PRICE T ROWE FIXED INCOME SERIES INC, 497, 1995-05-19

PRICE T ROWE FIXED INCOME SERIES INC
497, 1995-05-19

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PAGE 1

Prospectus for the T. Rowe Price Fixed Income Series, Inc., dated
May 1, 1995, should be inserted here.

Prospectus

T. Rowe Price
Limited-Term Bond Portfolio

Facts at a Glance

Investment Goal

To provide a high level of income consistent with moderate fluctuation in
principal value. There is no assurance the fund will achieve its goal.

Strategy
Invests primarily in investment-grade, short- and intermediate-term bonds.

Risk/Reward
Moderate income level and share price fluctuation.

Investor Profile
Individuals who seek higher income than shorter-term funds provide and who
can accept moderate share price fluctuation.

Investment Manager
Founded in 1937 by the late Thomas Rowe Price, Jr. T. Rowe Price
Associates, Inc. ("T. Rowe Price") and its affiliates managed over $57
billion for over three million individual and institutional investor
accounts as of December 31, 1994.

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION, OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION, OR ANY STATE SECURITIES COMMISSION,
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.

T. Rowe Price
Fixed Income Series,Inc.
May 1, 1995

Prospectus

Contents

1 About the Fund
Financial Highlights 2
Fund, Market, and Risk Characteristics 2

2 About Your Account
Pricing Shares; Receiving Sale Proceeds 5
Dividends and Distributions 6

3 More About the Fund
Organization and Management 6
Understanding Fund Performance 8
Investment Policies and Practices 9

This prospectus contains information that a prospective Contract Holder or
Participant should know about the fund before investing. Please keep it for
future reference. A Statement of Additional Information about the fund,
dated May 1, 1995, has been filed with the Securities and Exchange
Commission and is incorporated by reference in this prospectus. To obtain a
free copy, contact your insurance company.

1 About the Fund

Financial Highlights
The following table provides information about the fund's financial
history. It is based on a single share outstanding for the period May 13,
1994 (commencement of operations) to December 31, 1994. The table is part
of the fund's financial statements which are included in the fund's annual
report and incorporated by reference into the Statement of Additional
Information. This document is available to shareholders upon request. The
financial statements in the annual report have been audited by Price
Waterhouse LLP, independent accountants, whose unqualified report covers
the period shown.

<TABLE>
<CAPTION>
Investment Activities Distributions End of Period
Net
Real-
ized
and Total Ratio
Net Unreal- Return of Net
Asset ized Total Net (in- Ratio Invest-
Value, Net Gain from Asset cludes of Ex- ment Port-
Period Begin- Invest- (Loss) Invest- Net Net Total Value Rein- penses Income- folio
Ended, ning ment on ment Invest- Real- Dis- End vested to Aver- to Aver- Turn-
Dec. of Income Invest- Activi- ment ized tribu- of Divi- Net age Net age Net over
31 Period (Loss) ments ties Income Gain tions Period dends) Assets Assets Assets Rate

<FN>

<F1> Annualized.

</FN>
</TABLE>
Table 1

Fund, Market, and Risk Characteristics: What to Expect

To help you decide whether the fund is appropriate for you, this section
takes a closer look at its investment objective and approach.

The fund should not be relied upon as a complete investment program nor be
used for short-term trading purposes.

What is the fund's objective?
The fund's objective is to provide a high level of income consistent with
modest price fluctuations by investing primarily in investment-grade
securities.

What is the fund's overall investment program?
At least 65% of total assets will be invested in short- and
intermediate-term debt securities, including corporate, government, and
mortgage-backed securities. The fund's dollar-weighted effective average
maturity will not exceed five years, although there are no maturity
limitations on individual securities. Targeting effective instead of stated
maturity provides additional flexibility in portfolio management but could
result in higher share price fluctuations.

What is the credit quality of the fund's securities?
At least 90% of the portfolio will be invested in investment-grade
securities. Investment-grade securities are those rated in the four highest
credit categories by a nationally recognized rating agency, or, if unrated,
of equivalent quality as determined by T. Rowe Price. To enhance yield, up
to 10% of total assets can be invested in below-investment-grade securities
("junk bonds"), including those with the lowest rating. Junk bond prices
are usually more affected by adverse economic conditions or a change in the
issuers' financial circumstances than by overall changes in interest rates.
To compensate investors for these risks, high-yield bonds pay higher
income.

Can the fund invest in foreign securities?

Yes. While the fund is expected to emphasize U.S. securities initially,
over time it may invest up to 10% of total assets in foreign fixed-income
securities. To reduce the risk of adverse price swings due to currency
exchange rates, a substantial portion (but not necessarily all) of its
nondollar investments will be hedged back to the U.S. dollar.

What are the main risks of the Limited-Term Bond Portfolio and how does the
manager seek to reduce them?

- - Interest rate or market risk-the decline in bond prices that
accompanies a rise in the overall level of interest rates. Generally,
prices of bonds with shorter maturities are less sensitive to interest rate
changes than longer-term bonds.

The fund's share price will fluctuate. When you sell shares, you may lose
money.

- - Credit risk-the chance that any bonds held in the portfolio will have
their credit rating downgraded or will default (fail to make scheduled
interest and principal payments), potentially reducing the portfolio's
income level and/or share price.

Interest rate risk can be reduced, but not eliminated, by lengthening or
shortening the fund's effective maturity according to the expected change
in interest rates. Credit risk can be reduced through credit research and
diversification of holdings by type of issuer.

Is a bond fund's "yield" the same as its "total return"?
No. Your total return is a combination of the income paid and the change in
share price for a given time period. Income is always a positive
contributor to total return and can enhance a rise in share price or serve
as an offset to a drop in share price.

What is "credit quality" and how does it affect yield?
Credit quality refers to a bond issuer's expected ability to make all
required interest and principal payments in a timely manner. Because highly
rated bond issuers represent less risk, they can borrow at lower interest
rates than less creditworthy issuers. Therefore, a fund investing in
high-quality securities should have a lower yield than an otherwise
comparable fund investing in lower credit-quality securities.

What is meant by a bond's or bond fund's "maturity"?

Every bond has a stated maturity date when the issuer must repay the bond's
entire principal value to the investor. Some bonds, including
mortgage-backed securities, have an "effective maturity" that is shorter
than the stated date. The effective maturity of mortgage-backed bonds is
determined by the rate at which homeowners pay down the principal on the
underlying mortgages. Many corporate and municipal bonds are "callable,"
meaning their principal can be repaid before their stated maturity dates on
(or after) specified call dates. Bonds are most likely to be called when
interest rates are falling, because the issuer wants to refinance at a
lower rate. In such an environment, a bond's "effective maturity" is
usually its nearest call date.

A bond mutual fund has no maturity in the strict sense of the word, but
does have a dollar-weighted average maturity or average effective maturity.
This number is an average of the stated or effective maturities of the
underlying bonds, with each maturity "weighted" by the percentage of fund
assets it represents. Funds that target effective maturities would use the
effective (rather than stated) maturities of the underlying bonds when
computing the average. Targeting effective maturity provides additional
flexibility in portfolio management but, all else being equal, could result
in higher volatility than a fund targeting a stated maturity or maturity
range.

What is a bond's or bond fund's "duration"?
Duration is the time-weighted value of discounted future interest and
principal payments expressed in years. It is a better measure than maturity
of bond price sensitivity to interest rate changes because it takes into
account the time value of cash flows generated over the bond's life. Future
interest and principal payments are discounted to reflect their present
value and then are multiplied by the number of years they will be received
to produce a value that is expressed in years, i.e., the duration. A more
refined measure than average maturity, effective duration takes into
account call features and sinking fund payments which may shorten a bond's
life.

Since duration can also be computed for bond funds, you can estimate the
effect of interest rates on a bond fund's share price. Simply multiply the
fund's duration (available for T. Rowe Price bond funds in our quarterly
shareholder reports) by an expected change in interest rates. For example,
the price of a bond fund with a duration of five years would be expected to
fall approximately 5% if rates rose by one percentage point.

How is a bond's price affected by changes in interest rates?
When interest rates rise, a bond's price usually falls, and vice versa.

In general, the longer the bond's maturity, the greater the price increase
and decrease in response to a given change in interest rates, as shown in
the table at right.

How Interest Rates Affect Bond Prices

Bond Maturity Coupon Price of a $1,000 Bond If Interest Rates:
Increase Decrease
1% 2% 1% 2%
1 Year 6.15% $991 $981 $1,010 $1,019
5 Years 7.48 960 922 1,042 1,086
10 Years 7.80 934 874 1,072 1,150
30 Years 7.97 897 810 1,125 1,278

Table 2 Coupons reflect yields on Treasury securities as of October 31,
1994. This is an illustration and does not represent expected
yields or share price changes of any T. Rowe Price fund.

What are derivatives and can the fund invest in them?
The term derivative is used to describe financial instruments whose value
is derived from an underlying security (e.g., a stock or bond) or a market
benchmark (e.g., an interest rate index). Many types of investments
representing a wide range of potential risks and rewards fall under the
"derivatives" umbrella - from conventional instruments such as callable
bonds, futures and options, to more exotic investment such as stripped
mortgage securities and structured notes. While it was only recently that
the term derivative has become widely known among the investing public,
derivatives have, in fact, been employed by investment managers for many
years.

The fund will invest in derivatives only if the expected risks and rewards
are consistent with its objective, policies, and overall risk profile as
described in this prospectus. The fund will not invest in any high risk,
highly leveraged derivative instrument which is expected to cause the price
volatility of the portfolio to be meaningfully different than that of a
five year investment grade bond. The fund limits its use of derivatives to
situations in which they may: increase yield or total return; hedge against
a decline in principal value; or invest in eligible asset classes with
greater efficiency and lower cost than is possible through direct
investment.

What else should I consider before making a decision to invest?
Be sure to review "Investment Policies and Practices" in Section 3, which
discusses the following topics: Types of Portfolio Securities (bonds,
asset-backed securities, mortgage-backed securities, hybrid instruments,
high yield/high risk investing, private placements, and foreign
securities); Types of Management Practices (cash position, borrowing money
and transferring assets, futures and options, interest rate swaps, managing
foreign currency risk, lending of portfolio securities, when-issued
securities and forward commitment contracts, portfolio turnover, bond
ratings and high-yield bonds, and asset composition).

2 About Your Account

Pricing Shares and Receiving Sale Proceeds
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 will 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
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 deferred sales
charges and other charges may apply to annuity or life contracts. Those
charges are disclosed in the separate account prospectus.

How and when shares are priced
The share price (also called "net asset value" or NAV per share) for the
fund is calculated at 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.

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.

Note: The time at which transactions are priced and until which orders are
accepted may be changed in case of an emergency or if the New York Stock
Exchange closes at a time other than 4 p.m. ET.

How you can receive the proceeds from a sale
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.

Dividends and Other Distributions
For a discussion of the tax status of your variable annuity or life
contract, refer to the prospectus of your insurance company's separate
account.

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 daily
and paid monthly. 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.

3 More About the Fund

The Fund's Organization and Management

Shareholders benefit from T. Rowe Price's 58 years of investment management
experience.

How is the fund organized?
The fund 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 specific
objectives.

What is meant by "shares"?
As with all mutual funds, investors purchase "shares" when they invest in a
fund. These shares are part of a fund's authorized capital stock, but share
certificates are not issued.

Each share and fractional share entitles the shareholder to:

- - receive a proportional interest in a fund's income and capital gain
distributions;

- - cast one vote per share on certain fund matters, including the
election of fund directors, changes in fundamental policies, or approval of
changes in a 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.

Does the fund have an annual shareholder meeting?

The fund is not required to hold annual meetings and does not intend to do
so except when certain matters, such as a change in the fund's fundamental
policies, are to be decided. In addition, shareholders representing at
least 10% of all eligible votes may call a special meeting if they wish for
the purpose of voting on the removal of any fund director(s).

All decisions regarding the purchase and sale of fund investments are made
by T. Rowe Price-specifically by the fund's portfolio managers. The fund's
Board of Directors has authorized T. Rowe Price to use certain brokers
indirectly related to T. Rowe Price in the capacity of broker when buying
and selling the fund's securities.

Who runs the fund?
General Oversight. The fund 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 fund's officers. The policy of
the fund is that a majority of the Board members will be independent of T.
Rowe Price.

Portfolio Management. The fund has an Investment Advisory Committee
composed of the following members: Edward A. Wiese, Chairman, Robert P.
Campbell, Christy M. DiPietro, Thomas E. Tewksbury, and Mark J. Vaselkiv.
Mr. Wiese joined T. Rowe Price in 1984 and has been managing investments
since 1985.

Marketing. T. Rowe Price Investment Services, Inc., a wholly-owned
subsidiary of T. Rowe Price, distributes (sells) shares of this and all
other T. Rowe Price funds.

Shareholder Services. T. Rowe Price Services, Inc., another wholly-owned
subsidiary, acts as the fund's transfer and dividend disbursing agent and
provides shareholder and administrative services. T. Rowe Price calculates
the daily share price and maintains the portfolio and general accounting
records of the fund. The address for T. Rowe Price Services is 100 East
Pratt St., Baltimore, MD 21202.

How are fund expenses determined?
Under the management agreement, all expenses of the fund will be paid by T.
Rowe Price, except interest, taxes, brokerage commissions, directors' fees
and expenses (including counsel fees and expenses) and extraordinary
expenses. 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 does not anticipate levying such charges; such a fee, if charged, may
be retained by the fund or paid to T. Rowe Price.

The Management Fee. The fund pays T. Rowe Price an annual all-inclusive fee
of 0.70% 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.

Variable Annuity and Variable Life Charges. Variable annuity and variable
life fees and charges are in addition to those described above and are
described in the variable annuity and life prospectuses.

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.

Understanding Performance Information

This section should help you understand the terms used to describe the
fund's performance. You will come across them in shareholder reports you
receive from us two times a year.

Total return is the most widely used performance measure. Detailed
performance information is included in the fund's shareholder reports.

Total Return
This tells you how much an investment in a fund has changed in value over a
given time period. It reflects any net increase or decrease in the share
price and assumes that all dividends and capital gains (if any) paid during
the period were reinvested in additional shares. Including reinvested
distributions means that total return numbers include the effect of
compounding, i.e., you receive income and capital gain distributions on a
rising number of shares.

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

Cumulative Total Return
This is the actual rate of return on an investment for a specified period.
A cumulative return does not indicate how much the value of the investment
may have fluctuated between the beginning and the end of the period
specified.

Average Annual Total Return
This is always hypothetical. Working backward from the actual cumulative
return, it tells you what constant year-by-year return would have produced
the actual, cumulative return. By smoothing out all the variations in
annual performance, it gives you an idea of the investment's annual
contribution to your portfolio provided you held it for the entire period
in question.

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.

Yield

The current or "dividend yield" on the fund or any investment tells you the
relationship between the investment's current level of annual income and
its price on a particular day. The dividend yield reflects the actual
income paid to shareholders for a given period, annualized, and divided by
the average price during the given period. For example, a fund providing $5
of annual income per share and a price of $50 has a current yield of 10%.
Yields can be calculated for any time period.

The advertised or "SEC yield" is found by determining the net income per
share (as defined by the SEC) earned by the fund during a 30-day base
period and dividing this amount by the per-share price on the last day of
the base period. The "SEC yield" may differ from the dividend yield.

Investment Policies and Practices

This section takes a detailed look at some of the 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. The fund adheres to applicable
investment restrictions 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.

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 also follow certain
"operating policies" which can be changed without shareholder approval.
However, significant changes are discussed with shareholders in fund
reports.

The fund's holdings of certain kinds of investments cannot exceed maximum
percentages of total assets, which are set forth in the 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 than a 5% impact on the fund's share price. 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 investments 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) whose investment characteristics are consistent with the
fund's investment program. These and some of the other investment
techniques the fund may use are described in the following pages.

Fundamental policy: The fund will not purchase a security if, as a result,
with respect to 75% of the fund's total assets, more than 5% of its total
assets would be invested in securities of a single issuer or more than 10%
of the outstanding voting securities of the issuer would be held by a fund,
provided that those limitations do not apply to the fund's purchases of
securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities.

Bonds. A bond is an interest-bearing security -an IOU- issued by companies
or governmental units. The issuer has a contractual obligation to pay
interest at a stated rate on specific dates and to repay principal (the
bond's face value) on a specified date. An issuer may have the right to
redeem or "call" a bond before maturity, and the investor may have to
reinvest the proceeds at lower market rates.

A bond's annual interest income, set by its coupon rate, is usually fixed
for the life of the bond. Its yield (income as a percent of current price)
will fluctuate to reflect changes in interest rate levels. A bond's price
usually rises when interest rates fall, and vice versa so its yield is
current.

Bonds may be unsecured (backed by the issuer's general creditworthiness) or
secured (also backed by specified collateral).

Certain bonds have interest rates that are adjusted periodically in order
to minimize fluctuations of their principal value. The maturity of those
securities may be shortened under certain specified conditions.

Bonds may be senior or subordinated obligations. Senior obligations
generally have the first claim on a corporation earnings and assets and, in
the event of liquidation, are paid before subordinated debt.

Asset-backed Securities. An underlying pool of assets, such as credit card
or automobile trade receivables or corporate loans or bonds, backs these
bonds and provides the interest and principal payments to investors. Credit
quality depends primarily on the quality of the underlying assets and the
level of credit support, if any, provided by the issuer. The underlying
assets (i.e., loans) are subject to prepayments which can shorten the
securities' weighted average life and may lower their return. The value of
these securities also may change because of actual or perceived changes in
the creditworthiness of the originator, servicing agent, or of the
financial institution providing the credit support. There is no limit on
the fund's investments in these securities.

Mortgage-backed Securities. The fund may invest in a variety of
mortgage-backed securities. Mortgage lenders pool individual home mortgages
with similar characteristics to back a certificate or bond, which is sold
to investors such as the fund. Interest and principal payments generated by
the underlying mortgages are passed through to the investors. The "big
three" issuers are Government National Mortgage Association (GNMA), the
Federal National Mortgage Association (Fannie Mae), and the Federal Home
Loan Mortgage Corporation (Freddie Mac). GNMA certificates are backed by
the full faith and credit of the U.S. Government, while others, such as
Fannie Mae and Freddie Mac certificates, are only supported by the ability
to borrow from the U.S. Treasury or supported only by the credit of the
agency. Private mortgage bankers and other institutions also issue
mortgage-backed securities.

Mortgage securities are subject to scheduled and unscheduled principal
payments as homeowners pay down or prepay their mortgages. As these
payments are received, they must be reinvested when interest rates may be
higher or lower than on the original mortgage security. Therefore, mortgage
securities are not an effective means of locking in long-term interest
rates. In addition, when interest rates fall, the pace of mortgage
prepayments picks up. These refinanced mortgages are paid off at face value
(par), causing a loss for any investor who may have purchased the security
at a price above par. In such an environment, this risk limits the
potential price appreciation of these securities and can negatively affect
the fund's net asset value. When rates rise, however, mortgage-backed
securities have historically experienced smaller price declines than
comparable quality bonds.

Additional mortgage-backed securities in which the fund may invest include:

- - Collateralized Mortgage Obligations (CMOs). CMOs are debt securities
that are fully collateralized by a portfolio of mortgages or
mortgage-backed securities. All interest and principal payments from the
underlying mortgages are passed through to the CMOs in such a way as to
create, in most cases, more definite maturities than is the case with the
underlying mortgages. CMOs may pay fixed or variable rates of interest, and
certain CMOs have priority over others with respect to the receipt of
prepayments.

- - Stripped Mortgage Securities. Stripped mortgage securities (a
potentially high risk type of derivative) are created by separating the
interest and principal payments generated by a pool of mortgage-backed
securities or a CMO to create additional classes of securities. Generally,
one class receives only interest payments (IOs) and one principal payments
(POs). Unlike other mortgage-backed securities and POs, the value of IOs
tends to move in the same direction as interest rates. The fund could use
IOs as a hedge against falling prepaying rates (interest rates are rising)
and/or a bear market environment. POs can be used as a hedge against rising
prepayment rates (interest rates are falling) and/or a bull market
environment. IOs and POs are acutely sensitive to interest rate changes and
to the rate of principal prepayments. A rapid or unexpected increase in
prepayments can severely depress the price of IOs, while a rapid or
unexpected decrease in prepayments could have the same effect on POs. These
securities are very volatile in price and may have lower liquidity than
most other mortgage-backed securities. Certain non-stripped CMOs may also
exhibit these qualities, especially those which pay variable rates of
interest which adjust inversely with and more rapidly than short-term
interest rates. There is no guarantee the fund's investment in CMOs, IOs or
POs will be successful, and the fund's total return could be adversely
affected as a result.
Operating policy: The fund may invest up to 10% of its total assets in
stripped mortgage securities.

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

Hybrid Instruments. These instruments (a potentially high-risk type of
derivative) can combine the characteristics of securities, futures and
options. For example, the principal amount or interest rate of a hybrid
could be tied (positively or negatively) to the price of some commodity,
currency or securities index or another interest rate (each a "benchmark").
Hybrids can be used as an efficient means of pursuing a variety of
investment goals, including currency hedging, duration management, and
increased total return. Hybrids may not bear interest or pay dividends. The
value of a hybrid or its interest rate may be a multiple of a benchmark
and, as a result, may be leveraged and move (up or down) more steeply and
rapidly than the benchmark. These benchmarks may be sensitive to economic
and political events, such as commodity shortages and currency
devaluations, which cannot be readily foreseen by the purchaser of a
hybrid. Under certain conditions, the redemption value of a hybrid could be
zero. Thus, an investment in a hybrid may entail significant market risks
that are not associated with a similar investment in a traditional, U.S.
dollar-denominated bond that has a fixed principal amount and pays a fixed
rate or floating rate of interest. The purchase of hybrids also exposes the
fund to the credit risk of the issuer of the hybrid.

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

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 bonds but not as much as common stocks. Junk bonds are regarded as
predominantly speculative with respect to the issuer's continuing ability
to meet principal and interest payments. Successful investment in low and
lower-medium quality bonds involves greater investment risk and is highly
dependent on T.Rowe Price's credit analysis. A real or perceived economic
downturn or higher interest rates could cause a decline in high yield bond
prices, because such events could lessen the ability of issuers to make
principal and interest payments. These bonds are often thinly-traded and
can be more difficult to sell and value accurately than high-quality bonds.
Because objective pricing data may be less available, judgment may play a
greater role in the valuation process. In addition, the entire junk bond
market can experience sudden and sharp price swings due to a variety of
factors, including changes in economic forecasts, stock market activity,
large or sustained sales by major investors, a high-profile default, or
just a change in the market's psychology. This type of volatility is
usually associated more with stocks than bonds, but junk bond investors
should be prepared for it.
Operating policy: The fund will not purchase a non-investment grade debt
security (or junk bond) if immediately after such purchase the fund would
have more than 10% of its total assets invested in such securities.

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

Operating policy: The fund will invest more than 15% of its net assets in
illiquid securities.

Foreign Securities. The fund may invest in foreign securities, including
nondollar-denominated securities traded outside of the U.S. and U.S.
dollar-denominated securities that are issued and principally traded
outside the U.S. 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 greater for investments in emerging markets.

Operating policy: The fund may invest without limitation in U.S.
dollar-denominated debt securities of foreign issuers. The fund may also
invest up to 10% of its total assets in non-U.S. dollar-denominated
fixed-income securities principally traded in financial markets outside the
United States.

Types of Management Practices

Cash reserves provide flexibility and serve as a short-term defense during
periods of unusual market volatility.

Cash Position. The fund will hold a certain portion of its assets in U.S.
(and foreign dollar-denominated) money market securities, including
repurchase agreements, in the two highest rating categories, maturing in
one year or less. For temporary, defensive purposes, the fund may invest
without limitation in such securities. This reserve position provides
flexibility in meeting redemptions, expenses, and the timing of new
investments, and serves as a short-term defense during periods of unusual
market volatility.
Borrowing Money and Transferring Assets. The fund can borrow money from
banks as a temporary measure for emergency purposes, to facilitate
redemption requests, or for other purposes consistent with the fund's
investment objectives and program. Such borrowings may be collateralized
with fund assets, subject to restrictions.

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

Operating policies: 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.

In accordance with California law, the fund may not borrow more than 10% of
its net asset value when borrowing for any general purposes; and the fund
may not borrow more than 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.

Futures are used to manage risk; options give the investor the option to
buy or sell an asset at a predetermined price in the future.

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, but not the obligation, to buy or sell an asset at a predetermined
price in the future. The fund may buy and sell futures and options
contracts for a number of reasons including: to manage its exposure to
changes in interest rates, bond prices, and foreign currencies; as an
efficient means of adjusting its overall exposure to certain markets; to
enhance income; to protect the value of portfolio securities; and to adjust
the portfolio's duration. The fund may purchase, sell, or write call and
put options on securities, financial indices, and foreign currencies.

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

Operating policies: Futures: Initial margin deposits and premiums on
options used for non-hedging purposes will not equal more than 5% of the
fund's net asset value. Options on securities: The total market value of
securities against which the fund has written 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.

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

Operating policy: The fund will not invest more than 10% of its total
assets in interest rate swaps.

Managing Foreign Currency Risk. The fund will normally conduct its foreign
currency exchange transactions either on a spot (i.e., cash) basis at the
spot rate prevailing in the foreign currency exchange market, or through
entering into forward contracts to purchase or sell foreign currencies. The
fund will generally not enter into a forward contract with a term of
greater than one year.

The fund will generally enter into forward foreign currency exchange
contracts only under two circumstances. First, when the fund enters into a
contract for the purchase or sale of a security denominated in a foreign
currency, it may desire to "lock in" the U.S. dollar price of the security.
Second, when the fund believes that the currency of a particular foreign
country may suffer or enjoy a substantial movement against another
currency, it may enter into a forward contract to sell or buy the former
foreign currency (or another currency which acts as a proxy for that
currency) approximating the value of some or all of the fund's portfolio
securities denominated in such foreign currency. Although forward contracts
will be used primarily to protect the fund from adverse currency movements,
they also involve the risk that anticipated currency movements will not be
accurately predicted and the fund's total return could be adversely
affected as a result.

There are certain markets where it is not possible to engage in effective
foreign currency hedging. This may be true, for example, for the currencies
of various Latin American countries and other emerging markets where the
foreign exchange markets are not sufficiently developed to permit hedging
activity to take place.
Operating policy: The fund will not commit more than 10% of its total
assets to forward currency contracts.

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

Fundamental policy: The value of loaned securities may not exceed 33 1/3%
of the fund's total assets.

When-Issued Securities and Forward Commitment Contracts. The fund may
purchase securities on a when-issued or delayed delivery basis or may
purchase or sell securities on a forward commitment basis. There is no
limit on the fund's investment in these securities. The price of these
securities is fixed at the time of the commitment to buy, but delivery and
payment can take place a month or more later. During the interim period,
the market value of the securities can fluctuate, and no interest accrues
to the purchaser. At the time of delivery, the value of the securities may
be more or less than the purchase or sale price. To the extent the fund
remains fully or almost fully invested (in securities with a remaining
maturity of more than one year) at the 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 Turnover. Although the fund will not generally trade for
short-term profits, circumstances may warrant a sale without regard to the
length of time a security was held. A high turnover rate may increase
transaction costs and result in additional realized gains. The fund's
annualized portfolio turnover rate for the period ended December 31, 1994
was 146.0%.

Bond Ratings and High-Yield Bonds. Larger bond issues are evaluated by
rating agencies such as Moody's and Standard & Poor's on the basis of the
issuer's ability to meet all required interest and principal payments. T.
Rowe Price research analysts also evaluate all portfolio holdings of the
funds, including those rated by an outside agency. Other things being
equal, lower rated bonds have higher yields due to greater risk.
"High-yield" bonds also called "junk bonds," are those rated below BBB (see
Table 3).

Ratings of Corporate Debt Securities

Moody's Standard Fitch Definition
Investors & Poors Investors
Service, Inc. Corporation Service, Inc.

Long-Term Aaa AAA AAA Highest
quality

Aa AA AA High
quality

A A A Upper
medium
grade

Baa BBB BBB Medium
grade

Ba BB BB Low
grade

B B B Speculative

Caa, Ca CCC, CC CCC, CC Submarginal

Ca C C Income bond,
no interest
paid

C D DDD, Probably
DD, D in default

Moody's S&P Fitch

Commercial P-1 Superior A-1+ Extremely F-1+ Exceptionally
paper quality strong quality strong quality

A-1 Strong F-1 Very strong
quality quality

P-2 Strong A-2 Satisfactory F-2 Good
quality quality credit quality

P-3 Acceptable A-3 Adequate F-3 Fair
quality quality credit quality

B Speculative F-S Weak
quality credit quality

C Doubtful
quality
Table 3

PAGE 2
STATEMENT OF ADDITIONAL INFORMATION

T. ROWE PRICE FIXED INCOME SERIES, INC.

T. Rowe Price Limited-Term Bond Portfolio

(the "Fund")

Shares of the Fund may 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.

In the future, it is possible that the Fund may offer its
shares to separate accounts funding variable annuities, variable
life insurance or other insurance products of other insurance
companies.

This Statement of Additional Information is not a prospectus
but should be read in conjunction with the Fund's prospectus
dated May 1, 1995, which may be obtained from T. Rowe Price
Investment Services, Inc., 100 East Pratt Street, Baltimore,
Maryland 21202.

The date of this Statement of Additional Information is May
1, 1995.

PAGE 3
TABLE OF CONTENTS

Page Page

Adjustable Rate Securities Investment Performance . .
Adjustable Rate Mortgage Investment Programs . . .
Securities . . . . . . . . Investment Restrictions .
Asset-Backed Securities . . Legal Counsel . . . . . .
Capital Stock . . . . . . . Lending of Portfolio
Code of Ethics . . . . . . Securities . . . . . . .
Custodian . . . . . . . . . Management of Fund . . . .
Distributor for Fund . . . Money Market Securities .
Dividends . . . . . . . . . Mortgage-Related Securities
Federal and State Net Asset Value Per Share
Registration of Shares . . Options . . . . . . . . .
Foreign Currency Transactions Portfolio Transactions . .
Foreign Securities . . . . Pricing of Securities . .
Futures Contracts . . . . . Principal Holders of Securities
Hybrid Commodity and Security Ratings of Commercial
Instrument . . . . . . . . Paper . . . . . . . . . .
Illiquid or Restricted Ratings of Corporate Debt
Securities . . . . . . . . Securities . . . . . . .
Independent Accountants . . Repurchase Agreements . .
Industry Concentration . . Risk Factors . . . . . . .
Interest Rate Tax Status . . . . .
Transactions . . . . . . . When-Issued Securities and
Investment Management Forward Commitment
Services . . . . . . . . . Contracts . . . . . . . .
Investment Objectives Yield Information . .
and Policies . . . . . . .

INVESTMENT OBJECTIVE AND POLICIES

The following information supplements the discussion of the
Fund's investment objective and policies discussed in the Fund's
prospectus. The Fund will not make a material change in its
investment objective without obtaining shareholder approval.
Unless otherwise specified, the investment programs and
restrictions of the Fund is 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.

PAGE 4
The Fund's investment objective is to seek a high level of
income consistent with modest price fluctuation by investing
primarily in investment grade securities. The strategy of the
Fund described below is intended to result in lower share price
fluctuation than a long-term bond fund. Additionally, the Fund
is expected to provide a yield above that of a money market fund
but below that of a long-term bond fund.

RISK FACTORS

Because of its investment policy, the Fund may not be
suitable or appropriate for all investors. The Fund is not a
money market fund and is not an appropriate investment for those
whose primary objective is principal stability. There is risk in
all investment. The Fund is designed for the investor who seeks
to participate in a diversified portfolio of short- and
intermediate-term investment grade bonds and other debt
securities (up to 10% of which may be below investment grade)
which provide a higher rate of income than a money market fund
and less risk of capital fluctuation than a portfolio of long-
term debt securities. The value of the portfolio securities of
the Fund will fluctuate based upon market conditions. Although
the Fund seeks to reduce risk by investing in a diversified
portfolio, such diversification does not eliminate all risk.
There can, of course, be no assurance that the Fund will achieve
these results. 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.

Debt Obligations. Yields on short and intermediate-term
securities are dependent on a variety of factors, including the
general conditions of the money and bond markets, the size of a
particular offering, the maturity of the obligation, and the
credit quality and rating of the issue. Debt securities with
longer maturities tend to have 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 its obligations for the payment of interest and principal
when due. Although the Fund seeks to reduce risk by portfolio
diversification, credit analysis (considered by T. Rowe Price to
be among the most stringent in the investment management

PAGE 5
industry), 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.

Mortgage Securities. The Fund may invest significantly in
mortgage securities. Because they consist of underlying
mortgages, Mortgage Securities may not be an effective means of
"locking in" long-term interest rates due to the need for the
Fund to reinvest scheduled and unscheduled principal payments.
The incidence of unscheduled principal prepayments is also likely
to increase in mortgage pools owned by the Fund when prevailing
mortgage loan rates fall below the mortgage rates of the
securities underlying the individual pool. The effect of such
prepayments in a falling rate environment is to (1) cause the
Fund to reinvest principal payments at the then lower prevailing
interest rate, and (2) reduce the potential for capital
appreciation beyond the face amount of the security and adversely
affect the return to the Fund. Conversely, in a rising interest
rate environment such prepayments can be reinvested at higher
prevailing interest rates which will reduce the potential effect
of capital depreciation to which bonds are subject when interest
rates rise. In addition, prepayments of mortgage securities
purchased at a premium (or discount) will cause such securities
to be paid off at par, resulting in a loss (gain) to the Fund.
T. Rowe Price will actively manage the Fund's portfolio in an
attempt to reduce the risk associated with investment in
mortgage-backed securities.

After purchase by a Fund, a security may cease to be rated
or its rating may be reduced below the minimum required for
purchase by the Fund. For the Fund, neither event would require
a sale of such security by the Fund. However, T. Rowe Price
Associates, Inc. ("T. Rowe Price") will consider such event in
its determination of whether the Fund should continue to hold the
security. To the extent that the ratings given by Moody's
Investors Service, Inc. ("Moody's"), Standard & Poor's
Corporation ("S&P"), or Fitch Investors Service, Inc. ("Fitch")
may change as a result of changes in such organizations or their
rating systems, the Fund will attempt to use comparable ratings
as standards for investments in accordance with the investment
policies contained in the prospectus. When purchasing unrated
securities, T. Rowe Price, under the supervision of the Fund's
Board of Directors, determines whether the unrated security is of
a quality comparable to that which the Fund is allowed to
purchase.

The Fund's share price and yield will fluctuate with
changing market conditions, and your investment may be worth more
or less when redeemed than when purchased. The Fund should not

PAGE 6
be relied upon as a complete investment program, nor used to play
short-term swings in the bond markets. The Fund cannot guarantee
it 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 countries, such as many of the countries of Southeast
Asia, Latin America, Eastern Europe 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 may 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
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
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 will invest 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

PAGE 7
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 may limit at times and preclude investment in
certain of such countries and may 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 Fund 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.

Market Characteristics. Foreign stock and bond markets are
generally not as developed or efficient as, and may be more
volatile than, those in the United States. While growing in
volume, they usually have substantially less volume than U.S.
markets and the Fund's portfolio securities may be less liquid
and subject to more rapid and erratic price movements than
securities of comparable U.S. companies. Equity securities may
trade at price/earnings multiples higher than comparable United
States securities and such levels may not be sustainable. Fixed
commissions on foreign stock exchanges are generally higher than
negotiated commissions on United States exchanges, although the
Fund will endeavor to achieve the most favorable net results on
their portfolio transactions. There is generally less government
supervision and regulation of foreign stock exchanges, brokers
and listed companies than in the United States. Moreover,
settlement practices for transactions in foreign markets may
differ from those in United States markets. Such differences may
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 a 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

PAGE 8
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 discussed on pages __
and __. 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 may be 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. A
shareholder otherwise subject to United States federal income
taxes may, subject to certain limitations, be entitled to claim a
credit or deduction for U.S. federal income tax purposes for his
or her proportionate share of such foreign taxes paid by the
Fund. (See "Tax Status," page __.)

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 Fund, political or social
instability, or diplomatic developments which could affect
investments by U.S. persons in those countries.

Eastern Europe and Russia. Changes occurring in Eastern
Europe and Russia today could have long-term potential
consequences. As restrictions fall, this could result in rising
standards of living, lower manufacturing costs, growing consumer
spending, and substantial economic growth. However, investment
in the countries of Eastern Europe and Russia is highly
speculative at this time. Political and economic reforms are too
recent to establish a definite trend away from centrally-planned
economies and state owned industries. In many of the countries
of Eastern Europe and Russia, there is no stock exchange or
formal market for securities. Such countries may also have

PAGE 9
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 a Fund's assets invested in
such countries and these authorities may not qualify as a foreign
custodian under the Investment Company Act of 1940 and exemptive
relief from such Act may be required. All of these
considerations are among the factors which could cause
significant risks and uncertainties to investment in Eastern
Europe and Russia. Each 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. To the extent
any securities issued by companies in Eastern Europe and Russia
are considered illiquid, each Fund will be required to include
such securities within its 15% restriction on investing in
illiquid securities.

Latin America

To the extent the fund invests in Latin America, such
investments will be subject to the factors discussed below.

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.

PAGE 10
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
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.

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.

Special Risks of Investing in Junk Bonds

The following special considerations are additional risk
factors associated with the Fund's investments in lower rated
debt securities.

Youth and Growth of the Lower Rated Debt Securities Market.
The market for lower rated debt securities is relatively new and
its growth has paralleled a long economic expansion. Past
experience may not, therefore, provide an accurate indication of
future performance of this market, particularly during periods of
economic recession. An economic downturn or increase in interest
rates is likely to have a greater negative effect on this market,
the value of lower rated debt securities in the Fund's portfolio,
the Fund's net asset value and the ability of the bonds' issuers
to repay principal and interest, meet projected business goals
and obtain additional financing than on higher rated securities.
These circumstances also may result in a higher incidence of
defaults than with respect to higher rated securities. An
investment in this Fund is more speculative than investment in
shares of a fund which invests only in higher rated debt
securities.

Sensitivity to Interest Rate and Economic Changes. Prices
of lower rated debt securities may be more sensitive to adverse
economic changes or corporate developments than higher rated
investments. Debt securities with longer maturities, which may
have higher yields, may increase or decrease in value more than
debt securities with shorter maturities. Market prices of lower
rated debt securities structured as zero coupon or pay-in-kind

PAGE 11
securities are affected to a greater extent by interest rate
changes and may be more volatile than securities which pay
interest periodically and in cash. Where it deems it appropriate
and in the best interests of Fund shareholders, the Fund may
incur additional expenses to seek recovery on a debt security on
which the issuer has defaulted and to pursue litigation to
protect the interests of security holders of its portfolio
companies.

Liquidity and Valuation. Because the market for lower rated
securities may be thinner and less active than for higher rated
securities, there may be market price volatility for these
securities and limited liquidity in the resale market. Nonrated
securities are usually not as attractive to as many buyers as
rated securities are, a factor which may make nonrated securities
less marketable. These factors may have the effect of limiting
the availability of the securities for purchase by the Fund and
may also limit the ability of the Fund to sell such securities at
their fair value either to meet redemption requests or in
response to changes in the economy or the financial markets.
Adverse publicity and investor perceptions, whether or not based
on fundamental analysis, may decrease the values and liquidity of
lower rated debt securities, especially in a thinly traded
market. To the extent the Fund owns or may acquire illiquid or
restricted lower rated securities, these securities may involve
special registration responsibilities, liabilities and costs, and
liquidity and valuation difficulties. Changes in values of debt
securities which the Fund owns will affect its net asset value
per share. If market quotations are not readily available for
the Fund's lower rated or nonrated securities, these securities
will be valued by a method that the Fund's Board of Directors
believes accurately reflects fair value. Judgment plays a
greater role in valuing lower rated debt securities than with
respect to securities for which more external sources of
quotations and last sale information are available.

Congressional Action. New and proposed laws may have an
impact on the market for lower rated debt securities. For
example, as a result of the Financial Institution's Reform,
Recovery, and Enforcement Act of 1989, savings and loan
associations must dispose of their high yield bonds no later than
July 1, 1994. Qualified affiliates of savings and loan
associations, however, may purchase and retain these securities,
and savings and loan associations may divest these securities by
sale to their qualified affiliates. T. Rowe Price is unable at
this time to predict what effect, if any, the legislation may
have on the market for lower rated debt securities.

PAGE 12
Taxation. Special tax considerations are associated with
investing in lower rated debt securities structured as zero
coupon or pay-in-kind securities. The Fund accrues income on
these securities prior to the receipt of cash payments. The Fund
must distribute substantially all of its income to its
shareholders to qualify for pass-through treatment under the tax
laws and may, therefore, have to dispose of its portfolio
securities to satisfy distribution requirements.

INVESTMENT PROGRAM

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

Types of Securities

Debt Securities

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 its maturities.

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

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

PAGE 13
Corporate Debt Securities. Outstanding nonconvertible
corporate debt securities (e.g., bonds and debentures).
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. The Fund may also invest in the
securities of certain supranational entities, such as the
International Development Bank.

Mortgage-Related Securities

Investment in Mortgage-Backed Securities

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

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

PAGE 14

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

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

Fannie Mae Certificates. Fannie Mae is a federally
chartered and privately owned corporation organized and existing
under the Federal National Mortgage Association Charter Act of
1938. FNMA Certificates represent a pro-rata interest in a group
of mortgage loans purchased by Fannie Mae. FNMA guarantees the
timely payment of principal and interest on the securities it
issues. The obligations of FNMA are not backed by the full faith
and credit of the U.S. Government.
PAGE 15

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

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

When mortgages in the pool underlying a Mortgage-Backed
Security are prepaid by mortgagors or by result of foreclosure,
such principal payments are passed through to the certificate
holders. Accordingly, the life of the Mortgage-Backed Security
is likely to be substantially shorter than the stated maturity of
the mortgages in the underlying pool. Because of such variation
in prepayment rates, it is not possible to predict the life of a
particular Mortgage-Backed Security, but FHA statistics indicate
that 25- to 30-year single family dwelling mortgages have an
average life of approximately 12 years. The majority of Ginnie
Mae Certificates are backed by mortgages of this type, and,
accordingly, the generally accepted practice treats Ginnie Mae
Certificates as 30-year securities which prepay full in the 12th
year. FNMA and Freddie Mac Certificates may have differing
prepayment characteristics.

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

PAGE 16
Payments to holders of Mortgage-Backed Securities consist of
the monthly distributions of interest and principal less the
applicable fees. The actual yield to be earned by a holder of
Mortgage-Backed Securities is calculated by dividing interest
payments by the purchase price paid for the Mortgage-Backed
Securities (which may be at a premium or a discount from the face
value of the certificate).

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

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

Multi-Class Residential Mortgage Securities. Such
securities represent interests in pools of mortgage loans to
residential home buyers made by commercial banks, savings and
loan associations or other financial institutions. Unlike GNMA,
FNMA and FHLMC securities, the payment of principal and interest
on Multi-Class Residential Mortgage Securities is not guaranteed
by the U.S. Government or any of its agencies. Accordingly,
yields on Multi-Class Residential Mortgage Securities have been
historically higher than the yields on U.S. government mortgage
securities. However, the risk of loss due to default on such
instruments is higher since they are not guaranteed by the U.S.
Government or its agencies. Additionally, pools of such
securities may be divided into senior or subordinated segments.
Although subordinated mortgage securities may have a higher yield
than senior mortgage securities, the risk of loss of principal is
greater because losses on the underlying mortgage loans must be
borne by persons holding subordinated securities before those
holding senior mortgage securities.

PAGE 17
Privately-Issued Mortgage-Backed Certificates. These are
pass-through certificates issued by non-governmental issuers.
Pools of conventional residential mortgage loans created by such
issuers generally offer a higher rate of interest than government
and government-related pools because there are no direct or
indirect government guarantees of payment. Timely payment of
interest and principal of these pools is, however, generally
supported by various forms of insurance or guarantees, including
individual loan, title, pool and hazard insurance. The insurance
and guarantees are issued by government entities, private
insurance or the mortgage poolers. Such insurance and guarantees
and the creditworthiness of the issuers thereof will be
considered in determining whether a mortgage-related security
meets the Fund's quality standards. The Fund may buy mortgage-
related securities without insurance or guarantees if through an
examination of the loan experience and practices of the poolers,
the investment manager determines that the securities meet the
Fund's quality standards.

The Fund expects that governmental, government-related or
private entities may create mortgage loan pools offering pass-
through investments in addition to those described above. The
mortgages underlying these securities may be alternative mortgage
instruments, that is, mortgage instruments whose principal or
interest payments may vary or whose terms to maturity may differ
from customary long-term fixed rate mortgages. As new types of
mortgage-related securities are developed and offered to
investors, the investment manager will, consistent with the
Fund's objective, policies and quality standards, consider making
investments in such new types of securities.

Collateralized Mortgage Obligations (CMOs)

CMOs are bonds that are collateralized by whole loan
mortgages or mortgage pass-through securities. The bonds issued
in a CMO deal are divided into groups, and each group of bonds is
referred to as a "tranche". Under the traditional CMO structure,
the cash flows generated by the mortgages or mortgage pass-
through securities in the collateral pool are used to first pay
interest and then pay principal to the CMO bondholders. The
bonds issued under a CMO structure are retired sequentially as
opposed to the pro rata return of principal found in traditional
pass-through obligations. Subject to the various provisions of
individual CMO issues, the cash flow generated by the underlying
collateral (to the extent it exceeds the amount required to pay
the stated interest) is used to retire the bonds. Under the CMO
structure, the repayment of principal among the different
tranches is prioritized in accordance with the terms of the
particular CMO issuance. The "fastest-pay" tranche of bonds, as
specified in the prospectus for the issuance, would initially

PAGE 18
receive all principal payments. When that tranche of bonds is
retired, the next tranche, or tranches, in the sequence, as
specified in the prospectus, receive all of the principal
payments until they are retired. The sequential retirement of
bond groups continues until the last tranche, or group of bonds,
is retired. Accordingly, the CMO structure allows the issuer to
use cash flows of long maturity, monthly-pay collateral to
formulate securities with short, intermediate and long final
maturities and expected average lives.

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

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

Stripped Agency Mortgage-Backed Securities

Stripped Agency Mortgage-Backed securities represent
interests in a pool of mortgages, the cash flow of which has been
separated into its interest and principal components. "IOs"
(interest only securities) receive the interest portion of the
cash flow while "POs" (principal only securities) receive the
principal portion. Stripped Agency Mortgage-Backed Securities
may be issued by U.S. Government Agencies or by private issuers
similar to those described below with respect to CMOs and
privately-issued mortgage-backed certificates. As interest rates
rise and fall, the value of IOs tends to move in the same
direction as interest rates. The value of the other
mortgage-backed securities described herein, like other debt
instruments, will tend to move in the opposite direction compared
to interest rates. Under the Internal Revenue Code of 1986, as
amended (the "Code"), POs may generate taxable income from the

PAGE 19
current accrual of original issue discount, without a
corresponding distribution of cash to the Fund.

The cash flows and yields on IO and PO classes are extremely
sensitive to the rate of principal payments (including
prepayments) on the related underlying mortgage assets. For
example, a rapid or slow rate of principal payments may have a
material adverse effect on the prices of IOs or POs,
respectively. If the underlying mortgage assets experience
greater than anticipated prepayments of principal, an investor
may fail to recoup fully its initial investment in an IO class of
a stripped mortgage-backed security, even if the IO class is
rated AAA or Aaa or is derived from a full faith and credit
obligation. Conversely, if the underlying mortgage assets
experience slower than anticipated prepayments of principal, the
price on a PO class will be affected more severely than would be
the case with a traditional mortgage-backed security.

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

Adjustable Rate Mortgages. Adjustable rate mortgage (ARM)
securities are collateralized by adjustable rate, rather than
fixed rate, mortgages.

ARMs, like fixed rate mortgages, have a specified maturity
date, and the principal amount of the mortgage is repaid over the
life of the mortgage. Unlike fixed rate mortgages, the interest
rate on ARMs is adjusted at regular intervals based on a
specified, published interest rate "index" such as a Treasury
rate index. The new rate is determined by adding a specific

PAGE 20
interest amount, the "margin," to the interest rate of the index.
Investment in ARM securities allows the Fund to participate in
changing interest rate levels through regular adjustments in the
coupons of the underlying mortgages, resulting in more variable
current income and lower price volatility than longer term fixed
rate mortgage securities. The ARM securities in which the Fund
expects to invest will generally adjust their interest rates at
regular intervals of one year or less. ARM securities are a less
effective means of locking in long-term rates than fixed rate
mortgages since the income from adjustable rate mortgages will
increase during periods of rising interest rates and decline
during periods of falling rates.

Characteristics of Adjustable Rate Mortgage Securities -
Interest Rate Indices. The interest rates paid on adjustable
rate securities are readjusted periodically to an increment over
some predetermined interest rate index. Such readjustments occur
at intervals ranging from one to 60 months. There are three main
categories of indexes: (1) those based on U.S. Treasury
securities (2) those derived from a calculated measure such as a
cost of funds index ("COFI") or a moving average of mortgage
rates and (3) those based on actively traded or prominently
posted short-term, interest rates. Commonly utilized indexes
include the one-year, three-year and five-year constant maturity
Treasury rates, the three-month Treasury bill rate, the 180-day
Treasury bill rate, rates on longer-term Treasury securities, the
11th District Federal Home Loan Bank Cost of Fund, the National
Median Cost of Fund, the one-month, three-month, six-month or
one-year London Interbank Offered Rate (LIBOR), the prime rate of
a specific bank, or commercial paper rates. Some indexes, such
as the one-year constant maturity Treasury rate, closely mirror
changes in market interest rate levels. Others, such as the 11th
District Home Loan Bank Cost of Fund index, tend to lag behind
changes in market rate levels. The market value of the Fund's
assets and of the net asset value of the Fund's shares will be
affected by the length of the adjustment period, the degree of
volatility in the applicable indexes and the maximum increase or
decrease of the interest rate adjustment on any one adjustment
date, in any one year and over the life of the securities. These
maximum increases and decreases are typically referred to as
"caps" and "floors", respectively.

A number of factors affect the performance of the Cost of
Funds Index and may cause the Cost of Funds Index to move in a
manner different from indices based upon specific interest rates,
such as the One Year Treasury Index. Additionally, there can be
no assurance that the Cost of Funds Index will necessarily move
in the same direction or at the same rate as prevailing interest
rates. Furthermore, any movement in the Cost of Funds Index as
compared to other indices based upon specific interest rates may

PAGE 21
be affected by changes instituted by the FHLB of San Francisco in
the method used to calculate the Cost of Funds Index. To the
extent that the Cost of Funds Index may reflect interest changes
on a more delayed basis than other indices, in a period of rising
interest rates, any increase may produce a higher yield later
than would be produced by such other indices, and in a period of
declining interest rates, the Cost of Funds Index may remain
higher than other market interest rates which may result in a
higher level of principal prepayments on mortgage loans which
adjust in accordance with the Cost of Funds Index than mortgage
loans which adjust in accordance with other indices.

LIBOR, the London interbank offered rate, is the interest
rate that the most creditworthy international banks dealing in
U.S. dollar-denominated deposits and loans charge each other for
large dollar-denominated loans. LIBOR is also usually the base
rate for large dollar-denominated loans in the international
market. LIBOR is generally quoted for loans having rate
adjustments at one, three, six or 12 month intervals.

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

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

Other Mortgage Related Securities. The Fund expects that
governmental, government-related or private entities may create
mortgage loan pools offering pass-through investments in addition
to those described above. The mortgages underlying these
securities may be alternative mortgage instruments, that is,
mortgage instruments whose principal or interest payments may

PAGE 22
vary or whose terms to maturity may differ from customary long-
term fixed rate mortgages. As new types of mortgage-related
securities are developed and offered to investors, the investment
manager will, consistent with the Fund's objective, policies and
quality standards, consider making investments in such new types
of securities.

Asset-Backed Securities

The Fund may invest a portion of its assets in debt
obligations known as asset-backed securities.

The credit quality of most asset-backed securities depends
primarily on the credit quality of the assets underlying such
securities, how well the entity issuing the security is insulated
from the credit risk of the originator or any other affiliated
entities and the amount and quality of any credit support
provided to the securities. The rate of principal payment on
asset-backed securities generally depends on the rate of
principal payments received on the underlying assets which in
turn may be affected by a variety of economic and other factors.
As a result, the yield on any asset-backed security is difficult
to predict with precision and actual yield to maturity may be
more or less than the anticipated yield to maturity. Asset-
backed securities may be classified either as pass-through
certificates or collateralized obligations.

Pass-through certificates are asset-backed securities which
represent an undivided fractional ownership interest in an
underlying pool of assets. Pass-through certificates usually
provide for payments of principal and interest received to be
passed through to its holders, usually after deduction for
certain costs and expenses incurred in administering the pool.
Because pass-through certificates represent an ownership interest
in the underlying assets, the holders thereof bear directly the
risk of any defaults by the obligors on the underlying assets not
covered by any credit support. See "Types of Credit Support".

Asset-backed securities issued in the form of debt
instruments, also known as collateralized obligations, are
generally issued as the debt of a special purpose entity
organized solely for the purpose of owning such assets and
issuing such debt. Such assets are most often trade, credit card
or automobile receivables. The assets collateralizing such
asset-backed securities are pledged to a trustee or custodian for
the benefit of the holders thereof. Such issuers generally hold
no assets other than those underlying the asset-backed securities
and any credit support provided. As a result, although payments
on such asset-backed securities are obligations of the issuers,

PAGE 23
in the event of defaults on the underlying assets not covered by
any credit support (see "Types of Credit Support"), the issuing
entities are unlikely to have sufficient assets to satisfy its
obligations on the related asset-backed securities.

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

Asset-backed securities in which the payment streams on the
underlying assets are allocated in a manner different than those
described above may be issued in the future. The Fund may invest
in such asset-backed securities if such investment is otherwise
consistent with its investment objectives and policies and with
the investment restrictions of the Fund.

Types of Credit Support. Asset-backed securities are often
backed by a pool of assets representing the obligations of a
number of different parties. To lessen the effect of failures by
obligors on underlying assets to make payments, such securities
may contain elements of credit support. Such credit support
falls into two classes: liquidity protection and protection
against ultimate default by an obligor on the underlying assets.
Liquidity protection refers to the provision of advances,
generally by the entity administering the pool of assets, to
ensure that scheduled payments on the underlying pool are made in
a timely fashion. Protection against ultimate default ensures
ultimate payment of the obligations on at least a portion of the
assets in the pool. Such protection may be provided through
guarantees, insurance policies or letters of credit obtained from
third parties, through various means of structuring the
transaction or through a combination of such approaches.

PAGE 24
Examples of asset-backed securities with credit support arising
out of the structure of the transaction include "senior-
subordinated securities" (multiple class asset-backed securities
with certain classes subordinate to other classes as to the
payment of principal thereon, with the result that defaults on
the underlying assets are borne first by the holders of the
subordinated class) and asset-backed securities that have
"reserve funds" (where cash or investments, sometimes funded from
a portion of the initial payments on the underlying assets, are
held in reserve against future losses) or that have been
"overcollateralized" (where the scheduled payments on, or the
principal amount of, the underlying assets substantially exceeds
that required to make payment of the asset-backed securities and
pay any servicing or other fees). The degree of credit support
provided on each issue is based generally on historical
information respecting the level of credit risk associated with
such payments. Delinquency or loss in excess of that anticipated
could adversely affect the return on an investment in an asset-
backed security.

Automobile Receivable Securities. The Fund may invest in
Asset-Backed Securities which are backed by receivables from
motor vehicle installment sales contracts or installment loans
secured by motor vehicles ("Automobile Receivable Securities").
Since installment sales contracts for motor vehicles or
installment loans related thereto ("Automobile Contracts")
typically have shorter durations and lower incidences of
prepayment, Automobile Receivable Securities generally will
exhibit a shorter average life and are less susceptible to
prepayment risk.

Most entities that issue Automobile Receivable Securities
create an enforceable interest in its respective Automobile
Contracts only by filing a financing statement and by having the
servicer of the Automobile Contracts, which is usually the
originator of the Automobile Contracts, take custody thereof. In
such circumstances, if the servicer of the Automobile Contracts
were to sell the same Automobile Contracts to another party, in
violation of its obligation not to do so, there is a risk that
such party could acquire an interest in the Automobile Contracts
superior to that of the holders of Automobile Receivable
Securities. Also although most Automobile Contracts grant a
security interest in the motor vehicle being financed, in most
states the security interest in a motor vehicle must be noted on
the certificate of title to create an enforceable security
interest against competing claims of other parties. Due to the
large number of vehicles involved, however, the certificate of
title to each vehicle financed, pursuant to the Automobile
Contracts underlying the Automobile Receivable Security, usually

PAGE 25
is not amended to reflect the assignment of the seller's security
interest for the benefit of the holders of the Automobile
Receivable Securities. Therefore, there is the possibility that
recoveries on repossessed collateral may not, in some cases, be
available to support payments on the securities. In addition,
various state and federal securities laws give the motor vehicle
owner the right to assert against the holder of the owner's
Automobile Contract certain defenses such owner would have
against the seller of the motor vehicle. The assertion of such
defenses could reduce payments on the Automobile Receivable
Securities.

Credit Card Receivable Securities. The Fund may invest in
Asset Backed Securities backed by receivables from revolving
credit card agreements ("Credit Card Receivable Securities").
Credit balances on revolving credit card agreements ("Accounts")
are generally paid down more rapidly than are Automobile
Contracts. Most of the Credit Card Receivable Securities issued
publicly to date have been Pass-Through Certificates. In order
to lengthen the maturity of Credit Card Receivable Securities,
most such securities provide for a fixed period during which only
interest payments on the underlying Accounts are passed through
to the security holder and principal payments received on such
Accounts are used to fund the transfer to the pool of assets
supporting the related Credit Card Receivable Securities of
additional credit card charges made on an Account. The initial
fixed period usually may be shortened upon the occurrence of
specified events which signal a potential deterioration in the
quality of the assets backing the security, such as the
imposition of a cap on interest rates. The ability of the issuer
to extend the life of an issue of Credit Card Receivable
Securities thus depends upon the continued generation of
additional principal amounts in the underlying accounts during
the initial period and the non-occurrence of specified events.
An acceleration in cardholders' payment rates or any other event
which shortens the period during which additional credit card
charges on an Account may be transferred to the pool of assets
supporting the related Credit Card Receivable Security could
shorten the weighted average life and yield of the Credit Card
Receivable Security.

Credit cardholders are entitled to the protection of a
number of state and federal consumer credit laws, many of which
give such holder the right to set off certain amounts against
balances owed on the credit card, thereby reducing amounts paid
on Accounts. In addition, unlike most other Asset Backed
Securities, Accounts are unsecured obligations of the cardholder.

PAGE 26
Other Assets. T. Rowe Price anticipates that Asset Backed
Securities backed by assets other than those described above will
be issued in the future. The Fund may invest in such securities
in the future if such investment is otherwise consistent with its
investment objective and policies.

Hybrid Instruments

Hybrid Instruments (a type of potentially high-risk
derivative) have recently been developed and combine the elements
of futures contracts or options with those of debt, preferred
equity or a depository instrument. Often these Hybrid
Instruments are indexed to the price of a commodity, a particular
currency or a domestic or foreign debt or equity securities
index. 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.

The risks of investing in Hybrid Instruments reflect a
combination of the risks from investing in securities, options,
futures, and currencies, including volatility and lack of
liquidity. Reference is made to the discussion of futures,
forward contracts, and options herein, for a discussion of these
risks. Further, the prices of the Hybrid Instrument and the
related commodity or currency 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). In addition, because the purchase and sale of Hybrid
Instruments could take place in an over-the-counter market or in
a private transaction between the Fund and the seller of the
Hybrid Instrument, the creditworthiness of the contra party to
the transaction would be a risk factor which the Fund would have
to consider. 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, or any other governmental regulatory
authority.

Adjustable Rate Securities

Certain securities may be issued with adjustable interest
rates that are reset periodically by pre-determined formulas or

PAGE 27
indexes in order to minimize movements in the principal value of
the investment. Such securities may have long-term maturities,
but may be treated as a short-term investment under certain
conditions. Generally, as interest rates decrease or increase,
the potential for capital appreciation or depreciation on these
securities is less than for fixed-rate obligations. These
securities may take the following forms:

Variable Rate Securities. Variable rate instruments may
take the form of domestic certificates of deposit which
provide for the adjustment of its interest rate on set dates
and which, upon adjustment, can reasonably be expected to
have a market value which approximates its par value. A
variable rate instrument, the principal amount of which is
scheduled to be paid in 397 calendar days or less, is deemed
to have a maturity equal to the period remaining until the
next readjustment of the interest rate. A variable rate
instrument which is subject to a demand feature which
entitles the purchaser to receive the principal amount of
the underlying security or securities, either (i) upon
notice of no more than 30 days, or (ii) at specified
intervals not exceeding 397 calendar days and upon no more
than 30 days' notice, is deemed to have a maturity equal to
the longer of the period remaining until the next
readjustment of the interest rate or the period remaining
until the principal amount can be recovered through demand.

Floating Rate Securities. Floating rate may take the form
of corporate or bank holding company notes or Eurodollar
certificates of deposit. These instruments provide for the
adjustment of its interest rates whenever a specified
interest rate changes and which, at any time, can reasonably
be expected to have a market value that approximates its par
value. Floating rate instruments with demand features are
deemed to have a maturity equal to the period remaining
until the principal amount can be recovered through demand.
An instrument that is issued or guaranteed by the U.S.
Government or any agency thereof which has a variable rate
of interest readjusted no less frequently than every 762
days may be deemed to have a maturity equal to the period
remaining until the next readjustment of the interest rate.

Put Option Bonds. Long-term obligations with maturities
longer than one year may provide purchasers an optional or
mandatory tender of the security at par value at
predetermined intervals, often ranging from one month to
several years (e.g., a 30-year bond with a five-year tender
period). These instruments are deemed to have a maturity
equal to the period remaining to the put date.

PAGE 28
When-Issued Securities and Forward Commitment Contracts

The Fund may purchase securities on a "when-issued" or
delayed delivery basis ("When-Issueds") and the Fund may purchase
securities on a forward commitment basis ("Forwards"). 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 for 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
its 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 these 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 and/or liquid, high-grade debt
securities with its custodian bank equal in value to commitments
for them during the time between purchase and settlement.
Therefore, the longer this period, the longer the time 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.

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

PAGE 29
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 are 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 (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, a
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 a Fund's assets invested in
illiquid securities if qualified institutional buyers are
unwilling to purchase such securities.

There are, of course, other types of securities that are, or
may become available, which are similar to the foregoing and the
Fund may invest in these 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,

PAGE 30
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 on five
business days' notice or, in connection with securities trading
on foreign markets, within such longer period of time which
coincides with the normal settlement period for purchases and
sales of such securities in such foreign markets. The Fund will
not have the right to vote 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.

Other Lending/Borrowing

Subject to approval by the Securities and Exchange
Commission, the Fund may make loans to, or borrow funds from,
other mutual funds sponsored or advised by T. Rowe Price or
Price-Fleming (collectively, "Price Funds"). The Fund has no
current intention of engaging in these practices at this time.

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 Standard & Poor's Ratings Group, P1 by Moody's
Investors Service, 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 (i) the underlying securities are of the type (excluding
maturity limitations) which the Fund's investment guidelines
would allow it to purchase directly, (ii) the market value of the
underlying security, including interest accrued, will be at all

PAGE 31
times equal to or exceed the value of the repurchase agreement,
and (iii) payment for the underlying security is made only upon
physical delivery or evidence of book-entry transfer to the
account of the custodian or a bank acting as agent. In the event
of a bankruptcy or other default of a seller of a repurchase
agreement, a Fund could experience both delays in liquidating the
underlying security and losses, including: (a) possible decline
in the value of the underlying security during the period while
the Fund seeks to enforce its rights thereto; (b) possible
subnormal levels of income and lack of access to income during
this period; and (c) expenses of enforcing its rights.

Reverse Repurchase Agreements

Although the Fund has no current intention, in the
foreseeable future, of engaging in reverse repurchase agreements,
the Fund reserves the right to do so. Reverse repurchase
agreements are ordinary repurchase agreements in which a Fund is
the seller of, rather than the investor in, securities, and
agrees to repurchase them at an agreed upon time and price. Use
of a reverse repurchase agreement may be preferable to a regular
sale and later repurchase of the securities because it avoids
certain market risks and transaction costs. A reverse repurchase
agreement may be viewed as a type of borrowing by the Fund,
subject to Investment Restriction (1). (See "Investment
Restrictions," page __.)

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 a Fund. In writing covered call options, a
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 a 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

PAGE 32
style). So long as the obligation of the writer of a call option
continues, he may be assigned an exercise notice by the broker-
dealer through whom such option was sold, requiring him to
deliver the underlying security or currency against payment of
the exercise price. This obligation terminates upon the
expiration of the call option, or such earlier time at which the
writer effects a closing purchase transaction by repurchasing an
option identical to that previously sold. To secure his
obligation to deliver the underlying security or currency in the
case of a call option, a writer is required to deposit in escrow
the underlying security or currency or other assets in accordance
with the rules of a clearing corporation. The Fund will write
only covered call options. This means that a Fund will own the
security or currency subject to the option or an option to
purchase the same underlying security or currency, having an
exercise price equal to or less than the exercise price of the
"covered" option, or will establish and maintain with its
custodian for the term of the option, an account consisting of
cash, U.S. government securities or other liquid high-grade debt
obligations having a value equal to the fluctuating market value
of the optioned securities or currencies.

Portfolio securities or currencies on which call options may
be written will be purchased solely on the basis of investment
considerations consistent with the Fund's investment objective.
The writing of covered call options is a conservative investment
technique believed to involve relatively little risk (in contrast
to the writing of naked or uncovered options, which the Fund will
not do), but capable of enhancing a 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, a 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 a Fund has written expires, the Fund will
realize a gain in the amount of the premium; however, such gain
may be offset by a decline in the market value of the underlying
security or currency during the option period. If the call
option is exercised, the Fund will realize a gain or loss from
the sale of the underlying security or currency. The Fund does
not consider a security or currency covered by a call to be
"pledged" as that term is used in the Fund's policy which limits
the pledging or mortgaging of its assets.

The premium received is the market value of an option. The
premium a Fund will receive from writing a call option will

PAGE 33
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 a 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 a 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 a Fund to write another call
option on the underlying security or currency with either a
different exercise price or expiration date or both. If a 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 a Fund will be able to
effect such closing transactions at favorable prices. If a Fund
cannot enter into such a transaction, it may be required to hold
a security or currency that it might otherwise have sold. When a
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 a 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

PAGE 34
time, a 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.

A 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.

In order to comply with the requirements of several states,
the Fund will not write a covered call option if, as a result,
the aggregate market value of all portfolio securities or
currencies covering call or put options exceeds 25% of the market
value of the Fund's net assets. Should these state laws change
or should the Fund obtain a waiver of its application, the Fund
reserves the right to increase this percentage. 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 of the exercise price against
delivery of the underlying security or currency. The operation
of put options in other respects, including its related risks and
rewards, is substantially identical to that of call options.

The Fund would write put options only on a covered basis,
which means that the Fund would maintain in a segregated account
cash, U.S. government securities or other liquid high-grade debt
obligations 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

PAGE 35
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.) A
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
a 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 a 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, a 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.

In order to comply with the requirements of several states,
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. Should these state laws change or should
the Fund obtain a waiver of its application, the Fund reserves
the right to increase this percentage. 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 below.

A 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

PAGE 36
the value of the security or currency. Such hedge protection is
provided only during the life of the put option when a 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,
a 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, a 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.

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

Purchasing Call Options

The Fund may purchase American or European style call
options. As the holder of a call option, the Fund has the right
to purchase the underlying security or currency at the exercise

PAGE 37
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 below.

Call options may be purchased by a Fund for the purpose of
acquiring the underlying securities or currencies for its
portfolio. Utilized in this fashion, the purchase of call
options enables a 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 a 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, a 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.

To the extent required by the laws of certain states, the
Fund may not be permitted to commit more than 5% of its assets to
premiums when purchasing call and put options. Should these
state laws change or should the Fund obtain a waiver of its
application, the Fund may 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 a
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 a Fund as
well as loss of the expected benefit of the transaction.

PAGE 38

Exchange-traded options generally have a continuous liquid
market while dealer options have none. Consequently, a 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 a 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 a
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, a Fund may be unable to liquidate a dealer
option. With respect to options written by a Fund, the inability
to enter into a closing transaction may result in material losses
to the Fund. For example, since a Fund must maintain a secured
position with respect to any call option on a security it writes,
the Fund may not sell the assets which it has segregated to
secure the position while it is obligated under the option. This
requirement may impair a Fund's ability to sell portfolio
securities or currencies at a time when such sale might be
advantageous.

The Staff of the SEC has taken the position that purchased
dealer options and the assets used to secure the written dealer
options are illiquid securities. The Fund may treat the cover
used for written 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. Accordingly, the Fund will
treat dealer options as subject to the Fund's limitation on
unmarketable securities. If the SEC changes its position on the
liquidity of dealer options, the Fund will change its treatment
of such instrument accordingly.

Interest Rate Transactions

The Fund may enter into various interest rate transactions
such as interest rate swaps and the purchase or sale of interest
rate caps and floors, to preserve a return or spread on a
particular investment or portion of its portfolio, to create

PAGE 39
synthetic securities, or to structure transactions designed for
other non-speculative purposes.

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

The Fund will usually enter into interest rate swaps on a
net basis, i.e., the two payment streams are netted out, with the
Fund receiving or paying, as the case may be, only the net amount
of the two payments. The net amount of the excess, if any, of
the Fund's obligations over its entitlements with respect to each
interest rate swap will be accrued on a daily basis and an amount
of cash or high-quality liquid securities having an aggregate net
asset value at least equal to the accrued excess will be
maintained in an account by the Fund's custodian. If the Fund
enters into an interest rate swap on other than a net basis, the
Fund would maintain an account in the full amount accrued on a
daily basis of the Fund's obligations with respect to the swap.
To the extent the Fund sells (i.e., writes) caps and floors, it
will maintain in an account cash or high-quality liquid debt
securities having an aggregate net asset value at least equal to
the full amount, accrued on a daily basis, of the Fund's
obligations with respect to any caps or floors. The Fund will
not enter into any interest rate swap, cap or floor transaction
unless the unsecured senior debt or the claims paying ability of

PAGE 40
the counterparty thereto is rated at least A by S&P. T. Rowe
Price will monitor the creditworthiness of counterparties on an
ongoing basis. If there is a default by the other parties to
such a transaction, the Fund will have contractual remedies
pursuant to the agreements related to the transaction.

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

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

Futures Contracts

Transactions in Futures

The Fund may enter into futures contracts (a type of
potentially high-risk derivative), including interest rate and
currency futures ("futures or futures contracts").

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.

PAGE 41
The Fund will enter into futures contracts which are traded
on national or foreign futures exchanges, and are standardized as
to maturity date and underlying financial instrument. Futures
exchanges and trading in the United States are regulated under
the Commodity Exchange Act by the CFTC. Futures are traded in
London, at the London International Financial Futures Exchange,
in Paris, at the MATIF, and in Tokyo, at the Tokyo Stock
Exchange. Although techniques other than the sale and purchase
of futures contracts could be used for the above-referenced
purposes, futures contracts offer an effective and relatively low
cost means of implementing the Fund's objectives in these areas.

Regulatory Limitations

The Fund will engage in futures contracts and options
thereon only for bona fide hedging, yield enhancement, and risk
management purposes, in each case in accordance with rules and
regulations of the CFTC and applicable state law.

The Fund may not purchase or sell futures contracts or
related options if, with respect to positions which do not
qualify as bona fide hedging under applicable CFTC rules, the sum
of the amounts of initial margin deposits and premiums paid on
those positions would exceed 5% of the net asset value of the
Fund after taking into account unrealized profits and unrealized
losses on any such contracts it has entered into; provided,
however, that in the case of an option that is in-the-money at
the time of purchase, the in-the-money amount may be excluded in
calculating the 5% limitation. For purposes of this policy
options on futures contracts and foreign currency options traded
on a commodities exchange will be considered "related options".
This policy may be modified by the Board of Directors/Trustees
without a shareholder vote and does not limit the percentage of
the Fund's assets at risk to 5%.

In accordance with the rules of the State of California, the
Fund may have to apply the above 5% test without excluding the
value of initial margin and premiums paid for bona fide hedging
positions.

The Fund's use of futures contracts will not result in
leverage. Therefore, to the extent necessary, in instances
involving the purchase of futures contracts or the writing of
call or put options thereon by the Fund, an amount of cash, U.S.
government securities or other liquid, high-grade debt
obligations, equal to the market value of the futures contracts
and options thereon (less any related margin deposits), will be
identified in an account with the Fund's custodian to cover the
position, or alternative cover (such as owning an offsetting
position) will be employed. Assets used as cover or held in an

PAGE 42
identified account cannot be sold while the position in the
corresponding option or future is open, unless they are replaced
with similar assets. As a result, the commitment of a large
portion of a Fund's assets to cover or identified accounts could
impede portfolio management or the fund's ability to meet
redemption requests or other current obligations.

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

Trading in Futures Contracts

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

Unlike when the Fund purchases or sells a security, no price
would be paid or received by the Fund upon the purchase or sale
of a futures contract. Upon entering into a futures contract,
and to maintain the Fund's open positions in futures contracts,
the Fund would be required to deposit with its custodian in a
segregated account in the name of the futures broker an amount of
cash, U.S. government securities, suitable money market
instruments, or liquid, high-grade debt securities, 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.

PAGE 43
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 the market." The Fund expects to
earn interest income on its margin deposits.

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

As an example of an offsetting transaction in which the
underlying instrument is not delivered, the contractual
obligations arising from the sale of one contract of September
Treasury Bills on an exchange may be fulfilled at any time before
delivery of the contract is required (i.e., on a specified date
in September, the "delivery month") by the purchase of one
contract of September Treasury Bills on the same exchange. In
such instance, the difference between the price at which the
futures contract was sold and the price paid for the offsetting
purchase, after allowance for transaction costs, represents the
profit or loss to the Fund.

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

PAGE 44
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.

Because of the low margin deposits required, futures trading
involves an extremely high degree of leverage. 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.
However, the Fund would presumably have sustained comparable
losses if, instead of the futures contract, it had invested in
the underlying financial instrument and sold it after the
decline. Furthermore, in the case of a futures contract
purchase, in order to be certain that the Fund has sufficient
assets to satisfy its obligations under a futures contract, the
Fund earmarks to the futures contract money market instruments
equal in value to the current value of the underlying instrument
less the margin deposit.

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

Futures contracts may be closed out only on the exchange or
board of trade where the contracts were initially traded.
Although the Fund intends to purchase or sell futures contracts

PAGE 45
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 below, there is
no guarantee that the price of the underlying instruments will,
in fact, correlate with the price movements in the futures
contract and thus provide an offset to losses on a futures
contract.

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

Successful use of futures contracts by the Fund for hedging
purposes is also subject to T. Rowe Price's ability to correctly
predict movements in the direction of the market. It is possible
that, when the Fund has sold futures to hedge its portfolio
against a decline in the market, the index, indices, or
instruments underlying futures might advance and the value of the
underlying instruments held in the Fund's portfolio might
decline. If this were to occur, the Fund would lose money on the
futures and also would experience a decline in value in its
underlying instruments. However, while this might occur to a
certain degree, T. Rowe Price believes that over time the value
of the Fund's portfolio will tend to move in the same direction
as the market indices used to hedge the portfolio. It is also
possible that if the Fund were to hedge against the possibility
of a decline in the market (adversely affecting the underlying
instruments held in its portfolio) and prices instead increased,
the Fund would lose part or all of the benefit of increased value
of those underlying instruments that it has hedged, because it

PAGE 46
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 the 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 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

PAGE 47
of a call) or is less than (in the case of a put) the exercise
price of the option on the futures contract. Purchasers of
options who fail to exercise their options prior to the exercise
date suffer a loss of the premium paid.

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

Special Risks of Transactions in Options on Futures Contracts

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

PAGE 48
Additional Futures and Options Contracts

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

Foreign Futures and Options

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

Foreign Currency Transactions

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

PAGE 49

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

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

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

PAGE 50
Third, the Fund may use forward contracts when the Fund
wishes to hedge out of the dollar into a foreign currency in
order to create a synthetic bond or money market instrument--the
security would be issued in U.S. dollars but the dollar component
would be transformed into a foreign currency through a forward
contract.

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

PAGE 51
of the securities. It simply establishes a rate of exchange at a
future date. Additionally, although such contracts tend to
minimize the risk of loss due to a decline in the value of the
hedged currency, at the same time, they tend to limit any
potential gain which might result from an increase in the value
of that currency.

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

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

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

Transactions which are considered Section 1256 contracts
will be considered to have been closed at the end of the Fund's
fiscal year and any gains or losses will be recognized for tax
purposes at that time. Such gains or losses from the normal
closing or settlement of such transactions will be characterized
as 60% long-term capital gain or loss and 40% short-term capital
gain or loss regardless of the holding period of the instrument.
The Fund will be required to distribute net gains on such
transactions to shareholders even though it may not have closed
the transaction and received cash to pay such distributions.

Options, futures and forward foreign exchange contracts,
including options and futures on currencies, which offset a
foreign dollar denominated bond or currency position may be
considered straddles for tax purposes, in which case a loss on
any position in a straddle will be subject to deferral to the
extent of unrealized gain in an offsetting position. The holding
period of the securities or currencies comprising the straddle
will be deemed not to begin until the straddle is terminated.
For securities offsetting a purchased put, this adjustment of the
holding period may increase the gain from sales of securities
held less than three months. The holding period of the security
offsetting an "in-the-money qualified covered call" option on an

PAGE 52
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 loss, if the security
covering the option was held for more than twelve 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. Pending tax regulations could limit 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. In addition, gains realized on
the sale or other disposition of securities, including option,
futures or foreign forward exchange contracts on securities or
securities indexes and, in some cases, currencies, held for less
than three months, must be limited to less than 30% of the Fund's
annual gross income. In order to avoid realizing excessive gains
on securities or currencies held less than three months, the Fund
may be required to defer the closing out of option, futures or
foreign forward exchange contracts) beyond the time when it would
otherwise be advantageous to do so. It is anticipated that
unrealized gains on Section 1256 option, futures and foreign
forward exchange contracts, which have been open for less than
three months as of the end of the Fund's fiscal year and which
are recognized for tax purposes, will not be considered gains on
securities or currencies held less than three months for purposes
of the 30% test.

INVESTMENT RESTRICTIONS

Fundamental policies may not be changed without the approval
of the lesser of (1) 67% of a 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, a Fund.

PAGE 53
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;

(4) Loans. Make loans, although the Fund may (i) lend
portfolio securities and participate in an
interfund lending program with other Price Funds
provided that no such loan may be made if, as a
result, the aggregate of such loans would exceed
33 1/3% of the value of the Fund's total assets;
(ii) purchase money market securities and enter
into repurchase agreements; and (iii) acquire
publicly-distributed or privately-placed debt
securities and purchase debt;

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

PAGE 54
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 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 in securities
of companies engaged in the real estate business);

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

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

NOTES

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

With respect to investment restrictions (1) and
(4), the Fund will not borrow from or lend to any
other Price Fund unless each Fund applies for and
receives an exemptive order from the SEC or the
SEC issues rules permitting such transactions.
The Fund has no current intention of engaging in
any such activity and there is no assurance the
SEC would grant any order requested by the Fund or
promulgate any rules allowing the transactions.

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

PAGE 55

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 Annual Reports.

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

For purposes of investment restriction (5), the
Fund will consider repurchase agreements fully
collateralized with U.S. government securities to
be U.S. government securities.

Operating Policies

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

(1) Borrowing. (a) The Fund will not purchase
additional securities when money borrowed exceeds
5% of its total assets;

(b) The Fund will limit borrowing for any
variable annuity separate account to (1) 10% of
net asset value when borrowing for any general
purpose, and (2) 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) Equity Securities. Purchase any common stocks or
other equity securities;

(4) Futures Contracts. Purchase a futures contract or
an option thereon if, with respect to positions in
futures or options on futures which do not

PAGE 56
represent bona fide hedging, the aggregate initial
margin and premiums on such options would exceed
5% of the Fund's net asset value;

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

(6) Investment Companies. Purchase securities of
open-end or closed-end investment companies except
in compliance with the Investment Company Act of
1940 and applicable state law;

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

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

(9) Oil and Gas Programs. Purchase participations or
other direct interests in or enter into leases
with respect to, oil, gas, or other mineral
exploration or development programs;

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

(11) Ownership of Portfolio Securities by Officers and
Directors/Trustees. Purchase or retain the
securities of any issuer if those officers and
directors of the Fund, and of its investment
manager, who each owns beneficially more than .5%
of the outstanding securities of such issuer,
together own beneficially more than 5% of such
securities;

(12) Short Sales. Effect short sales of securities;

PAGE 57

(13) Unseasoned Issuers. Purchase a security (other
than obligations issued or guaranteed by the U.S.,
any foreign, state or local government, their
agencies or instrumentalities) if, as a result,
more than 5% of the value of the Fund's total
assets would be invested in the securities of
issuers which at the time of purchase had been in
operation for less than three years (for this
purpose, the period of operation of any issuer
shall include the period of operation of any
predecessor or unconditional guarantor of such
issuer). This restriction does not apply to
securities of pooled investment vehicles or
mortgage or asset-backed securities; or

(14) Warrants. Invest in warrants if, as a result
thereof, more than 2% of the value of the net
assets of the Fund would be invested in warrants
which are not listed on the New York Stock
Exchange, the American Stock Exchange, or a
recognized foreign exchange, or more than 5% of
the value of the net assets of the Fund would be
invested in warrants whether or not so listed.
For purposes of these percentage limitations, the
warrants will be valued at the lower of cost or
market and warrants acquired by the Fund in units
or attached to securities may be deemed to be
without value.

Notwithstanding anything in the above fundamental and
operating restrictions to the contrary, each 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 FUND

The officers and directors of the Fund are listed below.
Unless otherwise noted, the address of each is 100 East Pratt

PAGE 58
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 Investment Company Act of 1940 are noted
with an asterisk (*). These directors are referred to as inside
directors by virtue of its officership, directorship, and/or
employment with T. Rowe Price.

ROBERT P. BLACK, Director--Retired; formerly President, Federal
Reserve Bank of Richmond; Address: 10 Dahlgren Road, Richmond,
Virginia 23233
CALVIN W. BURNETT, PH.D., Director--President, Coppin State
College; Director, Maryland Chamber of Commerce and Provident
Bank of Maryland; Former President, Baltimore Area Council Boy
Scouts of America; Vice President, Board of Directors, The
Walters Art Gallery; Address: 2000 North Warwick Avenue,
Baltimore, Maryland 21216
ANTHONY W. DEERING, Director--Director, President and Chief
Executive Officer, The Rouse Company, real estate developers,
Columbia, Maryland; Advisory Director, Kleinwort, Benson (North
America) Corporation, a registered broker-dealer; Address: 10275
Little Patuxent Parkway, Columbia, Maryland 21044
F. PIERCE LINAWEAVER, Director--President, F. Pierce Linaweaver &
Associates, Inc.; formerly (1987-1991) Executive Vice President,
EA Engineering, Science, and Technology, Inc., and (1987-1990)
President, EA Engineering, Inc., Baltimore, Maryland; Address:
The Legg Mason Tower, 111 South Calvert Street, Suite 2700,
Baltimore, Maryland 21202
JOHN G. SCHREIBER, Director--President, Schreiber Investments,
Inc., a real estate investment company; Director, AMLI
Residential Properties Trust; Partner, Blackstone Real Estate
Partners, L.P.; Director and formerly (12/70-12/90) Executive
Vice President, JMB Realty Corporation, a national real estate
investment manager and developer; Director, Urban Shopping
Centers, Inc.; Address: 1115 East Illinois Road, Lake Forest,
Illinois 60045
ANNE MARIE WHITTEMORE, Director--Partner, law firm of McGuire,
Woods, Battle & Boothe, L.L.P., Richmond, Virginia; formerly,
Chairman (1991-1993) and Director (1989-1993), Federal Reserve
Bank of Richmond; Director, Owens & Minor, Inc., USF&G
Corporation, James River Corporation and Wilderness Conservancy
at Mountain Lake, Inc.; Board of Visitors, Old Dominion
University; Member, Virginia State Bar and American Bar
Association; Address: One James Center, 901 East Cary Street,
Richmond, Virginia 23219-4030
*GEORGE J. COLLINS, President and Director--President, Chief
Executive Officer and Managing Director, T. Rowe Price; Director,
Price-Fleming, T. Rowe Price Retirement Plan Services, Inc. and
T. Rowe Price Trust Company; Chartered Investment Counselor

PAGE 59
*JAMES S. RIEPE, Vice President and Director--Managing Director,
T. Rowe Price; Chairman of the Board, T. Rowe Price Services,
Inc., and T. Rowe Price Retirement Plan Services, Inc., President
and Trust Officer, T. Rowe Price Trust Company; President and
Director, T. Rowe Price Investment Services, Inc; Director,
Price-Fleming and Rhone-Poulenc Rorer, Inc.

EDWARD A. WIESE, Executive Vice President--Vice President, T.
Rowe Price, Price-Fleming and T. Rowe Price Trust Company
ROBERT P. CAMPBELL, Vice President--Vice President, T. Rowe Price
and Price-Fleming; formerly (4/80-5/90) Vice President and
Director, Private Finance, New York Life Insurance Company, New
York, New York

CHRISTY M. DIPIETRO, Vice President--Vice President, T. Rowe
Price and T. Rowe Price Trust Company
HENRY H. HOPKINS, Vice President--Vice President, Price-Fleming
and T. Rowe Price Retirement Plan Services, Inc.; 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
JAMES M. MCDONALD, Vice President--Vice President, T. Rowe Price
ROBERT M. RUBINO, Vice President--Vice President, T. Rowe Price
THOMAS E. TEWKSBURY, Vice President--Vice President, T. Rowe
Price; formerly (1/89-12/93) senior bond trader, Scudder, Stevens
& Clark, Boston, Massachusetts
LENORA V. HORNUNG, Secretary--Vice President, T. Rowe Price
PATRICIA S. BUTCHER, Assistant Secretary--Assistant Vice
President, T. Rowe Price; Assistant Vice President, T. Rowe Price
Investment Services, Inc.
CARMEN F. DEYESU, Treasurer--Vice President, T. Rowe Price, T.
Rowe Price Services, Inc., and T. Rowe Price Trust Company
DAVID S. MIDDLETON, Controller--Vice President, T. Rowe Price, T.
Rowe Price Services, Inc., and T. Rowe Price Trust Company
CHERYL A. REDWOOD, Assistant Vice President--Employee, T. Rowe
Price
ROGER L. FIERY, III, Assistant Vice President--Vice President,
Price-Fleming and Vice President, T. Rowe Price
EDWARD T. SCHNEIDER, Assistant Vice President--Assistant Vice
President, T. Rowe Price and Vice President, T. Rowe Price
Services, Inc.
INGRID I. VORDEMBERGE, Assistant Vice President--Employee, T.
Rowe Price

PAGE 60
COMPENSATION TABLE

_________________________________________________________________
Pension or Total Compensation
Retirement from Fund and
Name of Aggregate Benefits Fund Group
Person, Compensation Accrued as Paid to
Position from Fund(a) Part of Fund(b) Directors(c)
_________________________________________________________________
Robert P. Black, $770 N/A $52,667
Director

Calvin W. Burnett, 770 N/A 55,583
PH.D, Director

Anthony W. Deering, 770 N/A 66,333
Director

F. Pierce Linaweaver, 770 N/A 55,583
Director

John G. Schreiber, 770 N/A 55,667
Director

Anne Marie Whittemore, 770 N/A 32,667
Director

George J. Collins, -- N/A --
Chairman of the Board(d)

James S. Riepe, -- N/A --
Director(d)

a Amounts in this Column are for the period January 1, 1994
through December 31, 1994.
b Not applicable. The Fund does not pay pension or retirement
benefits to officers or directors/trustees of the Fund.
c Amounts in this column are for calendar year 1994, included
67 funds at December 31, 1994. (Includes estimated future
payments for all funds.)
d Any director/trustee of the Fund who is an officer or
employee of T. Rowe Price receives no remuneration from the
Fund.

The Fund's Executive Committee, comprised of Messrs. Collins
and Riepe, has been authorized by its Board of Directors to
exercise all powers of the Board to manage the Fund in the
intervals between meetings of the Board, except the powers
prohibited by statute from being delegated.

PAGE 61

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.

INVESTMENT MANAGEMENT SERVICES

Services Provided by T. Rowe Price

Under the Management Agreement with the Corporation relating
to the Fund, 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 its investment objectives, programs, and
restrictions as provided in the 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 allocation of principal business and portfolio
brokerage and the negotiation of commissions. In addition to
these services, T. Rowe Price provides the Fund with certain
corporate administrative services, including: maintaining the
Fund's corporate existence, corporate records, and registering
and qualifying the Fund's shares under federal and state 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 Fund's 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 0.70%. 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

PAGE 62
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' fees 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 does not anticipate levying such
charges; such a fee, if charged, may be retained by the Fund or
paid to T. Rowe Price.

DISTRIBUTOR FOR FUND

T. Rowe Price Investment Services, Inc. ("Investment
Services"), a Maryland corporation formed in 1980 as a wholly-
owned subsidiary of T. Rowe Price, serves as the distributor of
the Fund. 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 individual Underwriting Agreements ("Underwriting
Agreements"), which provide that Investment Services will pay all
fees and expenses in connection with: registering and qualifying
the Fund's shares under the various state "blue sky" laws;
preparing, setting in type, printing, and mailing its
prospectuses and reports to shareholders; issuing its shares,
including expenses of confirming purchase orders; printing and
distributing prospectuses and reports for use in offering and
selling shares for the Fund; 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 for the Fund. The
Underwriting Agreements provide that the Fund is responsible for

PAGE 63
interest, taxes 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 Investment Services. 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 all states in which the
shares are qualified and 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 domestic 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. 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
by the Fund's Board of Directors in accordance with regulations
under the Investment Company Act of 1940. State Street Bank's
main office is at 225 Franklin Street, Boston, Massachusetts
02110. The address for The Chase Manhattan Bank, N.A., London is
Woolgate House, Coleman Street, London, EC2P 2HD, England.

CODE OF ETHICS

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

PAGE 64
subject to internal trading restrictions. In addition, employees
are prohibited from engaging in 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 is made by T. Rowe Price. T.
Rowe Price is also responsible for implementing these decisions,
including the negotiation of commissions and the allocation of
portfolio brokerage and principal business. The Fund's purchases
and sales of portfolio securities are normally done on a
principal basis and do not involve the payment of a commission
although they may involve the designation of selling concessions.
That part of the discussion below relating solely to brokerage
commissions would not normally apply to a Fund. However, it is
included because T. Rowe Price does manage a significant number
of common stock portfolios which do engage in agency transactions
and pay commissions and because some research and services
resulting from the payment of such commissions may benefit the
Fund.

How Brokers and Dealers are Selected

Fixed Income Securities

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

T. Rowe Price may effect principal transactions on behalf of
a 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. The Fund may receive
brokerage and research services in connection with such
designations in fixed priced underwritings. T. Rowe Price may

PAGE 65
receive research services in connection with brokerage
transactions, including designations in fixed price offerings.

In purchasing and selling a Fund's portfolio securities, it
is T. Rowe Price's policy to obtain quality execution at the most
favorable prices through responsible brokers and dealers and, in
the case of agency transactions (in which a Fund does not
generally engage), at competitive commission rates. However,
under certain conditions, a Fund may pay higher brokerage
commissions in return for brokerage and research services. In
selecting broker-dealers to execute a Fund's portfolio
transactions, consideration is given to such factors as the price
of the security, the rate of the commission, the size and
difficulty of the order, the reliability, integrity, financial
condition, general execution and operational capabilities of
competing brokers and dealers, and 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.

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

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

Description 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

PAGE 66
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 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

PAGE 67
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 charged by broker-dealers reflect the value of
its 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 Fund participates.

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 or selling
concessions business where special needs do not exist, or where
the business may be allocated among several brokers or dealers
which are able to meet the needs of the transaction.

Each year, T. Rowe Price assesses the contribution of the
brokerage and research services provided by brokers and dealers,
and attempts to allocate a portion of its brokerage and selling
concession 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 and dealers and make
judgments as to the level of business which would recognize such
services. In addition, brokers and dealers sometimes suggest a
level of business they would like to receive in return for the
various brokerage and research services they provide. Actual
business 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

PAGE 68
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 is 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 its
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 its 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.

To the extent possible, T. Rowe Price intends to recapture
solicitation fees paid in connection with tender offers through
T. Rowe Price Investment Services, Inc., the Fund's distributor.
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.

PAGE 69
Transactions with Related Brokers and Dealers

As provided in the Investment Management Agreement between
the Fund and T. Rowe Price, T. Rowe Price is responsible not only
for making decisions with respect to the purchase and sale of the
Fund's portfolio securities, but also for implementing these
decisions, including the negotiation of commissions and the
allocation of portfolio brokerage and principal business. It is
expected that T. Rowe Price may place orders for the Fund's
portfolio transactions with broker-dealers through the same
trading desk T. Rowe Price uses for portfolio transactions in
domestic securities. The trading desk accesses brokers and
dealers in various markets in which the Fund's foreign securities
are located. These brokers and dealers may include of certain
affiliates of Robert Fleming Holdings Limited ("Robert Fleming
Holdings") and Jardine Fleming Group Limited ("JFG"), persons
indirectly related to T. Rowe Price. Robert Fleming Holdings,
through Copthall Overseas Limited, a wholly-owned subsidiary,
owns 25% of the common stock of Rowe Price-Fleming International,
Inc. ("RPFI"), an investment adviser registered under the
Investment Advisers Act of 1940. Fifty percent of the common
stock of RPFI is owned by TRP Finance, Inc., a wholly-owned
subsidiary of T. Rowe Price, and the remaining 25% is owned by
Jardine Fleming International Holdings Limited, a subsidiary of
JFG. JFG is 50% owned by Robert Fleming Holdings and 50% owned
by Jardine Matheson Holdings Limited. Orders for the Fund's
portfolio transactions placed with affiliates of Robert Fleming
Holdings and JFG will result in commissions being received by
such affiliates.

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. These affiliates include, but are
not limited to, Jardine Fleming (Securities) Limited ("JFS"), a
wholly-owned subsidiary of JFG, Robert Fleming & Co. Limited
("RF&Co."), Jardine Fleming Australia Securities Limited, and
Robert Fleming, Inc. (a New York brokerage firm). Other
affiliates of Robert Fleming Holdings 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 Investment Company Act
of 1940, the Board of Directors of the Fund has agreed that the
procedures set forth in Rule 17(e)(1) under that Act will be
followed when using such brokers.

Other

For the eight-month fiscal year ended December 31, 1994, the
Fund engaged in portfolio transactions involving broker-dealers
totaling $17,730,000. The entire amount represented principal

PAGE 70
transactions as to which the Fund had no knowledge of the profits
or losses realized by the respective broker-dealers for the
eight-month fiscal year ended December 31, 1994. The percentage
of total portfolio transactions, placed with firms which provided
research, statistical or other services to T. Rowe Price in
connection with the management of the Fund, or in some cases, to
the Fund for the eight-month fiscal year ended December 31, 1994
was approximately 79%. The portfolio rate for the Fund for the
eight-month fiscal year ended December 31, 1994 was 146.0%.

PRICING OF SECURITIES

Fixed income securities are generally traded in the over-
the-counter market. Investments in domestic securities with
remaining maturities of one year or more and foreign securities
are stated at fair value using bid-side valuation as furnished by
dealers who make markets in such securities or by an independent
pricing service, which considers yield or price of bonds of
comparable quality, coupon, maturity, and type, as well as prices
quoted by dealers who make markets in such securities. Domestic
securities with remaining maturities less than one year are
stated at fair value which is determined by using a matrix system
that establishes a value for each security based on bid-side
money market yields.

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

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

Assets and liabilities for which the above valuation
procedures are inappropriate or are deemed not to reflect fair
value are stated at fair value, as determined in good faith by or
under the supervision of officers of the Fund as authorized by
its 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
the Fund's liabilities (including accrued expenses and dividends

PAGE 71
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 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, Washington's Birthday, 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 a 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 a Fund of securities owned by it
is not reasonably practicable or it is not reasonably practicable
for the Fund fairly to determine the value of its net assets, or
(d) during which a governmental body having jurisdiction over the
Fund may by order permit such a suspension for the protection of
the Fund's shareholders; provided that applicable rules and
regulations of the Securities and Exchange Commission (or any
succeeding governmental authority) shall govern as to whether the
conditions prescribed in (b), (c), or (d) exist.

DIVIDENDS

Unless the separate account elects otherwise, the Fund's
annual capital gain distributions, if any, will be reinvested on
the reinvestment date using the NAV per share of that date. The
reinvestment date normally precedes the payment date by about 10
days although the exact timing is subject to change.

TAX STATUS

The Fund intends to qualify as a "regulated investment
company" under Subchapter M of the Internal Revenue Code of 1986,
as amended ("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

PAGE 72
adoption could alter the tax treatment of the policyholder,
separate account or insurance company.

For tax purposes, the Fund must declare dividends 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 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.

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. In addition to bearing their proportionate share of
the fund's expenses (management fees and operating expenses)
shareholders will also indirectly bear similar expenses of such
funds. Capital gains on the sale of such holdings will be deemed
to be ordinary income regardless of how long the Fund holds its
investment. In addition, 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.

PAGE 73
In accordance with tax regulations, the Fund intends to
treat these securities as sold on the last day of the Fund's
fiscal year and recognize any gains for tax purposes at that
time; losses will not be recognized. Such gains will be
considered ordinary income which the Fund will be required to
distribute 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 ordinary income for tax
purposes. If the net effect of these transactions is a gain, the
dividend paid by the Fund will be increased; if the result is a
loss, the income dividend paid by the Fund will be decreased.
Adjustments, to reflect these gains and losses will be made at
the end of the Fund's taxable year.

YIELD INFORMATION

From time to time, the Fund may advertise a yield figure
calculated in the following manner:

An income factor is calculated for each security in the
portfolio based upon the security's market value at the beginning
of the period and yield as determined in conformity with
regulation of the Securities and Exchange Commission. The income
factors are then totalled for all securities in the portfolio.
Next, expenses of the Fund for the period net of expected
reimbursement are deducted from the income to arrive at net
income, which is then converted to a per-share amount by dividing
net income by the average number of shares outstanding during the
period. The net income per share is divided by the net asset
value on the last day of the period to produce a monthly yield
which is then annualized. Quoted yield factors are for
comparison purposes only, and are not intended to indicate future
performance or forecast the dividend per share of the Fund.

The yield of the Fund calculated under the above-
described method for the month ended March 31, 1995 was
6.84%.

PAGE 74
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
gains dividends. The results shown are historical and should not
be considered indicative of the future performance of a 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.

Cumulative Performance Percentage Change

Since
1 Yr. Inception
Ended 5/31/94 to
12/31/94 12/31/94
___________ ____________

Limited-Term Bond Portfolio N/A 2.62

Merrill Lynch 1-5 year Corporate
and Government Bond Index -0.55 1.57

Lipper Short Investment Grade
Debt Funds Average -0.37 0.87*

* From 5/31/94.

From time to time, in reports and promotional literature,
one or more of the T. Rowe Price funds, including this Fund, may
compare its performance to Overnight Government Repurchase
Agreements, Treasury bills, notes, and bonds, certificates of
deposit, and money market deposit accounts. Performance may also
be compared to (1) indices of broad groups of managed and
unmanaged securities considered to be representative of or
similar to Fund portfolio holdings; (2) other mutual funds; or
(3) other measures of performance set forth in publications such
as:

Advertising News Service, Inc., "Bank Rate Monitor+ - The
Weekly Financial Rate Reporter" is a weekly publication

PAGE 75
which lists the yields on various money market instruments
offered to the public by 100 leading banks and thrift
institutions in the U.S., including loan rates offered by
these banks. Bank certificates of deposit differ from
mutual funds in several ways: the interest rate established
by the sponsoring bank is fixed for the term of a CD; there
are penalties for early withdrawal from CDs; and the
principal on a CD is insured.

Donoghue Organization, Inc., "Donoghue's Money Fund Report"
is a weekly publication which tracks net assets, yield,
maturity and portfolio holdings on approximately 380 money
market mutual funds offered in the U.S. These funds are
broken down into various categories such as U.S. Treasury,
Domestic Prime and Euros, Domestic Prime and Euros and
Yankees, and Aggressive.

First Boston High Yield Index. It shows statistics on the
Composite Index and analytical data on new issues in the
marketplace and low-grade issuers.

Lipper Analytical Services, Inc., "Lipper-Fixed Income Fund
Performance Analysis" is a monthly publication which tracks
net assets, total return, principal return and yield on over
1900 fixed income mutual funds offered in the United States.

Merrill Lynch, Pierce, Fenner & Smith, Inc., "Taxable Bond
Indices" is a monthly publication which lists principal,
coupon and total return on over 100 different taxable bond
indices tracked by Merrill Lynch, together with the par
weighted characteristics of each Index.

Morningstar, Inc. - is a widely used independent research
firm which rates mutual funds by overall performance,
investment objectives, and assets.

Salomon Brothers Inc., "Analytical Record of Yields and
Yield Spreads" is a publication which tracks historical
yields and yield spreads on short-term market rates, public
obligations of the U.S. Treasury and agencies of the U.S.
Government, public corporate debt obligations, municipal
debt obligations and preferred stocks.

Salomon Brothers Inc., "Bond Market Round-up" is a weekly
publication which tracks the yields and yield spreads on a
large, but select, group of money market instruments, public
corporate debt obligations, and public obligations of the
U.S. Treasury and agencies of the U.S. Government.

PAGE 76
Salomon Brothers Inc., "Market Performance" - a monthly
publication which tracks principal return, total return and
yield on the Salomon Brothers Broad investment - Grade Bond
Index and the components of the Index as well as some money
market instruments not included in the index.

Shearson Lehman Brothers, Inc., "The Bond Market Report" - a
monthly publication which tracks principal, coupon and total
return on the Shearson Lehman Govt./Corp. Index and Shearson
Lehman Aggregate Bond Index, as well as all the components
of these Indices.

Telerate Systems, Inc., a market data distribution network
computer system which tracks a broad range of financial
markets including, the daily rates on money market
instruments, public corporate debt obligations and public
obligations of the U.S. Treasury and agencies of the U.S.
Government.

Wall Street Journal, is a national daily financial news
publication which lists the yields and current market values
on money market instruments, public corporate debt
obligations, public obligations of the U.S. Treasury and
agencies of the U.S. Government as well as common stocks,
preferred stocks, convertible preferred stocks, options and
commodities; in addition to indices prepared by the research
departments of such financial organizations as Shearson
Lehman/American Express Inc., and Merrill Lynch, Pierce,
Fenner and Smith, Inc., including information provided by
the Federal Reserve Board.

Performance rankings and ratings reported periodically in
national financial publications such as MONEY, FORBES, BUSINESS
WEEK, BARRON'S, etc. will also be used.

Benefits of Investing in High-Quality Bond Funds

o Higher Income

Bonds have generally provided a higher income than money
market securities because yield usually increased with
longer maturities. For instance, the yield on the 30-year
Treasury bond usually exceeds the yield on the 1-year
Treasury bill or 5-year Treasury note. However, securities
with longer maturities fluctuate more in price than those
with shorter maturities. Therefore, the investor must weigh
the advantages of higher yields against the possibility of
greater fluctuation in the principal value of your
investment.

PAGE 77
o Income Compounding

Investing in bond mutual funds allows investors to benefit
from easy and convenient compounding because you can
automatically reinvest monthly dividends in additional fund
shares. Each month investors earn interest on a larger
number of shares. Also, reinvesting dividends removes the
temptation to spend the income.

o Broad Diversification

Each share of a mutual fund represents an interest in a
large pool of securities, so even a small investment is
broadly diversified by maturity. Since most bonds trade
efficiently only in very large blocks, mutual funds provide
a degree of diversification that may be difficult for
individual investors to achieve on its own.

o Lower Portfolio Volatility

Investing a portion of one's assets in longer term, high-
quality bonds can help smooth out the fluctuations in your
overall investment results, because bond prices do not
necessarily move with stock prices. Also, bonds usually
have higher income yields than stocks, thus increasing the
total income component of your portfolio. This strategy
should also add stability to overall results, as income is
always a positive component of total return.

o Liquidity

A bond fund can supplement a money market fund or bank
account as a source of capital for unexpected contingencies.
T. Rowe Price fixed-income funds offer you easy access to
money through free checkwriting and convenient redemption
and exchange features. Of course, the value of a bond
fund's shares redeemed through checkwriting may be worth
more or less than its value at the time of its original
purchase.

Suitability

High-quality bond funds are most suitable for the following
objectives: obtaining a higher current income with minimal
credit risk; compounding of income over time; or
diversifying overall investments to reduce volatility.

PAGE 78
IRAs

An IRA is a long-term investment whose objective is to
accumulate personal savings for retirement. Due to the long-term
nature of the investment, even slight differences in performance
will result in significantly different assets at retirement.
Mutual funds, with its diversity of choice, can be used for IRA
investments. Generally, individuals may need to adjust its
underlying IRA investments as its time to retirement and
tolerance for risk changes.

Other Features and Benefits

The Fund is a member of the T. Rowe Price Family of
Funds and may help investors achieve various long-term investment
goals, such as investing money for retirement, saving for a down
payment on a home, or paying college costs. To explain how the
Fund could be used to assist investors in planning for these
goals and to illustrate basic principles of investing, various
worksheets and guides prepared by T. Rowe Price Associates, Inc.
and/or T. Rowe Price Investment Services, Inc. may be made
available. These currently include: the Asset Mix Worksheet
which is designed to show shareholders how to reduce its
investment risk by developing a diversified investment plan: the
College Planning Guide which discusses various aspects of
financial planning to meet college expenses and assists parents
in projecting the costs of a college education for its children;
the Retirement Planning Kit (also available in a PC version)
which includes a detailed workbook to determine how much money
you may need for retirement and suggests how you might invest to
reach your goal; and the Retirees Financial Guide which includes
a detailed workbook to determine how much money you can afford to
spend and still preserve your purchasing power and suggest how
you might invest to reach your goal. From time to time, other
worksheets and guides may be made available as well. Of course,
an investment in the Fund cannot guarantee that such goals will
be met. Personal Strategy Planner simplifies investment decision
making by helping investors define personal financial goals,
establish length of time the investor intends to invest,
determine risk "comfort zone" and select diversified investment
risk.

To assist investors in understanding the different returns
and risk characteristics of various investments, the
aforementioned guides will include presentation of historical
returns of various investments using published indices. An
example of this is shown on the next page.

PAGE 79
Historical Returns for Different Investments

Annualized returns for periods ended 12/31/94

50 years 20 years 10 years 5 years

Small-Company Stocks 14.4% 20.3% 11.1% 11.8%

Large-Company Stocks 11.9 14.6 14.4 8.7

Foreign Stocks N/A 16.3 17.9 1.8

Long-Term Corporate Bonds 5.3 10.0 11.6 8.4

Intermediate-Term U.S.
Gov't. Bonds 5.6 9.3 9.4 7.5

Treasury Bills 4.7 7.3 5.8 4.7

U.S. Inflation 4.5 5.5 3.6 3.5

Sources: Ibbotson Associates, Morgan Stanley. Foreign stocks
reflect performance of The Morgan Stanley Capital International
EAFE Index, which includes some 1,000 companies representing the
stock markets of Europe, Australia, New Zealand, and the Far
East. This chart is for illustrative purposes only and should
not be considered as performance for, or the annualized return
of, any T. Rowe Price Fund. Past performance does not guarantee
future results.

Also included will be various portfolios demonstrating how
these historical indices would have performed in various
combinations over a specified time period in terms of return. An
example of this is shown below.

PAGE 80
Performance of Retirement Portfolios*

Asset Mix Average Annualized Value
Returns 20 Years of
Ended 12/31/94 $10,000
Investment
After Period
________________ __________________ ____________

Nominal Real Best Worst
Portfolio Growth Income Safety Return Return** Year Year

I. Low
Risk 40% 40% 20% 12.4% 6.9% 24.9% 0.1%$ 92,515

II. Moderate
Risk 60% 30% 10% 13.5% 8.1% 29.1% -1.8%$118,217

III. High
Risk 80% 20% 0% 14.5% 9.1% 33.4% -5.2%$149,200

Source: T. Rowe Price Associates; data supplied by Lehman
Brothers, Wilshire Associates, and Ibbotson Associates.

* Based on actual performance for the 20 years ended 1994 of
stocks (85% Wilshire 5000 and 15% Europe, Australia, Far
East [EAFE] Index), bonds (Lehman Brothers Aggregate Bond
Index from 1976-94 and Lehman Brothers Government/Corporate
Bond Index from 1975), and 30-day Treasury bills from
January 1975 through December 1994. Past performance does
not guarantee future results. Figures include changes in
principal value and reinvested dividends and assume the same
asset mix is maintained each year. This exhibit is for
illustrative purposes only and is not representative of the
performance of any T. Rowe Price fund.
** Based on inflation rate of 5.5% for the 20-year period ended
12/31/94.

Redemptions in Kind

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

PAGE 81
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 T. Rowe Price Fixed Income Series, Inc.
(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. 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 Fund has authorized to
issue without shareholder approval.

Except to the extent that the Corporation's Board of
Directors might provide by resolution that holders of shares of a
particular class are entitled to vote as a class on specified
matters presented for a vote of the holders of all shares
entitled to vote on such matters, there would be no right of
class vote unless and to the extent that such a right might be
construed to exist under Maryland law. The Charter contains no
provision entitling the holders of the present class of capital
stock to a vote as a class on any matter. Accordingly, the
preferences, rights, and other characteristics attaching to any
class of shares, including the present class of capital stock,
might be altered or eliminated, or the class might be combined
with another class or classes, by action approved by the vote of
the holders of a majority of all the shares of all classes

PAGE 82
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 meetings of shareholders for the
purpose of electing directors unless and until such time as less
than a majority of the directors holding office have been elected
by shareholders, at which time the directors then in office will
call a shareholders' meeting for the election of directors.
Except as set forth above, the directors shall continue to hold
office and may appoint successor directors. Voting rights are
not cumulative, so that the holders of more than 50% of the
shares voting in the election of directors can, if they choose to
do so, elect all the directors of the Fund, in which event the
holders of the remaining shares will be unable to elect any
person as a director. As set forth in the By-Laws of the
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
Investment Company Act of 1940.

PAGE 83
FEDERAL AND STATE REGISTRATION OF SHARES

The Fund's shares are registered for sale under the
Securities Act of 1933, and the Fund or its shares are registered
under the laws of all states which require registration, as well
as the District of Columbia and Puerto Rico.

LEGAL COUNSEL

Shereff, Friedman, Hoffman, & Goodman, LLP, whose address is
919 Third Avenue, New York, New York 10022, is legal counsel to
the Fund.

INDEPENDENT ACCOUNTANTS

Price Waterhouse LLP, 7 St. Paul Street, Suite 1700,
Baltimore, Maryland 21202, Baltimore, Maryland 21202, are
independent accountants to the Fund. The financial statements of
the Fund for the year ended December 31, 1994, and the report of
independent accountants are included in the Fund's Annual Report
for the year ended December 31, 1994. 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, 1994, are incorporated into this Statement of
Additional Information by reference:

LIMITED-TERM
BOND PORTFOLIO
_________________

Report of Independent Accountants 8
Statement of Net Assets, December 31, 1994 4-5
Statement of Operations, From May 31, 1994
(Commencement of Operations) to December 31, 1994 5
Statement of Changes in Net Assets, From May 13, 1994
(Commencement of Operations) to December 31, 1994 6
Notes to Financial Statements, December 31, 1994 6-7
Financial Highlights, From May 13, 1994
(Commencement of Operations) to December 31, 1994 7

RATINGS OF COMMERCIAL PAPER

Moody's Investors Service, Inc. The rating of Prime-1 is the
highest commercial paper rating assigned by Moody's. Among the
factors considered by Moody's in assigning ratings are the
following: valuation of the management of the issuer; economic

PAGE 84
evaluation of the issuer's industry or industries and an
appraisal of speculative-type risks which may be inherent in
certain areas; evaluation of the issuer's products in relation to
competition and customer acceptance; liquidity; amount and
quality of long-term debt; trend of earnings over a period of 10
years; financial strength of the parent company and the
relationships which exist with the issuer; and recognition by the
management of obligations which may be present or may arise as a
result of public interest questions and preparations to meet such
obligations. These factors are all considered in determining
whether the commercial paper is rated P1, P2, or P3.

Standard & Poor's Corporation. Commercial paper rated A (highest
quality) by S&P has the following characteristics: liquidity
ratios are adequate to meet cash requirements; long-term senior
debt is rated "A" or better, although in some cases "BBB" credits
may be allowed. The issuer has access to at least two additional
channels of borrowing. Basic earnings and cash flow have an
upward trend with allowance made for unusual circumstances.
Typically, the issuer's industry is well established and the
issuer has a strong position within the industry. The
reliability and quality of management are unquestioned. The
relative strength or weakness of the above factors determines
whether the issuer's commercial paper is rated A1, A2, or A3.

Fitch Investors Service, Inc.: Fitch 1 - Highest grade.
Commercial paper assigned this rating is regarded as having the
strongest degree of assurance for timely payment. Fitch 2 - Very
good grade. Issues assigned this rating reflect an assurance of
timely payment only slightly less in degree than the strongest
issues.

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.

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

PAGE 85
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: its
future 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 characteristics of the desirable
investment. Assurance of interest and principal payments of or
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.

Standard & Poor's Corporation

AAA - This is the highest rating assigned by Standard & Poor's to
a debt obligation and indicates an extremely strong capacity to
pay principal and interest.

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

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

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

BB, B, CCC, CC - 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 in

PAGE 86
accordance with the terms of the obligation. 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 - Bonds rated D are regarded as in default.

Fitch Investors Service, 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 a wide margin
of protection through collateral, security or direct lien on
specific property. Sinking funds or voluntary reduction of debt
by call or purchase are often factors, while guarantee or
assumption by parties other than the original debtor may
influence its 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.