PRICE T ROWE EQUITY SERIES INC, 497, 1999-05-04

PRICE T ROWE EQUITY SERIES INC
497, 1999-05-04

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PROSPECTUS
May 1, 1999
T. Rowe Price Equity Income Portfolio

A stock fund seeking substantial dividend income and long-term capital growth.
LOGO
The Securities and Exchange Commission has not approved or disapproved these
securities or passed upon the adequacy of this prospectus. Any representation
to the contrary is a criminal offense.
<PAGE>

T. Rowe Price Equity Series, Inc. T. Rowe Price Equity Income Portfolio
Prospectus

May 1, 1999

<TABLE>
<CAPTION>
<S> <C> <C> <C>
ABOUT THE FUND
1
Fund, Market, and Risk Characteristics 2

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Other Information About the Fund 4

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Some Basics of
Fixed
Investing
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ABOUT YOUR ACCOUNT
2
Pricing Shares and Receiving 7
Sale Proceeds
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Rights Reserved by the Fund 8

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Dividends and Distributions 9

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MORE ABOUT THE FUND
3
Organization and Management 10

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Understanding Performance Information 12

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Investment Policies and Practices 12

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Financial Highlights 17

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</TABLE>

Founded in 1937 by the late Thomas Rowe Price, Jr., T. Rowe Price Associates,
Inc., and its affiliates managed over $147.8 billion for more than seven
million individual and institutional investor accounts as of December 31, 1998.
Mutual fund shares are not deposits or obligations of, or guaranteed by, any
depository institution. Shares are not insured by the FDIC, Federal Reserve, or
any other government agency, and are subject to investment risks, including
possible loss of the principal amount invested.
<PAGE>

ABOUT THE FUND
1
FUND, MARKET, AND RISK CHARACTERISTICS: WHAT TO EXPECT
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To help you decide whether this fund is appropriate for you, this section
reviews its investment objective, strategy, and risks.

The fund is designed to serve as a funding vehicle for variable annuity and
variable life insurance contracts.

What is the fund's objective?

The fund seeks to provide substantial dividend income as well as long-term
growth of capital through investments in the common stocks of established
companies.

What is the fund's principal investment strategy?

We will normally invest at least 65% of the fund's total assets in the
common stocks of well-established companies paying above-average dividends.

We typically employ a "value" approach in selecting investments. Our
in-house research team seeks companies that appear to be undervalued by
various measures and may be temporarily out of favor, but have good
prospects for capital appreciation and dividend growth.

In selecting investments, we generally look for companies with the
following:

. an established operating history;

. above-average dividend yield relative to the S&P 500;

. low price/earnings ratio relative to the S&P 500;

. a sound balance sheet and other positive financial characteristics; and

. low stock price relative to a company's underlying value as measured by
assets, cash flow, or business franchises.

While most of the fund's assets will be invested in U.S. common stocks, we
may also invest in other securities, including foreign securities, futures,
and options, in keeping with the fund's objective.

The fund may sell securities for a variety of reasons, such as to secure
gains, limit losses, or redeploy assets into more promising opportunities.

. For details about the fund's investment program, please see the Investment
Policies and Practices section.

What are the main risks of investing in the fund?

As with all equity funds, this fund's share price can fall because of
weakness in the broad market, a particular industry, or specific holdings.
The market as a whole can decline for many reasons, including adverse
political or economic developments here or abroad, changes in investor
psychology, or heavy institutional selling. The prospects for an industry
or company may deteriorate because of a variety of factors, including
disappointing earnings or changes in the competitive environment. In
addition, our assessment of companies held in the fund may prove incorrect,
resulting in losses or poor performance even in a rising
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T. ROWE PRICE
market. Finally, the fund's investment approach could fall out of favor
with the investing public, resulting in lagging performance versus other
types of stock funds.

The value approach carries the risk that the market will not recognize a
security's intrinsic value for a long time, or that a stock judged to be
undervalued may actually be appropriately priced.

The fund's emphasis on stocks of established companies paying high
dividends and its potential investments in fixed income securities may
limit its potential for appreciation in a broad market advance. Such
securities may also be hurt when interest rates rise sharply. Also, a
company may reduce or eliminate its dividend.

To the extent that the fund invests in foreign securities, it is also
subject to the risk that some holdings may lose value because of declining
foreign currencies or adverse political or economic events overseas. If the
fund uses futures and options, it is exposed to additional volatility and
potential losses.

As with any mutual fund, there can be no guarantee the fund will achieve
its objective.

. The fund's share price may decline, so when you sell your shares, you may
lose money.

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

Consider your investment goals, your time horizon for achieving them, and
your tolerance for the inherent risk of common stock investments. If you
seek a relatively conservative equity investment that provides substantial
dividend income along with the potential for capital growth, the fund could
be an appropriate part of your overall investment strategy. This fund
should not represent your complete investment program or be used for
short-term trading purposes.

. Equity investors should have a long-term investment horizon and be willing
to wait out bear markets.

How has the fund performed in the past?

The bar chart and the average annual total return table indicate risk by
illustrating how much returns can differ from one year to the next. The
fund's past performance is no guarantee of its future returns.

The fund can also experience short-term performance swings, as shown by the
best and worst calendar quarter returns accompanying the following chart.
The returns are only for the years depicted in the chart.
<PAGE>

<TABLE>
INSERT BAR
CHART HERE
<CAPTION>
Calendar Year Total Returns
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<S> <C>
1995 34.76%
1996 19.56
1997 28.85
1998 9.07
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</TABLE>

Quarter ended Total return

Best quarter 6/30/1997 11.39%

Worst quarter 9/30/1998 -7.54%

<TABLE>
Table 1 Average Annual Total Returns
<CAPTION>
Periods ended December 31, 1998
Since inception
1 year (3/31/94)
<S> <C> <C> <S>

Equity Income Portfolio 9.07% 20.49%
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S&P 500 Stock Index 28.57 20.89
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</TABLE>

These figures include changes in principal value, reinvested dividends, and
capital gain distributions, if any.

OTHER INFORMATION ABOUT THE FUND
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What are the fund's major characteristics?

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

What is meant by a "value" investment approach?

Value investors seek to invest in companies whose stock prices are low in
relation to their real worth or future prospects. By identifying companies
whose stocks are currently out of favor or misunderstood, value investors
hope to realize significant appreciation as other investors recognize the
stock's intrinsic value and the price rises accordingly.

Finding undervalued stocks requires considerable research to identify the
particular company, analyze its underlying financial condition and
prospects, and assess the likelihood that the stock's underlying value will
be recognized by the market and reflected in its price.

. Value investors look for undervalued assets.
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T. ROWE PRICE
Some of the principal measures used to identify such stocks are:

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

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

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

. A stock selling at $10 with an annual dividend of $0.50 has a 5% yield.

. Price/cash flow Dividing a stock's price by the company's cash flow per
share, rather than by its earnings or book value, provides a more useful
measure of value in some cases. A ratio below that of the market or of its
peers suggests the market may be incorrectly valuing the company's cash
flow for reasons that may be temporary.

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

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

What are some examples of undervalued situations?

There are numerous situations in which a company's value may not be
reflected in its stock price. For example, a company may own a substantial
amount of real estate that is valued on its financial statements well below
market levels. If those properties were to be sold, or if their hidden
value became recognized in some other manner, the company's stock price
could rise. In another example, a company's management could spin off an
unprofitable division into a separate company, potentially increasing the
value of the parent. Or, in the reverse, a parent company could spin off a
profitable division that has not drawn the attention it deserves,
potentially resulting in higher valuations for both entities.

Sometimes new management can revitalize companies that have grown fat or
lost their focus, eventually leading to improved profitability. Management
could increase shareholder value by using excess cash flow to pay down
debt, buying back outstanding shares of common stock, or raising the
dividend.

What are some of the fund's potential rewards?

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

ABOUT THE FUND
What are some potential risks and rewards of investing in the stock market
through this fund?

Common stocks, in general, offer a way to invest for long-term growth of
capital. As the U.S. economy has expanded, corporate profits have grown and
share prices have risen. Nevertheless, economic growth has been punctuated
by periods of stagnation and recession. Share prices of all companies, even
the best managed and most profitable, can fall for any number of reasons.

Is there other information I can review before making a decision?

Investment Policies and Practices in Section 3 discusses various types of
portfolio securities the fund may purchase as well as types of investment
management practices the fund may use.
<PAGE>

ABOUT YOUR ACCOUNT
2
PRICING SHARES AND RECEIVING SALE PROCEEDS
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Here are some procedures you should know when investing in the fund. For
instructions on how to purchase and redeem shares of the fund, read the
separate account prospectus.

Shares of the fund are designed to be offered to insurance company separate
accounts established for the purpose of funding variable annuity contracts.
They may also be offered to insurance company separate accounts established
for the purpose of funding variable life contracts. Variable annuity and
variable life Contract Holders or Participants are not the shareholders of
the fund. Rather, the separate account is the shareholder. The variable
annuity and variable life contracts are described in separate prospectuses
issued by the insurance companies. The fund assumes no responsibility for
such prospectuses, or variable annuity or life contracts.

Shares of the fund are sold and redeemed without the imposition of any
sales commission or redemption charge. However, certain other charges may
apply to annuity or life contracts. Those charges are disclosed in the
separate account prospectus.

Your ability to exchange from this fund to any other one that serves as an
investment option under your insured contract is governed by the terms of
that contract and the separate account prospectus.

How and when shares are priced

The share price (also called "net asset value" or NAV per share) for a fund
is calculated at the close of the New York Stock Exchange, normally 4 p.m.
ET, each day the New York Stock Exchange is open for business. To calculate
the NAV, the fund's assets are valued and totaled, liabilities are
subtracted, and the balance, called net assets, is divided by the number of
shares outstanding. Current market values are used to price fund shares.

How your purchase, sale, or exchange price is determined

Purchases
The insurance companies purchase shares of the fund for separate accounts,
using premiums allocated by the Contract Holders or Participants. Shares
are purchased at the NAV next determined after the insurance company
receives the premium payment in acceptable form. Initial and subsequent
payments allocated to the fund are subject to the limits stated in the
separate account prospectus issued by the insurance company.

Redemptions
The insurance companies redeem shares of the fund to make benefit or
surrender payments under the terms of its Contracts. Redemptions are
processed on any day on which the New York Stock Exchange is open and are
priced at the fund's NAV next determined after the insurance company
receives a surrender request in acceptable form.

ABOUT YOUR ACCOUNT
How you can receive the proceeds from a sale

Payment for redeemed shares will be made promptly, but in no event later
than seven days. However, the right of redemption may be suspended or the
date of payment postponed in accordance with the Investment Company Act of
1940. The amount received upon redemption of the shares of the fund may be
more or less than the amount paid for the shares, depending on the
fluctuations in the market value of the assets owned by the fund.

Excessive Trading

. T. Rowe Price may bar excessive traders from purchasing shares.

Frequent trades, involving either substantial fund assets or a substantial
portion of your account or accounts controlled by you, can disrupt
management of the fund and raise its expenses. To deter such activity, the
fund has adopted an excessive trading policy. If you violate our excessive
trading policy, you may be barred indefinitely and without further notice
from further purchases of T. Rowe Price funds. Our excessive trading policy
applies to Contract Holders and Participants notwithstanding any provisions
in your insurance contract and has two parts:

. 120-day rule You can make one purchase and sale involving the same fund
within any 120-day period. For example, if you are in fund A, you can move
substantial assets from fund A to fund B and, within the next 120 days,
sell your shares in fund B to return to fund A or move to fund C. If you
exceed this limit, you are in violation of our excessive trading policy.

. 60-day rule If you purchase fund shares and hold them for less than 60
calendar days, you are in violation of our excessive trading policy.

Two types of transactions are exempt from our policy: 1) trades solely in
money market funds (exchanges between a money fund and a nonmoney fund are
not exempt); and 2) systematic purchases or redemptions.

RIGHTS RESERVED BY THE FUND
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The fund and its agents reserve the following rights: (1) to waive or lower
investment minimums; (2) to refuse any purchase or exchange order; (3) to
cancel or rescind any purchase or exchange order (including, but not
limited to, orders deemed to result in excessive trading, market timing,
fraud, or 5% ownership by individual Contract Holders or Participants) upon
notice to the Contract Holder or Participant within five business days of
the trade or if the written confirmation has not been received by the
Contract Holder or Participant, whichever is sooner; (4) to freeze any
account and suspend account services when notice has been received of a
dispute between the registered or beneficial account owners or there is
reason to believe a fraudulent transaction may occur; (5) to otherwise
modify the conditions of purchase and any services at any time; or (6) to
act on instructions believed to be genuine. These actions will be taken
when, in the sole discretion of management, they are deemed to be in the
best interest of the fund.

In an effort to protect the fund from the possible adverse effects of a
substantial redemption in a large account, as a matter of general policy,
no Contract Holder or Participant or group of Contract Holders or
Participants controlled by the same person or group of persons will
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T. ROWE PRICE
knowingly be permitted to purchase in excess of 5% of the outstanding
shares of the fund, except upon approval of the fund's management.

DIVIDENDS AND OTHER DISTRIBUTIONS
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For a discussion of the tax status of your variable annuity contract,
please refer to the separate account prospectus.

Dividends and other distributions

The policy of the fund is to distribute all of its net investment income
and net capital gains each year to its shareholders, which are the separate
accounts established by the various insurance companies in connection with
their issuance of variable annuity and life contracts. Dividends from net
investment income are declared and paid quarterly. All fund distributions
made to a separate account will be reinvested automatically in additional
fund shares, unless a shareholder (separate account) elects to receive
distributions in cash. Under current law, dividends and distributions made
by the fund to separate accounts generally are not taxable to the separate
accounts, the insurance company or the Contract Holder, provided that the
separate account meets the diversification requirements of Section 817(h)
of the Internal Revenue Code of 1986, as amended, and other tax-related
requirements are satisfied. The fund intends to diversify its investments
in the manner required under Code Section 817(h).

Foreign Transactions

If the fund pays nonrefundable taxes to foreign governments during the
year, the taxes will reduce the fund's dividends.
<PAGE>

MORE ABOUT THE FUND
3
ORGANIZATION AND MANAGEMENT
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How is the fund organized?

The T. Rowe Price Equity Series, Inc. (the "corporation") was incorporated
in Maryland in 1994, and is a "diversified, open-end investment company,"
or mutual fund. Mutual funds pool money received from shareholders and
invest it to try to achieve specified objectives. Currently, the
corporation consists of four series, each representing a separate class of
shares having different objectives and investment policies. The four series
are: the Equity Income Portfolio, the New America Growth Portfolio, and the
Personal Strategy Balanced Portfolio, which were all established in 1994;
and the Mid-Cap Growth Portfolio, established in 1996. The other three
portfolios are described in separate prospectuses.

While the fund is managed in a manner similar to that of the T. Rowe Price
Equity Income Fund, investors should be aware that the fund is not the same
fund and will not have the same performance. Investments made by the fund
at any given time may not be the same as those made by the T. Rowe Price
fund. Different performance will result due to factors such as differences
in the cash flows into and out of the fund, different fees and expenses,
and differences in portfolio size and positions.

. Shareholders benefit from T. Rowe Price's 62 years of investment management
experience.

What is meant by "shares"?

Contract Holders and Participants indirectly (through the insurance company
separate account) purchase shares when they put money in a fund offered as
an investment option in their insurance contracts. These shares are part of
a fund's authorized capital stock, but share certificates are not issued.

Each share and fractional share entitles the shareholder (the insurance
company separate account) to cast one vote per share on certain fund
matters, including the election of fund directors, changes in fundamental
policies, or approval of changes in the fund's management contract.

The shares of the fund have equal voting rights. The various insurance
companies own the outstanding shares of the fund in their separate
accounts. These separate accounts are registered under the 1940 Act or are
excluded from registration thereunder. Under current law, the insurance
companies must vote the shares held in registered separate accounts in
accordance with voting instructions received from variable Contract Holders
or Participants having the right to give such instructions.

Do T. Rowe Price funds have annual shareholder meetings?

The fund is not required to hold annual meetings and, to avoid unnecessary
costs to fund shareholders, does not intend to do so except when certain
matters, such as a change in its fundamental policies, must be decided. In
addition, shareholders representing at least 10% of all eligible votes may
call a special meeting, if they wish, for the purpose of voting on the
removal of any fund director or trustee. If a meeting is held and you
cannot attend, you can vote by proxy. Before the meeting, the fund will
send you proxy materials that explain the
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T. ROWE PRICE
issues to be decided and include instructions on voting by mail or
telephone, or on the Internet.

. All decisions regarding the purchase and sale of fund investments are made
by T. Rowe Price - specifically by the fund's portfolio managers.

Who runs the fund?

General Oversight
The corporation is governed by a Board of Directors that meets regularly to
review the fund's investments, performance, expenses, and other business
affairs. The Board elects the corporation's officers. The policy of the
corporation is that a majority of Board members are independent of T. Rowe
Price Associates, Inc. (T. Rowe Price).

Portfolio Management
The fund has an Investment Advisory Committee with the following members:
Brian C. Rogers, Chairman, Stephen W. Boesel, Arthur B. Cecil III, Giri
Devulapally, Richard P. Howard, John D. Linehan, and William J. Stromberg.
The committee chairman has day-to-day responsibility for managing the fund
and works with the committee in developing and executing the fund's
investment program. Mr. Rogers has been chairman of the fund's committee
since 1994. He joined T. Rowe Price in 1982 and has been managing
investments since 1983.

The Management Fee
The fund pays T. Rowe Price an annual all-inclusive fee of 0.85% based on
its average daily net assets. The fund calculates and accrues the fee
daily. This fee pays for investment management services and other operating
costs.

From time to time, T. Rowe Price may pay participating insurance companies
for services, provided by such insurance companies for the fund or on
behalf of contract holders.

Variable Annuity and Variable Life Charges

Variable annuity and variable life fees and charges imposed on Contract
Holders and Participants by the insurance companies are in addition to
those described previously and are described in the variable annuity and
life contract prospectuses.

Variable Annuity and Variable Life Conflicts
The fund may serve as an investment medium for both variable annuity
contracts and variable life insurance policies. Shares of the fund may be
offered to separate accounts established by any number of insurance
companies. The fund currently does not foresee any disadvantages to
variable annuity contract owners due to the fact that the fund may serve as
an investment medium for both variable life insurance policies and annuity
contracts; however, due to differences in tax treatment or other
considerations, it is theoretically possible that the interests of owners
of annuity contracts and insurance policies for which the fund serves as an
investment medium might at some time be in conflict. However, the fund's
Board of Directors is required to monitor events to identify any material
conflicts between variable annuity contract owners and variable life policy
owners, and will determine what action, if any, should be taken in the
event of such a conflict. If such a conflict were to occur, an insurance
company participating in the fund might be required to redeem the
investment of one or more of its separate accounts from the fund. This
might force the fund to sell securities at disadvantageous prices.
<PAGE>

ABOUT YOUR ACCOUNT
UNDERSTANDING PERFORMANCE INFORMATION
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This section should help you understand the terms used to describe fund
performance. You will come across them in shareholder reports you receive
from your insurance company.

Total Return

This tells you how much an investment in a fund has changed in value over a
given time period. It reflects any net increase or decrease in the share
price and assumes that all dividends and capital gains (if any) paid during
the period were reinvested in additional shares. Therefore, total return
numbers include the effect of compounding.

Advertisements for a fund may include cumulative or average annual total
return figures, which may be compared with various indices, other
performance measures, or other mutual funds.

Cumulative Total Return

This is the actual return of an investment for a specified period. A
cumulative return does not indicate how much the value of the investment
may have fluctuated during the period. For example, a fund could have a
10-year positive cumulative return despite experiencing three negative
years during that time.

Average Annual Total Return

This is always hypothetical and should not be confused with actual
year-by-year results. It smooths out all the variations in annual
performance to tell you what constant year-by-year return would have
produced the investment's actual cumulative return. This gives you an idea
of an investment's annual contribution to your portfolio, provided you held
it for the entire period.

Total returns quoted for the fund include the effect of deducting the
fund's expenses, but may not include charges and expenses attributable to
any particular insurance product. Since you can only purchase shares of the
fund through an insurance product, you should carefully review the
prospectus of the insurance product you have chosen for information on
relevant charges and expenses. Excluding these charges from quotations of
the fund's performance has the effect of increasing the performance quoted.

INVESTMENT POLICIES AND PRACTICES
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This section takes a detailed look at some of the types of securities the
fund may hold in its portfolio and the various kinds of investment
practices that may be used in day-to-day portfolio management. The fund's
investment program is subject to further restrictions and risks described
in the Statement of Additional Information.

Shareholder approval is required to substantively change the fund's
objective and certain investment restrictions noted in the following
section as "fundamental policies." The managers follow certain "operating
policies," which can be changed without shareholder approval. However,
significant changes are discussed with shareholders in fund reports. The
fund adheres to applicable investment restrictions and policies at the time
it makes an investment. A later change in circumstances will not require
the sale of an investment if it was proper at the time it was made.
<PAGE>

T. ROWE PRICE
The fund's holdings of certain kinds of investments cannot exceed maximum
percentages of total assets, which are set forth in this prospectus. For
instance, this fund is not permitted to invest more than 10% of total
assets in hybrid instruments. While these restrictions provide a useful
level of detail about the fund's investment program, investors should not
view them as an accurate gauge of the potential risk of such investments.
For example, in a given period, a 5% investment in hybrid instruments could
have significantly more of an impact on the fund's share price than its
weighting in the portfolio. The net effect of a particular investment
depends on its volatility and the size of its overall return in relation to
the performance of all the fund's other investments.

Changes in the fund's holdings, the fund's performance, and the
contribution of various investments are discussed in the shareholder
reports sent to you.

. Fund managers have considerable leeway in choosing investment strategies
and selecting securities they believe will help the fund achieve its
objective.

Types of Portfolio Securities

In seeking to meet its investment objective, the fund may invest in any
type of security or instrument (including certain potentially high-risk
derivatives described in this section) whose investment characteristics are
consistent with the fund's investment program. The following pages describe
various types of portfolio securities and investment management practices
of the fund.

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

The fund invests primarily in common stocks and may, to a lesser degree,
purchase other types of securities described below.

Common and Preferred Stocks
Stocks represent shares of ownership in a company. Generally, preferred
stock has a specified dividend and ranks after bonds and before common
stocks in its claim on income for dividend payments and on assets should
the company be liquidated. After other claims are satisfied, common
stockholders participate in company profits on a pro-rata basis; profits
may be paid out in dividends or reinvested in the company to help it grow.
Increases and decreases in earnings are usually reflected in a company's
stock price, so common stocks generally have the greatest appreciation and
depreciation potential of all corporate securities. While most preferred
stocks pay a dividend, the fund may purchase preferred stock where the
issuer has omitted, or is in danger of omitting, payment of its dividend.
Such investments would be made primarily for their capital appreciation
potential.

Convertible Securities and Warrants
The fund may invest in debt or preferred equity securities convertible
into, or exchangeable for, equity securities. Traditionally, convertible
securities have paid dividends or interest at rates higher than common
stocks but lower than nonconvertible securities. They generally participate
in the appreciation or depreciation of the underlying stock into which they
are convertible, but to a lesser degree. In recent years, convertibles have
been developed which combine higher or lower current income with options
and other features. Warrants are options to buy a stated number of shares
of common stock at a specified price anytime during the life of the
warrants (generally, two or more years).
<PAGE>

MORE ABOUT THE FUND
Foreign Securities
The fund may invest in foreign securities. These include
nondollar-denominated securities traded outside of the U.S. and
dollar-denominated securities of foreign issuers traded in the U.S. (such
as ADRs). Such investments increase a portfolio's diversification and may
enhance return, but they also involve some special risks, such as exposure
to potentially adverse local political and economic developments;
nationalization and exchange controls; potentially lower liquidity and
higher volatility; possible problems arising from accounting, disclosure,
settlement, and regulatory practices that differ from U.S. standards; and
the chance that fluctuations in foreign exchange rates will decrease the
investment's value (favorable changes can increase its value). These risks
are heightened for investments in developing countries, and there is no
limit on the amount of the fund's foreign investments that may be made in
such countries.

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

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

High-Yield, High-Risk Investing
The total return and yield of lower-quality (high-yield, high-risk) bonds,
commonly referred to as "junk" bonds, can be expected to fluctuate more
than the total return and yield of higher-quality, shorter-term bonds, but
not as much as those of common stocks. Junk bonds (those rated below BBB or
in default) are regarded as predominantly speculative with respect to the
issuer's continuing ability to meet principal and interest payments.

Operating policy The fund may purchase any type of noninvestment-grade
debt security (or junk bond) including those in default. The fund will not
purchase this type of security if immediately after such purchase the fund
would have more than 10% of its total assets invested in such securities.
The fund's investments in convertible securities are not subject to this
limit.

. Hybrids can have volatile prices and limited liquidity, and their use by
the fund may not be successful.

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

T. ROWE PRICE
securities may be readily sold, for example, under Rule 144A, others may be
illiquid, and their sale may involve substantial delays and additional
costs.

Operating policy The fund may invest up to 15% of its net assets in
illiquid securities.

Types of Investment Management Practices

Reserve Position
The fund will hold a certain portion of its assets in money market
reserves. The fund's reserve position is expected to consist primarily of
shares of one or more T. Rowe Price internal money market funds.
Short-term, high-quality U.S. and foreign dollar-denominated money market
securities, including repurchase agreements, may also be held. For
temporary, defensive purposes, the fund may invest without limitation in
money market reserves. The effect of taking such a position is that the
fund may not achieve its investment objective. The reserve position
provides flexibility in meeting redemptions, expenses, and the timing of
new investments and can serve as a short-term defense during periods of
unusual market volatility.

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

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

Operating policy The fund may not transfer as collateral any portfolio
securities except as necessary in connection with permissible borrowings or
investments, and then such transfers may not exceed 33/1//\\/3/\\% of the
fund's total assets. The fund may not purchase additional securities when
borrowings exceed 5% of total assets.

Futures and Options

Futures (a type of potentially high-risk derivative) are often used to
manage or hedge risk because they enable the investor to buy or sell an
asset in the future at an agreed-upon price. Options (another type of
potentially high-risk derivative) give the investor the right (where the
investor purchases the option), or the obligation (where the investor
writes (sells) the option), to buy or sell an asset at a predetermined
price in the future. The fund may buy and sell futures and options
contracts for any number of reasons, including: to manage its exposure to
changes in securities prices and foreign currencies; as an efficient means
of adjusting its overall exposure to certain markets; in an effort to
enhance income; as a cash management tool; and to protect the value of
portfolio securities. The fund may purchase, sell, or write call and put
options on securities, financial indices, and foreign currencies.

Futures contracts and options may not always be successful hedges; their
prices can be highly volatile; using them could lower the fund's total
return, and the potential loss from the use of futures can exceed the
fund's initial investment in such contracts.

Operating policies Futures: Initial margin deposits and premiums on
options used for non-hedging purposes will not exceed 5% of the fund's net
asset value. Options on securities: The total market value of securities
against which the fund writes call or put options may not exceed 25% of its
total assets. The fund will not commit more than 5% of its total assets to
premiums when purchasing call or put options.
<PAGE>

MORE ABOUT THE FUND
Managing Foreign Currency Risk
Investors in foreign securities may "hedge" their exposure to potentially
unfavorable currency changes by purchasing a contract to exchange one
currency for another on some future date at a specified exchange rate. In
certain circumstances, a "proxy currency" may be substituted for the
currency in which the investment is denominated, a strategy known as "proxy
hedging." If the fund were to engage in foreign currency transactions, they
would be used primarily to protect the fund's foreign securities from
adverse currency movements relative to the dollar. Such transactions
involve the risk that anticipated currency movements will not occur, and
the fund's total return could be reduced.

Lending of Portfolio Securities
Like other mutual funds, the fund may lend securities to broker-dealers,
other institutions, or other persons to earn additional income. The
principal risk is the potential insolvency of the broker-dealer or other
borrower. In this event, the fund could experience delays in recovering its
securities and possibly capital losses.

Fundamental policy The value of loaned securities may not exceed
33/1//\\/3/\\% of total fund assets.

Portfolio Turnover
The fund will not generally trade in securities for short-term profits,
but, when circumstances warrant, securities may be purchased and sold
without regard to the length of time held. A high turnover rate may
increase transaction costs and result in higher capital gain distributions
by the fund. The fund's portfolio turnover rates for the fiscal years
ending December 31, 1998, 1997, and 1996, were 18.2%, 20.5%, and 17.4%,
respectively.

Year 2000 Processing Issue

Many computer programs use two digits rather than four to identify the
year. These programs, if not adapted, will not correctly handle the change
from "99" to "00" on January 1, 2000, and will not be able to perform
necessary functions. The Year 2000 issue affects virtually all companies
and organizations.

T. Rowe Price has implemented steps intended to assure that major computer
systems and processes are capable of Year 2000 processing. We are working
with third parties to assess the adequacy of their compliance efforts and
are developing contingency plans intended to assure that third-party
noncompliance will not materially affect T. Rowe Price's operations.

Companies, organizations, governmental entities, and markets in which the
T. Rowe Price funds invest will be affected by the Year 2000 issue, but at
this time the funds cannot predict the degree of impact. For funds that
invest in foreign markets, especially emerging markets, it is possible
foreign companies and markets will not be as prepared for Year 2000 as
domestic companies and markets. To the extent the effect of Year 2000 is
negative, a fund's returns could be reduced.

T. ROWE PRICE
table represent the rate that an investor would have earned or lost on an
investment in the fund (assuming reinvestment of all dividends and
distributions). The financial statements in the annual report were audited
by the fund's independent accountants, PricewaterhouseCoopers LLP.

<TABLE>
Table 2 Financial Highlights
<CAPTION>
Year ended December 31
03/31/94/*/
through
12/31/94 1995 1996 1997 1998
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>

Net asset value,
beginning of period $10.00 $ 10.42 $ 13.21 $ 15.26 $ 18.59
Income From Investment Operations
Net investment income 0.30 0.44 0.42 0.40 0.39
--------------------------------------------------------
Net gains or losses
on securities (both
realized and 0.41 3.05 2.13 3.94 1.27
unrealized)
--------------------------------------------------------
Total from investment
operations 0.71 3.49 2.55 4.34 1.66
Less Distributions
Dividends (from net (0.29) (0.44) (0.42) (0.40) (0.39)
investment income)
--------------------------------------------------------
Distributions (from -- (0.26) (0.08) (0.61) (0.61)
capital gains)
--------------------------------------------------------
Returns of capital -- -- -- -- --
--------------------------------------------------------
Total distributions (0.29) (0.70) (0.50) (1.01) (1.00)
--------------------------------------------------------
Net asset value, $10.42 $ 13.21 $ 15.26 $ 18.59 $ 19.25
end of period
--------------------------------------------------------
Total return 7.15% 34.76% 19.56% 28.85% 9.07%
Ratios/Supplemental Data
Net assets, end of $2,191 $14,658 $103,751 $344,724 $526,952
period (in thousands)
--------------------------------------------------------
Ratio of expenses to 0.85%/a/ 0.85% 0.85% 0.85% 0.85%
average net assets
--------------------------------------------------------
Ratio of net income 3.88%/a/ 3.61% 2.94% 2.56% 2.15%
to average net assets
--------------------------------------------------------
Portfolio turnover 21.3%/a/ 10.1% 17.4% 20.5% 18.2%
rate
--------------------------------------------------------------------------------
</TABLE>

/a/ Annualized.

/*/ Inception date.
<PAGE>

A Statement of Additional Information about the fund has been filed with the
Securities and Exchange Commission and is incorporated by reference into this
prospectus. Further information about the fund's investments, including a review
of market conditions and the manager's recent strategies and their impact on
performance, is available in the annual and semiannual shareholder reports. To
obtain a free copy of a fund report or Statement of Additional Information, or
for inquiries, contact your insurance company.

Fund reports and Statements of Additional Information are also available from
the Securities and Exchange Commission by calling 1-800-SEC-0330 or by writing
the SEC's Public Reference Section, Washington, D.C. 20549-6009 (you will be
charged a duplicating fee); by visiting the SEC's public reference room; or by
consulting the SEC's Web site at www.sec.gov.
1940 Act File No.: 811-07143
LOGO
5/1/99

<PAGE>

STATEMENT OF ADDITIONAL INFORMATION
The date of this Statement of Additional Information is May 1, 1999.

T. ROWE PRICE EQUITY SERIES, INC. (the "Corporation")
T. Rowe Price Equity Income Portfolio (the "Fund")

______________________________________________________________________________

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

Shares of the Fund are designed to be offered to insurance company separate
accounts established for the purpose of funding variable annuity contracts.
They may also be offered to insurance company separate accounts established
for the purpose of funding variable life contracts. Variable annuity and
variable life Contract Holders or Participants are not the shareholders of
the Fund. Rather, the separate account is the shareholder. The variable
annuity and variable life contracts are described in separate prospectuses
issued by the insurance companies. The Fund assumes no responsibility for any
insurance company prospectuses or variable annuity or life contracts.

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

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

SAI-EIP 5/1/99
<PAGE>

<TABLE>
<CAPTION>
TABLE OF CONTENTS
-----------------
Page Page
---- ----
<S> <C> <C> <C> <C>
Capital Stock 35 Investment Restrictions 21

- ------------------------------ --------------------------------------------
Code of Ethics 27 Legal Counsel 36

- ------------------------------ --------------------------------------------
Custodian Management of
27 the 23
Fund
- ------------------------------ --------------------------------------------
Distributor for the 27 Net Asset Value Per Share 32
Fund
- ------------------------------ --------------------------------------------
Dividends and 32 Portfolio Management Practices 9
Distributions
- ------------------------------ --------------------------------------------
Federal Registration 36 Portfolio Transactions 28
of Shares
- ------------------------------ --------------------------------------------
Independent 36 Pricing of Securities 31
Accountants
- ------------------------------ --------------------------------------------
Investment Management 26 Principal Holders of Securities 26
Services
- ------------------------------ --------------------------------------------
Investment Objectives 2 Ratings of Corporate Debt Securities 37
and Policies
- ------------------------------ --------------------------------------------
Investment Performance 33 Risk Factors 2

- ------------------------------ --------------------------------------------
Investment Program 5 Tax Status 32

- ------------------------------ --------------------------------------------
</TABLE>

INVESTMENT OBJECTIVES AND POLICIES
-------------------------------------------------------------------------------
The following information supplements the discussion of the Fund's investment
objectives and policies discussed in the Fund's prospectus.

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

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

Rowe Price-Fleming International, Inc. ("Price-Fleming")

RISK FACTORS
-------------------------------------------------------------------------------
Reference is also made to the sections entitled "Types of Securities" and
"Portfolio Management Practices" for discussions of the risks associated with
the investments and practices described therein as they apply to the Fund.

Because of its investment policy, the Fund may or may not be suitable or
appropriate for all investors. The Fund is not a money market fund and is not
an appropriate investment for those whose primary objective is principal
stability. The Fund will normally have substantially all of its assets in
equity securities (e.g., common stocks). This portion of the Fund's assets
will be subject to all of the risks of investing in the stock

<PAGE>

market. There is risk in every investment. The value of the portfolio
securities of the Fund will fluctuate based upon market conditions. Although
the Fund seeks to reduce risk by investing in a diversified portfolio, such
diversification does not eliminate all risk. There can, of course, be no
assurance that the Fund will achieve its investment objective.

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

. Political and Economic Factors Individual foreign economies of certain
countries differ favorably or unfavorably from the United States' economy in
such respects as growth of gross national product, rate of inflation, capital
reinvestment, resource self-sufficiency and balance of payments position. The
internal politics of certain foreign countries are not as stable as in the
United States. For example, in 1991, the existing government in Thailand was
overthrown in a military coup. In 1992, there were two military coup attempts
in Venezuela and in 1992 the President of Brazil was impeached. In 1994-1995,
the Mexican peso plunged in value setting off a severe crisis in the Mexican
economy. Asia is still coming to terms with its own crisis and recessionary
conditions sparked off by widespread currency weakness in late 1997. In 1998,
there was substantial turmoil in markets throughout the world. In addition,
significant external political risks currently affect some foreign countries.
Both Taiwan and China still claim sovereignty of one another and there is a
demilitarized border and hostile relations between North and South Korea.

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

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

. Investment and Repatriation of Restrictions Foreign investment in the
securities markets of certain foreign countries is restricted or controlled
in varying degrees. These restrictions limit at times and preclude investment
in certain of such countries and increase the cost and expenses of the Fund.
Investments by foreign investors are subject to a variety of restrictions in
many developing countries. These restrictions may take the form of prior
governmental approval, limits on the amount or type of securities held by
foreigners, and limits on the types of companies in which foreigners may
invest. Additional or different restrictions may be imposed at any time by
these or other countries in which the Funds invest. In addition, the
repatriation of both investment income and capital from several foreign
countries is restricted and controlled under certain regulations, including
in some cases the need for certain government consents. For example, capital
invested in Chile normally cannot be repatriated for one year. In 1998, the
government of Malaysia imposed currency controls which effectively made it
impossible for foreign investors to convert Malaysian ringgits to foreign
currencies.

. Market Characteristics It is contemplated that most foreign securities will
be purchased in over-the-counter markets or on securities exchanges located
in the countries in which the respective principal offices of the issuers of
the various securities are located, if that is the best available market.
Investments in certain markets may be made through American Depository
Receipts ("ADRs") traded in the United States. Foreign securities

<PAGE>

markets are generally not as developed or efficient as, and more volatile
than, those in the United States. While growing in volume, they usually have
substantially less volume than U.S. markets and the Fund's portfolio
securities may be less liquid and subject to more rapid and erratic price
movements than securities of comparable U.S. companies. Securities may trade
at price/earnings multiples higher than comparable United States securities
and such levels may not be sustainable. Commissions on foreign securities are
generally higher than commissions on United States exchanges, and while there
is an increasing number of overseas securities markets that have adopted a
system of negotiated rates, a number are still subject to an established
schedule of minimum commission rates. There is generally less government
supervision and regulation of foreign securities exchanges, brokers, and
listed companies than in the United States. Moreover, settlement practices
for transactions in foreign markets may differ from those in United States
markets. Such differences include delays beyond periods customary in the
United States and practices, such as delivery of securities prior to receipt
of payment, which increase the likelihood of a "failed settlement." Failed
settlements can result in losses to the Fund.

. Investment Funds The Fund may invest in investment funds which have been
authorized by the governments of certain countries specifically to permit
foreign investment in securities of companies listed and traded on the stock
exchanges in these respective countries. The Fund's investment in these funds
is subject to the provisions of the 1940 Act. If the Fund invests in such
investment funds, the Fund's shareholders will bear not only their
proportionate share of the expenses of the Fund (including operating expenses
and the fees of the investment manager), but also will bear indirectly
similar expenses of the underlying investment funds. In addition, the
securities of these investment funds may trade at a premium over their net
asset value.

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

. Taxes The dividends and interest payable on certain of the Fund's foreign
portfolio securities may be subject to foreign withholding taxes, thus
reducing the net amount of income available for distribution to the Fund's
shareholders.

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

. Eastern Europe and Russia Changes occurring in Eastern Europe and Russia
today could have long-term potential consequences. As restrictions fall, this
could result in rising standards of living, lower manufacturing costs,
growing consumer spending, and substantial economic growth. However,
investment in the countries of Eastern Europe and Russia is highly
speculative at this time. Political and economic reforms are too recent to
establish a definite trend away from centrally planned economies and
state-owned industries. The collapse of the ruble from its crawling peg
exchange rate against the U.S. dollar has set back the path of reform for
several years. In many of the countries of Eastern Europe and Russia, there
is no stock exchange or formal market for securities. Such countries may also
have government exchange controls, currencies with no recognizable market
value relative to the established currencies of western market economies,
little or no experience in trading in securities, no financial reporting
standards, a lack of a banking and securities infrastructure to handle such
trading, and a legal tradition which does not recognize rights in private
property. In addition, these countries may have national policies which
restrict investments in companies deemed sensitive to the country's national
interest. Further, the governments in such countries may require governmental
or quasi-governmental authorities to act as custodian of the Fund's assets
invested in such countries, and these authorities may not qualify as a
foreign custodian under the 1940 Act and exemptive relief from such Act may
be required. All of these considerations are among the factors which could
cause significant risks and uncertainties to investment in Eastern Europe and
Russia. The Fund will only invest in a company located in, or a government
of, Eastern Europe and Russia, if it believes the potential return justifies
the risk.

<PAGE>

. Latin America

Inflation Most Latin American countries have experienced, at one time or
another, severe and persistent levels of inflation, including, in some cases,
hyperinflation. This has, in turn, led to high interest rates, extreme
measures by governments to keep inflation in check, and a generally
debilitating effect on economic growth. Although inflation in many countries
has lessened, there is no guarantee it will remain at lower levels.

Political Instability The political history of certain Latin American
countries has been characterized by political uncertainty, intervention by
the military in civilian and economic spheres, and political corruption. Such
developments, if they were to reoccur, could reverse favorable trends toward
market and economic reform, privatization, and removal of trade barriers, and
result in significant disruption in securities markets.

Foreign Currency Certain Latin American countries may have managed currencies
which are maintained at artificial levels to the U. S. dollar rather than at
levels determined by the market. This type of system can lead to sudden and
large adjustments in the currency which, in turn, can have a disruptive and
negative effect on foreign investors. For example, in late 1994 the value of
the Mexican peso lost more than one-third of its value relative to the
dollar. Certain Latin American countries also restrict the free conversion of
their currency into foreign currencies, including the U.S. dollar. There is
no significant foreign exchange market for many currencies and it would, as a
result, be difficult for the Fund to engage in foreign currency transactions
designed to protect the value of the Fund's interests in securities
denominated in such currencies.

Sovereign Debt A number of Latin American countries are among the largest
debtors of developing countries. There have been moratoria on, and
reschedulings of, repayment with respect to these debts. Such events can
restrict the flexibility of these debtor nations in the international markets
and result in the imposition of onerous conditions on their economies.

. Asia (ex-Japan)

Political Instability The political history of certain Asian countries has
been characterized by political uncertainty, intervention by the military in
civilian and economic spheres, and political corruption. Such developments,
if they continue to occur, could reverse favorable trends toward market and
economic reform, privatization and removal of trade barriers and result in
significant disruption in securities markets.

Foreign Currency Certain Asian countries may have managed currencies which
are maintained at artificial levels to the U.S. dollar rather than at levels
determined by the market. This type of system can lead to sudden and large
adjustments in the currency which, in turn, can have a disruptive and
negative effect on foreign investors. For example, in 1997 the Thai baht lost
46.75% of its value against the U.S. dollar. Certain Asian countries also may
restrict the free conversion of their currency into foreign currencies,
including the U.S. dollar. There is no significant foreign exchange market
for certain currencies and it would, as a result, be difficult for the Fund
to engage in foreign currency transactions designed to protect the value of
the Fund's interests in securities denominated in such currencies.

Debt A number of Asian companies are highly dependent on foreign loans for
their operation. In 1997, several Asian countries were forced to negotiate
loans from the International Monetary Fund ("IMF") and others that impose
strict repayment term schedules and require significant economic and
financial restructuring.

INVESTMENT PROGRAM
-------------------------------------------------------------------------------

Types of Securities

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

Hybrid Instruments

<PAGE>

(hereinafter "Hybrid Instruments"). Generally, a Hybrid Instrument will be a
debt security, preferred stock, depository share, trust certificate,
certificate of deposit, or other evidence of indebtedness on which a portion
of or all interest payments, and/or the principal or stated amount payable at
maturity, redemption, or retirement, is determined by reference to prices,
changes in prices, or differences between prices, of securities, currencies,
intangibles, goods, articles, or commodities (collectively "Underlying
Assets") or by another objective index, economic factor, or other measure,
such as interest rates, currency exchange rates, commodity indices, and
securities indices (collectively "Benchmarks"). Thus, Hybrid Instruments may
take a variety of forms, including, but not limited to, debt instruments with
interest or principal payments or redemption terms determined by reference to
the value of a currency or commodity or securities index at a future point in
time, preferred stock with dividend rates determined by reference to the
value of a currency, or convertible securities with the conversion terms
related to a particular commodity.

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

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

Hybrid Instruments are potentially more volatile and carry greater market
risks than traditional debt instruments. Depending on the structure of the
particular Hybrid Instrument, changes in a Benchmark may be magnified by the
terms of the Hybrid Instrument and have an even more dramatic and substantial
effect upon 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.

<PAGE>

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

The various risks discussed above, particularly the market risk of such
instruments, may in turn cause significant fluctuations in the net asset
value of the Fund. Accordingly, the Fund will limit its investments in Hybrid
Instruments to 10% of total assets. However, because of their volatility, it
is possible that the Fund's investment in Hybrid Instruments will account for
more than 10% of the Fund's return (positive or negative).

Illiquid or Restricted Securities

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

Notwithstanding the above, the Fund may purchase securities which, while
privately placed, are eligible for purchase and sale under Rule 144A under
the 1933 Act. This rule permits certain qualified institutional buyers, such
as the Fund, to trade in privately placed securities even though such
securities are not registered under the 1933 Act. 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% of its net assets in
illiquid securities. A determination of whether a Rule 144A security is
liquid or not is a question of fact. In making this determination, T. Rowe
Price will consider the trading markets for the specific security taking into
account the unregistered nature of a Rule 144A security. In addition, T. Rowe
Price could consider the following: (1) frequency of trades and quotes; (2)
number of dealers and potential purchases; (3) dealer undertakings to make a
market; and (4) the nature of the security and of marketplace trades (e.g.,
the time needed to dispose of the security, the method of soliciting offers,
and the mechanics of transfer). The liquidity of Rule 144A securities would
be monitored and, if as a result of changed conditions it is determined that
a Rule 144A security is no longer liquid, the Fund's holdings of illiquid
securities would be reviewed to determine what, if any, steps are required to
assure that the Fund does not invest more than 15% of its net assets in
illiquid securities. Investing in Rule 144A securities could have the effect
of increasing the amount of the Fund's assets invested in illiquid securities
if qualified institutional buyers are unwilling to purchase such securities.

Warrants

The Fund may acquire warrants. Warrants are pure speculation in that they
have no voting rights, pay no dividends, and have no rights with respect to
the assets of the corporation issuing them. Warrants basically are options to
purchase equity securities at a specific price valid for a specific period of
time. They do not represent ownership of the securities, but only the right
to buy them. Warrants differ from call options in that warrants are issued by
the issuer of the security which may be purchased on their exercise, whereas
call

<PAGE>

options may be written or issued by anyone. The prices of warrants do not
necessarily move parallel to the prices of the underlying securities.

Debt Securities

Debt Obligations Although a majority of the Fund's assets are invested in
common stocks, the Fund may invest in convertible securities, corporate debt
securities, and preferred stocks which hold the prospect of contributing to
the achievement of the Fund's objectives. Yields on short-, intermediate-,
and long-term securities are dependent on a variety of factors, including the
general conditions of the money and bond markets, the size of a particular
offering, the maturity of the obligation, and the credit quality and rating
of the issuer. Debt securities with longer maturities tend to have higher
yields and are generally subject to potentially greater capital appreciation
and depreciation than obligations with shorter maturities and lower yields.
The market prices of debt securities usually vary, depending upon available
yields. An increase in interest rates will generally reduce the value of
portfolio investments, and a decline in interest rates will generally
increase the value of portfolio investments. The ability of the Fund to
achieve its investment objective is also dependent on the continuing ability
of the issuers of the debt securities in which the Fund invests to meet their
obligations for the payment of interest and principal when due. The Fund's
investment program permits it to purchase below investment-grade securities.
Since investors generally perceive that there are greater risks associated
with investment in lower-quality securities, the yields from such securities
normally exceed those obtainable from higher-quality securities. However, the
principal value of lower-rated securities generally will fluctuate more
widely than higher-quality securities. Lower-quality investments entail a
higher risk of default-that is, the nonpayment of interest and principal by
the issuer than higher-quality investments. Such securities are also subject
to special risks, discussed below. Although the Fund seeks to reduce risk by
portfolio diversification, credit analysis, and attention to trends in the
economy, industries and financial markets, such efforts will not eliminate
all risk. There can, of course, be no assurance that the Fund will achieve
its investment objective.

After purchase by the Fund, a debt security may cease to be rated or its
rating may be reduced below the minimum required for purchase by the Fund.
Neither event will require a sale of such security by the Fund. However, T.
Rowe Price will consider such event in its determination of whether the Fund
should continue to hold the security. To the extent that the ratings given by
Moody's or S&P may change as a result of changes in such organizations or
their rating systems, the Fund will attempt to use comparable ratings as
standards for investments in accordance with the investment policies
contained in the prospectus.

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

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

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

<PAGE>

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.

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

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

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

When-Issued Securities and Forward Commitment Contracts

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

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

PORTFOLIO MANAGEMENT PRACTICES
-------------------------------------------------------------------------------

Lending of Portfolio Securities

<PAGE>

program. While the securities are being lent, the Fund will continue to
receive the equivalent of the interest or dividends paid by the issuer on the
securities, as well as interest on the investment of the collateral or a fee
from the borrower. The Fund has a right to call each loan and obtain the
securities, within such period of time which coincides with the normal
settlement period for purchases and sales of such securities in the
respective markets. The Fund will not have the right to vote on securities
while they are being lent, but it will call a loan in anticipation of any
important vote. The risks in lending portfolio securities, as with other
extensions of secured credit, consist of possible delay in receiving
additional collateral or in the recovery of the securities or possible loss
of rights in the collateral should the borrower fail financially. Loans will
only be made to firms deemed by T. Rowe Price to be of good standing and will
not be made unless, in the judgment of T. Rowe Price, the consideration to be
earned from such loans would justify the risk.

Interfund Borrowing and Lending

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

Repurchase Agreements

The Fund may enter into a repurchase agreement through which an investor
(such as the Fund) purchases a security (known as the "underlying security")
from a well-established securities dealer or a bank that is a member of the
Federal Reserve System. Any such dealer or bank will be on T. Rowe Price's
approved list and have a credit rating with respect to its short-term debt of
at least A1 by S&P, P1 by Moody's, or the equivalent rating by T. Rowe Price.
At that time, the bank or securities dealer agrees to repurchase the
underlying security at the same price, plus specified interest. Repurchase
agreements are generally for a short period of time, often less than a week.
Repurchase agreements which do not provide for payment within seven days will
be treated as illiquid securities. The Fund will only enter into repurchase
agreements where (1) the underlying securities are of the type (excluding
maturity limitations) which the Fund's investment guidelines would allow it
to purchase directly, (2) the market value of the underlying security,
including interest accrued, will be at all times equal to or exceed the value
of the repurchase agreement, and (3) payment for the underlying security is
made only upon physical delivery or evidence of book-entry transfer to the
account of the custodian or a bank acting as agent. In the event of a
bankruptcy or other default of a seller of a repurchase agreement, the Fund
could experience both delays in liquidating the underlying security and
losses, including: (a) possible decline in the value of the underlying
security during the period while the Fund seeks to enforce its rights
thereto; (b) possible subnormal levels of income and lack of access to income
during this period; and (c) expenses of enforcing its rights.

Money Market Reserves

It is expected that the Fund will invest its cash reserves primarily in one
or more money market funds established for the exclusive use of the T. Rowe
Price family of mutual funds and other clients of T. Rowe Price and
Price-Fleming. Currently, two such money market funds are in
operation-Reserve Investment Fund ("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.

<PAGE>

GRF are expected by T. Rowe Price to operate at very low expense ratios. The
Fund will only invest in RIF or GRF to the extent it is consistent with its
objective and program.

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

Options

Options are a type of potentially high-risk derivative.

Writing Covered Call Options

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

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

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

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

<PAGE>

The premium received is the market value of an option. The premium the Fund
will receive from writing a call option will reflect, among other things, the
current market price of the underlying security or currency, the relationship
of the exercise price to such market price, the historical price volatility
of the underlying security or currency, and the length of the option period.
Once the decision to write a call option has been made, T. Rowe Price, in
determining whether a particular call option should be written on a
particular security or currency, will consider the reasonableness of the
anticipated premium and the likelihood that a liquid secondary market will
exist for those options. The premium received by the Fund for writing covered
call options will be recorded as a liability of the Fund. This liability will
be adjusted daily to the option's current market value, which will be the
latest sale price at the time at which the net asset value per share of the
Fund is computed (close of the New York Stock Exchange), or, in the absence
of such sale, the latest asked price. The option will be terminated upon
expiration of the option, the purchase of an identical option in a closing
transaction, or delivery of the underlying security or currency upon the
exercise of the option.

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

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

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

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

Writing Covered Put Options

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

<PAGE>

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

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

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

Purchasing Put Options

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

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

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

<PAGE>

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

Purchasing Call Options

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

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

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

Dealer (Over-the-Counter) Options

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

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

<PAGE>

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

Futures Contracts

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

Transactions in Futures

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

Stock index futures contracts may be used to provide a hedge for a portion of
the Fund's portfolio, as a cash management tool, or as an efficient way for
T. Rowe Price to implement either an increase or decrease in portfolio market
exposure in response to changing market conditions. The Fund may purchase or
sell futures contracts with respect to any stock index. Nevertheless, to
hedge the Fund's portfolio successfully, the Fund must sell futures contacts
with respect to indices or subindices whose movements will have a significant
correlation with movements in the prices of the Fund's portfolio securities.

Interest rate or currency futures contracts may be used as a hedge against
changes in prevailing levels of interest rates or currency exchange rates in
order to establish more definitely the effective return on securities or
currencies held or intended to be acquired by the Fund. In this regard, the
Fund could sell interest rate or currency futures as an offset against the
effect of expected increases in interest rates or currency exchange rates and
purchase such futures as an offset against the effect of expected declines in
interest rates or currency exchange rates.

The Fund will enter into futures contracts which are traded on national or
foreign futures exchanges, and are standardized as to maturity date and
underlying financial instrument. Futures exchanges and trading in the United
States are regulated under the Commodity Exchange Act by the CFTC. Although
techniques other than the sale and purchase of futures contracts could be
used for the above-referenced purposes, futures contracts offer an effective
and relatively low cost means of implementing the Fund's objectives in these
areas.

Regulatory Limitations
If the Fund purchases or sells futures contracts or related options which do
not qualify as bona fide hedging under applicable CFTC rules, the aggregate
initial margin deposits and premium required to establish those positions
cannot exceed 5% of the liquidation value of the Fund after taking into
account unrealized profits and unrealized losses on any such contracts it has
entered into; provided, however, that in the case of an option that is
in-the-money at the time of purchase, the in-the-money amount may be excluded
in calculating the 5% limitation. For purposes of this policy, options on
futures contracts and foreign currency options traded on a commodities
exchange will be considered "related options." This policy may be modified by
the Board of Directors 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.

<PAGE>

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

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

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

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

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

For example, the S&P's 500 Stock Index is made up of 500 selected common
stocks, most of which are listed on the New York Stock Exchange. The S&P 500
Index assigns relative weightings to the common stocks included in the Index,
and the Index fluctuates with changes in the market values of those common
stocks. In the case of futures contracts on the S&P 500 Index, the contracts
are to buy or sell 250 units. Thus, if the value of the S&P 500 Index were
$150, one contract would be worth $37,500 (250 units x $150). The stock index
futures contract specifies that no delivery of the actual stocks making up
the index will take place. Instead, settlement in cash occurs. Over the life
of the contract, the gain or loss realized by the Fund will equal the
difference between the purchase (or sale) price of the contract and the price
at which the contract is terminated. For example, if the Fund enters into a
futures contract to buy 250 units of the S&P 500 Index at a specified future
date at a contract price of $150 and the S&P 500 Index is at $154 on that
future date, the Fund will gain $1,000 (250 units x gain of $4). If the Fund
enters into a futures contract to sell 250 units of the stock index at a
specified future date at a contract price of $150 and the S&P 500 Index is at
$152 on that future date, the Fund will lose $500 (250 units x loss of $2).

<PAGE>

Special Risks of Transactions in Futures Contracts

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

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

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

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

Futures contracts may be closed out only on the exchange or board of trade
where the contracts were initially traded. Although the Fund intends to
purchase or sell futures contracts only on exchanges or boards of trade where
there appears to be an active market, there is no assurance that a liquid
market on an exchange or board of trade will exist for any particular
contract at any particular time. In such event, it might not be possible to
close a futures contract, and in the event of adverse price movements, the
Fund would continue to be required to make daily cash payments of variation
margin. However, in the event futures contracts have been used to hedge the
underlying instruments, the Fund would continue to hold the underlying
instruments subject to the hedge until the futures contracts could be
terminated. In such circumstances, an increase in the price of underlying
instruments, if any, might partially or completely offset losses on the
futures contract. However, as described next, there is no guarantee that the
price of the underlying instruments will, in fact, correlate with the price
movements in the futures contract and thus provide an offset to losses on a
futures contract.

. Hedging Risk A decision of whether, when, and how to hedge involves skill
and judgment, and even a well-conceived hedge may be unsuccessful to some
degree because of unexpected market behavior, market or interest rate trends.
There are several risks in connection with the use by the Fund of futures
contracts as a hedging device. One risk arises because of the imperfect
correlation between movements in the prices of the futures contracts and
movements in the prices of the underlying instruments which are the subject
of the hedge. T. Rowe Price will, however, attempt to reduce this risk by
entering into futures contracts whose movements, in its judgment, will have a
significant correlation with movements in the prices of the Fund's underlying
instruments sought to be hedged.

<PAGE>

If this were to occur, the Fund would lose money on the futures and also
would experience a decline in value in its underlying instruments. However,
while this might occur to a certain degree, T. Rowe Price believes that over
time the value of the Fund's portfolio will tend to move in the same
direction as the market indices used to hedge the portfolio. It is also
possible that, if the Fund were to hedge against the possibility of a decline
in the market (adversely affecting the underlying instruments held in its
portfolio) and prices instead increased, the Fund would lose part or all of
the benefit of increased value of those underlying instruments that it has
hedged, because it would have offsetting losses in its futures positions. In
addition, in such situations, if the Fund had insufficient cash, it might
have to sell underlying instruments to meet daily variation margin
requirements. Such sales of underlying instruments might be, but would not
necessarily be, at increased prices (which would reflect the rising market).
The Fund might have to sell underlying instruments at a time when it would be
disadvantageous to do so.

In addition to the possibility that there might be an imperfect correlation,
or no correlation at all, between price movements in the futures contracts
and the portion of the portfolio being hedged, the price movements of futures
contracts might not correlate perfectly with price movements in the
underlying instruments due to certain market distortions. First, all
participants in the futures market are subject to margin deposit and
maintenance requirements. Rather than meeting additional margin deposit
requirements, investors might close futures contracts through offsetting
transactions, which could distort the normal relationship between the
underlying instruments and futures markets. Second, the margin requirements
in the futures market are less onerous than margin requirements in the
securities markets and, as a result, the futures market might attract more
speculators than the securities markets do. Increased participation by
speculators in the futures market might also cause temporary price
distortions. Due to the possibility of price distortion in the futures market
and also because of imperfect correlation between price movements in the
underlying instruments and movements in the prices of futures contracts, even
a correct forecast of general market trends by T. Rowe Price might not result
in a successful hedging transaction over a very short time period.

Options on Futures Contracts

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

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

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

Special Risks of Transactions in Options on Futures Contracts

<PAGE>

maintenance of a liquid secondary market. Reasons for the absence of a liquid
secondary market on an exchange include the following: (1) there may be
insufficient trading interest in certain options; (2) restrictions may be
imposed by an exchange on opening transactions or closing transactions or
both; (3) trading halts, suspensions or other restrictions may be imposed
with respect to particular classes or series of options, or underlying
instruments; (4) unusual or unforeseen circumstances may interrupt normal
operations on an exchange; (5) the facilities of an exchange or a clearing
corporation may not at all times be adequate to handle current trading
volume; or (6) one or more exchanges could, for economic or other reasons,
decide or be compelled at some future date to discontinue the trading of
options (or a particular class or series of options), in which event the
secondary market on that exchange (or in the class or series of options)
would cease to exist, although outstanding options on the exchange that had
been issued by a clearing corporation as a result of trades on that exchange
would continue to be exercisable in accordance with their terms. There is no
assurance that higher than anticipated trading activity or other unforeseen
events might not, at times, render certain of the facilities of any of the
clearing corporations inadequate, and thereby result in the institution by an
exchange of special procedures which may interfere with the timely execution
of customers' orders.

Additional Futures and Options Contracts

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

Foreign 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 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

<PAGE>

for currency parties will be incorporated into the longer term investment
decisions made with regard to overall diversification strategies. However, T.
Rowe Price believes that it is important to have the flexibility to enter
into such forward contracts when it determines that the best interests of the
Fund will be served.

The Fund may enter into forward contacts for any other purpose consistent
with the Fund's investment objective and program. However, the Fund will not
enter into a forward contract, or maintain exposure to any such contract(s),
if the amount of foreign currency required to be delivered thereunder would
exceed the Fund's holdings of liquid, high-grade debt securities, currency
available for cover of the forward contract(s) or other suitable cover as
permitted by the SEC. In determining the amount to be delivered under a
contract, the Fund may net offsetting positions.

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

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

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

Although the Fund values its assets daily in terms of U.S. dollars, it does
not intend to convert its holdings of foreign currencies into U.S. dollars on
a daily basis. It will do so from time to time, and there are costs
associated with currency conversion. Although foreign exchange dealers do not
charge a fee for conversion, they do realize a profit based on the difference
(the "spread") between the prices at which they are buying and selling
various currencies. Thus, a dealer may offer to sell a foreign currency to
the Fund at one rate, while offering a lesser rate of exchange should the
Fund desire to resell that currency to the dealer.

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

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.

<PAGE>

in which case a loss on any position in a straddle will be subject to
deferral to the extent of unrealized gain in an offsetting position. The
holding period of the securities or currencies comprising the straddle will
be deemed not to begin until the straddle is terminated. The holding period
of the security offsetting an "in-the-money qualified covered call" option on
an equity security will not include the period of time the option is
outstanding.

Losses on written covered calls and purchased puts on securities, excluding
certain "qualified covered call" options on equity securities, may be
long-term capital losses, if the security covering the option was held for
more than 12 months prior to the writing of the option.

In order for the Fund to continue to qualify for federal income tax treatment
as a regulated investment company, at least 90% of its gross income for a
taxable year must be derived from qualifying income, i.e., dividends,
interest, income derived from loans of securities, and gains from the sale of
securities or currencies. Tax regulations could be issued limiting the extent
that net gain realized from option, futures or foreign forward exchange
contracts on currencies is qualifying income for purposes of the 90%
requirement.

As a result of the "Taxpayer Relief Act of 1997," entering into certain
options, futures contracts, or forward contracts may result in the
"constructive sale" of offsetting stocks or debt securities of the Fund.

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

Fundamental Policies

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

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

(2) Commodities Purchase or sell physical commodities; except that it may
enter into futures contracts and options thereon;

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

<PAGE>

market securities and enter into repurchase agreements; and (iii) acquire
publicly distributed or privately placed debt securities and purchase
debt;

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

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

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

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

(9) Underwriting Underwrite securities issued by other persons, except to the
extent that the Fund may be deemed to be an underwriter within the
meaning of the 1933 Act in connection with the purchase and sale of its
portfolio securities in the ordinary course of pursuing its investment
program.

NOTES

The following Notes should be read in connection with the above-described
fundamental policies. The Notes are not fundamental policies.

With respect to investment restriction (2), the Fund does not consider
currency contracts or hybrid investments to be commodities.

For purposes of investment restriction (3), U.S., state or local
governments, or related agencies or instrumentalities, are not considered
an industry. Industries are determined by reference to the
classifications of industries set forth in the Fund's semiannual and
annual reports. It is the position of the Staff of the SEC that foreign
governments are industries for purposes of this restriction.

For purposes of investment restriction (4), the Fund will consider the
acquisition of a debt security to include the execution of a note or
other evidence of an extension of credit with a term of more than nine
months.

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;

The Fund will limit borrowing for any variable annuity separate account
to (a) 10% of net asset value when borrowing for any general purpose, and
(b) 25% of net asset value when borrowing as a temporary measure to
facilitate redemptions.

Net asset value of a portfolio is the market value of all investments or
assets owned less outstanding liabilities of the portfolio at the time
that any new or additional borrowing is undertaken.

(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;

<PAGE>

(4) Illiquid Securities Purchase illiquid securities if, as a result, more
than 15% of its net assets would be invested in such securities;

(5) Investment Companies Purchase securities of open-end or closed-end
investment companies except (i) in compliance with the 1940 Act; or (ii)
securities of the Reserve Investment or Government Reserve Investment
Funds;

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

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

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

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

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

(11) Warrants Invest in warrants if, as a result thereof, more than 10% of
the value of the net assets of the Fund would be invested in warrants.

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 FUND
-------------------------------------------------------------------------------
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.

Independent Directors/(a)/

DONALD W. DICK, JR., 1/27/43, Principal, EuroCapital Advisors, LLC, an
acquisition and management advisory firm; formerly (5/89-6/95) Principal,
Overseas Partners, Inc., a financial investment firm; formerly (6/65-3/89)
Director and Vice President; Consumer Products Division, McCormick & Company,
Inc., international food processors; Director, Waverly, Inc., Baltimore,
Maryland; Address: 925 Cleveland Street, #177, Greenville, South Carolina
29601

DAVID K. FAGIN, 4/9/38, Chairman and Chief Executive Officer, Western
Exploration and Development, Ltd.; Director Golden Star Resources Ltd. and
Miranda Mining Development Corporation; formerly (7/91- 9/97) Chairman,
Chief Executive Officer, Golden Star Resources Ltd.; (1986-7/91) President,
Chief Operating

<PAGE>

Officer and Director, Homestake Mining Company; Address: 1700 Lincoln Street,
Suite 4710, Denver, Colorado 80203

HANNE M. MERRIMAN, 11/16/41, Retail business consultant; formerly President
and Chief Operating Officer (1991-92), Nan Duskin, Inc., a women's specialty
store, Director (1984-90) and Chairman (1989-90) Federal Reserve Bank of
Richmond, and President and Chief Executive Officer (1988-89), Honeybee,
Inc., a division of Spiegel, Inc.; Director, Central Illinois Public Service
Company, CIPSCO Incorporated, Finlay Enterprises, Inc., The Rouse Company,
State Farm Mutual Automobile Insurance Company and USAir Group, Inc.;
Address: 3201 New Mexico Avenue, N.W., Suite 350, Washington, D.C. 20016

HUBERT D. VOS, 8/2/33, Owner/President, Stonington Capital Corporation, a
private investment company; Address: 1114 State Street, Suite 247, P.O. Box
90409, Santa Barbara, California 93190-0409

PAUL M. WYTHES, 6/23/33, Founding General Partner, Sutter Hill Ventures, a
venture capital limited partnership, providing equity capital to young high
technology companies throughout the United States; Director, Teltone
Corporation, Interventional Technologies Inc. and Stuart Medical, Inc.;
Address: 755 Page Mill Road, Suite A200, Palo Alto, California 94304-1005

(a) Unless otherwise indicated, the Independent Directors have been at their
respective companies for at least five years.

Inside Directors/Officers

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

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

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

BRIAN W.H. BERGHUIS, 12/12/58, Executive Vice President -Managing Director,
T. Rowe Price; Chartered Financial Analyst

BRIAN C. ROGERS, 6/27/55, Executive Vice President -Director and Managing
Director, T. Rowe Price; Vice President, T. Rowe Price Trust Company;
Chartered Financial Analyst

MARC L. BAYLIN, 11/17/67, Vice President -Vice President, T. Rowe Price;
formerly financial analyst, Rausher Pierce Refsnes; Chartered Financial
Analyst

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

ROBERT N. GENSLER, 10/18/57, Vice President -Vice President, T. Rowe Price

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

THOMAS J. HUBER, 9/23/66, Vice President -Vice President, T. Rowe Price;
formerly a Corporate Banking Officer with NationsBank; Chartered Financial
Analyst

KRIS H. JENNER, M.D., 2/5/62, Vice President -Vice President, T. Rowe Price;
formerly with the Laboratory of Biological Cancer, The Brigham & Women's
Hospital, Harvard Medical School

JOHN D. LINEHAN, 1/21/65, Vice President -Employee, T. Rowe Price; formerly
Vice President at E.T. Petroleum and Delaney Petroleum; Associate at Bankers
Trust

ROBERT J. MARCOTTE, 3/6/62, Vice President -Vice President, T. Rowe Price

<PAGE>

JOSEPH M. MILANO, 9/14/72, Vice President -Assistant Vice President, T. Rowe
Price; formerly 1996-1994 Research Assistant, Brookings Institution

DONALD J. PETERS, 7/3/59, Vice President -Vice President, T. Rowe Price;
formerly portfolio manager, Geewax Terker and Company

ROBERT W. SHARPS, 6/10/71, Vice President -Assistant Vice President, T. Rowe
Price; formerly Senior Consultant, KPMG Peat Marwick; Chartered Financial
Analyst

MICHAEL F. SOLA, 7/21/69, Vice President -Vice President, T. Rowe Price;
formerly Systems Analyst/ Programmer at SRA Corporation; Chartered Financial
Analyst

BRIAN D. STANSKY, 10/14/63, Vice President -Vice President, T. Rowe Price;
Chartered Financial Analyst

WILLIAM J. STROMBERG, 3/10/60, Vice President -Managing Director, T. Rowe
Price; Chartered Financial Analyst

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

JOHN F. WAKEMAN, 11/25/62, Vice President -Vice President, T. Rowe Price

RICHARD T. WHITNEY, 5/7/58, Vice President -Managing Director, T. Rowe Price;
Vice President, Price-Fleming and T. Rowe Price Trust Company; Chartered
Financial Analyst

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

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

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

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

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

Compensation Table

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

<TABLE>
<CAPTION>
Name of Person, Aggregate Compensation from Total
Position Fund(a) Compensati
- -------------------------------------- -------------------------------------------- from Fund
- --------------------------------------------------------------------------------------------------------------------------and
Fund
----
Complex
-------
Paid to
-------
Directors(
----------
----------
<C> <S> <S>
Donald W. Dick, Jr., Director $1,049 $82,000
David K. Fagin, Director 1,085 65,000
Hanne M. Merriman, Director 1,085 65,000
Hubert D. Vos, Director 1,085 66,000
Paul M. Wythes, Director 1,049 80,000
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

(a) Amounts in this column are based on accrued compensation for calendar
year 1998.

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

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.

<PAGE>

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 April 1, 1999, the following shareholders beneficially owned more than
5% of the outstanding shares of the Fund:

Security Benefit Life Insurance Company, FBO T. Rowe Price No-Load Variable
Annuity, Attn.: Mark Young, 700 SW Harrison St., Topeka, KS 66636-0002;
United Of Omaha-Series V, Attn.: John Martin, Corporate General Ledger,
Mutual Of Omaha Plaza, Omaha, NE 68175; American United Life Separate Account
II, Attn.: Bill Flory, P.O. Box 195, Indianapolis, IN 46206-9102; American
United Life, American Individual Unit Trust, Attn.: Bill Flory, P.O. Box 195,
Indianapolis, IN 46206-9102; American United Life, American Unit Trust,
Attn.: Bill Flory, P.O. Box 1995, Indianapolis, IN 46206-9102; Pruco Life,
Flexible Premium, Variable Annuity Account, Attn.: Financial RPTG/SEP
Accounts, 213 Washington St., 7th Floor, Newark, NJ 07102-2917.

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.

Management Fee
The Fund pays T. Rowe Price an annual all-inclusive fee (the "Fee") of 0.85%.
The Fee is paid monthly to the 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 rate and multiplying this product by the net
assets of the Fund for that day as determined in accordance with the Fund's
prospectus as of the close of business from the previous business day on
which the Fund was open for business.

The Management Agreement between the Fund and T. Rowe Price provides that T.
Rowe Price will pay all expenses of the 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' fee and expenses
(including counsel fees and expenses) and such nonrecurring 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 of the Fund 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

<PAGE>

does not anticipate levying such charges; such a fee, if charged, may be
retained by the Fund or paid to T. Rowe Price. Under the Management
Agreement, the Fund paid T. Rowe Price the following amounts for the years
indicated:

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

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

Investment Services serves as distributor to the Fund pursuant to an
Underwriting Agreement ("Underwriting Agreement"), which provides that the
Fund will pay all fees and expenses in connection with: necessary state
filings; preparing, setting in type, printing, and mailing its prospectuses
and reports to shareholders; and issuing its shares, including expenses of
confirming purchase orders.

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

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

CUSTODIAN
-------------------------------------------------------------------------------
State Street Bank and Trust Company is the custodian for the Fund's U.S.
securities and cash, but it does not participate in the Fund's investment
decisions. Portfolio securities purchased in the U.S. are maintained in the
custody of the Bank and may be entered into the Federal Reserve Book Entry
System, or the security depository system of the Depository Trust
Corporation. State Street Bank's main office is at 225 Franklin Street,
Boston, Massachusetts 02110.

The Fund has entered into a Custodian Agreement with The Chase Manhattan
Bank, N.A., London, pursuant to which portfolio securities which are
purchased outside the United States are maintained in the custody of various
foreign branches of The Chase Manhattan Bank and such other custodians,
including foreign banks and foreign securities depositories as are approved
in accordance with regulations under the 1940 Act. The address for The Chase
Manhattan Bank, N.A., London is Woolgate House, Coleman Street, London, EC2P
2HD, England.

<PAGE>

report their personal securities transactions within 10 days of their
execution. Employees will not be permitted to effect transactions in a
security: if there are pending client orders in the security; the security
has been purchased or sold by a client within seven calendar days; the
security is being considered for purchase for a client; 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.

How Brokers and Dealers Are Selected

Equity Securities

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

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

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

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

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

<PAGE>

Descriptions of Research Services Received From Brokers and Dealers

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

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

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

<PAGE>

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

Miscellaneous

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

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

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

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

At the present time, T. Rowe Price does not recapture commissions or
underwriting discounts or selling group concessions in connection with
taxable securities acquired in underwritten offerings. T. Rowe Price does,
however, attempt to negotiate elimination of all or a portion of the
selling-group concession or underwriting discount when purchasing tax-exempt
municipal securities on behalf of its clients in underwritten offerings.

Trade Allocation Policies

T. Rowe Price has developed written trade allocation guidelines for its
Equity, Municipal, and Taxable Fixed Income Trading Desks. Generally, when
the amount of securities available in a public offering or the secondary
market is insufficient to satisfy the volume or price requirements for the
participating client portfolios, the guidelines require a pro-rata allocation
based upon the amounts initially requested by each portfolio manager. In
allocating trades made on combined basis, the Trading Desks seek to achieve
the same net unit price of the securities for each participating client.
Because a pro-rata allocation may not always adequately accommodate all facts
and circumstances, the guidelines provide for exceptions to allocate trades
on an adjusted, pro-rata basis. Examples of where adjustments may be made
include: (i) reallocations to recognize the efforts of a portfolio manager in
negotiating a transaction or a private placement; (ii)

<PAGE>

reallocations to eliminate deminimis positions; (iii) priority for accounts
with specialized investment policies and objectives; and (iv) reallocations
in light of a participating portfolio's characteristics (e.g., industry or
issuer concentration, duration, and credit exposure).

Transactions With Related Brokers and Dealers

As provided in the Investment Management Agreement between the Fund and T.
Rowe Price, T. Rowe Price is responsible not only for making decisions with
respect to the purchase and sale of the Fund's portfolio securities, but also
for implementing these decisions, including the negotiation of commissions
and the allocation of portfolio brokerage and principal business. It is
expected that, from time to time, T. Rowe Price may place orders for the
Fund's portfolio transactions with broker-dealer affiliates of Robert Fleming
Holdings Limited ("Robert Fleming" or "Flemings"), an affiliate of
Price-Fleming. Robert Fleming, through Copthall Overseas Limited, a wholly
owned subsidiary, owns 25% of the common stock of Price-Fleming. Fifty
percent of the common stock of Price-Fleming is owned by TRP Finance, Inc., a
wholly owned subsidiary of T. Rowe Price, and the remaining 25% is owned by
Jardine Fleming Holdings Limited, a subsidiary of Jardine Fleming Group
Limited ("JFG"). JFG is owned by Robert Fleming.

The Board of Directors 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.

Other

For the fiscal years ended December 31, 1998, 1997, and 1996, the total
brokerage commissions paid by the Fund, including the discounts received by
securities dealers in connection with underwritings was $269,760, $221,000,
and $86,000, respectively. Of these commissions, approximately 29.6%, 29.6%,
and 25.3%, respectively, were paid to firms which provided research,
statistical or other services to T. Rowe Price in connection with the
management of the Fund, or in some cases, to the Fund.

The portfolio turnover rates for the fiscal years ending December 31, 1998,
1997, and 1996, were 18.2%, 20.5%, and 17.4%, respectively.

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

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

Investments in mutual funds are valued at the closing net asset value per
share of the mutual fund on the day of valuation. In the absence of a last
sale price, purchased and written options are valued at the mean of the
latest bid and asked prices, respectively.

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

<PAGE>

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

NET ASSET VALUE PER SHARE
-------------------------------------------------------------------------------
The purchase and redemption price of the Fund's shares is equal to the Fund's
net asset value per share or share price. The Fund determines its net asset
value per share by subtracting its liabilities (including accrued expenses
and dividends payable) from its total assets (the market value of the
securities the Fund holds plus cash and other assets, including income
accrued but not yet received) and dividing the result by the total number of
shares outstanding. The net asset value per share of the Fund is normally
calculated as of the close of trading on the New York Stock Exchange ("NYSE")
every day the NYSE is open for trading. The NYSE is closed on the following
days: New Year's Day, Dr. Martin Luther King, Jr. Holiday, Presidents' Day,
Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day, and
Christmas Day.

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

DIVIDENDS AND DISTRIBUTIONS
-------------------------------------------------------------------------------

Unless the separate account elects otherwise, the fourth quarter dividend and
capital gain distribution will be reinvested on the reinvestment date using
the NAV per share of that date. The reinvestment date normally precedes the
payment date by one day, although the exact timing is subject to change and
can be as great as 10 days.

TAX STATUS
-------------------------------------------------------------------------------
The Fund intends to qualify as a "regulated investment company" under
Subchapter M of the Code and also intends to diversify its assets in
accordance with regulations under Code Section 817(h).

In 1987, the Treasury Department indicated that it may issue regulations
addressing the circumstances in which a policyholder's control of the
investments of the insurance company separate account would result in the
policyholder being treated as the owner of such assets. Although there is no
present indication that such regulations will be issued, their adoption could
alter the tax treatment of the policyholder, separate account or insurance
company.

For tax purposes, 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. In certain circumstances, the Fund
may not be required to comply with the excise tax distribution requirements.
It does not make any difference whether dividends and capital gain
distributions are paid in cash or in additional shares.

<PAGE>

At the time a shareholder acquires Fund shares, the Fund's net asset value
may reflect undistributed income, capital gains or net unrealized
appreciation of securities held by the Fund which may be subsequently
distributed as either dividends or capital gain distributions.

If, in any taxable year, the Fund should not qualify as a regulated
investment company under the Code: (i) the Fund would be taxed at normal
corporate rates on the entire amount of its taxable income, if any, without
deduction for dividends or other distributions to shareholders; and (ii) the
Fund's distributions to the extent made out of the Fund's current or
accumulated earnings and profits would be treated as ordinary dividends by
shareholders (regardless of whether they would otherwise have been considered
capital gain dividends), and (iii) the separate accounts investing in the
Fund may fail to satisfy the requirements of Code Section 817(h) which in
turn could adversely affect the tax status of life insurance and annuity
contracts with premiums invested in the affected separate accounts.

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

Passive Foreign Investment Companies

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

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

Foreign Currency Gains and Losses

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

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

Total Return Performance

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

<PAGE>

<TABLE>
<CAPTION>
Cumulative Performance Percentage Change
1 Yr. 5 Yrs. 10 Yrs. % Since Inception
----- ------ ------- ------- ---------
Ended Ended Ended Inception Date
----- ----- ----- --------- ----
12/31/98 12/31/98 12/31/98 12/31/98
-------- -------- -------- --------
<S> <C> <C> <C> <C> <S>
S & P 500 Stock Index 28.57% 193.88% 479.58% 205.47%
Dow Jones Industrial
Average 18.13 173.37 461.09 180.43
CPI 1.61 12.41 36.02 11.35

Equity Income Portfolio 9.07 -- -- 142.62 03/31/94
- -------------------------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
Average Annual Compound Rates of Return
1 Yr. 5 Yrs. 10 Yrs. % Since Inception
----- ------ ------- ------- ---------
Ended Ended Ended Inception Date
----- ----- ----- --------- ----
12/31/98 12/31/98 12/31/98 12/31/98
-------- -------- -------- --------
<S> <C> <C> <C> <C> <S>
S & P 500 Stock Index 28.57% 24.06% 19.21% 26.48%
Dow Jones Industrial
Average 18.13 22.28 18.82 24.22
CPI 1.61 2.37 3.12 2.29

Equity Income Portfolio 9.07 -- -- 20.49 03/31/94
- -------------------------------------------------------------------------------
</TABLE>

Outside Sources of Information

From time to time, in reports and promotional literature: (1) the Fund's
total return performance, ranking, or any other measure of the Fund's
performance may be compared to any one or combination of the following: (a) a
broad-based index; (b) other groups of mutual funds, including T. Rowe Price
Funds, tracked by independent research firms ranking entities, or financial
publications; (c) indices of securities comparable to those in which the Fund
invests; (2) the Consumer Price Index (or any other measure for inflation,
government statistics, such as GNP may be used to illustrate investment
attributes of the Fund or the general economic, business, investment, or
financial environment in which the Fund operates; (3) various financial,
economic and market statistics developed by brokers, dealers and other
persons may be used to illustrate aspects of the Fund's performance; (4) the
effect of tax-deferred compounding on the Fund's investment returns, or on
returns in general in both qualified and nonqualified retirement plans or any
other tax advantage product, may be illustrated by graphs, charts, etc.; and
(5) the sectors or industries in which the Fund invests may be compared to
relevant indices or surveys in order to evaluate the Fund's historical
performance or current or potential value with respect to the particular
industry or sector.

Other Publications

From time to time, in newsletters and other publications issued by Investment
Services, T. Rowe Price mutual fund portfolio managers may discuss economic,
financial and political developments in the U.S. and abroad and how these
conditions have affected or may affect securities prices or the Fund;
individual securities within the Fund's portfolio; and their philosophy
regarding the selection of individual stocks, including why specific stocks
have been added, removed or excluded from the Fund's portfolio.

Other Features and Benefits

<PAGE>

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 Charter of the Corporation authorizes its 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. Currently, the Corporation consists of four series, T.
Rowe Price Equity Income Portfolio, T. Rowe Price Personal Strategy Balanced
Portfolio, T. Rowe Price New America Growth Portfolio all established in
1994, and the T. Rowe Price Mid-Cap Growth Portfolio established in 1996.
(The other funds are described in separate Statements of Additional
Information). Each series represents a separate class of the Corporation's
shares and has different objectives and investment policies. 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 Corporation's Board of Directors may increase or
decrease the aggregate number of shares of stock or the number of shares of
stock of any class or series that the Funds have authorized to issue without
shareholder approval.

<PAGE>

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

The various insurance companies own the outstanding shares of the Fund in
their separate accounts. These separate accounts are registered as investment
companies under the 1940 Act or are excluded from registration. Each
insurance company, as the Shareholder, is entitled to one vote for each full
share held (and fractional votes for fractional shares held). Under the
current laws the insurance companies must vote the shares held in registered
separate accounts in accordance with voting instructions received from
variable Contract Holders or Participants. Fund shares for which Contract
Holders or Participants are entitled to give voting instructions, but as to
which no voting instructions are received, and shares owned by the insurance
companies or affiliated companies in the separate accounts, will be voted in
proportion to the shares for which voting instructions have been received.

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

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

<PAGE>

<TABLE>
<CAPTION>
ANNUAL REPORT REFERENCE:

EQUITY INCOME PORTFOLIO
-----------------------
<S> <C>
Report of Independent Accountants 15
Statement of Net Assets, December 31, 1998 7-10
Statement of Operations, year ended December 31, 1998 11
Statement of Changes in Net Assets, years ended
December 31, 1998 and December 31, 1997 12
Notes to Financial Statements, December 31, 1998 13-14
Financial Highlights 6
</TABLE>

RATINGS OF CORPORATE DEBT SECURITIES
-------------------------------------------------------------------------------

Moody's Investors Service, Inc.

Aaa-Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt
edge."

Aa-Bonds rated Aa are judged to be of high quality by all standards. Together
with the Aaa group they comprise what are generally know as high-grade bonds.

A-Bonds rated A possess many favorable investment attributes and are to be
considered as upper medium-grade obligations.

Baa-Bonds rated Baa are considered as medium-grade obligations, i.e., they
are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any
great length of time. Such bonds lack outstanding investment characteristics
and in fact have speculative characteristics as well.

Ba-Bonds rated Ba are judged to have speculative elements: their futures
cannot be considered as well assured. Often the protection of interest and
principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterize bonds in this class.

B-Bonds rated B generally lack the characteristics of a desirable investment.
Assurance of interest and principal payments or of maintenance of other terms
of the contract over any long period of time may be small.

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.

<PAGE>

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

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

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

D-In default.

Fitch IBCA, Inc.

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

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

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

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

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

<PAGE>

PROSPECTUS
May 1, 1999
T. Rowe Price Mid-Cap Growth Portfolio

A stock fund seeking long-term capital appreciation through investments in
medium-sized growth companies.
The Securities and Exchange Commission has not approved or disapproved these
securities or passed upon the adequacy of this prospectus. Any representation
to the contrary is a criminal offense.
LOGO
<PAGE>

T. Rowe Price Equity Series, Inc. T. Rowe Price Mid-Cap Growth Portfolio
Prospectus

May 1, 1999

<TABLE>
<CAPTION>
<S> <C> <C> <C>
ABOUT THE FUND
1
Fund, Market, and Risk Characteristics 2

---------------------------------------------
Other Information About the Fund 4

---------------------------------------------
Some Basics of
Fixed
Investing
---------------------------------------------

ABOUT YOUR ACCOUNT
2
Pricing Shares and Receiving 6
Sale Proceeds
---------------------------------------------
Rights Reserved by the Fund 7

---------------------------------------------
Dividends and Distributions 8

---------------------------------------------

MORE ABOUT THE FUND
3
Organization and Management 9

---------------------------------------------
Understanding Performance Information 11

---------------------------------------------
Investment Policies and Practices 11

---------------------------------------------
Financial Highlights 15

---------------------------------------------
</TABLE>

The fund is designed to serve as a funding vehicle for variable annuity and
variable life insurance contracts.

What is the fund's objective?

The fund seeks to provide long-term capital appreciation by investing in
mid-cap stocks with potential for above-average earnings growth.

What is the fund's principal investment strategy?

We will invest at least 65% of the fund's assets in a diversified portfolio
of common stocks of mid-cap companies whose earnings T. Rowe Price expects
to grow at a faster rate than the average company. We define mid-cap
companies as those whose market capitalization (number of shares
outstanding multiplied by share price) falls within the range of companies
in the S&P MidCap 400 Index. However, the fund will not automatically sell
or cease to purchase stock of a company it already owns just because the
company's market capitalization grows or falls outside this range.

As "growth" investors, we believe that when a company's earnings grow
faster than both inflation and the overall economy, the market will
eventually reward it with a higher stock price.

In selecting investments, we generally favor companies that:

. have proven products or services;

. have a record of above-average earnings growth;

. have demonstrated potential to sustain earnings growth;

. operate in industries experiencing increasing demand; or

. have stock prices that appear to undervalue their growth prospects.

The fund may sell securities for a variety of reasons, such as to secure
gains, limit losses, or redeploy assets into more promising opportunities.

. For details about the fund's investment program, please see the Investment
Policies and Practices section.

What are the main risks of investing in the fund?

T. ROWE PRICE
may deteriorate because of a variety of factors, including disappointing
earnings or changes in the competitive environment. In addition, our
assessment of companies held in the fund may prove incorrect, resulting in
losses or poor performance even in a rising market. Finally, the fund's
investment approach could fall out of favor with the investing public,
resulting in lagging performance versus other types of stock funds.

The stocks of mid-cap companies entail greater risk and are usually more
volatile than the shares of large companies. In addition, growth stocks can
be volatile for several reasons. Since they usually reinvest a high
proportion of earnings in their own businesses, they may lack the dividend
associated with value stocks that can cushion their decline in a falling
market. Also, since investors buy these stocks because of their expected
superior earnings growth, earnings disappointments often result in sharp
price declines.

As with any mutual fund, there can be no guarantee the fund will achieve
its objective.

. The fund's share price may decline, so when you sell your shares, you may
lose money.

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

Consider your investment goals, your time horizon for achieving them, and
your tolerance for risk. If you can accept the greater risk of investing in
mid-cap growth companies in an effort to achieve superior capital
appreciation, the fund could be an appropriate part of your overall
investment strategy. This fund should not represent your complete
investment program or be used for short-term trading purposes.

. Equity investors should have a long-term investment horizon and be willing
to wait out bear markets.

How has the fund performed in the past?

<TABLE>
INSERT BAR
CHART HERE
<CAPTION>
Calendar Year Total Returns
-------------------------------
<S> <C>
1997 18.80%
1998 22.08
-------------------------------
</TABLE>

Quarter ended Total return

Best quarter 12/31/1998 26.44%

Worst quarter 9/30/1998 -17.36%

<TABLE>
Table 1 Average Annual Total Returns
<CAPTION>
Periods ended December 31, 1998
Since inception
1 year (12/31/96)
<S> <C> <C> <S>

Mid-Cap Growth Portfolio 22.08% 20.43%
-------------------------------------
S&P MidCap 400 Index 19.11 25.51
-------------------------------------------------------------------------------
</TABLE>

These figures include changes in principal value, reinvested dividends, and
capital gain distributions, if any.

OTHER INFORMATION ABOUT THE FUND
-------------------------------------------------------------------------------

What are the advantages of mid-cap investing?

Mid-cap companies are often in the early, more dynamic phase of their life
cycles, but are no longer considered new or emerging. By being more focused
in their business activities, these companies may be more responsive and
better able to adapt to the changing needs of their markets than large
companies. Medium-sized companies also tend to have greater resources, and
therefore represent less risk, than small companies. They are usually
mature enough to have established organizational structures and the depth
of management needed to expand their operations. In addition, they
generally have sufficient financial resources and access to capital to
finance their growth. Since mid-cap stocks are usually less actively
followed by securities analysts, they could be undervalued by the market,
providing opportunities for investors.

What is meant by a "growth" investment approach?

Thomas Rowe Price, Jr. pioneered the growth stock theory of investing over
60 years ago. It is based on the premise that inflation represents a more
serious long-term threat to an investor's portfolio than stock market
fluctuations or recessions. Mr. Price believed that when a company's
earnings grow faster than both inflation and the economy in general, the
market will eventually reward its long-term earnings growth with a higher
stock price. In addition, the company should be able to raise its dividend
in line with its growth in earnings. However, investors should be aware
that, during periods of adverse economic and market conditions, stock
prices may fall despite favorable earnings trends.

. Growth investors look for companies with above-average earnings gains.
<PAGE>

T. ROWE PRICE
What are some potential risks and rewards of investing in the stock market
through this fund?

Is there other information I can review before making a decision?

Investment Policies and Practices in Section 3 discusses various types of
portfolio securities the fund may purchase as well as types of investment
management practices the fund may use.
<PAGE>

Your ability to exchange from this fund to any other one that serves as an
investment option under your insured contract is governed by the terms of
that contract and the separate account prospectus.

How and when shares are priced

How your purchase, sale, or exchange price is determined

T. ROWE PRICE
How you can receive the proceeds from a sale

Excessive Trading

. T. Rowe Price may bar excessive traders from purchasing shares.

. 60-day rule If you purchase fund shares and hold them for less than 60
calendar days, you are in violation of our excessive trading policy.

ABOUT YOUR ACCOUNT
knowingly be permitted to purchase in excess of 5% of the outstanding
shares of the fund, except upon approval of the fund's management.

Dividends and other distributions

The policy of the fund is to distribute all of its net investment income
and net capital gains each year to its shareholders, which are the separate
accounts established by the various insurance companies in connection with
their issuance of variable annuity and life contracts. Dividends from net
investment income are declared and paid annually. All fund distributions
made to a separate account will be reinvested automatically in additional
fund shares, unless a shareholder (separate account) elects to receive
distributions in cash. Under current law, dividends and distributions made
by the fund to separate accounts generally are not taxable to the separate
accounts, the insurance company or the Contract Holder, provided that the
separate account meets the diversification requirements of Section 817(h)
of the Internal Revenue Code of 1986, as amended, and other tax-related
requirements are satisfied. The fund intends to diversify its investments
in the manner required under Code Section 817(h).

Foreign Transactions

If the fund pays nonrefundable taxes to foreign governments during the
year, the taxes will reduce the fund's dividends.
<PAGE>

MORE ABOUT THE FUND
3
ORGANIZATION AND MANAGEMENT
-------------------------------------------------------------------------------

How is the fund organized?

While the fund is managed in a manner similar to that of the T. Rowe Price
Mid-Cap Growth Fund, investors should be aware that the fund is not the
same fund and will not have the same performance. Investments made by the
fund at any given time may not be the same as those made by the T. Rowe
Price fund. Different performance will result due to factors such as
differences in the cash flows into and out of the fund, different fees and
expenses, and differences in portfolio size and positions.

. Shareholders benefit from T. Rowe Price's 62 years of investment management
experience.

What is meant by "shares"?

Do T. Rowe Price funds have annual shareholder meetings?

ABOUT YOUR ACCOUNT
issues to be decided and include instructions on voting by mail or
telephone, or on the Internet.

Who runs the fund?

. All decisions regarding the purchase and sale of fund investments are made
by T. Rowe Price - specifically by the fund's portfolio managers.

Portfolio Management

The fund has an Investment Advisory Committee with the following members:
Brian W.H. Berghuis, Chairman, Marc L. Baylin, Anna M. Dopkin, Kris H.
Jenner, Joseph Milano, Michael F. Sola, and John F. Wakeman. The committee
chairman has day-to-day responsibility for managing the portfolio and works
with the committee in developing and executing the fund's investment
program. Mr. Berghuis has been chairman of the fund's committee since 1996.
Mr. Berghuis joined T. Rowe Price in 1985 and has been managing investments
since 1988.

From time to time, T. Rowe Price may pay participating insurance companies
for services, provided by such insurance companies for the fund or on
behalf of contract holders.

Variable Annuity and Variable Life Charges

T. ROWE PRICE
UNDERSTANDING PERFORMANCE INFORMATION
-------------------------------------------------------------------------------
This section should help you understand the terms used to describe fund
performance. You will come across them in shareholder reports you receive
from your insurance company.

Total Return

Advertisements for a fund may include cumulative or average annual total
return figures, which may be compared with various indices, other
performance measures, or other mutual funds.

Cumulative Total Return

Average Annual Total Return

ABOUT YOUR ACCOUNT
The fund's holdings of certain kinds of investments cannot exceed maximum
percentages of total assets, which are set forth in this prospectus. For
instance, this fund is not permitted to invest more than 10% of total
assets in hybrid instruments. While these restrictions provide a useful
level of detail about the fund's investment program, investors should not
view them as an accurate gauge of the potential risk of such investments.
For example, in a given period, a 5% investment in hybrid instruments could
have significantly more of an impact on the fund's share price than its
weighting in the portfolio. The net effect of a particular investment
depends on its volatility and the size of its overall return in relation to
the performance of all the fund's other investments.

Changes in the fund's holdings, the fund's performance, and the
contribution of various investments are discussed in the shareholder
reports sent to you.

. Fund managers have considerable leeway in choosing investment strategies
and selecting securities they believe will help the fund achieve its
objective.

Types of Portfolio Securities

The fund invests primarily in common stocks and may, to a lesser degree,
purchase other types of securities described below.

T. ROWE PRICE
Foreign Securities
The fund may invest in foreign securities. These include
nondollar-denominated securities traded outside of the U.S. and
dollar-denominated securities of foreign issuers traded in the U.S. (such
as ADRs). Such investments increase a portfolio's diversification and may
enhance return, but they also involve some special risks, such as exposure
to potentially adverse local political and economic developments;
nationalization and exchange controls; potentially lower liquidity and
higher volatility; possible problems arising from accounting, disclosure,
settlement, and regulatory practices that differ from U.S. standards; and
the chance that fluctuations in foreign exchange rates will decrease the
investment's value (favorable changes can increase its value). These risks
are heightened for investments in developing countries, and there is no
limit on the amount of the fund's foreign investments that may be made in
such countries.

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

. Hybrids can have volatile prices and limited liquidity, and their use by
the fund may not be successful.

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

Private Placements
These securities are sold directly to a small number of investors, usually
institutions. Unlike public offerings, such securities are not registered
with the SEC. Although certain of these securities may be readily sold, for
example, under Rule 144A, others may be illiquid, and their sale may
involve substantial delays and additional costs.

Operating policy The fund may invest up to 15% of its net assets in
illiquid securities.

Types of Investment Management Practices

MORE ABOUT THE FUND
the fund's investment objective and program. Such borrowings may be
collateralized with fund assets, subject to restrictions.

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

Futures and Options

Managing Foreign Currency Risk
Investors in foreign securities may "hedge" their exposure to potentially
unfavorable currency changes by purchasing a contract to exchange one
currency for another on some future date at a specified exchange rate. In
certain circumstances, a "proxy currency" may be substituted for the
currency in which the investment is denominated, a strategy known as "proxy
hedging." If the fund were to engage in foreign currency transactions, they
would be used primarily to protect the fund's foreign securities from
adverse currency movements relative to the dollar. Such transactions
involve the risk that anticipated currency movements will not occur, and
the fund's total return could be reduced.

Fundamental policy The value of loaned securities may not exceed
33/1//\\/3/\\% of total fund assets.
<PAGE>

T. ROWE PRICE
Portfolio Turnover
The fund will not generally trade in securities for short-term profits,
but, when circumstances warrant, securities may be purchased and sold
without regard to the length of time held. A high turnover rate may
increase transaction costs and result in higher capital gain distributions
by the fund. The fund's portfolio turnover rates for the fiscal years
ending December 31, 1998 and 1997, were 47.8% and 40.3% (annualized),
respectively.

Year 2000 Processing Issue

FINANCIAL HIGHLIGHTS
-------------------------------------------------------------------------------
Table 2, which provides information about the fund's financial history, is
based on a single share outstanding throughout each fiscal year. The table
is part of the fund's financial statements, which are included in its
annual report and are incorporated by reference into the Statement of
Additional Information (available upon request). The total returns in the
table represent the rate that an investor would have earned or lost on an
investment in the fund (assuming reinvestment of all dividends and
distributions). The financial statements in the annual report were audited
by the fund's independent accountants, PricewaterhouseCoopers LLP.
<PAGE>

MORE ABOUT THE FUND
<TABLE>
Table 2 Financial Highlights
<CAPTION>
12/31/96/*/
through Year ended December 31
12/31/97
------------- 1998
--------------------------------------- -----------------------------
<S> <C> <C> <C> <C>

Net asset value,
beginning of period $ 10.00 $ 11.88
Income From Investment Operations
Net investment income -- (0.01)
-------------------------------------
Net gains or losses
on securities (both
realized and 1.88 2.61
unrealized)
-------------------------------------
Total from investment
operations 1.88 2.60
Less Distributions
Dividends (from net -- --
investment income)
-------------------------------------
Distributions (from -- (0.21)
capital gains)
-------------------------------------
Returns of capital -- --
-------------------------------------
Total distributions -- (0.21)
-------------------------------------
Net asset value, end $ 11.88 $ 14.27
of period
-------------------------------------
Total return 18.8% 22.08%
Ratios/Supplemental Data
Net assets, end of
period $15,272 $29,911
(in thousands)
------------------------------------------
Ratio of expenses to 0.85%/a/ 0.85%
average net assets
-------------------------------------
Ratio of net income -- (0.11)%
to average net assets
-------------------------------------
Portfolio turnover 40.3% 47.8%
rate
---------------------------------------------------------------------------------
</TABLE>

/a/ Annualized.

/*/ Inception date.
<PAGE>

T. ROWE PRICE
<PAGE>

<PAGE>

STATEMENT OF ADDITIONAL INFORMATION
The date of this Statement of Additional Information is May 1, 1999.

T. ROWE PRICE EQUITY SERIES, INC. (the "Corporation")
T. Rowe Price Mid-Cap Growth Portfolio (the "Fund")

______________________________________________________________________________

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

SAI-MGP 5/1/99
<PAGE>

<TABLE>
<CAPTION>
TABLE OF CONTENTS
-----------------
Page Page
---- ----
<S> <C> <C> <C> <C>
Capital Stock 34 Investment Restrictions 20

- ----------------------------------- ---------------------------------------
Code of Ethics 26 Legal Counsel 35

- ----------------------------------- ---------------------------------------
Custodian 26 Management of the Fund 22

- ----------------------------------- ---------------------------------------
Distributor for the Fund 25 Net Asset Value Per Share 30

- ----------------------------------- ---------------------------------------
Dividends and Distributions 31 Portfolio Management Practices 8

- ----------------------------------- ---------------------------------------
Federal Registration of 35 Portfolio Transactions 26
Shares
- ----------------------------------- ---------------------------------------
Independent Accountants 35 Pricing of Securities 30

- ----------------------------------- ---------------------------------------
Investment Management 25 Principal Holders of Securities 24
Services
- ----------------------------------- ---------------------------------------
Investment Objectives and 2 Risk Factors 2
Policies
- ----------------------------------- ---------------------------------------
Investment Performance 32 Tax Status 31

- ----------------------------------- ---------------------------------------
Investment Program 5

- ----------------------------------- ---------------------------------------
</TABLE>

Rowe Price-Fleming International, Inc. ("Price-Fleming")

<PAGE>

. Latin America

. Asia (ex-Japan)

INVESTMENT PROGRAM
-------------------------------------------------------------------------------

Types of Securities

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

Hybrid Instruments

<PAGE>

Illiquid or Restricted Securities

Warrants

<PAGE>

options may be written or issued by anyone. The prices of warrants do not
necessarily move parallel to the prices of the underlying securities.

PORTFOLIO MANAGEMENT PRACTICES
-------------------------------------------------------------------------------

Lending of Portfolio Securities

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

Interfund Borrowing and Lending

Repurchase Agreements

Reverse Repurchase Agreements

<PAGE>

seller of, rather than the investor in, securities, and agrees to repurchase
them at an agreed upon time and price. Use of a reverse repurchase agreement
may be preferable to a regular sale and later repurchase of the securities
because it avoids certain market risks and transaction costs. A reverse
repurchase agreement may be viewed as a type of borrowing by the Fund,
subject to Investment Restriction (1). (See "Investment Restrictions.")

Money Market Reserves

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

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

Options

Options are a type of potentially high-risk derivative.

Writing Covered Call Options

<PAGE>

with sufficient collateral to satisfy SEC prohibitions on issuing senior
securities, this type of strategy would expose the Fund to the risks of
writing uncovered options.

<PAGE>

Writing Covered Put Options

Purchasing Put Options

<PAGE>

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

Dealer (Over-the-Counter) Options

<PAGE>

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.

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").

<PAGE>

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

<PAGE>

Fund realizes a gain; if it is less, the Fund realizes a loss. The
transaction costs must also be included in these calculations. There can be
no assurance, however, that the Fund will be able to enter into an offsetting
transaction with respect to a particular futures contract at a particular
time. If the Fund is not able to enter into an offsetting transaction, the
Fund will continue to be required to maintain the margin deposits on the
futures contract.

Special Risks of Transactions in Futures Contracts

<PAGE>

been used to hedge the underlying instruments, the Fund would continue to
hold the underlying instruments subject to the hedge until the futures
contracts could be terminated. In such circumstances, an increase in the
price of underlying instruments, if any, might partially or completely offset
losses on the futures contract. However, as described next, there is no
guarantee that the price of the underlying instruments will, in fact,
correlate with the price movements in the futures contract and thus provide
an offset to losses on a futures contract.

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.

Options on Futures Contracts

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

<PAGE>

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.

Special Risks of Transactions in Options on Futures Contracts

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

Additional Futures and Options Contracts

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

<PAGE>

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

<PAGE>

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.

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

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

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.

<PAGE>

Fundamental Policies

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

(2) Commodities Purchase or sell physical commodities; except that it may
enter into futures contracts and options thereon;

(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;