance for timely payment is adequate but adverse
changes could cause the securities to be rated below investment grade. F-5
weak credit quality, having characteristics suggesting a minimal degree of
assurance for timely payment.

All Summit Income Funds

RATINGS OF CORPORATE DEBT SECURITIES
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Moody's Investors Services, 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.

<PAGE>

AA-Bonds rated AA also qualify as high-quality debt obligations. Capacity to
pay principal and interest is very strong.

A-Bonds rated A have a strong capacity to pay principal and interest,
although they are somewhat more susceptible to the adverse effects of changes
in circumstances and economic conditions.

BBB-Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay principal and interest for bonds
in this category than for bonds in the A category.

BB, B, CCC, CC, C-Bonds rated BB, B, CCC, and CC are regarded on balance, as
predominantly speculative with respect to the issuer's capacity to pay
interest and repay principal. BB indicates the lowest degree of speculation
and CC the highest degree of speculation. While such bonds will likely have
some quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.

D-In default.

Fitch IBCA, Inc.

AAA-High grade, broadly marketable, suitable for investment by trustees and
fiduciary institutions, and liable to but slight market fluctuation other
than through changes in the money rate. The prime feature of a "AAA" bond is
the showing of earnings several times or many times interest requirements for
such stability of applicable interest that safety is beyond reasonable
question whenever changes occur in conditions. Other features may enter, such
as wide margin of protection through collateral, security or direct lien on
specific property. Sinking funds or voluntary reduction of debt by call or
purchase or often factors, while guarantee or assumption by parties other
than the original debtor may influence their rating.

AA-Of safety virtually beyond question and readily salable. Their merits are
not greatly unlike those of "AAA" class but a bond so rated may be junior
though of strong lien, or the margin of safety is less strikingly broad. The
issue may be the obligation of a small company, strongly secured, but
influenced as to rating by the lesser financial power of the enterprise and
more local type of market.

A-Bonds rated A are considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than bonds with higher ratings.

BBB-Bonds rated BBB are considered to be investment grade and of satisfactory
credit quality. The obligor's ability to pay interest and repay principal is
considered to be adequate. Adverse changes in economic conditions ad
circumstances, however, are more likely to have adverse impact on these
bonds, and therefore impair timely payment. The likelihood that the ratings
of these bonds will fall below investment grade is higher than for bonds with
higher ratings.

BB, B, CCC, CC, and C are regarded on balance as predominantly speculative
with respect to the issuer's capacity to repay interest and repay principal
in accordance with the terms of the obligation for bond issues not in
default. BB indicates the lowest degree of speculation and C the highest
degree of speculation. The rating takes into consideration special features
of the issue, its relationship to other obligations of the issuer, and the
current and prospective financial condition and operating performance of the
issuer.

All Summit Municipal Funds

RATINGS OF MUNICIPAL DEBT SECURITIES
-------------------------------------------------------------------------------

Moody's Investors Services, 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."

<PAGE>

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.

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.

D-In default.

Fitch IBCA, Inc.

<PAGE>

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.

RATINGS OF MUNICIPAL NOTES AND VARIABLE RATE SECURITIES
-------------------------------------------------------------------------------
Moody's Investors Service, Inc. VMIG1/MIG-1 the best quality. VMIG2/MIG-2
high quality, with margins of protection ample though not so large as in the
preceding group. VMIG3/MIG-3 favorable quality, with all security elements
accounted for, but lacking the undeniable strength of the preceding grades.
Market access for refinancing, in particular, is likely to be less well
established. VMIG4/MIG-4 adequate quality but there is specific risk.

Standard & Poor's Corporation SP-1 very strong or strong capacity to pay
principal and interest. Those issues determined to possess overwhelming
safety characteristics will be given a plus (+) designation. SP-2
satisfactory capacity to pay interest and principal. SP-3 speculative
capacity to pay principal and interest.